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Accounting Standard – 25
Interim Financial Reporting
Objective
The objective of this Statement is to prescribe the minimum content of an interim financial report
and to prescribe the principles for recognition and measurement in complete or condensed financial
statements for an interim period. Timely and reliable interim financial reporting improves the ability
of investors, creditors, and others to understand an enterprise's capacity to generate earnings and
cash flows, its financial condition and liquidity.

Scope
This Statement does not mandate which enterprises should be required to present interim
financial reports, how frequently, or how soon after the end of an interim period. If an enterprise is
required or elects to prepare and present an interim financial report, it should comply with this
Statement.

May apply…
• Quarterly reports presented to Board / Bank
• Interim Accounts prepared in M & A deals
• Interim Accounts for IPO offers
• Interim Accounts for the purpose of declaration of interim Dividend
• Interim accounts prepared for consolidation purposes particularly when parent and
subsidiaries year ends are different

Objective and scope under Ind AS 34

•To prescribe the minimum contact of anintrarin financial report and to prescribe recognition and
measurement principals
•This std dos not mandate which entities should be required to public intrarin financial riports
•This std applies if an entity is required or elect to publish an interim financial report as per ind As

A statute governing an enterprise or a regulator may require an enterprise to prepare and present
certain information at an interim date which may be different in form and/or content as required by
this Statement. In such a case, the recognition and measurement principles as laid down in this
Statement are applied in respect of such information, unless otherwise specified in the statute or by
the regulator.
The requirements related to cash flow statement, complete or condensed, contained in this
Statement are applicable where an enterprise prepares and presents a cash flow statement for the
purpose of its annual financial report.

Definitions
The following terms are used in this Statement with the meanings specified:

Interim period is a financial reporting period shorter than a full financial year.

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During the first year of operations of an enterprise, its annual financial reporting period may be
shorter than a financial year. In such a case, that shorter period is not considered as an
interim period.

Interim financial report means a financial report containing either a complete set of financial
statements or a set of condensed financial statements (as described in this Statement) for an
interim period.

Content of an Interim Financial Report

A complete set of financial statements normally includes:
a. Balance sheet;
b. Statement of profit and loss;
c. Cash flow statement; and
d. Notes including those relating to accounting policies and other statements and explanatory
material that are an integral part of the financial statements.

In the interest of timeliness and cost considerations and to avoid repetition of information previously
reported, an enterprise may be required to or may elect to present less information at interim dates
as compared with its annual financial statements. The benefit of timeliness of presentation may be
partially offset by a reduction in detail in the information provided. Therefore, this Statement
requires preparation and presentation of an interim financial report containing, as a minimum, a set of
condensed financial statements.

The interim financial report containing condensed financial statements is intended to provide an
update on the latest annual financial statements. Accordingly, it focuses on new activities, events, and
circumstances and does not duplicate information previously reported.

This Statement does not prohibit or discourage an enterprise from presenting a complete set of
financial statements in its interim financial report, rather than a set of condensed financial
statements. This Statement also does not prohibit or discourage an enterprise from including, in
condensed interim financial statements, more than the minimum line items or selected explanatory
notes as set out in this Statement. The recognition and measurement principles set out in this
Statement apply also to complete financial statements for an interim period, and such statements
would include all disclosures required by this Statement (particularly the selected disclosures in
paragraph 16) as well as those required by other Accounting Standards.

Minimum Components of an Interim Financial Report

An interim financial report should include, at a minimum, the following components:
a. Balance sheet;
b. Statement of profit and loss;
c. Cash flow statement; and
d. Selected explanatory notes.

Form and Content of Interim Financial Statements

If an enterprise prepares and presents a complete set of financial statements in its interim financial
report, the form and content of those statements should conform to the requirements as applicable
to annual complete set of financial statements.

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If an enterprise prepares and presents a set of condensed financial statements in its interim
financial report, those condensed statements should include, at a minimum, each of the headings and
sub-headings that were included in its most recent annual financial statements and the selected
explanatory notes as required by this Statement. Additional line items or notes should be included if
their omission would make the condensed interim financial statements misleading.
If an enterprise presents basic and diluted earnings per share in its annual financial statements in
accordance with Accounting Standard (AS) 20, Earnings Per Share, basic and diluted earnings per
share should be presented in accordance with AS 20 on the face of the statement of profit and loss,
complete or condensed, for an interim period.

Selected Explanatory Notes

An enterprise should include the following information, as a minimum, in the notes to its interim
financial statements, if material and if not disclosed elsewhere in the interim financial report:

a. A statement that the same accounting policies are followed in the interim financial statements as
those followed in the most recent annual financial statements or, if those policies have been changed,
a description of the nature and effect of the change;

b. Explanatory comments about the seasonality of interim operations;

c. The nature and amount of items affecting assets, liabilities, equity, net income, or cash flows that
are unusual because of their nature, size, or incidence (see paragraphs 12 to 14 of Accounting
Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies);

d. The nature and amount of changes in estimates of amounts reported in prior interim periods of the
current financial year or changes in estimates of amounts reported in prior financial years, if those
changes have a material effect in the current interim period;

e. Issuances, buy-backs, repayments and restructuring of debt, equity and potential equity shares;

f. Dividends, aggregate or per share (in absolute or percentage terms), separately for equity shares
and other shares;

g. Segment revenue, segment capital employed (segment assets minus segment liabilities) and segment
result for business segments or geographical segments, whichever is the enterprise's primary basis
of segment reporting (disclosure of segment information is required in an enterprise's interim
financial report only if the enterprise is required, in terms of AS 17, Segment Reporting, to disclose
segment information in its annual financial statements);

h. The effect of changes in the composition of the enterprise during the interim period, such as
amalgamations, acquisition or disposal of subsidiaries and long-term investments, restructurings, and
discontinuing operations; and

i. Material changes in contingent liabilities since the last annual balance sheet date. (& contingent
assets under Ind AS 34)

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The above information should normally be reported on a financial year-to-date basis. However, the
enterprise should also disclose any events or transactions that are material to an understanding of
the current interim period.

Content of interim financial report under Ind AS 34

The condensed statement should include, at

Content of interim financial report
the minimum

Each of the headings and subtotals

Condensed balance sheet
that were included in its most recent
annual financial statement

Condensed statement of profit & loss

Selected explanatory notes as
required by this standard
Condensed statement of changes in
equity
Additional line items should be
included if their omission would make
Condensed statement of cash flows the condensed interim financial stame

Basic and diluted earnigs per share

Selected explanatory notes for that period (when applicable)nts
misleading

Periods for which Interim Financial Statements are required to be presented

Interim reports should include interim financial statements (condensed or complete) for periods as
follows:

a. Balance sheet as of the end of the current interim period and a comparative balance sheet as of
the end of the immediately preceding financial year;
b. Statements of profit and loss for the current interim period and cumulatively for the current
financial year to date, with comparative statements of profit and loss for the comparable interim
periods (current and year-to-date) of the immediately preceding financial year;

c. Cash flow statement cumulatively for the current financial year to date, with a comparative
statement for the comparable year-to-date period of the immediately preceding financial year.

Comparatives for same period Comparatives for the year just ended

P&L Balance Sheet

Cash Flow Statement

For an enterprise whose business is highly seasonal, financial information for the twelve months
ending on the interim reporting date and comparative information for the prior twelve-month period

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may be useful. Accordingly, enterprises whose business is highly seasonal are encouraged to consider
reporting such information in addition to the information called for in the preceding paragraph.

Under Ind AS 34 Statement of changes of equity cumulatively for the current financial year to
date along with its prior period comparative

Materiality
In deciding how to recognize, measure, classify, or disclose an item for interim financial reporting
purposes, materiality should be assessed in relation to the interim period financial data. In making
assessments of materiality, it should be recognised that interim measurements may rely on estimates
to a greater extent than measurements of annual financial data.

Disclosure in Annual Financial Statements

If an estimate of an amount reported in an interim period is changed significantly during the final
interim period of the financial year but a separate financial report is not prepared and presented for
that final interim period, the nature and amount of that change in estimate should be disclosed in a
note to the annual financial statements for that financial year.

Recognition and Measurement

Same Accounting Policies as Annual
An enterprise should apply the same accounting policies in its interim financial statements as are
applied in its annual financial statements, except for accounting policy changes made after the date
of the most recent annual financial statements that are to be reflected in the next annual financial
statements. However, the frequency of an enterprise's reporting (annual, half-yearly, or quarterly)
should not affect the measurement of its annual results. To achieve that objective, measurements
for interim reporting purposes should be made on a year-to-date basis.

Revenues Received Seasonally or Occasionally

Revenues that are received seasonally or occasionally within a financial year should not be anticipated
or deferred as of an interim date if anticipation or deferral would not be appropriate at the end of
the enterprise's financial year.

Costs Incurred Unevenly During the Financial Year

Costs that are incurred unevenly during an enterprise's financial year should be anticipated or
deferred for interim reporting purposes if, and only if, it is also appropriate to anticipate or defer
that type of cost at the end of the financial year.

Use of Estimates
The measurement procedures to be followed in an interim financial report should be designed to
ensure that the resulting information is reliable and that all material financial information that is
relevant to an understanding of the financial position or performance of the enterprise is
appropriately disclosed. While measurements in both annual and interim financial reports are often
based on reasonable estimates, the preparation of interim financial reports generally will require a
greater use of estimation methods than annual financial reports.

Restatement of Previously Reported Interim Periods

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A change in accounting policy, other than one for which the transition is specified by an Accounting
Standard, should be reflected by restating the financial statements of prior interim periods of the
current financial year.

Distinct views of Interim reporting

Integral View
Each interim period is considered as an integral part of the annual period.
Deferrals, accruals and estimates at the end of each interim period are affected by judgments made
with reference to the remainder of the annual period.
Therefore an enterprise allocates a expense item that might be considered as falling wholly within
the fiscal period among interim periods based on estimated time, sales volume, productive activity, or
some other basis.

Discrete View
Each interim period is basic accounting period.
The results of operations for each interim period should be determined in essentially the same
manner as if the interim period were an annual accounting period.
Therefore, an enterprise determines accruals, deferrals, and estimates at the end of each interim
period by the following the same principles and judgments that apply to annual periods.

Follows Discrete approach

-Interim period income tax expense is accrued by applying the estimated annual
Income Tax income tax rate to the pre-tax income or loss of the interim period
-Estimated average annual income-tax rate would reflect the tax rate structure
expected to be applicable to the full year’s earnings
Credits against the tax payable based on amounts of investments, exports,
research and development expenditures, or other bases may be provided under the
Tax Credits tax statutes.
- Tax benefits that relate to a one-time event are recognized in computing income
tax expense in that interim period.
The benefits of tax loss carry forwards are to be reflected in the interim period in
Tax Loss Carry which the related tax loss occurs.
forwards - A deferred tax asset should be recognized in respect of carry forward tax losses
to the extent that it is virtually certain supported by convincing evidence
Liabilities A liability at an interim reporting date must represent an existing obligation at
that date, just as it must at an annual reporting date.
Depreciation for the interim period is based only on assets owned during that
Depreciation / interim period. It does not take into account asset acquisitions or dispositions
Amortization planned for later in the financial year. This rule therefore is more consistent with
the discrete view of interim reporting.
Foreign Should be measured by the same principles as for the annual reporting purposes,
Currency which is essentially the discrete approach
Translation
Subsequent Subsequent events that confirm a condition relating to an asset/liability at the
Events interim period date need to be taken into consideration
Revenue from products sold or services rendered is to be recognized as earned on
Sales the same basis as for annual accounting policies. No revenue is booked in
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anticipation of its accrual in future interim periods.

Interest and Interest payments are contractual commitments and therefore interest
Dividend expense/income is recognized on a periodic basis. Dividends are recognized only if
the right to receive dividend is established during the interim period.
The entire amount of the provision should be recognized as expense immediately
Provisioning for notwithstanding the length of the accounting period.
doubtful assets provision for doubtful assets is not in the nature of a period cost and therefore
should not be pro-rated
(a) the bonus is a legal obligation or an obligation arising from past practice for
which the enterprise has no realistic alternative but to make the payments, and
(b) a realistic estimate of the obligation can be made. Some bonuses are earned
Bonus based on a monthly, quarterly, or annual measure of operating result and some are
during a time period.
They may be purely discretionary, contractual, or based on years of historical
precedent. Depending on the contractual arrangement there may be bonus liability
in the interim period

Transitional Provision
On the first occasion that an interim financial report is presented in accordance with this Statement,
the following need not be presented in respect of all the interim periods of the current financial
year:
a. Comparative statements of profit and loss for the comparable interim periods (current and year-
to-date) of the immediately preceding financial year; and
b. Comparative cash flow statement for the comparable year-to-date period of the immediately
preceding financial year.

25.1 Sincere Corporation is dealing in seasonal product sales pattern of the product, quarter
wise is as follows:
1st quarter 30th June 10%
2nd quarter 30th September 10%
3rd quarter 31st December 60%
4th quarter 31st March 20%
Information regarding the 1st quarter ending on 30th June, 2012 is as follows:
Sales 80 crores
Salary and other 60 crores
expenses
Advertisement 4 crores
expenses (routine)
Administrative and 8 crores
selling expenses
While preparing interim financial report for first quarter Sincere Corporation wants to defer Rs.
10 crores expenditure to third quarter on the argument that third quarter is having more sales
therefore third quarter should be debited by more expenditure. Considering the seasonal nature
of business and the expenditures are uniform throughout all quarters, calculate the result of the
first quarter as per AS 25. Also give a comment on the company’s view.
Solution
Particulars (Rs. In crores)

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Result of first quarter ending 30th June, 2012

Turnover 80
Other Income Nil
Total (a) 80
Less: Changes in inventories Nil
Salaries and other cost 60
Administrative and selling 12
Expenses (4+8)
Total (b) 72
Profit (a)-(b) 8
According to AS 25 the Income and Expense should be recognized when they are earned and incurred
respectively. Therefore seasonal incomes will be recognized when they occur. Thus the company’s view
is not as per AS 25.
25.2 The accounting year of X Ltd. ends on 30th September, 2012 and it makes its reports
quarterly. However for the purpose of tax, year ends on 31st March every year. For the
Accounting year beginning on 1-10-2011 and ends on 30-9-2012, the quarterly income is
as under:-
1st quarter ending on 31-12-2011 Rs. 200 crores
2nd quarter ending on 31-3-2012 Rs. 200 crores
3rd quarter ending on 30-6-2012 Rs. 200 crores
4th quarter ending on 30-9-2012 Rs. 200 crores
Total Rs. 800 crores
Average actual tax rate for the financial year ending on 31-3-2012 is 20% and for financial
year ending 31-3-2013 is 30%. Calculate tax expense for each quarter.
Solution
Calculation of tax expense
1st quarter ending on 31-12- 200 *20% Rs. 40 lakhs
2011
2nd quarter ending on 31-3- 200 *20% Rs. 40 lakhs
2012
3rd quarter ending on 30-6- 200 *30% Rs. 60 lakhs
2012
4th quarter ending on 30-9- 200 *30% Rs. 60 lakhs
2012
25.3 Accountants of Poornima Ltd. show a net profit of Rs. 7,20,000 for the third quarter of
2011 after incorporating the following:
(i) Bad debts of Rs. 40,000 incurred during the quarter. 50% of the bad debts have been
deferred to the next quarter.
(ii) Extra ordinary loss of Rs. 35,000 incurred during the quarter has been fully recognized in
this quarter.
(iii) Additional depreciation of Rs. 45,000 resulting from the change in the method of charge of
depreciation.
Ascertain the correct quarterly income.
Solution
In the above case, the quarterly income has not been correctly stated. As per AS 25 “Interim
Financial Reporting”, the quarterly income should be adjusted and restated as follows:
Bad debts of Rs. 40,000 have been incurred during current quarter. Out of this, the company has

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deferred 50% (i.e.) Rs. 20,000 to the next quarter. Therefore, Rs. 20,000 should be deducted from
Rs. 7,20,000. The treatment of extra-ordinary loss of Rs. 35,000 being recognized in the same
quarter is correct.
Recognising additional depreciation of Rs. 45,000 in the same quarter is in tune with AS 25. Hence, no
adjustments are required for these two items.
Poornima Ltd should report quarterly income as Rs. 7,00,000 (Rs. 7,20,000–Rs. 20,000).
25.4 Intelligent Corporation (I Corp.) is dealing in seasonal products. The quarterly sales
pattern of the product is given below:
Quarter I II III IV
Ending 31st March 30th June 30th September 31st
December
15%- 15%- 50%- -25%

For the First quarter ending 31st March, 2011, I Corp. gives you the following information:
Sales 50
Salary and other expenses 30
Advertisement expenses (routine) 02
Administrative and selling expenses 08
While preparing interim financial report for the first quarter ‘I Corp’ wants to defer Rs. 21
crores expenditure to third quarter on the argument that third quarter is having more sales,
therefore third quarter should be debited by higher expenditure, considering the seasonal
nature of business. The expenditures are uniform throughout all quarters.
Calculate the result of first quarter as per AS 25 and comment on the company’s view.
Solution
Result of the first quarter ended 31st March, 2011
Turnover 50
Add: Other Income Nil
Total 50
Less: Change in inventories Nil
Salaries and other cost 30
Administrative and selling expenses (8 + 2) 10
Total 40
Profit 10

As per AS 25 on Interim Financial Reporting, the income and expense should be recognised when they
are earned and incurred respectively. As per para 38 of AS 25, the costs should be anticipated or
deferred only when
(i) it is appropriate to anticipate that type of cost at the end of the financial year, and
(ii) costs are incurred unevenly during the financial year of an enterprise.
Therefore, the argument given by I-Corp relating to deferment of Rs. 21 crores is not tenable as
expenditures are uniform through out all quarters.
25.5 On 30.6.2010, Asmitha Ltd. incurred Rs. 2,00,000, net loss from disposal of a business
segment. Also, on 30.7.2010, the company paid Rs. 60,000 for property taxes assessed
for the calendar year 2010. How the above transactions should be included in
determination of net income of Asmitha Ltd. for the six months interim period ended on
30.9.2010.
According to Para 10 of AS 25 “Interim Financial Reporting”, If an enterprise prepares and presents

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a complete set of financial statements in its interim financial report, the form and content of those
statements should conform to the requirements as applicable to annual complete set of financial
statements. As on 30.9.2010, Asmitha Ltd., would report the entire Rs. 2,00,000 loss on the disposal
of its business segment since the loss was incurred during interim period. A cost charged as an
expense in an annual period should be allocated to Interim periods on accrual basis. Since Rs. 60,000
Property Tax payment relates to entire calendar year 2010, Rs. 30,000 would be reported as an
expense for six months ended on 30th September, 2010 while remaining Rs. 30,000 would be reported
as prepaid expenses.
25.6 An enterprise reports quarterly, estimates an annual income of Rs. 10 lakhs. Assume tax
rates on 1st Rs. 5,00,000 at 30% and on the balance income at 40%. The estimated
quarterly income are Rs. 75,000, Rs. 2,50,000, Rs. 3,75,000 and Rs. 3,00,000.
Calculate the tax expense to be recognized in each quarter.
As per para 29 of AS 25 ‘Interim Financial Reporting’, income tax expense is recognised in each
interim period based on the best estimate of the weighted average annual income tax rate expected
for the full financial year.
Estimated Annual Income (A) 10,00,000
Tax expense:
30% on Rs. 5,00,000 1,50,000
40% on remaining Rs. 5,00,000 2,00,000
(B) 3,50,000
Weighted average annual income tax rate = B/A= 350000/1000000=35%

Tax expense to be recognised in each of the quarterly reports

Quarter I - Rs. 75,000 x 35% 26,250
Quarter II - Rs. 2,50,000 x 35% 87,500
Quarter III - Rs. 3,75,000 x 35% 1,31,250
Quarter IV - Rs. 3,00,000 x 35% 1,05,000
Rs. 10,00,000 3,50,000

Weak Ltd., is required by its bankers to furnish Balance Sheet, Profit and Loss, and Cash Flow
Statement for half year ended 30th September 2004. Is Weak Ltd. required to prepare half year
figures only upto September 2004 or is also required to give comparative figures ? If yes,
comparatives should be given for which period ?
(a) Balance sheet as of the end of the current interim period and a comparative balance sheet as
of the end of the immediately preceding financial year. Thus, Weak Ltd. will have to prepare
balance sheet as at September 30, 2004 and give comparative balance sheet for the year
ended March 31, 2004, being the immediately preceding financial year.
(b) P&L and cash flow for 30. Sept, 2005
25.7 Unpredictable Ltd., a listed company, decides in December 2004 to change the method
of providing depreciation from straight-line method to written-down-value method. In
compliance with AS 6, the depreciation method is changed retrospectively. Should
Unpredictable Ltd., give effect to such change in third quarter results or will have to
restate the financial statements of prior interim periods of the current financial year ?
As per AS 25, A change in accounting policy, other than one for which the transition is
specified by an Accounting standard, should be reflected by restating the financial statement of
prior interim periods of the current financial year. Thus, Unpredictable Ltd., will have to restate the
financial statements of prior interim periods upto September 30, 2004 and give effect of the change
in amount of depreciation arising due to change in accounting policy for depreciation.
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25.8 High Inventory Ltd., for the quarter ending September 30, 2004, made a write-down
of inventory amounting to Rs.50 lakhs based on the principles of AS 2. For the quarter
ending December 31, 2004, the net realisable value of the inventory has gone up due to
upsurge in demand. As a result, the write down of Rs.50 lakhs calls for a reversal.
Should High Inventory Ltd., restate the quarterly results for September 30,
2004 or give effect of such reversal in results of quarter ending December 31, 2004?
Reversal of inventory write-down of Rs.50 lakhs, results in a change of estimate. The same should be
accounted in the quarter in which the estimate gets revised. Thus, High Inventory Ltd., should give
reversal effect in quarter ending December 31, 2004.
25.9 Star Investments Ltd., a listed enterprise is an investment company. Its main income is
income from dividend, which is received mainly in quarter 2, ending September 30, 2004.
However, not to distort the working of other quarters, Star Investments Ltd., accounts
proportionate income in each quarter commencing from quarter 1, ending June 30,
2004. Is accounting treatment adopted by Star Investments Ltd., appropriate?
AS 25 states that revenues that are received seasonally or occasionally within a financial year
should not be anticipated or deferred as of an interim date if anticipation or deferral would not
be appropriate at the end of the enterprise's financial year.
Thus, revenues such as dividend, royalties and government grants are recognised when they occur.
Star Investments Ltd., should recognise dividend income in the quarter in which revenue recognition
falls due as per AS 9
25.10 Heaven Travels Ltd., sells holiday package tours. It has made advance booking in
December 2004, in respect of travel tours to be conducted in May-July 2005. Heaven
Travels Ltd., should show relevant income in which quarter ?
Heaven Travels Ltd., which sells holiday package tours should not recognise revenue on tours until the
interim period in which the revenue would be recognised under AS 9 and should not defer any costs
into later interim periods unless those costs meet the relevant criteria in AS 26 or are implied by
the application of the percentage of completion method in AS 9.
Thus, Heaven Travels Ltd., will have to book income in the quarter April-June 2005 and July
September 2005, following the revenue recognition criteria as laid down in AS 9 and not in the
quarter where booking advance is received
25.11 High Seasons Ltd., a listed enterprise is in seasonal business, where profits are earned
for first three months and incurs losses for the rest of nine months. For the 1st quarter
ending June 30, 2004, High Seasons Ltd., made a profit of Rs.200 lakhs, whereas for
the next three quarters it expects to incur losses of Rs.40 lakhs in each quarter.
High Seasons in its quarter 1 results, ending 30-06-04, mentioned, tax provision
will be made at year end as the company is in Seasonal business. Is the contention of
High Seasons Ltd. correct ?
High Seasons Ltd., as per AS 25 will have to make a tax provision in first quarter, whereas for the
subsequent three quarters it will have to make a tax write-back on account of losses.
Assuming the estimated average annual effective tax rate to be 35% for High Seasons Ltd., the
amount of income tax expense that will be reported in each quarter will be as under:
1st 2“d 3rd 4th Total
Quarter Quarter Quarter Quarter
Tax expense 70 (14) (14) (14) 28
25.12 How should the following be recognised and measured in the interim financial statements?
(i) Gratuity and other defined benefit schemes;
(ii) Year-end bonus;
(iii) Income-tax expense;

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(iv) Provisions
(v) Foreign currency translation gains and losses.
(i) As illustrated in AS 25, ‘Interim Financial Reporting’, provisions in respect of gratuity and other
defined benefit schemes for an interim period are calculated on a year-to-date basis by using the
actuarially determined rates at the end of the prior financial year, adjusted for significant market
fluctuations since that time and for significant curtailments, settlements, or other significant one-
time events.
(ii) A year-end bonus is anticipated for interim reporting purposes if, and only if,
(1) the bonus is a legal obligation or an obligation arising from past practice for which the enterprise
has no realistic alternative but to make the payments, and
(2) a reliable estimate of the obligation can be made.
(iii) For income-tax expense, apply estimated average annual effective income-tax rate to the pre-tax
income of the interim period.
(iv) An enterprise should apply the same criteria for recognising and measuring a provision at an
interim date as it would at the end of its financial year.
(v) Foreign currency translation gains and losses are measured for interim financial reporting by the
same principles as at financial year end in accordance with the principles as stipulated in AS 11.
25.13 Estimated annual income Rs. 1,00,000
(inclusive of estimated capital gains of Rs. 20,000 earned in quarter II)
Assumed tax rates:
On capital gains 10%
On other income:
First Rs. 40,000 30%
Balance income 40%
Assuming there is no difference between the estimated taxable income and the estimated
accounting income; calculate tax expense and weighted average annual effective tax rate. Also,
calculate tax expense for each quarter, when the estimated income of each quarter is Rs.
25,000 and income for 2nd quarter of Rs. 25,000 includes capital gain of Rs. 20,000.
Tax Expense
Tax on capital gain portion of annual income: 10% of Rs.20,000 2,000
Tax on other income: 30% of Rs.40,000 + 40% of remaining Rs.40,000 28,000
Total 30,000
Weighted average annual effective tax rate:
Rate on capital gain portion of annual income = 2,000x 100/20,000 = 10%
Rate on other income = 28,000x 100/80,000 = 35%
Tax expense for each quarter:
Income Tax Expense
Rs. Rs.
Quarter I 25,000 35% of Rs.25,000 = 8,750
Quarter II Capital Gain 20,000 10% of Rs.20,000 = 2,000
Other income 5,000 35% of Rs.5,000 = 1,750 3,750
Quarter III 25,000 35% of Rs.25,000 = 8,750
Quarter IV 25,000 35% of Rs.25,000 = 8,750
Total tax expense for the year 30,000
25.14 Antarbarti Limited reported a Profit Before Tax (PBT) of Rs. 4 lakhs for the third
quarter ending 30-09-2011. On enquiry you observe the following, give the treatment
required under AS 25:
(i) Dividend income of Rs. 4 lakhs received during the quarter has been recognized to the extent
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of Rs. 1 lakh only.

(ii) 80% of sales promotion expenses Rs. 15 lakhs incurred in the third quarter has been
deferred to the fourth quarter as the sales in the last quarter is high.
(iii) In the third quarter, the company changed depreciation method from WDV to SLM, which
resulted in excess depreciation of Rs. 12 lakhs. The entire amount has been debited in the
third quarter, though the share of the third quarter is only Rs. 3 lakhs.
(iv) Rs. 2 lakhs extra-ordinary gain received in third quarter was allocated equally to the third
and fourth quarter.
(v) Cumulative loss resulting from change in method of inventory valuation was recognized in the
third quarter of Rs. 3 lakhs. Out of this loss Rs. 1 lakh relates to previous quarters.
(vi) Sale of investment in the first quarter resulted in a gain of Rs. 20 lakhs. The company had
apportioned this equally to the four quarters.
Prepare the adjusted profit before tax for the third quarter.
As per para 36 of AS 25 “Interim Financial Reporting”, seasonal or occasional revenue and cost within
a financial year should not be deferred as of interim date untill it is appropriate to defer at the end
of the enterprise’s financial year. Therefore dividend income, extra-ordinary gain, and gain on sale of
investment received during 3rd quarter should be recognised in the 3rd quarter only. Similarly, sales
promotion expenses incurred in the 3rd quarter should also be charged in the 3rd quarter only.
Further, as per the standard, if there is change in the accounting policy within the current financial
year, then such a change should be applied retrospectively by restating the financial statements of
prior interim periods of the current financial year. The change in the method of depreciation or
inventory valuation is a change in the accounting policy. Therefore, the prior interim periods’ financial
statements should be restated by applying the change in the method of valuation retrospectively.
Accordingly, the adjusted profit before tax for the 3rd quarter will be as follows:
Statement showing Adjusted Profit Before Tax for the third quarter
Profit before tax (as reported) 4
Add: Dividend income RRs. (4-1) lakhs 3
Excess depreciation charged in the 3rd quarter, due to change in the method, should be 9
applied retrospectively Rs. (12-3) lakhs
Extra ordinary gain Rs. (2-1) lakhs 1
Cumulative loss due to change in the method of inventory valuation should be applied 1
retrospectively Rs. (3-2) lakhs
18
Less: Sales promotion expenses (80% of Rs. 15 lakhs) (12)
Gain on sale of investment (occasional gain should not be deferred) (5)
Adjusted Profit before tax for the third quarter 1
25.15 Accountants of Neelam Ltd. show a net profit of Rs. 7,20,000 for the third quarter of
2012 after incorporating the following:
(i) Bad debts of Rs. 40,000 incurred during the quarter. 50% of the bad debts have been
deferred to the next quarter.
(ii) Extra ordinary loss of Rs. 35,000 incurred during the quarter has been fully recognized in
this quarter.
(iii) Additional depreciation of Rs. 45,000 resulting from the change in the method of charge of
depreciation.
Ascertain the correct quarterly income.
In the above case, the quarterly income has not been correctly stated. As per AS 25 “Interim
Financial Reporting”, the quarterly income should be adjusted and restated as follows:
Bad debts of Rs. 40,000 have been incurred during current quarter. Out of this, the company has
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deferred 50% (i.e.) Rs. 20,000 to the next quarter. Therefore, Rs. 20,000 should be deducted from
Rs. 7,20,000. The treatment of extra-ordinary loss of Rs. 35,000/- being recognized in the same
quarter is correct.
Recognising additional depreciation of Rs. 45,000 in the same quarter is in tune with AS 25 .Hence, no
adjustments are required for these two items.
Neelam Ltd should report quarterly income as Rs. 7,00,000 (Rs. 7,20,000–Rs. 20,000).
25.16 On 30-6-2011, X Limited incurred Rs. 3,00,000 net loss from disposal of a business
segment. Also on 31-7-2011, the company paid Rs. 80,000 for property taxes assessed
for the calendar year 2011. How should the above transactions be included in
determination of net income of X Limited for the six months interim period ended on 30-
9-2011?
Para 28 of AS 25 “Interim Financial Reporting” states that revenues and gains should be recognised in
interim reports on the same basis as used in annual reports. As at September 30, 2011, X Ltd. would
report the entire Rs. 3,00,000 loss on the disposal of its business segment since the loss was incurred
during the interim period.
A cost charged as an expense in an annual period should be allocated among the interim periods, which
are clearly benefited from the expense, through the use of accruals and/or deferrals. Since Rs.
80,000 property tax payment relates to the entire 2011 calendar year, only Rs. 40,000 of the
payment would be reported as an expense at September 30, 2011, while out of the remaining Rs.
40,000, Rs. 20,000 for Jan. 2011 to March, 2011 would be shown as payment of the outstanding
amount of previous year and another Rs. 20,000 related to quarter October, 2011 to December, 2011,
would be reported as a prepaid expense.
25.17 Fixed production overheads for the financial year is Rs. 19,200. Normal expected
production for the year, after considering planned maintenance and normal breakdown,
and the future demand of the product is 4,800 MT. It is considered that there are no
quarterly/seasonal variations. Therefore, the normal expected production for each
quarter is 1200 MT and the fixed production overheads for the quarter are Rs. 4,800.
First quarter 1000 MT
Second quarter 1400 MT
Third quarter 800 MT
Fourth quarter 1400 MT
Required:
(i) Presuming that there is no quarterly/seasonal variation, calculate the allocation of fixed
production overheads for all the four quarters as per relevant Accounting Standards.
(ii) In case there are quarterly and seasonal variation how the estimate of normal capacity to be
made as per relevant Accounting Standards.
(Hint: Para 27 & 29(a) of AS 25 and Para 9 of AS 2)

(i) It is considered that there is no quarterly/seasonal variation, therefore normal expected

production for each quarter is 1200 MT and fixed production overheads for the quarter are Rs.
4,800.
Fixed production overhead to be allocated per unit of production in every quarter will be Rs. 4 per MT
(Fixed overheads/Normal production i.e. Rs. 4,800/1200 MT).
First quarter
Actual fixed production overheads = Rs. 4,800.
Fixed production overheads based on the allocation rate of Rs. 4 per unit allocated to actual
production = Rs. 4 x 1000 MT = Rs. 4,000.
Unallocated fixed production overheads to be charged as expense as per paragraph 9 of AS-2 and

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consequently as per AS-25 = Rs. 800.

Second quarter
Actual fixed production overheads as per para 27 of AS 25, on year-to-date basis = Rs. 9,600.
Fixed production overheads to be absorbed on year-to-date basis
2400 MT x Rs. 4 = Rs. 9,600.
Rs. 800 was not allocated to production in the first quarter. To give effect to the entire Rs. 9,600 to
be allocated in the second quarter, as per paragraph 29(a) of AS-25, Rs. 800 is reversed by way of a
credit to the profit and loss account of the second quarter.
Third quarter
Actual production overheads on year-to-date basis = Rs. 14,400.
Fixed production overheads to be allocated on year-to-date basis
3,200 MT x Rs. 4 = Rs. 12,800
Under allocated overheads of Rs. 1600 is to be changed as expense as per para 9 of AS 2 and
consequently as per AS-25.
Fourth quarter/Annual
Actual fixed production overheads on year-to-date basis = Rs. 19,200.
Fixed production overheads to be allocated on year-to-date basis
4,600 MT x Rs. 4 = Rs. 18,400
Rs. 1600 was not allocated to production in the third quarter due to less production. However, due to
over production of 200 MT in the fourth quarter, excess allocable fixed overhead in the fourth
quarter is given effect to by reversal of previously charged amount to Profit and Loss account (i.e. in
the third quarter) to the extent of Rs. 800 (200 MT x Rs. 4). Therefore, Rs. 800, over allocable in
the fourth quarter, are to be reversed as per para 29(a) of AS-25 by way of a credit to the profit
and loss account of the fourth quarter.
Unallocated overheads for the year Rs. 800 are expensed in the profit and loss account as per para 9
of AS-2.
The cumulative result of all the quarters would also result in unallocated overheads of Rs. 800. Hence,
the requirements of para 27 of AS-25 that the quarterly results should nnot affect the measurement
of the annual results has been complied with.
(ii) In a case where there are quarterly/seasonal variations, the estimates of normal capacity would
have to be made on the quarterly/seasonal basis. The enterprise will have to estimate its normal
capacity on the basis of the average of the relevant quarters/seasons of past few years, say 3 to 5
years, also considering the demand of the product during the season. (For example, a company is
having seasonal variations say, in the 3rd quarter. The estimate for the 3rd quarter should be based on
the capacity utilisation of the 3rd quarter for the past few years, say 3 to 5 years, also keeping in
mind the future demand of the product during the quarter). Once the normal capacity for a quarter is
determined, as aforesaid, the quarter should be considered for measurement purposes, as per
paragraph 27 of AS-25 on year –to-date basis, i.e. on cumulative basis, which would then be added up
to determine the normal capacity for the year on the basis of which the absorption rate will be
determined. The variations between the seasons would thus be considered normal and treated
accordingly.
If there is an abnormal breakdown during a period, as per AS-2, the amount of fixed production
overheads not allocated to units of production is charged to the profit and loss account. However, the
result of under allocation of overheads or over allocation of overheads should not affect the
measurement of its annual results since interim periods are parts of a financial year.
25.18 To comply with listing requirements and other statutory obligations Quaker Ltd. prepares
interim financial reports at the end of each quarter. The company has brought forward
losses of Rs. 700 lakhs under Income Tax Law, of which 90% is eligible for set off as

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per the recent verdict of the Court, that has attained finality. No Deferred Tax Asset
has been recognized on such losses in view of the uncertainty over its eligibility for set
off. The company has reported quarterly earnings of Rs. 700 lakhs and Rs. 300 lakhs
respectively for the first two quarters of Financial year 2013-14 and ·anticipates a net
earning of Rs. 800 lakhs in the coming half year ended March 2014 of which Rs. 100
lakhs will be the loss in the quarter ended Dec. 2013. The tax rate for the company is
30% with a 10% surcharge. You are required to calculate the amount of Tax Expense to
be reported for each quarter of financial year 2013-14.
Estimated tax liability on annual income =
[Income Rs.1,800 lakhs less b/f losses Rs. 630 lakhs (90% of 700)] x 33%
= 33% of Rs. 1,170 lakhs = Rs. 386.10 lakhs
As per Para 29(c) of AS 25 ‘Interim Financial Reporting’, income tax expense is recognised in each
interim period based on the best estimate of the weighted average annual income tax rate expected
for the full financial year.
Thus, estimated weighted average annual income tax rate = Rs. 386.10 lakhs divided by Rs. 1,800
lakhs=21.45%
Tax expense to be recognised in each quarter Rs. in lakhs
Quarter I – Rs. 700 lakhs x 21.45% 150.15
Quarter II – Rs. 300 lakhs x 21.45% 64.35
Quarter III – (Rs. 100 lakhs) x 21.45% (21.45)
Quarter IV – Rs. 900 lakhs x 21.45% 193.05
386.10
25.19 At the end of quarter 1, a company estimated that 20% of its annual profit would be
earned and taxed in USA. Tax rates in USA and India are 30% and 40% respectively.
The proportion of US income was re-estimated at 25% at the end of quarter 2.
Company’s profit before tax for quarter 1 and quarter 2 were Rs. 50 lakh and Rs. 30
lakh respectively. Compute after tax profits for the quarters
25.20 In the last annual report, X Ltd, reported a contingent liability towards the Bills
discounted to the extent of Rs.50,000/-. During the current interim period, the amount
of bills that was discounted rose up to Rs.2,50,000/- should this be reported separately
as part of Interim financial statements assuming that they have a material effect in the
current interim period? Will your answer differ if the event does not have a material
effect?

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Accounting Standard 26
Intangible Assets
This Statement should be applied by all enterprises in accounting for intangible assets, except:
a. intangible assets that are covered by another Accounting Standard;
Goodwill arising from amalgamation/Consolidation(AS-14 & 21)
Termination Benefits- AS15
Deferred Tax Assets-AS22
b. financial assets;(AS-30,31,32)
c. mineral rights and expenditure on the exploration for, or development and extraction of, minerals,
oil, natural gas and similar non-regenerative resources;(Guidance note in force)
d. intangible assets arising in insurance enterprises from contracts with policyholders.
This Statement should not be applied to expenditure in respect of termination benefits also.

26.1 A is in the business of buying and selling Brand endorsement rights and has in his control
different kinds of brand rights at any point of time . How would the cost of purchase of
Brand endorsement rights be accounted or amortized in compliance of AS 26 ?
A. AS 26 has no application here as the Brand endorsement right as an asset is A’s inventory.
Therefore AS 2 and AS 9 is applicable here.
26.2 X Ltd. a listed company, had incur-red Rs.100 lakhs towards VRS for employees in
2001-02. Company decided to amortize the amount over a period of five years.
Accordingly, Rs.60 lakhs was appearing as unamortized amount as on 1-4-2003. After
AS 26 coming into operation, what treatment X Ltd. should follow for the unamortized
amount?
A. The above is covered by the Transitional provisions enumerated in the Accounting Standard. VRS
per se is not an intangible asset but an Intangible item. As per the transitional provisions, the
remaining period of amortization is 3 years as per accounting policy followed by X Ltd., which is
shorter as compared to the amortization period prescribed by the AS ( AS 26 prescribes 10
years). Accordingly, X Ltd would be required to amortize the intangible item as per the accounting
policy followed by it.
However, should X Ltd. incur VRS expense in accounting year 2003-04, the same will be required
to be expensed in 2003-04 and no amortization will be permissible, as VRS cannot be considered as
an Intangible Asset, as it does not meet the definition criteria.
Note: Few listed companies in their June quarterly results have adjusted the unamortized amount
outstanding as on 01/04/2003 against revenue reserves instead of amortizing as per the treatment
provided in the transitional provisions.

What are intangible assets and how they are recognized?

An intangible asset is an

identifiable non-monetary asset, without physical substance,

held for use in

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the production or supply of goods or services, for rental to others, or for administrative purposes.

An intangible asset should be recognized if, and only if:

a. it is probable that the future economic benefits that are attributable to the asset will flow
to the enterprise; and
b. the cost of the asset can be measured reliably.
An enterprise should assess the probability of future economic benefits using reasonable and
supportable assumptions that represent best estimate of the set of economic conditions that will
exist over the useful life of the asset.

Internally generated goodwill should not be recognized as an asset

Intangible assets as per Ind AS 38

•identifiable, non-monetary assets, without physical substance.

Identifiability
•If it either :
•is payable, ie is capable of being separated and sold, transferred licensed, rented or exchange; or
•arises from contractual or other legal rights

Notes
•some intangibles is contained in a physical asset, e.g. compact disc.
•Judgments is required : if IAS 16 or IAS 38 should be applied
•When software is not an integral part of related hardware, it is an intangible asset

26.3 X ltd purchased 100 computers from IBM and granted a turnkey contract of installing
them in a networked set up. The contract also included the cost of licensed operating
systems, antivirus systems, satellite connectivity etc... The contract further included a
tripartite arrangement with Oracle and IBM where in an Oracle based ERP system would
be installed and IBM would facilitate the installation.
A. Here the contract has two broad elements software and support systems that form an integral
part of the hardware and those not forming its integral part. ERP system falls in second category.
Therefore it is an intangible asset. However those falling as an integral part of the hardware are
part of fixed assets.
26.4 P ltd has been using a brand name “turmericano” for its ayurvedic product which they
transferred to another company for a consideration. The application for registration of
brand name is not approved by the authorities. The buyer company continues to treat it
as an intangible asset .Auditor’s view lack of control over asset as a reason to
derecognize the asset. Comment
A. Legal enforceability of a right is not a necessary condition for control if an enterprise is able
to control the future economic benefits in some other way.
As long as there is no restriction to use the brand name and there is market for product, economic
benefits can assume to be accruing to the asset holder.

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Yet, misuse of the brand name by others , in the absence of a legal right , is a threat to “control
over the asset”
Therefore it is a matter of subjective judgment
26.5 A Company after installing a sophisticated software has not been able to make use of its
benefits because of the untrained staff and lack of support from software provider (due
to contractual disputes). The company has recognized the software expenses as intangible
assets. Auditor has cited reservation in view of the lack of usefulness of the asset.
Comments
A. Recognition of an intangible asset depends on the future economic benefits available to the
company. Appropriate impairment provisions may be made and in future such impairment losses can
be reversed if the asset becomes useful

How to determine the cost of Intangible Assets?

If an intangible asset is acquired separately, the cost of the intangible asset can usually be measured
reliably. This is particularly so when the purchase consideration is in the form of cash or other
monetary assets.
The cost of an intangible asset comprises its
i. purchase price, including any import duties and other taxes (other than those subsequently
recoverable by the enterprise from the taxing authorities), and
ii. any directly attributable expenditure on making the asset ready for its intended use. Directly
attributable expenditure includes, for example, professional fees for legal services.
Any trade discounts and rebates are deducted in arriving at the cost.

Laxmi Mittal gives share certificate to arcelor group for purchase of company and brand name, value of brand purchase will be as
below
If an intangible asset is acquired in exchange for shares or other securities of the reporting
enterprise, the asset is recorded at its fair value, or the fair value of the securities issued,
whichever is more clearly evident.
An intangible asset may be acquired in exchange or part exchange for another asset. In such a case,
the cost of the asset acquired is determined in accordance with the principles laid down in this
regard in AS 10, Accounting for Fixed Assets.
26.6 H Ltd purchased the distribution rights of a motion picture for Rs 50 crores that
includes the cost of 2600 prints of CDs, 5000 prints of DVDs and a master copy of the
film to enable creating further copies of prints for a period of 6 years. How would the
hardware cost be accounted here ?
A. Here the intangible asset is contained on the hardware and therefore it is not separable. At
the same time the comparative cost element of the hardware is not significant .Therefore the
whole amount becomes intangible asset.

exchange of • the cost of such acquired asset is measured at fair value unless
assets under (a) lacks commercial substance or
Ind AS 38 (b) the fair value not reliably
• if not measured at fair value, is cost is measured at the carrying amount
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of the asset given up

Acquisition recognize initially at fair value Example:
by way (a) airport landing rights, licenses to operate radio or television stations, import
government licenses or
grant (b) quotas or right to access other restricted resource

26.7 Lupin Ltd. exchanges its patent right of inhaler Loftair with NATCO Ltd. patent right of
anti-cancer drug – sorafenib tosylate. Fair value of Loftair patent is 500Crore and that
of sorafenib tosylate is Rs.515 crore. Book value of Loftair patent is 470 Crore and that
of sorafenib tosylate is 380 crore. Determine accounting treatment as per Ind AS 38
Answer
In books of LUPIN Ltd.
Cost of Loftair patent to be de recognised = 470 Crore
Fair value of sorafenib tosylate patent to be recognised =
FV of asset given up = 500Crore
Profit is credited to P&L

Intangible asset acquired in an amalgamation

An intangible asset acquired in an amalgamation in the nature of purchase is accounted for in
accordance with Accounting Standard (AS) 14, Accounting for Amalgamations. Where in preparing
the financial statements of the transferee company, the consideration is allocated to individual
identifiable assets and liabilities on the basis of their fair values at the date of amalgamation,
following points need to be considered:
1. Quoted market prices in an active market provide the most reliable measurement of fair value.
2. If no active market exists for an asset, its cost reflects the amount that the enterprise would
have paid, at the date of the acquisition, for the asset in an arm's length transaction between
knowledgeable and willing parties, based on the best information available. In determining this
amount, an enterprise considers the outcome of recent transactions for similar assets.
3. In accordance with this Statement:

transferee recognizes an intangible asset that meets the recognition criteria even if that intangible
asset had not been recognized in the financial statements of the transferor

if the cost (i.e. fair value) of an intangible asset acquired as part of an amalgamation in the nature
of purchase cannot be measured reliably, that asset is not recognized as a separate intangible asset
but is included in goodwill

Unless there is an active market for an intangible asset acquired in an amalgamation in the nature
of purchase, the cost initially recognized for the intangible asset is restricted to an amount that
does not create or increase any capital reserve arising at the date of the
amalgamation

26.8 V ltd amalgamated with P Ltd and while accounting for the assets taken over identified
brand value with a fair value at Rs 100 crores which was not in the books of V Ltd. P Ltd

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recognized the asset and created capital reserve of Rs 75.00 crores as goodwill value
was only Rs 25.00 crores. Comment.
A. In the case of amalgamation in the nature of purchase , intangible assets of vendor company
can be brought to purchaser’s book, even if it was not reflected in vendors books .However such
accounting shall not create or increase any capital reserve, unless there is an active market for the
intangible asset .Considering this the brand value cannot be accounted for, more than Rs 25.00
crores
26.9 S ltd got merged in to Y Ltd and while accounting for the assets and liabilities acquired,
Y Ltd identified patent rights in the name of S ltd , that had a fair value of 10 crores,
but had not been reflected in the financial statements of S Ltd. Y Ltd decided to
Account for the same by reducing goodwill account for equivalent amount. Comment.
A. As per A S 14, in the case of amalgamation in the nature of merger, assets and liabilities of
transferor company gets shifted to transferee at carrying value and therefore assets not in the
books of transferor gets no chance to get reflected in the books of transferee.
However scheme of approval by court can perhaps alter this situation
26.10 A company on amalgamating with another one acquired a brand use license originally
belonging to an overseas company and which required their approval for use by any
transferee company. The company is hopeful of getting brand owners approval sooner or
later and hence desirous of keeping the asset value in balance sheet. Comment.
A. In the given case although the absolute ownership is not with the company for brand use they
have done all right steps to enjoy the usefulness of the asset for economic benefit in future and
therefore subject to impairment losses the asset can remain in the books

Internally Generated Intangible Assets

It is sometimes difficult to assess whether an internally generated intangible asset qualifies for
recognition. It is often difficult to:
a. identify whether, and the point of time when, there is an identifiable asset that will generate
probable future economic benefits; and
b. determines the cost of the asset reliably. In some cases, the cost of generating an intangible asset
internally cannot be distinguished from the cost of maintaining or enhancing the enterprise’s
internally generated goodwill or of running day-to-day operations.
Therefore, in addition to complying with the general requirements for the recognition and initial
measurement of an intangible asset, an enterprise applies the requirements and guidance as stated
below to all internally generated intangible assets.
To assess whether an internally generated intangible asset meets the criteria for recognition, an
enterprise classifies the generation of the asset into:

a. a research phase; and b. a development phase.

Although the terms ‘research’ and ‘development’ are defined, the terms ‘research phase’ and
‘development phase’ have a broader meaning for the purpose of this Statement.
26.11 X ltd has created an innovative effluent management system , with the help of which it
anticipates 2% reduction in its operating cost. Company intends to capitalize the cost of
internally developed technology. Auditors are of the view that this is not a case where
future economic benefits from revenue are possible and hence definition of “asset” is
complied with. Comment

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A. It is not necessary that future economic benefit has to accrue through income generation
alone. It could be from cost saving too. Hence subject to compliance of other conditions,
capitalization is possible
26.12 List of intangible assets of a company include the following . Comment
1. Cost of technical know-how, designs, processes
2. Cost of Rights under licensing agreements,
3. Intellectual property rights, brands, trade marks
4. Computer software expenses
5. Start up expenses
6. Training expenses
7. Expenditure on advertising
8. Expenditure on relocating or re-organizing
A. The first four only are intangible assets. Even amongst them, for brands and trademarks ,
only acquisition cost if any is allowed for capitalization
26.13 X wants to recognize its internally generated goodwill and brand value as intangible
assets .Comment.
A. AS 26 does not permit capitalization of internally generated goodwill , brands mastheads,
publishing titles, customer list or similar items as intangible asset . Expenses if any on them has
to be charged to revenue
26.14 Whether the following expenditure incurred will result in creation of an intangible asset?
(a) Benefits arising from research
(b) publishing titles
(c) training expenses
(d) management or technical talent
(e) a port folio of customers
(f) market share
(g) Advertising for building a brand
(h) Relocating or re-organizing part or all of an enterprise.
A. The expenditure on intangible items which does not meet the definition and recognition criteria
of an intangible asset should be recognized as an expense in the period in which it is incurred. AS
states that an intangible asset should be recognized if and only if
(a) it is probable that the future economic benefits that are attributable to the asset will flow
to the enterprise and
(b) the cost of the asset can be measured reliably.
Further the intangible asset should also be identifiable as well as the enterprise should be able
to exercise control over the intangible asset.
It will be observed that for items mentioned in (a) to (h) above, though they may have intangible
value or benefit, they will not be considered as intangible asset since they do not meet the
definition criteria of Intangible asset. Either control or identification or future economic benefit
or measurement would be missing one way or other. Many a times say in case of advertising, or
sales promotion activities, the cost of generating an intangible asset internally cannot be
distinguished from the cost of maintaining or enhancing the enterprise’s internally generated
goodwill or of running day-to-day operations.
However, few of the above items may qualify for recognition as intangible assets when acquired
separately or acquired in an amalgamation in nature of purchase and their fair value at the date of
acquisition can be ascertained.

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Research Phase
No intangible asset arising from research (or from the research phase of an internal project) should
be recognized. Expenditure on research (or on the research phase of an internal project) should be
recognized as an expense when it is incurred.

Development Phase
An intangible asset arising from development (or from the development phase of an internal project)
should be recognized if, and only if, an enterprise can demonstrate all of the
following:
a. the technical feasibility of completing the intangible asset so that it will be
available for use or sale;
b. its intention to complete the intangible asset and use or sell it;
c. its ability to use or sell the intangible asset;
d. how the intangible asset will generate probable future economic benefits.
Among other things, the enterprise should demonstrate the existence of a
market for the output of the intangible asset or the intangible asset
itself or, if it is to be used internally, the usefulness of the intangible
asset;
e. the availability of adequate technical, financial and other resources
to complete the development and to use or sell the intangible asset; and
f. its ability to measure the expenditure attributable to the intangible
asset during its development reliably.
Internally generated brands, mastheads, publishing titles, customer lists and items similar in
substance should not be recognized as intangible assets.

26.15 X ltd has been developing a new production process and on 31-10-2006, it has been able
to demonstrate that it is likely to enjoy future economic benefits from the research. It
incurred Rs. 50 lakhs on this account till 31-10-06 and Rs24 lakhs afterwards up to
31-03-07.As on 31-3-07 it estimates the recoverable amount of know how embodied in
the process at Rs. 22.00 lakhs
A. Rs 50.00 lakhs is research expense to be charged to P/L
Rs 24.00 lakhs is development expenses –intangible asset
Rs 2.00 lakhs impairment loss to be debited and asset to be reduced.
26.16 An Ltd incurred Rs 20 L for developing a new product . However it has not been able to
distinguish the research phase with development phase and showed the whole expenses
under R&D Expenses. Wants to show appropriate amount under Intangible assets towards
“products rights”
A. In the absence of proper distinction the whole expense will be research expense to be
charged to P/L
26.17 Dell International Ltd. is developing a new production process. During the financial Year
31st March, 2011, the total expenditure incurred on this process was Rs. 40 lakhs. The
production process met the criteria for recognition as an intangible asset on 1st 2010.
Expenditure incurred till this date was Rs. 16 lakhs.
Further expenditure incurred on the process for the financial year ending 31st March 2013,
was Rs. 70 lakhs. As at 31-3-2013, the recoverable amount of know-how embodied in the
process is estimated to be Rs. 62 lakhs. This includes estimates of future cash outflows as well
as inflows.
You are required to work out:
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(a) What is the expenditure to be charged to the profit and loss account for the financial year
ended 31st March 2011? (Ignore depreciation for this purpose)
(b) What is the carrying amount of the intangible asset as at 31st March 2011?
(c) What is the expenditure to be charged to the profit and loss account for the financial year
ended 31st March 2012? (Ignore depreciation for this purpose)
(d) What is the carrying amount of the intangible asset as at 31st March 2012?
Solution
(a) Rs. 22 lakhs
(b) Carrying amount as on 31-3-2011 will be expenditure incurred after 1-12-2010= Rs. 24 lakhs
(c) Book cost of intangible asset as on 31-3-2012 is as follows
Total Book cost = Rs. (70 + 24) lakhs = Rs. 94 lakhs
Recoverable amount as estimated = Rs. 62 lakhs
Difference to be charged to Profit and Loss account = Rs. 32 lakhs
(d) Rs. 62 lakhs
26.18 A Pharma Company spent Rs. 33 lakhs during the accounting year ended 31st March,
2012 on a research project to develop a drug to treat “AIDS”. Experts are of the view
that it may take four years to establish whether the drug will be effective or not and
even if found effective it may take two to three more years to produce the medicine,
which can be marketed. The company wants to treat the expenditure as deferred
revenue expenditure. Comment.
Solution
No intangible asset arising from research (or from the research phase of an internal project) should
be recognized. Expenditure on research (or on the research phase of an internal project) should be
recognized as an expense when it is incurred. Thus the company cannot treat the expenditure as
deferred revenue expenditure. The entire amount of Rs. 33 lakhs spent on research project should
be charged as an expense in the year ended 31st March, 2012.
26.19 During 2011, an enterprise incurred costs to develop and produce a routine, low risk
computer software product, as follows:
Amount (Rs.)
Completion of detailed programme and design 25,000
Coding and Testing 20,000
Other coding costs 42,000
Testing costs 12,000
Product masters for training materials 13,000
Duplication of computer software and training materials, from 40,000
product masters (2,000 units)
Packing the product (1,000 units) 11,000
What amount should be capitalized as software costs in the books of the company, on Balance
Sheet date?
Solution
As per para 44 of AS 26, costs incurred in creating a computer software product should be charged
to research and development expense when incurred until technological feasibility/asset recognition
criteria has been established for the product. Technological feasibility/asset recognition criteria
have been established upon completion of detailed programme design or working model. In this case,
Rs. 45,000 would be recorded as an expense (Rs. 25,000 for completion of detailed program design
and Rs. 20,000 for coding and testing to establish technological feasibility/asset recognition
criteria). Cost incurred from the point of technological feasibility/asset recognition criteria until the
time when products costs are incurred are capitalized as software cost (Rs. 42,000 + Rs. 12,000 + Rs.
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13,000) Rs. 67,000.

26.20 A company acquired for its internal use a software costing Rs. 10 lakhs∗ on 28.01.2012
from the USA for US $ 1,00,000. The exchange rate on that date was Rs. 52 per
USD. The seller allowed trade discount @ 5 %. The other expenditure were:
(i) Import Duty : 20%
(ii) Purchase Tax : 10%
(iii) Entry Tax : 5 % (Recoverable later from tax department)
(iv) Installation expenses : Rs. 25,000
(v) Profession fees for Clearance from Customs : Rs. 20,000
Compute the cost of Software to be capitalized.
Calculation of cost of software (intangible asset) acquired for internal use
Purchase cost of the software $ 1,00,000
Less: Trade discount @ 5% ($ 5,000)
$ 95,000
Cost in Rs. (US $ 95,000 x Rs. 52) 49,40,000
Add: Import duty on cost @ 20% (Rs.) 9,88,000
59,28,000
Purchase tax @ 10% (Rs.) 5,92,800
Installation expenses (Rs.) 25,000
Profession fee for clearance from customs (Rs.) 20,000
Cost of the software to be capitalised (Rs.) 65,65,800
26.21 On 1.4.2017, X Ltd. acquired patent rights for Rs.50 lakhs. Down payment of 20% was
made and balance is to be paid in 5 equal annual installments. Incremental borrowing rate
of X Ltd. is 11%. Find cost of acquisition as per Ind AS 38
Answer
Year Cash Flow PVF @ 11% PV
0 10 1 10
1 8 0.9009 7.21
2 8 0.8116 6.49
3 8 0.7312 5.85
4 8 0.6587 5.27
5 8 0.5935 4.75
39.57

Statement of Cost and Liability

Year Interest Repayment Closing liability
0 10 29.57
1 3.25 8 24.82
2 2.73 8 19.55
3 2.15 8 13.70
4 1.51 8 7.21
5 0.79 8 0

Cost of an Internally Generated Intangible Asset

The cost of an internally generated intangible asset comprises all expenditure that can be directly
attributed, or allocated on a reasonable and consistent basis, to creating, producing and making the
asset ready for its intended use. The cost includes, if applicable:
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a. expenditure on materials and services used or consumed in generating the intangible asset;
b. the salaries, wages and other employment related costs of personnel directly engaged in
generating the asset;
c. any expenditure that is directly attributable to generating the asset, such as fees to register a
legal right and the amortization of patents and licenses that are used to generate the asset; and
d. overheads that are necessary to generate the asset and that can be allocated on a reasonable and
consistent basis to the asset (for example, an allocation of the depreciation of fixed assets,
insurance premium and rent). Allocations of overheads are made on bases similar to those used in
allocating overheads to inventories (see AS 2, Valuation of Inventories). AS 16, Borrowing Costs,
establishes criteria for the recognition of interest as a component of the cost of a qualifying asset.
These criteria are also applied for the recognition of interest as a component of the cost of an
internally generated intangible asset.

The following are not components of the cost of an internally generated intangible asset:
a. selling, administrative and other general overhead expenditure unless this expenditure can be directly
attributed to making the asset ready for use;
b. clearly identified inefficiencies and initial operating losses incurred before an asset achieves planned
performance; and
c. expenditure on training the staff to operate the asset.

26.22 A company has earmarked 30% of its advertisement and sales promotion expenses
towards brand value, every year. Auditors objected to the act. Comment
A. Internally generated brands, publishing titles, customer lists and similar items cannot be
recognized as intangible assets. Auditor is right. Charge them to revenue.
26.23 A BPO company spends Rs 30000.00 per employee as induction training cost and
recognizes it as an intangible asset, amortized over 4 years. The company faces 40 %
attrition on an average, out of which 50 % or more are employees served less than one
year. Comment.
A. Control over the resources is not with the company as employees can leave the company. So
Training costs are not expected to give future economic benefits to the company with certainty,
and are not eligible to be reckoned as intangible assets .They are required to be charged off
expenses in the year of incurrence as per paragraph 55-56 of AS 26.

Recognition of an Expense
Expenditure on an intangible item should be recognized as an expense when it is incurred unless:
a. it forms part of the cost of an intangible asset that meets the recognition criteria (see paragraphs
19-54); or
b. the item is acquired in an amalgamation in the nature of purchase and cannot be recognized as an
intangible asset. If this is the case, this expenditure (included in the cost of acquisition) should form
part of the amount attributed to goodwill (capital reserve) at the date of acquisition (see AS 14,
Accounting for Amalgamations).

26.24 A software company has developed dedicated software for the US financial sector , the
cost of which has been capitalized. Auditors have challenged the rationale behind
capitalization , pointing out that the ongoing market situation suggests unlikely economic
benefits from the product in near future. Comment
A. AS 26 requires the entity to assess the probability of future economic benefits using

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reasonable and supportable assumptions that represent best estimate of the economic conditions,
that will exist over the useful life of the asset.
In view of the market condition auditors have a case , a subjective matter
26.25 Government has granted exploration licenses to H ltd for which a nominal licensee fee of
Rs 10.00 lakh was charged . Should this be recognized as an intangible asset. Suppose
there would have been no fees charged what would have been the difference.
A. Cost incurred towards acquisition of an intangible asset or in case it is granted by
government as a free license, actual cost or a nominal amount , as may be appropriate, has to be
recognized towards intangible asset.
However in the given case the license is only for exploration. Unless the future economic benefit
attributable to this asset is likely to flow to H LTD , it cannot recognize it as an intangible asset
26.26 On 1.4.2017, X Ltd. acquired mining rights from government for Rs.10 crore having
fair value of Rs.100 crore. How should it be accounted for as per Ind AS 38?
Answer
As per Ind AS 38, intangible asset acquired from government has to be recorded at fair value of
Rs.100 crore. Difference to be transferred to Government grant account being of the nature of
capital reserve.

Past Expenses not to be Recognized as an Asset

Expenditure on an intangible item that was initially recognized as an expense by a reporting
enterprise in previous annual financial statements or interim financial reports should not be
recognized as part of the cost of an intangible asset at a later date.

26.27 During the quarter ended 30th sep 2007, X Ltd recognized Rs 2.00 crores towards R&D
expenses as expenses although it was realized that it belonged to a new product line
ready for commercial launch soon and was to be treated as intangible asset. Company
reversed the expenses and capitalized the expenses. Comment.
A. As per paragraph 58 of AS 26 such reversal are not possible.
However according to A S 5 prior period items can be reported suitably in the subsequent
reporting period

Subsequent Expenditure
Subsequent expenditure on an intangible asset after its purchase or its completion should be
recognized as an expense when it is incurred unless:
a. it is probable that the expenditure will enable the asset to generate future economic
benefits in excess of its originally assessed standard of performance; and
b. the expenditure can be measured and attributed to the asset reliably.
If these conditions are met, the subsequent expenditure should be added to the cost of the
intangible asset.
After initial recognition, an intangible asset should be carried at its cost less any accumulated
amortization and any accumulated impairment losses.
26.28 Software was bought in 2007 and was capitalized. In 2008 certain in-house modifications
were made to the software through a special project, the cost of which is proposed to be
added to the intangible asset’s value. Comment
A. General principle is that the subsequent expenses are not to be capitalized.
There are exceptions. When additional expenses have enhanced the future economic benefits and
such cost is reliably measured, capitalization is allowed

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Subsequent After initial recognition: An entity should choose either the cost model or the
Measurement revaluation model as its accounting policy
as per Ind Cost model
AS 38 • It is carried at its cost less any accumulated amortization and any
accumulated impairment losses
Revaluation model
• It is carried at a revalued amount, being fair value at revaluation date
(less subsequent accumulated amortization and accumulated impairment
losses)
• Fair value should be measured by reference to an active market
• When there is no active market, use cost model

Amortization Period
The depreciable amount of an intangible asset should be allocated on a systematic basis over the best
estimate of its useful life. There is a rebuttable presumption that the useful life of an intangible
asset will not exceed ten years from the date when the asset is available for use.
Amortization should commence when the asset is available for use.
If control over the future economic benefits from an intangible asset is achieved through legal rights
that have been granted for a finite period, the useful life of the intangible asset should not exceed
the period of the legal rights unless:
a. the legal rights are renewable; and
b. renewal is virtually certain.
26.29 A ltd., having turnover in excess of Rs.100 crores got territorial rights to use a Brand
for 20 years. A Ltd., paid upfront Rs. 10 crores as non-refundable deposit. If pre-
mature termination takes place from either party, than balance amount would be
refunded considering Rs.50 lakhs p.a. as usage fees. A Ltd. is unsure as to whether
Territorial rights would give rise to intangible asset and if so, what should be the
amortization period, 10 or 20 years?
A. Territorial rights are akin to marketing rights. By definition an intangible asset is an identifiable
non-monetary asset, without physical substance, held for use in the production or supply of goods
or services, for rental to others or for administrative purposes. Further, AS 26 also mentions
that an intangible asset should be recognized if, and only if.
(a) it is probable that the future economic benefits that are attributable to the asset will flow to
the enterprise and
(b) the cost of the asset can be measured reliably.
From above, it emerges that territorial rights are identifiable, the enterprise through
agreement has control over it, future economic benefits will arise from exploitation of those
rights and there is a specific cost attached to those rights. Since Territorial rights meet the
definition and recognition criteria, the same will be considered as an Intangible asset.
The second and important question is whether amortization period should be 10 or 20 years.
Since there is persuasive evidence that the intangible asset is available for use for 20 years and
that economic benefits are expected to flow from use of such asset, A Ltd.
can amortize the territorial rights over a period of 20 years in preference to 10 years as
stipulated in the bench mark treatment by AS.
However, A Ltd. is well advised to carryout out the impairment test on an annual basis in respect
of such intangible asset.

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Amortization Method
The amortization method used should reflect the pattern in which the asset's economic benefits are
consumed by the enterprise. If that pattern cannot be determined reliably, the straight-line
method should be used. The amortization charge for each period should be recognized as an expense
unless another Accounting Standard permits or requires it to be included in the carrying amount of
another asset.
26.29 A company decides to amortize the cost of its licensee rights for movie distribution as
8:1:1:5:1:1:2 over 7 year period with the reasoning that it expects to reap good
revenues after every two year break, with a renewed launch of the movie in the market
.Comments
A. The method of amortization shall reflect the pattern in which economic benefits are
accrued to the company . If there are empirical evidences to the claim of the company from past,
the method can be accepted. Otherwise straight line method may be used.
26.30 Swift Ltd. acquired a patent at a cost of Rs. 80,00,000 for a period of 5 years and
the product life-cycle is also 5 years. The company capitalized the cost and started
amortizing the asset at Rs. 10,00,000 per annum. After two years it was found that
the product life-cycle may continue for another 5 years from then. The net cash flows
from the product during these 5 years were expected to be Rs. 36,00,000, Rs.
46,00,000, Rs. 44,00,000, Rs. 40,00,000 and Rs. 34,00,000. Find out the
amortization cost of the patent for each of the years.
Solution
Swift Limited amortised Rs. 10,00,000 per annum for the first two years i.e. Rs. 20,00,000. The
remaining carrying cost can be amortized during next 5 years on the basis of net cash flows arising
from the sale of the product. The amortisation may be found as follows:
Year Net cash flows Amortization Ratio Amortization
Rs. Amount
Rs.
I - 0.125 10,00,000*
II - 0.125 10,00,000
III 36,00,000 0.180 10,80,000
IV 46,00,000 0.230 13,80,000
V 44,00,000 0.220 13,20,000
VI 40,00,000 0.200 12,00,000
VII 34,00,000 0.170 10,20,000
Total 2,00,00,000 1.000 80,00,000
It may be seen from above that from third year onwards, the balance of carrying amount i.e., Rs.
60,00,000 has been amortized in the ratio of net cash flows arising from the product of Swift Ltd.
*It has been assumed that the company had amortized the patent at Rs. 10,00,000 per annum in the
first two years on the basis of economic benefits derived from the product manufactured under the
patent.
Note: The answer has been given on the basis that the patent is renewable and Swift Ltd. got it
renewed after expiry of five years.

Residual Value
The residual value of an intangible asset should be assumed to be zero unless:
a. there is a commitment by a third party to purchase the asset at the end of its useful life; or
b. there is an active market for the asset and:

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i. residual value can be determined by reference to that market; and

ii. it is probable that such a market will exist at the end of the asset's useful life.

Review of Amortization Period and Amortization Method

The amortization period and the amortization method should be reviewed at least at each financial
year end. If the expected useful life of the asset is significantly different from previous estimates,
the amortization period should be changed accordingly. If there has been a significant change in the
expected pattern of economic benefits from the asset, the amortization method should be changed
to reflect the changed pattern. Such changes should be accounted for in accordance with AS 5, Net
Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.
In addition to the requirements of Accounting Standard on Impairment of Assets, an enterprise
should estimate the recoverable amount of the following intangible assets at least at each financial
year end even if there is no indication that the asset is impaired:
a. an intangible asset that is not yet available for use; and
b. an intangible asset that is amortized over a period exceeding ten years from the date when the
asset is available for use.
The recoverable amount should be determined under Accounting Standard on Impairment of Assets
and impairment losses recognized accordingly.

Retirements and Disposals

An intangible asset should be derecognized (eliminated from the balance sheet) on disposal or when
no future economic benefits are expected from its use and subsequent disposal.
Gains or losses arising from the retirement or disposal of an intangible asset should be determined as
the difference between the net disposal proceeds and the carrying amount of the asset and should
be recognized as income or expense in the statement of profit and loss.

26.31 A patent right was acquired for 15 year period. The patent is renewable for another 5
years subject to revised terms to be agreed up on at the time of such renewal.
Company wants to amortize it over 20 years.
A. 10 year period of useful life stipulated in AS 26 is rebutted by evidences in the form of legal
agreement which provides the useful life as 15 years.
Only if the contract is virtually certain to be renewed by virtue of renewal clause, a longer than
legal period as useful life period is permitted ( Para 69) . Here virtual certainty is not established
and hence amortize over 15 years

Ind AS 38
Useful life • An entity should assess whether the useful life of an intangible asset is
finite or indefinite
• If finite: Amortize
• If indefinite: Do not amortize
When finite Amortization period and amortization method
useful life • The depreciable amount of an intangible asset should be allocated on a
systematic basis over its useful life
• Amortization begins when the asset is available for use
• Amortization ceases at the earlier of the date that the asset is classified
as held for sale (Ind AS 105) and the date that the asset is derecognized
• The amortization method used should reflect the pattern of future
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economic benefits expected to be consumed

Residual value
It should be assumed to be zero unless
(a) There is a commitment by the third party to purchase the asset at
the end of the useful life
(b) There is an active market for the asset
a. Residual value can be determined by reference to that market and
b. It is probable that such market will exist at the end of the assets
useful life
Review of amortization period and amortization method
The amortization period and method should be reviewed at least at each financial
year end
Indefinite • Not amortized
useful life • Test for impairment annually or when indication
• If no longer indefinite then change from indefinite to finite
• Account for the change in accounting estimate

Disclosure
The financial statements should disclose the following for each class of intangible assets,
distinguishing between internally generated intangible assets and other intangible assets:
a. the useful lives or the amortization rates used;
b. the amortization methods used;
c. the gross carrying amount and the accumulated amortization (aggregated with accumulated
impairment losses) at the beginning and end of the period;
d. a reconciliation of the carrying amount at the beginning and end of the period showing:
i. additions, indicating separately those from internal development and through amalgamation;
ii. retirements and disposals;
iii. impairment losses recognized in the statement of profit and loss during the period (if any);
iv. impairment losses reversed in the statement of profit and loss during the period (if any);
v. amortization recognized during the period; and
vi. other changes in the carrying amount during the period.
The financial statements should also disclose:
a. if an intangible asset is amortized over more than ten years, the reasons why it is presumed
that the useful life of an intangible asset will exceed ten years from the date when the asset is
available for use. In giving these reasons, the enterprise should describe the factor(s) that played a
significant role in determining the useful life of the asset;
b. a description, the carrying amount and remaining amortization period of any individual intangible
asset that is material to the financial statements of the enterprise as a whole;
c. the existence and carrying amounts of intangible assets whose title is restricted and the carrying
amounts of intangible assets pledged as security for liabilities; and
d. the amount of commitments for the acquisition of intangible assets.
The financial statements should disclose the aggregate amount of research and development
expenditure recognized as an expense during the period.

26.32 For the first year in Financial Statements, when figures for intangible assets are given,
are comparative figures required to be given for previous year?
A. AS does not make reference to disclosure of corresponding previous year figures in respect of
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intangible assets reporting in the first year of application of AS 26. Hence corresponding previous
year figures need not be disclosed in the first year of application of AS.
26.33 w.e.f. 01-04-2003, whether preliminary expenses such as filing fees with ROC, stamp
duty, printing of M/A & A/A, etc can be considered as miscellaneous expenditure (to
the extent not written off) on Asset side of balance-sheet to be written off over say
five years?
A. With AS 26 becoming effective from 1-4-2003, (for listed companies and companies having
annual turnover in excess of Rs.50 crores) preliminary expenses incurred in establishing legal
entity such as legal and secretarial costs shall be required to be written off in the year of
occurrence, irrespective of the fact that such expenses are having a separate treatment under
Income Tax Act, 1961.
26.34 NDA Corporation is engaged in research on a new process design for its product. It had
incurred an expenditure of Rs. 530 lakhs on research upto 31st March, 09.
The development of the process began on 1st April, 09 and Development phase expenditure
was Rs. 360 lakhs upto 31st March, 10 which meets assets recognition criteria.
From 1st April, 10, the company will implement the new process design which will result in
after tax saving of Rs. 80 lakhs per annum for the next five years.
The cost of capital of company is 10%.
Explain:
(1) Accounting treatment for research expenses.
(2) The cost of internally generated intangible asset as per AS 26.
(3) The amount of amortization of the assets. (The present value of annuity factor of Rs.1
for 5 years @ 10% = 3.7908)
(i) Research Expenditure - According to para 41 of AS 26 ‘Intangible Assets’, the expenditure on
research of new process design for its product Rs. 530 lakhs should be charged to Profit and Loss
Account in the year in which it is incurred. It is presumed that the entire expenditure is incurred in
the financial year 2008-09. Hence, it should be written off as an expense in that year itself.
(ii) Cost of internally generated intangible asset - The question states that the 80 lakhs
development phase expenditure amounting Rs. 360 lakhs incurred upto 31st March, p.a.
2010 meets asset recognition criteria. As per AS 26 for measurement of such
internally generated intangible asset, fair value can be estimated by discounting
estimated future net cash flows. Savings (after tax) from implementation of new
design for next 5 years
Company’s cost of capital 10 %
Annuity factor @ 10% for 5 years 3.7908
Present value of net cash flows (Rs. 80 lakhs x 3.7908) 303.26
lakhs

Transitional Provisions
Where, on the date of this Statement coming into effect, an enterprise is following an accounting
policy of not amortizing an intangible item or amortizing an intangible item over a period longer than
the period determined under paragraph 63 of this Statement and the period determined under
paragraph 63 has expired on the date of this Statement coming into effect, the carrying amount
appearing in the balance sheet in respect of that item should be eliminated with a
corresponding adjustment to the opening balance of revenue reserves.
In the event the period determined under paragraph 63 has not expired on the date of this
Statement coming into effect and:

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a. if the enterprise is following an accounting policy of not amortizing an intangible item, the
carrying amount of the intangible item should be restated, as if the accumulated amortization
had always been determined under this Statement, with the corresponding adjustment to the
opening balance of revenue reserves. The restated carrying amount should be amortized over
the balance of the period as determined in paragraph 63.
b. if the remaining period as per the accounting policy followed by the enterprise:
i. is shorter as compared to the balance of the period determined under paragraph 63, the
carrying amount of the intangible item should be amortized over the remaining period as
per the accounting policy followed by the enterprise,
ii. is longer as compared to the balance of the period determined under paragraph 63, the
carrying amount of the intangible item should be restated, as if the accumulated
amortization had always been determined under this Statement, with the corresponding
adjustment to the opening balance of revenue reserves. The restated carrying amount
should be amortized over the balance of the period as determined in paragraph
Example 1 - Intangible Item was not amortized and the amortization period determined under
paragraph 63 has expired.
An intangible item is appearing in the balance sheet of A Ltd. at Rs. 10 lakhs as on 1-4-2003. The item
was acquired for Rs. 10 lakhs on April 1, 1990 and was available for use from that date. The
enterprise has been following an accounting policy of not amortizing the item. Applying paragraph 63,
the enterprise determines that the item would have been amortized over a period of 10 years from
the date when the item was available for use i.e., April 1, 1990.
Since the amortization period determined has already expired as on 1-4-2003, the carrying
amount of the intangible item of Rs. 10 lakhs would be required to be eliminated with a
corresponding adjustment to the opening balance of revenue reserves as on 1-4-2003.
Example 2 - Intangible Item is being amortized and the amortization period determined under
paragraph 63 has expired.
An intangible item is appearing in the balance sheet of A Ltd. at Rs. 8 lakhs as on 1-4-2003. The item
was acquired for Rs. 20 lakhs on April 1, 1991 and was available for use from that date. The
enterprise has been following a policy of amortizing the item over a period of 20 years on straight-
line basis. Applying paragraph 63, the enterprise determines that the item would have been
amortized over a period of 10 years from the date when the item was available for use i.e., April 1,
1991.
Since the amortization period determined by applying paragraph 63 has already expired as on
1-4-2003, the carrying amount of Rs. 8 lakhs would be required to be eliminated with a
corresponding adjustment to the opening balance of revenue reserves as on 1-4-2003.
Example 3 - Amortization period determined under paragraph 63 has not expired and the
remaining amortization period as per the accounting policy followed by the enterprise is shorter.
An intangible item is appearing in the balance sheet of A Ltd. at Rs. 8 lakhs as on 1-4-2003. The item
was acquired for Rs. 20 lakhs on April 1, 2000 and was available for use from that date. The
enterprise has been following a policy of amortizing the intangible item over a period of 5 years on
straight line basis. Applying paragraph 63, the enterprise determines the amortization period to be 8
years, being the best estimate of its useful life, from the date when the item was available for use
i.e., April 1, 2000.
On 1-4-2003, the remaining period of amortization is 2 years as per the accounting policy
followed by the enterprise which is shorter as compared to the balance of amortization period
determined by applying paragraph 63, i.e., 5 years. Accordingly, the enterprise would be
required to amortize the intangible item over the remaining 2 years as per the accounting policy
followed by the enterprise.
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Example 4 - Amortization period determined under paragraph 63 has not expired and the
remaining amortization period as per the accounting policy followed by the enterprise is longer.
An intangible item is appearing in the balance sheet of A Ltd. at Rs. 18 lakhs as on 1-4-2003. The item
was acquired for Rs. 24 lakhs on April 1, 2000 and was available for use from that date. The
enterprise has been following a policy of amortizing the intangible item over a period of 12 years on
straight-line basis. Applying paragraph 63, the enterprise determines that the item would have been
amortized over a period of 10 years on straight line basis from the date when the item was available
for use i.e., April 1, 2000.
On 1-4-2003, the remaining period of amortization is 9 years as per the accounting policy
followed by the enterprise which is longer as compared to the balance of period stipulated in
paragraph 63, i.e., 7 years. Accordingly, the enterprise would be required to restate the
carrying amount of intangible item on 1-4-2003 at Rs. 16.8 lakhs (Rs. 24 lakhs - 3xRs. 2.4
lakhs, i.e., amortization that would have been charged as per the Standard) and the difference
of Rs. 1.2 lakhs (Rs. 18 lakhs-Rs. 16.8 lakhs) would be required to be adjusted against the
opening balance of the revenue reserves. The carrying amount of Rs. 16.8 lakhs would be
amortized over 7 years which is the balance of the amortization period as per paragraph 63.
Example 5 - Intangible Item is not amortized and amortization period determined under
paragraph 63 has not expired.
An intangible item is appearing in the balance sheet of A Ltd. at Rs. 20 lakhs as on 1-4-2003. The
item was acquired for Rs. 20 lakhs on April 1, 2000 and was available for use from that date. The
enterprise has been following an accounting policy of not amortizing the item. Applying paragraph 63,
the enterprise determines that the item would have been amortized over a period of 10 years on
straight line basis from the date when the item was available for use i.e., April 1, 2000.
On 1-4-2003, the enterprise would be required to restate the carrying amount of intangible
item at Rs. 14 lakhs (Rs. 20 lakhs - 3xRs. 2 lakhs, i.e., amortization that would have been
charged as per the Standard) and the difference of Rs. 6 lakhs (Rs. 20 lakhs-Rs. 14 lakhs)
would be required to be adjusted against the opening balance of the revenue reserves. The
carrying amount of Rs. 14 lakhs would be amortized over 7 years which is the balance of the
amortization period as per paragraph 63.

26.35 From the following information determine the possible value of brand under the potential
earning model:
(a) Profit before tax 13.00
(b) Income tax 3.00
(c) Tangible Fixed Asset 20.00
(d) Identifiable Intangible other than brand model 10.00
(e) Expected return on tangible fixed assets 6.00
Appropriate capitalization factor for intangibles is 25%.
Calculation of possible value of brand under potential earning model
Profit after tax (13 – 3) 10.00
Less: Profit allocated to tangible fixed assets (6.00)
Profit relating to intangible assets including brand 4.00
Capitalisation factor 25%
Capitalised value of intangibles including brand (x 100) 4.0025 16.00
Less: Identifiable intangibles other than brand (10.00)
Brand value 6.0

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26.36 X Ltd is engaged in the business of newspaper and radio broadcasting. It operates
through different brand names. During FY 12-13 it incurred substantial amounts on
external trade, business communication and branding expenses by participation in various
corporate social responsibility initiatives. The company expects to receive benefits by
this expenditure by attracting new customers over a period of time and accordingly it has
capitalized the same under brand development expenses and intends to amortize the same
over the period in which it expects the benefits to flow. Comment on this in line with the
relevant Accounting Standard.
As per AS 26 on Intangible Assets, Expenditure on an intangible item should be recognized as an
expense when it is incurred unless it forms part of the cost of an intangible asset that meets the
recognition criteria. In the given case, it incurred substantial amounts on external trade, business
communication and branding expenses by participation in various corporate social responsibility
initiatives. The company expects to receive benefits by this expenditure by attracting new customers
over a period of time and accordingly it has capitalized the same under brand development expenses.
Here, no intangible assets or other asset is acquired or created that can be recognized. Therefore,
the accounting treatment by the company to amortize the entire expenditure over the period in
which it expects the benefits to flow is not correct and the same should be debited to the profit &
loss account.

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Accounting Standard - 28
IMPAIRMENT OF ASSETS

What is the objective of AS – 28 ?

The objective of this Statement is to prescribe the procedures that an enterprise applies to ensure
that its assets are carried at no more than their recoverable amount. An asset is carried at more
than its recoverable amount if its carrying amount exceeds the amount to be recovered through use
or sale of the asset. If this is the case, the asset is described as impaired and this Statement
requires the enterprise to recognize an impairment loss. This Statement also specifies when an
enterprise should reverse an impairment loss and it prescribes certain disclosures for impaired
assets.

What are the assets on which AS 28 is applicable?

This Statement should be applied in accounting for the impairment of all assets, other than:

a. inventories (see AS 2, Valuation of Inventories);

b. assets arising from construction contracts (see AS 7, Accounting for Construction Contracts);

c. financial assets, including investments that are included in the scope of AS 13, Accounting for
Investments; and

d. deferred tax assets (see AS 22, Accounting for Taxes on Income).

Meaning of Impairment: Weakening in value of Assets

As per AS – 28, asset is said to be impaired when carrying amount of asset is more than its
recoverable amount.

What is Carrying Amount?

The amount at which asset is shown in Balance Sheet (i.e. cost less depreciation or amortization as
the case may be).

What is Recoverable Amount?

It is the higher of the following
• Net Selling Price
• Value in use.

What is Net Selling Price?

It is the amount obtainable from

the sale of an asset less cost of disposal.

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What is Value in use?

Value in use of an asset is present value of

Estimated future cash flow arising from use of asset, plus

Residual price (scrap value) at end of its useful life.

Fair Value less

Sales Cost
Recoverable
Amount
Higher of
Present Value of Assets
Value in use
future cash flows

How are future cash flows determined?

Para 26
In measuring value in use:
a. cash flow projections should be based on reasonable and supportable assumptions that represent
management’s best estimate of the set of economic conditions that will exist over the remaining
useful life of the asset. Greater weight should be given to external evidence;

b. cash flow projections should be based on the most recent financial budgets/forecasts that have
been approved by management. Projections based on these budgets/forecasts should cover a
maximum period of five years, unless a longer period can be justified; and
c. cash flow projections beyond the period covered by the most recent budgets/forecasts should be
estimated by extrapolating the projections based on the budgets/forecasts using a steady or
declining growth rate for subsequent years, unless an increasing rate can be justified. This growth
rate should not exceed the long-term average growth rate for the products, industries, or country or
countries in which the enterprise operates, or for the market in which the asset is used, unless a
higher rate can be justified.
Estimates of future cash flows should include:

projections of cash inflows of cash outflows that are necessarily net cash flows, if any, to be
from the continuing use of incurred to generate the cash inflows received (or paid) for the
the asset from continuing use of the asset disposal of the asset at the
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(including cash outflows to prepare end of its useful life

the asset for use) and that can be
directly attributed, or allocated on a
reasonable and consistent basis, to
the asset

Future cash flows should be estimated for the asset in its current condition.

Estimates of future cash flows should not include estimated future cash inflows or outflows
that are expected to arise from:

future restructuring to which an

enterprise is not yet committed future capital expenditure that will improve or
enhance the asset in excess of its originally
assessed standard of performance

What should be the applicable Discount Rate for ascertaining the present value of future cash
flows?
The discount rate should be a pre tax rate that reflects current market assessments of the time
value of money and the risks specific to the asset. The discount rate should not
reflect risks for which future cash flow estimates have been adjusted.

What is Impairment Loss?

If the recoverable amount of an asset is less
than its carrying amount, the carrying amount
of the asset should be reduced to its recoverable
Recoverabl
e Amount amount.
That reduction is an impairment loss.

Carrying Impairment loss = Carrying Amount minus

Amount is Recoverable Amount
less than
(If recoverable amount is more than carrying amount,
Impairment no impairment loss is accounted for, and the asset is
Loss if not impaired)

How is Impairment Loss recognized?

Recognition of Impairment Loss for an individual asset:
1. If asset is carried at historical cost – Impairment losses will be recognised only when recoverable
amount is less than the carrying amount. Amount of impairment loss will be debited to Profit and Loss
account.

2. If asset is carried at revalued amount – The amount of impairment loss is calculated in the same
way. However the recognition of impairment loss shall be as under:

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• Impairment loss equal to revaluation reserve balance (if any) shall be set off against such
reserve. And
• Impairment loss in excess of revaluation reserve shall be recognised as expense in Profit and
Loss account.
After the recognition of an impairment loss, the depreciation (amortisation) charge for the asset
should be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual
value (if any), on a systematic basis over its remaining useful life.

28.1 Ergo Industries Ltd. gives the following estimates of cash flows relating to fixed asset on
31-12-2010. The discount is 15%.
Year Cash Flow (Rs. In lakhs)
2011 4000
2012 6000
2013 6000
2014 8000
2015 4000
Residual value at the end of 2015 = Rs. 1000 lakhs
Fixed Asset purchased on 1-1-2008 = Rs. 40,000 lakhs
Useful life = 8 years
Net selling price on 31-12-2010 = Rs. 20,000 lakhs
Calculate on 31-12-2010:
(a) Carrying amount at the end of 2010
(b) Value in use on 31-12-2010
(c) Recoverable amount on 31-12-2010
(d) Impairment loss to be recognized for the year ended 31-12-2010
(e) Revised carrying amount
(f) Depreciation charge for 2011
Solution
Calculation of value in use
Year Cash Flow Discount as per Discounted cash
15% flow
2011 4000 0.870 3480
2012 6000 0.756 4536
2013 6000 0.658 3948
2014 8000 0.572 4576
2015 4000 0.497 1988
2015 1000 0.497 497
Value in use = Rs. 19025 lakhs
Calculation of carrying amount:
Net Selling Price = Rs. 20,000 lakhs
Depreciation for 3 years = [(40,000-1000)*3/8] = Rs. 14,625
Carrying amount on 31-12-2010 = [40,000-14,625] = Rs. 25,375
Recoverable amount = Rs. 20,000 lakhs
Impairment Loss = Rs. (25,375-20,000) = Rs. 5,375 lakhs
Revised carrying amount = Rs. (25,375-5,375) = Rs. 20,000 lakhs
Depreciation Charge for 2011 = (20,000-1000)/5 = Rs. 3,800
28.2 X Ltd. is having a plant (asset) carrying amount of which is Rs. 100 lakhs on 31.3.2004.
Its balance useful life is 5 years and residual value at the end of 5 years is Rs. 5 lakhs.
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Estimated future cash flow from using the plant in next 5 years are:-
For the year ended on Estimated cash flow (Rs. in lakhs)
31.3.2011 50
31.3.2012 30
31.3.2013 30
31.3.2014 20
31.3.2015 20
Calculate “value in use” for plant if the discount rate is 10% and also calculate the recoverable
amount if net selling price of plant on 31.3.2010 is Rs. 60 lakhs.
Solution
Present value of future cash flow
Year ended Future Cash Flow Discount @ 10% Rate Discounted cash flow
31.3.2011 50 0.909 45.45
31.3.2012 30 0.826 24.78
31.3.2013 30 0.751 22.53
31.3.2014 20 0.683 13.66
31.3.2015 20 0.620 12.40
118.82
Present value of residual price on 31.3.2015 = 5 * 0.620 3.10
Present value of estimated cash flow by use of an asset and residual 121.92
value, which is called “value in use”.
If net selling price of plant on 31.3.2010 is Rs. 60 lakhs, the recoverable amount will be higher of Rs.
121.92 lakhs (value in use) and Rs. 60 lakhs (net selling price), hence recoverable amount is Rs. 121.92
lakhs
28.3 From the following details of an asset
(i) Find out impairment loss
(ii) Treatment of impairment loss
(iii) Current year depreciation
Particulars of asset: Cost of Rs. 56 lakhs
asset
Useful life period 10 years
Salvage value Nil
Current carrying value Rs. 27.30 lakhs
Useful life remaining 3 years
Recoverable amount Rs. 12 lakhs
Upward revaluation done in last Rs. 14 lakhs
year

According to para 59 of AS 28 “Impairment of Assets”, an impairment loss on a revalued asset is

recognised as an expense in the statement of profit and loss. However, an impairment loss on a
revalued asset is recognised directly against any revaluation surplus for the asset to the extent that
the impairment loss does not exceed the amount held in the revaluation surplus for that same asset.
Impairment Loss and its treatment Rs.
Current carrying amount (including revaluation amount of Rs. 27,30,000
14 lakhs)
Less: Current recoverable amount (12,00,000)
Impairment Loss 15,30,000
CA. Sumit L. Sarda Impairment -28.5
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Less : Impairment loss charged to revaluation reserve (14,00,000)

Impairment loss charged to profit and loss account 1,30,000
(amortization) charge for the asset should be adjusted in future periods to allocate the asset’s
revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful
life.”
In the given case, the carrying amount of the asset will be reduced to Rs. 12,00,000 after impairment.
This amount is required to be depreciated over remaining useful life of 3 years (including current
year). Therefore, the depreciation for the current year will be Rs. 4,00,000.
28.4 An asset does not meet the requirements of environment laws which have been recently
enacted. The asset has to be destroyed as per the law. The asset is carried in the
Balance Sheet at the year end at Rs. 6,00,000. The estimated cost of destroying the
asset is Rs. 70,000. How is the asset to be accounted for?
As per AS 28 “Impairment of Assets”, impairment loss is the amount by which the carrying amount of
an asset exceeds its recoverable amount, where, recoverable amount is the higher of an asset’s net
selling price* and its value in use·. In the given case, recoverable amount will be nil [higher of value in
use (nil) and net selling price (Rs.70,000)]. Thus impairment loss will be calculated as Rs. 6,00,000
[carrying amount (Rs.6,00,000) – recoverable amount (nil)]. Therefore, asset is to be fully impaired
and impairment loss of Rs. 6,00,000 has to be recognized as an expense immediately in the statement
of Profit and Loss as per para 58 of AS 28.

28.5 A company operates a mine in a country where legislation requires that the owner must
restore the site on completion of its mining operations. The cost of restoration includes
the replacement of the overburden, which must be removed before mining operations
commence. A provision for the costs to replace the overburden was recognized as soon as
the overburden was removed. The amount provided was recognized as part of the cost of
the mine and is being depreciated over the mine's useful life. The carrying amount of the
provision for restoration costs is Rs. 50,00,000, which is equal to the present value of
the restoration costs.
The enterprise is testing the mine for impairment. The cash-generating unit for the mine
is the mine as a whole. The enterprise has received various offers to buy the mine at a
price of around Rs. 80,00,000; this price encompasses the fact that the buyer will take
over the obligation to restore the overburden. Disposal costs for the mine are negligible.
The value in use of the mine is approximately Rs. 1,20,00,000 excluding restoration
costs. The carrying amount of the mine is Rs. 1,00,00,000.
The net selling price for the cash-generating unit is Rs. 80,00,000. This amount considers restoration
costs that have already been provided for. As a consequence, the value in use for the cash generating
unit is determined after consideration of the restoration costs and is estimated to be Rs. 70,00,000
(Rs. 1,20,00,000 less Rs. 50,00,000). The carrying amount of the cash-generating unit is Rs.
50,00,000, which is the carrying amount of the mine (Rs. 1,00,00,000) less the carrying amount of the
provision for restoration costs (Rs. 50,00,000).
28.6 A Ltd. is the sole manufacturer of product X. A particular machine is exclusively used for
production of product X. The company had near monopoly of the product. A competitor
has recently come out with a cheaper substitute of product X. The company is
anticipating significant fall in demand for its product and cash flow from the machine
used in production of X is also expected to fall. As per the latest budget estimates,
taking the entry of the competitor in consideration, the operating pre-tax cash flows
from the machine expected over next 5 years are Rs. 9 lakh, Rs. 8 lakh, Rs. 6 lakh, Rs.
5.5 lakh and Rs. 5 lakh respectively. The expected life of the machine is 10 years.
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Declining growth rates for future cash flows are estimated from year 6 onwards at 10%,
20%, 30%, 40%, 60% respectively. The disposal value (net of expected cost of disposal)
realizable at the end of year 10 is Rs. 1 lakh.
The machine can be disposed off immediately for Rs. 25 lakh subject to payment of brokerage
2% on disposal value. The carrying amount of the machine on the current date is Rs. 35 lakh.
Taking the risk involved in the use of the machine for production of X in consideration, a pre-
tax rate of return of 10% seems to be appropriate.
Determine impairment loss if any and give the journal entries in the books of A Ltd.
As per paras 57 and 58 of AS 28 ‘Impairment of Assets’, if the recoverable amount of an asset is less
than its carrying amount, the carrying amount of the asset should be reduced to its recoverable
amount. That reduction is an impairment loss which should be recognized as an expense in the
statement of profit and loss immediately.
Impairment Loss
Net Selling Price = Disposal value – Brokerage
= Rs. 25 lakh – 2% of Rs. 25 lakh = Rs. 24.5 lakh
Value in use = Rs. 32.98 lakh (Refer Working Note)
Recoverable value = Rs. 32.98 lakh (Higher of value in use and net selling price)
Carrying amount = Rs. 35 lakh
Impairment loss = Rs. 35 lakh - Rs. 32.98 lakh = Rs. 2.02 lakh.
Journal Entries
Impairment Loss A/c Dr. 2.02
To Machine A/c 2.02
(Being impairment loss recognised)
Profit & Loss A/c Dr. 2.02
To Impairment Loss A/c 2.02
(Being impairment loss transferred to Profit
and Loss Account)
Working Note:
Calculation of Value in use
Year Growth rate Operating cash flow Disposal Cash flow DF (10%) Present
Rs. 000 value Rs. 000 Value
Rs. 000 Rs. 000
1 900 900 0.909 818.10
2 800 800 0.826 660.80
3 600 600 0.751 450.60
4 550 550 0.683 375.65
5 500 500 0.621 310.50
6 -10% 450 450 0.564 253.80
7 -20% 360 360 0.513 184.68
8 -30% 252 252 0.467 117.68
9 -40% 151.20 151.20 0.424 64.11
10 -60% 60.48 100 160.48 0.386 61.95
3,297.87
28.7 Ego Ltd., purchased a Fixed Asset four years back at a cost of Rs. 100 lakhs and
depreciates it on SLM basis at 10% per annum. At the end of this year, it has revalued
the asset at Rs. 50 lakhs and has written off the loss on revaluation to the Profit and
Loss Account. However, on the date of revaluation, the Market price is Rs. 45 lakhs and

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the expected disposal costs are Rs. 2 lakhs. What will be the treatment in respect of
Impairment Loss on the basis that fair value for revaluation purposes is determined by
market value and Value in Use is estimated at Rs. 40 lakhs?
Recognition of Loss on Revaluation:
Particulars Computation Rs. in lakhs
(1) Original Cost of the Asset Given 100.00
(2) Accumulated Depreciation for 100* 10% *4 years 40.00
four years
(3) Carrying amount before Net Book Value (1)-(2) 60.00
Revaluation
(4) Fair Value = Revalued amount Given 50.00
(5) Loss on Revaluation debited to Profit and Loss Account (3) – (4) 10.00
(6) Carrying amount after revaluation (3) – (5) [or] Fair Value (Market 50.00
Value)

Recognition of Impairment Loss:

(1) Net Selling Price = Market 43
Value – Disposal Costs = Rs. 45
lakhs – Rs. 2 lakhs
(2) Value in use 40
(3) Recoverable Amount = Net 43
Selling Price or Value in Use,
whichever is higher
(4) Carrying Amount after 50
revaluation
(5) Impairment Loss = Carrying 7
amount less Recoverable
Amount.
28.8 A plant was acquired 15 years ago at a cost of `5 crores. Its accumulated depreciation
as at 31st March, 20X1 was `4.15 crores. Depreciation estimated for the financial year
20X1-20X2 is `25 lakhs. Estimated Net Selling Price as on 31st March, 20X1 was `30
lakhs, which is expected to decline by 20 per cent by the end of the next financial year.
Its value in use has been computed at `35 lakhs as on 1st April, 20X1, which is expected to
decrease by 30 per cent by the end of the financial year.
(i) Assuming that other conditions for applicability of the impairment Accounting Standard are
satisfied, what should be the carrying amount of this plant as at 31st March, 20X2?
(ii) How much will be the amount of write off for the financial year ended 31st March, 20X2?
(iii) If the plant had been revalued ten years ago and the current revaluation reserves against
this plant were to be `12 lakhs, how would you answer to questions (i) and (ii) above?
(iv) If the value in use was zero and the enterprise were required to incur a cost of `2 lakhs to
dispose of the plant, what would be your response to questions (i) and (ii) above?
Solution
As per AS 28 “Impairment of Assets”, if the recoverable amount of an asset is less than its carrying
amount, the carrying amount of the asset should be reduced to its recoverable amount and that
reduction is an impairment loss. An impairment loss on a revalued asset is recognized as an expense in
the statement of profit and loss. However, an impairment loss on a revalued asset is recognised
directly against any revaluation surplus for the asset to the extent that the impairment loss does not
exceed the amount held in the revaluation surplus for that same asset.
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In the given case, recoverable amount (higher of asset’s net selling price and value in use) will be
`24.5 lakhs on 31.3.20X2 according to the provisions of AS 28 [Refer working note].
(`in lakhs)
st
(i) Carrying amount of plant (after impairment) as on 31 March, 20X2 24.5
(ii) Amount of write off (impairment loss) for the financial year ended
31st March, 20X2 [`60 lakhs – `24.5 lakhs] 35.5

(iii) If the plant had been revalued ten years ago

Debit to revaluation reserve 12.00
Amount charged to profit and loss account (`35.50 lakhs – `12 lakhs) 23.50

(iv) If Value in use is zero

Value in use (a) Nil
Net selling price (b) (2.00)
Recoverable amount [higher of (a) and (b)] Nil
Carrying amount (closing book value) Nil
Amount of write off (impairment loss) (`60 lakhs– Nil) 60.00
Entire book value of plant will be written off and charged to profit and
loss account.
Working Note:
Calculation of Closing Book Value, Estimated Net Selling Value and Estimated Value in Use of
Plant at 31st March, 20X2.
(`in lakhs)
Opening book value as on 1.4.20X1 (`500 lakhs – `415 lakhs) 85
Less: Depreciation for financial year 20X1–20X2 (25)
Closing book value as on 31.3.20X2 60
Estimated net selling price as on 1.4.20X1 30
Less: Estimated decrease during the year (20% of `30 lakhs) (6)
Estimated net selling price as on 31.3.20X2 24
Estimated value in use as on 1.4.20X1 35.0
Less: Estimated decrease during the year (30% of 35 lakhs) (10.5)
Estimated value in use as on 31.3.20X2 24.5
st
28.9 G Ltd., acquired a machine on 1 April, 20X0 for `7 crore that had an estimated useful
life of 7 years. The machine is depreciated on straight line basis and does not carry any
residual value. On 1st April, 20X4, the carrying value of the machine was reassessed at
`5.10 crore and the surplus arising out of the revaluation being credited to revaluation
reserve. For the year ended March 20X6, conditions indicating an impairment of the
machine existed and the amount recoverable ascertained to be only `79 lakhs. You are
required to calculate the loss on impairment of the machine and show how this loss is to
be treated in the books of G Ltd. G Ltd., had followed the policy of writing down the
revaluation surplus by the increased charge of depreciation resulting from the revaluation.
Solution
Statement Showing Impairment Loss (`in crores)
Carrying amount of the machine as on 1st April 20X0 7.00
Depreciation for 4 years i.e. 20X0-20X1 to 20X3-20X4
7 crores * 4yrs / 7yrs (4.00)
Carrying amount as on 31.03.20X4 3.00
Add: Upward Revaluation (credited to Revaluation Reserve account) 2.10

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Carrying amount of the machine as on 1st April 20X4 (revalued) 5.10

Less: Depreciation for 2 years i.e. 20X4-20X5& 20X5-20X6
5.10 crores × 2 years/ 3 years (3.40)
Carrying amount as on 31.03.20X6 1.70
Less: Recoverable amount (0.79)
Impairment loss 0.91
Less: Balance in revaluation reserve as on 31.03.20X6:
Balance in revaluation reserve as on 31.03.20X4 2.10
Less: Enhanced depreciation met from revaluation reserve
20X4-20X5& 20X5-20X6=[(1.70 –1.00) x 2 years] (1.40)
Impairment loss set off against revaluation reserve balance as per para 58
of AS 28 “Impairment of Assets” (0.70)
Impairment Loss to be debited to profit and loss account 0.21
28.10 X Ltd. purchased a fixed asset four years ago for `150 lakhs and depreciates it at 10%
p.a. on straight line method. At the end of the fourth year, it has revalued the asset at
`75 lakhs and has written off the loss on revaluation to the profit and loss account.
However, on the date of revaluation, the market price is `67.50 lakhs and expected
disposal costs are `3 lakhs. What will be the treatment in respect of impairment loss on
the basis that fair value for revaluation purpose is determined by market value and the
value in use is estimated at `60 lakhs?
Solution
Treatment of Impairment Loss
As per para 57 of AS 28 “Impairment of assets”, if the recoverable amount (higher of net selling
price and its value in use) of an asset is less than its carrying amount, the carrying amount of the
asset should be reduced to its recoverable amount. In the given case, net selling price is `64.50 lakhs
(`67.50 lakhs –`3 lakhs) and value in use is `60 lakhs. Therefore, recoverable amount will be `64.50
lakhs. Impairment loss will be calculated as `10.50 lakhs [`75 lakhs (Carrying Amount after
revaluation - Refer Working Note) less `64.50 lakhs (Recoverable Amount)].
Thus impairment loss of `10.50 lakhs should be recognised as an expense in the Statement of Profit
and Loss immediately since there was downward revaluation of asset which was already charged to
Statement of Profit and Loss.
Working Note:
Calculation of carrying amount of the fixed asset at the end of the fourth year on revaluation
(`in lakhs)
Purchase price of a fixed asset 150.00
Less: Depreciation for four years [(150 lakhs / 10 years) x 4 years] (60.00)
Carrying value at the end of fourth year 90.00
Less: Downward revaluation charged to profit and loss account (15.00)
Revalued carrying amount 75.00

How would you Identify an Asset that may be Impaired?

An enterprise should assess at each balance sheet date whether there is any
indication that an asset may be impaired. If any such indication exists, the enterprise
should estimate the recoverable amount of the asset.

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In assessing whether there is any indication that an asset may be impaired, an enterprise should
consider, as a minimum, the following indications:

External sources of information

a. during the period, an asset’s market value has declined significantly more than would be
expected as a result of the passage of time or normal use;
b. significant changes with an adverse effect on the enterprise have taken place during the
period, or will take place in the near future, in the technological, market, economic or legal
environment in which the enterprise operates or in the market to which an asset is dedicated;

c. market interest rates or other market rates of return on investments have increased during
the period, and those increases are likely to affect the discount rate used in calculating an
asset’s value in use and decrease the asset’s recoverable amount materially;
d. the carrying amount of the net assets of the reporting enterprise is more than its market
capitalization;

Internal sources of information

a. evidence is available of obsolescence or physical damage of an asset;
b. significant changes with an adverse effect on the enterprise have taken place during the
period, or are expected to take place in the near future, in the extent to which, or manner in
which, an asset is used or is expected to be used. These changes include plans to discontinue
or restructure the operation to which an asset belongs or to dispose of an asset before the
previously expected date; and
c. evidence is available from internal reporting that indicates that the economic performance of
an asset is, or will be, worse than expected.

Ind AS 36 on Impairment
When & what Annual - Intangible assets with an indefinite useful life
to test for IMPAIRMENT - Goodwill
Impairment? - Intangible assets not yet available for use
When There are - Indicators are assessed at the end of each
indicators of reporting period
IMPAIRMENT
Minimum External sources of i. Significant decline in market value
Indicators information ii. Change in technological, market, economic or legal
environment
iii. Change in interest rate
iv. Low market capitalization
Internal source of i. Evidence of obsolescence or physical damage
information ii. Discontinuance, disposal or restructuring plans
iii. Declining asset performance

Cash-Generating Units:
If there is any indication that an asset may be impaired, the recoverable amount should be estimated
for the individual asset.
CA. Sumit L. Sarda Impairment -28.11
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Cash Generating Unit Machine part of CGU

If it is not possible to estimate the recoverable amount of the individual asset, an enterprise should
determine the recoverable amount of the cash-generating unit to which the asset
belongs (the asset’s cash-generating unit).

The recoverable amount of an individual asset cannot be determined if:

a. the asset’s value in use cannot be estimated to be close to its net selling price (for
example, when the future cash flows from continuing use of the asset cannot be estimated to
be negligible); and
b. the asset does not generate cash inflows from continuing use that are largely
independent of those from other assets. In such cases, value in use and, therefore,
recoverable amount, can be determined only for the asset’s cash-generating unit.

28.11 A machine has suffered physical damage but is still working, although not as well as it
used to. The net selling price of the machine is less than its carrying amount. The
machine does not generate independent cash inflows from continuing use. The smallest
identifiable group of assets that includes the machine and generates cash inflows from
continuing use that are largely independent of the cash inflows from other assets is the
production line to which the machine belongs. The recoverable amount of the production
line shows that the production line taken as a whole is not impaired.
Assumption 1: Budgets/forecasts approved by management reflect no commitment of
management to replace the machine.
The recoverable amount of the machine alone cannot be estimated since the machine's value in use:
a. may differ from its net selling price; and
b. can be determined only for the cash-generating unit to which the machine belongs (the
production line).
The production line is not impaired, therefore, no impairment loss is recognised for the machine.
Nevertheless, the enterprise may need to reassess the depreciation period or the depreciation
method for the machine. Perhaps, a shorter depreciation period or a faster depreciation method is
required to reflect the expected remaining useful life of the machine or the pattern in which
economic benefits are consumed by the enterprise

Assumption 2: Budgets/forecasts approved by management reflect a commitment of management

to replace the machine and sell it in the near future. Cash flows from continuing use of the
machine until its disposal are estimated to be negligible.
The machine's value in use can be estimated to be close to its net selling price. Therefore, the
recoverable amount of the machine can be determined and no consideration is given to the
cashgenerating unit to which the machine belongs (the production line). Since the machine's net
selling price is less than its carrying amount, an impairment loss is recognised for the machine.
28.12 A significant raw material used for plant Y's final production is an intermediate product

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bought from plant X of the same enterprise. X's products are sold to Y at a transfer
price that passes all margins to X. 80% of Y's final production is sold to customers
outside of the reporting enterprise. 60% of X's final production is sold to Y and the
remaining 40% is sold to customers outside of the reporting enterprise.

For each of the following cases, what are the cash-generating units for X and Y?
Case 1: X could sell the products it sells to Y in an active market. Internal transfer prices
are higher than market prices.

Case 2: There is no active market for the products X sells to Y.

Solution

Case 1

X could sell its products on an active market and, so, generate cash inflows from continuing use
that would be largely independent of the cash inflows from Y. Therefore, it is likely that X is a
separate cash-generating unit, although part of its production is used by Y (see paragraph 68 of
this Statement).
It is likely that Y is also a separate cash-generating unit. Y sells 80% of its products to customers
outside of the reporting enterprise. Therefore, its cash inflows from continuing use can be
considered to be largely independent.
Internal transfer prices do not reflect market prices for X's output. Therefore, in determining
value in use of both X and Y, the enterprise adjusts financial budgets/forecasts to reflect
management's best estimate of future market prices for those of X's products that are used
internally (see paragraph 68 of this Statement).

Case 2

It is likely that the recoverable amount of each plant cannot be assessed independently from the
recoverable amount of the other plant because:

a. the majority of X's production is used internally and could not be sold in an active market.
So, cash inflows of X depend on demand for Y's products. Therefore, X cannot be
considered to generate cash inflows that are largely independent from those of Y; and

b. the two plants are managed together.

As a consequence, it is likely that X and Y together is the smallest group of assets that generates
cash inflows from continuing use that are largely independent.

28.13 Enterprise M produces a single product and owns plants A, B and C. Each plant is
located in a different continent. A produces a component that is assembled in either B
or C. The combined capacity of B and C is not fully utilised. M's products are sold
world-wide from either B or C. For example, B's production can be sold in C's
continent if the products can be delivered faster from B than from C. Utilisation levels
of B and C depend on the allocation of sales between the two sites.
For each of the following cases, what are the cash-generating units for A, B and C?
Case 1: There is an active market for A's products.

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Case 2: There is no active market for A's products.

Solution

Case 1
It is likely that A is a separate cash-generating unit because there is an active market for its
products (see Example B-Plant for an Intermediate Step in a Production Process, Case 1).
Although there is an active market for the products assembled by B and C, cash inflows for B and C
depend on the allocation of production across the two sites. It is unlikely that the future cash
inflows for B and C can be determined individually. Therefore, it is likely that B and C together is
the smallest identifiable group of assets that generates cash inflows from continuing use that are
largely independent.

In determining the value in use of A and B plus C, M adjusts financial budgets/forecasts to reflect
its best estimate of future market prices for A's products (see paragraph 68 of this Statement).

Case 2
It is likely that the recoverable amount of each plant cannot be assessed independently because:
a. there is no active market for A's products. Therefore, A's cash inflows depend on sales of
the final product by B and C; and
b. although there is an active market for the products assembled by B and C, cash inflows for
B and C depend on the allocation of production across the two sites. It is unlikely that the
future cash inflows for B and C can be determined individually.
As a consequence, it is likely that A, B and C together (i.e., M as a whole) is the smallest
identifiable group of assets that generates cash inflows from continuing use that are largely
independent.

28.14 A publisher owns 150 magazine titles of which 70 were purchased and 80 were self-
created. The price paid for a purchased magazine title is recognised as an intangible
asset. The costs of creating magazine titles and maintaining the existing titles are
recognised as an expense when incurred. Cash inflows from direct sales and advertising
are identifiable for each magazine title. Titles are managed by customer segments.
The level of advertising income for a magazine title depends on the range of titles in
the customer segment to which the magazine title relates. Management has a policy to
abandon old titles before the end of their economic lives and replace them immediately
with new titles for the same customer segment.

What is the cash-generating unit for an individual magazine title?

Solution

It is likely that the recoverable amount of an individual magazine title can be assessed. Even though
the level of advertising income for a title is influenced, to a certain extent, by the other titles in
the customer segment, cash inflows from direct sales and advertising are identifiable for each
title. In addition, although titles are managed by customer segments, decisions to abandon titles
are made on an individual title basis.
Therefore, it is likely that individual magazine titles generate cash inflows that are largely
independent one from another and that each magazine title is a separate cash-generating unit.

28.15 M is a manufacturing company. It owns a headquarter building that used to be fully

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occupied for internal use. After down-sizing, half of the building is now used internally
and half rented to third parties. The lease agreement with the tenant is for five
years.

What is the cash-generating unit of the building?

Solution

The primary purpose of the building is to serve as a corporate asset, supporting M's manufacturing
activities. Therefore, the building as a whole cannot be considered to generate cash inflows that
are largely independent of the cash inflows from the enterprise as a whole. So, it is likely that the
cash-generating unit for the building is M as a whole.

The building is not held as an investment. Therefore, it would not be appropriate to determine the
value in use of the building based on projections of future market related rents.
28.16 Good Drugs and Pharmaceuticals Ltd. acquired a sachet filling machine on 1st April, 20X1
for `60 lakhs. The machine was expected to have a productive life of 6 years. At the
end of financial year 20X1-20X2 the carrying amount was `41 lakhs. A short circuit
occurred in this financial year but luckily the machine did not get badly damaged and was
still in working order at the close of the financial year. The machine was expected to
fetch `36 lakhs, if sold in the market. The machine by itself is not capable of
generating cash flows. However, the smallest group of assets comprising of this machine
also, is capable of generating cash flows of `54 crore per annum and has a carrying
amount of `3.46 crore. All such machines put together could fetch a sum of `4.44 crore
if disposed. Discuss the applicability of Impairment loss.
Answer
As per provisions of Para 91(b) of AS 28 “Impairment of Assets”, impairment loss is not to be
recognized for a given asset if its cash generating unit (CGU) is not impaired. In the given question,
the related cash generating unit which is group of asset to which the damaged machine belongs is not
impaired; and the recoverable amount is more than the carrying amount of group of assets. Hence
there is no need to provide for impairment loss on the damaged sachet filling machine

Steps for measurement and recognition of impairment loss:

1. Identification of Cash Generating Unit to which the asset belongs.
2. Determine the Value in Use of the Cash Generating Unit.
3. Is goodwill as recognized in financial statement related to this Cash Generating Unit, if yes,
allocate the carrying amount of goodwill on reasonable basis to the Cash Generating Unit (Bottom-Up
Test).
4. Is corporate assets as recognized in financial statement related to this Cash Generating Unit, if
yes, allocate the carrying amount of corporate assets on reasonable basis to the Cash Generating
Unit (Bottom-Up Test).
5. Determine the net selling price of the Cash Generating Unit if possible.
6. Determine the recoverable amount of Cash Generating Unit, which is higher of step 2 and
step 5 above.
7. Determine the carrying amount of Cash Generating Unit, which is equal to – carrying amount of all
assets of Cash Generating Unit + allocated amount of goodwill (as per step 3) + allocated amount of
corporate assets (as per step 4)
8. Determine the Impairment loss, if step 7 is more than step 6 (Impairment loss = step 7 -
step 6)
9. Allocate the Impairment loss as calculated in step 8 to:
CA. Sumit L. Sarda Impairment -28.15
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• First to goodwill, allocated to the Cash Generating Unit.

• Then to other assets of the Cash Generating Unit including the corporate assets allocated, on
pro rata basis on carrying amount of assets.
• Ensure that after allocating Impairment loss, as above, the carrying amount of an asset of
Cash Generating Unit should not be reduced below the highest of:
a. Net selling price
b. Value in use
c. Zero.
10. If an amount of Impairment loss is left, unallocated as per step 9 due to constraints stated above
then such loss should be allocated on the remaining assets on pro-rata basis of their revised carrying
amount. This should be repeated till all the assets are brought down to the highest of:
a. Net selling price
b. Value in use
c. Zero.
11. If an amount of Impairment loss is left, unallocated as per step 10, an Impairment liability should
be created for the balance amount of Impairment loss if the other accounting standard requires so.

If goodwill and corporate assets related to Cash Generating Unit cannot be

allocated to Cash Generating Unit on a reasonable and consistent basis, then, both the test
i.e. Bottom-Up Test and
Top-Down Test, to be followed.

In such a situation following 3 possibilities are there:

Goodwill- not
Goodwill- allocable Goodwill- allocable
allocable
Corporate Assets- Corporate assets-
Corporate Assets-
not allocable not allocable
not allocable

1. Identification of Cash Generating Unit to which the asset belongs.

2. Determine the Value in Use of the Cash Generating Unit.
3. Determine the net selling price of the Cash Generating Unit if possible.
4. Determine the recoverable amount of Cash Generating Unit, which is higher of step 2 and step
3 above.
5. Carrying amount will be only of assets of Cash Generating Unit excluding goodwill and
corporate assets, as these are not allocable.
6. Determine the Impairment loss only for Cash Generating Unit, excluding goodwill and
corporate assets, if step 5 is more than step 4 (Impairment loss = step 5 - step 4) (Bottom-Up
Test).
7. Then allocate the loss over the assets of cash generating unit on pro rata basis on carrying
amount of assets. Ensure that after allocating Impairment loss, as above, the carrying amount
of an asset of Cash Generating Unit should not be reduced below the highest of:
a. Net selling price
b. Value in use
c. Zero.

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8. If an amount of Impairment loss is left, unallocated as per step 7 due to constraints stated
above then such loss should be allocated on the remaining assets on pro-rata basis of their
revised carrying amount. This should be repeated till all the assets are brought down to the
highest of:
a. Net selling price
b. Value in use
c. Zero.
9. If an amount of Impairment loss is left, unallocated as per step 8, an Impairment liability
should be created for the balance amount of Impairment loss if the other accounting standard
requires so.
10. Calculate the revised carrying amount after Bottom-Up Test, which is carrying amount at step
5 less Impairment loss as per step 6 to 9.
11. Since goodwill and corporate assets could not be allocated on a reasonable basis to Cash
Generating Unit, therefore a Top-Down test also to be performed in accordance with Para 78(b) of
the standard; Identify the smallest larger cash generating unit, which includes the Cash Generating
Unit under review and to which Goodwill and Corporate Assets can be allocated on reasonable and
consistent basis.
12. Now determine the carrying amount of Larger Cash Generating Unit, including goodwill and
corporate assets allocated.
13. Calculate recoverable amount of Larger Cash Generating Unit (i.e. higher of net selling price and
Value in use)
14. Calculate Impairment loss (i.e. Step 13 minus Step 12)
Allocate the Impairment loss first to goodwill then to corporate assets. Ensure that after allocating
Impairment loss, as above, the carrying amount of corporate asset on individual basis should not be
reduced below the highest of:
a. Net selling price
b. Value in use
c. Zero.
Any remaining amount of an Impairment loss for a Cash Generating Unit, after applying step 14 should
be shown as liability if the other accounting standard requires so.

28.17 At the end of 20X0, enterprise M acquired 100% of enterprise Z for Rs. 3,000 lakhs.
Z has 3 cash-generating units A, B and C with net fair values of Rs. 1,200 lakhs, Rs.
800 lakhs and Rs. 400 lakhs respectively. M recognises goodwill of Rs. 600 lakhs (Rs.
3,000 lakhs less Rs. 2,400 lakhs) that relates to Z.
At the end of 20X4, A makes significant losses. Its recoverable amount is estimated to be Rs.
1,350 lakhs. Carrying amounts are detailed below.
Carrying amounts at the end of 20X4 (Amount in Rs. lakhs)

End of 20X4 A B C Goodwill Total

Net carrying amount 1,300 1,200 800 120 3,420
Determine Impairment loss if
28.18 Goodwill is allocable in the ratio of Fair value of 20x0
28.19 Goodwill is allocable in the ratio of Carrying amount of 20x4
28.20 Goodwill is non allocable and Enterprise M has recoverable amount of Rs.3200

Answer

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1. Goodwill is allocable in ratio of fair value

Goodwill = 120
Ratio = 1200 : 800 : 400
Thus goodwill related to A = 120 * 1200 / 2400 = 60
Thus Total C.A. of A = 1300 + 60= = 1360
R.A. of A as given in the question = 1350
Thus Impairment Loss = 10
Allocated to Goodwill = 10
2. Goodwill is allocable in ratio of carrying amount
Goodwill = 120
Ratio = 1300 : 1200 : 800
Thus goodwill related to A = 120 * 1300 / 3300 = 47
Thus Total C.A. of A = 1300 + 47 = 1347
R.A. of A as given in the question = 1350
Thus Impairment Loss = Nil
3. Goodwill is not allocable
Goodwill = 120
Carrying Amount of Enterprise = 3420
Recoverable Amount of Enterprise = 3200
Thus Impairment Loss = 220
Allocated to Goodwill = 120
Allocated to
I. A = 100 * 1300 / 3300 = 39.4
II. B = 100 * 1200 / 3300 = 36.4
III. C = 100 * 800 / 3300 = 24.2

28.18 Acute Ltd. is the owner of a CGU (Cash Generating Unit) block of assets whose current
carrying cost is Rs. 999 lakhs. The company, after a detailed study by its technical
team, has assessed the present recoverable amount of this CGU block of assets at Rs.
555 lakhs. The value of the block of assets as per the Income tax Records is Rs. 777
lakhs. The Board of Directors of the company have issued a signed statement confirming
that the impairment in the value of the CGU is only a temporary phenomenon which is
reversible in subsequent periods and also assuring virtual certainty of taxable incomes in
the foreseeable future. You are required to show Deferred Tax workings as per
Accounting Standards in force, given the tax rate of 30% plus 10% surcharge thereon.
The depreciation rate for tax purposes is 15% and that per books is 13.91%
Assumption: It is assumed that current carrying cost of the CGU block of asset as per Accounting and
Tax Records are after charging depreciation of the current year. The assumption has been taken on
the basis that impairment loss is calculated on carrying value after charging depreciation of the year.
In the absence of specific instructions, deferred tax workings of current year have been shown as
below:
Statement showing Deferred Tax workings for the current year
Depreciation as per Accounting books for the current year 999*.1391/(1-.1391) 161.41

Depreciation as per Income Tax Records for the current year 777*.15/(1-.15) 137.12

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Timing difference 24.29

Tax effect of the above timing difference at 33%* (deferred tax asset) (A) 8.02
Impairment Loss recognised in the profit and loss account (999- 555) 444
Impairment Loss allowed for tax purposes Nil
Timing difference 444
Tax effect of the above timing difference at 33% (deferred tax asset) (B) 146.52
Total deferred tax asset (A+B) 154.54
Note:
1. Deferred tax asset should be recognised and carried forward only to the extent that there is a
reasonable certainty that sufficient future taxable income will be available against which such
deferred tax asset can be realised. The Board of Directors of Acute Ltd. have issued signed
statement confirming virtual certainty of taxable incomes in the foreseeable future. Therefore, the
company can recognize deferred tax asset during the current year.
2. The deferred tax asset calculated on account of difference of depreciation as per accounting and
tax records is actually a reversal of deferred tax liability created in the previous years.

Reversal of an Impairment Loss:

An enterprise should assess at each balance sheet date whether there is any indication that an
impairment loss recognised for an asset in prior accounting periods may no longer
exist or may have decreased. If any such indication exists, the enterprise should estimate the
recoverable amount of that asset.

An impairment loss recognised for an asset in prior accounting periods should be reversed if there
has been a change in the estimates of cash inflows, cash outflows or discount rates
used to determine the asset’s recoverable amount since the last impairment loss was recognised. If
this is the case, the carrying amount of the asset should be increased to its recoverable amount.
That increase is a reversal of an impairment loss.

Reversal of an Impairment Loss for an Individual Asset:

The increased carrying amount of an asset due to a reversal of an impairment loss should not
exceed the carrying amount that would have been determined (net of amortisation or
depreciation) had no impairment loss been recognised for the asset in prior accounting periods.

A reversal of an impairment loss for an asset should be recognized as income immediately in the
statement of profit and loss, unless the asset is carried at revalued amount in accordance with
another Accounting Standard (see Accounting Standard (AS) 10, Accounting for Fixed Assets) in
which case any reversal of an impairment loss on a revalued asset should be treated as a revaluation
increase under that Accounting Standard.

After a reversal of an impairment loss is recognised, the depreciation (amortisation) charge

for the asset should be adjusted in future periods to allocate the asset’s revised carrying
amount, less its residual value (if any), on a systematic basis over its remaining useful life.
Reversal of an Impairment Loss for a Cash-Generating Unit:
A reversal of an impairment loss for a cash-generating unit should be allocated to increase the
carrying amount of the assets of the unit in the following order:

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a. first, assets other than goodwill on a pro-rata basis based on the carrying amount of each
asset in the unit; and
b. then, to goodwill allocated to the cash-generating unit (if any), if the requirements in
paragraph 108 are met.

These increases in carrying amounts should be treated as reversals of impairment losses for
individual assets and recognized in accordingly.

In allocating a reversal of an impairment loss for a cash-generating unit as above, the carrying
amount of an asset should not be increased above the lower of:
a. its recoverable amount (if determinable); and
b. the carrying amount that would have been determined (net of amortisation or depreciation) had no
impairment loss been recognised for the asset in prior accounting periods.

The amount of the reversal of the impairment loss that would otherwise have been allocated to the
asset should be allocated to the other assets of the unit on a pro-rata basis.

Reversal of an Impairment Loss for Goodwill:

Write short note on Reversal of an Impairment Loss
As an exception to the requirement for reversal of and Impairment loss, an impairment loss
recognized for goodwill should not be reversed in a subsequent period unless:
a. the impairment loss was caused by a specific external event of an exceptional nature that is not
expected to recur; and
b. subsequent external events have occurred that reverse the effect of that event.

28.19 On 1.4.2008, C Ltd. purchased an asset for Rs.10 lakhs with an estimated life of 10yrs.
Machine is depreciated on SLM. On 1.4.2011, the asset was revalued to Rs. 840,000
and surplus arising out of Revaluation being credited to Revaluation reserve. During the
year ending 31.3.2014 the asset was reviewed for Impairment and the recoverable
amount of the asset was ascertained to be Rs. 430,000. Next year there were some
favorable changes in the market conditions and the recoverable amount of the asset was
reassessed at Rs.500,000. You are required to calculate the carrying amount of the
asset as on 31.3.2015 and show how changes in the value of the asset is to be treated
in the books of accounts , assuming C Ltd. has the policy of writing down excess
depreciation charged to Revaluation Surplus

Cost of the asset purchased on 01.04.2008 10,00,000

Less: Depreciation 3 years–upto 31.03.2011 (3/10) (3,00,000)
Carrying amount as on 31.03.2011 7,00,000
Add: Upward revaluation as on 01.04.2011 credited to Revaluation
Reserve 1,40,000
Carry amount as on 01.04.2011 8,40,000
Less: Depreciation 3 years– upto 31.03.2014 (3/7) (3,60,000)
4,80,000
Less: Impairment loss due to recoverable amount being 4,30,000 (50,000)

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Carrying amount as on 01.04.2014 4,30,000

Less: Depreciation for 2014-15 (4,30,000/4) (1,07,500)
3,22,500
Add: Reversal of impairment (as per Working Note 2) 37,500
Carrying amount as on 31.03.2015 3,60,000

Statement showing balance of Revaluation Reserve

Revaluation Reserve credited on 01.04.2011 1,40,000

Less: Excess depreciation charges due to revaluation for
3 years upto 31.03.2014 [(1 ,40, 000/7) x 3] (60,000)
Revaluation Reserve balance on 31.03.2014 80,000
Less: Impairment loss on 31.03.2014 (50,000)
Revaluation Reserve balance on 01.04.2014 30,000
Less: Depreciation charge for 2014-15 (7,500)
22,500
Add: Reversal of impairment on 31.03.2015 37,500
Revaluation Reserve balance on 01.04.2015 60,000

Treatment of Impairment loss:

Reversal of impairment loss should not exceed the carrying amount that would have been
determined (net of depreciation) has no impairment loss been recognized for the asset in
prior accounting periods.
Carrying amount of the asset before impairment as on 31.03.2014 4,80,000
Less: Depreciation for the year 2014-15 (1,20,000)
Carrying amount of the asset as on 31.03.2015 3,60,000
Carrying amount as calculated after impairment (3,22,500)
Reversal of impairment to be transferred to Revaluation surplus 37,500
Impairment gain to be ignored:
Recoverable amount on 31.03.2015 5,00,000
Less: Carrying amount on 31.03.2015 (3,60,000)
1,40,000

28.20 X Ltd. consisted of a CGU comprising Asset A, Asset B and goodwill. The following
relevant details regarding impairment loss or reversal of impairment loss are given below
as on 1.4.2013
Particulars Amount
Asset A life 20 yrs 1000
Asset B Life 10 yrs 200

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Goodwill 100
Recoverable amount as on 31.3.2014 1000
Recoverable amount as on 31.3.2016 1050
Determine Impairment loss and reversal of impairment loss as per Ind AS 36
Answer
Particulars A B Goodwill Total
2013-14
Original cost 1000 200 100 1300
Less: Depreciation for 2013-14 (50) (20) (70)
Balance 950 180 100 1230
Recoverable amount 1000
Impairment loss (109) (21) (100) 230
Carrying amount 841 159 1000
Depreciation for 2014 – 15 (44.3) (17.67)
Depreciation for 2015-16 (44.3) (17.67)
carrying amount on 1.4.2016 752.4 123.66 876.06
Recoverable amount 1050
Reversal of goodwill Prohibited
Revised carrying amount had there been no 850 140 990
impairment
Reversal of impairment loss 97.6 16.34 0

DISCLOSURE:
For each class of assets, the financial statements should disclose:
a. the amount of impairment losses recognised in the statement of profit and loss during the period
and the line item(s) of the statement of profit and loss in which those impairment losses are
included;
b. the amount of reversals of impairment losses recognised in the statement of profit and loss during
the period and the line item(s) of the statement of profit and loss in which those impairment losses
are reversed;
c. the amount of impairment losses recognised directly against revaluation surplus during the period;
and
d. the amount of reversals of impairment losses recognised directly in revaluation surplus during the
period.

Disclosure as Per Ind AS 36

The event and circumstances led to the recognition or reversal of the important loss.
The amount of the impairment loss recognized or reversed
For an individual asset :
(i) The nature of the asset; and
(ii) The reportable segment to which the asset belongs
For a cash-generating unit :
(i) A description of the cash-generating unit
(ii) The amount of the impairment loss recognized or reversed by assets and by
reportable segment; and generating unit’s recoverable amount (if any), a description of the
current and former way of aggregating assets and the reasons for changing the way the
cash-generating unit is identified.

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The recoverable amount and whether is fair value less asset (cash-generating unit) is its fair
value less cost of disposal or its value in use.
It the recoverable amount is fair value costs of disposal, the entity should disclose a level of
the fair value hierarchy, a description of the technique for measuring fair value less cost of
disposal, key assumptions and the discount rates used
If recoverable amount is value in use, the discount rate used in the current estimate and
previous estimate (if any) of value in use.
Additional disclosure
The main classes of assets affected by impairment losses and the main classes of assets
affected by reversals of impairment losses.
The main event and circumstances that let to the recognition of these impairment losses and
reversals of impairment losses.

TRANSITIONAL PROVISIONS:
On the date of this Statement becoming mandatory, an enterprise should assess whether there is
any indication that an asset may be impaired. If any such indication exists, the enterprise should
determine impairment loss, if any, in accordance with this Statement. The impairment loss, so
determined, should be adjusted against opening balance of revenue reserves being the accumulated
impairment loss relating to periods prior to this Statement becoming mandatory unless the
impairment loss is on a revalued asset. An impairment loss on a revalued asset should be recognised
directly against any revaluation surplus for the asset to the extent that the impairment loss does not
exceed the amount held in the revaluation surplus for that same asset. If the impairment loss
exceeds the amount held in the revaluation surplus for that same asset, the excess should be
adjusted against opening balance of revenue reserves.

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Accounting Standard 29
Provisions, Contingent Liabilities and
Contingent Assets
What is the objective of AS 29?
The objective of this Statement is to ensure that appropriate recognition criteria and measurement
bases are applied to provisions and contingent liabilities and that sufficient information is disclosed
in the notes to the financial statements to enable users to understand their nature, timing and
amount. The objective of this Statement is also to lay down appropriate accounting for contingent
assets.

Scope
This Statement should be applied in accounting for provisions and contingent liabilities and in dealing
with contingent assets, except:
1. those resulting from financial instruments that are carried at fair value(AS-30,31,32);
2. those resulting from executor contracts(AS-7);
3. those arising in insurance enterprises from contracts with policy-holders; and
4. those covered by another Accounting Standard(Emplyee Benefits).

What is meant by Provision?

.
A provision is a liability which can be measured only by using a substantial degree of estimation.

What is a Liability?

A liability is a present obligation of the enterprise arising from past events, the settlement of which
is expected to result in an outflow from the enterprise of resources embodying economic benefits.

What is a Present Obligation?

An obligation is a present obligation if, based on the evidence available, its existence at the
balance sheet date is considered probable, i.e., more likely than not.

What is a Contingent Liability?

A contingent liability is:
a. a possible obligation that arises from past events and the existence of which will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not wholly
within the control of the enterprise; or
b. a present obligation that arises from past events but is not recognised because:
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i. it is not probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; or
ii. a reliable estimate of the amount of the obligation cannot be made.

What is a Possible Obligation?

An obligation is a possible obligation if, based on the evidence available, its existence at the balance
sheet date is considered not probable.

What is a Contingent Asset?

A contingent asset is a possible asset that arises from past events the existence of which will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the enterprise.

What is an Obligating Event?

An obligating event is an event that creates an obligation that results in an enterprise having no
realistic alternative to settling that obligation.

How can you distinguish a provision from other liabilities?

Provisions can be distinguished from other liabilities such as trade payables and accruals because in
the measurement of provisions substantial degree of estimation is involved with regard
to the future expenditure required in settlement. By contrast:
1. trade payables are liabilities to pay for goods or services that have been received or supplied and
have been invoiced or formally agreed with the supplier; and
2. accruals are liabilities to pay for goods or services that have been received or supplied but have
not been paid, invoiced or formally agreed with the supplier, including amounts due to employees.
Although it is sometimes necessary to estimate the amount of accruals, the degree of estimation is
generally much less than that for provisions.

What are the principles for recognition of ‘Provisions’?

A provision should be recognised when:
1. an enterprise has a present obligation as a result of a past event;
2. it is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation; and
3. a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognised.

Refurbishment Costs – No Legislative Requirement

29.1 A furnace has a lining that needs to be replaced every five years for technical reasons.
At the balance sheet date, the lining has been in use for three years.
Present obligation as a result of a past obligating event- There is no present obligation.
Conclusion – No provision is recognized.
The cost of replacing the lining is not recognized because, at the balance sheet date, no obligation to
replace the lining exits independently of the company’s future actions – even the intention to incur
the expenditure depends on the company deciding to continue operating the furnace or to replace
the lining.
Refurbishment Costs – Legislative Requirement
29.2 An Airline is required by law to overhaul its aircraft once every three years.
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Present obligation as a result of a past obligating event – There is no present obligation.

Conclusion – No provision is recognized.
The costs of overhauling aircraft are not recognized as a provision for the same reason as the cost
of replacing the lining is not recognized as a provision in example 9A. Even a legal requirement to
overhaul does not make the cost of the overhaul a liability, because no obligation exits to overhaul
the aircraft independently of the enterprise’s future actions – the enterprise could avoid the future
expenditure by its future actions, for example by selling the aircraft.
29.3 A manufacturer gives warranties at the time of sale to purchasers of its product. Under
the terms of the contract for the manufacturer undertakes to make good, by repairs or
replacement, manufacturer defects that become apparent within three years from the
date of sale. On past experience, it is probable (i.e. more likely than not) that there
will be some claims under the warranties.
Present obligation as a result of a past obligating event- The obligating event is the sale of the
product with a warranty, which gives rise to an obligation
An outflow of resources embodying economics benefits in settlement- Probable for the warranties as
a whole.
Conclusion – A provision is recognized for the best estimate of the costs of making good under the
warranty products sold before the balance sheet date.
29.4 An enterprise in the oil industry causes contaminated but does not clean up because
there is no legislation requiring cleaning up, and the enterprise has been contaminating
land for several years. At 31 March 2005 it is virtually certain that a law requiring a
clean up of land already contaminated will be enacted shortly after the year end.
Present obligation as a result of a past obligating event- he obligating event is the contamination of
the land because of the virtually certainty of legislation requiring cleaning up.
An outflow of resources embodying economics benefits in settlement- Probable.
Conclusion - A provision is recognized for the best estimate of the costs of the clean up.
29.5 An enterprise operates an offshore oilfield where its licensing agreement requires it to
remove the oil rig at the end of production and restore the seabed. Ninety per cent of
the eventual costs relate to the removal of the oil rig and restoration of damage caused
by building it, and ten per cent arise through the extraction of oil. At the balance sheet
date, the rig has been constructed but no oil has been extracted. Is a provision required
to be recognised?
Present obligation as a result of past obligating event- The construction of the oil rig created an
obligation under the terms of the license to remove the rig and restore the seabed and is thus as
obligating event. At the balance sheet date, however, there is no obligation to rectify the damage
that will be caused by extraction of oil.
An outflow of resources embodying economics benefits in settlement- Probable.
Conclusion- A provision is recognized for the best estimate of ninety percent of the eventual costs
that relate to the removal of the oil rig and restoration of damage caused by building it. There
coasts are included as part of the cost of the oil rig. The ten percent of costs that arise through the
extraction of oil are recognized as a liability when the oil is extracted.
Refunds Policy
29.6 A retail store has a policy of refunding purchases by dissatisfied customers, even though
it is under no legal obligation to do so. Its policy of making refunds is generally known.
Present obligation as a result of a past obligating event- The obligating event is the sale of the
product, which gives rise to an obligation because obligating also arise from normal business practice,
custom and a desire to a maintain good business relations or act in an equitable manner
Outflows of resources embodying economic benefit in settlement–Probable, a proportion of goods are

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returned for refund.

Conclusion – A provision is recognized for the best estimate of the costs of refunds.
Legal Requirement to Fit Smoke Filters
29.7 Under new legislation, an enterprise is required to fit smoke filters to its factories by
30 September 2005. The enterprise has not fitted the smoke filters.
(a) At the balance sheet date of 31 March 2005
Present obligation as a result of a past obligating event – There is no obligation because there is no
obligating event either for the costs of fitting smoke filters or for fines under the legislation
Conclusion – No provision is recognized for the cost of fitting the smoke filters.
(b) At the balance sheet date of 31 March 2006
Present obligations as a result of a past obligating event – There is still no obligation for the costs of
fitting smoke filters because no obligating event has occurred (the fitting of the filters). However,
an obligation might arise to pay fines o penalties under the legislation because the obligating event
has occurred (the non-complaint operation of the factory).
An outflow of resources embodying economic benefits in settlement - Assessment of probability of
incurring fines and fines and penalties by non-compliant operation depends on the details of the
legislation and the stringency of the enforcement regime.
Conclusion – No provision is recognized for the costs of fitting smoke filters. However, a provision is
recognized for the best estimate of any fines and penalties that are more likely than not to be
imposed.
Staff retraining as a Result of Changes in the Income Tax System
29.8 The government introduces a number of changes to the income tax system. As a result
of these changes, an enterprise in the financial services sector will need to retrain a
large proportion of its administrative and sales workforce in order to ensure continued
compliance with financial services regulation. At the balance sheet date, no retraining of
staff has taken place.
Present obligation as a result of past obligating event – There is no obligation because no obligating
event (retraining) has taken place.
Conclusion – No provision is recognized.
A Court Case
29.9 After a wedding in 2004-05, ten people died, possibly as a result of food poisoning from
products sold by the enterprise. Legal proceedings are started seeking damages from the
enterprise but it disputes liability. Up to the date of approval of the financial
statements for the year 31 March 2005, the enterprise’s lawyers advice that it is
probable that the enterprise will not be found liable. However, when the enterprise
prepares the financial statements for the year 31 March 2006, its lawyer’s advice that,
owing to developments in the case, it is probable that the enterprise will be found liable.
(a) At 31 March 2005
Present obligation as a result of a past obligating event – On the basis of the evidence available when
the financial statements were approved, there is no present obligation as a result of past events.
Conclusion – No provision is recognized. The matter is disclosed as a contingent liability unless the
probability of any outflow is regarded as remote
(b) At 31 March 2006
Present obligation as a result of a past obligating event – On the basis of the evidence available,
there is a present obligation.
An outflow of resources embodying economic benefits in settlement – Probable.
Conclusion – A provision is recognized for the best estimate of the amount to settle the obligation
29.10 Raghav Ltd. Had a major break down in its plant in the month of February. In the
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month of March it entered into an agreement with an Engineering Firm for the purpose of
repairing its plant for a consideration of Rs. 180 lakhs. The Engineering Firm started the
repairing work in the month of April and completed it in the same month. Raghav Ltd.
Made the Provision for said expenditure on repairs in its books of account for the financial
year ended 31st March on the plea that the event of break down leading to repair
expenditure had taken place in that financial year, binding contract for repairs was
entered into during the same financial year and repair work was also completed before the
Financial Statements were approved by the Company’s Board of Directors. Comment
29.11 Mini Ltd. Took a factory premises on lease on 1.4.07 for Rs.2,00,000 per month.
The lease is operating lease. During March, 2008, Mini Ltd. Relocates its operation to a
new factory building. The lease on the old factory premises continues to be live upto
31.12.2010. The lease cannot be cancelled and cannot be sub-let to another user. The
auditor insists that lease rent of balance 33 months upto 31.12.2010 should be provided
in the account for the year ending 31.3.2008. Mini Ltd. Seeks your advice

How a provision should be measured?

The amount recognized as a provision should be the best estimate of the expenditure required to
settle the present obligation at the balance sheet date. The amount of a provision should
not be discounted to its present value.
The provision is measured before tax; the tax consequences of the provision, and changes in it, are
dealt with under AS 22, Accounting for Taxes on Income.
The risks and uncertainties that inevitably surround many events and circumstances should be taken
into account in reaching the best estimate of a provision.

Present value for Ind AS 37

Where time value of money is material, the amount of a provision should be the present value
of the expenditures expected to settle the obligation.
Future events that may affect the amount required to settle an obligation should be reflected
in the amount of a provision where there is sufficient objective evidence that they will occur.
Gains from the expected disposal of asset shall not be taken into account in measuring a
provision

29.12 At the end of the financial year ending on 31st December, 2011, a company finds that
there are twenty law suits outstanding which have not been settled till the date of
approval of accounts by the Board of Directors. The possible outcome as estimated by
the Board is as follows:
Probability Loss (Rs. )
In respect of five cases (Win) 100% -
Next ten cases (Win) 60% -
Lose (Low damages) 30% 1,20,000
Lose (High damages) 10% 2,00,000
Remaining five cases
Win 50% -
Lose (Low damages) 30% 1,00,000
Lose (High damages) 20% 2,10,000
Outcome of each case is to be taken as a separate entity. Ascertain the amount of contingent

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loss and the accounting treatment in respect thereof.

Solution
According to AS 29 ‘Provisions, Contingent Liabilities and Contingent Assets’, contingent liability
should be disclosed in the financial statements if following conditions are satisfied:
(i) There is a present obligation arising out of past events but not recognized as provision.
(ii) It is not probable that an outflow of resources embodying economic benefits will be required to
settle the obligation.
(iii) The possibility of an outflow of resources embodying economic benefits is also remote.
(iv) The amount of the obligation cannot be measured with sufficient reliability to be recognized as
provision.
In this case, the probability of winning of first five cases is 100% and hence, question of providing
for contingent loss does not arise. The probability of winning of next ten cases is 60% and for
remaining five cases is 50%. As per AS 29, we make a provision if the loss is probable. As the loss
does not appear to be probable and the possibility of an outflow of resources embodying economic
benefits is not remote rather there is reasonable possibility of loss, therefore disclosure by way of
note should be made. For the purpose of the disclosure of contingent liability by way of note, amount
may be calculated as under:
Expected loss in next ten cases = 30% of Rs. 1,20,000 + 10% of Rs. 2,00,000
= Rs. 36,000 + Rs. 20,000
= Rs. 56,000
Expected loss in remaining five cases = 30% of Rs. 1,00,000 + 20% of Rs. 2,10,000
= Rs. 30,000 + Rs. 42,000
= Rs. 72,000
To disclose contingent liability on the basis of maximum loss will be highly unrealistic. Therefore, the
better approach will be to disclose the overall expected loss of Rs. 9,20,000 (Rs. 56,000 *10 + Rs.
72,000 *5) as contingent liability.

Future Events
Future events that may affect the amount required to settle an obligation should be reflected in the
amount of a provision where there is sufficient objective evidence that they will occur.
Expected future events may be particularly important in measuring provisions. For example, an
enterprise may believe that the cost of cleaning up a site at the end of its life will be reduced by
future changes in technology. The amount recognised reflects a reasonable expectation of technically
qualified, objective observers, taking account of all available evidence as to the technology that will
be available at the time of the clean-up. Thus, it is appropriate to include, for example, expected cost
reductions associated with increased experience in applying existing technology or the expected cost
of applying existing technology to a larger or more complex clean-up operation than has previously
been carried out. However, an enterprise does not anticipate the development of a completely new
technology for cleaning up unless it is supported by sufficient objective evidence.
The effect of possible new legislation is taken into consideration in measuring an existing obligation
when sufficient objective evidence exists that the legislation is virtually certain to be enacted. The
variety of circumstances that arise in practice usually makes it impossible to specify a single event
that will provide sufficient, objective evidence in every case.
Evidence is required both of what legislation will demand and of whether it is virtually certain to be
enacted and implemented in due course. In many cases sufficient objective evidence will not exist
until the new legislation is enacted.

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Expected Disposal of Assets

Gains from the expected disposal of assets should not be taken into account in measuring a
provision. Gains on the expected disposal of assets are not taken into account in measuring a
provision, even if the expected disposal is closely linked to the event giving rise to the provision.
Instead, an enterprise recognises gains on expected disposals of assets at the time specified by the
Accounting Standard dealing with the assets concerned.

Reimbursements
Where some or all of the expenditure required to settle a provision is expected to be reimbursed by
another party, the reimbursement should be recognised when, and only when, it is virtually certain
that reimbursement will be received if the enterprise settles the obligation. The reimbursement
should be treated as a separate asset. The amount recognised for the reimbursement should not
exceed the amount of the provision.
In the statement of profit and loss, the expense relating to a provision may be presented net of the
amount recognised for a reimbursement.

Changes in Provisions
Provisions should be reviewed at each balance sheet date and adjusted to reflect the current
best estimate. If it is no longer probable that an outflow of resources embodying economic benefits
will be required to settle the obligation, the provision should be reversed.

Use of Provisions
A provision should be used only for expenditures for which the provision was originally recognised.
What are the principles for recognition of ‘Contingent Liabilities’?
An enterprise should not recognise a
contingent liability. A contingent
liability is disclosed unless the
possibility of an outflow of resources
embodying economic benefits is remote.
Where an enterprise is jointly and
severally liable for an obligation, the
part of the obligation that is expected
to be met by other parties is treated as
a contingent liability. The enterprise
recognises a provision for the part of
the obligation for which an outflow of
resources embodying economic benefits
is probable, except in the extremely
rare circumstances where no reliable
estimate can be made.

What are the principles for

recognition of ‘Contingent Assets’?
An enterprise should not recognise a contingent asset. Contingent assets usually arise from
unplanned or other unexpected events that give rise to the possibility of an inflow of economic

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benefits to the enterprise. An example is a claim that an enterprise is pursuing through legal
processes, where the outcome is uncertain.
Contingent assets are not recognised in financial statements since this may result in the
recognition of income that may never be realised. However, when the realisation of income
is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.
A contingent asset is not disclosed in the financial statements. It is usually disclosed in the report of
the approving authority (Board of Directors in the case of a company, and, the corresponding
approving authority in the case of any other enterprise), where an inflow of economic benefits is
probable.
Contingent assets are assessed continually and if it has become virtually certain that an inflow of
economic benefits will arise, the asset and the related income are recognised in the financial
statements of the period in which the change occurs.

Recognition of - An entity should not recognize a contingent asset.

Contingent - A contingent asset is disclosed when an inflow is possible
assets as per - Contingent asset are assessed continually to ensure that they are
Ind AS 37
appropriately reflected.
- If virtually certain that inflow will arise then asset & related income
recognized in financial statements.

Disclosure
For each class of provision, an enterprise should disclose:
a. the carrying amount at the beginning and end of the period;
b. additional provisions made in the period, including increases to existing provisions;
c. amounts used (i.e. incurred and charged against the provision) during the period; and
d. unused amounts reversed during the period.
An enterprise should disclose the following for each class of provision:
a. a brief description of the nature of the obligation and the expected timing of any resulting
outflows of economic benefits;
b. an indication of the uncertainties about those outflows. Where necessary to provide adequate
information, an enterprise should disclose the major assumptions made concerning future events,
c. the amount of any expected reimbursement, stating the amount of any asset that has been
recognised for that expected reimbursement.
Unless the possibility of any outflow in settlement is remote, an enterprise should disclose for each
class of contingent liability at the balance sheet date a brief description of the nature of the
contingent liability and, where practicable:
a. an estimate of its financial effect,
b. an indication of the uncertainties relating to any outflow; and
c. the possibility of any reimbursement.
(Where any of the information required by above paragraph is not disclosed because it is not
practicable to do so, that fact should be stated).

29.13 During 2004-05, Enterprise A gives a guarantee of certain borrowing of Enterprise B,

whose financial condition at that time is sound. During 2005-06, the financial condition
of Enterprise B deteriorates and at 30 September 2005 Enterprise B goes into

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liquidation..
(a) At 31 March 2005
Present obligation as a result of a past obligating event – The obligating event is the giving of the
guarantee, which gives rise to an obligation.
An outflow of resources embodying economics benefits in settlement – No outflow of benefits is
probable at 31 March 2005.
Conclusion – No provision is recognized. The guarantee is disclosed as a contingent liability unless the
probability of any is regarded as remote
(b) At 31 March 2006
Present obligation as a result of a past obligating event – The obligating event is the giving of the
guarantee, which gives to a legal obligation.
Conclusion – A provision is recognized for the best estimate of the obligation.
Note: This example deals with a single guarantee. If an enterprise has a portfolio of similar
guarantee, it will assess that portfolio as a whole in determining whether an outflow of resources
embodying economic benefit is probable. Where an enterprise gives guarantees in exchange for a
fee, revenue is recognized under AS 9, Revenue recognition.
29.14 Sun Ltd. has entered into a sale contract of Rs. 5 crores with X Ltd. during 2010-11
financial year. The profit on this transaction is Rs. 1 crore. The delivery of goods to
take place during the first month of 2011-12 financial year. In case of failure of Sun
Ltd. to deliver within the schedule, a compensation of Rs. 1.5 crores is to be paid to X
Ltd. Sun Ltd. planned to manufacture the goods during the last month of 2010-11
financial year. As on balance sheet date (31.3.2011), the goods were not manufactured
and it was unlikely that Sun Ltd. will be in a position to meet the contractual obligation.
(i) Should Sun Ltd. provide for contingency as per AS 29?
(ii) Should provision be measured as the excess of compensation to be paid over the profit?
(i) AS 29 “Provisions, Contingent Liabilities and Contingent Assets” provides that when an enterprise
has a present obligation, as a result of past events, that probably requires an outflow of resources
and a reliable estimate can be made of the amount of obligation, a provision should be recognised.
Sun Ltd. has the obligation to deliver the goods within the scheduled time as per the contract. It is
probable that Sun Ltd. will fail to deliver the goods within the schedule and it is also possible to
estimate the amount of compensation. Therefore, Sun Ltd. should provide for the contingency
amounting Rs. 1.5 crores as per AS 29.
(ii) Provision should not be measured as the excess of compensation to be paid over the profit. The
goods were not manufactured before 31st March, 2011 and no profit had accrued for the financial
year 2010-2011. Therefore, provision should be made for the full amount of compensation amounting
Rs. 1.50 crores.
29.15 A company is in a dispute involving allegation of infringement of patents by a competitor
company who is seeking damages of a huge sum of Rs. 900 lakhs. The directors are of
the opinion that the claim can be successfully resisted by the company. How would you
deal the same in the annual accounts of the company?
As per para 14 of AS 29, 'Provisions, Contingent Liabilities and Contingent Assets’, a provision should
be recognised when
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met,
no provision should be recognised.
If these conditions are not met, no provision should be recognised.

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In the given situation, since, the directors of the company are of the opinion that the claim can be
successfully resisted by the company, therefore there will be no outflow of the resources. The
company will disclose the same as contingent liability by way of the following note:
“Litigation is in process against the company relating to a dispute with a competitor who alleges that
the company has infringed patents and is seeking damages of Rs. 900 lakhs. However, the directors
are of the opinion that the claim can be successfully resisted by the company.”

29.16 A company is in a dispute involving allegation of infringement of patents by a competitor

company who is seeking damages of a huge sum of Rs. 900 lakhs. The directors are of
the opinion that the claim can be successfully resisted by the company. How would you
deal with the same in the annual accounts of the company?
As per para 14 of AS 29, 'Provisions, Contingent Liabilities and Contingent Assets’, a provision should
be recognised when
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met,
no provision should be recognised.
If these conditions are not met, no provision should be recognised.
In the given situation the directors of the company are of the opinion that the claim can be
successfully resisted by the company, therefore there will be no outflow of the resources. The
company will disclose the same as contingent liability by way of the following note:
“Litigation is in process against the company relating to a dispute with a competitor who alleges
that the company has infringed patents and is seeking damages of Rs. 900 lakhs. However, the
directors are of the opinion that the claim can be successfully resisted by the company ”.
29.17 Shyam Ltd. (a Public Sector Company) provides consultancy and engineering services to
its clients. In the year 2010-11, the Government has set up a commission to decide
about the pay revision. The pay will be revised with respect from 1-1-2006 based on
the recommendations of the commission. The company makes the provision of Rs. 680
lakhs for pay revision in the financial year 2010-11 on the estimated basis as the report
of the commission is yet to come. As per the contracts with the client on cost plus job,
the billing is done on the actual payment made to the employees and allocated to jobs
based on hours booked by these employees on each job.
The company discloses through notes to accounts
"Salaries and benefits include the provision of Rs. 680 lakhs in respect of pay revision. The
amount chargeable from reimbursable jobs will be billed as per the contract when the actual
payment is made”.
The accountant feels that the company should also book/recognise the income by Rs. 680 lakhs
in Profit and Loss Account as per the terms of the contract. Otherwise, it will be the violation
of matching concept & understatement of profit.
(Hint: Para 46 of AS 29)
As per para 46 of AS-29, ‘Provisions, Contingent Liabilities and Contingent Assets’, where some or all
of the expenditure required to settle a provision is expected to be reimbursed by another party, the
reimbursement should be recognised when, and only when, it is virtually certain that reimbursement
will be received if the enterprise settles the obligation. The reimbursement should be treated as a
separate asset. The amount recognised for the reimbursement should not exceed the amount of the
provision.
Accordingly, potential loss to an enterprise may be reduced or avoided because a contingent liability

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is matched by a related counter-claim or claim against a third party. In such cases, the amount of
the provision is determined after taking into account the probable recovery under the claim if no
significant uncertainty as to its measurability or collectability exists.
In this case, the provision of salary to employees of Rs. 680 lakhs will be ultimately collected from
the client, as per the terms of the contract. Therefore, the liability of Rs. 680 lakhs is matched by
the counter claim from the client. Hence, the provision for salary of employees should be made
reducing the claim to be made from the client. It appears that the whole amount of Rs. 680 lakhs is
recoverable from client and there is no significant uncertainty about the collection. Hence, the net
charge to profit and loss account should be nil.
The opinion of the accountant regarding non-recognition of income of Rs. 680 lakhs is not as per AS-
29 and AS-9. However, the concept of prudence will not be followed if Rs. 680 lakhs is
simultaneously recognized as income. Rs. 680 lakhs is not the revenue at present but only
reimbursement of claim. However the accountant is correct to the extent as that non- recognition of
Rs. 680 lakhs as income will result in the under statement of profit.
A company incorporated under section 25 of the Companies Act having main objectives to
promote the trade by organizing trade fairs/exhibitions. When the company was organizing the
trade fair and exhibitions it decided to charge 5% contingency charges for the
participants/outside agencies on the income received from them by the company, while in the
case of fairs organized by outside agencies, 5% contingency charges are levied separately in
the invoice, the contingency charges in respect of fairs organized by the company itself are
inbuilt in the space rent charged from the participants. Both are credited to income &
expenditure account of the company.
The intention of levying these charges is to meet any unforeseen liability, which may arise in
future. The instances of such unforeseen liabilities could be on account of injury/loss of life to
visitors/exhibitors etc due to fire, terrorist attack, stampede, natural calamities and other
public and third party liability. The chances of occurrence of these events are high because of
large crowds visit the fair. The decision to levy 5% contingency charges was based on
assessment only as actual liability on this account cannot be estimated.
The following accounting treatment and disclosure was made by the company in its financial
statements:
1. 5% contingency charges are treated as income and matching provision for the same is also
being made in accounts.
2. A suitable disclosure to this effect is also made in the notes forming part of accounts.
Required:
(i) Whether creation of provision for contingencies under the facts and circumstances of the
case is in conformity with AS 29.
If the answer of (i) is “No” then what should be the treatment of the provision which is
already created in the balance sheet with a specific reference to Schedule III of the
Companies Act, 2013.

As per paragraph 14 of AS 29, a provision should be recognized when:

1. an enterprise has a present obligation as a result of a past event
2. it is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation and
3. a reliable estimate can be made of the amount of obligation.
If these conditions are not met, no provisions should be recognized.
As per paragraph 10.4 of AS 29, a contingent liability is:

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(1) a possible obligation that arises from past events and the existence of which will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not wholly within
the control of the enterprise; or
(2) a present obligation that arises from past events but is not recognized because:
(a) it is not probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; or
(b) a reliable estimate of the amount of the obligation cannot be made.
In this case company is required to assess the probability of occurrence of contingencies on the
basis of such events taken place in earlier period. Though there is a present obligation based on such
past event and it is probable that an outflow of resources will be required, a reliable estimate of
amount of obligation cannot be made.
Hence no provision for the same is to be created and the same is to be disclosed as contingent
liability
Treatment of Provision already created in the Balance Sheet:
♦ Reversal of provision should be netted off against the relevant expenditure and should not be
shown as “Other Income”.
♦ Where the reversal is greater than the current year’s expenditure, the net amount would be
negative which may be reflected as other income.
♦ If such provision is related to earlier year, then the same should be disclosed as prior period
income.
♦ As required by AS 29, specific disclosure should be given for reversal of provision in the notes to
accounts and reference of note should be given in the specific line item of expenditure in which
reversal of provision is made.

29.12- Contingency CA. Sumit L. Sarda