CA-Final

New Syllabus
May-2021
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Notes:-
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Financial Reporting in a
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CA. PARVEEN JINDAL

As Per ICAI
Syllabus
Applicable
From May 2021
Exam Onwards
 Index
Chapter
Particulars Page Range
No.
1 CHAPTER 1 BUSINESS COMBINATION IND AS 103 1-51
Part -1 1
Part -2 2-4
Part -3 5-8
Part -4 9-10
Part -5 11-14
Part -6 15-18
Part -7 19-21
Part -8 22-24
Part -9 25-28
Part -10 29-31
Part -11 32-34
Part -12 35-38
Part -13 39-40
Part -14 41-45
Part -15 46-51
2 CHAPTER 2 PROVISIONS IND AS 37 52-55
Part -1 52-53
Part -2 54
Part -3 54-55
3 CHAPTER 3 REVENUES FROM CONTRACT IND AS 115 56-78
Part -1 56
Part -2 56
Part -3 57-59
Part -4 60
Part -5 60-61
Part -6 61-62
Part -7 62
Part -8 63
Part -9 64-67
Part -10 68
Part -11 68
 Part -12 68-75
Part -13 76
Part -14 77-78
4 CHAPTER 4 INTERIM FINANCIAL STATEMENTS IND AS 34 79-86
Part -1 79
Part -2 79-80
Part -3 80-82
Part -4 83-84
Part -5 85-86
5 CHAPTER 5 FOREIGN EXCHANGE IND AS 21 87-98
Part -1 87-93
Part -2 94-94
Part -3 95
Part -4 95
Part -4 96-98
6 CHAPTER 6 CASH FLOW STATEMENTS IND AS 7 99-106
Part -1 99-101
Part -2 102-103
Part -3 104
Part -4 105-106
7 CHAPTER 7 EVENT AFTER BALANCE SHEET IND AS 10 107-109
Part -1 107
Part -2 108
Part -3 108
8 CHAPTER 8 SHARE BASED PAYMENT IND AS 102 110-137
Part -1 110-112
Part -2 113-119
Part -3 120-123
Part -4 124-130
Part -5 131-134
Part -6 135
Part -7 136
Part -8 136-137
9 CHAPTER 9 PRESENTATION OF FINANCIAL STATEMENTS IND AS 1 138-140
Part -1 138
Part -2 139
 Part -3 139-140
10 CHAPTER 10 ACCOUNTING POLICY IND AS 8 141-143
Part -1 141
Part -2 142
Part -3 143

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CA. Parveen Jindal

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CA-Final Financial Reporting CA Parveen Jindal Classes

Ind AS 103 : Business Combination *V.V.V.Imp

(Lost Amendment made by MCA in Ind AS 103 on 24.07.2020)

*Part 1*
Unit I : Important Definitions

Definitions

A. Meaning of Business B. Meaning of Assets C. Meaning of Business

Acquisition Combination

A. Meaning of Business *V.V.Imp

As per the Provisions of Ind AS 103, A Business is an Integrated Set of

Activities & Assets that is capable of being conducted or managed for the purpose of
Providing goods or services to customers, Generating Investment Incomes or other
Incomes during ordinary Course of Business.
“In Bare Act : 3 Elements have been defined”
Explanation : A Business has four Elements as follows :

Inputs + + =
Processes Application of Process Outputs

These Elements are mandatory to classify a Set It is not required to classify

Of Activities as “Business” A set of Activities as Business
“Although, Businesses usually have
Outputs”, but “Ability to generate
Outputs is also considerable “

i. Inputs : As per the Provisions of Ind AS 103, It is an “ Economic Resource”

Which creates output or has ability to contribute to the creation of
Outputs when one or more Processes are applied to it.
(i.e. Inputs may include Tangible & Intangible Assets in the form of
L&B, P&M, Patents, Copy Rights etc.)

ii. Processes : It is a System, Protocol, Rule, Standard when applied to Inputs

then It creates output or has ability to create outputs.
(i.e., Strategic Management Process, Operational Process, Resource
Management Process)

iii. Application of Process : For Implementation of Process on Inputs, we held

Intellectual Capacity which is “Skilled Work Force” in a Business
These are knowledgable & Expert Persons who know, how to
Create Outputs.

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iv. Outputs : These are the results of implementation of Process on Inputs in the
Form of Providing Goods or services to customers or Investment
“Revenue Incomes.
From Business”

“Further Assessment as per Amendments in Ind AS”

As per Recent Amendments in business Combination, An Acquirer should
Further Assets the Given Transaction on Acquisition date whether it is a Business
Combination or Assets Acquisition. There may be two situations for this Assessment
as follows :-

Situation I : If Acquire does not have “Outputs” on Acquisition date.

No Customers/ No Sale
In the Given case, the following Elements should Exist in the Transaction to classify
it as “Business” :-
I. There should be a “Substantive Process” which is critically required for
Conversion of Inputs into outputs.
II. There should be “Skilled workforce” & “other Inputs” that have ability to
Generate outputs. Tangible & I. Assets
+ +
Substantive Process Skilled Workforce Other Inputs

Situation II : If Acquires has “outputs” on Acquisition date

i. There should be a Substantive Process which is required for continuation of
Production.
+
ii. There should be *skilled workforce & Other Input

Exception

If an Entity has already outputs on Acquisition date then Skill workforce may not be
required if Process is Unique/Rare/ Cannot be replaced.

Solution of Q.2, Q3, Q.4, Q.5, Q.6, Q.7

(Discussed in Class)

*Part 2*

Important Note on “Concentration Test”

As per Amendments made by MCA on 24.7.2020, Acquirer may conduct an Optional

Test to identify the acquisition whether it is an Asset acquisition or Business
Acquisition we will discuss it in Last video of this Topic for Better understanding.

B. Meaning of Assets Acquisition

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As per the provisions of Ind AS 103, An Acquisition, which cannot be considered as

Business Acquisition, should be classified as Assets acquisition. The following 2 Rules
Should be considered under Assets Acquisition :-

Rule 1 : Under Acquisition, there will be no Recognition of Goodwill or capital Reserve

For the difference between Purchase consideration & fair value of Assets.
Rule 2 : The Amount of Purchase consideration which has been paid for Acquisition of
Assets, will be allocated over the acquired Assets in the ratio of fair value of
Acquired Assets.

Solution of Q.8

In the Given Case, It is clearly mentioned that the Given Acquisition does not
Constitute Business due to which it will be considered as Assets Acquisition. As per
the Provisions, initial Recognition of these Assets shall be made in the ratio of fair
Values as follows :-

Statement Showing Allocation of Price

Assets (Acquired) Fair Value Price Allocation

P&M 200 228.57 (200/350)
Furniture 30 34.29 (30/350)
Equipment 50 57.14 (50/350)
Intangibles 70 80 (70/350)
350 400

Solution of Q.9 (Discussed in Class)

C. Meaning of Business Combination *Imp

As per the Provisions of Ind AS 103, Business Combination occurs when An

Entity acquires control over the other Entity “by acquiring Net Assets” or “by
Acquiring significant Equity Interest”

Important Note : Ind AS 103 provides Guidance on Accounting in the books of Acquire
Only. There is no Explanation on Accounting in the books of Acquire.

We can classify Business Combination under the following headings :-

Business Combination

By Acquiring By Acquiring Equity *Special

N. Assets Interest Transactions

Case I : Acquisition of Control by Acquiring N. Assets

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CA-Final Financial Reporting CA Parveen Jindal Classes

A. If and Existing Company takes over Net Assets of one or more Existing
Companies Acquirer Acquiree
E.g. X ltd y Ltd

X Ltd. Takes over N. Assets of Y Ltd.

Comments : The Given transaction is a Business Combination because X ltd. Has
Acquired N. Assets of Y Ltd. Acquiree Acquiree
E.g. X Ltd. Y Ltd Z Ltd.

Acquirer
X Ltd. Takes over N. Assets of Y Ltd. & Z Ltd.

Comments : In the Given Case, X Ltd. Should be considered as an acquirer because It

is acquiring control over Y Ltd. & Z Ltd. By acquiring N. Assets.

B. If Newly Formed company acquires N. Assets from two or more Existing

Companies Acquiree Acquiree
E.g. X Ltd. Y Ltd.

XY Ltd. (New Co.

Acquirer

XY Ltd. Acquires N. Assets of X Ltd. & Y Ltd.

Comments : The Given Transaction is a Business combination because XY Ltd. is

Acquiring N. Assets of X Ltd. & Y Ltd.

Case II : Acquisition of control by acquiring Significant Equity Interest

E.g. X Ltd . acquires 60% Equity Shares in Y Ltd. is it Business Combination ?

Comments : Yes, the Given case is a Business combination because X Ltd (Acquirer) has
Obtained control over Y Ltd. by acquiring Significant Equity Interest

Important Points to be considered on control by Equity Interest

A. Under Significant Equity Interest, we will discuss the relationship between
Holding & Subsidiary.
B. For Detailed Discuss on meaning of control by shares, we need to refer Ind AS 110.
in this Topic we will Assume that control by shares means Acquisition of more than
50% of Equity shares by Acquirer in Acquiree
C. Ind AS 103 (Business Combination) & Ind AS 110, (Consolidation) Both Covers
different Accounting Aspects which are as follows :-

Consolidation

Ind AS 103 Ind AS 110

It deals with all Accounting Aspects It deals with Post acquisition

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Related to Consolidated financial Period of Holding/Subsidiary

Statements “On the date of Relationship in CFS
Acquisition of Shares”

Case III : Special Transactions

A. Reverse Acquisition
B. Common Control Transactions
(Mergers, Demergers etc : Appendix C )

*We will Start discussion on these Topics after understanding Normal Business
Combination.

*Part 3*

Unit II: Accounting for “Business Combination”

We need to learn Accounting for Business Combination for Different Type of

Transaction Separately. There are 4 Types of Transactions under Business
Combination as follows :-

Part A : Accounting for “Acquisition by Net Assets”

Part B : Accounting for “Acquisition by Significant Equity Interest”
Part C : Accounting for “Reverse Acquisition”
Part D : Accounting for “Common Control Transactions” (i.e. Mergers, Demergers)

PART A : Accounting for Business Combination by acquiring Net Assets

If an Entity acquires N. Assets of other Entity then Accounting for Such

Combination will be done as per “Acquisition method” (It is called as Purchase method
in AS-14). There are 6 Steps under Acquisition method :-
Step I :Identify the Acquirer
Step II : Identify the Acquisition date
Step III : Identify the Purchase Consideration
Step IV : Identify the Assets & Liab. Acquired
Step V : Identify the Goodwill/ Bargain Purchase
Step VI : Identify Special Adjustments *V.V.V.V.Imp

Step I : Identification of Acquirer

As per the Provisions of Ind AS 103, Identification of Acquirer is very important

because Application of Ind AS 103 can be made on Acquirer only. There is no Guidance
on Acquire Books in this statement. It means that Identification of Acquirer is very
Critical for this statement.
As per the provisions of Ind AS 103, there are following situations where we
need to identify the Acquirer :

Case I : If Purchase Consideration is a paid in cash : “Acquirer will be the entity which
pays cash”

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X Ltd Pays Cash to Y Ltd. in PC

E.g. X Ltd. Y Ltd.

X Ltd. acquires N. Assets from Y Ltd.

Comments : In the Given Case, X Ltd. will be assumed as an acquirer because It is

Paying cash to y Ltd in settlement of Purchase consideration.

Case II : If Purchase consideration is settled : Acquirer will be the Entity “which

by “Transfer of other Assets” transfers its other Assets in
Settlement of PC “
X Ltd. Transfers Land of 10 Crores to Y Ltd. in PC

E.g. X Ltd. Y Ltd.

X Ltd. acquired N. Assets of Y Ltd.

Comments : In the Given Case, X Ltd. will be assumed as Acquirer because it is

Transferring its Land in PC.

Case III : If Purchase Consideration is Settled : Acquirer will be the Entity “Which
by incurring Liabilities incurs Liab.”
X Ltd. issued Debentures to Y in Settlement of PL

E.g. X Ltd. Y Ltd.

X Ltd. acquired N. Assets from Y Ltd.

Comments : In the Given Case, X Ltd. will be assumed as on Acquirer because It has
incurred Liab. In the form of “Debentures”

Case IV : If Purchase Consideration is Settled : Acquirer will be the Entity “Which

by issuing Equity Shares issues Equity Shares”

Subject to Exceptions
X Ltd. issues Equity Shares in PL Settlement

E.g. X Ltd. Y Ltd.

X Ltd. acquires N. Assets from Y Ltd.

Comments : X Ltd. will be assumed as Acquirer in “ Normal Cases” because It has issued
its Equity shares.

Exceptions to Case IV

Normally, we assume the Entity as an Acquirer which issues its Equity shares in
Settlement of PC. Sometimes, It does not happen. It means that Accounting

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Acquirer can be different from Legal Acquirer. It happens because of Capital

Structure in Post Combination Entity. There are following cases which are covered in
Exceptions :-

Exception I : Reverse Acquisition

If an acquirer issues Equity Shares to Acquiree but in Post Combination B/s Acquiree
Obtains control over acquirer because Acquirer issued high Number of Shares than its
Existing Capital held by Former members then we will assume Acquirer as Legal
Acquirer only, but from Accounting Point of View, we consider Acquiree as an
Accounting Acquirer.

Comments : The Case of Reverse Acquisition takes place where a small Entity takes
Over the Net Assets of Large Entity

Note : we will Apply Ind AS 103 on Acquiree in this Case

E.g. X Ltd. Y Ltd

X Ltd. acquires N. Assets from Y ltd.

i. X Ltd issued 15000 New Shares to Y Ltd in PL.

ii. X Ltd. has 10,000 Shares in its Pre Combination B/s as Share Capital

Solution : In the Given Case, members of Y Ltd shall have 60% Voting Power in Post
Combination Balance sheet (15000/25000 x 100) which indicates that y Ltd.
Will obtain control over X Ltd in Post Combination Business. So, we can take
X Ltd. as Legal Acquirer only, but for the Application of Ind AS 103, Acquirer
Will be Y Ltd.

Exception II : If Two or more Entities combines their Businesses by Forming New

Company then Accounting Acquirer will be the Entity which will have
Control in New Company. It can also be said that New Company will be
taken as “Legal Acquirer” Only.

E.g. X Ltd. Y Ltd.

XY Ltd. (New Company)

i. XY Ltd. acquired Net Assets of X Ltd. & Y Ltd.
ii. XY Ltd. will issue 20,000 Shares to X Ltd. and 30,000 Shares to Y Ltd. in PC.

Solution :

In the Given case, It is Clearly indicated that Y Ltd. will have control in XY Ltd
due to 60% share in voting Power. So, Y Ltd. will be considered as an “Accounting
Acquirer” for the Purpose of Ind AS 103. It can also be said that XY Limited is Just a
Legal Acquirer & X Ltd. will be considered as an Acquiree.

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Exception III : If 3 or more Entities combine their Businesses by transferring

N. Assets to a newly formed company and All the Entities are in
Minority then larger Group of minority will be taken as an Acquirer.

E.g. X Ltd. Y Ltd. Z Ltd.

XYZ Ltd. (New Co.)

i. XYZ Ltd. takes over N. Assets of all 3 Companies
ii. XYZ Ltd. issues 40,000 Shares to X Ltd, but 30,000 Shares to Y & Z.

Solution :

In the Given Case, No company will Exercise control in XYZ Ltd. because All are
in minority Interest. In Post combination Entity, X Ltd. will have 40% shares and
Y & Z shall have 30% shares in XYZ Ltd. So, X ltd will be considered as Accounting
Acquirer because It is the largest minority holder.
❖ Legal Acquirer = XYZ Ltd., Acquiree = Y & Z

Exception IV : If all Entities have Equal voting Power in Post Combination B/s then
Accounting Acquirer will be the Entity “which will have dominance in
Management”

E.g. X Ltd. Y Ltd. Z Ltd.

XYZ Ltd. (New Co.)

i. XYZ Ltd. takes over X, Y, Z
ii. XYZ will issue equal shares to all 3 companies
iii. X Ltd. BOD shall have dominance in BOD of XYZ

Solution : In the Given Case, X Ltd. will be taken as “Accounting Acquirer”. There is no
Large minority Group, but X ltd will have dominance in management.

Solution of Q.11, Q.12, Q.13, Q.14 (Discussed in Class)

Step II : Identification of “Acquisition Date”

As per the provisions of Ind AS 103, Identification of Acquisition date is very

Important because Assets & Liab. of Acquiree are measured on this date for
Recognition in Acquirer Books. It is the date on which Acquirer obtains control over
Acquiree”
➢ In Normal Cases, Acquisition date is considered as payment date at which
Purchase consideration is settled by Purchasing Co./Acquirer.
Note : In Practical question, Payment date will be considered as Acquisition date if It
is not mentioned that Acquirer has obtained control from which date.
➢ If control is obtained by Acquirer over Acquiree on an Earlier date or Later date
than Payment of PC then we may analyse the circumstances to identify date.

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Note : If Approval of Transaction is substantive then Approval Date will be

considered as an acquisition date. In this Case, Earlier or Later Acquisition
is not allowed Refer Q.19.

Solution of Q.15, Q.17, Q.18, Q.19 (Discussed in Class)

*Part 4*

Step III : Identification of Purchase Consideration

As per the Provisions of Ind AS 103, Purchase consideration is the aggregate

Of payments which is made by An Acquirer to An Acquirer in Consideration of
Acquisition of Business. The following statement may be prepared for the calculation
Of PC :-
Payment in Cash xxxx
Fair Value of :
i. Other Assets transferred xxxx
(i.e., Land, P&M, Investments etc)
ii. Liabilities Incurred xxxx
(i.e., Debentures issued etc)
iii. Issue of New Equity Shares xxxx
PC xxxx

It should be taken which Prevails on “Acquisition Date”

Important Notes

i. The Difference between fair value of Assets Transferred & Carrying Amount of
Assets transferred in the books of Acquirer shall be transferred to P&L A/c
Assuming Profit or Loss on sale of Assets.
ii. The Difference between fair value of Newly issued shares and face value of
Newly issued shares shall be transferred to “Securities Premium” and It will be
disclosed under other Equity in B/s.

Step IV : Identification of Assets & Liabilities (Subject to Step VI)

As per the provisions of Ind AS 103, Acquirer will take over Assets & Liabilities
From Acquiree at “Fair value” Which Prevails on Acquisition Date

Exception to above Rule : Measurement Period *Imp

As per the Provisions of Ind AS 103, It may be possible that Recognition of

Acquired Assets & Liabilities has been made on Provisional fair value on Acquisition
date because confirmed fair value may not Prevail sometimes in relation to An Asset
Or Liability on Acquisition date. In this case, Ind AS 103 has been Given measurement
Period of 1 year.”If any Change takes place within one year in Provisional fair values
then such change will be adjusted against Goodwill assuming that we are adjusting it
On Acquisition date.” But changes beyond one year shall be adjusted in SOPL and there

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Will be no adjustment in Goodwill on Acquisition date.

Solution of Q.22, Q.23 (Discussed in Class)

Step V : Identification of Goodwill or Bargain Purchase

Concept 1 : Goodwill

If Purchase Consideration Exceeds Net Assets acquired on Acquisition date then

It will be transferred to Goodwill. It will be assumed that Acquirer will recover this
Extra Payment in future by running Business of Acquiree.

E.g. Fair value of Assets acquired : ₹ 50,00,000

Fair Value of Liab. acquired : ₹ 20,00,000
PC : 1) Cash Paid : ₹ 10,00,000
2) Equity Shares Issued : ₹ 60,00,000
(30,000 Shares of 100 each @200)
Pass Journal Entry

Solution : Journal Entry

Assets a/c Dr 50,00,000

Goodwill (Bal. fig) a/c Dr 40,00,000
To Liabilities 20,00,000
To Cash 10,00,000
To E.S. Cap. (30,000 x 100) 30,00,000
To Sec. Premium (30,000 x 100) 30,00,000
(Being Assets & liab. Acquired)

Concept 2 : Bargain Purchase

If Purchase Consideration becomes Lower than N. Assets acquired then

Difference will be considered as Bargain Purchase and It will be transferred to
“Capital Reserve”. The following points should also be considered in this relation :-
i. The Situation of Bargain Purchase is considered very Rare in Practical Life by
Ind AS 103. So, it suggests Re-Assessment of acquired Assets & Liab.
ii. The Entity should identify reasons for such Bargain Purchase i.e., Acquisition
Of an Entity under Govt. Restrictions, Loss making venture etc. If Entity can
Prove the reasons of Bargain Purchase then Capital Reserve will be disclosed in
“OCI”
iii. If Reasons cannot be disclosed, Capital Res. will be disclosed directly in other
Equity but other than under the heading of OCI.

E.g. i) N. Assets (fv) = ₹ 20,00,000

ii) Cash Paid = ₹ 15,00,000
Solution : N. Assets a/c Dr 20,00,000
To Cash 15,00,000
To capital Reserve 500,000 (Bal. Fig)

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*Part 5*

Step VI : Recognition of Special Items on Acquisition date *V.V.Imp

Concept 1 : Treatment of Acquiree’s Contingent Liabilities

At the time of Acquisition of Acquiree Assets & Liab. on Acquisition date, It may
be possible that acquire has some contingent Liabilities. In the Given Case, Acquirer
Can Recognise Acquiree’s Contingent Liabilities in its Books On Acquisition date as
Present Obligation/ Actual Liab. Only if A Reliable Estimate in Amount can be made for
Such Liability whether Outflow is Probable or not on Such date.

Contingent Liab.

Outflow is Probable Outflow is not Probable

Reliable Estimate Reliable Estimate Reliable Estimate Reliable Estimate

Can be made cannot be made can be made cannot be made

*Recognise a Do not Recognise Recognise a Do not Recognise

Liability a Liab. Liab. a Liab.

❖ Summary : Whether there is a Reliable Estimate of the Liability then we will

Provide For it
If fair value of Liab. is available

Solution of Q.30, Q.31 (Discussed in Class)

Solution of Q.32

As per the Provisions of Ind AS 103, Contingent Liab. of Acquiree can be regonised
in the books of Acquirer as a Liability only if there is a reliable Estimate of Such Liab.
In the Given case, X Ltd. (Acquirer) has Assessed 5 million for 20 cases & 1 million
For other 2 cases. This Assessment can be taken as a Reliable Estimate.
So, X Ltd. shall recognise a Liability of 6 million on Acquisition date.

Concept 2 : Indemnification *V.V.Imp

Indemnification

Unit I : Indemnification on Unit II : Indemnification

Liabilities on Assets

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Unit I : Indemnification on Liabilities

If an Acquiree Provides Guarantee to the Acquirer for Loss on Uncertain

Liabilities in future beyond a limit then Acquirer should recognise “ An Indemnified
Asset” due to such Guarantee because Acquirer can Recover the Excess Losses from
Acquiree if it faces Losses due to Excess Payment of Obligation beyond the
Guaranteed Amount of Liabilities.
(i.e., Uncertain Liabilities may be in the form of warranty Provisions, Prov. For
cases/ Compensations etc.)
The following Steps may be considered in the books of Acquirer on Acquisition
date and on subsequent date of settlement :-

Step I : Acquisition Date

i. Acquirer will recognise liability on fair value as per its “Own Estimation”
ii. Acquirer will also recognise an “Indemnified Asset” against the above
Recognised Liab. as follows:

Indemnified Asset = Fair value of Liab. – Guaranteed Limit of Liab.

(Acquirer) (Acquiree)

Beyond this Limit Acquiree will bear the Losses

iii. Journal : Indemnified Assets a/c Dr xxxx (Recoverable)

To Liabilities xxxx (fair Value)

Step II : Subsequent Settlement

Case I : If payment of Liab. remains below or Equal to Guaranteed Limit

i.Cancel the indemnified Assets due to low Payments :

Liabilities a/c Dr xxxx
To Indemnified Assets xxxx
❖ We cannot Recover any Amount from Acquiree because there is no Loss to Acquirer
Beyond Guaranteed Amount

ii. Payment should be Recorded for Actual Settlement : * Liab. a/c Dr xxxx
To Bank xxxx
❖ If any Balance Remains in Liab. A/c if Settlement is made within
Measurement period then It will be
Liab. a/c Dr xxxx Adjusted in Goodwill Otherwise It will be
To Goodwill xxxx OR Reversed in PL
To PL xxxx

E.g. i) Guaranteed Liability Limit by Acquiree : 20,00,000

ii) Fair value Estimated by Acquirer : 22,00,000
iii) Actual Payment within 6 months of Acquisition : 19,80,000

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Show Indemnification Entries.

Solution :
i. Indemnified Assets a/c Dr 22,00,000
To Liabilities 22,00,000
ii. Liabilities a/c Dr 22,00,000
To Bank 19,80,000
To Indemnified Assets 200,000
To Goodwill 20000
(Being Liab. Settled within measurement Period)

Measurement period rule

Case II : If payment is made beyond the Guaranteed Limit

Settlement : i) Actual Payment will be recorded as follows :-

Liabilities a/c Dr xxxx
To Bank xxxx
ii) Recover the amount that goes beyond the limit as per Guarantee from
Acquiree
Bank a/c Dr xxxx
To Indemnified Asset xxxx
iii) Reverse the Balance in Indemnified Asset (if any)
Liabilities a/c Dr xxxx
To Indemnified Asset xxxx

E.g.
i. Guaranteed Limit of Liab. : ₹ 50,00,000
ii. Fair valuation made by Acquirer : ₹ 60,00,000
iii. Actual Payment within 6 months : ₹ 55,00,000

Solution :

Journal Entries

i. Indemnified Asset a/c Dr 10,00,000

To Liab. 60,00,000
ii. Liabilities a/c Dr 60,00,000
To Bank 55,00,000
To Indemnified Assets 500,000
(Being Settlement of Liab. made & Indemnified Assets Cancelled)
iii. Bank a/c Dr 500,000
To Indemnified Assets 500,000
(Being Indemnified Assets Recovered)

Solution of Q.26, Q.27, Q.28

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Unit II : Indemnification on Assets (Trade Receivables)

If Acquiree Guarantees minimum Collection from Debtors which is more than

Fair value Estimated by Acquirer then Difference will be debited as Indemnified
Assets. The following Steps should be followed :-

Step I : Recognition on Acquisition date

Trade Receivables a/c Dr xxxx Fair value Estimated by Acquirer
Indemnified Assets a/c Dr xxxx
[Guaranteed collection – fair value estimates by Acquirer]
. .
. .
. .

Step II : Subsequent Collection

Case I : If collection remains Less than Guarantee

Bank a/c Dr xxxx
To Debtors xxxx
To Indemnified Assets xxxx

Case II : If collection remains above Guarantee

Bank a/c Dr xxxx
To Debtors xxxx
To Indemnified Assets xxxx
To GW/PL xxxx

If collection made If Collection made

during measurement beyond measurement period
Period

E.g.
i. Fair value of Debtors (Acquirer) : 20,00,000
ii. Guaranteed collection : 28,00,000
iii. Actual Collection : 27,00,000
Pass Collection Entries.

Solution :
i. Trade Receivable a/c Dr 20,00,000
Indemnified Assets a/c Dr 800,000
. .
. .
ii. Bank a/c Dr 27,00,000
To Trade Receivable 20,00,000
To Indemnified Assets 700,000
(Being Actual Collection made)

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iii. Bank a/c Dr 100,000

To Indemnified Assets 100,000
(Being Amount Recovered from Acquiree as per Guarantee)

E.g. if Actual Collection is made of 30,00,000 in above Example beyond measurement

Period then what will be the Entry for collection ?

Solution :
Bank a/c Dr 30,00,000
To trade Receivable 20,00,000
To Indemnified Assets 800,000
*To Gain on Collection 200,000
(Being Actual Collection made)
❖ It will be transferred to PL because collection is made beyond measurement
Period

*Part 6*

Concept 3 : Items Not to be included in business combination

Items not to be included in Business Combination

Unit I : Acquisition Cost Unit II : Future Services Unit III : Pre-Existing

Relationship *Imp

Unit I : Acquisition Cost

As per the Provisions of Ind AS 103, Acquirer should write off “Acquisition
Costs” in P&L A/c as an Expense if there costs are incurred at the time of Business
Combination for Acquisition of Business of Acquiree. “These Expenses shall not be
Considered as a part of Business combination due to which there will be no impact on
Goodwill/ Bargain Purchase due to these Expenses.” As per Ind AS 103, these
Expenses do not increase future cash flows from Business, so these Expenses should
be Expensed immediately.
These Expenses may be in the form of Legal fees, Accounting fees, Investment
Banker fees, finder fees, Advisory fees, Stamp Duty for Registration of Assets,
Govt. fees for transfer of titles of I. Assets etc.

Journal Entry (Acquirer Books)

i. Acquisition Cost a/c Dr xxxx

To Bank xxxx
(Being Expenses Paid)
ii. P&L a/c Dr xxxx
To Acquisition Cost xxxx
(Being Expenses written off)

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Conclusion : On the Basis of above Explanation, It can be said that Treatment of

Acquisition cost will be separately from Business Combination Entries.

Solution of Q.33, Q.34 (Discussed in Class)

Unit II : Future Services

If any Payment is made by Acquirer to Any Person or persons of Acquiree in

Lieu of their Guidance/ Services for Running the Acquired Business in future/ Post
Combination Period then Such Payment shall not be considered as a part of Business
Combination. There will be no impact on Assets/ Liab or Goodwill/ Bargain Purchase on
Acquisition Date due to such contractual Payments for future Services. “The Acquirer
Shall write off these payments in future as Remuneration” in P&L A/c as Normal
Employee Benefit Expense is written off.

Journal Entries

i. Remuneration Exp. a/c Dr xxxx

To Bank xxxx
(Being Remuneration Paid) At the time, it will become due
ii. P&L a/c Dr xxxx
To Remuneration xxxx
(Being Exp. written off)

Conclusion : On the basis of above Explanation, It can be said that future Services are
Settled Separately from Business combination.

Solution of Q.25

No, there will be no recognition of any Liability for this contract on Acquisition date
because 10 million shall be paid for future services of Acquiree management. So, we will
Write off this amount in P&L A/c as Normal Remuneration is written off when it will
become due.

Unit III : Pre- Existing Relationships

Pre- Existing Relationships

Part A : Non – Contractual Part B : Contractual

Part A : Non Contractual

(i.e., Court Cases etc.)

As per the Provisions of Ind AS 103, Non Contractual Pre- Existing

Relationship should be considered Separately from Business combination. The
Settlement of these relationship shall be routed through P&L A/c instead of any
Adjustment in Goodwill/ Capital Reserve. The following steps shall be followed while

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Making Accounting Entries on Acquisition date :-

Step I : First of all, “Fair value” should be identified for these Non contractual
Relationships
Step II : Reduce the Amount of Purchase consideration by fair value of Non
Contractual Liab.
Net PC = Gross Purchase consideration X – fair value of Non Contractual
Relationships
It’s Not PC for Business combination
It will be considered as PC while
Computing GW/ Capital Res.

Step III : Calculate Gain/ Loss on Settlement of Pre-Existing Relationship as

follows :-

*Gain/ Loss = Fair value of Non contractual – Carrying Amount in Books (if any
Liab Provision) is already created by Acquirer
It will be transferred to P&L A/c

❖ If there is no carrying amount of provision in acquirer books then fair value

Of Non contractual Liab. will be considered as full Loss.

Observation : The Amount of Actual loss/ Gain will depend on carrying Amount of
Related Relationship.

Solution of Q.35

In the Given Case, X Ltd is paying 40 crores to Y ltd. for its Business, but
there is a Pre-Existing Relationship in the form of court case which should not be
Considered as a part of Business combination. It should be accounted for separately
From Business combination. So, PC for Business of Y Ltd. should be taken as follows :

Net PC = Gross PC – Fair value of court case

= 40 crores – 30 Lacs
= 39.70 Crores

Journal Entries for Business Combination

i. Provision for Court case a/c Dr 40 Lacs (carrying Amount)

To Bank 30 Lacs ( Fair value)
To Gain on settlement 10 Lacs (Bal fig.)
(Being Settlement of Pre- Existing Relationship made)
ii. Gain on Settlement a/c Dr 10 Lacs
To P&L a/c 10 Lacs
(Being gain transferred to P&L)

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iii. Assets a/c Dr 45 crore

Goodwill a/c Dr 5.7 crore (Bal fig)
To Liab. 10 Crores
To DTL 1 Crore
To Bank (PC) 39.70 Crore
(Being Net Assets acquired from y Ltd)

Solution of Q.36 (Discussed in Class)

Part B : Contractual Pre-Existing Relationship *Imp

(Re-acquired Rights)

If Acquirer has distributed its rights to sell its Goods or Services or use of
Technology to other Entities in the form of Franchise Agreement/ Licence
Agreement/ Distributorship etc. in lieu of some fees, but takes over the same
Entity later on before Expiry of Such contract then It will be Accounted for
Separately from Business Combination if some compensation is payable for Early
Termination. “The Acquirer will compute Gain/ Loss on settlement on such
Pre-Existing contract and will route it through P&L A/c”. It means that there will be
no impact of these settlement on Goodwill/ Bargain Purchase. The following steps
Should be followed :-

Step I : First of all, Calculate the Amount which can be reduced from PC

It will be lower of

Fair value of - Carrying Amount Actual Amount to be paid as

Re acquired right of Given Rights or compensation

Net PC = Gross Pc – Lower of above Explained values

It will be considered as PC for Business combination

Step II : Calculation Gain/ Loss on Settlement of Pre- Existing Relationship as

follows :-

Lower of above values – carrying Amount of Unamortised fees (if any) = Gain/ Loss
(Actual Payment)

Step III : Recognition of Re- acquired Rights :- *Imp

An Intangible Asset equal to fair value of Re-acquired Rights will be recognised

and It will be amortised over remaining contractual Life. It means that I. Asset in
the form of Re- acquired Right will be considered as a Part of Business combination.

Note : No Loss/ No Gain on settlement will be computed if there is no payment for

Settlement of these Rights, but I. Asset will be recognised at market terms.

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Solution of Q.38 *V.V.Imp

Step I : Calculation of Amount to be deducted from PC

a) Fair value of right – Carrying Amount 300,000

(450,000 – 150,000)
(250,000/10 x 6)
Or
b) Actual Amount to be paid as per contract whichever is lower = 180,000

Step II : Calculation of Net PC

Net PC = ₹ 100,00,000 – ₹ 180,000 = ₹ 98,20,000

Step III : Loss on Settlement of Re- acquired Right

Loss on settlement in P&L A/c = ₹ 180,000 – ₹ 150,000 = 30,000

Journal : Unamortised fees a/c Dr 150,000

(unexpired)
PL a/c Dr 30,000
To Bank 180,000

Step IV : Recognition of Re-Acquired Right

An Intangible Asset will be recognised at ₹ 450,000 on Acquisition date.

Solution of Q.37 (Discussed in Class)

*Part 7*

Concept 4: Acquisition of Intangible Assets from Acquire *Imp

As per the Provisions of Ind AS 103, Acquirer will recognise Intangible Assets
Separately from goodwill which are held by Acquiree on Acquisition date only if Any
Criteria is fulfilled as Specified below :-

Criteria for Recognition of I. Assets

Legal Criteria or Separability Criteria

i. Legal Criteria : If Acquiree has Permissions or Approvals from Govt. to

Conduct any Special Activity then we can recognise such Licences as I. Assets
Separately from Goodwill Even if these Licences are not saleable or Exchangeable
Or Giveable on Rent.
OR
ii. Separability criteria : If Acquiree has any I. Asset in the form of patent,
Copyrights, Trademarks etc. which can be sold, can be Exchanged or can be Given

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On Rent then It will be considered as a Separate I. Asset from Goodwill.

Exceptions to Separability Rules

i. Customer Lists/ Data : If Acquiree has some Customer List or Registered

User Date on its Website/ App then It may not be an Intangible for Acquiree
because It is Generated during Normal Course of Business & No Separate Cost is
Incurred for it.
As per the Provisions of Ind AS 103, the Specified List/Data can be
Considered as a Separate Asset at the time of Acquisition of Business if Acquirer
Measures its fair value. If Acquirer can take Benefits from using it or selling it then
Fair value of Such an Asset can be recorded as a Separate Asset.

ii. In Process Research Projects : If Acquiree has some Projects in research

then It cannot consider research work as an intangible in its books as per Ind AS 38.
But Acquirer can recognise it as a separate Asset at the time of Business Acquisition
if Acquirer Estimates that the Specified Research will be developed in future & there
are Economic Benefits in it.

Solution of Q.39, Q.40 (Discussed in Class)

Solution of Q.41 *V.V.Imp

In the Given Case, KK limited recognise Patents & Licences as a Separate

Intangible Asset because It has an Estimation of future cash flows from these
Assets and fair value can also be measured for these Asset on Acquisition Date. On
Acquisition date, we will follow Ind AS 103 for Recognition of Intangible Assets which
are acquired by Acquirer from Acquiree but subsequent measurements shall be made as
Per Ind AS 38. The following Entry shall be passed on Acquisition date :-

Patents a/c Dr 30 crores (20 + 10)

Licence a/c Dr 10 crores
N. Assets a/c Dr 15 Crores
To Cash/ ESC 35 Crores
To Capital Res. (Bal) 20 Crores
(Being Assets & Liab acquired on Acquisition date)

Concept 5: Contingent Consideration *V.V.Imp

If any Purchase consideration is promised by Acquirer to Acquire in future

On achievements of some Targets** in Post Combination Period then It will be
Considered as “ Contingent Consideration” on Acquisition date.
(**Targets : Increase in sales, Profits, Increase in EPS or Retaining the customers
etc.)
As per the Provisions of Ind AS 103, Acquirer should Assess “fair value of
Contingent consideration” on Acquisition date. If fair value can be measured reliably
On Acquisition date then It will be recognised as a Liability, but will be considered as
“PC”

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“Subsequent measurement of contingent Consideration”

As per the provisions, Subsequent measurement will be made at each B/s date
For Pending/ O/s Liability of Contingent consideration. If any changes take place in
Fair value of contingent consideration then “It will be transferred to P&L A/c”

Note : The concept of measurement period will not be considered for change in fair
Value of contingent consideration. It means that changes in fair value of
Contingent consideration will not have any impact on GW/ C. Res on Acquisition
date.

Exception to above Rule

If contingent consideration is promised by Acquirer in fixed number of Equity Shares

then It will be considered as an Equity instrument under Ind AS 109. This Promise will
not re-measured at any B/s date but It will remain same as it was recorded on
Acquisition date It can also said that there will be no change Subsequently in such
Promise and It will be recorded once on Acquisition date fair value of shares.

Important Note

Promise for variable Number of shares shall be considered as a financial Liability and
It will be re-measured at each B/s date and Changes shall be transferred to P&L A/c.

When Amount is fixed for shares instead of numbers

Solution of Q.43 *V.V.Imp

Case I : If contingent Consideration is promised in fixed No. of Equity Shares

A. Initial Recognition on Acquisition Date :-

On Acquisition date, fair value of contingent consideration is ₹ 25,00,000
Which will be satisfied by issue of 200000 shares. So, Calculation of PC (Total) will be
made as follows :-
Actual PC (10,00,000 Shares @20) 200,00,000
Fair value of Contingent Consideration 25,00,000
Total PC 2,25,00,000

B. Subsequent Measurement (31.3.x2) : In the Given Case, consideration was promised

in fixed number of shares on Acquisition date to which Re-measurement is not
Allowed. So, we should ignore fair value per share of 25/- on 31.3.x2, but shares shall
be issued at 25,00,000 as follows :-
Issue Price = 250,000 (fixed) = 12.50
20,000 Shares
SC SPR
10 2.5

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Case II : Variable Number of shares in contingent consideration

Initial Recognition (1.4.x1)

- Same as in Case I -

Subsequent measurement of contingent consideration :-

In the Given case, variable No. of shares have been promised on Acquisition
date due to which Re-measurement is required. At the time of changes in fair value of
Contingent consideration, we will transfer it to P&L A/c.

I. Changes in fair value on 31.2.x2 = 40,00,000 – 25,00,000 = 15,00,000 (P&L)

II. No. of shares to be issued = ₹ 40,00,000 = 16000 Shares
25 Per share

Solution of Q.42

i. In the Given Case, Acquirer has Promised 20,00,000 shares to Acquiree on

Expected Profits of 100 crores in future. It will be considered as a contingent
Consideration and should be classified as an Equity Instrument as per Ind AS 109
due to fixed No. of Shares. It will be recorded on Acquisition date fair value.

ii. Computation of Goodwill :

Actual PC ( 1 Crore share x 100) 100 Crores
Contingent Consideration ( 20L Share x 100) 20 Crore
PC 120 Crores
N. Assets (100 -20) 80 Crores
Goodwill 40 Crores

iii. The Given Contract is for fixed No. of shares due to which subsequent
Measurement is not allowed.

*Part 8*

Solution of Q.44, Q.45 (Discussed in Class)

Concept 6 : Contingent Consideration to Employees Shareholders *Imp

As per the Provisions of Ind AS 103, Contingent Consideration will not be

Considered as purchase consideration as we discussed in concept 5 if continuous
Employment is mandatory for former owners in Post combination Period. If such
Consideration will be forfeited in case former owners do not continue with Acquirer
for the Specified minimum Period. In concept 5, there was no condition of
Employment for the payment of contingent consideration, but performance Targets
Were Specified only.
In concept 6, we will consider contingent consideration as a Remuneration
Payable to employees in post combination period for future services, but It will not
be treated as PL on Acquisition date. It means that such contingent payment will

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not form a part of Business combination. It will have no Impact on goodwill or capital
Reserve, but such consideration will be written off as salary to Employees in Post
Combination Period.

Refer Q.44 & Q.45 for this concept

Concept 7 : Share Based Payment Plans of Acquiree *V.V.V.Imp

SBP Plans

Unit I : Replacement of Awards Unit II : Non Replacement of Awards

Unit I : Replacement of Awards

If Acquiree has share Based Payment Plan (ESOP’) in its B/s on Acquisition
date and Acquirer Replaces such plan with a new plan in its shares then the following
Steps/ Points shall be considered while making Entries for Business Combination on
Acquisition date :-
A. As per Ind AS 103, there plans shall be divided into two Separate headings on
Acquisition date as follows :-
SBP Plans

(i) Pre combination Obligation (ii) Post Combination Obligation

(Expired Services) (future Services)

It will be considered on Acquisition date It will be considered as future

& will be credited on such date Services & will be written of as
Employees Expense in Post Period

It will have impact on Recognition It will have impact on P&L A/c in

Of GW/ C. Res. Post combination Period

B. Steps to find out Pre & Post Combination Obligation :-

Step I : Identify New Vseting Period under Acquirer Plan

New V.P = Expired Period + Further Period as per Acquirer Plan

Step II : Identify fair value of original Plan on Acquisition date which was announced
by Acquiree

Step III : Calculate Pre- combination Obligation as follows :-

Pre – Combination Obligation = fair value of original plan on Acquisition date x Expired
New vesting Period or Old Vesting Period Period

Higher

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Step IV : Post Combination = fair value of New Plan - Pre Combination

Obligation on Acq. Date obligation

Solution of Q.48 *Imp

Calculation of Pre Combination Obligation

Pre combination Obligation = fair value of Original plan on Acquisition date x Expired
New VP or Old VP Period

Higher
= 500 x 2 years
4 years or 5 years

5Y
= 200

Comments : The Amount of Pre-Combination obligation will be recorded on Acquisition

date as a Liab. and It will have direct impact on GW/ C. Res.

Calculation of Post Combination Obligation

Post combination Obligation = fair value of New plan on – Pre comb Obligation
Acq. Date
= 600 – 200
= 400

Comments : The Post comb. Obligation will be written off in P&L over the remaining
Vesting period of 2 years (400/2 = 200 p.a

Solution of Q.47

Pre- comb. Obligation = 9 million x 2 y = 3.6

5y
Post- Comb. Obligation = 10 million – 3.6 million = 6.4

Solution of Q.46

Pre Combination obligation = Fair value of original plan on Acquisition date x Expired
New vesting period or Old VP Period

Higher
= 9 million x 5 years = 6.43 million
(5y + 2y) or 5y

Higher : 7 years

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Post combination obligation = fair value of new plan – Pre comb obligation
= 10 million – 6.43 million
= 3.57 (It will be amortised over 2 years)

Unit II : Non replacement of Awards

(Relevant for Holding/ Subsidiary only)

If Acquirer does not replace the share Based Awards and Employees of Acquiree shall
Get receive shares from Acquire itself then Acquirer will consider these Awards as
No Controlling Interest. The pre- combination obligation for Expired period will be
Considered as NCI on Acquisition date, but Post combination obligation will be added
to NCI in future over Expired Period.

Solution of Q.49

Calculation of Pre- Combination Obligation

Pre- Combination = 500 million x 2 y = 200 million

4 y or 5y

5y

Comments : It will be added to NCI on Acquisition Date

Calculation of Post Comb. Obligation

Post Comb. = 500 million – 200 million = 300

Comments : It will be amortised over a Period of 2 years in future in PL & will be

added to NCI

*Part 9*

Solution of Q.50

A. Calculation of PC

i. Fair value of retail Division 360 million

ii. Fair value of shares to be issued 350 million
(10,00,000 Shares x 350 Per share) PC 710 million

B. Calculation of Goodwill/ Bargain Purchase on Acquisition Date

Purchase Consideration 710 million

Fair value of Net Assets Acquired (Given) 700 million
GW 10 million

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C. Journal Entries
(In the books of X Ltd.)

i. Land & building a/c Dr 50

Plant & machinery a/c Dr 600
Equipment a/c Dr 10
Inventory a/c Dr 80
Trade Receivable a/c Dr 80
Cash a/c Dr 10
Goodwill (Bal Fig.) a/c Dr 10
To Loans 100
To Trade Payable 30
To Liquidator of X Ltd. (PC) 710
(Being Assets & Liab. Acquired from y Ltd. at fair value)

ii. Liquidator of Y Ltd a/c Dr 350 million

To Eq. Share capital (10L x 10) 10 million
To Sec. Premium (10L x 340) 340 million
(Being 10 Lac Shares issued @ 350 in settlement of PC)

iii. Payable a/c Dr 30

Liquidator of y ltd a/c Dr 360 million
To Equipment 120
To Inventory 120
To Receivables 110
To Gain on Disposal of
N. Assets (Bal fig) 40 (360 -320)
(Being Purchase consideration settled by transferring Retail Division)

iv. Gain on Disposal of N. Assets a/c Dr 40

To SOPL 40
(Being Gain transferred to other Incomes)

Solution of Q.52

A. Calculation of Net Assets Acquired (millions)

Fair Value of PPE 220

Fair value of Intangible Assets : Brand value 20
Customer List 10
Fair value of Trade Receivables 24
Indemnified Debtors 6
Assets held for Earning Rentals 100
Inventory 40
Indemnified Assets against warranty 1
Total Assets (A) 420

Debentures 100

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Trade Payables 30
Retirement Benefits 50
Deferred Tax Liab. 20
Fair Value of warranty Obligation 2
Total (B) 202
(A-B) Net Assets Acquired (421 - 202) = 219

B. Calculation of Purchase Consideration

1) Current Promised Payment 250 million

2) Contingent consideration 50 million
PC 300 million

Goodwill = Purchase consideration – N. Assets acquired

(Acquisition date) (Acquisition Date)
= 300 million – 219 million
= 81 million

Note on Future Services: In the Given case, we have ignored payment of 5 million to
Managing director because It will be paid by Acquirer for has future services. This
Amount will not be considered as a part of Business combination, but It will be
Written off in P&L in post combination Period.

Solution of Q.51 *V.V.Imp

In the Given case, Bx Ltd. will be the Larger Entity in the Group. It means
that Bx Ltd. will have control over New Entity ABx Ltd. which indicates that Bx Ltd.
Will be taken as an Accounting Acquirer and ABx Ltd. will be considered as a Legal
Acquirer, but Ax Ltd will be taken as an Acquiree in this transaction. The following
Points shall be considered due to consequence of Difference in Legal Acquirer &
Accounting Acquirer :-

A. All the Accounting Entries shall be recorded in the books of ABx Ltd. which is a
Newly incorporated Entity.
B. Bx Ltd is the Real Acquire in the Given transaction due to which we will not apply
Acquisition method on its B/s. It means that there will be no Change in its B/s. Its
Assets, Liab, reserves & capital will be shifted to New Entity at same value as it was
Existed in its Original B/s.
C. Ax Ltd. is an acquire in Given transaction due to which we will Apply Acquisition
Method on its Assets & liab. Its Assets & Liab shall be taken on fair value and it will
be issued PL at fair value Per share of Acquirer (Bx). We will also identify GW and
capital reserve for Ax Ltd.

A. Calculation of N. Assets & Goodwill for Acquire (Ax Ltd)

Fair Value of Assets : Fixed Assets (PPE) 9500

Investments 1050
Inventory 1300

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Receivables 1800
Cash 450
Fair Value of Liab : Borrowings (3000)
Trade payables (1000)
N. Assets 10100
Value of Business (PC) 11000
Goodwill (Bal) 900
(PC Exceeds N. Assets)

B. Calculation of Value Per share of Acquirer (Bx Ltd)

Value of Business of Bx Ltd (Given) 14,000

No. of shares in Bx Ltd (7000/10) 700
Fair Value Per share 20

C. Payment of Purchase consideration to AX ltd.

No. of shares = Value of Ax Ltd = 11000 = 550

Value per share of Bx Ltd 20
5500 5500
(Capital) (Premium)

D. Journal Entries
(In the Books of ABX Ltd)

i. Acquisition of Ax Ltd :-
Property, Plant & Equip. a/c Dr 9500
Investments a/c Dr 1050
Inventory a/c Dr 1300
Receivables a/c Dr 1800
Cash & Cash Equivalents a/c Dr 450
Goodwill a/c Dr 900 (Bal fig)
To Borrowings 3000
To Trade Payables 1000
To E. S. Capital 5500
To Sec . Premium 5500
(Being Business Acquired from Ax Ltd)

ii. Acquisition of Bx Ltd. (Book values without any change) :-

Property, Plant & Equip. a/c Dr 7500
Investments a/c Dr 550
Inventory a/c Dr 2750
Receivables a/c Dr 4000
Cash & Cash Equivalents a/c Dr 400
To Borrowings 4000
To Trade Payables 1500
To R& S (Other Equity) 2750
To E. S. Capital (New Issue) 7000

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(Being Business Acquired from Accounting Acquirer at Book values)

Balance sheet of ABX Ltd. (post combination)

Notes ₹
Non Current Assets :
i. Property, Plant & Equipment 1 17,000
ii. Goodwill - 900
iii. Financial Assets : Investments 2 1600

Current Assets :-
1) Inventory 3 4050
2) Financial Assets :
Trade Receivables 4 5800
Cash 5 850
Total 30200

Equity :
E.S Capital 6 12500
Other Equity 7 8200

Non current Liab :

Borrowings 8 7000

Current Liab :
Payables 9 2500
Total 30200

*Part 10*

Concept 8 : Skilled workforce

Assembled Workforce

As per the provisions of Ind AS 103, there will be No recognition of Any Asset
Or liability in relation to continuation of Employment of Skill workforce of Acquiree
in Post Combination Period with Acquirer. They will be paid by Acquirer in future for
Their services as Remuneration in post combination period, but there will be no
Accounting on Acquisition date in this Regard.

Concept 9 : Employees “Retirement Benefits”

As per the Provisions of Ind AS 103, Retirement Benefits held by Acquiree shall
be recognised in the books of Acquirer on Acquisition Date only if Employees of
Acquiree are continuing their jobs with Acquirer. The retirement obligation will be
Measured as per Ind AS 19 on Acquisition date (Exception to fair value Rule).

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Concept 10 : Assets Held for sale with Acquiree

As per the Provisions of Ind AS 103, Non current Assets held for sale of
Acquirere shall be recognised in the books of Acquirer as per Ind AS 105 : Fair value
Less cost to Sell on Acquisition date.

Concept 11 : Lease Contracts held by Acquiree *V.V.Imp

If Acquiree

is a “Lessee” (Unit I) is a “Lessor” (Unit II)

Unit I : If Acquiree is a Lessee

Lessee

A. Exempted Lease B. Non Exempted Lease

A. If Acquiree is a Lessee in an Exempted Lease then there will be No RoU or Lease

Liability in its books. In this case, Acquirer will recognise Nothing in its books on
Acquisition date, but Acquirer will make payments for Lease Rentals if it continue
the Exempted Lease in future. These Rentals shall be Expensed in future, but there
Will be no Accounting on Acquisition date for Exempted Lease.

B. If Acquiree is a Lessee in Non Exempted Lease then It will have ROU Assets &
Lease Liability in its books. In this case, Acquirer will take over ROU Assets and
Lease Liab. from Acquirer on Acquisition Date. *Imp

Step I : Acquirer will compute Lease Liab. on Acquisition date as it is a new contract
For it.
(Present value of future payments)
Current Rate

Step II : Acquirer will recognise ROU Asset Equal to Lease Liab as per Step I

Unit II : If Acquiree is a Lessor

Lessor

Operating Lease Finance Lease

A. Operating Lease : Under operating Lease, Acquirer will not Recognise future
Rentals on Acquisition date but It will acquire “Assets Given operating Lease at
Fair value” on Acquisition Date. The Acquirer will recognise Earning from Rentals in
Future on SLM Basis.

B. Finance Lease: Under Finance Lease, Acquirer cannot recognise Assets on Lease
On Lease on Acquisition date because Assets do not Prevail Acquiree Books. In this

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Case, Acquirer can recognise “Lease Receivable” on Acquisition date in its books.

“Lease Receivables shall be computed on Acquisition date assuming a New contract for
Acquirer”

Lease Receivables = Future Lease collections x PVF at Current Rate on Acquisition

Date

Concept 12 : Deferred Tax on Acquisition Date

(Refer Ind AS 12 for Detailed Discussion)

As per the provisions of Ind AS 103, Acquirer will compute Deferred Tax on
Acquisition date for the difference in fair values of Net Assets & Tax Base of Net
Assets which are Acquired by Acquirer from Acquiree.

Deferred Tax = Fair value of Net Assets acquired – Tax Base of Net Assets acquired
(Acquisition Date)
Acquisition Method Acquiree Tax Returns

i. If fair value of N. Assets Exceeds Tax Base = DTL (Diff x rate)

ii. If Net Assets under Tax Base Exceeds fair value of N.Assets = DTA (Diff x Rate)

Notes : 1) GW/ Bargain Purchase shall be recognised after recognising Deferred Tax
2) Rate will be taken which is applicable on Acquiree

Solution of Q.53

i. Calculation of Deferred Tax

Fair value of N. Assets Acquired 1070

Tax Base of N. Assets Acquired (920)
Difference 150
Tax Rate (S Ltd) 40%
DTL 60

ii. Goodwill on Acquisition Date

Journal : N. Assets a/c Dr 1070 (fair value)

Goodwill a/c Dr 490 (Bal. fig)
To D.T Liab. 60
To Cash 1500 PL
(Being Business Acquired from S)

Alternatively

Purchase consideration 1500

Net Assets acquired (1070 – 60) (1010)
GW 490

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*Part 11*

Part B : Business Combination by way of “Significant Equity Interest”

(Holding/ Subsidiary Relationship)

As per the provisions of Ind AS 103, Acquisition of controlling Interest by

One company into other company is also a type of Business combination. The following
Flow chart should be understood capacity before Learning Accounting Aspects in this
Case :-

Acquirer (if Acquirer controlling Interest in other Entity)

Acquirer stand Alone financial Acquirer consolidated

Statements (Separate financial financial Statements
Statements) (holding + Sub = CFS)

Ind AS 109
CFS on Date of Acquisition CFS in Post Acquisition
Of Shares by Acquirer Period
(Updation of CFS)

Ind AS 103 (Ind AS 110)

A. Accounting in Separate financial Statements of Acquirer

Step I : On the date of Acquisition of Shares

The Acquirer will debit Investment in Equity Instruments are we record

Normal Purchase of Investments. These Investments shall be recorded as per Ind
109 as follows :-
Investment in Shares a/c Dr xxxx
To Bank xxxx
(Being Investments Acquired)

Step II : At each B/s, fair value measurement will be made as per Given choices in Ind
AS 109 :-
i. FVPL
ii. FVOCI (Irrevocable)

Comments : At each B/s date, Changes in fair value of Investments shall be

transferred to PL or OCI as per Opted model.

Ind AS 103 has No Guidance for Accounting in SFS of Acquirer in this Regard

B. Accounting Treatment in CFS of Acquirer

(We will Discuss Accounting on D.O.A only)

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➢ Refer Ind AS 110 for Accounting in CFS for Post acquisition Period
➢ Refer Ind AS 110 for detailed discussion on meaning of “Controlling Interest”

“Acquisition method in CFS on D.O.A”

Aspect I : Identify fair value of Assets & Liab. of Subsidiary on date of Acquisition of
Shares which are to be incorporated in CFS in the books of Acquirer
Aspect II : Identify the value of Non controlling Interest which is held by outside
Shareholders in subsidiary company.

NCI

Method I : Proportionate method Method II : Fair value method

“NCI = N. Assets in x % of shares held “NCI = No. of shares x fair value per
Subsidiary by outside held by share in
Co. shareholders outsiders subsidiary co.

Note : In study material of ICAI, All questions have been solved by proportionate
Method due to which we will prefer it in the absence of any specific Information

Aspect 3 : Identify Goodwill/ Capital Reserve on D.O.A of shares by the following

Entry :-

Journal Proportionate GW

Assets a/c Dr xxxx (fair value)

Goodwill a/c Dr xxxx (bal fig) If NCI is computed by proportionate
To liabilities xxxx (fair value) method then GW will belong to Holding
To NCI xxxx (Method I) only
To Investments xxxx (PC)
To Cap. Res. xxxx (Bal fig)
(Being Assets/ Liab. acquired on Acquisition Date)

Full Goodwill
Assets a/c Dr xxxx (fair value)
Goodwill a/c Dr xxxx (bal fig) If NCI is computed at fair value then
To liabilities xxxx (fair value) It will belong to Holding & NCI
To NCI xxxx (Method I)
To Investments xxxx (PC)
To Cap. Res. xxxx (Bal fig)
(Being Assets/ Liab. acquired on Acquisition Date)

Statement Showing calculation of GW/ C. res.

Cost of Investments made in Acquiree (PC) xxxx

NCI xxxx
Total xxxx

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Net Assets (xxxx)

GW/ C. Res. xxxx

[GW/ C. Res = (PC + NCI) – N. Assets]

Solution of Q.54

Journal
Full Goodwill
N. Assets a/c Dr 130 crores
Goodwill a/c Dr 20 crores (Bal fig.)
To Investments 120 crores
To NCI 30 Crores (fair value)
(Being Acquisition of B Ltd recorded in CFS on DOA)

Solution of Q.55

Journal

Assets a/c Dr 130 crores

Goodwill a/c Dr 16 crores (Proportionate GW)
To Investments 130 crores
To NCI (130 x 20%) 26 Crores
(Being Acquisition made of B Ltd on Acquisition Date)

Solution of Q.56

Journal

Assets a/c Dr 130

To Investments 90
To NCI (130 x 20%) 26
To Capital Res. (Bal fig) 14
(Being Acquisition made of B Ltd on Acquisition Date)

Solution of Q.57

Calculation of Goodwill / Capital Reserve

Method I Method II

Purchase consideration 15,00,000 Purchase consideration 15,00,000

NCI (500,000 x 40%) 200,000 NCI (fair value) 10,00,000
Net Assets Total 17,00,000 Total 25,00,000
Net Assets (500,000) Net Assets (500,000)
Goodwill 12,00,000 Goodwill 20,00,000

Question 58, 59, 60 (H.W)

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Solution of Q.61

Calculation of Goodwill

Purchase consideration 525

NCI (100,000 shares x 40% x 775) 310
Total 835
Net Assets (590)
Goodwill 245 (full)

Solution of Q.62

Method I : NCI by Proportionate Method

NCI = N. Assets (fair value) x % of shares held by NCI in Subsidiary

= 100 crores x 10%
= 10 crores

Method II : NCI by fair value method

It is already Given in question at 15 crores

Question 63, 65 (H.W)

*Part 12*

Solution of Q.86

i. Calculation of GW/ Bargain Purchase

Purchase Consideration 300

Fair value of NCI 84
Total 384
N. Assets on Acquisition date (500 – 100) 400
Bargain Purchase 16

Journal : Assets a/c Dr 500

To Liabilities 100
To Investments 300
To NCI (fv) 84
To Bargain Purchase 16 (Bal fig)
(Being consolidation made on D.D.A of shares in Beeta)

ii. NCI (Proportionate method) :-

NCI = (500 – 100) 20% = 80

Bargain Purchase = (300 + 80) – 400 = 20
PC NCI N. Assets (Bal fig)

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Solution of Q.87 *V.V.Imp

I. Calculation of Purchase Consideration

Payment in shares 120,00,000 x 75% x 2 x 6.50 ₹ 3,90,00,000

3
Payment in Liabilities Assumed 7150000 x 100 ₹ 65,00,000
110
Fair value of contingent consideration on 1.7.x1 ₹ 2,50,00,000
PC ₹ 7,05,00,000

II. Calculation of NCI (25%)

NCI at fair value : Shares held by NCI in JKL Ltd. x Value Per share of JKL
= 30,00,000 Shares x 6/-
= ₹ 1,80,00,000

NCI at Proportionate method : Net Assets at fair value (jkl) x % of NCI

= (₹ 7,00,00,000 – *20,00,000) x 25%
= ₹ 1,70,00,000

❖ We have assumed that carrying Amount of N. Assets & Tax Base are same in jkl. S0
We have created a DTL on Diff. in fair value & Tax Base of N. Assets

Calculation of Goodwill

Fair value NCI Proportionate NCI

Purchase consideration 7,05,00,000 7,05,00,000
NCI 180,00,000 170,00,000
Total ₹ 8,85,00,000 ₹ 8,75,00,000
N. Assets (₹ 6,80,00,000) (₹ 6,80,00,000)
Goodwill ₹ 2,05,00,000 ₹ 195,00,000

Impairment @ 10% 2050,000 ₹ 1950,000

Additional Concepts under PART B : Significant Equity Interest

Concept 1 : Step by Step Acquisition *V.V.Imp

Step by Step Acquisition

Case I : If Previous Equity Interest Case II : If Previous Equity Interest

Was 20% or more in Acquiree was Less than 20% in Acquiree

Case I : If Previous Equity Interest was 20% or more in Acquiree *Imp

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If Acquirer obtains control over Acquiree through multiple Acquisitions then It

Will be considered as step by Step Acquisition. In this case, % of Earlier Investment
is very Important which were held by Acquirer before the Establishment of Holding/
Subsidiary Relationships.
If Earlier Investments in Equity shares were for 20% or more then
Consolidated financial statements would have been prepared by the Acquirer with its
Acquire as per Ind AS 28 (Associates).
On Acquisition date, the Acquirer will have to De-recognise Investment in
Associate. The following Points should be considered :-

I. Investment in Associates in CFS shall be de-recognised at “fair value” which

Prevails on “Acquisition date”
II. Gain/ Loss on De-Recognition will also be computed as follows :-

Gain/ Loss = Fair value of Investment in - Carrying Amount of Investment in

Associate Associate in CFS

Journal Entry

Assets a/c Dr xxxx (fair value)

Goodwill a/c Dr xxxx (Bal fig)
To Liabilities xxxx (fair value)
To NCI xxxx
To PC xxxx (Current Acquisition)
To Investments in
Associates xxxx (carrying Amount)
To Gain on De- Recog. xxxx (FV – C. Amt)
To Bargain Purchase xxxx (Bal fig)
(Being De- recognition of Associate, but Recognition of subsidiary made at fair value)

Notes :
1. If fair value becomes Less than carrying Amount of Associates then Loss on
De- Recognition will be debited before computing GW/C. Res
2. Gain or Loss on De-recognition of Associate will be transferred to consolidated
P&L A/c.

Observation on Concept

If An associate becomes subsidiary due to increase in Investment of Equity

Interest of company then we will De-Recognise Investment in Associate in CFS at
Fair value before computing GW/CR on Acquisition of subsidiary.

Solution of Q.69

Journal Entry

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i. Net Assets a/c Dr 880 Lacs

Goodwill a/c Dr 120 Lacs (Bal Fig)
To Cash 600 Lacs (60%)
To Invest. In E 40 Lacs (carrying Amount in CFS)
(Associate)
To Gain on De-Recog. 360 Lacs (400 – 40)
(Being Acquisition of Subsidiary & De-Recognition of Associate made)

ii. Gain on De- Recognition of Associate a/c Dr 360

To P&L A/c 360
(Being Gain Recognised)

Solution of Q.70

Accounting in the books of A Ltd.

i. Net Assets a/c Dr 60,00,000

Goodwill (Bal fig) a/c Dr 39,50,000
To NCI 750,000
To Cash (PC) 59,00,000
To E. S. Capital (1L x 10) 10,00,000 PC (65%)
To Contingent consideration 300,000
To Investments 600,000 (25%)
To Gain on Invest 14,00,000
(Being Recognition of Subsidiary made)

ii. Gain on Investments a/c Dr 14,00,000

To P&L 14,00,000
(Being Gain on De-Recognition recognised)

Note : Acquisition Cost will be written off in P&L A/c as per Ind AS 103

Case II : If % of Investments (Earlier) are below 20% in Acquiree

In the Given Case, Accounting Entries shall be quite similar as we passed in

Case I Except De-recognition of Investments. We will De- recognise the carrying
Amount of Earlier Investments which is disclosed in Separate financial statements
Of Acquirer on Acquisition Date as per Ind AS 109. The Difference between the
Carrying Amount of De- recognised Investments & fair value on these Investments
On Acquisition Date will be considered as “ Gain/ Loss on De-Recognition of
Investments”
We will Transfer the above Gain/Loss on De-Recognition to P&L/OCI as per
Opted model of Accounting under Ind AS 109.

Assets a/c Dr xxxx (fair value)

Goodwill a/c Dr xxxx (Bal fig.)
To Liabilities xxxx (fair value)
To PC xxxx (Current Payment)

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To NCI xxxx
To Investments (109) xxxx (FV – C Amt)
To Gain xxxx

PL or OCI

Opted model

Solution of Q.84 *Imp (Discussed in class)

*Part 13*

Concept 2 : Investments in Associates with “OCI”

(Extra Concept in Step by Step)

In Case An Acquirer has share in OCI Reserves of an Associate in CFS (Ind As

28 : Equity method) then the share of Acquirer in OCI Reserves of the Associate will
also be De-Recognised by transferring it to P&L or retained Earning according to
Nature of OCI reserve on Acquisition Date (i.e., Revaluation Res. to R.E/ FCTR to P&L
Etc).
There will be no change in rest of Accounting as we discussed in concept I.

Journal :

1) Assets a/c Dr xxxx (F.V)

Goodwill a/c Dr xxxx (Bal. fig)
To Liabilities xxxx
To NCI xxxx
To PC xxxx (Current)
To Invest. In Associates xxxx (carrying Amount)
To Gain on Invest. xxxx
(fair value – carrying Amt)
(Being Acquisition of Subsidiary Recognised)

2) Gain on Investments a/c Dr xxxx

OCI Reserves a/c Dr xxxx
To P&L xxxx
To R.E xxxx
(Being Profits recognised)

Solution of Q.71 *V.V.Imp

Journal

1) N. Assets a/c Dr 30,000 Crores

Goodwill a/c Dr 4000 Crores (Bal fig)
To Cash 25000 crores (PC : 70%)
To Investment in

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Associates 8850 Crores (carrying Amount)

To Gain on Invest. 150 (9000 – 8850)
(Being Acquisition of Subsidiary made)

2) Gain on Investment a/c Dr 150 Crores

OCI Reserves : FCIR a/c Dr 100 Crores
R. res a/c Dr 50 Crores
To P&L (150 + 100) 250
To R.E (Rev. Res) 50
(Being OCI Res. & Gain on Invest. Recognised)

Solution of Q.72

Journal Entry

i. Assets a/c Dr 1200

Goodwill a/c Dr 104 (Bal fig.)
To Liabilities 200
To D.T Liab. 40
To NCI (960 x 40%) 384
To Cash (30% :New) 350
To Invest. in Associate 300 (carrying Amount)
To Gain on Invest 30 (330 – 300)
(Being Acquisition of Subsidiary made)

ii. Gain on Invest. a/c Dr 30

OCI Res. a/c Dr 100 (CFS : FVOCI)
To P&L 130
(Being profit recognised on Derecognition)

Concept 3 : Acquisition control over an Enterprise “without acquisition of

shares” *Imp

It may be possible that An Acquirer obtains control over the other Enterprise due to
Buy back of shares by other Enterprise. If an Acquirer has significant influence
before Buy Back of shares by that Entity, but after Buy Back of shares, significant
Influence converts into controlling Interest then Acquisition method will be
applicable even if Acquirer has not made any further Investment for Acquisition of
controlling Interest.
All Entries shall remain same as be we recorded in case of step by step
Method as follows :-
Assets a/c Dr xxxx (F.v)
To Liab. xxxx (f.v)
To NCI xxxx
To Invest in Asso. xxxx (carrying)
To Gain on Inves. Xxxx (FV – CA)

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Solution of Q.73

1) Calculation of % of Controlling Interest after Buy Back

Total No. of Issued shares by Y Ltd 100 million

Buy Back of shares (10 million)
No. of shares issued after Buy Back 90 million

No. of shares held by X Ltd in Y Ltd 41 million

% of controlling Interest = 46 x 100 = 51.11 %
90
% of NCI = 100 – 51.11% = 48.89 %

2) Accounting under Acquisition method

Assets a/c Dr 14,000

Cash a/c Dr 1800
To Liab. 2000
To NCI (13800 x 48.89%) 6747
To Invest in Asso. 6900 (carrying Amount)
To Bargain Purchase (Bal) 153
(Being Acquisition of Subsidiary made)

Note : In the Given question, fair value of Associate is not Given due to which we
have not computed Gain/ Loss on De-Recognition of Associate. We cannot not
Use 110 Per share value for fair valuation of Associate because its Buy Back
Price which is normally offered at higher value than fair value to make the offer
Attractive.

Question 67 (H.W)

Solution of Q.66 (Discussed in Class)

*Part 14*

PART C : Common control Transactions

(Appendix C : Pooling Interest Method)

Units

Unit I : Identification of Unit II : Accounting Rules Unit III : Accounting Rules

Common Control for Merger for De-mergers

Unit I : Identification of Common control *Imp

As per the Provisions of Ind AS 103 (Appendix C), Acquisition method will be
Exempted for Accounting if Business combination has taken place under common

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Control. It can also be said that common control Transactions are not covered by
Acquisition method. “ Ind AS 103 has Prescribed Application of Pooling Interest
method for Accounting of common control Transactions”. The following Examples may
be noted for common control Transactions :-
i. Merger of fellow subsidiaries “Change in
ii. Acquisition of one fellow subsidiary by other fellow subsidiary control
iii. Split off of one company into 2 or more companies Structure”

Mergers Demergers

Under Common control

❖ Note : If Controlling Authority remains same before and after Business

Combination then It will be considered as common control Transaction and
Pooling Interest method will be Applied.

Solution of Q.74

Yes, the Given case is a Common Control Transaction because X is the

Controlling Authority before & after Business combination.
Before the Given Acquisition, X was controlling the company y directly,
but after Acquisition X will control the company y indirectly through Z ltd.

Solution of Q.75

Yes, the Given case is of common control. There is a contractual Agreement

between B, C & D in relation to control company ABC & XYZ. It indicates that
controlling Authority is same for Both companies.

Solution of Q.76

No, there is no contract between shareholders in relation to controlling the

Companies. The Given case cannot be considered as common control Transaction
Because controlling Authority is not same.
(Note : If there is a voting Pattern even though we cannot consider it as common
control Transaction without contract.)

Solution of Q.85 *Imp

No, the Given transaction cannot be considered as common control transaction

Because controlling Authority is not same in Pre combination and post combination
Period. Before Acquisition, control of Entity A was in hands of group of shareholders,
but after Acquisition, Entity A is controlled by Mr. Ram. So, Acquisition method will be
applicable in this case.

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Unit II : Accounting Rules for Mergers

i. It should be under common control

ii. Apply : Pooling Interest method

Step I : Acquire All the Assets & All the liabilities of Acquiree at “ Carrying Amount”
Note : we will Ignore fair value of Assets & Liabilities under Pooling Int. method

Step II : Acquire All the Reserves of Acquiree at carrying Amount and maintain the
Identify of each reserve.
Note : G. Res of Acquiree will be added to G. res of Acquirer……. Same Rule will be
followed for other reserves as well

Step III : Difference between Purchase consideration & Share capital of Acquiree will
be considered as Given or Loss on merger and will be transferred to
“Capital Reserve”.
Note : If there is no capital Reserve for writing off Loss on merger then we can use
Other reserves i.e., G. Res, PL etc.

Important Note

New shares shall be issued in settlement of PC at “Par value” only

Face value
“No Security Premium can be booked”

Journal : Assets a/c Dr xxxx (Book value)

Cap Res/ GR/ PL a/c Dr xxxx (Bal Fig)
To Liabilities xxxx (Book value)
To Reserves xxxx (Book Value)
To S. Capital xxxx (PC)
To capital Res. xxxx (Bal Fig)

i. No Goodwill will be debited Here

ii. No New Asset or Liab. can be recognised in merger

Solution of Q.77

Calculation of PC
(pooling Interest method)

AX Ltd. BX Ltd Total

P.P.E 8500 7500 16,000
Investments 1050 550 1600
Inventory 1250 2750 4000
Trade Receivables 1800 4000 5800
Cash 450 400 850
Total A 13050 15200 28250

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Reserves 3050 2700 5750

Borrowings 3000 4000 7000
Trade Payable 1000 1500 2500
Total B 7050 8200 15250
(A-B) PC 6000 7000 13000

“New shares of ₹ 13000 at Par value shall be issued”

B/S of ABX Ltd.

Non Current Assets :

1) P.P.E 16000
2) Financial Assets : Investments 1600

Current Assets :
1) Inventory 4000
2) Financial Assets : Trade Receivable 5800
Cash 850
Total 28250

Equity :
Equity Share capital 13000
Other Equity 5750

Non Current Liab : Borrowings 7000

2500
Current Liab : Payables Total 28250

Unit III : Accounting for De- Mergers *V.V.Imp

(Special Accounting Treatment)

If any loss making segment/ Division is transferred by one company to

Another New company which is incorporated by transferor company itself to improve
Overall profits then It will be considered as a case of De- merger. The following
Conditions should be satisfied if Exemption from Acquisition method is to be availed :

I. All Assets & Liab which are related with Loss making Division shall be
transferred to New co./ resulting co. at carrying Amount.
(Note : S. Capital & Reserves shall not be transferred because Equity does not
Belong to division, but It belongs to company)

II. New co. will issue new shares in PL to the members of Transferor company at
Par value.

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Notes

1. It means that Transferor will Transfer its division without PC because PC will be
Given directly to its members.
2. In Practical questions Given by ICAI in study material, shares have been issued
at Premium by New Co. So, we will follow wrong Treatment to match our with S.M.
3. When N. Co will issue shares to members of old co. then common control condition
Will be satisfied.

III. In the books of Transferor & Transferee, Difference in Entries will be taken
to “Capital Reserve” assuming Loss or Profit on De-Merger.

No Goodwill/ No New Asset/ No new Liab can be recognised.

Journal Entry

Transferor Transferee

Liab . a/c Dr xxxx Assets a/c Dr xxxx

Cap Res. a/c Dr xxxx (Bal) Cap Res. (Bal) a/c Dr xxxx
To Assets xxxx To Liab. xxxx
To Cap Res xxxx (Bal) To S. Capital xxxx
To S. Premium xxxx
To Cap Res (Bal Fig) xxxx

In the absence of Cap Res, other Reserves can be used

Solution of Q.79

In the books of Enterprise Limited

Current Liab . a/c Dr 400

Loans a/c Dr 300
To Fixed Assets (WDV) 100
To current Assets 500
To capital Res. (Bal fig) 100
(Being mobile division transferred to Turnaround Ltd.)

B/S of Enterprise Ltd.

Non Current Assets :

Fixed Assets 25
Current Assets 200
Total 225
Equity :
Share capital 25
Other Equity (75 + 100) 175
Current Liab 25
Total 225

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In the books of Turnaround

Fixed Assets a/c Dr 100

C. Assets a/c Dr 500
Cap. Res (Bal Fig) a/c Dr 125 (Loss)
To C. Liab. 400
To Loans 300
To S. Capital 10 (1 x 10)
To S. Premium 15 (1 x 15)

Balance sheet

Non Current Assets :

Fixed Assets 100
Current Asset 500
600

Equity share capital 10

Other Equity [15 + (125)] (110)
N. C. Liab : Loans 300
Current Liab 400
600

*Part 15*

Solution of Q.78 *Imp

i. Accounting in the books of Companies

A. In the books of mini ltd New Co.

Fixed Assets a/c Dr 200

Current Assets a/c Dr 500
To Loans 100
To Current Liab. 100
To E.S. Capital 50 (5 x 10) (PC)
To Cap. Res (Bal Fig) 250
(Being mini division acquired)

Balance sheet of mini Ltd.

Non Current Assets : PPE 200

Current Assets 300
Total 500

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Equity :
E.S. Capital 50
Other Equity : Capital Res. 250

Non Current Liab : Loan funds 100

Current Liab 100
Total 500

B. In the books of Maxi mini Ltd.

Loan funds a/c Dr 100

L. Liab a/c Dr 100
*Loss on Demerger a/c Dr 300 (Bal fig)
To Fixed Assets 200
To Current Assets 300
(Being mini division transferred to mini Ltd)

Capital Reserve a/c Dr 300

* To Loss on Demerger 300
(Being Losses written off)

Balance sheet of maxi mini Limited

Pre- Demerger Post Demerger

Non Current Assets : P.P.E 300 100
Current Assets 700 400
Total Assets 1000 500

Equity :
Equity share capital 50 50
Other Equity 650 350
(650 – 300)
Non Current Liab : Loans 100 -
Current Liab 200 100
Total Equity & Liab 1000 500

ii. Calculation of Intrinsic value Pre & Post Demerger

Pre- Demerger Post Demerger

Maxi mini ltd Maxi mini ltd Mini ltd
PPE 300 100 200
C. Assets 700 400 300
C. Liab (200) (100) (100)
Loans (100) - (100)
Net Assets 700 400 300
No. of Shares 5 5 5
I.Value 140 80 60

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iii. Comments on Impact on Shareholders wealth

In the Given case, there is no impact on the shareholders wealth in pre Demerger
& Post Demerger situation because value Per share Pre- Demerger was 140 per share,
but Post Demerger it is 80 & 60 Per share in two different Entries.

PART D : Accounting for Reverse Acquisition in “Consolidated financial

statements” *Imp

If A small company Acquires controlling Interest in Large company then It will be a

case of “Reverse Acquisition”. In the Given case, Legal Acquirer and Accounting
Acquirer shall be different. It can also be said that consolidated financial statements
Shall be prepared from the point of Accounting Acquirer. These type of Transactions
are undertaken to obtain Listing Licence which is held by small company. Sometimes,
SEBI denies a large Group from providing listing in stock market due to Bad
practices in past. So these large Entities acquire small listed companies to acquire
Listing licence. It is called Back Door Listing. The following steps should be followed
while preparing CFS on D.O.A under Ind AS 103 in Reverse Acquisition :-

Step I : Identify Post Combination control structure whether Legal Acquiree has
Obtained control in Legal Acquirer or Not.
Notes : 1) If Answer is “Not” in Step I then It will not be considered as Reverse
Acquisition. No further Discussion will be made.
2) If Answer is “yes” in step I then It will be considered as a Case of
Reverse Acquisition and we will move to Step II.

Step II : Calculate No. of shares to be issued from the Point of view Legal Acquiree to
Legal Acquirer assuming the Legal Acquiree as Accounting Acquirer and Legal
Acquirer as Accounting Acquiree.
Note : It means that Reverse Swap ratio will be applied on Legal Acquirer/ Accounting
Acquiree No. of shares

Step III : Pass Entry for Acquisition in CFS of Accounting Acquirer on Date of
Acquisition :-

Assets (Legal Acquirer) a/c Dr xxxx (FV)

Goodwill a/c Dr xxxx (Bal Fig)
To Liab. (Legal Acquirer) xxxx (fair Value)
To NCI (If any : N.A x 1 %) xxxx
To S. Capital (Step II) xxxx

Solution of Q.80 *V.V.Imp

i. Identification of Accounting Acquirer

In the Given Case, A Ltd is Legal Acquirer because it is issuing its shares to
Members of B Ltd. in the ratio of 2.5 shares for 1 share. On the basis of Given Swap
Ratio, A ltd will issue 15o shares (60 x 2.5/1) to B Ltd. In Post combination Entity, A

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Will have Total shares 250 (100 + 150) in which 60% of Total capital will be held by
members of B limited which indicates that they will become the controlling Authority
in A Ltd. It Clearly indicates that A ltd is ot acquiring control over B Ltd, but It is
Giving its control to B Ltd. The Given case should be considered as reverse
Acquisition and we need to calculate No. of shares to be issued from the point of B ltd
as follows :-

No. of shares to be issued from = 100 shares in A ltd. x 1 = 40 shares

the point of B Ltd 2.5
(B will issue its one share for 2.5 shares in A)

Post Combination control structure in B Ltd = 60 Shares + 40 Shares = 100

60%
(Members of B are still Excercising control)

ii. Journal Entry (CFS) (In the books of B)

PPE a/c Dr 1500

C.Assets a/c Dr 500
To Current Liab 300
To Non current Liab 400
To E. S. Capital 400 40 x 40 = 1600
(40 shares x 10)
To Sec. Premium 1200
(40 Shares x 30)
To NCI 0
(Being Accounting for Reverse Acquisition made)

Consolidated B/s of B Ltd with its subsidiary A ltd.

Non current Assets :

i. P.P.E (3000 + 1500) 4500
ii. Goodwill 300

Current Assets (700 + 500) 1200

6000

E.S Capital (600 + 400) 1000

Other Equity (1400 + 1200) 2600

Non Current Liab (1100 + 400) 1500

Current Liab (600 + 300) 900
6000

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“Explanation on optional Concentration Test”

(Added by MCA in Ind AS 103 dated 24.7.2020)
Amendment

As per the Amendments made by MCA on 24.7.2020, An Acquirer may conduct

Optional concentration Test at initial stage whether it is an Asset Acquisition or
Business Acquisition. The following flow chart may be noted as a Summary for
understanding of the Amendments :-

“Optional” Concentration Test (Acquirer)

If Acquirer conducts this optional If Acquirer does not conduct this

Test Optional Test

Detailed Assessment will be

If Test meets If Test fails the required as Given in Ind AS 103
the conditions conditions as whether Acquisition is an Asset
as Specified in Specified in Acquisition or Business
Rules Rules combination

Assume the Given It’s a Business

Acquisition as Assets Acquisition &
Acquisition & further
“No Need to Refer Assessment will
Ind AS 103 for be made to identify
Further Assessment” substantive process

Understanding of Application of Optional Concentration Test *Imp

(Less chances from Examination Point of view)

Step I : Calculate Value of Gross Assets Acquired by the following Statement :-

Consideration paid for current Acquisition xxxx

+ Fair value of Previously held Interest xxxx
+ Fair value of NCI xxxx
+ Fair value of Liabilities Acquired xxxx
(Excluding DTL)
xxxx
- Cash & Cash Equivalents (xxxx)
- D.T Assets (xxxx)
Value of Loss Assets Acquired xxxx

Step II : If value of Gross Assets Acquired is concentrated in single Identifiable

Asset then It will be Assumed that optional concentration Test has been
Passed and It will be taken as an Asset Acquisition Case.

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Value of Gross Assets Acquired = Single Identifiable Asset

P.P.E I.A Debtors Stock

(If value of Single Identifiable Asset is not equal to gross value of Assets Acquired
Only then It will be considered as Business Acquisition )

Summary : value of Individual Asset should be less than value of Gross Assets

Solution of Q.10

Calculation of value of Gross Assets Acquired

Fair value of : Consideration Paid 300

NCI 120
Previously held Interest 80
+ fair value of Liab (Given) (excluding DTL) 800
- Cash & Cash Equivalent (200)
Fair value of Gross Assets 1100

Comments : i) In Exams as per S.M

Fair value of Gross Assets Acquired is 1100 which is concentrated on single
Asset (Building) which has fair value of 1000. It means fair value of Gross
Assets acquired 91% of single Asset which is Approx. equal. So the Given
Case should be considered as an Asset Acquisition.

ii) Practical Life :

Fair value of Gross Assets is not concentrated in single Asset because 1100
is not equal to fair value of Building which is 1000. So, It is not a Case of
Asset acquisition.

Thank You 😊
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Ind AS -37
(Provisions, Contingent Assets & Liab.)

*Part 1*

Concept 1 : Coverage of Ind AS 37

Coverage

Provisions Contingent Liab. Contingent Assets Additional Issues

Concept 2 : Provisions

A. Out of Scope : The following Provisions out of scope of Ind AS-37 :-

i. Provisions under Ind AS-12 (Taxes)
ii. Provisions under Ind AS-17 (Lease)
iii. Provisions under Ind AS-19 (Emp. Benefits)
iv. Provisions under Ind AS-104 (Insurance contracts)
v. Provision for contingent consideration (103)
vi. Provision created under 109 financial Instruments

B. All other Provisions are covered under Ind AS-37

C. Meaning of Provision & its Recognition :- *Imp

As per the provisions of Ind AS-37, Provision is a liability. It can be recognised

in the books only if the following 4 conditions are satisfied :-

Condition I : There should be some present obligation whether Legal or constructive.

➢ Legal : Legislation or Operation of Law
➢ Constructive : Based on Past Practice or own Commitments or Promises
+
Condition II : It should be a result from Past transactions
+
Condition III : The outflow from the Transaction should be Probable (Probable
means likely to occur means more than 50% chance/ Probability to
Face obligation)
+
Condition IV : A Reliable Estimate can be made for outflow

D. Use of Provision : As per the Provisions of Ind AS-37, Provisions can be used for
Netting off the payment of Liab. In future. In case there is some difference
Between Provision & Actual Payment then It will be Treated as change in Estimates
and It will be dealt under Ind AS-8.

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E. Measurement of Provisions : As per the provisions of Ind AS-37, Provisions

Should be measured at each B/s date and changes in provisions may be in the form of
Increase or Reversal of Provisions.

F. Present value of Provisions :- If Time value of money has Significant Effect on

Provisions then we should create (material)
Provisions at Present value : At each B/s date, we will increase such provision by
Borrowing cost/ Interest cost on O/s Liability.

G. Best Estimate :- As per the Provisions of Ind AS-37, Liability to create

Provisions should be based on best Estimation. It should cover all risks &
Uncertainities.

Concept 3 : Contingent Liabilities

As per the provisions of Ind AS-37, contingent Liability is a Possible obligation

Which is not probable (Less than likely to occur) from the point of view of outflows.
These Liabilities are not provided for in books of A/cs, but these are disclosed in
Notes to A/Cs. (If chances of occurance of an obligation is 5% to 50% then It will be
Considered as contingent Liability)

Note : If Probability of occurance of any obligation is Less than 5% then It will not
be Provided or disclosed in Notes to A/cs.

Concept 4 : Contingent Assets *Imp

As per the Provisions of Ind AS-37, Contingent Assets can be recognised as an

Income and receivables only if It is Probable that It will be collected in future
(Probable means chances are more than 50%). If chances are not more than 50% then
we should ignore these Assets in books of A/cs as well as in Notes to A/Cs.

ILLustration 1 , 2, 3, 4, 5, 6, 7, 8 (Discussed in Class)

ILLustration 9 (H.W)

Concept 5 : Additional Issues

A. Operating Losses : If any Business is incurring Losses and It is Expected that

It will continue its business Losses in future as well then we cannot create
Provisions for the Expected Losses. It means that Provisions are not allowed for
Operating Losses.

B. Onerous Contracts:- If any contract has unavoidable cost which are Expected to
be met in future then It is recognised as an Onerous contract. It should be Provided
For in the books of A/cs.

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C. Re- Structuring Cost :- As per the Provisions of Ind AS-37, Re-structuring means
Discontinuation of a Business, Business line etc. We can provide for Re-Structuring
Cost if the following 2 conditions are met :

I. A Formal Plan has been announced about Re-structuring

II. There are some Probable outflows due to Such Plans.
(i.e., Compensation to staff etc.)

Illustration 10, 11 (Discussed in Class)

*Part 2*

Solution of Q.1, Q.2, Q,3,Q.4, Q.5

*Part 3*

New Questions on Ind AS 37

Solution of Q.2

Calculation of Provision to be made at 31.3.X1

Prov. For Re-storation Cost = 10,00,000 x .907 = 907,000

@ 5% for 2 years
Comments : As per the provisions of Ind AS 37, Provision for liabilities is required to
be made if there is a Present obligation due to past Events with Reliable
Estimate whether It is a Legal obligation or constructive obligation. In
the Given case, there is a Legal obligation to re-store Sea bed due to past
Events due to which we have created a Provision of Rs. 907000. In
Subsequent years, Provision will get increased by unwinding Cost.

Solution of Q.6 *Imp

Calculation of Provision to be made for Re-storation Cost

Provision for Ist Phase ending on 31.3.x3 18,18,000

(20,00,000 x .909)
Provision for IInd Phase ending on 31.3.x6 23,90,500
(35,00,000 x .683)
Provision Required 42,08,500

Comments :
1) There is an obligation on company to Re-store the land due to which we have
created a provision for Re-storation cost.
2) There will be a Tax Relief on such Provision in future under Income Tax Act due to
Which DTA can be created on Such Amount .
(4208500 x 30%)

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Solution of Q.5

As per the Provisions of Ind AS-37, Onerous contracts are the contracts which
Cannot be cancelled without unavoidable Cost. In the Given case, the Given contract
is an Onerous contract because It can be cancelled on a Payment of compensation of
Rs. 25 Lacs only.
Further, the company should create a Provision for at least25 Lacs because Cost
Of Input is higher than the amount of compensation. The cost of input Exceeds
Revenues by 50 Lacs, but compensation is required at 25 Lacs. So, Provision should be
Made for 25 Lacs.

Solution of Q.3

As per the Provisions of Ind AS 37, Provision is required to be made for present
Obligation (whether Legal/ Constructive) due to past Events with a Reliable Estimate.
In the Given Case, Termination Benefits to Employees & Penalty for cancellation of
Operating Lease are to be considered for creating Provisions as per Definition Given
In Ind AS 37. There is no present Obligation for Relocation cost of Employees and
for operating Losses due to which No Provision is required for these items on B/s
Date.
As per the Provisions of Ind AS 10, Events after B/s date, which were in the
Knowledge of Entity on B/s date, can be adjusted in previous year Even if these
items occurred after b/s date. But the last date for adjustment is Approval on
Statements by BOD which 15.5.x2 in this case. So, payment to Employees and Payment
for Penalty can be provided on 31.3.x2 because these payments were made before
Approval.

Provision Required on 31.3.x2 = 520 + 410 = 930 lacs

Solution of Q.1

In the Given case, there is no Present Obligation because there is no delay in

Delivery of material on 31.3.x1 due to past Events. So there is no Liab for creating
Provisions. If delay is Expected in same then It will attract Liab. In july.

Thank You 😊
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Ind AS : 115
Revenue from Contracts with Customers
*Part 1*

*Message*

*Part 2*

Concept 1 : Applicability & Nature

i. Applicability : 1.4.2018 onwards

ii. Nature : Mandatory for all companies which are applying Ind AS
(Note : After issuance of Ind AS 115, ICAI & MCA have withdrawn the application of
Ind AS 18, Ind AS 11 & Guidance Note on Real Estate Business)

Concept 2 : Objective of Ind AS 115

As per the Provisions of Ind AS 115, The following Aspects will be covered under the
Statement :-
i. Nature of Revenue
ii. Timing of Revenue
iii. Amount of Revenue
iv. Uncertainties attached to Revenues
v. Accounting for revenues

Concept 3 : Important Definitions

1) Meaning of Contract :- As per the Provisions, contract is an agreement that

creates Enforceable Rights & Obligation to the Parties. It can be written, oral or
Implied as per Customers business Activities.
It is a matter of Law
*Imp
2) Meaning of Customer :- As per the Provisions, customer is a Party that has
contracted with Entity to obtain Goods/Services for consideration.

Note 1 : Ind AS 115 shall be applied on contract only if Good/ Service is a outcome of
Ordinary business Activities. It can be said that goods/ Services under the
Contract shall be ordinary in nature as per the nature of business.
Note 2 : If any Revenue is Received but It is not Received from customer then It will
be dealt by other Ind AS.
i. Revenue from sale of PPE : Ind AS 16
ii. Revenue from sale of property : Ind AS 40
iii. Revenue from Dividend Income or Interest Income : Ind AS 109 etc.

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3) Meaning of Revenues :- Revenue means Income which arises in ordinary course of

Business. “Income means increase in Equity”

Concept 4 : Contracts which are out of scope of Ind AS 115

As per the provisions of Ind AS 115, the following contracts are out of scope
From this statement :-
➢ Insurance Contracts (Ind AS 104)
➢ Lease contracts (Ind AS 17)
➢ Financial Assets (Ind AS 109)
Instruments
➢ Contracts with subsidiary, Associates & joint ventures (Ind AS 110, 28, 111)
➢ Non monetary Exchanges between the Entities in similar nature of business to
Facilitates sale to the customers
(These transactions are not Barter Transactions because Barter Transactions are
Always done at fair value, we will discuss these transactions Later.)
*V.V.Imp

*Part 3*

Concept 5 : “5 Step Model”

As per the provisions of Ind AS 115, There are 5 steps which are to followed before
the understanding of Revenue Recognition :-

Steps

Step I : Step II : Step III : Step IV : Step V :

Identifying Identifying Identifying Identifying Satisfying
the the the the the
Contract “Performance Transaction Allocation of Performance
Obligation” Price Transaction Obligation
Price

Step I : Identifying the Contract

As per the provisions of Ind AS 115, the following conditions should be satisfied to
Identify a contract with customer :-

Condition I : It should be approved by all the concerned Parties (Seller & Buyer) &
Parties are committed to fulfil their Obligations.
+
Condition II: The Entity can identify each party’s rights in the contract.
+
Condition III: The Entity can identify the payment Terms.
+

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Condition IV: The Entity can identify that the transaction has some commercial
Substance.
+
Condition V : The Entity can identify that ultimate collection will be made from
Customer.

Additional Points to be considered under “Step I” of Ind AS 115 :-

a) Combination of Contracts
As per the Provisions of Ind AS 115, we can combine multiple contracts as a
Single contract if the following conditions are satisfied :-
i. The contracts are negotiated as a Package in single commercial Activity
+
ii. The Price of one contract affects the Price of other contract
+
iii. All the contracts are like a Single Performance Obligation

Solution of Q.4, Q.5, Q.6 (Discussed in Class)

b) Duration of Contract :- *Imp

As per the Provisions if Ind AS 115, Revenue shall be recognised on the basis
Of Duration of Contract. An Entity can identify the duration of contract on the
basis of Termination clause in the contract as follows :-

Termination

Case I Case II

If Both Parties have Unilateral right

to terminate unformed Performance Without penalty with Penalty
Obligation without any Penalty
Prefer shorter Prefer Long
Duration Duration

Solution of Q.7, Q.8, Q.9, Q.10 (Discussed in Class)

c) Modification in contract :- *V.V.Imp

As per the Provisions of Ind AS 115, modification in contract can be made in

the original contract . It can be made in the following ways :-

Modification : Type I
If Additional Goods or Services are added in the original contract at stand
Alone selling Price “SSP” then It will be assumed as a Separate contract and It will
not be treated as modification.

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“SSP”= It is the Price at which Goods can be sold in the Open market and It will be
charged from new customer.

Solution of Q.11 (Discussed in class)

Modification : Type 2
If Additional Goods or Services are added to the Original contract, but at a
Price other than Stand alone Price then It will be assumed that Transaction has
Negotiated as a Package. In the Given Case, we will consider the accounting on
Prospectively basis.

Prospectively : “Allocate remaining Revenue over the remaining Performance

obligation”

Solution of Q.14 (Discussed in Class)

Modification : Type 3
If Additional Goods/ Services are not added in Original Contract, but price is
Revised for Original Contract then “Cumulative catch up adjustment” will be
Considered.

Cumulative catch up Adjustment :

Revenue will be adjusted with retrospectively Effect

Solution of Q.15, Q.13*Imp, Q.12 (Discussed in Class)

Step II : Identifying the Performance Obligation

As per the Provisions of Ind AS 115, Performance Obligation has been defined
as a Promise in the contract with customer to deliver :-
i. A Good or A Service which is “Distinct”
OR
ii. A Service of Goods or services which are same in nature

❖ Meaning of Distinct Good/Service :- As per the Provisions of Distinct Good/

Service is a Good/ Service which is separable from other Goods or Services. The
Following conditions should be satisfied to identify distinct Goods or Services :-

I. If Integration is not required then all Goods or Services are distinct.

+
II. If Goods/Services are not highly inter related then All Goods or Services are
Distinct.
+
III. If Goods/Services are not Customised/ modified then all Goods or Services
Are distinct.

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Note : Identification of Separate Performance Obligation is mandatory because

Allocation of transaction value over distinct Goods/Services will be made for
Adequate Presentation of Revenues.

Solution of Q.18, Q.19, Q.20, Q.21, Q.22, Q.16, Q.17 (Discussed in Class)

*Part 4*

Solution of Q.12, Q.13, Q.11, Q.14 (Discussed in Class)

*Part 5*

Step III : Identifying the Transaction Price *V.V.Imp

As per the Provisions of Ind AS 115, Transaction Price is the Price which an
Entity Expects to be Entitled in Exchange of Goods/Services, but Excluding Amount
Collected on behalf of 3rd Party (i.e., GST or other Taxes which are collected from
Customer but Payable to Govt.
The Estimation of Transaction Price may Get Effected by the following 4 Items
as follows :-
I. Variable Consideration
II. Financing Component
III. Non Cash Consideration
IV. Amount Payable to Customer

Case I : Variable Consideration *Imp

If variable consideration is a Part of the Transaction Price then we should

Estimate variable consideration while Estimating Transaction Price. It may be in the
Form of Discounts, Rebates, Refunds, Price concession, Performance Bonus,
Incentives, Penalties etc.
There are 2 methods to Estimate the value of variable consideration as follows :-

Methods

Expected value Method Most likely Amount method

Apply Probability weight if we have Under this method, There will be 2

Different Ranges of Revenue options only (i.e., Yes or No)
Either It will be a Revenue or It
Will not be Revenue

Solution of Q.23, Q.24, Q.25*Imp, Q.42, Q.26*V.V.Imp (Discussed in Class)

Case II : Financing Component *Imp

As per the Provisions of Ind AS 115, An Entity should find out financing component in
the Transaction Price. It means that Ind AS 115 considers the Time value of money

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Concept. The following 3 Points should be considered while computing financing

Component :-

I. The Difference between Transaction Price for promised Goods & Cash Selling
Price.
Hint : If Difference is insignificant then financing component may be ignored
II. The Duration between transfer of control of Goods/Services & Actual
Payment by Customer.
Hint : If collection is made within 1 year then financing component may be ignored
III. The Entity should consider market Rate of Interest
Hint : IRR may also be considered if market rate is not available

Note : We should not identify Interest in all contract If customer pays Advance
money or customer does not pay according to nature of Transaction then we will
Ignore financing component

Solution of Q.28, Q.29, Q.32, Q.33, Q.34, Q.35, Q.36, Q.37, Q.47 (Discussed in Class)

Case III : Non Cash Consideration

It may be possible that An Entity has received Non Cash consideration in

Exchange of Goods or Services. In the Given Case, transaction Price will be computed
as follows :-

a) Fair value of received consideration will be taken as Revenue on the date of

Exchange of consideration.
❖ Subsequent changes in Revenue will not be made after initial Recognition
b) In the absence of fair value of Received consideration, we can consider fair value
Of Given Goods/Services.

Solution of Q.38, Q.39, Q.40, Q.45*Imp, Q.46 (Discussed in Class)

Case IV : Consideration Payable to Customer

As per the Provisions of Ind AS 115, consideration which is paid to customer

(i.e., Voucher, Coupen etc.) should be reduced from Transaction Price.

Solution of Q.44, Q.41 (Discussed in Class)

*Part 6*

Case V : Sales with Right to Return Exceptional Case

If an Entity Sells its Goods with Right to Return then the following Steps should be
Applied :-
Step I : The Entity should create refund Liability for the Expected returns instead
Of Recognition of Revenue as follows :-

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Cash/ Customer a/c Dr xxxx

To Revenues xxxx
To Refund Liab xxxx
Expected to be returned
(Being Goods Sold)

Step II : The Entity Should debit Returnable Inventory instead of Debiting Goods as
Follows :-
Returnable Inventory a/c Dr xxxx
P&L a/c Dr xxxx
To Cost of Sales xxxx
(Being Expenses Charged)

Solution of Q.27 (Discussed in class)

Step IV : Allocation of Transaction Price over the Performance Obligation

As per the Provisions of Ind AS 115, Transaction Price shall be allocated over all
the performance obligations in the ratio of their stand alone Selling Price “SSP”. In
Case SSP of any Performance obligation is not available then It will be find out by any
Of the following methods :-

Method I : Market Assessment Approach

(We consider market Prices which are offered by other Entities for similar
Goods/Services)

Method II : Cost Plus Reasonable margin

(We consider Cost Plus Margin as SSP)

Method III : Residual Method

SSP = Total Transaction Price – Observable SSP for other Goods

Solution of Q.48 (Discussed in Class)

Important Points to be considered :-

If Discounts/ Variable consideration is related with a Particular range of

Goods or services then allocation of such discount/ variable consideration will be
made on the related Products/ Services. It means that full SSP will be allocated to
those Goods/Services which are not related with discounts/Variable consideration.

Solution of Q.49, Q.50, Q.51 (Discussed in Class)

*Part 7*

Solution of Q.26, Q.27, Q.47, Q.29, Q.31, Q.28, Q.33 , Q.34, Q.35, Q.30 (Discussed & Doubts
Solving)

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*Part 8*

Step 5 : Revenue Recognition

As per the Provisions of Ind AS 115, An Entity can recognise revenue when
It delivers/ transfers the Promised Goods/ Services to Customer. The delivery of
Goods/Services is assumed to be completed when control of Goods/Services is
Transferred to customer. Under the Provisions of Ind AS 115, the following indicators
May be noted to identify transfer of control :-
➢ The customer has accepted Goods/Services
➢ The Goods/Services are under Physical Possession of customer.
➢ The Legal title has been transferred to customer.
➢ The customer will Enjoy the remaining Benefits from the Goods/Services and
Customer can restrict others from taking benefits from Goods/Services.

Additional points to be considered :-

Point 1 : Methods of Transferring the control

As per the Provisions, Control can be transferred by 2 methods as follows:-

Method I : Over the period of contract

Method II : At a Point of time of contract

Point 2 : Revenue Recognition Methods

Methods

Input Method Output Method

If Performance Obligation is satisfied If Control is transferred at a Point

Over the Period then It will be Applied of time then It is applied

Under this method, Revenue is booked on Under this method full Revenue is
the basis of Proportion of Actual Cost Recognised for delivered Items
to Total Estimated Cost

Point 3 : Indicators for “Over the Period”

a) The Entity transfers Service to consumer and consumer takes Benefits

Immediately.
OR
b) The Entity Constructs/ Creats an Asset which is under the control customer
OR
c) The Entity creates an Asset without any alternative use and has right to seek
Payment for completed work.

Solution of Q.56, Q.55, Q.53, Q.52

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*Part 9*

Concept 6 : Various Situations

Case I : Repurchase Agreement

If an Entity sells its Goods under Repurchase Agreement then the following Points
should be considered :-

A. Types of Re- Purchase Agreement

Types

Future Contract Call Option Put Option

Entity is bound to Entity has a right to Customer has a right

Re-purchase the sold Re-purchase the sold to Return the Asset
Asset the Asset

B. Accounting Treatment

As per the Provisions of Accounting Treatment will not change whether it is

a future contract, call option or Put option contract. The Accounting Treatment will
be different in following situation :-

i. If Re-Purchase Price is higher than Original selling Price then Difference will
be considered as a financing component as follows :-

Bank a/c Dr xxxx (Original Selling Price)

Finance cost a/c Dr xxxx (Diff.)
To Financial Liab. xxxx (Re-Purchase Price)
(Being Re-Purchase Agreement Entered into with customer)

ii. If re-Purchase price is Less than Original Selling Price in the contract then
this Agreement will be considered as a Lease Agreement under Ind AS 17 and
Difference in Prices will be taken as Lease Income.

Solution of Q.57, Q.58 (Discussed in Class)

Case II : Bill & Hold

If Delivery of Goods is Pending at Buyer Request then Seller can recognise

Revenue assuming that Seller has delivered the Promised Goods or Services. The
Following conditions should be satisfied to identify the Bill & Hold Situation :-

I. The Goods should be identifiable Separately from other Goods in warehouse.

II. The Goods cannot be transferred to any other Party.

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III. The Goods should be ready for delivery at any time at the Request of
Customer.

Solution of Q.59 (Discussed in Class)

Case III : Service Concession Arrangement

(Build – Operate – Transfer) or (Private to Public)

Under these Arrangements, Public Properties are Granted to Private companies

to construct & maintain for Public Benefits. These Arrangements may be for
Hospitals, Airports, Roads, Bridges, Tunnels etc. These Arrangements may be entered
into by 2 methods as follows :-

Method I : Recovery from Public

If Private companies have to recover their invested money from Public then
the following steps for Accounting shall be considered :-

Step I : During construction Phase

Capital WIP a/c Dr xxxx
To Bank xxxx
(Being Const. Exp. incurred)

Step II : At the time of Completion of Const.

Intangible Asset a/c Dr xxxx (fair value)
To Capital WIP xxxx (Actual Cost)

i. PPE will not be debited (Ownership Clause)

ii. I. Asset will be debited at fair value
iii. Diff. between fair value & Actual Cost incurred will be transferred to P&L

Step III : During Operation of Agreement

Bank a/c Dr xxxx
To Revenues xxxx
(Being Revenue Collected from Public)

Note : I. Asset will be amortised over the period of licence under the Guidance of Ind
AS 38.

Method II : Guaranteed Recovery from Govt.

Under this Arrangement, Entity shall have contractual right to collect a fixed
Amount from Govt. The following steps should be considered for Accounting :-

Step I : During Const. Phase

Capital WIP a/c Dr xxxx
To Bank xxxx
(Being Expenditure Incurred on Construction)

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Step II : When Asset becomes ready for use

Financial Asset a/c Dr xxxx (Fair value)
To Capital WIP xxxx (Actual Cost)
❖ Diff. will be transferred to P&L

Step III : During Operation Phase

1) Financial Asset a/c Dr xxxx

To Finance Income xxxx
(Being Int. Income made due at IRR)
2) Finance Income a/c Dr xxxx
To Finance Income xxxx
(Being Income Recognised)

Step IV : At the time of final collection

Bank a/c Dr xxxx
To financial Assets xxxx
To Other Income xxxx (Bal Fig.)
(Being Collection made)

Solution of Q.62

i. Bhilwara to Jabal Pur Toll Road :-

Under this Arrangement, Entity has contractual Right to collect the cash
From Govt. It cannot recover its invested funds from Public due to which the Given
Arrangements cannot be classified as an Intangible Asset, but It will be recognised
as a financial Asset.

ii. Kohlapur to Nagar Toll Road :-

Under this arrangement, Entity can recover its invested funds from public
Due to which we can recognise I. Asset for the Given Agreement.

iii. Accounting Treatment :-

a) Bhilwara- Jabal Pur :-

1) Financial Asset a/c Dr 110 Crores (fair value)
To Capital WIP 100 Crores (Const. Exp)
To P&L (Diff) 10 Crores
(Being financial Assets debited due to contractual right to Receive the cash)
2) Financial Asset a/c Dr 15 Crores
To Finance Income 15 Crores
(Being F. Income recognised)

3) Finance Income a/c Dr 15 crore

To Other Revenues 15 Crore
(Being Int. Income transferred to P&L)
4) Bank a/c Dr 200
To financial Asset 125

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To Other Income 75
(Being Collection made)

b) Kohlapur – Nagpur :-

1) I. Asset a/c Dr 200 (fair value)

To capital WIP 100 (Actual Cost)
To P&L (Diff) 100
(Being I. Asset recognised)
2) Bank a/c Dr xxxx
To revenues xxxx
(Being Revenue Collected from Public)
3) P&L a/c Dr xxxx
To I. Asset xxxx
(Being Asset amortised)

Case IV : Consignment Sales

If consignor Deliver Goods to Consignee then It will not e treated as

Revenue because consignee does not Enjoy control the Goods. As per the Provisions
of Ind AS 115, Revenue can be Recognised only if Goods are delivered by consignee to
customer means 3rd Party.

Solution of Q.63 (Discussed in Class)

Case V : Upfront fees (Joining fees/ File charges/ Registration fees etc)

If any Upfront fees (Non Refundable) is collected by an Entity from a

Customer then It will not be treated as a Separate Performance Obligation It will be
Recognised as a Revenue when Promised Goods or Services are delivered to Customer.

Case VI : Allocation of Cost over the contract *Imp

Contract Cost

Contract Acquisition Cost Contract Fulfilment Cost

Capitalised cost Expensed Amount D. Material G.OH

D. wages A.OH
Commission Paid for Legal fees, Stamp duty, Allocated OH S.OH
Acq. Of Contract Staff Salary, Staff

Travel Exp etc.

During Acquisition
Phase

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❖ If any Asset is acquired during fulfilment of contract then It will be dealt under
Relevant Ind AS.

Solution of Q.60 (Discussed in Class)

*Part 10*

Solution of Q.50, Q.51, Q.62 (Discussed & Doubts Solving)

*Part 11*

Ind AS 115 Vs AS-7 & AS-9

Ind AS 115 AS-7 & AS-9

1) It does not cover Revenue from Int. 1) AS-9 Covers Interest & Dividend
& Dividend Income
2) It deals with Transaction Price & its 2) It deals with Gross inflows whether
Allocation over Performance obligations Received or Receivable
3) It Explains Revenue Recognition on 3) It Explains different Rules for
the basis of Transfer of control in different Revenues
Step 5
4) It Explains service concession 4) It does not deal with Service
Arrangements concession arrangements

*Part 12*

Extra Question on Ind AS 115

Construction Contracts

Issue I : Balance sheet (Extracts) under Const. Contract in the books of

Contractor

As per the Provisions of Ind AS 115, the following statement should be

Prepared at the end of financial year to show Amount Due from/ to customers :-

Actual Cost incurred till date xxxx

(+) Profits/ Losses recognised till date + xxxx
Amount to be Billed xxxx
Amount Received till date (xxxx)
+ Due from Custo.
- Due to Custo.

Solution of Q.1

Accounting for 2015

i. % of completion of Contract = A. Cost to date x 100

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T.E Cost
= 2750 x 100
(2750 + 7750)
= 26.19%
ii. Cont. Revenue = Cont. Price x % of Completion
= 12000 x 26.19%
= 3142.8 or 3143 (rouded off)
iii. Cont. Profit = Cont. Rev. – Cont. Cost
= 3143 -2750
= 393
iv. Amount Due from/ to Customers :-
A. Cost to date 2750
Profit 393
Amount billed 3143
Received Amount (3000)
Due from Cust. 143

Accounting for 2016

a) % of Completion = A. Cost to date x 100

T.E. Cost
= (2750 + 3000) x 100
(5750 + 7750)
A.Cost to date
= 5750 x 100
13500
= 42.59%

b) Cont. Rev. = 12000 x 42.59% = 5111 – 3143 = 1968

Already Booked

c) Cont. Profit/Loss = 1968 – 3000 = (1032)

(Rev) (Cost)

d) Amount Due to/Due from Customer :

Actual Cost to date (2750 + 3000) 5750
Profit/ Loss Recognised to date : 2015 393
2016 (1032)
Total Billed Amount 5111
Received Amount to date (5000)
Due from Cust. 111

Accounting for 2017

i. % of Completion = 2750 + 3000 + 4200 x 100

9950 + 1550
= 86.52% Recognised
ii. Cont. Rev = 12000 x 86.52% = 10382 – 5111 = 5271
iii. Cont. Profit = 5271 – 4200 = 1071
iv. Due from/to Customer :-

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A. Cost to date (2750 + 3000 + 4200) 9950

P/L Recognised (393 – 1032 + 1071) 432
Billed Amount 10382
Received Amount 11000
Due to Customer 618

Accounting for 2018

Cont. Rev = 12000 – 10382 = 1618

Cont. Profit = 1618 – 1150 = 468
Due from customer = A. Cost to date (9950 + 1150) 11100
Profit (432 + 468) 900
Billed 12000
Received 12000
Dues Nil

Issue 2 : Cumulative Catch up Adjustment *Imp

If Contract Price and Contract cost are revised without adding any distinct
Goods or services then we should consider application of cumulative catch up
Adjustment on Earlier booked Revenues as follows (Retrospective Adjust) :-

Step I : Calculate Revised % of completion till the date of such changes in prices as
Follows :-
Actual Cost till date x 100 = Revised % of Completion
Revised T.E Cost

Step II: Revenue Adjust.

(Revised cont. Price x Revised % of Completion) – Earlier Booked Revenue

Cumulative Catch up Adj. in Rev. with Retrospective Adjust.

Solution of Q.3 *Imp

Statement Showing Cumulative Catch up Adjustment

i. Revised Transaction Price in the beginning of 2nd Year :-

Original Transaction Price 80,00,000
Increase in Price 15,00,000

Bonus (Probable) 500,000

Revised Price 100,00,000

ii. Revised Contract Cost :-

Original Estimation 60,00,000
Increase in Cost 10,00,000
Revised Est. 70,00,000

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iii. Revised % of Completion in the beginning of 2nd Year :-

% of Completion = A. Cost x 100
T.E Cost
= 45,00,000 x 100
70,00,000
= 64.286%

iv. C. Rev. as per Revised % = 100,00,000 x 64.286%

= 6428600

v. Cumulative Catch up = 6428600 – 6000000 = 428600

Revised Already Cumulative

Rev. Booked Catch up
Rev.

Solution of Q.7 *Imp

Assumption : We have assumed that there is no doubt regarding on time completion of

Const. work.

A. Accounting at 31.3.2018 (without modification) :-

Contract Price 20,00,000

Bonus (Assumption) 400,000
Trans. Price 24,00,000
% of Completion 60%
Cont. Rev 14,40,000
A.Cost 840000 (14L x 60%)
Profit 600,000

B. Cumulative catch up Adjust :-

1) % of Completion (Revised) = 840000 x 100
1640000
= 51.22 %
2) Revised Cont. Rev = 2700,000 x 51.22% = 1382940
3) Cumulative Catch up = 1382940 – 1440000 = (57060)
Rev. Should be Reversed
Assumption : It is not Probable at contract date that contract will not be completed
On time

a) Accounting at the end of 2017-18 :-

Transaction Price 20,00,000
% of Completion 60%
Cont. Rev. 12,00,000
A. Cost (840,000)
Profit 360,000

b) Cumulative Catch up Adj :-

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Revised Rev. = 2700,000 x 51.22% = 1382940

C.C. Adj. = 1382940 – 12,00,000 = 182940

Issue 3 : Survey Method/ Sales Method

It may be possible that completion stage of the project is certified by an

Independent surveyor. In the Given case, we will recognise Revenue according to %
of work certified by Surveyor. The following Additional Points should also be
considered :-
I. Actual Expenses shall be recognised in P&L A/c under this method as follows :-
“Total Estimated Cost x % of Work Certified “
Note : It can be said that Revenue & Expenses shall be booked at equal % due to
Matching Rule.

II. If there is a difference between A. Cost to date & Recognised Cost to date
then It will be treated as WIP Work.
Matching Rule

Solution of Q.6

Calculation of Profit/ Loss for the Current year

i. Survey method/ Sales method :-

a) % of Completion = 1800 x 100 = 56.25%
3200
b) Calculation of Profit or Loss for C.Y :-
Cont. Rev. to date = 3200 x 56.25% 1800
Cont. Rev Recog. in Earlier years (1200)
Revenue for Current year 600
Cont. Cost for C. year (456)
[(2500 x 56.25%)- 950] Profit 144
c) WIP work not certified :-
A.Cost to date 1500
Certified Cost (1406)
Cost incurred but not certified 94

ii. Cost method/ Input method

a) % of Completion = 1500 x 100 = 60%
2500

b) Cont. Rev (3200 x 60%) - 1200 = 720

Cont. Cost (1500 – 950) = (550)
Profit 170

Solution of Q.2

Accounting for 1st Contract

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i. Calculation of P/L upto 31.3.18 :-

Contract Revenue (36,00,000 x 40%) 14,40,000
Contract Cost: Normal (30,00,000 x 40%) (12,00,000)
Additional Exp. (100,000)
Cont. Profit 140,000

ii. Amount Due from Customer :-

A. Cost incurred during 17-18 13,00,000
Profit 140,000
Amount Billed 14,40,000
Received Amount (12,00,000)
Due from Cust. 240,000

iii. WIP Inventory :-

A. Cost till B/s adte (Assumed : Normal) 15,00,000
Certified Normal Exp. (12,00,000)
(Uncertified Exp.) WIP 300,000

Accounting for 2nd Contract :-

i. Cont. revenue (60000 x 30%) 18000

Cont. Cost : i) Normal (48000 – 8000) 30% (12000)
ii) N. C. Asset (Exp) (8000)
Loss 2000

ii. Amount Due to Customer :-

A. Csot incurred till B/ s date 20000
(12000 + 8000)
Losses incurred (2000)
Billed Amount 18000
Received (21000)
Due to Customer 3000

Accounting for 3rd Contract :-

a) Calculation of P/L for 17-18 :-

Cont. Revenue (24,00,000 x 25%) 600,000
Cont. Cost (20,00,000 x 25%) (500,000)
Profit 100,000

b) Due from Customer/ to Customer :-

Cont. Cost (Certified) 500000
Profit 100000
Billed Amount 600000
Received Amount 10,00,000
Due to Cust. 400,000

c) WIP Inventory (Uncertified Cost) :-

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A. Exp. till date 700,000

Certified Cost (500,000)
Uncertified work 200,000

Solution of Q.5 *V.V.Imp

Statement Showing Calculation of Total Cost for All Performance Obligation

(2018-19)

Design & Tech. Assistance Const. Contract

Material - 4000
Labour - 1000
Insurance - 2
Technical 25 -
Designs 25 -
Depreciation - 10
Other Exp. - 100
Specific Cost 50 5112
Common Exp. :
i. Exp. for Cont. 21 21.79
(22L in the ration of 50:5112)
ii. B. Cost .48 49.52
(50L in the ratio of 50:5112)
T. Cost in 18-19 50.69 5183.31

Statement showing calculation of T. Cost in 19-20

Design & Tech. Const. Contract

Material - 5000
Labour - 1300
Insurance - -
Technical 15 -
Designs - -
Depreciation - 10
Other Exp. - 100
Specific Cost 15 6411
B. Cost 13 54.87
(55L in the ration of 15 : 6411) 15.13 6465.87

Calculation of P/L for Different Performance Obligations

a) Total Cost for Designs & Tech.

18-19 19-20 Total

T. Cost 50.69 15.13 65.82
% of Completion 77% 23% 100%

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50.69 x 100 (100% - 77%)

65.82

b) Cont. Rev. for Designs & Tech

18-19 = 81.25L x 77% = 62.5625
19-20 = 81.25L – 62.5625L = 18.6875

c) Cont. P/L for Designs & tech.

18-19 = 62.5625 – 50.69 = 11.8725
19-20 = 18.6875 – 15.13 = 3.5575

d) Due from Customer (18-19)

Billed Amount 62.5625
Received 50.000
Dues 12.5625

II Const. Cont.

18-19 19-20 Total

T. Cost 5183.31 6465.87 11649.18
% of Comp. 44.50% 55.5%
5183.31 x 100 (Bal)
11649.18

Cont. revenue :
18-19 = (15000 – 81.25) x 44.5% = 6638.84
19-20 = (15000 – 81.25) x 55.5% = 8279.91

Cont. Profit
18-19 = 6638.84 – 5183.31 = 1455.53
19-20 = 8279.91 – 6465.87 = 1814.04

Dues from Customer (18-19)

Billed Amount 6638.84
Received Amount (6100)
538.84

Dues from Customer (19-20)

Billed Amount to date 14918.75 (15000 – 81.25)
Received Amount till date (14918.75)
Nil

Solution of Q.4

In the Given case, Sun Ltd. has an Expected Profit margin of 25% on Estimated
Cost because It Expects total cost of Rs.80L in a Contract of 100L. So, Sun Ltd. can
raise a bill of Rs.12.5L at the time of termination of contract by moon ltd. for total
Incurred cost of 10 Lacs

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*Part 13*

New Questions

Solution of Q.1, Q.2, Q.3, Q.4, Q.5, Q.6, Q.7 (Discussed in Class)

Solution of Q.8 *Imp

Statement showing calculation of Revenue & Liab. in Ist Year

i. Total Collection Expected over = (7500 x 100) + (6000 x 50) + (6000 x 25)
the period of 3 years
= 12,00,000
ii. Avg. revenue Per customer = 12,00,000/175 = 6857
iii. Bank a/c Dr 750,000 (7500 x 100)
To Revenues from 685700 (6857 x 100)
Customer
To Adv. From 64300 (Bal fig)
Customer
(Being Revenue & Liab. recognised in Ist year)

Subsequent years (Not required in question, but only for understanding)

2nd year : Bank a/c Dr 300,000 (6000x 50)

Advance a/c Dr 42850 (Bal . fig)
To Revenues 342850 (6857 x 50)

3rd year : Bank a/c Dr 150,000 (6000 x 25)

Advance a/c Dr 21450
To Revenues 171450 (6857 x 25)

Question 9 (H.W)

Solution of Q.10 *Imp

Journal Entries

i. Bank a/c Dr 36000

To Revenues 32000
To Contract Liab. 4000 (Extended Liab)
(Being Transaction Price Allocated in the ration of SSP of Performance Obligation)

ii. P&L a/c Dr 2000

To Prov. For warranty 2000
(Being Prov. Created for fee warrants period based on Experience)

iii. COGS a/c Dr 14400

To Opening Stock 14400
(Being Opening Stock Derecognised & Added to COGS)

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Question 11 (H.w)

*Part 14*

Solution of Q.26, Q.25 *Imp (Discussed in Class)

Solution of Q.24 *Imp

In the given case, there are 3 outcomes due to which Expected value method
Should be applied. The following statement may be referred for Transaction Price in
the Given Transaction:

Transaction Price : (5000 – 0) x 70% = Rs.3500

(5000 – 500) x 20% = Rs.900
(5000 – 1000) x 10% = Rs.400
Rs.4800

In the Given case, Television have been sold out for Rs.5000 Per unit, but
Transaction Price is 4800 due to which a liability is required to be created for
difference between 5000 & 4800 because reversal of revenue is Possible. If No
reversal is made within 6 months then It will be transferred to Revenue.

Journal

Bank a/c Dr 50,00,000 (100 x 5000)

To Revenues 48,00,000 (100 x 4800)
To Contract Liab. 200,000 (100 x 200)
(Being Revenue recognised as per expected value method)

Solution of Q.23, Q.22 (Discussed in Class)

Solution of Q.21

In the Given case, Supplier (J) Estimates the annual sales of 2.8 million
Containers to the customer which clearly indicates that Price would 90 per container,
But 700,000 containers have been sold against a consideration of 100 per container in
the first Qtr. It means that there may be a reversal of Rs.10 Per container in future
Which should be considered as a Liability at the time of delivery of 700000 containers.
So, the transaction Price would be 100 – 10 = 90 Per container

Journal

Bank a/c Dr 700,00,000 (7L x 100)

To revenues 630,00,000 (7L x 90)
To Contract Liab. 70,00,000 (7L x 10)
(Being Revenues & liab. recognised)

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Solution of Q.20, Q.19, Q.16, Q.15, Q.14, Q.13, Q.12 (Discussed in Class)

Question 18 (H.w)

Thank You 😊
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Ind AS : 34
Interim Financial Reporting (IFR)

*Part 1*

Discussion about Topic

*Part 2*

Concept 1 : Legal Status

As per the Provisions of Ind AS 34, IFR is not mandatory under Ind AS Rules. In an
Entity Prepares (Legally or voluntary) IFR then It should apply Ind AS 34.
❖ In India, Listed companies are bound to prepare its financial statement on
Quarterly basis as per SEBI Guidelines. So, these companies should consider Rules as
Specified in Ind AS 34.

Concept 2 : Forms & Content

a) Form of IFR : Condensed form

b) Content of IFR :
i. Condensed B/S
ii. Condensed P&L
iii. Condensed cash flow
iv. Condensed Notes to A/Cs
v. Condensed changes in Equity
c) Manner of Reporting :
i. B/s : Interim Period with comparative B/s in Preceding year
ii. P&L : a) Interim Period with comparatives
b) Cumulative year to date with comparative
iii. Cash flow : Cumulative year to date with comparatives
iv. Changes in equity : Cumulative year to date with comparatives

Concept 3 : Rules to be followed while preparing IFR

Rule 1 : Accounting Policies

All the Accounting Policies should remain same while preparing IFR which are used
For Annual Reporting. It means that Policies cannot be changed for IFR Purpose only.

Rule 2 : Revenues (Seasonally, Cyclically, Occasionally)

If any Exceptional revenue arises in any Interim Period due to seasonal nature
Of Business then we cannot defer or anticipates any revenue over any other period.
It means that Revenue should be booked on Actual Basis.

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Rule 3 : Expenses :
As per the Provisions of Ind AS 34, Exp. should not be deferred over other
Periods, but Expenses should be charged in the same period in which these are
Incurred. However, Provision can be created for Expected losses or Expenses only if
there is constructive obligation for such loss.

Rule 4 : Income tax :

- Refer Guidance Note on Income Tax in IFR -
(Weighted Avg. Tax rate)

Rule 5 : Dividend Paid : ( New Point)

If any Dividend is paid in any Qtr then It should also be reported in Aggregate
& per share.

Rule 6 : Extra-ordinary Items : (New Point)

- Deleted from Ind AS 34 -

Rule 6 : Explanation on significant & material Items :-

(New Point) (Notes to A/C’s)

i. If Inventories are written down to NRV or Reversal of Such written Down

ii. Impairment Loss & Reversal of Such Loss
iii. Acquisition or Disposal of PPE
iv. Any Loan default or Breach of contract
v. Related Party Transactions
vi. Change in contingent Liab. & Contingent Assets
vii. Any other material fact which can improve presentation of statements

Rule 7 : Other Disclosures (New Concept) :-

i. A note should be given that Accounting Policies are same in IFR and AFR
ii. A Note should be given on Seasonality, Cyclical of Revenue.
iii. Issue or Buy Back of Securities
iv. Operating Segment information as per Ind AS 108

*Part 3*

Guidance Note on Calculation of Tax in Interim financial Reporting

As per the Provisions of Guidance Note Calculation of Income Tax for the
Purpose of IFR should be based on “weighted Avg. Tax Rate” instead of Actual Tax
For respective Qtr. This concept is based on Accrual concept which Explains the
Allocation of Annual Exp. & Incomes over the period of 12 months. The following
Equation may be considered for the computation of “WATR” :-

WATR = Annual Estimated Tax

Annual Estimated Income

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E.g.
i. Annual Income (Estimated) : 400,000
ii. Qtr. wise : I 150,000
II 50,000
III 100,000
IV 100,000
iii. Tax : First 2L = 20%
Net Bal. = 30%
Calculate Qtr. wise Tax.

Solution:

I. Calculation of WATR
a) Total Annual Income (Est.) : 400,000
b) Total Annual Tax (Est.) :
First 2 L @ 20% 40,000
Next 2 L @ 30% 60,000
100,000
c) WATR = 100,000 x 100 = 25%
400,000

II. Calculation of Qtr. Wise tax

I II III IV
Est. Income 150,000 50,000 100,000 100,000
WATR @ 25% 37,500 12,500 25,000 25,000

Note on Capital Gain Tax

As per the Provisions of Guidance Note, WATR should not include capital gain
Taxes because these Taxes are calculated on Specific Transactions. It can also be said
that these Taxes can be dealt on respectively/ Actual Basis.

E.g.
i. Estimated Annual Income : 400,000
(Including 20,000 capital Gain in 3rd Qtr)
ii. Qtr. wise : I 120,000
II 60,000
III 120,000 (including C.G)
IV 100,000
iii. Tax on Capital Gain @ 20%
iv. Normal Tax : First 1L = 10%
Next 1L = 20%
Bal. = 30%
Calculate Taxes for IFR.

Solution : Calculation of WATR

a) Annual Estimated Income (4L -2L) 380,000

(other than C. Gain)

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b) Annual Estimated Taxes :

First 1L @ 10% 10,000
Next 1L @ 20% 20,000
Bal 1.8L @ 30% 54000
3.8L 84000

c) WATR = 84,000 x 100 = 22.11%

380,000

Calculation of Qtr Wise Tax

Q1 = 120,000 x 22.11% = 26532

Q2 = 60,000 x 22.11% = 13266
Q3 = (20,000 x 20%) + (100,000 x 22.11%) =26110

C.G Normal
Q4 = 100,000 x 22.11% = 22110

Solution of Q.1

Calculation of WATR

WATR = (40,000 x 30%) + (60,000 x 40%) x 100

100,000
= 36%

Calculation of Qtr. Wise Tax

Q1 Q2 Q3 Q4
Est. Income 25,000 25,000 25,000 25,000
Tax @ 36% 9000 9000 9000 9000

Solution of Q.2

Calculation of WATR

WATR = (40,000 x 30%) + (40,000 x 40%) x 100

80,000
= 12000 + 16000 x 100
80,000
= 35%

Calculation of Qtr. Wise Tax

Q1 = 25000 x 35% = 8750

Q2 = (20,000 x 10%) + (5000 x 35%) = 3750
Q3 = 25000 x 35% = 8750
Q4 = 25000 x 35% = 8750

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*Part 4*

Solution of Q.5 *Imp

Statement showing Results for Ist Qtr ending on 31.3.2020

Sales 50 Crores
Expenses : Salaries 30 Crores
Advert. 2 Crores
Adm. & Selling Exp. 8 Crores (40 Crores)
Profits 10 Crores

Comments : As per the Provisions of Ind AS 34, An Entity cannot defer its incomes
or Expenses. In the Given case, company wants to defer Expenses of
Rs.21 crores without any reason which is not allowed. So, the company’s
Point of view to defer its Expenses is not correct and all Expenses shall
be charged in Q1 itself.

Solution of Q.8 *Imp

Calculation of Correct Income

Profit (Given) 720,000

Bad debts (deferment is not allowed) (20,000) (40,000 x 50%)
Correct Income 700,0000

Comments :
1) In the Given case, we have ignored any adjustment relating to Extra-ordinary
Loss because there is no concept of Extra-ordinary Items under Ind AS Rules. The
Loss of Rs.35,000 is to be charged in Q.3 which is correctly recorded.
2) In the Given case, Adjustment of Rs.45000 is also correct because change in
method of Depreciation is treated as change in Estimation which is considered
Prospectively.

Solution of Q.2, Q.3 *Imp, Q.6 (Discussed in Class)

Solution of Q.9

As per the Provisions of Ind AS 34, All incomes & Expenses should be recorded in the
Period in which these are incurred or Earned. We cannot defer any Income or
Expense.
In the given case, Dividend Income of Rs.100 crores has been received by the
Entity in 3rd Qtr. Which should be recognised in 3rd Qtr.

Conclusion : on the basis of above discussion, It can be said that company point of
view of recognising Income of 25 crores in each Qtr. is not correct.

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Solution of Q.10 *Imp

In the Given case, Company overall Profit is ‘Zero’, but we cannot avoid Tax
calculations because we are preparing Quarterly Reports. So, calculation of Tax should
Be made on the basis of Qtrly Profits or Losses as follows :-

Statement Showing Qtrly Taxes

Q1 Q2 Q3 Q4 Total
Profits 150 (50) (50) (50) NIL
Tax Rate 35% 35% 35% 35% 35%
Tax Liab. (Saving) 52.5 (17.5) (17.5) (17.5) 0

Solution of Q.11 *V.V.Imp

In the Given question, Accounting year is 1.10.2019 – 30.9.2020, but Tax Laws are based
On Normal financial year (Apr – march). So, Different Tax Rates can be applied in
Different financial years as per Tax Laws. We will compute Tax Exp. for IFR on
Actual basis as follows :-

Q1 Q2 Q3 Q4
PBT 200 200 200 200
Tax Rate 20% 20% 30% 30%
Taxes 40 40 60 60

Solution of Q.4 (H.w)

Solution of Q.7

Calculation of Qtrly Income

Net Income (Given) 102,000

i. Extra-ordinary Income (20,000)
(Related to Second Qtr, but Deferred in 3rd Qtr)
ii. Changes in Inventory valuation 10,000
(related to Earlier Qtrs)
Correct Income 92000

Comments : The Entity should re-state IFR for Earlier Periods due to deferment of
Extra- ordinary Gain & Change in Accounting Policy.

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*Part 5*

New Questions
Solution of Q.1

Adjustments relating to fixed OH in IFR

I. Basic Information : QI QII QIII QIV

A. Fixed OH per Qtr. 2500 2500 2500 2500

B. Recovery Rate per unit 5/- 5/- 5/- 5/-
(2500/ 500 Units)
C. Actual Output (units) 400 600 500 400
D. Normal Output 500 500 500 500

II. Adjustment in Ist Qtr.

i. Fixed OH in Ist Qtr. Rs.2500
Recovered OH in Ist Qtr (400 x5) (Rs.2000)
Under- Recovery Rs.500

ii. As per the provisions of Ind AS-2, unabsorbed fixed OH shall be written off in
SOPL due to which we will debit Rs.500 in Qtrly P&L as Unabsorbed Expenses.

III. Adjustments in 2nd Qtr :-

As per the Provisions of Ind AS 34, Qtrly Reports should reflect Annual Results,
So we may need to adjust change in Estimations on prospectively basis. In Second
Qtr, we should compute cumulative figures in relation to fixed OH as follows :-

Cumulative Fixed OH (Ist Qtr. + IInd Qtr.) Rs.5000

Cumulative Recovered OH (1000 x 5) ( Rs.5000)
Under- Recovery NIL

Comments : As per cumulative figures, there is no under Recovery till 2nd Qtr. due to
Which we should have to Reverse 500 in PL of 2nd Qtr. which was charged in
Ist Qtr as a result of change in Estimation.

IV. Adjustment in 3rd Qtr

Cumulative F.OH for 3 Qtrs. Rs.7500

Recovered OH on Actual Production (Rs.7500) (1500 x 5)
Diff NIL

❖ There will be no adjustment relating to under Recovery in 3rd Qtr.

V. Adjustment in 4th Qtr

Cumulative F.OH for 4 Qtrs 10,000

Recovered OH (1900 x 5) (9500)
Under Recovered 500

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Comments :We will charge under Recovery of Rs.500 in statement of P&L.

Thank You 😊
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Ind AS-21 : Foreign Currency Transactions *Imp

*Part 1*

Concept 1 : Coverage

Coverage

Unit I : Foreign Currency Transactions Unit II : Foreign Operations

(Note : Accounting for forward contracts & long term Loans is out of Scope of Ind
As -21 : Refer Last Concept of this statement for better understanding.)

Concept 2 : Important Definitions

1. Meaning of Exchange Rate :- As per the Provisions of Ind AS 21, Exchange Rate
is the rate at which Single Unit of Foreign Currency can be Exchanged into
Indian Currency. In Practical Life, Exchange Rate can be Classified into the
Following headings :-
I. Buying Rate
II. Selling Rate
❖ Buying Rate is the rate at which foreign currency is purchased by an Entity to
Repay its Liabilities but selling Rate is the rate at which foreign Currency sold to
Recover the Assets. Normally, Buying Rate remains higher in the market. While
Applying Ind AS 21, It will be assumed that Both the rates are similar.
Under the rules of this statement Exchange Rate should be classified under
4 headings as follows :-
i. Opening Rate : It Prevails in the beginning of year
ii. Closing Rate : It Prevails at the end of year
iii. Actual Rate/ Daily Rate / : It Prevails on daily Basis (Date wise Rate)/ It
Spot Rate/ Transaction Rate Prevails on the date of Transaction.
iv. Average Rate : It Prevails during the year on Average Basis
Aggregation of 365 Rates
365 days

2. Meaning of Monetary & Non-Monetary Items

a) Monetary Items are the Assets & Liabilities which are fixed in foreign currency
From the point of view of Receivables & Payables. These Items may be in the form of
Debtors, Creditors, B/R, B/P, Loan, Bank Balances etc.
b) Non-monetary Items are the Assets & Liab. Which are not fixed in foreign
Currency from the Point of view of foreign Currency. These Items may be in the
form of fixed Assets, Inventories, Investment in Equity shares, ESC, R&S etc.

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3. Meaning of functional Currency :-

As per the provisions of Ind AS-21, functional Currency is the currency in
Which Business is operated under Legal Economic Environment. It is the currency in
Which sales, Purchases, Loans, Investments etc. are recorded Prominently.
(In India, Functional Currency is INR)

4. Meaning of Reporting Currency :-

As per the Provisions of Ind AS 21, Reporting Currency is the currency in
Which financial Statements are Prepared. In India, Reporting Currency is INR.
(It means that functional & Reporting Currency will be same in India. These
currencies may be different in other countries (China/ Hongkong)

5. Meaning of Foreign Currency :-

As per the Provisions, Foreign Currency is the currency which is other than
Indian currency whether It is USD, GBP, EURO etc.

Concept 3 : Accounting for Monetary Items

Unit I : F.C. Transactions

Accounting for Monetary Items Accounting for Non Monetary Items

(Concept 3) (Concept 4)

Monetary Items

Case I : Settlement in same year Case II : Settlement in Next year

Case I : Settlement in Same Year

Step I : Initial Recognition

As per the Provisions of Ind AS 21, Initial Recognition will be made at Actual
Rate which Prevails on the date of Transaction.

Step II : Settlement
As per the Provisions of Ind AS 21, Settlement should also be recorded at
Actual rate. Which Prevails on the date of Settlement.
Note : Difference between Step I & Step II will be considered as Exchange Gain/Loss
and It will be transferred to P&L A/c.

E.g.
a) Export : USD 10,000
b) Export Date (1.5.17) : 60 = 1 USD
c) Collection (1.7.17) : 61.50 = 1 USD
(5000 USD)
Collection (1.8.17) : 61.60 = 1 USD
(5000 USD)

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Pass Journal Entries.

Solution :
Journal Entries

1.5.17 F.C. Debtors a/c Dr 600,000

To F.C. Sales 600,000
(Being Export sales of 10,000 USD recorded @ 60)
1.7.17 Bank a/c Dr 307500 (USD 5000 x 61.50)
To F.C. Debtors 300,000 (5000 x 60)
To E. Gain (Bal) 7500 [(61.50 – 60) x 5000]
(Being Settlement of 5000 USD made)
1.8.17 Bank a/c Dr 308000 (USD 5000 x 61.60)
To F.C. Debtors 300,000 (5000 x 60)
To E. Gain 8000 (61.6 – 60) x 5000
(Being Settlement of 5000 USD made)
31.3.18 E. Gain a/c Dr 15500
To P&L 15500
(Being Income Recognised)

E.g.
i. Import : 5000 USD
ii. Date : 1.6.17 (1 USD= 68)
iii. Payment : 1.8.17 (1 USD = 67.80)
Pass Journal Entries

Solution
Journal

1.6.17 F.C. Purchases a/c Dr 340,000

To F.C. Creditors 340,000
(Being Import recorded of 5000 USD @ 68)
1.8.17 F.C Creditors a/c Dr 340,000
To Bank (5000 x 67.80) 339000
To E. Gain (Bal fig) 1000
(Being Payment made)
31.2.18 E. Gain a/c Dr 1000
To P&L 1000
(Being Income recognised)

Case II : Settlement after B/s date

(Settlement in Next year)

Step I : Initial Recognition

Initial Recognition should be made at Actual Rate which Prevails on the date
Of Transaction.

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Step II : B/S date

At B/S date, Disclosure of O/s monetary Items will be made at Closing Rate
For True & fair Presentation.
(Difference between Step I & Step II will be transferred to P&L A/c assuming
Exchange fluctuation on monetary Items)

Step III : Settlement date

At the time of settlement, we consider Actual rate.
(Difference between Step II & Step III will be transferred to P&L A/c assuming
Exchange fluctuation)

E.g.
i. Export : USD 5000 (1.2.17)
ii. B/s date : 31.3.17
iii. Settlement : 1.6.17
iv. Exchange Rate :-
1.2 =61 , 31.3 = 63, 1.6 = 61.50
Pass Journal Entries.

Solution
Journal Entries

1.2.17 F.C. Debtors a/c Dr 305000 (5000 x 61)

To F.C. Sales 305000
(Being Goods Sold)
31.3.17 F.C Debtors a/c Dr 10,000 (63-61) x 5000
To E. Gain 10,000
(Being monetary Items reported at closing)
31.3.17 E. Gain a/c Dr 10,000
To P&L 10,000
(Being Income Recognised)
1.6.17 Bank a/c Dr 307500 (5000 x 61.50)
E. Loss a/c Dr 7500 (Bal. fig)
To F.C Debtors 315000
(Being Settlement made)
31.3.18 P&L a/c Dr 7500
To E. Loss 7500
(Being Losses written off)

E.g.
a) Import : 4000 USD
b) Date of Import : 1.3.17 (60)
c) B/S : 31.3.17 (61)
d) Payment : 1.5.17 (62)
Pass Journal Entries.

Solution:

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Journal Entries

1.3 F.C. Purchases a/c Dr 240,000 (4000 x 60)

To F.C Creditors 240,000
(Being Goods imported)
31.3 E. Loss a/c Dr 4000 (61-60) x 4000
To F.C Creditors 4000
(Being monetary Items reported at Closing Rate)
31.3 P&L a/c Dr 4000
To E. Loss 4000
(Being Losses written off)
1.5 F.C. Creditors a/c Dr 244000 (61)
E. Loss a/c Dr 4000 (1)
To Bank 248000 (4000 x 62)
(Being Settlement made)

E.g. (short Term Loans/ Borrowings)

i. F.C. Loan : 100,000 USD
ii. Date of Loan : 1.8.17 (62)
iii. B/S : 31.3.18 (63)
iv. Repayment : 1.5.18 (64)
Pass Journal Entries

Solution :

1.8.17 Bank a/c Dr 6200,000

To S.T.B 62,00,000
(Being S.T.B of 100,000 USD taken @ 62)
31.3.18 E. Loss a/c Dr 100,000 [(63-62) x 100,000]
To S.T.B 100,000
(Being monetary Items reported at Closing Rate)
31.3.18 P&L a/c Dr 100,000
To E. Loss 100,000
(Being Losses written off)
1.5.18 S.T.B a/c Dr 63,00,000 (63)
E. Loss a/c Dr 100,000 (Bal)
To Bank 64,00,000 (64)
(Being o/s Liab. Settled)
31.3.19 P&L

Concept 4 : Accounting for Non Monetary Items

(i.e., Inventory, PPE, Invest. in Equity shares)

As per the provisions of Ind AS 21, Non monetary Items should be Accounted
For in the books of A/c on the basis of following Rates :-

Step I : Initial Recognition

As per the Provisions of Ind AS 21, Non monetary Items should be recognised

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Initially at “Actual Rate” which Prevails on the date of transaction.

Step II : B/S date

We will not consider Closing rate at B/s date for these Items, but we will
Consider Step I value in B/s without any fluctuation.

Step III : Disposal :

At the time of Disposal of NMI, we will consider Actual Rate which Prevails at the
time of sale.
[Step I – Step III = Exchange fluctuation to be transferred to P&L]

Exception to above Rule *V.V.Imp

If Non monetary Items are valued at fair value at B/S date under Relevant
Ind AS then Presentation of Non Monetary can be made at closing Rate.

Case I : Non monetary Items in the form of Inventory

E.g.
i. Cost of Inventory : 10,000 USD (62)
ii. NRV at B/.s date : 11,000 USD (62.50)
Apply Ind AS 21

Solution:
In the Given Case, there is no Loss on Inventories under Ind AS 2 because
NRV is higher than Cost of Inventory. So, we will ignore fair value of stock.
Under Ind AS 21, we will not change Actual value of Inventory (10000 x 62)
Because Non monetary Items are normally reported at Actual Rate in B/s.

E.g.
i. Cost of Inventory : 10,000 USD (60)
ii. NRV at B/s date : 9800 USD (61)

Solution :

Step I : Valuation Loss under Ind AS 2

(10,000 – 9800) x 60 = 12,000

Step II : Exchange fluctuation under Ind AS 21

E. Gain = 9800 x (61 -60) = 9800

a) Fair value Loss a/c Dr 12000

To Inventory 12000
b) Inventory a/c Dr 9800
To E. Gain 9800

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Case II : Impairment Loss in PPE

i. P&M = 10,000 USD (60)
ii. Fair value B/s date = 9800 USD (58)
Apply Ind AS 16,36 & 21.

Solution :
a) I. Loss = (10,000 – 9800) x 60 = 12,000
b) Exchange Loss = 9800 x (60 - 58) = 19600

1) Impairment Loss a/c Dr 12000

E. Loss a/c Dr 19600
To PPE 31600
2) P&L a/c Dr 31600
To I. Loss 12000
To E. Loss 19600

E.g.
i. PPE : 10,000 USD (60)
ii. F.V at B/s date : 11,000 USD (61)
Apply Ind AS 16, 21 assuming Revaluation model can be applied.

Solution :

Revaluation Res. = (10,000 – 11,000) x 60 = 60,000

Ex. Gain = 11,000 x (61-60) = 11,000

1) PPE a/c Dr 71,000

To Gain on Rev. 60,000
To E. Gain 11,000
2) Gain on Rev. a/c Dr 60,000
E. Gain a/c Dr 11,000
To OCI 71,000

Note :
1) If fair value fluctuation is transferred to P&L then Exchange Fluctuation will also
be transferred to P&L.
2) If fair value fluctuation is transferred to OCI and Exchange fluctuation will also
be transferred to OCI.

E.g.
i. Investment in Equity shares : 10,000 USD (58)
ii. Fair value at B/s date : 11,000 USD (59)
Under 109, Investments are valued at B/s date at fair value. Apply Ind AS 21.

Solution :

a) F.V Changes = (11,000 – 10,000) x 58 = 58,000

b) Exchange Gain = 11000 x (59-58) = 11000

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FVTPL FVOCI
1) Invest in Shares a/c Dr 69000
To F.V Gains 58,000
To E. Gain 11,000
2) F.V Gain a/c Dr 58,000 2) FV Gain a/c Dr 58,000
E. Gain a/c Dr 11,000 E. Gain a/c Dr 11,000
To P&L 69000 To OCI 69,000

*Part 2*

Concept 5 : Foreign Operations

a) As per the Provisions of Ind AS 21, foreign Operation means a business which is
Carried by an Enterprise outside India.
b) A foreign can be run outside India in the form of an Associate, A Subsidiary, a
Joint venture or a branch.
c) Before making any consolidation of foreign operation with an Indian Investor,
It is mandatory to translate F.C. Trial Balance into Indian Currency. The
Following Rules should be considered while translating Trial Balance :-

Particulars Debit Credit Working

Assets xxxx - Closing Rate
Liabilities - xxxx Closing Rate
Incomes - xxxx Actual Rate
(Avg. Rate may be
Preferred if Actual
Is not Given)
Expenses xxxx - Actual Rate
[Avg rate may be
Preferred if Actual
is not Given)
S. Capital - xxxx
Other Equity : Actual Rate on DOA
Upto DOA - xxxx
Post acq. - xxxx Avg. Rate
xxxx xxxx

Difference : FCTR
(Foreign Currency Translation Reserve )

“OCI”

Question 2 (H.W)

d) Disposal of Investments in Foreign Operation :- *Imp

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If Investment in Foreign Operation is disposed off then FCTR will be

Transferred to P&L A/c. It means that OCI will be recognised as Actual Profit.

Solution of Q.1
Journal :P

NCI a/c Dr 100

Bank a/c Dr 1500
FCTR a/c Dr 180
To Assets 1000
To P&L 780 (Bal)
(Being Investment Sold)

❖ Holding Company will De-recognise Assets, Liab, NCI & FCTR at the time of
Disposal of Invest.

Concept 6 : Long Term Borrowings

Long Term Borrowings

If LTB were made by Entity before If LTB are taken after application
Application of Ind AS-21 of Ind AS-21
(Case I) (case II)

Explanation on Case I

- If any LTB were made before the Application of Ind AS 21 then It will still be
Treated under Para 46 of AS-11
(Ind AS 21 will not work Here)

Explanation on Case II

- If any LTB is taken recently then It will be treated as a simple monetary

Item & Closing Rate will be applied at each B/S date

*Part 3*

Solution of Q.1 *Imp, Q.2 *Imp, Q.3, Q.4 (Discussed in Class)

*Part 4*

Solution of Q.1 , Q.2, Q.3, Q.4, Q.5 (Discussed in Class)

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*Part 5*

New Questions

Solution of Q.3

i. In the Given Case, Advance form Customer has been received on 1.1.18, but
Revenue will be recognised on 31.3.18 because performance obligation is satisfied
By company (A ltd.) on such date as per Ind AS 115
ii. Total Contract is for 50 million USD out of which 30 million is Still Recoverable
After adjusting Advance of 20million. The Amount of advance will be translated on
Rate which prevails on 1.1.18, but Receivables should be considered as a monetary
Item due to which It will be translated at closing rate at B/s date & at
Settlement Rate on collection date.

iii. Calculation of Revenue to be Recognised on 31.3.2018

Advance from B Ltd. (20m x 72) 1440

Receivables on revenue Recog. (30m x 75) 2250
3690

Journal :

1) 1.1.18 Bank a/c Dr 1440

To Advance from B Ltd. 1440
(Being Advances Received from Customer)
2) 31.3.18 Advance from B ltd. a/c Dr 1440 (72)
Trade Receivable (B) a/c Dr 2250 (75)
To Sales 3690
(Being Sales Recognised)

Solution of Q.2

As per the Provisions of Ind AS 21, monetary Items shall be reported at closing
Rate on B/S date, but Non monetary Items shall be reported at Acquisition Rate
until these are items are measured at fair value. In the Given case, fair value of
machine at B/s date is not Given due to which It can be said that machine is not
Revalued and It can be shown at Acquisition Rate. But Payables for machinery are
Monetary Items and shall be reported at closing rate.
So, there may be Exchange fluctuation at B/s date on monetary Items which
Should be transferred to P&L A/c. The following adjustments are required to be made
in the financial statements ending 31.3.18 :-

i. Gain on Reduction in Payables = (68-65) x 200,000 USD = Rs.600,000

Comments : There is a Gain on Reduction in Payables which should be transferred to
P&L A/c.
ii. Dep. On Machine = $ 200,000 x 68 = 136,00,000 x 3 = 850,000
4 years 12

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Journal Entries
1.1.18 Machine a/c Dr 136,00,000
To Payables 136,00,000
(Being machine acquired on credit for 200,000 USD @ 68 Per USD)

31.3.18 Payables a/c Dr 600,000

To Exchange Gain (PL) 600,000
(Being Liab. Reduced due to decline in USD Rate)
31.3.18 Depreciation a/c Dr 850,000
To Machine 850,000
(Being Dep. Charged for 3 months)

Solution of Q.1

Journal Entries

A. Accounting for Payables

30.1.x1 Machinery a/c Dr 300,000 (5000x 10)

To Payables 300,000
(Being machinery acquired on Credit)
31.3.x1 Exchange Loss (PL) a/c Dr 25,000 (65-60) x 5000
To Payables 25,000
(Being Liab. increased due to increase in Rate)
31.3.x2 Exchange Loss (PL) a/c Dr 10,000 (67-65) x 5000
To Payables 10,000
(Being Liab. increased due to increase in Rate on settlement date)
31.3.x2 Payables a/c Dr 335000
To Bank 335000
(Being Liab. Settled)

B. Accounting for Payables

30.1.x1 Machinery a/c Dr 300,000

To Payables 300,000
(Being machinery acquired for 5000 USD on Credit @ 60 Per USD)
31.3.x1 Machinery a/c Dr 30,000 (5500 – 5000) x 60
To Revaluation Res (OCI) 30,000
(Being fair value measurement of Asset has been made)
31.3.x1 Machinery a/c Dr 27500 (65-60) x 5500
To Exchange Gain (OCI) 27500
(Being Exchange fluctuation recorded on Non Monetary Items due to fair
Value measurement)
31.3.x1 OCI a/c Dr 17250 (57500 x 30%)
To DTL 17250
(Being DTL Created)

Refer *Ind AS 12

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Thank You 😊
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Ind AS : 7
Cash Flow Statements (CFS)

*Part 1*

Concept 1 : Meaning & Presentation of CFS

As per the Provisions of Ind AS-7, Cash flow statement is the summary of
Cash & Bank Balances. It is prepared to disclose the Position of Cash balance during
the year. It is Prepared under the 3 headings as follows :-

Classification

CFS

Cash from Operating Cash from Investing Cash from financing

Activities Activities Activities

Direct Method Indirect Method

Concept 2 : Explanation of C.F. Activities

I. C.F.F.A (Financing Activities)

As per the Provisions of Ind AS-7, Cash from financing Activities should
include all transactions in C&B A/c which are related with share capital & Loans. The
Following Transactions may be considered under this heading :-
Long Term Short Term
i. Issue of shares/ Debentures
ii. Redemption or Buy Back of Shares/ Debentures
iii. Receiving/ Repayment of Loans
iv. Interest/ Dividend Paid
v. C.D Tax Paid
vi. Proceeds from Calls in Arrear
vii. Premium on Issue/ Redemption/ Buy Back of Securities etc.

II. C.F.I.A (Investing)

As per the Provisions of Ind AS-7, CFIA should include all transactions in
C&B A/c which are related with fixed Assets (TA & IA) & Investments (LT & ST). The
Following Transactions may be covered :-
i. Sale of F. Assets/ Purchase of F. Assets
ii. Sale of Investments/ Purchase of Investments
iii. Dividend Received, Interest Received, Rental Received
iv. Capital Gain Tax Paid etc.

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III. CFOA (Operating Activities)

Unit I : Direct method
(Ind AS -7 Encourages this method)

As per the Provisions of Ind AS 7, All the Transactions, which are not financing
Or Investing in nature, should be reported under Operating Activities. It can also be
Said that All the Transactions which are related to nature of Business should be
Reported under this heading. under Direct Method, All transactions are taken
directly from cash & Bank A/c as follows :-
i. Cash Sales/ Cash Purchases
ii. Collection from Debtors/ payment to creditors
iii. Expenses paid (Salaries, wages etc)
iv. Tax Paid
v. Collection from B/R & B/P
vi. Interest from customers
vii. Interest to Suppliers etc.

Unit II : Indirect Method

Under Indirect method, we use P&L for reporting of CFOA. The following format is
Normally Applied :-

CFOA
Non Cash
Net Profit after Tax xxxx
Tax Expenses for Current year xxxx
PBT xxxx
C.T DTL DTA

Non Cash Items :

i. Depreciation on PPE xxxx
ii. Amortisation on I.A xxxx
iii. Loss on sale of Assets xxxx
iv. Impairment Loss written off xxxx

Non Operating Items :-

i. Interest Income (xxxx)
ii. Interest Exp. xxxx
iii. Profit on sale of Assets (xxxx)

Working Capital Adjust :-

Increase in C. Assets (xxxx)
Decrease in C. Assets xxxx
Increase in C. Liab. xxxx
Decrease in C. Liab. (xxxx) + xxxx

Tax Paid (including Advance Tax Paid) (xxxx)

CFOA xxxx

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Concept 3 : Other Important Points to be considered

i. Cash & Cash Equivalents

As per the provisions of Ind AS-7, Cash & Cash Equivalents are the Opening & Closing
Balances in CFS. These Balances may be in the form of Cash Balance, Bank Balance &
Investments which are Expected to be realised within 90 days.

❖ If any Bank Overdraft is repayable on Demand then It will also be considered

as a part of Cash & Cash Equivalents. All other overdrafts shall be disclosed under
Financing Activities.

ii. Net Cash Flows

As per the Provisions of Ind AS-7, cash flow reporting should not be made on net
Basis. All cash flows should be reported on Gross Basis.

iii. Cash Equivalents in foreign Currency

If any cash Equivalent is held in foreign currency then we will consider it at Actual
Rate instead of Closing Rate. If any Exchange fluctuation was booked at B/s date due
to change in Exchange Rate then such difference should also be dominated from NP.

Illustration 2 (Discussed in Class)

iv. CFS for Banking & NBFC

If CFS is prepared by Banking Co. & NBFC then Interest on Loans & Deposits shall be
Considered under Operating Activities.

Illustration 5

Direct Method :

W.N I Debtors A/c

To Bal 7000 By Cash 497000
To Sale 500,000 (Bal Fig.)
By Bal C/d 10,000

W.N. II Calculation of Purchases

COGS = OS + P – CS
350,000 = 13000 + P – 12,000
P = 349,000

W.N III Creditors A/c

To Cash (Bal) 345000 By Bal 8000
To Bal 12,000 By P 349000

W.N IV Exp. A/c

To Cash (Bal) 52000 By Bal 7000
To Bal 10,000 By P 55000

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CFOA

Collection from Debtors (W.N I) 497,000

Payment to Creditors (W.N II) (345000)
Exp. paid (W.N V) (52,000)
Tax Paid (30,000)
CFOA 70,000

Indirect Method

PBT 83000
Dep 7000
Loss on Sale 3000
Int. Paid 2000

WC Adj.

Debtors (3000)
Stock 1000
Crs 4000
Exp. 3000
Tax Paid (30,000)
CFOA 70,000

*Part 2*

Illustration 1 , 6 , 7 , 8 (Discussed in Class)

Test Your Knowledge

Solution of Q.1

Cash Flow Statement

(Indirect Method)

Cash From Operating Activities :-

Net Profit 1000

Non Cash Items :-

Depreciation on Fixed Assets 15,000

Working Cap. Adjust. :

Decrease in A/R 7500
Decrease in Insurance 2000
Increase in Stock (3000)
Increase in Creditors 2000
Decrease in o/s Wages (3000) 21500

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Cash from Investing Activities :-

Purchase of F. Assets (46000) (46,000)

Cash from financing Activities :-

Dividend Paid (2500)
Increase in Debentures 1300
Increase in ESC 4000 14500

O+I+F (10,000)
Add: OB 14,000
CB 4000

Cash Flow Statement

(Direct Method)

CFOA
Collection from Debtors (W.N I) 207500
Payment to Creditors (W.N III) (124000)
Wages Paid (W.N.V) (53000)
Insurance Paid (W.N.IV) (9000) 21500

CFIA : Purchase of FA (46000) (46000)

CFFA : Dividend Paid (2500)

Debentures 13000
ESC 4000 14500
(10000)
OB 14000

W.N I Debtors A/c

To Bal 32500 By Cash (Bal Fig.) 207500
To Sale 200,000 By Bal C/d 25,000
232500 232500

W.N. II Calculation of Purchases

COGS = OS + P – CS
123,000 = 34000 + P – 37,000
P = 126,000

W.N III Creditors A/c

To Bank (Bal) 124000 By Bal 8000
To Bal c/d 18,000 By Purchases (W.N II) 126000
142000 142000
W.N IV Insurance A/c
To Bal b/d 7000 By PL 11000
To Bank 9,000 By Bal C/d 5000
16000 16000

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W.N V Wages A/c

To Bank (Bal) 53000 By Bal b/d 7000
To Bal b/d 4000 By PL 50,000
57000 57000

*Part 3*

Solution of Q.1

Cash Flow Statement

CFOA :- Profit after Tax 4450

Tax Paid 105
Profit before Tax 4555
Depreciation (500 + 20) 520
Profit on sale of PPE (10)
Decrease in financial Assets 25
Increase in DTA (105)
Increase in other N.C Assets (30)
Decrease in other N.C. Liab. (875) 4080

Working Cap. Adjust. :

Increase in C. Assets (110)
Increase in Trade payables 60
Increase in O.C Liab 100 50
Tax Paid (105)
4025
CFIA : Sale of PPE 70
Purchase of PPE (W.N #1) (1060)
Purchase of I. Asset (W.N. #2) (40)
Decrease in Investments 200 (830)

CFFA: Interim Dividend Paid (450)

Repayment of Long Term Borrowings (3000) (3450)
(255)
OB 400
(460 – 60)
CB
(220 – 75) 145

W.N #1 P.P.E A/c

To Bal b/d 12500 By Dep 500
To P&L (Profit) 10 By Bank 70
To Cash (Bal) 1060 By Bal C/d 13000
13570 13570

W.N #2 I. Assets A/c

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To Bal b/d 30 By Amort. 20

To P&L (Profit) 40
By Bal C/d 50
70 70

Solution of Q.2 (Discussed in Class)

*Part 4*

Concept on Investments & Changes in Invest in Subsidiary

If changes in Interest in Subsidiary Company takes place, but without any

Impact on relationship of Holding & Subsidiary then It will be reported under
financing Activities. Such Changes may include further Acquisition of shares in
subsidiary or Disposal of shares in subsidiary, but Holding co. will continue the
Exercise of control over subsidiary.

Note : As per the provisions of Ind AS-7, Investments which are made originally to
Establish control over subsidiary shall be reported under Investing Activities.
If any Disposal of subsidiary is made during the period due to which holding
ceases to Exercise control then such Disposal shall also be reported under
Investing Activities.

Solution of Q.2

In the books of A Ltd. (SFS)

i. Treatment of original Investments (70%)

As per the Provisions of Ind AS-7, Acquisition or Disposal of Investments in
Subsidiary which effect Holding/ Subsidiary Relationship should be reported under
“Investing Activities”. In the Given Case, A Ltd. acquires control over B Ltd. by
Acquiring 70% shares which will be considered as an Investing Activity. So, Payment of
15,00,000 shall be disclosed as an outflow under Investing Activity. But issuance of
shares will be ignored in cash flow statement because it’s a non cash Activity.

Treatment for changes in Interest in Subsidiary :-

As per the rules, changes in Interest in subsidiary shall be reported as
Financing Activity, but these should not be any impact on holding subsidiary
Relationships. In the Given case, A ltd acquires further 10% interest in B Ltd and
pays 800,000/- for it. So we will report this outflow under financing Activity.

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Thank You 😊
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Ind AS : 10
Events after B/s date

*Part 1*

Concept 1 : Events after B/s date

As per the Provisions of Ind AS-10, Events after B/s date, but Upto date of Approval
by BOD on financial statements can be classified under 2 different headings as
follows :-
a) Adjustment Events
b) Non Adjusting Events

a) Adjusting Event :- If any Event which was known to the enterprise at B/s date,
but It occurred after B/s date then It will be considered as an adjusting Event.
It will be adjusted in the financial statements at B/s date Even if It occurs
after B/s date. It will be assumed that It is related with previous year even if
It occurs in Current year. The following Examples may be considered for the
Understanding of Adjusting Events :-
i. If decision of any “Pending” Court case comes after B/s date but upto date
Of Approval on statements then It will be adjusted in financial statements at
B/s date.
(It is irrelevant whether decision is favourable or unfavourable.)
ii. If any Asset is Purchased/ Sold prior to B/s date, but Actual collection or
Payment is settled after B/s date then we can adjust settlement at B/s date.
iii. If Insolvency of customer is confirmed after B/s date, for which Entity had
Created PFDD at B/s date then we can adjust Bad debts at B/s date.
iv. If valuation of stock has been made at cost at B/s date, but It is sold at
NRV which is lower than cost after B/s date then we can consider such NRV at B/s
date for valuation Purpose.
v. If Provision has been created for the Expenses of March, but Actual Bills are
Received after B/s date then we can adjust Provision against Actual Bills at B/s
Date.
(i.e., Electricity Bills, water Bills, Telephone Bills etc.)

b) Non Adjusting Events :- If any Event which was not in the knowledge of Entity
at B/s date and It is not related with B/s date then It will be considered as Non
Adjusting Event. It will be considered as a part of financial statements of Next
Year and there will be no adjustment in B/s or P&L of previous year, but we can
Disclose these Events in Notes to A/cs of Previous year if Amount is
Significant. These Events shall be considered as New Events.

Examples of Non Adjusting Events :-

I. If any Business combination takes place after B/s date.
II. If any announcement has been made after B/s date regarding
Discontinuation of an Operation

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III. If any Asset or Group of Assets are declared after B/s date as held for sale
(105)
IV. Any Abnormal Losses i.e., Loss by fire, Assets destroyed etc.
V. Abnormal changes in Tax Rates
VI. Abnormal changes in foreign Exchange Rate
VII. Changes in Guarantees after B/s date etc.

Concept 2 : Other Cases

Case I : Dividend Proposed after B/s date

If any Dividend is Proposed by BOD after B/s date but before Approval on financial
Statements then It will be considered as Non Adjusting Event because It cannot be
treated as a Liability. It can be cancelled by members in AGM.
“we can show it in Notes to A/cs only”

Case II : Going Concern

As per the provisions of Ind AS-10, Events will be classified under the heading
Of Adjusting or Non Adjusting only if Assumption of Going concern still prevails.
In case Entity wants to Liquidate its Business in Near future then All Events
Would be adjusting Events because we will merge all the reporting Periods of current
Year & Next year as a single Reporting Period.

Case III : Approving Authority

We will consider Approval by BOD only under Ind AS-10
(Shareholder Approval or any other approval is not considerable)

*Part 2*

Solution of Q.1, Q.2, Q.3, Q.4 (Discussed in Class)

Test your Knowledge

Solution of Q.1, Q.2, Q.3, Q.4 (Discussed in Class)

*Part 3*

Extra Question

Solution of Q.1, Q.2, Q.3, Q.4, Q.5*Imp, Q.6 *Imp, Q.7 , Q.8, Q.9, Q.10, Q.11 *Imp, Q.12, Q.13,
Q.14

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Thank You 😊
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Ind AS: 102

Share Based Payments

*Part 1*

Concept 1 : Meaning of S.B Payments

As per the Provisions of Ind AS 102, share Based Payments are the contractual
Arrangements whereby An Entity makes Payment in shares* in lieu or goods or
services acquired from External Parties including Employees.

❖ Payment in cash may also be made, but computation of cash Payment will be made
On the basis of Prices of shares.

Goods/ Services

Entity External Party

(including Emp.)

Payment in shares
(or Payment in cash but equivalent to shares)

As per the Provisions, the following Payment in shares are out of scope of this
Statement :-
1. If a company issues shares in lieu of acquisition of N. Assets under the scheme of
Business combination (103)
2. If a company acquires Significant Equity Interest in another company in lieu of
Issue of its own shares (103)
3. If an Entity issues shares to outside Parties in the capacity of shareholders as
Right issue instead of in consideration of Goods or Services.

Concept 2 : Coverage of Topic

Coverage

If SBP are made to External *V.V.Imp- If SBP are made to”Employees”

Parties
Services

Goods Services

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Concept 3 : If SBP are made to External Parties (Excluding Employees)

Situation I : SBP for Goods/ Assets

As per the Provisions of Ind AS 102, the following Points should be considered
While accounting for these transactions :-

a) Recognition of Goods acquired & SBP should be made on Acquisition date of Goods.
b) We should consider the value of goods acquired first. In the absence of value of
Goods acquired, we can consider the fair value of shares.

Journal Entries

Ist Case : If fair value of Goods acquired is known

Assets a/c Dr xxxx (fair value)

To ESC xxxx (face value)
To SPR xxxx (Bal fig.)
(Being shares issued)

IInd Case : If fair value of Goods Acquired is not Known

Assets a/c Dr xxxx (Bal fig.)

To ESC xxxx fair value
To SPR xxxx
(Being shares issued)

E.g Case I : Fair value of Assets : ₹ 500,000

Shares Issued : 1000 (fair value 100)
Case II : fair value of Assets : ?
Shares Issued : 10,000 shares of 10 each at 25/-
Case III : fair value of Assets : 500,000
Cash Given : 100,000
Shares issued : 1000 of 100 each

Solution :
Journal Entries

Case I : Assets a/c Dr 500,000

To ESC (100) 100,000
To SPR (Bal fig.) 400,000
(we have ignored MP of shares @800 because fair value of Assets acquired in Given)

Case II : Assets a/c Dr 250,000

To ESC (10) 100,000
To SPR (15) 150,000
(we have considered MP of shares because fair value of Assets acquired is not Given)

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Case III : Assets a/c Dr 500,000

To Cash 100,000
To ESC (100) 100,000
To SPR (Bal) 300,000
(Being Assets acquired)

Solution of Q.4

Journal Entries

Case I : Building a/c Dr 200,000

To ESC (100) 99,500
To SPR (Bal fig.) 100,500
(Being Building acquired)

Situation II : If SBP are made for services from External Parties (Excluding
Employees)

If an Entity has to issue its shares to External Parties in lieu of their services
then the following steps should be applied while making accounting for these
transactions :-

Step I : As per the Provisions, we should recognise Expense for Services only if the
Entity has received services from 3rd Party.
Step II: we should recognise Expense from Services at fair value of Services received.
In case fair value of services cannot be Estimated then we can consider fair
Value of shares to be issued as well.
Step III : We should amortise the fair value of services received on SLM Basis over
the period of Service (Monthly Basis) as follows :-

Monthly Exp. = fair Value of Services

No. of months of Service Period

Journal : *Emp. Benefit Exp. a/c Dr xxxx

To Share Based Payments Res. (Equity) Xxxx
(Being monthly Exp. charged)

*Emp. Benefit Exp. will be written off in P&L A/c as an Exp.

Step IV : At the end of Service Period :-

Share Based Payment Reserve a/c Dr xxxx

To ESC (face value) xxxx
To SPR (bal Fig) xxxx
(Being shares issued)

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Solution of Q.1

30.4.x1 Emp. Benefit Exp. a/c Dr 33,333 (100,000/3)

To SBP Res 33,333
(Being monthly Service charged)
31.5.x1 Emp. Benefit Exp. a/c Dr 33,333 (100,000/3)
To SBP Res 33,333
(Being monthly Service charged)
30.6.x1 Emp. Benefit Exp. a/c Dr 33,334
To SBP Res 33,334
(Being monthly Service charged)
1.7.x1 SBP Res. a/c Dr 100,000
To SC (10) 10,000
To SPR (Bal fig) 90,000
(Being SBP made)

*Part 2*

Concept 4 : SBP to Employees *V.V.Imp

Employees

Unit I : Unit II :
SBP without any consideration SBP with same consideration
(100% Free)

Unit II : SBP without consideration

Types of SBP

Case I : SBP in shares Case II : SBP in cash

Case I : SBP in Shares

As per the Provisions of Ind AS 102, Payment in shares (100% free) can be
Made in the following 2 situations :-
Situation I : without vesting condition
Situation II : With Vesting condition

Situation I : without vesting condition

(ESPP : Employees stock Purchase Plans)

Under these Plans, company vests its shares at fair value to its Employees
immediately without any vesting condition. There may be some Post vesting
condition. There may be some Restriction on sale of shares upto some specified
period after vesting. The following Steps should be applied while making Entries

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For these Plans :-

Step I : The company should debit Entire Expense immediately on the date of Issue
Of shares.
Step II : The company should Pass the following Journal Entry :

a) Emp. Benefit Exp. a/c Dr xxxx (Face value)

To ESC xxxx (Face value)
To SPR xxxx (FV – Fv)
(Being shares Allotted without consideration)

b) P&L a/c Dr xxxx

To Emp. Benefit Exp. xxxx
(Being Exp. written off)

E.g.
i. SBP in Shares : 10,000 Shares
ii. Vesting Condition : No Condition
iii. Fair value Per share : 190/-
iv. Face value Per share : 100/-
v. Exercise Price :0
vi. Restriction to Sell upto 2 years
vii. Fair value due to restriction : 160/-

Solution :
Journal Entry

Emp. Benefit Exp. a/c Dr (10,000 x 160) 1600,000

To ESC (10000 x 100) 10,00,000
To SPR (10000 x 60) 600,000
(Being 10,000 shares Allotted without any consideration)
P&L a/c Dr 16,00,000
To Emp. Benefit Exp. 16,00,000
(Being Exp. written off)

Situation II : Vesting Conditions

Vesting Conditions

Case I : Service Condition Case II : Performance Condition

(a)

Market Related Non Market Related

(b) (c)

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Case I : Service Vesting condition

(ESOP : Emp. Stock Option Plans)

Under these Plans, There is some Pre vesting condition regarding some
Continuous Service Period. It means that Employees cannot leave the company upto
Some specified period and they have to keep themselves in service to get Benefit of
Shares. The following steps should be applied while making the Accounting Entries for
these Plans :-

Step I : Calculate Emp. Benefit Exp. for each year on SLM Basis over the vesting
Period as follows :-
E.B. Exp. = No. of shares x fair value Per share
(P.a) Vesting Period

*Fair value should be taken which Prevails on Grant date of Plan

Step II : Journal Entries

(At the end of each year)

a) Emp. Benefit Exp. a/c Dr xxxx

To SBP Reserve xxxx
(Being Exp. debited on SLM Basis)
b) P&L a/c Dr xxxx
To Emp. Benefit Exp. xxxx
(Being Exp. written off)

Step III : On Expiry date of vesting Period

SBP Reserve a/c Dr xxxx

To ESC (Fv) xxxx
To SPR (Bal) xxxx
(Being Shares Issued)

E.g.
i. SBP in shares : 1000
ii. Fair value : 150
iii. Face value : 10
iv. Vesting Condition : 2 years service
Pass Journal Entries

Solution :

Emp. Benefit Exp. (P.a) = 1000 x 150 = 75000 P.a

2Y

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Journal Entries

At the end of 1st Year

a) Emp. Benefit Exp. a/c Dr 75,000

To SBP Res. 75,000
(Being Exp. debited)
b) P&L a/c Dr 75,000
To Emp. Benefit Exp. 75,000
(Being Exp. written off)

At the end of 2nd Year

a) Emp. Benefit Exp. a/c Dr 75,000

To SBP Res. 75,000
(Being Exp. debited)
b) P&L a/c Dr 75,000
To Emp. Benefit Exp. 75,000
(Being Exp. written off)
c) SBP Res. a/c Dr 150,000
To ESC (10) 10,000
To SPR (140) 140,000
(Being Shares Issued)

E.g. (If Employees Left during the year)

a) No. of Employees : 200

b) Shares Per Emp. : 20
c) Fair value Per share : 150
d) Face value Per share : 10
e) Employees Left : y1 = 15
Y2 = 18
Y3 = 5
f) Service Period : 3 Y
g) Exercise Price : 0
Calculate Emp. Benefit Exp. for each year & also prepare SBP Res. A/c

Solution

Calculation of Emp. Benefit Exp. Amount

At the end of y1
E.B. Exp. = (200 -15) x 20 x 150 x 1Y = 185,000
3Y

At the end of Y2
(185 – 18) x 20 x 150 x 2Y - 185000
3Y
= 149,000

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At the end of y3

(167-5) x 20 x 150 x 3y - (185000 + 149000)

3Y
= 152000

SBP Res. A/c

Y1
To Bal c/d 185000 By Emp. B. Exp. 185000
Y2
By Bal b/d 185000
To Ba/ c/d 334000 By Emp. B. Exp. 149000
Y3
To ESC (10) 32400 By Bal b/d 334000
To SPR (140) 453600 By E.B. Exp. 152000
486000 486000
162 x 20 Shares = 3240 x 10 = 32400

E.g.
i. No. of Employees : 500
ii. Shares Per Emp. : 10
iii. Fair value of shares : 120/-
iv. Face value : 10/-
v. Service condition : 3y
vi. Exercise Price : 0
vii. Employee left :
Actual Estimated Departure Rate
At the end of 1st year 20 5% P.a
nd
At the end of 2 year 15 5% P.a
At the end of 3rd year 20 -
Calculate Expense for each year & Prepare SBP Reserve A/c.

Solution

Calculation of E.B. Exp

1st Year :-
Exp. = (100 -20- 5% - 5%) x 10 x 120 x 1 = 28,880
3
2nd Year :-
Exp. = (100 – 20 – 15 -5%) x 10 x 120 x 2 = 49400 – 28880 = 20,520
3
3rd year :-
Exp. = (100 – 20 – 15- 20) x 10 x 120 x 3 = 54,000 – 49,400 = 4600
3

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SBP Res. A/c

1
To Bal c/d 28880 By Emp. B. Exp. 28880
2
By Bal b/d 28880
To Ba/ c/d 49400 By Emp. B. Exp. 20520
3
To ESC (10) 4500 By Bal b/d 49400
To SPR (140) 49500 By E.B. Exp. 4600

Solution of Q.1

Calculation of Emp. Benefit Exp.

31.3.20x1 :-
Exp. = ₹ 500,000 x 91% x 1 = 151667
3
31.3.20x2 :-
Exp. = (₹ 500,000 x 89%) x 2 = 296667 – 151667 = 145,000
3
31.3.20x3 :-
Exp. = (₹ 500,000 x 82%) x 3 = 410000 – 296667 = 113,333
3

Journal Entries

31.3.x1
Emp. Benefit Exp. a/c Dr 151667
To SBP Res. 151667
P&L a/c Dr 151667
To Emp. Benefit Exp. 151667

31.3.x2
Emp. Benefit Exp. a/c Dr 145000
To SBP Res. 145000
P&L a/c Dr 145000
To Emp. Benefit Exp. 145000

31.3.x3
Emp. Benefit Exp. a/c Dr 113333
To SBP Res. 113333
P&L a/c Dr 113333
To Emp. Benefit Exp. 113333
SBP Res. a/c Dr 410000
To SC 410000

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Test Your Knowledge

Solution : Calculation of Emp. B. Exp.

1st Year :-
Exp. = (1000 x97%) x 100 x 195 x 1 = 94,57,500
2
nd
2 Year :-
Exp. = (1000 x 91%) x 100 x195 = 17745000 – 9457500 = 8287500
2

Emp. B. Exp. A/c

I
To SBP Res. 9457500 By PL 9457500
II
To SBP Res 8287500 By PL 8287500

SBP Res A/c

I
To Bal c/d 9457500 By E. B. Exp. 9457500
II
To SC 17745000 By Bal 9457500
By E.B. Exp. 8287500

Case II : Performance condition

Condition

Market Based Non Market Based

External Performance Internal Performance

Market Price Target Target : 1) Sales

2) Net Profit
3) Cost control
4) EPS etc.

It may be possible that the Entity has imposed Performance condition in addition to
Service addition. In this case, Vesting of shares will be based on Such Performance
Condition.

Solution of Q.7

Calculation of Emp. Benefit Exp.

20x1
Exp. = (500 – 29 – 31) x 100 x 122 x 1y = 2684000
2Y

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20x2
Exp. = (500 – 29 – 29 - 23) x 100 x 122 x 2y = 3407867 – 2684000 = 723867
3Y
20x3
Exp. = (500 – 29 – 29 - 21) x 100 x 122 x 3y = 5136200 - 3407867 = 1728333
3Y
SBP Res. A/c

To Bal c/d 2684000 By E.B. Exp. 2684000

By Bal b/d 2684000

To Bal c/d 3407867 By E.B. Exp. 723867

To SC 5136200 By Bal b/d 3407867

By E.B. Exp. 1728333

*Part 3*

Solution of Q.7

Calculation of Emp. Benefit Exp.

Y1
Exp. = (1000 x 97%) x 10 Shares x 100 x 1y = 323333
3Y
Y2
Exp. = (1000 x 95%) x 10 Shares x 100 x 2y = 633,333 – 323333 = 310,000
3Y
20x3
Exp. = (1000 x 93%) x 10 Shares x 100 x 3y = 930,000 - 633,333 = 296,667
3Y

SBP Res. A/c

Y1
To Bal c/d 323333 By E.B. Exp. 323333
Y2
By Bal b/d 323333
To Bal c/d 633333 By E.B. Exp. 310000
Y3
To SC (Bal fig.) 930000 By Bal b/d 633333
By E.B. Exp. 296667

Solution of Q.6

Calculation of Emp. Benefit Exp.

Annual Exp. = 100 x 25 = 625 P.a

4 years

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Treatment in Ist Case : If options are vested in 3 years

Total Emp. Benefit Exp. (100 x 25) 2500

Ist Year : Expense to be written off (625)
IInd Year : Expense to be written off (625)

IIIrd Year : Remaining Exp. to be written off 1250

Comments : If condition is satisfied in 3rd Year then Entire remaining Expense will be
Written off in 3rd Year.

Treatment in IInd Case : If condition is satisfied in 5 Years

Total Emp. Benefit Exp. (100 x 25) 2500

Ist Year : Expense to be written off (625)
IInd Year : Expense to be written off (625)
IIIrd Year : Expense to be written off (625)
IVth Year : Expense to be written off (625)

Comments : There will be no Expense in Vth year because we have already written off
the entire Expense during 4 years.

Solution of Q.8 *Imp

Calculation of Emp. Benefit Exp.

Ist Year
Exp. = 10,000 x 95 = 316667
3Y
nd
II Year (Reversal) :-
Exp. = 10,000 x 95 x 2 = 633333 – 316667 = 316667
3
Reversal = 633333 (Plan is not Expected to be vested)
IIIrd (Entire Exp.) :-
Exp. = 10,000 x 95 = 950,000 (It will be written off at once as condition is satisfied

Journal Entries

I II
1) Emp. Benefit Exp. a/c Dr 316667 1) Emp. Benefit Exp. a/c Dr 316667
To SBP Res. 316667 To SBP Res. 316667
(Being Exp. debited) (Being Exp. debited)
2) P&L a/c Dr 316667 2) P&L a/c Dr 316667
To Emp. Benefit Exp. 316667 To Emp. Benefit Exp. 316667
(Being Exp. written off) (Being Exp. written off)
3) SBP Res a/c Dr 633333
III To P&L 633333
1) Emp. Benefit Exp. a/c Dr 950000 (Being Reversal made)
To SBP Res. 950000 OR

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(Being Exp. debited) SBP Res. a/c Dr 316667

2) P&L a/c Dr 950000 To P&L 316667
To Emp. Benefit Exp. 950000 (Being Ist year Res. reversed)
(Being Exp. written off)

3) SBP Res. a/c Dr 950000

To SC 950000
(Being issue made)

Solution of Q.9

In the Given case, there is no hint about the cancellation/ Reversal of Plan due to
which we cannot discontinue the Plan. So, we will write off the Expense over the
period of 3 years as follows :-

Annual Exp. = 10,000 x 120 = 400,000/-

3Y

Unit I : SBP without consideration

(Case II : SBP in cash)
SAR (Stock Appreciation Rights)

Under these Plans, the following features should be noted :-

1) Under these Plans, Payment in cash is made at the end of vesting period instead
Of payment in shares.
2) The calculation of Cash Payment will be made on the basis of Current market Price.
3) Journal Entries :-
At the end of each year
i. Emp. Benefit Exp. a/c Dr xxxx
To SBP Liab. xxxx
ii. P&L a/c Dr xxxx
To Emp. Benefit Exp. xxxx
At the end of Vesting Period
SBP Liab. a/c Dr xxxx
To cash xxxx

E.g.
i. Service condition : 3 years
ii. Options (SAR) : 10,000
iii. Fair value (Grant date) : 110/-
iv. Fair value at the end :
I 115
II 125
III 140
Prepare SBP Liab A/c.

Solution :

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Y1
Exp. = 10,000 x 115 x 1 = 383,333
3
Y2
Exp. = 10,000 x 125 x 2 = 833,333 -383,333 = 450,000
3

Y3
Exp. = 10,000 x 140 x 3 = 1400,000 - 833,333 = 566,667
3

SBP Liab. A/c

I
To Bal c/d 383333 By E.B. Exp. 383333
II
By Bal b/d 383333
To Bal c/d 833333 By E.B. Exp. 450000
III
To Bank (Bal fig.) 1400000 By Bal b/d 833333
By E.B. Exp. 566667

Solution of Q.2
Calculation of Emp. B. Exp

Y1
Exp. = 50 x 170 x 80 x 1 = 340,000/-
2
Y2
Exp. = 50 x 170 x 90 x 2 = 765000 - 340,000 = 425000
2

Payment : SBP Liab a/c Dr 765000

To Cash 765000
(Being Liab. Settled)

Solution of Q.2

Calculation of Emp. B. Exp

1.4.x0
10,000 x 95 = 950,000
31.3.x1
10,000 x 112 x 95%= 1064000 – 950000 = 114000
31.3.x2
10,000 x 109 x 92%= 1002800 - 1064000 = (61200)
31.3.x3
10,000 x 114 x 89%= 1014600 - 1002800 = 11800

Journal

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1.4.xo E.B. Exp. a/c Dr 950,000

To SBP Liab 950,000
(Being Exp debited without any condition)

31.3.x1 E.B. Exp. a/c Dr 114000

To SBP Liab 114000
(Being Exp. debited due to Appreciation)
31.3.x1 P&L a/c Dr 1064000
To E.B Exp. 1064000
(Being Exp. written off)
31.3.x2 SBP Liab. a/c Dr 61200
To P&L 61200
(Being Liab. reversed)
31.3.x3 Emp. B. Exp a/c Dr 11800
To SBP Liab. 11800
P&L a/c Dr 11800
To E.B. Exp. 11800
SBP Liab. a/c Dr 1014600
To Cash 1014600

*Part 4*

Unit II : SBP with Some consideration

(Intrinsic Value Method)

As per the Provisions of Ind AS 102, the following Points may be considered under
this heading :-
i. Under these Plans, Employees are Given ESOP with some Exercise Price. It
means that Employees have to pay some consideration if they want to Exercise
the Options.
ii. The company should write off Employees Benefit Expenses Equal to difference
between fair value Per share and Exercise Price Per share.

Emp. B. Exp. = Fair value Per share – Exercise Price Share

Intrinsic Value Per Option

iii. The Accounting Procedure is almost same as in Earlier questions.

Solution of Q.12

Calculation of Emp. Benefit Exp.

2006-07
Exp. = (525 – 15 – 2% -2% ) x 100 x (149 – 125) x 1y = 391843
3Y

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2007-08
Exp. = (525 – 15 – 10 -3% ) x 100 x (149 – 125) x 2y = 776000 – 391843 = 384157
3Y
2008-09
Exp. = (525 – 15 – 10 -8) x 100 x (149 – 125) x 3y = 1180800 - 776000 = 404800
3Y

Emp. Benefit Exp. A/c

31.3.07
To SBP Res. 391843 By PL 391843
31.3.08
To SBP Res 384157 By PL 384157
31.3.09
To SBP Res. 404800 By PL 404800

SBP Res. A/c

31.3.07 31.3.07
To Bal c/d 391843 By E.B. Exp. 391843
1.4.07
By Bal b/d 391843
31.3..08 31.3.08
To Bal c/d 776000 By E.B. Exp. 384157
1.4.08
31.3.09 By Bal b/d 776000
31.3.09
To Bal c/d 1180800 By E.B. Exp. 404800
31.3.10 1.4.09
To S. Capital 4800000 By Bal b/d 1180800
(480 x 100 x 100) 31.3.10 – Exercise date
To S.P Res 2352000 By Bank 6000000
(480 x 100 x 49) (480 x 100 x 125)
To P&L (Reversal) 28800
(12 x 100 x 24) Emp shares Excercise
Per Emp Price
7180800 7180800

Solution of Q.13

Calculation of Emp. Benefit Exp.

31.3.07
Exp. = 474 x 100 x 25 x 1y = 592500
2Y Expected to vest in next year
31.3.2008
Exp. = 465 x 100 x 25 x 2Y = 775000 – 592500 = 182500
3Y
31.3.2009
Exp. = 450 x 100 x 25 x 3Y = 1125000 – 775000 = 350000
3Y
Ans : 592500, 182500, 350000

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Solution of Q.14

Calculation of Emp. Benefit Exp.

31.3.2007
Exp. = 48 x 1000 x 9 x 1y = 144000
3Y
31.3.2008
Exp. = 47 x 1000 x 9 x 2y = 282000 – 144000 = 138000
3Y
31.3.2009
Exp. = 45 x 1000 x 9 x 3y = 405000 – 282000 = 123000
3Y

SBP Res. A/c

I
To Bal c/d 144000 By E.B. Exp. 144000
II
By Bal b/d 144000
To Bal c/d 282000 By E.B. Exp. 138000
III
To P&L (Reversal) 405000 By Bal b/d 282000
By E.B. Exp. 123000

Solution of Q.15

Journal

Bank a/c Dr 16,00,000 (400 x 100 x 40)

E.B. Exp. a/c Dr 320000 (400x 100 x 8)
To S. Capital (400 x 100 x 10) 400,000
To S.P. Res. (400 x 100 x 38) 1520,000
(Being Shares issued without any vesting condition)
P&L a/c Dr 320000
To E.B. Exp. 320000
(Being Exp. written off)

Note : In the Given question, we have considered ₹ 48 as fair value instead of ₹ 50

Because there is a Post Vesting restriction to sell upto 3 years.

Concept 5 : Cash & Cash Equity settled Options *V.V.Imp (8-10 marks)

Step I : Calculate Equity component on Grant date under these Plans as follows :-
Fair value of ESOP “Grant date” xxxx
Fair value of SAR (xxxx)
Equity component xxxx

Step II : The Equity component will be treated as ESOP and It will be amortised over

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the vesting Period as we do in normal questions.

Step III: The fair value of SAR component will be treated as Liab. component as we
deal in Normal questions of SAR.

E.g.
i. Vesting Condition : 3 years
ii. Option I : SBP in shares = 10,000
iii. Option II : SBP in cash = 8,000
iv. Fair value per share on Grant date of Plan = 120
v. Fair value at the end of :
st
I year = 135
IInd year = 142
IIIrd year = 148
Assuming all Emp. Are Interested in Cash, show the Accounting Treatment.

Solution
Calculation of Equity Component

Fair value of ESOP (10,000 x 120) 1200,000

Fair value of SAR (8000 x 120) 960,000
Equity component 240000

Calculation of Emp. B. Exp

1st Year
a) ESOP = 240000 x 1 = 80,000
3
b) SAR = 8000 x 135 x 1 = 360,000
3
440,000

2nd year
a) ESOP = 240000 x 2 - 80000 = 80,000
3
b) SAR = 8000 x 142 x 2 = 757333 - 360000 = 360,000
3
477333

3rd Year
a) ESOP = 240000 x 3 = 240000 – 80000 - 80000 = 80,000
3
SAR = 8000 x 148 x 3 = 1184000 - 757333 = 426667
3
506667

Journal Entries

1st Year
a) E.B. Exp. a/c Dr 440000

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To SBP Res. 80,000

To SBP Liab. 360,000
(Being Exp. debited)

b) P&L a/c Dr 440000

To E.B. Exp. 440000
(Being Exp. written off)

2nd Year
a) E.B. Exp. a/c Dr 477333
To SBP Res. 80,000
To SBP Liab. 397333
(Being Exp. debited)
b) P&L a/c Dr 477333
To E.B. Exp. 477333
(Being Exp. written off)

3rd Year
a) E.B. Exp. a/c Dr 506667
To SBP Res. 80,000
To SBP Liab. 426667
(Being Exp. debited)
b) P&L a/c Dr 506667
To E.B. Exp. 506667
(Being Exp. written off)
c) SBP Liab a/c Dr 1184000
To Cash 1184000
(360000 + 397333 + 426667)
(Being Liab. repaid)
d) SBP Res. a/c Dr 240000
To P&L 240000
(Being Reserve Reversed)

If all Emp. Are Interested in shares :-

SBP Liab. a/c Dr 1184000
SBP Res. a/c Dr 240000
To SC 1424000
(Being Shares issued)

E.g.
i. No. of Emp. : 500
ii. Vesting condition : 3y
iii. Option in shares : 100 shares per Emp
iv. SAR in cash : 80 shares Per emp
v. Fair value of Grant date : 110
vi. Fair value at the end of : 1 = 120
2 = 145
3 = 148

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vii. Employees left : Actual Est.

1 10 20
2 11 19
3 15 -

Show all calculations for these hybrid options.

(50% Emp. are interested in cash, but remaining opted for shares)

Solution :
Calculation of Equity Component

Fair value of ESOP (500 x 100 x 110) 5500,000

Fair value of SAR (500 x 80 x 110) (4400000)
Equity component 1100000

Calculation of Emp. B. Exp

1st Year
a) ESOP = (500 – 10 – 20) x 20 x 110 x 1 = 344667
3
b) SAR = (500 – 10 – 20) x 80 x 120 x 1 = 1504000
3
1848667

2nd Year
a) ESOP = (500 – 10 – 11 - 19) x 20 x 110 x 2 = 674667 – 344667 = 330000
3
b) SAR = (500 – 10 – 11 - 19) x 80 x 145 x 2 = 3227333 – 1504000 = 2053333
3
2383333

3rd Year
a) ESOP = (500 – 10 – 11 - 15) x 20 x 110 x 3 = 1020800 – 674667 = 346133
3
SAR = (500 – 10 – 11 - 15) x 80 x 148 x 3 = 5493760 – 3557333 = 1936427
3
2282560

Journal Entries

1st Year
E.B. Exp. a/c Dr 1848667
To SBP Res. 344667
To SBP Liab. 1504000

P&L a/c Dr 1848667

To E.B. Exp. 1848667

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2nd Year
E.B. Exp. a/c Dr 2383333
To SBP Res. 330000
To SBP Liab. 2053333

P&L a/c Dr 2383333

To E.B. Exp. 2383333

3rd Year
E.B. Exp. a/c Dr 2282560
To SBP Res. 346133
To SBP Liab. 1936427

P&L a/c Dr 2282560

To E.B. Exp. 2282560

SBP Liab a/c Dr 2746880

To Cash 2746880
(1504000 + 2053333 + 1936427) x 50%

SBP Liab. a/c Dr 2746880

SBP Res. a/c Dr 1020800
To SL 3767680

Solution of Q.3

Calculation of Equity Component

Fair value of ESOP (1500 x 102) 153000

Fair value of SAR (1000 x 113) (113000)
Equity component 40000

Calculation of Emp. B. Exp

31.12.x1
a) ESOP = 40000 x 1 = 20000
2
b) SAR = 1000 x 120 x 1 = 60000
2
80,000

31.12.x2
a) ESOP = 40000 x 2 - 20000 = 20000
2
b) SAR = 1000 x 132 x 2 – 60000 = 72000
2
92,000

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Journal Entries
31.12.x1
E.B. Exp. a/c Dr 80000
To SBP Res. 20000
To SBP Liab. 60000

P&L a/c Dr 80000

To E.B. Exp. 80000

31.12.x2
E.B. Exp. a/c Dr 92000
To SBP Res. 20000
To SBP Liab. 72000

P&L a/c Dr 92000

To E.B. Exp. 92000

SBP Liab a/c Dr 132000

To Cash 132000

SBP Res. a/c Dr 40000

To P&L 40000

*Part 5*

Solution of Q.6

Calculation of Equity component (Hybrid Option)

Total value of Equity component (90000 x 115) 103,50,000

Total value of cash Options (74000 x 135) (99,90,000)
Equity Component 360,000

Calculation of SBP Exp.

20x0
a) SAR (74000 x 138) 3404000
3Y
b) Equity ( 360000/ 3y) 120000
3524000

20x1
a) SAR (74000 x 140) x 2 = (6906667 – 3404000) = 3404000
3Y
b) Equity ( 360000 x 2y) = 240000 – 120000 = 120000
3 3622667

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20x2 :
a) SAR (74000 x 147) - 6906667 = 3971333
b) Equity ( 360000 – 240000) = 120000
4091333

Journal Entries

20x0
a) SBP Exp. a/c Dr 3524000
To SBP Liab. 340,4000
To SBP Res. 120,000
(Being Exp. debited)
b) P&L a/c Dr 3524000
To E.B. Exp. 3524000
(Being Exp. written off)

20x1
a) SBP Exp. a/c Dr 3622667
To SBP Liab. 3502667
To SBP Res. 120,000
(Being Exp. debited)
b) P&L a/c Dr 3622667
To E.B. Exp. 3622667
(Being Exp. written off)

20x2
a) SBP Exp. a/c Dr 4091333
To SBP Liab. 3971333
To SBP Res. 120,000
(Being Exp. debited)
b) P&L a/c Dr 4091333
To E.B. Exp. 4091333
(Being Exp. written off)

Comments : In the Given case, It is not specified that Employees are interested in
Cash or shares due to which we cannot Pass Journal Entries related with
Settlement.

Solution of Q.8

Calculation of Equity component (Hybrid Option)

Equity (990 x 212) = 209880

Cash (800 x 213) = (170400)
Equity Component 39480

20x0
SAR (800 x 220) x 1 = 88000
2Y

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Equity ( 39480/ 2y) = 19740

107740

20x1
SAR (800 x 232) x 2 = (185600 – 88000) = 97600
2Y
Equity ( 39480/ 2y) = 19740
117340

Journal :
20x0 (a) SBP Exp. a/c Dr 107740
To SBP Liab. 88000
To SBP Res. 19740
PL a/c Dr 107740
To SBP Exp. 107740

20x1 (b) SBP Exp. a/c Dr 117340

To SBP Liab. 97600
To SBP Res. 19740
PL a/c Dr 117340
To SBP Exp. 117340

Settlement
SBP Liab a/c Dr 185600 (800 x 232)
To Cash 185600
SBP Res. a/c Dr 39480
To P&L 39480
(Reversal)

Concept 6 : Modification in ESOP *Imp

As per the Provisions of Ind AS -102, Plan can be modified if fair value of shares
Declines during the vesting Period. Under modifications, company may reduce Exercise
Price. The following steps may be considered while modifying the plan :-

Step I : There will be no change in the Accounting for original Expense which relates
to Original Plan.
Step II : At the time of modification in Plan, we should calculate Additional Expense
Due to Reduction in Exercise Price as follows :-
Fair value of shares at the time of modification xxxx
Exercise Price at the time of modification (xxxx)
Additional Exp. xxxx

Step III : The amount of Additional Exp. will be amortised over the remaining vesting
Period.

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Solution of Q.10

Calculation of Employees Benefit Expenses

At the end of year I :

Total Loss = 150 x 129 x (1000 – 35 – 60) = 17511750
Loss for year I = 17511750 x 1 = 5837250
3

At the end of year II :

a) Original Plan = 150 x 129 x (1000 – 35 – 30 – 36) = 17395650

Loss upto 2nd year = 17395650 x 2 = 11597100
3
Loss for 2nd Year = 11597100 – 5837250 = 5759850

b) Modified Plan

Loss = 150 x 30 x (1000 – 35 – 30 – 36) x 1 = 2022750 II

2
Emp. B. Exp. = 5759850 + 2022750 = 7782600

At the end of year III :

a) Original Plan =1 50 x 129 x (1000 – 35 – 30 – 39) = 1733760

Loss = 17337600 – 11597100 = 5740500

b) Modified Plan = 150 x 30 x (1000 – 35 – 30 – 39) = 4032000

Loss = 4032000 - 2022750 = 2009250

Emp. B. Exp. = 5740500 + 2009250 = 7749750

Emp. B. Exp. : y1 = 5837250

Y2 = 7782600
Y3 = 7749750

Concept 7 : Cancellation of Plan *Imp

If plan is cancelled due to heavy decline in values of shares then the following
Steps should be applied while making Accounting Adjustments :-

Step I : The Entity should write off Emp. B. Expense for the remaining Period at
once in P&L on the date of cancellation of plan. It means that E.B. Exp. which
is related with future years shall also be written off in advance at the time of
Cancellation of Plan.

Step II : If any compensation is paid to Employees in lieu of cancellation of plan

then such compensation will be written off from SBP Res. (reduction in
Equity).

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Exception

If compensation Exceeds fair value of cancelled options on such date then Excess
Payment will be written off in P&L A/c.

Solution of Q.11 *Imp

Calculation of Emp. B. Exp.

At the end of year I :

Loss = 2000 x 8 x 130 x 1y = 693333
3Y

At the end of year II :

Loss = 2000 x 9 x 130 = 2340000 – 693333 = 1646667

Accounting for Compensation

Compensation Paid (2000 x 9 x 95) 1710000

Payment from SBP Res (2000 x 9 x 90) (1620000)
Excess payment from P&L 90000

1) Compensation a/c Dr 1710000

To Bank 1710000
2) SBP Res. a/c Dr 1120000
PL a/c Dr 90000
To Compensation 1710000

2340000 – 1620000 = 720000

Question 4 & 5 (H.W)

*Part 6*

Accounting for shares issued by Holding co. to Employees of Subsidiary co.

As per the Ind AS 102, Holding co, will consider it as an Investment in subsidiary,
but subsidiary will consider it as capital contribution by parent. The following journal
Entries shall take place :-

Holding CO. Subsidiary CO.

Invest. in subsidiary a/c Dr xxxx Emp B. Exp. a/c Dr xxxx

To ESC xxxx To Capital contribution by parent xxxx
(Being shares issued to Emp. Of (Being cap. Contributed by parent)
Subsidiary )

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Solution of Q.3

Holding CO. Subsidiary CO.

Invest. in subsidiary a/c Dr 217500 Emp. B. Exp. a/c Dr 217500

To ESC 217500 To Capital contribution by parent 217500
(Being shares issued to Emp. Of (Being cap. Contributed by parent)
Subsidiary )

*Part 7*

Solution of Q.6, Q.8, Q.9, Q.11 (Discussed in Class)

Test your Knowledge

Solution of Q.4, Q.5, Q.2 (Discussed in Class)

*Part 8*

New Question

Solution of Q.1

Calculation of Employees Expenses

(Assuming Vesting Period 4 years)

31.3.x2
Expense for C.Y = 400 x 75 x 210 x 1 = ₹ 1575000
4
31.3.x3
Expense for C.Y = 400 x 75 x 220 x 2 – 1575000 = ₹ 1725000
4
31.3.x4
Expense for C.Y = 400 x 75 x 215 x 3 – ₹ 1575000 - 1725000 = ₹ 1537500
4
31.3.x5
Expense for C.Y = 400 x 75 x 218 x 4 – 1575000 - 1725000 - 1537500 = ₹ 1702500
4

Calculation of Employees Expenses

(Assuming Vesting Period 3 years)

31.3.x2
Expense for C.Y = 400 x 75 x 210 x 1 = ₹ 1575000
4

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31.3.x3
Expense for C.Y = 400 x 75 x 220 x 2 – 1575000 = ₹ 2825000
3
31.3.x4
Expense for C.Y = 400 x 75 x 215 x 3 – 1575000 - 2825000 = ₹ 2050000
3

Solution of Q.3

Journal Entries

Company P Company S

Investment in S a/c Dr 3750 Remuneration Exp. a/c Dr 15000

Bank a/c Dr 11250 (30 x 100 x 5)
To Equity 15000 To Bank (.75) 11250
(Being Shares issued under ESOP to To Capital Contribution by P 3750
Employees of S) (Being Accounting for ESOP Granted by P
made)

Thank You 😊
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Ind AS 1: Presentation of Financial Statements

*Part 1*

Coverage

Roadmap of Application Guidance IInd Division Additional concepts

Of Ind AS of Schedule III related with financial
statements
Already Done Already Done

Additional Concepts

As per the Provisions of Ind AS 1, the following Additional Points should be considered
While preparing financial statements :-

1. Going Concern : As per the Provisions of Ind AS-1, financial statements should be
Prepared on the basis of Assumption of Going concern. It means that Entity will
Continue its business in near future. In case Business is to be liquidated in near
Future then facts should be disclosed. (Near future is not limited upto 12 months,
but It is a matter of Judgement)

2. Accrual Concept : As per the Provisions of Ind AS 1, financial statements should

be prepared on Accrual Concept.

3. Consistency : The financial statements should be prepared on the basis of Rule of

Consistency. It means that Accounting Policies should be same for all reporting
Periods.

4. Comparatives : As per the Provisions of Ind AS 8, Entity should present

comparative financial statements in addition to current year’ financial
Statements. It means that 2 Lets are Prepared for Presentation Purpose.
❖ If any Accounting Policy is revised retrospectively then 3 sets of B/s shall be
Presented while other statements shall be in 2 sets.
3 sets of B/s

C.Y P.Y (comparative) Beginning of comparative Period

(2 Sets = P&L, Cash flow, changes in Equity, Notes)

5. Off- Setting : As per the Provisions of Ind AS 1, Incomes or Expenses, Assets or

Liab. should not be net off. All Items should be reported separately. We can
consider off Set of Items only if It is Permitted by any other Ind AS (Trade
Discount can be set off against sales Ind AS 18)

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6. Explicit & Unreserved statement :- The financial statement should include the
specified statement that Entity has applied all Ind AS.

Solution of Q.1, Q.3, Q.4, Q.5, Q.6, Q.7, Q.8, Q.9, Q.10, Q.11, Q.2 (Discussed in Class)

Solution Q.12 H.W

*Part 2*

Extra Question

Solution of Q.1, Q.2, Q.3, Q.4, Q.5*Imp, Q.6

*Part 3*

New Question

Solution of Q.4

A. Yes, the treatment of company regarding Presentation of Debtors under current

Assets is correct because collection is Expected within Operating Cycle Period.
B. No, the treatment of company regarding Presentation of payables under Non
Current Liab. is not correct because Payment is due within 14 months which falls
Within operating Cycle Period. So, It should be treated as a current Liability.
C. No, the Given Deposit should be treated as a Non Current Asset because It is
Refundable after 24 months from B/s date which is outside the scope of 18 months
Operating cycle of company.
D. No, the received Deposit should not be considered as a Non current Liability
Because Deposit is Refundable at the time of completion of contract which is 18
Months. It means that Deposit id Refundable within the Period of Operating Cycle.
So, It should be reported as Current Liability.

Solution of Q.3

A. No, the company does not require the presentation of 3rd B/s because there is no
Impact on financial statements of Earlier Period than the Preceding year.
B. No, The contention of company is not correct because Rectification of Errors
Can not be made Prospectively. So, correction is required in the comparatives for
the year 20x1-x2.

Solution of Q.2

A. Yes, the company can provide Additional Disclosures for better understanding of
Financial statements. The Given disclosures in schedule 3 are minimum and these
Can be Extended if required.
B. Yes, the additional disclosures shall also be as per Ind AS Rules.
C. Yes, the company can disclose additional P&L in comparatives without Presenting
B/s, Cash flows or SOCE because there is no rule for additional disclosures these

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are made on Entity’ choice.

Solution of Q.1

A. As per the Provisions of Ind AS 1, company is required to mention an Explicit &

Unreserved statement in financial statements that company has Applied Ind AS
While Preparing financial statements. But As per Given qualification by Auditor, it
Indicates that company has not applied Ind AS adequately. So, Proper disclosure is
Required on this.
B. No, the company is not required to Attach “stand Alone word” with B/s, PL, CFS or
Notes, but It needs to Present in Notes that the Given statements are
individual financial statements.
C. Yes, It is mandatory to mention Presentation currency as per Ind AS 21. So,
Company is required to mention “₹ ” in financial statements
D. Yes, company can Present figures in absolute Amounts because it is allowed as per
Schedule III.
E. No, Company cannot Alter the comparatives on the basis of Given Grounds.

Thank You 😊
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Ind AS-8
Accounting Policy, Estimates & Errors

*Part 1*

Concept 1 : Coverage

Coverage

Unit I: Unit II : Unit III:

Accounting Policy Errors Estimates

Concept 2 : Accounting Policies *Imp

As per the Provisions of Ind AS 8, Accounting Policies are the Accounting

Principles or Rules which are considered by an Entity while Preparing financial
statements. Generally, Accounting Policies are discussed in various Ind AS. However
in some cases, we need to apply our judgement while selecting Accounting Policies.
The following Policies are discussed by various Ind AS :-
i. Depreciation by SLM/ WDV (16)
ii. Inventory by FIFO or Weighted Avg (2)
iii. Accounting on cash Basis, Accrual Basis or Hybrid basis
iv. Inclusions/ Exclusions in cash Equivalents
v. Valuation of Investments through P&L or OCI etc.
If any Accounting Policy is not readymade then we need to consider the following
Factors while selecting Accounting Policy :
i. It should be Prudent
ii. It should be Neutral
iii. It should be on the basis of Substance over form
iv. It should be reliable
v. It should be Transparent
In addition to above It should also be considered that Application of Accounting
Policy should be on consistent basis. We cannot change Accounting Policies after
Making their selection. If any Policy is required to be changed then It should be the
Requirement of any New Ind AS or to improve the presentation of financial
statements. The following procedure should be Applied while making change in Policy :-

Step I : Calculate Total Accounting Effects by Existing Policy from the date of its
First Application till the date in its change.
Step II : Calculate Total Accounting Effects by New Policy for the same Period as in
Step I
Step III : Difference between Step I & Step II should be adjusted in previous year
Retained Earnings & Assets/ Liab so that Opening Balances in current year
May be taken correctly.

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(Note : It means that financial statements for Previous year should be restated)

Important Notes

i. If Transitional Provisions are mentioned in New Ind AS then change in policy

will be made as per those provisions.
ii. If Retrospective Adjustment in all financial years is Impracticable then we
Can consider Adjustments from the year It is Practicable.

Concept 3 : Accounting Estimates

As per the Provisions of Ind AS 8, we use different types of Estimates while

Preparing financial statements. The following Estimates are used in statements :_
i. Estimation of NRV for valuation of stock
ii. Estimation of PFDD
iii. Estimation of Useful life of PPE
iv. Estimation of Departure rate for ESOP’
v. Estimation of fair value under different Ind AS
vi. Estimation of warranty Liab. Provisions etc.
In case any change takes place in Accounting Estimates of Earlier year/years
then we will adjust it in current year profit and there will be no retrospective
Adjustment.

Concept 4 : Errors in Prior Period

If any mistake is discovered in current year in relation to financial statements of

Prior Period/ Periods then these mistakes are known Prior Period Errors. These
Mistakes may be in the form of Errors of Omissions, Commissions, misinterpretation
Of facts, misapplication of Accounting Policy etc.
The rectification of Errors should also be made retrospectively in the retained
Earnings of Previous comparative statements.

Except

If mistakes are relating to previous year which are discovered in current year then
financial statement of previous year should be Restated. (i.e., P&L, B/s etc.)

Illustration 3 (Discussed in class)

*Part 2*

Extra Question

Solution of Q.1, Q.2, Q.3, Q.4*Imp, Q.5, Q.6, Q.7, Q.8 *Imp, Q.9 *Imp, Q.10 *Imp, Q.11,
(Discussed in Class)

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Solution of Q.12 *V.V.Imp

Re-statement in 3rd B/s as at 1.4.x2 :-

(in the beginning of Preceding year)

Non Current Assets

Investment Property (100,000 – 10,000) upto 31.3.x1 90,000

Other Equity : Retained Earnings xxxx

Dep. Upto 31.3.x1 (10,000) xxxx

Re-statement in comparatives as at 31.3.x3 (x2-x3)

I. Re-stated P&L Statement

Depreciation & Amortisation *10,000
*It will dilute Previous year Net Profit

II. Re-stated B/s

Non Current Assets
Invest. Property (90,000 – 10,000) 80,000

Re-statement in Current Year (31.3.x4)

I. P&L Statement
Dep. & Amort. 10,000

II. B/S
Non Current Assets
Invest. Property (80,000 – 10,000) 70,000

*Part 3*

New Question

Solution of Q.2, Q.1 (Discussed in class)

Thank You 😊
Best of Luck…..!!!!!!
CA. Parveen Jindal

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