6

6 6

8
8

8
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8
 ROADMAP OF IND AS

01 ROADMAP OF IND AS

“The Past can-not be changed.

The Future is yet in your power”

APPLICABILITY OF IND AS (INDIAN ACCOUNTING STANDARDS)

APPLICABILITY OF IND AS FOR COMPANIES

(OTHER THAN BANKS, NBFCs, INSURANCE COMPANIES)

Phase-I: Obligation to Comply with Ind AS from 1st April, 2016

In accordance with clause (ii) of sub- rule (1) of Rule 4 of the Companies (Indian Accounting
Standards) Rules, 2015, the following companies shall comply with Ind AS w.e.f. April 2016:
(a) Companies listed/in process of listing (Except companies listed on SME Exchanges) on Stock
Exchanges in India or Outside India having net worth of ₹500 crore or more;
(b) Unlisted Companies having net worth ≥ ₹500crore;
(c) Holding (Parent), subsidiary, joint venture or associate companies of above.

COMPLIANCE CURRENT FY COMPARATIVE PERIOD TRANSITION DATE FOR

OPENING IND AS BS
Voluntary FY 15-16 i.e. year ending FY 14-15 i.e. year ending 01/04/2014
st st
Compliance 31 March 2016 31 March 2015
(Optional)
Mandatory FY 16-17 i.e. year ending FY 15-16 i.e. year ending 01/04/2015
st st
Compliance 31 March 2017 31 March 2016

Phase-II: Mandatory Compliance of Ind AS from 1st April, 2017

Clause (iii) of sub- rule (1) of Rule 4 of the Companies (Indian Accounting Standards) Rules, 2015
states that the following companies shall comply with Ind AS for the accounting periods beginning on
or after 1st April, 2017:
(a) Companies listed/in process of listing (Except companies listed on SME Exchanges) on
Stock Exchanges in India or Outside India having net worth of less than Rs. 500crore;
(b) Unlisted companies having net worth of ≥ Rs.250 crore but < Rs.500crore;
(c) Holding, Subsidiary, Associate and J.V. of Above.

1.1
 ROADMAP OF IND AS

COMPLIANCE IND AS IND AS TRANSITION DATE

CURRENT FY COMPARATIVE FOR OPENING
PERIOD INDAS BS
Voluntary FY 16-17 i.e. FY 15-16 i.e. year 01/04/2015
st st
Compliance year ending 31 ending 31 March
(Optional) March 2017 2016
Mandatory FY 17-18 i.e. FY 16-17 i.e. year 01/04/2016
st st
Compliance year ending 31 ending 31 March
March 2018 2017

NET WORTH OF COMPANIES FOR THE PURPOSE OF IND AS

The term Net Worth shall have the meaning assigned to it in clause (57) of Section 2 of the Companies
Act, 2013. For the purposes of calculation of net worth of companies, the following principles shall
apply, namely:-

(a) The net worth shall be calculated in accordance with:

i) the stand-alone financial statements of the company as on 31st March, 2014; or
ii) the first audited financial statements for accounting period which ends after 31st
March,2014;
(b) for companies which are not in existence on 31st March, 2014 or an existing company falling
under any of thresholds specified in sub-rule (1) for the first time after 31st March, 2014,
the net worth shall be calculated on the basis of the first audited financial statements ending
after that date in respect of which it meets the thresholds specified in sub-rule(1).

Net Worth = Total Paid-up Share Capital + Free Reserves (Excluding Revaluation Res.) + Sec. Prem
A/c – Accumulated Losses – Deferred Expenditures & Misc Exp. (excluding written back of
depreciation)

Note – ESOP reserve and Capital Reserve made out of Govt. Grants shall be part of Net Worth for
the purpose of calculating IndAS applicability.

Note:
⮚ Ind As once required to be complied with in accordance with Companies (Indian Accounting
Standards) Rules, 2015, shall apply to both standalone financial statements and consolidated
financial statements.

⮚ For companies which are not in existence on 31st March, 2014 or an existing company falling under
any of thresholds specified for the first time after 31st March, 2014, the net worth shall be
calculated on the basis of the first audited financial statements ending after that date in respect
of which it meets the thresholds specified.

⮚ Overseas subsidiary, associate, joint venture and other similar entities of an Indian company may
prepare its standalone financial statements in accordance with the requirements of the specific
1.2
 ROADMAP OF IND AS

jurisdiction, provided that such Indian company shall prepare its consolidated financial
statements in accordance with Ind AS either voluntarily or mandatorily if it meets the criteria.

⮚ Indian company which is a subsidiary, associate, joint venture and other similar entities of a
foreign company shall prepare its financial statements in accordance with the Ind AS either
voluntarily or mandatorily if it meets the criteria. (based on Net Worth of Individual Financial
Statements of Subsidiary).

⮚ Listing Status shall be checked only in First Year of INDAS Financial Statements. (refer case 7)

⮚ Subsidiary/Associates/JV status shall be checked only in First Year of INDAS Financial

Statements. (refer case 2)

IND AS FOR BANK, INSURANCE COMPANIES AND NBFCS

S.No. Entities For Accounting For Accounting Period Beg.

st
Period Beg. Frm 1 Frm 1st April 2019
April 2018 onwards Onwards
1 All India Term lending Mandatory -
refinancing Institutions
(EXIM, NABARD, SIDBI)
2 Non-Banking Financial Having Net Worth NBFCs whose equity/debt
Institutions (NBFCs) of Rs. 500 Cr. or instruments are listed or in
More process of listing and having
Net Worth Less than Rs. 500
Holding, Cr.
Subsidiary, JV or
Associates of the Unlisted NBFCs, Having Net
above worth of Rs. 250 Cr. or more
but less than Rs. 500 Cr.

Holding, Subsidiary, JV or
Associates of the Above
Parent NBFC and Subsidiary is Non-Finance Company or vice versa:
A) Case 1 – Parent NBFC prepares Consolidated Financial Statements as per AS and its
Subsidiary/Associate/JV (Non-Finance Company) is preparing INDAS Financial
Statements. Now such non finance company (Subs/Ass/JV) has to prepare one additional
financial statement as per AS for the purpose of Preparation of Consolidated Financial
Statements by its Parent NBFC.
B) Case 2 – Parent Non-Finance Company is preparing INDAS Financial Statements wef
1/04/2016 and it has a Subsidiary/Associate/JV who is NBFC preparing Financial
Statements (FY 16-17) as per AS. Since Parent has to prepare Consolidated Financial
Statements as per INDAS, therefore such NBFC Subsidiary/Ass/JV has to prepare

1.3
 ROADMAP OF IND AS

INDAS Financial Statements for its Parent company for the purpose of Consolidation. It
implies that the NBFC subsidiary, associate or a joint venture, in such case shall continue
to prepare th e financials under AS until IndAS are applicable to it. (Refer Case 8 below)
3 Insurance Companies Insurance Companies will apply Ind AS
after Finalisation of IFRS 17
4 BANKS (Excluding Implementation of Ind AS is deferred till further
RRBs) Notice by RBI vide
Notification dated 22/03/19
5 Mutual Fund Applicable wef 1/04/2023 as per SEBI’s notification
Companies dated 25th Jan 2022 with specific Format.
Notes:
1. Voluntary adoption is not permitted for BANKs/NBFCs/INSURERS
2. Entities not covered in the roadmap shall continue to apply Accounting Standards at present. Such
as RRBs, Banks, Insurance Companies, Unlisted entities having NW less than 250 Cr., Entities
listed on SME Exchanges.

IMPORTANT CASES:

Case - 1
Company X, on standalone basis, had a net worth of above Rs. 250 crore but below Rs. 500 crore in
financial year 2013-14 as well as financial year 2014-15 and is expected to exceed Rs. 500 crore in
financial year 2015-16.
Whether the Company X be required to comply with Ind AS from financial year 2017-18 i.e. under
Phase II, given that the net worth as on 31st March 2014 was below Rs. 500 Crore and the Company
X was a company existing as on 31st March 2014 and was already falling under the threshold as on
31st March 2014 itself irrespective of the fact that the net-worth as on 31st March 2016 might be
above Rs. 500crore.
(Answer: IND AS will be applicable from the financial year beginning from 1st April, 2016 - Phase I,
However if expectation doesn’t meet then Phase II)

Case – 2
(ITFG Clarification Bulletin 1, Issue 2)
Company A is a listed company and has three Subsidiaries Company X, Company Y and Company Z. As
on 31stMarch 2014, the net worth of Company A is Rs 600 Crores, net worth of Company X is Rs 100
Crores, Company Y is Rs 400 Crores and Company Z is Rs 210 Crores. All the three subsidiaries are
non-listed public companies.

Sub - Case A During the financial year 2014-15, Company A has sold off its entire investment in
Company X on 31stDecember 2014. Therefore, Company X is no longer a subsidiary of Company A for
the purposes of preparation of financial statements as on
31 March 2015. Should Company X prepare its financial statements as per the Companies (Accounting
Standards) Rules, 2006 or the Companies (Indian Accounting Standards) Rules, 2015?

1.4
 ROADMAP OF IND AS

Sub - Case B During the financial year 2015-16, Company A has sold off its investment in Company
Y on 31stDecember, 2015. Therefore, Company Y is no longer a subsidiary of Company A for the
purposes of preparation of financial statements as on 31 March 2016. Should Company Y prepare its
financial statements as per the Companies (Accounting Standards) Rules, 2006 or the Companies
(Indian Accounting Standards) Rules, 2015?

Sub - Case C During the financial year 2016-17, Company A has sold off its investment in Company
Z on 31stDecember 2016, therefore company Z is no longer a subsidiary of Company A for the purposes
of preparation of financial statements as on 31 March 2017. Should Company Z prepare its financial
statements as per the Companies (Accounting Standards) Rules, 2006 or the Companies (Indian
Accounting Standards) Rules, 2015?
(Answer: CASE A & B – NO Ind AS BS of Subsidiaries X & Y; CASE C – Subsidiary Z has to prepare
its FS as per Ind AS)

Case – 3
(ITFG Clarification Bulletin 2, Issue 2)
Company X Ltd. and Company Y Ltd. registered in India having net worth of Rs 600 crores and 100
crores respectively are subsidiaries of a Foreign Company viz., ABC Inc., which has net worth of more
than Rs. 500 crores in financial year 2015-16. Whether Company X Ltd. and Y Ltd. are required to
comply with Ind AS from financial year 2016-17 on the basis of net worth of the parent Foreign
Company or on the basis of their own net worth?
(Answer: Foreign Company – Not required to Comply with Ind AS. Company X – will follow Ind AS &
Company Y will not follow Ind AS, but foreign company’s net worth would not be the basis for deciding
the applicability)

Case – 4
(ITFG Clarification Bulletin 12, Issue 6)
ABC & Co. incorporated in US with limited liability, has established a branch office in India, with the
permission of the RBI, to provide consultancy service in India. The branch office remits the amounts
earned by it to ABC & Co. (i.e. Head office) net of applicable Indian taxes and subject to RBI
guidelines.
AS on April 1, 2016, it has more than 500 crore balance as “Head Office account”.
Whether the India branch office of ABC Co. will be required to comply with IndAS?
(Answer: Branch office of a foreign co. is not covered under rule 6 since branch is not incorporated
under the Co. Act. Therefore, branch office of ABC & Co. is not required to comply with Ind AS.)

Case – 5
(ITFG Clarification Bulletin 11, Issue 7)
A Ltd. is a first time adopter of IndAS. It has incorporated a partnership firm with B Ltd. namely,
M/s A&B Associates. Whether IndAS will be applicable to M/s A&B Associates by virtue of the fact
that Ind AS is applicable to A Ltd.?
(Answer: Ind AS is not applicable to Partnership entity as it is not Incorporated under the Act.

1.5
 ROADMAP OF IND AS

However, partnership firm will be required to provide financial statements for the purpose of
Consolidation.)

Case – 6
(ITFG Clarification Bulletin 6, Issue 2)
Company X Ltd. is being covered under Phase I of Ind AS and needs to apply Ind AS from financial
year 2016-17. Company Y which is an associate company of Company X Ltd. is a charitable organization
and registered under section 8 of the Companies Act, 2013.
Whether company Y is required to comply with Ind AS from financial year 2016-17?
(Answer: Section 8 companies are incorporated under Co. Act, 2013 and are required to comply with
the provisions of Co. Act, 2013, therefore Co. Y will be required to apply Ind AS from the financial
year 2016-17)

Case – 7
(ITFG Clarification Bulletin 3, Issue 8)
As on March 31, 2014, Company A is a listed company and has a net worth of 50 Crore. As on March
31, 2015, the company is no more a listed company. Whether Company A is required to comply with
Ind AS from the FY 2017-18.
(Answer: Before the mandatory applicable date (i.e. 17-18) company A ceases to be a listed company.
Accordingly, it will not be required to apply Ind AS from FY 17- 18)

Case - 8
As per the roadmap, Ind AS is applicable to Company X from the financial year 2017-18. Company X
(non-finance company) is a subsidiary of Company Y (NBFC). Company Y is an unlisted NBFC company
having net worth of ` 400 crores. What will be the date of applicability of Ind AS for company X and
company Y? If Ind AS applicability date for parent NBFC is different from the applicability date of
corporate subsidiary, then, how will the consolidated financial statements of parent NBFC be
prepared?
Answer:
In accordance with the roadmap, it may be noted that NBFCs having net worth of less than 500 crore
shall apply Ind AS from 1 April, 2019 onwards. Further, the holding, subsidiary, joint venture or
associate company of such an NBFC other than those covered by corporate roadmap shall also apply
Ind AS from 1 April, 2019.
Accordingly, in the given case, Company Y (NBFC) shall apply Ind AS for the financial year beginning
1 April, 2019 with comparative for the period ended 31 March, 2019 . Company Xshall apply Ind AS in
its statutory individual financial statements from the financial year 2017-2018 (as per the corporate
roadmap). However, for the purpose of Consolidation by Company Y for financial years 2017-2018 and
2018-2019, Company X shall also prepare its individual financial statements as per AS.

1.6
 SCHEULE III TO THE COMPANIES ACT,
2013

SCHEULE III TO THE

02
COMPANIES ACT, 2023
“Sometimes Later becomes Never”

DIVISION II

Financial Statements for a company whose financial statements are drawn up in

compliance of the Companies (Indian Accounting Standards) Rules, 2015.

Dear Students,
In this topic, I have included important points of Schedule III relevant for Examination purpose. For
full annexure u can refer ICAI Module.

Name of the Company....................

Balance Sheet as at......................
(Rupees in )
Particulars Note Figures as at Figures as at
No. the end of the end of the
current previous
reporting reporting
period period

1 2 3 4
(1) ASSETS
Non-current assets
(a) Property, Plant and Equipment INDAS 16
(b) Capital work-in-progress INDAS 16
(c) lnvestment Property INDAS 40
(d) Goodwill INDAS 103,110,111
(e) Other Intangible assets INDAS 38
(f) Intangible assets under development INDAS 38
(g) Biological Assets other than bearer plants INDAS 41
(h) Financial Assets INDAS 32/109
(i) Investments
(ii) Trade receivables
(iii) Loans
(iv) Others, to be specified
(I) Deferred tax assets (net) INDAS 12
(J) Other Non-current assets

2.1
 SCHEULE III TO THE COMPANIES ACT,
2013
(2) Current assets
(a) Inventories INDAS 2
(b) Financial Assets INDAS 32/109
(i) Investments
(ii) Trade receivables
(iii) Cash and cash equivalents
(iv) Bank balances other than (iii) above
(v) Loans
(vi) Others (to be specified)
(c)
Current Tax Assets (Net) INDAS 12
(d)
Other current assets

Total Assets
EQUITY AND LIABILITIES
Equity
(a) Equity Share capital INDAS 32
(b) Other Equity INDAS 32
LIABILITIES
Non-current liabilities
(a) Financial Liabilities
(ia) Lease Liabilities INDAS 116
(i) Borrowings INDAS 32/109
(ii) Trade Payables: INDAS 32/109
(A) Total outstanding dues of micro enterprises and small enterprises; and
(B) Total outstanding dues of creditors other than micro enterprises and small
enterprises.
(iii) Other financial liabilities (other than those specified in item (b), to be specified)
(b) Provisions INDAS 37
(c) Deferred tax liabilities (Net) INDAS 12
(d) Other non-current liabilities

Current liabilities
(a) Financial Liabilities
(i) Lease Liabilities INDAS 116
(ii) Borrowings INDAS 32/109
(iii) Trade Payables: INDAS 32/109
(A) Total outstanding dues of micro enterprises and small enterprises; and
(B) Total outstanding dues of creditors other than micro enterprises and small
enterprises.
(iv) Other financial liabilities (other than those specified in item (c)
(b) Other Current Liabilities
(c) Provisions INDAS 37
(d) Current Tax Liabilities (Net) INDAS 12
Total Equity and Liabilities

2.2
 SCHEULE III TO THE COMPANIES ACT,
2013

STATEMENT OF CHANGES IN EQUITY

Name of the Company..............

Statement of Changes in Equity for the period ended ............

A. Equity Share Capital

1. Current Reporting Period
Balance at the Changes in equity Restated Balance Changes in equity Balance at the end
beginning of the share capital due at the beginning share capital of the current
reporting period to prior period of the current during the current reporting period
errors reporting period year

2. Previous Reporting Period

Balance at the Changes in equity Restated Balance Changes in equity Balance at the end
beginning of the share capital due at the beginning of share capital of the previous
previous to prior period the previous during the reporting period
reporting period errors reporting period previous year

2.3
SCHEULE III TO THE COMPANIES ACT,
2013

2.4
SCHEULE III TO THE COMPANIES ACT,
2013

2.5
 SCHEULE III TO THE COMPANIES ACT,
2013

GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE

SHEET

1. ITEMS OF NON-CURRENT ASSETS

Investments Trade Receivables Loans Other Non-
Current Assets
Investments Sub classified into – Classify loans into- Classified into-
shall be ● Secured ● Security Deposits ● Capital
classified as ● Unsecured ● Loans to related Advances
Equity, Pref, ● Significant Parties ● Other
Govt or trust increase in ● Others than
securities, Debn, or credit Risk Capital
Bonds ● Credit Sub classified into – Advances
MF, Other Impaired ● Secured
Investments. ● Unsecured Others
Provision for bad & ● Significant increase (specify)
Also, details doubtful debts shall be in credit Risk Other than
regarding separately disclosed ● Credit Impaired
Investments in under the relevant Capital Advances
Subsidiaries, head. Provision for bad & doubtful is sub classified as
Associates, JV or debts shall be separately –
structured entities Debts due by disclosed under the relevant ● Security
shall also be given directors/officers of head. deposits
from above entity shall be ● Advances to
classification. separately disclosed. Loans due by related parties
directors/officers of entity ● Other advances
Disclose quoted Ageing schedule of shall be separately disclosed. Advances to
investments & their Disputed and directors/
market values undisputed TR for the officers/ their
separately from mentioned periods private
unquoted must be given. companies to be
investments and disclosed
aggregate amount separately under
of impairment in ‘Other Financial
these values Assets'

2. Other Financial Assets

(i) Security Deposits
(ii) Bank deposits with more than 12 months maturity
(iii) Others (to be specified)

2.6
 SCHEULE III TO THE COMPANIES ACT,
2013

3. Items of Current Assets

Inventories Investments Trade Cash & Cash Loans
Receivables Equivalents
Classified into- Investments Sub classified Classified Classify loans
● Raw shall be into – into- into-
Materials classified as ● Good & ● Balance ● Security
● WIP Equity, Pref, Secured with Banks Deposits
● Finished Govt or trust ● Good but ● Cheques/D ● Loans to
Goods securities., Unsecured rafts on related Parties
● Stock in Debn or ● TR with hand ● Others
Trade bonds, Significant ● Cash on
(acquired for MF increase in Hand Sub classified into
trading) partnerships credit Risk ● Others such –
● Stores & & Others. ● Credit as FDs lower ● Good &
Spares Impaired than 12 Secured
● Loose tools Also, details months or ● Good but
● Others regarding Provision for bad & short term Unsecured
Investments in doubtful debts highly liquid ● TR With
GIT shall be Subsidiaries, shall be investments Significant
disclosed under Associates, JV separately increase in
sub-heads shall also be disclosed under credit Risk
separately given from the relevant ● Credit
above head. Impaired
Mode of classification.
valuation shall Debts due by Provision for bad &
be disclosed Disclose quoted directors/officer doubtful debts shall
investments & s of entity shall be separately
their market be separately disclosed under the
values disclosed. relevant head.
separately from
unquoted Ageing schedule of Loans due by
investments Disputed and directors/officers
undisputed TR for of entity shall be
Aggregate the separately
amount of mentioned periods disclosed.
impairments in must be given.
value of
investments are
also to be
disclosed.

2.7
 SCHEULE III TO THE COMPANIES ACT,
2013
For Trade Receivables outstanding, following ageing schedule shall be given:

Outstanding for the following period from due date

Particulars of payment*
Less than 6 months 1 - 2 2 - 3 More than Total
6 months – 1 year year year 3 years
I) Undisputed Trade Receivables
– Considered Good
ii) Undisputed Trade Receivables –
which have significant increase in
credit risk
iii) Undisputed Trade Receivables –
Credit Impaired
iv) Disputed Trade Receivables –
Considered Good
iv) Disputed Trade Receivables –
which have significant increase in
credit risk
vi) Disputed Trade Receivables –
Credit Impaired

4. Non-Current Liabilities
BORROWINGS PROVISIONS OTHER NON-CURRENT
Classified into: Classified into: Classified into-
● Bonds or debentures ● Provision for ● Advances
● Term Loans from Banks Employee ● Others
● Term Loans from Parties benefits
● Deferred payment liabilities ● Others
● Deposits
● Loans from related parties
● Long term maturities of FL
● Liability component of
compound financial
instruments
● Other Loans (specify)

Borrowings shall Further Classified

as Secured and Unsecured along
with nature of security.

Any guarantees by directors or

2.8
 SCHEULE III TO THE COMPANIES ACT,
2013
others

Bonds or debentures in descending

order of maturity or conversion

Particulars of any redeemed bonds

or debentures which the company
can re-issue

Terms of Repayments

Period and amount of default as on

BS date

5. Current Liabilities
Borrowings Other FL Other CL Provisions Trade Payables
Classified into: Classified into- Classified into- Classified Classified into-
● Bonds a) Current (a) revenue into: ● Outstanding
● Term Loans maturities of received in ● Provision from Micro
from Banks long-term debt; advance; for Enterprises &
● Term Loans b) Current (b) other Employee Small
from Parties maturities of advances benefits Enterprises;
● Deferred finance lease and ● Others and
payment obligations; (c) others ● Outstanding
liabilities c) Interest from others
● Deposits accrued;
● Loans from d) Unpaid
related parties dividends;
● Long term e) Application
maturities of FL money received
● Liability for allotment of
cmponent of securities to
compound the extent
financial refundable and
instruments interest
● Other Loans accrued
thereon;
Further Classified f) Unpaid matured
as Secured and deposits and
Unsecured along interest
with nature of accrued
security. thereon;

2.9
 SCHEULE III TO THE COMPANIES ACT,
2013
Any guarantees by g) Unpaid matured
directors or debentures and
others interest
accrued
Period and thereon; and
amount of h) Others
default as on BS
date Current
Maturity of
long-term debt
to be disclosed
separately

Trade Payables Ageing Schedule:

Outstanding for the following period from due date
Particulars of payment*

Less than 1 1-2 2-3 More than Total

year years year 3 years
I) MSME
ii) Other
iii) Disputed Dues - MSME
iv) Disputed Dues - Others
*Similar information shall be given where no due date of payment is specified in that case disclosure
shall be from the date of the transaction.
Unbilled dues shall be disclosed separately.

6. Contingent Liabilities and Commitments: (to the extent not provided for)
(a) Contingent Liabilities shall be classified as-
• claims against the company not acknowledged as debt.
• guarantees excluding financial guarantees; and
• other money for which the company is contingently liable.

(ii) Commitments shall be classified as-

(a) estimated amount of contracts remaining to be executed on capital account and
not provided for;
(b) uncalled liability on shares and other investments partly paid; and
(c) other commitments (specify nature).

7. Following Ratios to be disclosed:

(a) Current Ratio,
(b) Debt-Equity Ratio,

2.10
 SCHEULE III TO THE COMPANIES ACT,
2013
(c) Debt Service Coverage Ratio,
(d) Return on Equity Ratio,
(e) Inventory turnover ratio,
(f) Trade Receivables turnover ratio,
(g) Trade payables turnover ratio,
(h) Net capital turnover ratio,
• Net profit ratio,
j) Return on Capital employed,
k) Return on investment.

The company shall explain the items included in numerator and denominator for computing the above
ratios. Further explanation shall be provided for any change in the ratio by more than 25% as compared
to the preceding year.

PART II - STATEMENT OF PROFIT AND LOSS

Name of the Company.........................

Statement of Profit and Loss for the period ended................
Particulars Note No. Figures as at Figures for
the end of the previous
current reporting
reporting period period
I Revenue from operations IndAS - 115
II Other Income
III Total Income (l + Il)
IV EXPENSES
a. Cost of materials consumed
(Opn. RM + Purchased – Clog. RM)
b. Purchases of Stock-in-Trade
C. Changes in inventories of finished
goods, Stock-in -Trade and work-in-
progress
d. Employee benefits expense IndAS– 19
e. Finance costs IndAS–32
f. Depreciation and amortization expenses IndAS - 16
& 38
g. Other expenses
Total expenses (lV)
V Profit/(loss) before exceptional
items and tax (I-IV)
2.11
 SCHEULE III TO THE COMPANIES ACT,
2013
VI Exceptional Items
VII Profit/ (loss) before Tax (V-VI)
VIII Tax expense: IndAS -
(1) Current tax 12
(2) Deferred tax
IX Profit (Loss) for the period from
continuing operations (VII - VIII)
X Profit/(loss) from discontinued
operations
XI Tax expenses of discontinued
operations
XII Profit/(loss) from Discontinued
operations (after tax) (X-XI)
XI Profit/(loss) for the period
II (IX+XII)

XIV Other Comprehensive Income

A. (i) Items that will not be reclassified
to profit or loss
(ii) Income tax relating to items that
will not be reclassified to profit or loss

B. (i) Items that will be reclassified to

profit or loss
(ii) lncome tax relating to items that
will be reclassified to profit or loss
XV Total Comprehensive Income for the
period (XIII+XIV) Comprising Profit
(Loss) and Other comprehensive
Income for the period)
XVI Earnings per equity share (for IndAS -
continuing operation): 33
(1) Basic
(2) Diluted
XV Earnings per equity share (for IndAS –
II discontinued operation): 33
(1) Basic
(2) Diluted
XV Earning per equity share (for IndAS –
III Discontinued & continuing operation) 33
(1) Basic
(2) Diluted
2.12
 SCHEULE III TO THE COMPANIES ACT,
2013

GENERAL INSTRUCTIONS FOR PREPARING OF STATEMENT OF

PROFIT AND LOSS

1. The Statement of Profit and Loss shall include:

(1) Profit or loss for the Period;
(2) Other Comprehensive Income for the period
The sum of (1) and (2) above is “Total Comprehensive Income"

2. Revenue from operations shall disclose separately in the notes

(i) sale of products (including Excise Duty);
(ii) sale of services;
(iia) Grant or donation received (relevant in case of section 8 companies only) and
(iii) Other operating revenues.

3. Finance Costs: Finance costs shall be classified as-

(i) interest;
(ii) dividend on redeemable preference shares;
(iii) exchange differences regarded as an adjustment to borrowing costs; and
(iv) Other borrowing costs (specify nature).

4. Other income: other income shall be classified as-

(a) interest Income;
(b) dividend Income; and
(c) other non-operating income (net of expenses directly attributable to such income)

5. Other Comprehensive Income shall be classified into-

(A) Items that will not be reclassified to profit or loss (NRPL):
(i) Changes in revaluation surplus;
(ii) Re-measurements of the defined benefit plans;
(iii) Equity Instruments through Other Comprehensive Income;
(iv) Fair value changes relating to own credit risk of financial liabilities designated at
fair value through profit or loss;
(v) Share of Other Comprehensive Income in Associates and Joint Ventures, to the
extent not to be classified into profit or loss; and
(vi) Others (specify nature).

(B) Items that will be reclassified to profit or loss (RPL);

(i) Exchange differences in translating the financial statements of a foreign
operation;

2.13
 SCHEULE III TO THE COMPANIES ACT,
2013
(ii) Debt instruments through Other Comprehensive Income;
(iii) The effective portion of gains and loss on hedging instruments in a cash flow
hedge;
(iv) Share of other comprehensive income in Associates and Joint Ventures, to the
extent to be classified into profit or loss; and
(v) Others (specify nature)

6. Additional Information: A Company shall disclose by way of notes, additional information

regarding aggregate expenditure and income on the following items:
(a) employee Benefits expense (showing separately (i) salaries and wages, (ii) contribution to
provident and other funds, (iii) share based payments to employees, (iv) staff welfare
expenses).
(b) depreciation and amortisation expense;
(c) any item of income or expenditure which exceeds one per cent of the revenue from
operations or Rs 10,00,000, whichever is higher, in addition to the consideration of
'materiality ‘as specified in clause 7 of the General Instructions for Preparation of
Financial Statements of a Company;
(d) interest Income;
(e) interest Expense
(f) dividend income;
(g) net gain or loss on sale of investments;
(h) net gain or loss on foreign currency transaction and translation (other than considered
as finance cost);
(i) payments to the auditor as (a) auditor, (b) for taxation matters, (c) for company law
matters, (d) for other services, (e) for reimbursement of expenses;
(j) in case of companies covered under section 135, amount of expenditure incurred on
corporate social responsibility activities; and
(k) details of items of exceptional nature;

7. Depending upon the Total Income of the company, the figures appearing in the Financial
Statements shall be rounded off as below:
Turnover Rounding off
a) less than one hundred crore rupees To the nearest hundreds,
thousands, lakhs or millions, or
decimals thereof
b) one hundred crore rupees or more To the nearest, lakhs, millions or
crores, or decimals thereof.
Once a unit of measurement is used, it should be used uniformly in the Financial Statements.

2.14
 FRAMEWORK FOR PREPARATION & PRESENTATION OF FINANCIAL STATEMENTS

FRAMEWORK FOR PREPARATION

03 AND PRESENTATION OF
FINANCIAL STATEMENTS
“Ever tried. Ever failed. No matter.
Try Again. Fail again. Fail better.

1. INTRODUCTION

1. The Conceptual Framework for Financial Reporting under Indian Accounting Standards (INDAS)
(hereinafter the 'Conceptual Framework under INDAS') is not a Standard and it does not
override any standard or any requirement in any standard.

2. Therefore, this does not form part of a set of standards pronounced by the standard- setters.

3. While the Conceptual Framework under INDAS is primarily meant for the standard- setter for
formulating the standards, it has relevance to the preparers in certain situations such as to
develop consistent accounting policies for areas that are not covered by a standard or where
there is choice of accounting policy, and to assist all parties to understand and interpret the
Standards.

4. As a result, certain individual standards e.g. INDAS 1, Presentation of Financial Statements,

INDAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, INDAS 103,
Business Combinations, etc., require the preparers to follow the guidance in the Conceptual
Framework for Financial reporting under Indian Accounting Standards.

5. Nothing in the Conceptual Framework under INDAS overrides any INDAS or any requirement
in an INDAS.

2. OBJECTIVES OF GENERAL PURPOSE FINANCIAL REPORTING

2.1 OBJECTIVES
To provide financial information about the reporting entity that is useful to:
● Existing and potential investors,
● Lenders and
● Other creditors
in making decisions relating to providing resources to the entity.

3.1
 FRAMEWORK FOR PREPARATION & PRESENTATION OF FINANCIAL STATEMENTS

Those decisions involve decisions about:

(a) Buying, selling or holding equity and debt instruments;
(b) Providing or settling loans and other forms of credit; or
(c) Exercising rights to vote on, or otherwise influence, management's actions that affect the
use of the entity's economic resources.

2.2 LIMITATION OF GENERAL PURPOSE FINANCIAL REPORTING

General purpose financial reports:
● Do not and cannot provide all of the information that existing and potential investors,
lenders and other creditors need. Those users need to consider pertinent information from
other sources, for example, general economic conditions and expectations, political events
and political climate, and industry and company outlooks;
● Are not designed to show the value of a reporting entity; but they provide information to
help existing and potential investors, lenders and other creditors to estimate the value of
the reporting entity; and
● Are not primarily directed to other parties, such as regulators and members of the public
other than investors, lenders and other creditors.

2.3 INFORMATION PROVIDED BY GENERAL PURPOSE FINANCIAL REPORTS

GPFR provides Financial Information such as:
1. Financial Information on Financial Position – contains Economic Resources of entity (i.e.
Assets) and Claims on Entity (Liabilities)
2. Effects of transactions and other events that change entity's economic resources and
claims – contains Financial performance (Comprehensive Income), Cash Flows and Changes
not resulting from financial performance.

2.3.1 Economic Resources and Claims

Information about the nature and amounts of a reporting entity’s economic resources and claims can
help users to identify the reporting entity’s financial strengths and weaknesses. That information can
help users to:
(a) assess the reporting entity’s:
(i) liquidity and solvency,
(ii) its needs for additional financing and
(iii) how successful it is likely to be in obtaining that financing
(b) assess management’s stewardship of the entity’s economic resources
(c) predict how future cash flows will be distributed among those with a claim against the reporting
entity

2.3.2 Changes in Economic Resources and Claims

Changes in a reporting entity’s economic resources and claims result from:
♦ that entity’s financial performance and
♦ other events or transactions such as issuing debt or equity instruments

3.2
 FRAMEWORK FOR PREPARATION & PRESENTATION OF FINANCIAL STATEMENTS

To properly assess both the prospects for future net cash inflows to the reporting entity and
management’s stewardship of the entity’s economic resources, users need to be able to identify those
two types of changes.

3. QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL

INFORMATION

3.1 QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL

INFORMATION

Sr. No. Qualitative Characteristics Meaning

1 Relevance Financial information should have a predictive value or
confirmatory value or both, if this is a case then financial
information is considered as Relevant for decision making.
Relevance also includes Materiality.
2 Faithful Representation Financial information should be based on Substance of
the Economic phenomenon if its legal form is different.
Providing information only about the legal form would
not faithfully represent the economic phenomenon.
3 Completeness Financial information should be complete with all
necessary descriptions and Explanations.
4 Neutral A neutral depiction is without bias in the selection or
presentation of financial information.
A neutral depiction is not slanted, weighted, emphasised,
de-emphasised or otherwise manipulated to increase the
probability that financial information will be received
favourably or unfavourably by users.
5 Free from Error Free from error means there are no errors or omissions
in the description of the phenomenon, and the process
used to produce the reported information has been
selected and applied with no errors in the process.
6 Comparability Financial information should be comparable with
alternatives to take decisions
7 Verifiability Verifiability means that different knowledgeable and
independent observers could reach consensus, although
not necessarily complete agreement, that a particular
depiction is a faithful representation.
8 Timeliness Timeliness means having information available to decision-
makers in time to be capable of influencing their decisions.
9 Understandability Classifying, characterising and presenting information
clearly and concisely makes it understandable.

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 FRAMEWORK FOR PREPARATION & PRESENTATION OF FINANCIAL STATEMENTS

3.2 THE COST CONSTRAINT ON USEFUL FINANCIAL INFORMATION

1. Cost is a pervasive constraint on the information that can be provided by financial reporting.
Reporting financial information imposes costs, and it is important that those costs are
justified by the benefits of reporting that information.

2. Both the providers and users of financial information incur costs in reporting and analysing
financial information. In applying the cost constraint, the ICAI assesses whether the
benefits of reporting particular information are likely to justify the costs incurred to
provide and use that information. When applying the cost constraint in formulating a
proposed INDAS, the ICAI seeks information from providers of financial information, users,
auditors, academics and others about the expected nature and quantity of the benefits and
costs of that INDAS. In most situations, assessments are based on a combination of
quantitative and qualitative information.

3. Because of the inherent subjectivity, different individuals’ assessments of the costs and
benefits of reporting particular items of financial information will vary. Therefore, the ICAI
seeks to consider costs and benefits in relation to financial reporting generally, and not just
in relation to individual reporting entities.

4. FINANCIAL STATEMENTS & REPORTING ENTITY

4.1 OBJECTIVE AND SCOPE OF FINANCIAL STATEMENTS

The objective of financial statements is to provide financial information about the reporting entity's:
● Assets, liabilities and equity; and
● Income and expenses
that is useful to users of financial statements in assessing:
● The prospects for future net cash inflows to the reporting entity, and
● Management's stewardship of the entity's economic resources

Such financial information is provided:

1. In the balance sheet, by recognising assets, liabilities and equity;
2. In the statement of profit and loss, by recognising income and expenses; and
3. In other statements and notes, by presenting and disclosing information about:
● Recognised assets, liabilities, equity, income and expenses, including information about
their nature and about the risks arising from those recognised assets and liabilities;
● Assets and liabilities that have not been recognised, including information about their
nature and about the risks arising from them;
● Cash flows;
● Contributions from holders of equity claims and distributions to them; and
● The methods, assumptions and judgements used in estimating the amounts presented
or disclosed, and changes in those methods, assumptions and judgements.
3.4
 FRAMEWORK FOR PREPARATION & PRESENTATION OF FINANCIAL STATEMENTS

4.1.1 Reporting period

Financial statements are prepared for a specified period of time (reporting period) and to
help users of financial statements to identify and assess changes and trends; financial
statements also provide comparative information for at least one preceding reporting period.

4.1.2 Perspective adopted in financial statements

Financial statements provide information about transactions and other events viewed from
the perspective of the reporting entity as a whole, not from the perspective of any
particular group of the entity's existing or potential investors, lenders or other creditors.

4.1.3 Going concern assumption

Financial statements are normally prepared on the assumption that the reporting entity is
a going concern and will continue in operation for the foreseeable future. Hence, it is
assumed that the entity has neither the intention nor the need to enter liquidation or to
cease trading. If such an intention or need exists, the financial statements may have to be
prepared on a different basis. If so, the financial statements describe the basis used.
(Refer Practical Example 1)

4.2 THE REPORTING ENTITY

A reporting entity is an entity that is required, or chooses, to prepare financial statements.
If the reporting entity is not a legal entity and does not comprise only legal entities linked by a parent-
subsidiary relationship, how can the boundary of reporting entity be determined?
In such cases, determining the boundary of the reporting entity is driven by the information needs of
the primary users of the reporting entity’s financial statements. Those users need relevant information
that faithfully represents what it purports to represent. Faithful representation requires that:
(a) The boundary of the reporting entity does not contain an arbitrary or incomplete set of economic
activities;
(b) Including that set of economic activities within the boundary of the reporting entity results in
neutral information; and
(c) A description is provided of how the boundary of the reporting entity was determined and of what
constitutes the reporting entity

4.2.1 Consolidated and unconsolidated financial statements

Consolidated financial statements provide information about the assets, liabilities, equity, income and
expenses of both the parent and its subsidiaries as a single reporting entity. That information is
useful for existing and potential investors, lenders and other creditors of the parent in their
assessment of the prospects for future net cash inflows to the parent. This is because net cash
inflows to the parent include distributions to the parent from its subsidiaries, and those distributions
depend on net cash inflows to the subsidiaries.
Consolidated financial statements are not designed to provide separate information about the assets,
liabilities, equity, income and expenses of any particular subsidiary. A subsidiary's own financial
statements are designed to provide that information.

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 FRAMEWORK FOR PREPARATION & PRESENTATION OF FINANCIAL STATEMENTS

5. THE ELEMENTS OF FINANCIAL STATEMENTS

Broadly, a statement of financial position or balance sheet comprises three elements viz. Asset,
Liability and Equity which can be described as below –

(a) ASSETS – A present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits.

Right to Entity (or Obligation of Another Party)

+ Potential for Future Economic Benefits
+ Control

Example: Control over Asset (substance over form)

Due to some legal constraints in the country, Entity A holds some assets on behalf of Company B
which are being used/ directed by the Company B itself, without any interfere by the Company A. All
production benefits will exclusively be used by Company B.
Merely holding an asset as its legal owner will not satisfy recognition criteria for an asset, hence,
Asset will be recognized in the books of Company B as all the future economic benefit which is
expected to flow to Company B only.

Example: Economic Benefits Flow to the Entity

A Pharma Company incurs some expenditure which is expensed off in order to develop its new drug.
The future economic benefits will not have expected to flow to the Pharma Company because
research phase itself does not establish any rationale to provide any kind of benefit which will flow
to the Company at this stage (as per the relevant accounting standards).
Hence all expenditures will not be eligible to recognize as asset unless its benefits are expected

(b) LIABILITY - A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources embodying
economic benefit

Obligation is Present
Entity has to transfer obligation as
Liability
obligation economic a result of
resource past events

Example: Present Obligation based on Past Events

An Entity has got information about the requirement to implement new taxation system based on
proposed change in legislation in the country. The amount that is expected to outflow from the entity

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 FRAMEWORK FOR PREPARATION & PRESENTATION OF FINANCIAL STATEMENTS

is not based on past events and hence this cannot be treated as present obligation.

Example: Additional Custom Duty Rate Changes

An import has been done in the past on which there is change in additional duty, as announced by the
government of that country, which is to be paid in future. Since, the goods have been imported in the
past period and new additional custom duty obligation arises because of this past event, hence this
will result in a present obligation based on past events and therefore, a liability will be created.
Settlement of such liability could be in cash, transfer of other assets, conversion of obligation into
equity etc. There are liabilities, where timing and amount are not certain, but meets the recognition
criteria, then the amounts are being estimated using some techniques and shown as provisions.

(c) EQUITY- Equity is the residual interest in the assets of the entity after deducting all its
liabilities.

(d) INCOME - Income is increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases of liabilities that result in increases
in equity, other than those relating to contributions from equity participants.

(e) EXPENSES - Expenses are decreases in economic benefits during the accounting period in
the form of outflows or depletions of assets or incurrences of liabilities that result in
decreases in equity, other than those relating to distributions to equity participants.

ASPECTS WHICH ARE COMMON TO ASSETS AND LIABILITIES

1. Unit of Account
2. Executory Contracts
3. Substance of Contractual Rights and Contractual Obligations

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 FRAMEWORK FOR PREPARATION & PRESENTATION OF FINANCIAL STATEMENTS

6. RECOGNITION AND DERECOGNITION

6.1 THE RECOGNITION PROCESS

● Recognition is the process of capturing for inclusion
● In the balance sheet or the statement of profit and loss
● An item that meets the definition of one of the elements of financial statements—an asset,
a liability, equity, income or expenses.
The amount at which an asset, a liability or equity is recognised in the balance sheet is referred to as
its 'carrying amount'

6.2 RECOGNITION CRITERIA

Only items that meet the definition of an asset, a liability or equity are recognised in the balance
sheet. Similarly, only items that meet the definition of income or expenses are recognised in the
statement of profit and loss. However, not all items that meet the definition of one of those elements
are recognised.

An asset or liability is recognised only if recognition provides users of financial statements with
information that is useful, i.e. with:
a. Relevant information; and
b. A faithful representation of the asset or liability and of any resulting income,
expenses or changes in equity.

6.3 DERECOGNITION
Derecognition is the removal of all or part of a recognised asset or liability from an entity's balance
sheet. Derecognition normally occurs when that item no longer meets the definition of an asset or of a
liability
Derecognition of Asset - When the entity loses control of all or part of the recognised asset
Derecognition of Liability - When the entity no longer has a present obligation for all or part of the
recognised liability
In some cases, an entity might appear to transfer an asset or liability, but derecognition of that asset
or liability is not appropriate. For example,
● If an entity has apparently transferred an asset but retains exposure to significant positive
or negative variations in the amount of economic benefits that may be produced by the asset,
this sometimes indicates that the entity might continue to control that asset
● If an entity has transferred an asset to another party that holds the asset as an agent for
the entity, the transferor still controls the asset.

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 FRAMEWORK FOR PREPARATION & PRESENTATION OF FINANCIAL STATEMENTS

7. MEASUREMENT OF THE ELEMENTS OF FINANCIAL

STATEMENTS

A very broad comparison between the historical cost and current value measurement bases is given
below
Factor Historical cost Current value
Monetary information about assets Derived at least in part, from the Using information updated to
liabilities and related income and price of the transaction or other reflect conditions at the
expenses event that gave rise to them measurement date
Changes in values Not reflected except to the extent Reflect changes, since the
that those changes relate to previous measurement date, in
impairment of an asset or a liability estimates of cash flows and
becoming onerous other factors reflected in those
current values

1 Historical cost
The table below summarises the concept of ‘historical cost’ in case of assets and liabilities:
Particulars Assets Liabilities
Components Consideration paid (+) transaction Consideration received (-) transaction
costs costs

Changes ● consumption of part or all of the

economic resource that constitutes
the asset (depreciation or

3.9
 FRAMEWORK FOR PREPARATION & PRESENTATION OF FINANCIAL STATEMENTS

amortisation)
● payments received that extinguish ● fulfilment of the liability, for example,
part or all of the asset (collection by making payments that extinguish
from trade receivables) part or all of the liability or by
satisfying an obligation to deliver goods
● effect of events that cause the ● effect of events that increase the value
historical cost of the asset to be no of the obligation to transfer the
longer recoverable (impairment) economic resources needed to fulfil the
liability to such an extent that the
liability becomes onerous. A liability is
onerous if the historical cost is no
longer sufficient to depict the
obligation to fulfil the liability
● accrual of interest to reflect any accrual of interest to reflect any
financing component financing component

2. Exit Value – Fair Value in use/fulfilment value

The following table summarises these concepts in comparative form:
Particulars Fair Value Value in use/Fulfillment value
Definition Price that would be received to sell an Value in use present value of the cash flows,
asset, or paid to transfer a liability, in an or other economic benefits, that an entity
orderly transaction between market expects to derive from the use of an asset
participants at the measurement date and from its ultimate disposal.
Fulfilment value - present value of the cash,
or other economic resources, that an entity
expects to be obliged to transfer as it
fulfils a liability.
Value From Reflects the perspective of market Reflect entity specific assumptions rather
whose participants-participants in a market to than assumptions by market participants
perspective? which the entity has access the assets or
liability is measured using the same
assumptions that market participants
would use when pricing the asset or
liability if those market participants act
in their economic best interest
How Directly by observing prices in active Cannot be observed directly and are
determined? market or using measurement techniques, determined using cash-flow based
for example cash-flow-based measurement techniques
measurement techniques
Transaction Neither those costs incurred on initial Those costs incurred on initial recognition
costs considered recognition, nor those costs to be are not considered, but the present value of
in measurement? incurred on disposal of asset or those costs to be incurred on disposal of
settlement of liability are considered assets or settlement of liability are
considered.

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 FRAMEWORK FOR PREPARATION & PRESENTATION OF FINANCIAL STATEMENTS

3. Entry Value – Current Cost:

Like Historical cost, current cost is also an entry value. Hence, it would be appropriate to
understand the concept of ' current cost’ by comparing it with ‘historical cost’ as below:
Particulars Historical Cost Current Cost
Value Date of acquisition of asset or Each measurement date.
determined on incurrence of liability

Components Assets: Consideration paid (+) Assets: consideration that would be paid (+)
transactions costs transaction costs that would be incurred
Liabilities: Consideration received (-) Liabilities: Consideration that would be
transaction costs received (-) transaction costs that would be
incurred.

MEASUREMENT OF EQUITY
The total carrying amount of equity (total equity) is not measured directly. It equals the total of the
carrying amounts of all recognised assets less the total of the carrying amounts of all recognised
liabilities.

8. PRESENTATION AND DISCLOSURE

8.1 PRESENTATION AND DISCLOSURE OBJECTIVES AND PRINCIPLES

To facilitate effective communication of information in financial statements, when developing
presentation and disclosure requirements in INDASs a balance is needed between:
● Giving entities the flexibility to provide relevant information that faithfully represents the
entity's assets, liabilities, equity, income and expenses; and
● Requiring information that is comparable, both from period to period for a reporting entity
and in a single reporting period across entities.

8.2 CLASSIFICATION
Classification is the sorting of assets, liabilities, equity, income or expenses on the basis of shared
characteristics for presentation and disclosure purposes. Such characteristics include — but are not
limited to the nature of the item, its role (or function) within the business activities conducted by the
entity, and how it is measured. Classifying dissimilar assets, liabilities, equity, income or expenses
together can obscure relevant information, reduce understandability and comparability and may not
provide a faithful representation of what it purports to represent.

8.2.1 Profit or loss and other comprehensive income

Income and expenses are classified and included either:
● In the profit or loss section of statement of profit and loss; or
● Outside the profit or loss section of statement of profit and loss, in other comprehensive
income.
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 FRAMEWORK FOR PREPARATION & PRESENTATION OF FINANCIAL STATEMENTS

8.3 AGGREGATION
Aggregation is adding together of assets, liabilities, equity, income or expenses that have shared
characteristics and are included in the same classification.
Aggregation makes information more useful by summarising a large volume of detail. However,
aggregation conceals some of that detail. Hence, a balance needs to be found so that relevant
information is not obscured either by a large amount of insignificant detail or by excessive aggregation.

9. FINANCIAL CAPITAL MAINTENANCE VS. PHYSICAL

CAPITAL MAINTENANCE

(Also Refer Practical Examples 2, 3 & 4)

The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to
maintain. It provides the linkage between the concepts of capital and the concepts of profit because
it provides the point of reference by which profit is measured. In general terms, an entity has
maintained its capital if it has as much capital at the end of the period as it had at the beginning of the
period. Any amount over and above that required to maintain the capital at the beginning of the period
is profit.

There are two concepts of capital maintenance:

A. Financial Capital maintenance Under this concept, a profit is earned only if the financial amount
of the net assets at the end of the period exceeds the financial amount of net assets at the
beginning of the period, after excluding any distribution to, and contribution from, owners during
the period.
B. Physical Capital maintenance Under this conept, a profit is earned only if the physical productive
or operating capability of the entity at the the end of the period exceeds the physical productive
capacity at the beginning of the period, after excluding any distributions to, and contributions
from, owners during the period .

3.12
 IND AS 1

IND AS 1
04 PRESENTATION OF FINANCIAL
STATEMENTS
“The way to get Started is to
Quit Talking & Begin Doing”

1. SUMMARY OF THE STANDARD

1. Applicable for preparing and presenting General purpose financial statements (not for any specific
industry).

2. General purpose FS means – which intends to fulfill the need of those users who cannot require
an entity to prepare tailored reports (means customized reports) for their particular needs.

3. Not applicable to the Structure and Content of condensed Interim FS (where IND AS 34 is
applicable) except provisions relating to Fair presentation, compliance with IND AS and
Fundamental accounting assumptions.

4. It uses terminology suitable for Profit Oriented entities. (Entities having non-profit activities
have to amend description used for particular line item)

5. Material (Amended definition)

● Information is material if omitting, misstating or obscuring it could reasonably be expected
to influence decisions that the primary users of general purpose financial statements make
on the basis of those financial statements, which provide financial information about a
specific reporting entity.
● Materiality depends on the nature or magnitude (size) of information, or both. An entity
assesses whether information, either individually or in combination with other information, is
material in the context of its financial statements taken as a whole.
● Information is obscured if it is communicated in a way that would have a similar effect for
primary users of financial statements to omitting or misstating that information.

Examples of circumstances that may result in material information being obscured:

(a) information regarding a material item, transaction or other event is disclosed in the
financial statements but the language used is vague or unclear;
(b) information regarding a material item, transaction or other event is scattered throughout
the financial statements;
(c) dissimilar items, transactions or other events are inappropriately aggregated;
(d) similar items, transactions or other events are inappropriately disaggregated; and
4. 1
IND AS 1

(e) the understandability of the financial statements is reduced as a result of material

information being hidden by immaterial information to the extent that a primary user is
unable to determine what information is material.

6. Notes – Additional information, Narrative descriptions or disaggregation of items.

7. OCI (Other Comprehensive Income)- Items which are not recognized in the statement of Profit
or loss as per any other IND ASs. Components of OCI (examples):
(i) Revaluation Reserve (IND AS 16 & IND AS 38)
(ii) Re Measurements of defined benefit Plans i.e. Actuarial Gains and Losses (IND AS19)
(iii) FCTR on conversion of Foreign Operations (IND AS 21)
(iv) Change in fair value of Equity Instruments if not HFT and designated as FVTOCI (IND
AS 109)
(v) Change in fair value of Hedged Instrument in case of CASH FLOW HEDGE (IND AS
109)

8. Reclassification adjustments – amounts reclassified to Profit or Loss in current period that

were recognized in OCI in the current or previous periods.

9. Complete Set of Financial Statements

(a) A Balance Sheet as at the end of the Period
(b) A Statement of Profit and Loss for the period (two sections – P&L and OCI)
(c) A Statement of Changes in Equity for the period ( all owner changes in equity)
(d) A Statement of Cash Flows for the period
(e) Notes, significant a/c policies and explanatory information
(f) Comparative information in respect of preceding period (including Notes).
(g) A Balance Sheet as at the beginning of preceding period if entity applies accounting policy
retrospectively or makes retrospective restatement of items or on reclassification of items
and they are material. (Notes of this Opening BS need not be presented)

10. Entity shall make an EXPLICIT & UNRESERVED STATEMENT of compliance if its FS are complied
with in accordance with IND ASs.
However IND AS 1 allows deviation from a requirement of an Accounting Standard in case:
● The Management concludes that compliance with IND ASs will be misleading; &
● If the regulatory framework requires such a departure OR if the
regulatory framework does not prohibit such a departure.
Else, Disclosure of non-compliance is required to be given.

11. Inappropriate Accounting policies can-not be rectified only by Disclosure, or Notes or Explanatory
statements. It should be retrospectively adjusted as per Ind AS 8

12. FS shall be prepared on the basis of GOING CONCERN unless there is intention to liquidate or
to cease trading or has no realistic alternative but to do so.
4.2
 IND AS 1

If on the basis of material uncertainties that may cast significant doubt upon the entity’s ability
to continue as a going concern the entity shall disclose such uncertainties.
If FS are not prepared on Going Concern Basis then it shall disclose such fact along with the basis
on which it is prepared and reasons.
Assessment of Going Concern assumption should be based on all available future information which
is at least 12 months from the end of reporting period.

13. FS shall be prepared on ACCRUAL basis.

14. No offsetting of Assets and Liabilities or Incomes and Expenses unless requires by IND AS.
Measuring assets net of valuation allowances — for example, obsolescence allowances on inventories
and doubtful debts allowances on receivables—is not offsetting.

15. Frequency of Reporting: at least Annual.

16. Change in Presentation or Change in Classification of items in FS – reclassify comparative

amounts unless it is impracticable.

17. Consistency: Presentation and Classification of items shall be consistent from one period
to next unless:
(a) It is apparent that such change would be more appropriate; or
(b) An IND AS requires such Change.

18. Structure and Content of FS: Clearly identify each financial statements and notes and
distinguished from other information in published documents. Disclose following
information prominently and repeat it as necessary:
(a) Name of reporting entity and any change in the name
(b) Whether FS are of Individual entity or Group of Entity
(c) Date of end of reporting period or the period covered by FS
(d) Presentation currency used
(e) Level of rounding used.

19. Separate classification for Current and Non-Current items except when presentation on liquidity
basis provides reliable and more relevant information. (Even mixed basis is allowed in diverse
operations)

20. IND AS 1 does not prescribe format of FS rather prescribed minimum line items.

21. Current Assets as per (Schedule III of Comp Act, 2013):

(a) It expects to realise the asset, or intends to sell or consume it, in its normal operating
cycle (receivables and inventories);
(b) It holds the asset primarily for the purpose of trading (Financial Instr. - HFT);

4. 3
IND AS 1

(c) It expects to be realised within 12 months after the reporting period.

(d) Cash and Cash equivalents, unless it is restricted for being exchanged or used to settle
liability for at least 12 months after the reporting period.

22. Normal operating cycle is the Time between the acquisition of assets for processing and the
irrealisation in cash or cash equivalents. If not clearly identifiable it is assumed to have a period
of 12months.

Note: To determine the operating cycle, each business segment shall be assessed separately.
Operating cycle can be different segment wise. Hence it should not be assessed on whole business
wise.

23. Current liabilities are those:

● expected to be settled within the entity's normal operating cycle
● held for purpose of trading
● due to be settled within 12months
● for which the entity does not have an unconditional right to defer settlement beyond 12 months
(settlement by the issue of equity instruments does not impact classification).

Note:
1. Financial institutions or Entities with diverse operations may present assets and liabilities in
increasing or decreasing order of liquidity if the presentation is reliable and more relevant than a
current / non-current presentation. This is because such entity does not supply goods or services
within a clearly identifiable operating cycle.
2. The need for a mixed basis of presentation might arise when an entity has diverse operations.

Example 1:
An entity produces whisky from barley, water and yeast in a 24-month distillation process. At the end
of the reporting period the entity has one month’s supply of barley and yeast raw materials, 800
barrels of partly distilled whisky and 200 barrels of distilled whisky.
All raw materials (barley and yeast) work in process (partly distilled whisky) and finished goods
(distilled whisky) are inventories. The raw materials are expected to be realised (ie turned into cash
after being processed into whisky) in the entity’s normal operating cycle. Therefore, even though the
realisation is expected to take place more than twelve months after the end of the reporting period,
the raw materials, work in progress and finished goods are current assets.

Example 2:
An entity owns a machine with which it manufactures goods for sale. It also owns the building in
which it carries out its commercial activities.
The machine and the building are non-current assets because:
♦ They are not cash or cash equivalents;
♦ They are not expected to be realised or consumed in the entity’s normal operating cycle;

4.4
 IND AS 1

♦ They are not held for the purpose of trading; and

♦ They are not expected to be realised within twelve months of the end of the reporting period.

Example 3
On 31 December 20x2, an entity replaced a machine in its production line. The replaced machine was
sold to a competitor for Rs. 300,000. Payment is due 15 months after the end of the reporting period.
The receivable is a non-current asset because:
♦ It is not cash or a cash equivalent;
♦ It is not expected to be realised or consumed in the entity’s normal operating cycle;
♦ It is not held for the purpose of trading; and
♦ It is not expected to be realised within twelve months of the end of the reporting period.
Note: If payment was due in less than twelve months from the end of the reporting period, it would
have been classified as a current asset.

24. REFINANCING:
Refinancing Agreement on a long term At the Reporting date, if Entity Expects
basis is completed after the reporting and has discretion to refinance/roll over
period but before the approval of FS – the Obligation for at least 12 months -
Treat FL as Current when it is due to be Treat FL as Non- Current even it is due to be
settled within 12 months after RP. settled within 12months.
(Non-adjusting Event)

25. BREACH OF PROVISION OF LONG TERM LOAN ARRENGMENT ON OR BEFORE

REPORTING DATE:
Non – Current Non-Current Current
If Liability become If lender agreed to provide If Liability becomes
repayable on demand and grace period before end of repayable on demand
if lender agreed after reporting period for at least and if the lender does
reporting period but 12 months from the end of not agreed for not
before approval of FS for reporting date and during Demanding the
not demanding the which lender cannot demand payment.
payment. (Adjusting Event) immediate payments.

26. Statement of Profit or loss and Other Comprehensive income: Under the Single Statement only

27. Allocation of Profit or loss and OCI attributable to:

(a) Non -controlling Interest; and
(b) Owners of the parent

28. OCI will be grouped into the items:

(a) Which will not be reclassified subsequently to Profit or loss; and
(b) Which will be reclassified subsequently to Profit or Loss A/c when conditions met.

4. 5
IND AS 1

29. EXTRAORDINARY ITEM: PROHIBITED

30. Presentation of Notes normally in following order:

(a) Statement of compliance with IND ASs
(b) Summary of Significant Acc. Policies applied
(c) Supporting information for items shown in BS, P&L, Cash Flows (i.e. schedules)
(d) Other disclosures such as Contingent liabilities and Non-financial disclosures.

31. Disclosure of Critical Judgments made by management in applying accounting policies in summary
of significant accounting policies.
Eg. of Critical judgment: whether substantially all the significant risks and rewards of ownership
of FA and Leased Assets are transferred to other entities.

32. Disclose key source of Estimation Uncertainty at the end of reporting period that have a significant
risk of causing material adjustment to the carrying amounts of A/L within the next financial year.
(Jo assumptions or estimations liye gaye hai year-end pe unke karan next f.y. me A/L ki book value par
agar koi material impact aa sakta hai to vo assumptions or estimations disclose karo)

2. CARVE OUT

When ICAI decided to converge and not to adopt IFRS issued by the IASB, certain changes have
been made considering the economic environment of the country, which is different as compared to
the economic environment presumed to be in existence by IFRS. These differences are due to
differences in application of accounting principles and practices and economic conditions prevailing in
India. These differences which are in deviation to the accounting principles and practices stated in
IFRS, are commonly known as ‘Carve-outs’.

IAS 1 IND AS 1 (CARVE OUT)

It requires that in case of a loan liability, if It clarifies that when there is breach of a material
any condition of the agreement which was provision of a long term loan liability on or before
classified as Non-Current is breached on the end of reporting period with the effect that
the reporting date, such loan liability the liability becomes payable on demand on the
should be classified as Current. reporting date, the entity does not classify the
Even if the breach is rectified after the liability as Current, if the lender agreed not to
reporting date, IAS 1 requires loans to be demand payment as a consequence of breach after
classified as Current. the reporting period and before the approval of
(Non-Adjusting Event) financial statements for issue. (Adjusting Event)

4.6
 IND AS 1

3. DIFFERENCE BETWEEN IND AS 1 & IAS 1

BASIS IAS 1 IND AS 1

Single or Two Statements It permits companies to It does not permit the two statement
present all items of income and approach. All items of incomes and
expenses recognised either in a expenses to be presented in a single
single or in two statements statement of Profit and Loss.
Analysis of Expenses Expenses will be presented IND AS 1 mandates only nature
using the classification based wise classification of expenses.
on either their nature or their
function within the company.
Statement of Changes in Equity It requires the statement to be Requires the statement to be
presented as a separate presented as a part of the Balance
statement. Sheet.

4. 7
IND AS 1

4.8
 IND AS 16

IND AS 16
05
PROPERTY, PLANT & EQUIPMENT

Dream Big and Dare to Fail…….

(1) NON APPLICABILITY OF IND AS 16

1. When any other Standard specifically applied to a particular item or transaction such as IND AS
116 on Leases of Fixed Assets.
2. Biological Assets related to Agricultural activity (IND AS 41 is applicable on such assets)
However, IND AS 16 – PPE is applicable on Bearer Plants.
3. PPE classified as “Held for Sale” (IND AS 105)
4. Recognition and Measurement of Exploration and Evaluation Assets (IND AS 106)
5. Mineral rights and mineral reserves such as oil, natural gas and similar non regenerative resources

(2) IMPORTANT DEFINITIONS

1. PROPERTY PLANT AND EQUIPMENT

Any Tangible item will be called as PPE if it satisfies the following Conditions:
Condition – 1 Condition – 2
Held for Use in Expected to be Used for more than
● Production or Supply of goods and services 12 Months.
● For Rental to Others
● For Administrative Purposes
Renting should be the main business activity of the entity to Qualify tangible item as PPE
otherwise it would be qualified as an Investment Property under IND AS 40

Items of PPE may also be acquired for safety or environmental reasons:

Although not directly increasing the future economic benefits, Such items of PPE qualify for
recognition as assets because they enable an enterprise to derive future economic benefits from
related assets in excess of what could be derived had those items not been acquired.

2. BIOLOGICAL ASSETS
It means Living Plants and Animals. IND AS 16 applies on Bearer Plants only.

3. BEARER PLANT: a plant that satisfies all the 3 conditions:

is used in the production or supply of Agricultural produce
is expected to bear produce for more than a period of 12 months
Bearer Plant is a plant which
Has a remote likelihood of being sold as Agricultural produce Except
for incidental scrap sales
5.1
 IND AS 16

Note: When bearer plants are no longer used to bear produce they might be cut down and sold as
scrap. For example - use as firewood. Such incidental scrap sales would not prevent the plant from
satisfying the definition of a Bearer Plant.
Example of bearer plant is Mango Tree, Coconut Tree etc

(3) RECOGNITION CRITERIA FOR PPE

The cost of an item of PPE should be recognized as an asset if, and only if:
(a) It is probable that future economic benefits associated with the item will flow to the
enterprise, and
(b) The cost of the item can be measured reliably.

Treatment of Spare Parts, Standby Equipment and Servicing Equipment

Case I: If they meet the definition of PPE as per IND AS 16: Recognised as PPE as per IND AS 16
Case II: If they do not meet the definition of PPE as per IND AS 16: Such items are classified
as Inventory as per IND AS 2.
• Treat Expense First as a part of Purchase of Goods
• if at the end of Reporting Period, these items are not yet fully consumed then
treat them as Inventory (Closing Stock)

(4) MEASUREMENT OF PPE

Subsequent measurement on Balance

At Initial Recognition sheet date
COST MODEL
COST MODEL (Or)
REVALUATION MODEL

Note: Selection of Any Model at BS date is an Accounting Policy.

INITIAL RECOGNITION
Cost of an item of PPE comprises:
COST Includes COST Excludes
(a) Purchase Price including Import duties and Non- ● Cost of Opening new business such as
refundable Taxes inauguration cost

(b) Any Directly attributable Costs bringing the ● Startup Costs (i.e. Legal Expenses)
Asset to its ‘location and condition’
Eg. ● Cost of introducing a new product including
● Cost of Employee benefits on construction or advertising
acquisition of PPE
● Installation Cost ● Initial operating losses
5.2
 IND AS 16

● Cost of Testing the PPE

● Professional Fees ● Cost of relocating or reorganizing part or
● Initial delivery Cost etc all the operations of an enterprises.
(c) Decommissioning Restoration and Similar
Liabilities ● Administrative and other general
This cost is to be estimated using appropriate overheads
discounting rate i.e. it should be recognised initially
at PV of future outflow. ● Abnormal Cost/Losses (eg. Loss due to
strike)

● Staff Training Costs

● Income earned from incidental operations

eg. Income from Car Park.

Excess of Net Proceeds from Sale of Items produced during testing will be deducted from the Cost
of Item of PPE.

Carve Out: However IAS 16 prohibits this deduction and requires to transfer to P&L

5.3
 IND AS 16

(5) MEASUREMENT OF COST AT INITIAL RECOGNITION

Case - 1
If Payment is deferred beyond Normal Credit Terms:
Cost of an item of PPE is the CASH PRICE EQUIVALENT (PV of agreed price) at the recognition date.
Total payment - Cash price equivalent = Deemed Interest, charged to P&L over the period of Credit
unless such interest is capitalised in accordance with IND AS 23

Case - 2
PPE acquired in Exchange for a Non-monetary Asset or Assets or a combination of Monetary
and Non-monetary Assets:
Cost of such an item of PPE is measured at fair value of Asset Given Up (1st Priority) or Asset
Received (2nd Priority) unless:
(i) Exchange transaction lacks commercial substance; Or
(ii) Fair value of neither the asset(s) received nor the asset(s) given up is reliably measurable.
If the PPE acquired is not measured at Fair Value, its cost is measured at the carrying amount of the
asset given up. (Refer Practical Examples 1 to 3)

Case - 3
PPE purchased for a Consolidated Price:
Where several items of PPE are purchased for a consolidated price, the consideration is apportioned
to the various items on the basis of their respective fair values at the date of acquisition.
Note: In case the fair values of the items acquired cannot be measured reliably, these values are
estimated on a fair basis as determined by competent valuer.

Case - 4
Government Grant related to PPE:
If Govt. Grant is received in Kind (i.e. PPE received at Free of Cost or at Concessional Price) then it
should be recognised at Fair Value or Nominal Value as per IND AS 20.

Case - 5
Cost of Self Constructed Assets:
Construction Cost excluding Internal profit generated if any but including borrowing Costs.

Case - 6
Cost of Bearer Plants:
Bearer plants are accounted for in the same way as self-constructed items of property, plant and
equipment before they are in the location and condition necessary to be capable of operating in the
manner intended by management. Consequently, references to 'construction' in this Standard should
be read as covering activities that are necessary to cultivate the bearer plants before they are in the
location and condition necessary to be capable of operating in the manner intended by management.

5.4
 IND AS 16

(6) SUBSEQUENT MEASUREMENT AT BALANCE SHEET DATE

An enterprise should choose,

♦ Either Cost model,
♦ Or Revaluation model
as its accounting policy (IND AS 8) and should apply that policy to an entire class of PPE.
Any change in Accounting Policy shall have Retrospective effect.

Class of PPE: A class of PPE is a grouping of assets of a similar nature and use in operations of an
enterprise.

Examples of separate classes:

1) Land
2) Land and Buildings
3) Machinery
4) Ships
5) Aircraft
6) Motor Vehicles
7) Furniture and Fixtures
8) Office Equipment
9) Bearer plants

Example:
Venus Ltd. is a large manufacturing group. It owns a considerable number of industrial buildings, such as factories
and warehouses, and office buildings in several capital cities. The industrial buildings are located in industrial
zones whereas the office buildings are in central business districts of the cities. Venus's Ltd. management wants
to apply the Ind AS 16 revaluation model to subsequent measurement of the office buildings but continue to
apply the historical cost model to the industrial buildings. Is this acceptable under Ind AS 16, Property, Plant
and Equipment?
SOLUTION:
Venus's Ltd. management can apply the revaluation model only to the office buildings. The office buildings can
be clearly distinguished from the industrial buildings in terms of their function, their nature and their general
location. Ind AS 16 permits assets to be revalued on a class-by-class basis. The different characteristics of
the buildings enable them to be classified as different PPE classes.

Cost Model
After recognition as an asset, an item of PPE should be carried at:
Cost - Any Accumulated Depreciation - Any Accumulated Impairment losses

Revaluation Model
After recognition as an asset, an item of PPE whose fair value can be measured reliably should be
carried at a revalued amount.
Fair value at the date of revaluation -
Less: Any subsequent accumulated depreciation (-)
5.5
 IND AS 16

Less: Any subsequent accumulated impairment losses (-)

Carrying value =
Revaluation for entire class of PPE
If an item of PPE is revalued, the entire class of PPE to which that asset belongs should be revalued.

Frequency of
Revaluations
(Sufficient Regularity)

Items of PPE experience Items of PPE with

significant and volatile only insignificant
changes in Fair value changes in Fair value

Revalue the
ANNUAL
item only every
REVALUATION
3 - 5 years

5.6
 IND AS 16

(7) ACCOUNTING TREATMENT OF REVALUATIONS

When an item of PPE is revalued, the carrying amount of that asset is adjusted to the revalued amount.
At the date of the revaluation, the asset is treated in one of the following ways:

Technique 1:
Accumulated depreciation is eliminated against the gross carrying amount of the asset

Step 1 – Eliminate the Accumulated Depreciation balance from Gross Carrying amount of PPE (Debit
Acc. Dep A/c and Credit PPE A/c)

Step 2 – Now Compare the Net Carrying Amount of PPE with Fair Value of PPE and determine the
Revaluation Profit/Loss

Step 3 – Increase or Decrease the Net Carrying Amt. of PPE with the Revaluation Profit/Loss by
either Debiting or Crediting the PPE.

Technique 2:
Restatement Approach (No elimination of Accumulated Depreciation)

Gross carrying amount and Accumulated Depreciation is adjusted in a manner that is consistent with
the revaluation of the carrying amount of the asset.
● No need to eliminate Accumulated Depreciation.
● Calculate the Revaluation Gain/Loss and its “% of Change” (Gain (loss) / WDV)
● Increase/Decrease the Original Cost and Accumulated Depreciation with above % and pass
following journal entry:

PPE A/c Dr.

To Accumulated Depreciation A/c
To Revaluation Surplus A/c
(Refer Practical Example 4)

5.7
 IND AS 16

(7.1) Revaluation - Increase or Decrease – Treatment

Revaluation

Increase Decrease

Credited directly to Exception : Charged to the Exception:

owners’ interests under When it is Subsequent statement of When it is subsequent
the heading of Increase (Initially Profit and Loss Decrease (Initially
Revaluation surplus Decrease) Increase)

Recognised in the Statement of profit Decrease should be debited directly

and loss to the extent that it reverses a to owners’ interests under the
revaluation decrease of the same asset heading of Revaluation surplus to the
previously recognised in the Statement extent of any credit balance existing
of profit and loss in the Revaluation surplus in respect
of that asset

(Refer Practical Example 5)

(7.2) Utilisation of Revaluation Surplus

The revaluation surplus included in owners’ interests in respect of an item of PPE maybe transferred
to the Revenue Reserves (i.e. Retained Earnings) when the asset is de-recognised.

Case I: Mandatory transfer of Revaluation Reserve to Retained Earnings (GR):

When the asset is:
♦ Retired; or
♦ Disposed of

Case II: Option to Transfer Revaluation Reserve to Retained Earnings (GR)

● When the asset is still used by an enterprise not yet sold.
● Transfer the amount equal to the excess depreciation due to Upward Revaluation.

Note:
Transfers from Revaluation Surplus to the Revenue Reserves are not made through the Statement of
Profit and Loss.

5.8
 IND AS 16

(8) TREATMENT OF DIFFERENT SUBSEQUENT

EXPENDITURE ON PPE

1. Cost of day to day Servicing: This cost is directly recognised in the Statement of Profit
and Loss because it does not increase the earning efficiency of PPE.

2. Replacement of parts of PPE: Capitalise in the carrying amount of PPE if the recognition
criteria are met. (i.e. Future Economic Benefits + Cost Reliable)
Examples:
a) Aircraft interiors such as seats and galleys may require replacement several times during the life
of the air frame.
b) Replacing the interior walls of a building, or to make a non-recurring replacement.

3. Regular Major Inspection or Overhaul: When each major inspection is performed, its cost
is recognised in the carrying amount of the item of PPE as a replacement, if the recognition criteria
are satisfied.
Any remaining carrying amount of the cost of the previous inspection (as distinct from physical
parts) is derecognized.

Example:
A shipping company is required by law to bring all ships into dry dock every five years for a major inspection
and overhaul. Overhaul expenditure might at first sight seem to be a repair to the ships but it is actually a
cost incurred in getting the ship back into a seaworthy condition. As such the costs must be capitalised.
A ship which cost ₹ 20 million with a 20 year life must have major overhaul in every five years. The estimated
cost of the overhaul at the five-year point is ₹ 5 million.
The depreciation charge for the first five years of the assets life will be as follows:
Overhaul Component Ship (other than overhaul
(Million) component) Million
Cost 5 15
Years 5 20
Depreciation per year 1 0.75

Total accumulated depreciation for the first five years will be Rs. 8.75, and the carrying amount of the ship
at the end of year 5 will be Rs. 11.25 million.
The actual overhaul costs incurred at the end of year 5 are Rs. 6 million. This amount will now be capitalised
into the costs of the ship, to give a carrying amount of Rs. 17.25 million.
The depreciation charge for years 6 to 10 will be as follows:
Overhaul Component (Million) Ship (other than overhaul
component) Million
Cost 6 11.25
Years 5 15
Depreciation per year 1.2 0.75
Annual depreciation for years 6 to 10 will now be Rs.1.95 million. This process will be continued for years 11
to 15 and years 16 to 20. By the end of year 20, the capital cost of ₹ 20 million will have been depreciated
plus the actual overhaul costs incurred at years 5, 10 and 15.

5.9
 IND AS 16

(9) DEPRECIATION

Component Method of Depreciation:

Each part of an item of PPE with a cost that is significant in relation to the total cost of the item with
significant useful life different from other components should be depreciated separately.
Example:
It may be appropriate to depreciate separately the airframe and engines of an aircraft, whether owned or
subject to a finance lease.
Is Grouping of Components possible?
Yes.
A significant part of an item of PPE may have a useful life and a depreciation method that are the same as the
useful life and the depreciation method of another significant part of that same item. Such parts may be
grouped in determining the depreciation charge.

(a) Accounting Treatment:

Depreciation charge for each period should be recognized in the Statement of Profit and Loss unless
it is included in the carrying amount of another asset for example -
• IND AS 2: Depreciation of manufacturing plant and equipment is included in the costs of
conversion of inventories as per IND AS 2.
• IND AS 38: Depreciation of PPE used for development activities may be included in the cost of an
intangible asset recognised in accordance with IND AS 38 on Intangible Assets.
• IND AS 16: Depreciation of PPE used for construction and development of another self- generated
PPE may be included in the cost of self-generated asset in accordance with IND AS 16 on PPE.

(b) Depreciable Amount and Depreciation Period

What is “Depreciable Amount”?
Depreciable amount is:
Cost of an asset (or other amount substituted for cost i.e. revalued amount) - Residual value
The depreciable amount of an asset should be allocated on a systematic basis over its useful life.

(c) Review of Residual Value and Useful Life of an Asset

Residual value and the useful life of an asset should be reviewed at least at each financial year-end
and, if expectations differ from previous estimates, the change(s) should be accounted for as a
change in an accounting estimate in accordance with IND AS 8 ‘Accounting Policies, Changes in
Accounting Estimates and Errors’.

(d) Commencement of period for charging Depreciation

Depreciation of an asset begins when it is available for use, i.e., when it is in the location and condition
necessary for it to be capable of operating in the manner intended by the management. (i.e. Ready to
use)

5.10
 IND AS 16

Depreciation in Case the asset is Not Working/ lying idle (in case of situations like covid):
Depreciation of an asset ceases, at the earlier of the date that ,the asset is classified as held for sale
and the date the asset is de-recognised. Therefore, the asset continues to be depreciated even if it
remains idle, unless the asset is fully depreciated.

Apart from the above, it may be noted that as per Ind AS 16, one of the factors in determining useful
life of an asset is technical or commercial obsolescence. Therefore, even when the asset is idle, the
same should be depreciated due to technical or commercial obsolescence and wear and tear during that
period.

(e) Cessation of Depreciation

I. Depreciation ceases to be charged when asset’s residual value exceeds its carrying amount; or

II. Depreciation of an asset ceases at the earlier of:

♦ The date that the asset is retired from active use and is held for disposal, and
♦ The date that the asset is derecognized

Therefore, depreciation does not cease when the asset becomes idle or is retired from active use (but
not held for disposal) unless the asset is fully depreciated.

(f) Depreciation on Land and Buildings

Land and buildings are separable assets and are accounted for separately, even when they are acquired
together.
A. Land: Land has an unlimited useful life and therefore is not depreciated.
Exceptions: Quarries and sites used for landfill.
Depreciation on Land:
I. If land itself has a limited useful life:
It is depreciated in a manner that reflects the benefits to be derived from it.
II. If the cost of land includes the costs of site dismantlement, removal and restoration:
That portion of the land asset is depreciated over the period of benefits obtained by
incurring those costs.

B. Buildings:
Buildings have a limited useful life and therefore are depreciable assets.
An increase in the value of the land on which a building stands does not affect the determination of
the depreciable amount of the building.

(g) Depreciation Method

The depreciation method used should reflect the pattern in which the future economic benefits of the
asset are expected to be consumed by the enterprise.
The method selected is applied consistently from period to period unless:
• There is a change in the expected pattern of consumption of those future economic
benefits; or

5.11
 IND AS 16

• That the method is changed in accordance with the statute to best reflect the way
the asset is consumed.

Note: A depreciation method which is based on Revenue generated from the use of an asset, is not
appropriate. Revenue generation includes other factors also such as selling activities; changes in sales
volumes and prices. The price component of revenue may be affected by inflation, which has no bearing
upon the way in which an asset is consumed.

(h) Review of Depreciation method:

The depreciation method applied to an asset should be reviewed at least at each financial year-end and,
if there has been a significant change in the expected pattern of consumption of the future economic
benefits embodied in the asset, the method should be changed to reflect the changed pattern.

Note:
Such a change should be accounted for as a change in an accounting estimate in accordance with
IND AS 8.

Fair Valu
e > Carrying Amount (Residual Value is less than Carrying Amount)
(10) RETIREMENTS

According to IND AS 105 - Items of PPE retired from active use and held for disposal should
be stated at the lower of:
♦ Carrying Amount, and
♦ Fair Value less cost of disposal

Note: Any write-down in this regard should be recognised immediately in the Statement of Profit
and Loss.

5.12
 IND AS 16

(11) DE-RECOGNITION

The carrying amount of an item of PPE should be de-recognised:

• On disposal
• By sale
• By entering into a finance lease, or
• By donation, or
• When no future economic benefits are expected from its use or disposal

Accounting Treatment:
● Gain or loss arising from de-recognition of an item of PPE should be included in the Statement
of Profit and Loss when the item is derecognized unless IND AS 116 on Leases, requires
otherwise on a sale and leaseback (IND AS 116 on Leases, applies to disposal by a sale and
leaseback.)
● Compensation from third parties for items of PPE that were Impaired, Lost or Given up shall be
included in Profit and Loss when such compensation becomes receivable.
● Gain or loss arising from de-recognition of an item of PPE =
Net disposal proceeds (if any) - Carrying Amount of the item

Note: Gains should not be classified as revenue, as defined in IND AS 115. (Rather it can be shown
under exceptional items of Statement of P&L)

Exception:
An enterprise that in the course of its ordinary activities, routinely sells items of PPE that it had held
for rental to others should transfer such assets to inventories at their carrying amount when they
cease to be rented and become held for sale.
The proceeds from the sale of such assets should be recognised in revenue in accordance with IND
AS 115. (Refer Practical Example 6)

Example:
Jai Chawla is in the business of Renting cars to his customers. Jai owns 20 luxury Cars. Jai's Policy is to purchase
a new car, use it in business of rental and then sell it after every 5 years. Now, Jai will not calculate Gain on sale
of Car under INDAS 16, rather the entire sale proceeds shall be treated as Revenue from Operation and Carrying
Amount of car after 5 years is treated as Inventory.

5.13
 IND AS 16

(12) CHANGES IN EXISTING DECOMMISSIONING,

RESTORATION AND OTHER LIABILITIES

(Refer Practical Example No. 7)

5.14
 IND AS 2

06 IND AS 2
INVENTORIES
“It Doesn’t Matter How Slowly you
go as long as you do not Stop”

1. DEFINITION OF INVENTORY - IND AS 2

Inventories are Assets:

(a) Held for sale in the ordinary course of business (Finished Goods)
(b) In the process of Production for Such Sale (WIP) or
(c) In the form of materials or supplies to be consumed in the production process or in the
rendering of services (Raw Material).

2. NON - APPLICABILITY OF IND AS 2

(A) IND AS-2 is not applicable to following cases.

● Any financial instruments held as stock in trade which includes shares, debentures, bonds etc.
(INDAS 32, 109)
● Biological Assets (i.e. living plants and animals) related to agriculture activity and agriculture
produce at the point of harvest (IND AS 41)

(B) This Standard also does not apply to the measurement of inventories held
by:
● Producers of agricultural and forest products, agricultural produce after harvest, and minerals
and mineral products, to the extent that they are measured at Net Realisable value in
accordance with well-established practices in those industries.
● Commodity broker-traders who measure their inventories at fair value less costs to sell.

6.1
INDAS 2

3. HOW TO MEASURE INVENTORY:

At the lower
of

Net realisable
cost
value

4. WHAT IS NET REALISABLE VALUE?

The actual transaction price (i.e. customer order price) after the balance sheet date could be the best
available evidence to identify NRV of Finished Goods or Stock in Trade.

In Respect of Finished goods:

Normal selling price of the Finished Goods XXX
Less - Estimated Expenditure to sale such goods XXX
Net Realisable Value XXX

In Respect of WIP:
Normal selling price of the Finished Goods XXX
Less - Estimated Expenditure to sale such goods XXX
Less – Estimated further Cost to Make Finished Goods XXX
Net Realisable Value of WIP XXX

Measurement of Raw Material:

If Finished goods sold at Cost or Above If Finished goods sold at below Cost
Estimated Realisable value of Raw material and Estimated Realisable value of Raw material or
supplies is considered more than cost. supplies may be less than Cost.
Therefore, Raw Material should be measured Therefore, Raw Material should be measured at
at Cost. Replacement Cost or Original Cost whichever is
Lower.

Note:-
● Estimates of Net Realisable Value also take into consideration the purpose for which the
inventory is held. For example, the net realizable value of the quantity of inventory held to
satisfy firm sales or service contracts is based on the contract price.
● If the sales contract are for less than inventory quantities held, the net realizable value of the
excess quantity is based on general selling prices.
● If there is a firm contract to sell quantities in excess of inventory quantities that the entity
holds or is able to obtain under a firm purchase contract, this may give rise to a onerous contract
6.2
 IND AS 2

liability that should be provided for in accordance with INDAS 37 ”Provisions, Contingent
liabilities, Contingent Assets”.
(Also Refer Practical Example 1)

Example:
Computers and laptops on 31/03/20X1 :- 150 units
Normal Selling Price :- Rs.1,20.000/- per unit
On 30/04/20X1, customer order for supply of 100 units @ Rs.95000/-per unit
Calculate the NRV of total 150 units.
Solution:-
Sr. No. Particulars Amounts
1 100units X 95,000 9,50,000
2 50units X 1,20,000 60,00,000
Total NRV 1,55,00,000

5. COST OF INVENTORY

There can be three types of cost are included in the inventory which are as follow.
1. PURCHASE COST:
● Invoice price at which goods are purchased
● Duties and taxes paid
● Transport, Handling and Freight inward
● Any other expenditure directly relating to acquiring goods or services
Above cost should be reduced by following:
● Duties and taxes received or receivable back from the tax authority
● Trade discount
● Rebate
● Duty drawback
Note :-
● Primary packing charges of material is included in cost.
● Secondary packing and publicity charges of material is recorded as Selling expense in
Statement of P&L

2. COST OF CONVERSION (Labour + Production Overhead)

● Direct Material, Labour and other direct expense.
● Plus a systematic allocation of fixed and variable production overheads that are incurred in
converting materials into finished goods.

Following things should be considered for conversion cost of the inventory.

(a) FIXED PRODUCTION OVERHEAD –
For example – depreciation and maintenance of factory building.
Allocation of fixed expense should be made on the bases of normal capacity

6.3
INDAS 2

If production levels are abnormally Unallocated overheads are recognized as an

low expense (P&L)
If production levels are abnormally Amount of Fixed O/H allocated to each unit is
high decreased so that inventory should not be
measured above cost.
(Also Refer Practical Example 2 for Fixed OH Cost)

(b) VARIABLE OVERHEAD –

Variable production overheads are allocated to each unit of production on the basis of the actual
use of the production facilities.

3. OTHER COST:
It includes any other expenditure incurred to bring inventory in the present location and condition.
For eg. Transportation cost from factory to warehouse for storage of goods.
But rent for such warehouse is not other cost & not a part of cost measurement.
Exclusion in Cost of Inventory - But it should not include abnormal wastage relating to material and
labour, storage cost, administrative expenses & selling and distribution expenses, finance element
in case of deferred settlement.

Example:
The production of whiskey involves the distilling of aged whiskey in a cask prior to bottling should be capitalized,
as aging is integral to making the finished product saleable.

IMPORTANT ISSUE IN RELATION TO COST OF INVENTORY:

Issue 1:
Whether borrowing costs should become part of cost of Inventory?
Answer:
The extent to which borrowing cost is included in the cost of inventories is determined on the basis of
the requirement of Ind AS 23 Borrowing Costs.
It means if borrowing costs are directly attributable to Acquisition, Construction or Production of
Inventory being Qualifying Asset (i.e.takes substantial period of time to get ready for sale) then borrowing
costs shall become part of Cost of Such Inventory.

Issue 2:
If payment for Cost of Inventory is to be made beyond CreditTerms then what should be the Cost of
Inventory?
Answer:
An entity may acquire inventories on deferred settlement terms. When the arrangement effectively
contains a financing element, that element, for example a difference between the purchase prices for
normal credit terms and the amount paid, is recognised as interest expense over the period of the
financing.

6.4
 IND AS 2

Issue 3:
What should be the Treatment of Spare Parts, Standby Equipment and Servicing Equipments purchased
and used in PPE?
Answer:
Case I: If they meet the definition of PPE as per INDAS 16: Recognised as PPE as per INDAS 16.
PPE a/c Dr.
To Bank a/c
Case II: If they do not meet the definition of PPE as per INDAS 16: Such items are classified as
Inventory as per AS 2.
Purchase a/c Dr.
To Bank a/c
(At balance sheet date, if they are not yet fully consumed then shall be included under Inventory and
Measured accordingly as per INDAS 2)

Issue 4:
What should be the treatment of Cost of dismantling/removing/restoring site on which the item (PPE) is
located and such item (PPE) is used for Manufacturing of goods and such restoring is required due to
manufacturing of goods?
Answer:
Such Cost should be Added to the Cost of Inventory only and not to the Cost of PPE because restoring
the site is required due to Manufacturing of Goods.
However, if dismantling is required due to Installation of item of PPE then such Cost of dismantling shall
be added to the Cost of PPE.

Issue 5 - Transfers of rental assets to inventory

An entity may, in the course of its ordinary activities, routinely sell items that had previously been held
for rental and classified as property, plant and equipment.
For example, Entity A is car rental companies that acquires cars with the intention of giving them on rent
for a limited period and then sell them. Ind AS 16 requires that when such items become held for sale
rather than rental they be transferred to inventory at their carrying value. Revenue from the subsequent
sale is then recognised gross rather than net.

6.5
INDAS 2

6. ALLOCATION OF COST TO JOINT PRODUCTS AND BY-

PRODUCTS

6.6
 IND AS 2

7. COST OF AGRICULTURAL PRODUCE HARVESTED FROM

BIOLOGICAL ASSETS

In accordance with Ind AS 41, Agriculture, inventories comprising agricultural produce that an entity
has harvested from its biological assets are measured on initial recognition at their fair value less
costs to sell at the point of harvest.
This is the cost of the inventories at that date for application of this Standard.

Bearer Plant gives

Bearer Plants Agricultural produce

(I) Initial Recognitian as per Ind AS

41 (i.e Fair Value less cost to Sell)

Measurement as (ii) For Subsequent Measurement

per Ind AS 16 apply Ind AS 2 & For this Purpose
Cost will be previous measurement
of Ind AS 41 (i.e. Fair value less cost
to sell).

6.7
INDAS 2

8. TECHNIQUES FOR THE MEASUREMENT OF COST

(i) Standard Cost Method: Cost is based on normal levels of materials and supplies, labour
efficiency and capacity utilization. They are regularly reviewed and revised where necessary.

(ii) Retail Method: Cost is determined by reducing the sales value of the inventory by the
appropriate percentage gross margin. The percentage used takes into consideration inventory
that has been marked down to below its original selling price. This method is often used in the
retail industry for measuring inventories of rapidly changing items that have similar margins.
Note: Ind AS 2 Inventories does not permit using LIFO (last-in-first-out).

Imp Issue: Whether an entity can use different cost formulae for the inventories held at different geographical
locations?
Answer:
Ind AS 2 states that an entity shall use the same cost formula for all inventories having a similar nature and use
to the entity. For inventories with a different nature or use, different cost formulas may be justified.
Also, difference in geographical location of inventories does not justify the use of a different cost formula, if
the inventories are of similar nature and use to the entity.

6.8
 IND AS 2

9. RECOGNITION OF INVENTORY AS AN EXPENSE

The amount of inventories recognised as an expense in the period will generally be:
a) Carrying Amount of the inventories sold in the period in which related revenue is recognized (i.e.
COGS); and
b) The amount of any write-down of inventories to net realisable value and all losses of inventories shall
be recognised as an expense in the period the write-down or loss occurs; reduced by
c) The amount of any Reversal in the period of any write-down of inventories, arising from an increase
in net realisable value.
d) Some inventories may be allocated to other asset accounts, for example, inventory used as a
component of self-constructed property, plant or equipment. Inventories allocated to another asset
in this way are recognised as an expense during the useful life of that asset through charging of
depreciation on that asset.
Example:
A whisky distiller would not write down an inventory of grain because of a fall in the grain price, so long as it
expects to sell the whisky at a price which is sufficient to recover cost.

Example:
XYZ is an electronics dealer mainly in LCD television sets. Due to technology change, the LCDs televisions are no
longer in demand and the new LED version of television sets are now in demand. XYZ has an inventory of LCD
television sets wroth Rs 5,00,000. However, due to low demand, there has been significant drop in the sale prices
of LCD television sets. If XYZ were to dispose off the inventory in the market, it would fetch Rs 3,00,000 at
current market prices.
In such a situation, assuming the costs of disposals to be insignificant, the NRV will be taken to be Rs 3,00,000.
Hence, the carrying amount of the LCD television sets should be reduced to its NRV.

Example:
An item of inventory costing ₹ 20,000 as covered under Ind AS 2 is consumed in the construction of self-
constructed property to be accounted as Property, plant and equipment under Ind AS 16. The cost of such
property, plant and equipment other than inventories is ₹ 80,000. Such Inventory needs to be capitalized in the
cost of Property, plant and equipment. The useful life of the property is 5 years. The depreciation on such
property charged to profit and loss account is ₹ 20,000 per annum (i.e. 1,00,000/5)

6.9
INDAS 2

10. DIFFERENCE BETWEEN NRV AND FAIR VALUE

● NRV is the estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.
● Fair Value, is the price that would be received to sell assets or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
● The former is an entity-specific measurement; the latter is a market-based measurement. NRV for
inventories may not be equal to fair value less costs to sell.

Example:
An entity holds inventories of 10,000 units and it colud sell the same in the market at Rs. 10 each. The entity has
an order in hand to sell the inventories at Rs. 11. The incrementsal selling cost per unit is Rs. 0.50 per unit. In
this situation, fair value is Rs. 10 each, but net realizable value is Rs.10.5 each.

Example:
Manufacture of LCD TVs can sell each unit in the market for Rs 1,00,000 (after incurring selling expense). The
manufacture has a confirmed order on hand to sell the LCD TVs for Rs 1,25,000 each. In this situation, fair value
is Rs 1,00,000, but NRV is Rs 1,25,000.

11. TRADE DISCOUNT & CASH DISCOUNT

● Trade discount should be deducted to determine the Cost of Inventory.

● Cash discounts are incurred to recover the sale proceeds immediately or before the end of the
specified period or credit period allowed to the customer. Therefore, the same should not be
considered while determining NRV.

6.10
 IND AS 38

IND AS 38
07
INTANGIBLE ASSETS
1. MEANING of an ASSET

➢ Any Resource which is Controlled by the enterprise as a result of past events and,
➢ From which Future Economic Benefits are expected to flow to the enterprise.

2. MEANING OF INTANGIBLE ASSETS

An Intangible asset is:

➢ An identifiable
➢ Non – Monetary item
➢ Without physical substance

Intangible
Assets

Customer Technology Marketing

Contract Based Artistic Related
Related Based Related

Let's run through some examples of each broad category listed above:

Marketing
Related

Internet Domain Non Competetive Newspaper

Trade Matk
Names Agreements Mastheads

Customer Related

Customer Non Contractual Customer

Customer lists Customer
Contracts Relationship
Relationship

7. 1
 IND AS 38

Artistic Related

Magazines,
Plays, operas and Pictures and
Musical Words Newspapers and
ballets photograph
other literary

Contract
Based

Operating and
Franchise Employment Lease
broadcasting
Agreements Contracts Agreements
Rights

Technology Based

Trade Secrets Computer Software Databases Patented Technology

Note: If an item within the scope of this Standard does not meet the definition of an intangible asset,
expenditure to acquire it or generate it internally is recognised as an expense when it is incurred.
However, if the item is acquired in a business combination, it forms part of the goodwill recognised at
the acquisition date.

2.1 IDENTIFIABILITY
An asset is identifiable if it either:
➢ is separable, ie is capable of being separated or divided from the entity and sold, transferred,
licensed, rented or exchanged, either individually or together with a related contract,
identifiable asset or liability, regardless of whether the entity intends to do so; or
➢ arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations.

Author’s Note:
Goodwill is not identifiable if it is internally generated. Therefore, this is not an intangible asset
within the scope of IND AS 38

7. 2
 IND AS 38

2.2 CONTROL

Power to obtain the future economic Ability to restrict the access of others
benefits from the underlying resource to those benefits

Control

EXAMPLES ON CONTROL

Example:
Specific management or technical talent is unlikely to meet the definition of an intangible asset, unless it is
protected by legal rights to use it and to obtain the future economic benefits expected from it, and it also
meets the other parts of the definition.

Example:
An entity may have a portfolio of customers or a market share and expect that, because of its efforts in
building customer relationships and loyalty, the customers will continue to trade with the entity. However, in
the absence of legal rights to protectors other ways to control, the relationships with customers or the loyalty
of the intangible assets.

2.3 FUTURE ECONOMIC BENEFITS

The future economic benefits flowing from an intangible asset may include:
(a) Revenue from the sale of products or services;
(b) Cost savings; or

For clarification, following are not Intangible Assets as per IND AS – 38, hence they should be written off in
P&L immediately:
(a) Preliminary expenses (non – identifiable)
(b) Pre-Operating expenses (non – identifiable)
(c) Staff Training
(d) Heavy Advertisement expenses

3. RECOGNITION OF INTANGIBLE ASSETS

If the following conditions are satisfied then, an intangible asset should be recognized/ recorded in
the books of accounts, otherwise treated as an expense:
➢ It is probable that future economic benefits from the intangible asset will flow to the
enterprise; and
➢ The COST of intangible can be measured reliably.

7. 3
 IND AS 38

Author’s Note:
Internally generated brands, mastheads, publishing titles, customer lists (if not acquired)
and items similar in substance are not recognised as intangible assets.

4. MEASUREMENT OF COST AT INITIAL RECOGNITION

INITIAL MEASURMENT
Intangible Assets should be recognized only at COST.

Case - 1
If Separately Acquired – Cost will be Purchase price including non-refundable duties and taxes and
any other directly attributable cost (DAC) of preparing the asset for its intended use.
• Cost of Employee Benefits,
• Professional & Legal Fees,
• Cost of Testing

Cost Excludes: Cost of introducing a new product or brand or service including advertising and
promotional activities, Cost of conducting business in a new location or with a new class of customers,
Administration and General overhead costs.
(Refer Practical Example 1)

Case - 2
If payment is deferred beyond normal credit terms:
Cost of Intangible Asset is the CASH PRICE EQUIVALENT at the recognition date.
Remaining Amount is Interest which is Total payment - Cash price equivalent.

Case - 3
Business Combination:
In accordance with IND AS 103, Business Combinations, if an intangible asset is acquired in a business
combination, the cost of that intangible asset is its fair value at the acquisition date.
An acquirer recognises at the acquisition date, separately from goodwill, an intangible asset of the
acquiree, irrespective of whether the asset had been recognised by the acquiree before the business
combination.
This means that the acquirer recognises as an asset separately from goodwill an in-process research
and development project of the acquiree if the project meets the definition of an intangible asset.
(Refer Practical Example 2)

Case - 4
Exchange of Assets:
Intangible Assets acquired in Exchange for a Non-monetary Asset or Assets or a combination of
Monetary and Non-monetary Assets:
7. 4
 IND AS 38

Cost of Intangible Asset is measured at fair value of Asset Given (1st Priority) or Asset Received
(2nd Priority) unless:
(i) Exchange transaction lacks commercial substance; Or
(ii) Fair value of neither the asset(s) received nor the asset(s) given up is reliably measurable.
If the PPE acquired is not measured at Fair Value, its cost is measured at the carrying amount of the
asset given up.

Case - 5
Acquisition by way of Govt. Grants –
In accordance with Ind AS 20, Accounting for Government Grants and Disclosure of Government
Assistance, an entity should recognise both the intangible asset and the grant initially at Fair Value
(or) Nominal Value

Example:
Government transfers or allocates to an entity intangible assets such as airport landing rights, licences to
operate radio or television stations, import licences or quotas or rights to access other restricted
resources.

Case - 6
Internally Generated Goodwill – Cost cannot be measured reliably hence, not recognized.

Case - 7
Internally generated Intangible assets - like Brands, Customer Lists; Good and Trained employees
should not be recognized as intangible assets. Publishing Titles such as “India Today”, “Champak” cannot
be recorded as IA. (Cost can-not be measured reliably).

5. MEASUREMENT OF EXPENDITURE ON RESEARCH &

DEVELOPMENT

(a) Research is original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge and understanding i.e. Gaining of scientific or technical
knowledge.
Cost of Research activity should not be capitalized as an intangible asset, it should be treated as
expense and transfer to P&L a/c as par IND AS 38.
Here Entity cannot demonstrate that an intangible asset exists that will generate probable future
economic benefits. Therefore, this expenditure is recognised as an expense when it is incurred.

Examples of research activities are:

a) Activities aimed at obtaining new knowledge;
b) The search for, evaluation and final selection of, applications of research findings or other knowledge;

7. 5
 IND AS 38

c) The search for alternatives for materials, devices, products, processes, systems or services; and
d) The formulation, design, evaluation and final selection of possible alternatives for new or improved
materials, devices, products, processes, systems or services.

Author’s Note:
In process research project of Acquiree company can be recognised as an Intangible Asset under
Business Combination (IND AS 103)

(b) Development: It is the activity which converts the result of the research to a marketable
product (Gained knowledge is applied).
An intangible asset arising from development (or from the development phase of an internal project)
should be recognised if, and only if, an entity can demonstrate all of the following:
1. Technical feasibility of completion of Intangible asset to make it available for use or sale
2. Intention to complete the intangible asset and use or sell it
3. Ability to use or sell the intangible asset.
4. How the intangible asset will generate probable future economic benefits. Among other things,
the entity can 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.
5. Adequate resources (like technical, financial or others) to complete the development.
6. Ability to measure reliably the expenditure attributable to the intangible asset during its
development.
7. Cost of Development Phase or Internally Generated Intangible Assets comprises all directly
attributable costs necessary to create, produce, and prepare the asset to be capable of operating
in the manner intended by management.

Examples of directly attributable costs are:

● Cost of materials and services used or consumed in generating the intangible assets.
● Costs of employee benefits arising from the generation of the intangible assets
● Fees to register a legal rights

6. SUBSEQUENT EXPENDITURE

Subsequent Expenditure on already recognized Intangible Asset should be capitalized if the following
two conditions are fulfilled:
1. Subsequent Expense increases the future economic benefits of Intangible Assets.
2. Such expense can be measured reliably.
If the above two conditions are not fulfilled than the subsequent expense should be transferred to
P&L A/c.

7. 6
 IND AS 38

7. MEASUREMENT AFTER INITIAL RECOGNITION

(on Balance Sheet)
An enterprise should choose
♦ Either COST model,
♦ Or REVALUATION model
COST MODEL
After recognition as an asset, an item of PPE should be carried at:
Cost - Any Accumulated Amortisation - Any Accumulated Impairment losses =
Carrying value

REVALUATION MODEL
After recognition as an asset, an item of PPE whose fair value can be measured reliably should
be carried at a revalued amount.
Fair value at the date of revaluation -
Less: Any subsequent accumulated amortisation (-)
Less: Any subsequent accumulated impairment losses (-)
Carrying value =

Revaluation for entire class of IA

If an item of Intangible is revalued, the entire class of IA to which that asset belongs should be
revalued unless there is no active market for those Assets.

Frequency of Revaluations
(Sufficient Regularity)

Items of PPE experience Items of PPE with only

significant and volatile changes insignificant changes in
in Fair value Fair value

Revalue the item

ANNUAL
only every 3 - 5
REVALUATION
years

8. ACCOUNTING TREATMENT OF REVALUATIONS

When IA is revalued, the carrying amount of that asset is adjusted to the revalued amount. At the
date of the revaluation, the asset is treated in one of the following ways:

Technique 1:
Accumulated Amortisation is eliminated against the gross carrying amount of the asset

7. 7
 IND AS 38

Step 1 – Eliminate the Accumulated Amortisation balance from Gross Carrying amount of PPE (Debit
Acc. Amortisation A/c and Credit Intag. Asset A/c)

Step 2 – Now Compare the Net Carrying Amount of Intangible Asset with Fair Value of Intangible
Asset and determine the Revaluation Profit/Loss

Step 3 – Increase or Decrease the Net Carrying Amt. of Intangible Asset with the Revaluation
Profit/Loss by either Debiting or Crediting the Intangible Asset.

Technique 2:
Restatement Approach (No elimination of Accumulated Amortisation)
Gross carrying amount and Accumulated Amortisaiton is adjusted in a manner that is consistent with
the revaluation of the carrying amount of the asset.
● No need to eliminate Accumulated Amortisation.
● Calculate the Revaluation Gain/Loss and its “% of Change” (Gain (loss) / WDV)
● Increase/Decrease the Original Cost and Accumulated Amortisation with above % and pass
following journal entry:

Intangible Asset A/c Dr.

To Accumulated Amortisation A/c
To Revaluation Surplus A/c

Revaluation - Increase or Decrease - Treatment

Revaluation

Increase Decrease

Credited directly to Exception: Exception:

Charged to the
owners’ interests under When it is Subsequent When it is Subsequent
Statement of Profit
the heading of lncrease (Initially Decrease (Initially
and Loss
Revaluation surplus Decrease) Decrease)

Recognised in the Statement of profit and Decrease should be debited directly

loss to the extent that it reverses a to owners’ interests under the
revaluation decrease of the same asset heading of Revaluation surplus to the
Previously recognised in the Statement of extent of any credit balance existing
profit and loss in the Revaluation surplus in respect
of that asset

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 IND AS 38

9. USEFUL LIFE OF INTANGIBLE ASSETS

The accounting for an intangible asset is based on its useful life. An intangible asset with a finite useful
life is amortised, and an intangible asset with an indefinite useful life is not amortised and tested for
impairment. (Also Refer Practical Example 3)

EXAMPLE OF AN INTANGIBLE ASSET WITH AN INDEFINITE USEFUL LIFE

Example:
The trademark has a remaining legal life of five years but is renewable every 10 years at little cost. The acquiring
entity intends to renew the trademark continuously and evidence supports its ability to do so. An analysis of (1)
product life cycle studies, (2) market, competitive and environmental trends, and (3) brand extension
opportunities provides evidence that the trademarked product will generate net cash inflows for the acquiring
entity for an indefinite period. The trademark would be treated as having an indefinite useful life because it is
expected to contribute to net cash inflows indefinitely.

When the entity shall treat an Intangible Asset as Indefinite Useful Life:
When there is no foreseeable limit to the period over which the asset is expected to generate net cash
inflows for the entity.

Note: In accordance with Ind AS 36, an entity is required to test an intangible asset with an
indefinite useful life for impairment by comparing its recoverable amount with its carrying amount
(a) Annually; and
(b) Whenever there is an indication that the intangible asset may be impaired.

Factors for consideration in determining useful life

• Expected usage.
• Technological, Technical, Commercial and other obsolescence.
• Typical Product life cycle for the Asset
• Industrial Stability and Change in Market demand.
• Period of control over the asset and legal or similar limits on the use of assets.
• Whether the useful life is dependent on the useful lives of other assets of the entity.

Useful life of an Intangible asset

Finite Life Indefinite Life

No foreseeable limit the

Limited period of Amortisation period over which asset is Amortisation Not
benefit to entity. required expected to generate net cash required
inflows to the entity

7. 9
 IND AS 38

10. AMORTIZATION PERIOD & AMORTIZATION METHOD

Amortisation

Meaning Begin Cease

Allocation of the Earlier of the date-

depreciable amount of an
intangible asset with a finite when the asset is available when asset is classified as
wseful life on a systematic for use held for sale -
basis over its useful life when asset is derecognised

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 (SLM) should be used.
Rebuttable Presumption: A depreciation method which is based on Revenue generated from the use of
an asset, is not appropriate. Revenue generation includes other factors also such as selling activities;
changes in sales volumes and prices. The price component of revenue may be affected by inflation,
which has no bearing upon the way in which an asset is consumed.

REVIEW OF AMORTIZATION PERIOD AND METHOD:

• The amortization period and method should be reviewed at least at each financial year end.
• If the expected useful life or expected pattern of Economic benefits are significantly different
from the previous estimates, the amortization period should be changed accordingly.

11. RESIDUAL VALUE

The residual value of intangibles should be assumed to be Zero unless:

Residual Value is
assumed to be zero
unless there is

Commitment by a third party to

purchase at end of useful life i.e. An acive market
have a guaranteed residual value

7. 10
 IND AS 38

12. IMPAIRMENT OF INTANGIBLE ASSETS

market
• Intangible Asset should be impaired as per Ind AS 36
• For an intangible asset with indefinite useful lives, an impairment review is required at least
annually.

13. RETIREMENT AND DISPOSAL OF INTANGIBLE ASSETS:

An intangible asset should be derecognized (eliminated from the Balance sheet) if:
• It is disposed; or
• No future economic benefits are expected from its use.
Gain/Loss arising on retirement or disposal of intangibles should be recognized as income or expense
in P&L A/c.
The disposal of an intangible asset may occur in a variety of ways (e.g. by sale, by entering into a
finance lease, or by donation).

Entering into
Finance Lease
By
By Sale
Donation

Disposal of
Intangible
Asset

SOME IMPORTANT POINTS

1. Acquired Customer list may be recognized as Intangible Asset if entity expects to derive benefit
from the information on the list for at least one year.

2. The product protected by the patented technology is expected to be a source of net cash inflows
for at least 15 years. The entity has a commitment from a third party to purchase that patent in
five years for 60 per cent of the fair value of the patent and the entity intends to sell the patent
in five years.
The patent would be amortised over its five-year useful life to the entity, with a residual value
equal to the present value of 60 per cent of the patent’s fair value at the date it was acquired.

3. Intangible Assets should be amortised based on the useful life instead of the legal life (if legal
life is different).

4. Assets that incorporate both Tangible & Intangible elements should be treated as under:
The entity uses judgement to assess which element is more significant i.e. “Which one is more
dominating?”

7. 11
 IND AS 38

For example, computer software for a computer-controlled machine tool that cannot operate
without that specific software is an integral part of the related hardware and it is treated as
property, plant and equipment. The same applies to the operating system of a computer.
When the software is not an integral part of the related hardware, computer software is treated
as an intangible asset.

14. Appendix A: Intangible Assets - Web Site Costs

Accounting principles:
The nature of each activity for which expenditure is incurred (eg training employees and maintaining
the web site) and the web site’s stage of development or post-development shall be evaluated to
determine the appropriate accounting treatment:

Expenditure – Not to be Treated as Intangible Expenditure – To be treated as Intangible

Asset Asset
Planning Stage – It is similar to research phase. Expenditure on Application and Infrastructure,
Content development Expenditure - if it is developed to graphical design and content development – if
advertise and promote entity’s own product. content development is not for promotion.
Operating Expenses on website – these are incurred once
website is complete, they are recurring in nature.

Useful life
The best estimate of a web site’s useful life shall be short.

7. 12
 IND AS 38

Student Notes:-

7. 13
 IND AS 38

Student Notes:-

7. 14
 IND AS 40

IND AS 40
08
INVESTMENT PROPERTY

Walk a Path that will make you Better and make you Proud!

Why there is need to develop separate standard when we already have IND AS 16 PPE?
Investment property is held to earn rentals or for capital appreciation or both. Therefore, an
investment property generates cash flows largely independently of the other assets held by an entity.
This distinguishes investment property from owner- occupied property.

1. MEANING OF INVESTMENT PROPERTY

The investment property is a LAND or a BUILDING (or a part of it), or both, held by:
(a) Owner; or
(b) Lessee as a right of use asset
for the following specific purposes:
• To earn Rentals;
• For Capital Appreciation; or
• Both
Rather than for:
a) use in the production or supply of goods or services or for administrative purposes; or
b) sale in the ordinary course of business.

Author’s Note:
Rental should not be the main revenue generating source of activity from that Land & Building.

Understand the above definition in a simple manner:

Here, the strong impact is on purpose. If you hold a building or a land for any of the following
purposes, then it cannot be classified as investment property:
• For production or supply of goods or services (i.e. Business Purpose)
• For administrative purposes (i.e. Business Purpose), or
• For sale in ordinary course of business (i.e. Inventory), or
• Property leased to another entity under a Finance Lease.

Note:

1) Owner-occupied property is property held (by the owner or by the lessee as a right- of-use asset)
for use in the production or supply of goods or services or for administrative purposes.
2) This standard also deals with the measurement in the lessee’s financial statements of investment
property interests held as Right of Use Asset (as per IND AS 116) and

8.1
 IND AS 40

3) The standard applied to lessor’s financial statements of investment property provided to a lessee
under an operating lease.

2. EXAMPLES OF INVESTMENT PROPERTY

● Land held as an investment for long-term capital appreciation rather than short term sale in the
ordinary course of business.
● Land held for future undetermined use (i.e. you don’t know yet what you’ll use it for. Whether it
will be used as owner occupied property or for short-term sale in the ordinary course of business,
it is not yet decided.).
● However, if you buy land and you intend to build some production hall for your own purposes
sometime in the future, then this land is NOT an investment property.
● A building owned by the entity (or held by the entity as right of use asset) and leased out under
one or more operating leases. This includes a building that is still vacant, but you plan to lease it
out.
● Any property that you actually construct or develop for future use as investment property.

Be careful here again, because when you construct a building for some third party, this is NOT
an investment property, but you should apply – IND AS 115 - Revenue from Contracts with
Customers.
Land held as Short Term Investment and Planning to Sale in Near Future within 12 Months,
then IND AS 105 will be applicable and not IND AS 40

Jai Sir has taken Building on Lease for 99 Apply Ind AS 116 First, Jai Sir shall record
years from Govt. Authorities ROU Asset.
Now, if Same Building is being used in Jai’s
Business -> Ind AS 16 will be applied on ROU
Asset
Now, if Building is not being used
in Jai’s Business -> Jai has
leased it to other Party on:-

Finance Lease Operating Lease

ROU Asset will Ind AS 40 will be
be de-recognised applicable on ROU
Asset
No Question of
Applicability of
Ind AS 40 & 16
Jai sir took a Building on Lease. Building is Jai Sir First will apply Ind AS 116 &
not to be Used in Jai Sir Business. Jai Sir Record "Right of Use Asset”
has Sub-let the same Building under &
operating Lease (Sub-letting is not Business Such ROU Asset is treated as
Activity of Jai Sir) Investment Propery Under Ind AS 40
Which Ind AS Jai Sir should apply?

8.2
 IND AS 40

Important Conclusions:-
1. Assets owned by Entity but given on Finance Lease – Ind AS 40 shall not apply
2. Asset taken on Finance Lease by Entity and given on Operating Sub - Lease – Ind AS 40 shall
apply.
3. Asset owned by Entity and given on Operating Lease – Ind AS 40 shall apply.
4. Asset taken by Entity on Operating Lease (i.e. Short Term Period) (High chances to use in
business) – Ind AS 40 may not apply because there are high chances to use the asset in
Business.

3. SPECIAL CASES

A. PROPERTY HELD FOR MORE THAN ONE PURPOSE (Dual Use Property)
In circumstances when property is held partly for capital appreciation and/or rentals, and partly
for production or supply of goods or services or for administrative purposes, the two parts are
accounted for separately if they could be sold, or leased out separately under a finance lease,
separately.
If the two portions could not be sold separately:
● The property is treated as owner-occupied if a significant portion is held for own use.
● The property is treated as investment property only if an insignificant portion is held for
own use.

Case 1)
Lets assume we have a property with 1200 sq feet of space out of which 700 sq feet space is used for
business purposes and the remaining 500 sq feet is vacant and intended to be given on operating lease.
Both the parts can be separately sold or leased out.
Answer:
As both parts can be separately sold or leased out, hence 700 sq feet of space shall be recognized as
Owner Occupied Property and 500 sq feet shall be recognized as Investment Property.

Case 2)
Lets assume we have a property with 1200 sq feet of space out of which 1100 sq feet space is used for
business purposes and the remaining 100 sq feet is vacant and intended to be given on operating lease.
Both the parts can-not be separately sold or leased out.
Answer:
As significant part of property is used for business purpose and both the parts can-not be separately
sold or leased out, hence whole 1200 sq feet of space shall be recognized as Owner Occupied Property.
(Record PPE)

Case 3)
Lets assume we have a property with 1200 sq feet of space out of which 100 sq feet space is used for

8.3
 IND AS 40

business purposes and the remaining 1100 sq feet is vacant and intended to be given on operating lease.
Both the parts can-not be separately sold or leased out.
Answer:
As insignificant part of property is used for business purpose and both the parts can-not be separately
sold or leased out hence whole 1200 sq feet of space shall be recognized as Investment Property.

Case 4)
Lets assume we have a property with 1200 sq feet of space out of which 300 sq feet space is used for
business purposes and the remaining 900 sq feet is vacant and intended to be given on operating lease.
Both the parts can-not be separately sold or leased out. Property with business part is having
significant use.
Answer:
As significant part of property is used for business purpose and both the parts can-not be separately
sold or leased out hence whole 1200 sq feet of space shall be recognized as Owner Occupied Property.
(Record PPE)

Dual use property (Business / Capital appreciation)

Separable Non-Separable
One Part – PPE ● Treat full property as Investment Property when
Other Part – Investment Property insignificant part of property is used for business
(Ignore Significant/ Insignificant parts) purpose.
● Otherwise full property is PPE in all other cases.

Example 1
Sun Ltd owns a building having 15 floors of which it uses 5 floors for its office; the remaining 10 floors are
leased out to tenants under operating leases. According to law company could sell legal title to the 10 floors
while retaining legal title to the other 5 floors. In the given scenario, the remaining 10 floors should be
classified as investment property, since they are able to split the title between the floors.

Example 2
Moon Ltd uses 35% of the office floor space of the building as its head office. It leases the remaining 65% to
tenants, but it is unable to sell the tenant’s space or to enter into finance leases related solely to it.
Therefore, the company should not classify the property as an investment property as the 35% of the floor
space used by the company is significant.

Example 3
An entity owns a hotel, which includes a health and fitness centre, housed in a separate building that is part of
the premises of the entire hotel. The owner operates the hotel and other facilities on the hotel with the
exception of the health and fitness centre, which can be sold or leased out under a finance lease. The health
and fitness centre will be leased to an independent operator.
The entity has no further involvement in the health and fitness centre. In this scenario, management should
classify the hotel and other facilities as property, plant and equipment and the health and fitness centre as
investment property.
If the health and fitness centre could not be sold or leased out separately on a finance lease, then because
the owner-occupied portion is not insignificant, the whole property would be treated as an owner-occupied
8.4
 IND AS 40

property.

B. ANCILLARY SERVICES
In some cases, an entity provides ancillary services to the occupants of a property it holds. An
entity treats such a property as investment property if the services are insignificant to the
arrangement as a whole. An example is when the owner of an office building provides security and
maintenance services to the lessees who occupy the building.
In other cases, the services provided are significant. For example, if an entity owns and manages
a hotel, services provided to guests are significant to the arrangement as a whole.

C. PROPERTY LEASED TO OTHER GROUP MEMBERS

In some cases, an entity owns property that is leased to, and occupied by, its parent or another
subsidiary. The property does not qualify as investment property in the consolidated financial
statements, because the property is owner-occupied from the perspective of the group. The end
use of the property is to be checked to record property accordingly. Therefore, the lessor treats
the property as investment property in its individual financial statements.

TABULAR SUMMARISATION
S. No. Property Does it meet Which Ind
definition of AS is app.?
Inv. Prop?
1 Owned by a company and leased out under an YES Ind AS 40
operating lease
2 Held under Right of Use Asset and leased out YES Ind AS 40
under an Operating Lease
3 Held under Right of Use Asset and leased out No Ind AS 116
under an Finance Lease
4 Property acquired with a view for development or resale No Ind AS 2 &
Ind AS 115
rd
5 Property developed on behalf of 3 Party No Ind AS 115
6 Property partly owner occupied and partly Depends Ind AS 16
leased out under Operating Lease Ind AS 40
7 Land held for Currently Undetermined use YES Ind AS 40
8 Property occupied by Employees paying rent No Ind AS 16
at less than market rate
9 Investment Property held for Sale No Ind AS 105
10 Existing Investment Property that is being Yes Ind AS 40
redeveloped for continued use as Investment Property.

8.5
 IND AS 40

4. INITIAL RECOGNITION

The rules for recognition of investment property are essentially the same as stated in IND AS 16 for
property, plant and equipment, i.e. you recognize an investment property as an asset only if 2 conditions
are met:
1. It is probable that future economic benefits associated with the item will flow to the entity;
and
2. The cost of the item can be measured reliably.

An investment property held by a lessee as a right-of-use asset shall be recognised in accordance

with Ind AS 116.

How to Measure Investment Property Initially

Investment property shall be initially measured at cost, including the transaction cost.
The cost of investment property includes:
● Its purchase price and
● Any directly attributable expenditure (DAC), such as legal fees or professional fees, property
taxes, etc.
We should NOT include:
● Start-up expenses whatsoever.
However, if these start-up expenses are directly attributable to the item of investment
property, then you can include them. But do NOT include any general start- up expenses.
● Operating losses that you incur before planned occupancy level is achieved, and
● Abnormal waste of material, labor or other resources incurred at construction.

Deferred Payments
If payment for an investment property is deferred, its cost is the cash price equivalent. The difference
between this amount and the total payments is recognised as interest expense over the period of credit.

Investment Property acquired through Exchange of another Asset

Investment Property acquired in Exchange for a Non-monetary Asset or Assets or a combination
of Monetary and Non-monetary Assets:
Cost of Investment Property is measured at Fair Value of Asset Given (1st Priority) or Asset
Received (2nd Priority) unless:
(i) Exchange transaction lacks commercial substance; Or
(ii) Fair value of neither the asset(s) received nor the asset(s) given up is reliably measurable.
If the PPE acquired is not measured at Fair Value, its cost is measured at the carrying amount of the
asset given up.

Example 4
Sun Ltd acquired a building in exchange of a warehouse whose fair value is Rs. 5,00,000 and payment of cash is
Rs. 2,00,000. The fair value of the building received by the Company is Rs. 8,00,000. The company decided to

8.6
 IND AS 40

keep that building for rental purposes.

The Building is acquired with the purpose to earn rentals. Hence, it is a case of Investment Property acquired
in exchange for a combination of monetary and non-monetary asset.
Therefore, Journal entry at the time of acquisition is:
Investment Property (Building) (5,00,000 + 2,00,000) Dr. 7,00,000
To Cash 2,00,000
To PPE (Property, Plant and Equipment) i.e. Warehouse 5,00,000

Note: When the fair value of both the asset given up and acquired is mentioned, it is presumed that
both the fair values are equally evident. In such a case, the fair value of the asset given up is considered
as the cost of the asset purchased.
However, if the fair value of property acquired is more clearly evident, then the fair value of the asset
acquired is considered. In such a situation, the Journal Entry at the time of acquisition (taking
information given in the above example) would be
Investment Property (Building) Dr. 8,00,000
To Cash A/c 2,00,000
To PPE (Warehouse) 5,00,000
To Gain on Sale of PPE 1,00,000

5. SUBSEQUENT COSTS

Do Not Capitalised Can be Capitalised

Cost of Day to Day servicing of Replacement cost incurred for the parts of
a property Investment property if it meets the recognition
criteria.
In this case, carrying amount of old replaced parts
are derecognized.

6. SUBSEQUENT MEASUREMENT OF INVESTMENT PROPERTY

After initial recognition, we have only one choice for measuring our investment property i.e. at COST
Model
Here, IND AS 40 does not describe it in details, but refers to the standard IND AS 16 Property, Plant
and Equipment. It means you need to take the same methodology as in IND AS 16. Investment property
is depreciated and impaired same as in IND AS 16.

(a) Fair value only for disclosure

Entities are required to measure the fair value of investment property, for the purpose of
disclosure even though they are required to follow the cost model. An entity is encouraged, but
not required, to measure the fair value of investment property on the basis of a valuation by an
independent valuer who holds a recognised and relevant professional qualification and has recent
experience in the location and category of the investment property being valued. Fair Value should
8.7
 IND AS 40

reflect the Rental income from current leases and other assumptions that market participants
would use when pricing investment property under current market conditions.

(b) Inability to measure fair value reliably

There is a rebuttable presumption that an entity can reliably measure the fair value of an
investment property on a continuing basis.
If an entity determines that the fair value of an investment property (other than an investment
property under construction) is not reliably measurable on a continuing basis, the entity should
make the disclosures as prescribed under Ind AS 40.

(c) Investment property in the course of construction

If an entity determines that the fair value of an investment property under construction is not
reliably measurable but expects the fair value of the property to be reliably measurable when
construction is complete, it should measure the fair value of that investment property either
when its fair value becomes reliably measurable or construction is completed (whichever is
earlier).
Once construction of that property is complete, it is presumed that fair value can be measured
reliably. If this is not the case, the entity should make the disclosures as required by Ind AS 40.

Treatment when Fair

Value is not reliably
measurable

Investment property under Investment property (other

than investment property
construction under construction)

Entity determines that the Fair

Entity determines that the Fair
value is not reliably measurable
value is not reliably measurable
on a continuing basis

But entity expects that the Fair Entity shall disclose the following:
Value of the property will be
(I) A description of the investment property
reliably measurable when
construction is complete (ii) Explanation of why fair value cannot be
measured reliably;
Then the entity shall measure the and
Fair Value of such Investment (iii) If possible, the range of estimates within
Property either when it becomes which fair value is likely to lie
reliably measurable, or construction
is completed, whichever is earlier

8.8
 IND AS 40

7. TRANSFERS FROM AND TO INVESTMENT PROPERTY

The transfers are possible, but only when there’s a change in use or asset’s purpose, for example:
1. You start renting out the property that you previously used as your headquarters (transfer to
investment property from owner-occupied property under INDAS 16)
2. You stop renting out the building and start using it for yourself.
3. You held a land for undefined purpose and recently, you decided to construct an apartment house
to sell apartments when they are built (transfer from investment property to inventories).
4. Commencement of owner-occupation, or of development with a view to owner-occupation, for a
transfer from investment property to owner-occupied property;
5. Commencement of development with a view to sale, for a transfer from investment property to
inventories;
6. End of owner-occupation, for a transfer from owner-occupied property to investment property;
7. Inception of an operating lease to another party, for a transfer from inventories to investment
property.
So what’s the accounting treatment in this case.
Transfers between investment property, owner-occupied property and inventories do not change the
carrying amount of the property transferred and they do not change the cost of that property for
measurement or disclosure purposes

Note:
• Such change in classification is not a change in Accounting Policy. Hence no retrospective effect.
• PPE reclassified to Investment Property:- Earlier PPE was revalued and after some years it is reclassified
to Investment Property. In such case it is reclassified to the same carrying amount after revaluation
effect. But no further revaluation shall be done.
• Balance of Revaluation Surplus shall be continued till the disposal of Property.

8. DERECOGNITION OF INVESTMENT PROPERTY

The De-recognition rules (when you can remove your investment property from your books) in INDAS
40 are similar to the rules in IND AS 16.

8.9
 IND AS 40

Example 5:
Sun Ltd, an aeronautics company is having a building which is given on an operating lease. The book value of
such building in the books is ₹ 2,00,000.
Case -A
Pluto Ltd. offers to buy the building at ₹ 4,00,000.
Bank Dr 4,00,000
To Investment Property 2,00,000
To Gain on disposal 2,00,000

Case- B
Pluto Ltd. Offers to take the building on finance lease for 10 years at a lease rental of ₹ 80,000 p.a. The present
value of minimum lease payments is ₹ 3,20,000.
Lease Receivable Dr 3,20,000
To Investment Property 2,00,000
To Gain on Disposal 1,20,000

9. DISCLOSURES
An entity should disclose:
❖ Its accounting policy for measurement of investment property.
❖ the criteria it uses to distinguish investment property from owner-occupied property and from
property held for sale in the ordinary course of business.
❖ The Fair Value of Investment Property. In the exceptional cases when an entity cannot measure
the fair value of the investment property reliably, it should disclose:
● a description of the investment property;
● an explanation of why fair value cannot be measured reliably; and
● if possible, the range of estimates within which fair value is highly likely to lie.

❖ the amounts recognised in profit or loss for:

● rental income from investment property;
● direct operating expenses (including repairs and maintenance)arising from investment
property that generated rental income during the period; and
● direct operating expenses (including repairs and maintenance)arising from investment
property that did not generate rental income during the period.

❖ In addition to the general disclosures required above, an entity is required to disclose:

● the depreciation methods used;
● the useful lives or the depreciation rates used;
● the gross carrying amount and the accumulated depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the period;

8.10
 IND AS 116

09 IND AS 116
LEASES
“The higher you go, the more challenges you face.
Every new Levels Attract new devils”

Index
S.No Content Sub Parts Page No.
1 Part – 1 SCOPE OF IND AS 116 Applicability 9.2
Short Term Lease 9.2
Low Value Leases 9.3
2 Part – 2 IMPORTANT DEFINITIONS Leases 9.4
Right to Control 9.4
Identified Asset 9.5
Lease Term 9.6
Cancellable Lease 9.6
3 Part – 3 RECOGNITION AND Initial Recog. 9.7
MEASUREMENT OF LEASE CONTRACT Subsequent Recog. 9.8
IN THE BOOKS OF LESSEE Re-Measurement 9.10
4 Part – 4 IMPORTANT POINTS UNDER Lease of Multiple 9.11
BOOKS OF LESSEE Assets
Separate Lease 9.11
Components
Lease Modifications 9.12
6 Part – 5 RECOGNITION AND Finance Leases 9.16
MEASUREMENT OF LEASE CONTRACT Operating Leases 9.17
IN THE BOOKS OF LESSOR Lease Modifications 9.18
7 Part – 6 SUB – LEASE - 9.19

8 Part – 7 SALE & LEASE BACK - 9.20

9 Part – 8 TRANSITION APPROACH - 9.22

KEY DIFFERENCES BETWEEN IND AS 9.24

116 AND AS 19

Note: Ind AS 116 is applicable to Lessee’s as well as Lessor’s Financial Statements

9.1
 IND AS 116

1. SCOPE OF INDAS 116:

Ind AS 116 shall be applied to all leases except for:

Sr. No. Particulars Reason
1 Leases to explore for or use Within the scope of Ind AS 106 ‘Exploration
minerals, oil, natural gas and similar for and Evaluation of Mineral Resources’
non- regenerative resources
2 Leases of biological assets held by a Within the scope of Ind AS 41 ‘Agriculture’
lessee
3 Service concession arrangements Within the scope of Appendix D of Ind AS 115
Eg. BOT Contracts ‘Revenue from Contracts with Customers’
4 Licences of intellectual property Within the scope of Ind AS 115 ‘Revenue
granted by a lessor from Contracts with Customers’
5 Rights held by a lessee under Within the scope of Ind AS 38 ‘Intangible
licensing agreements for such items Assets’
as motion picture films, video
recordings, plays, manuscripts,
patents and copyrights

A lessee can elect not to apply Ind AS 116’s recognition requirements to:

If a lessee elects to apply the above recognition exemption, the lessee shall recognise the lease
payments associated with those leases as an expense on either a straight-line basis over the lease
term or another systematic basis, if that basis is more representative of the pattern of the lessee’s
benefit. Hence ROU Asset and Lease Liability not recorded.

(A) Short Term Leases

Meaning - A short-term lease is a lease that, at the commencement date, has a lease term of 12 months
or less and does not include an option to purchase the underlying asset.
Conditions –
(a) This Exemption shall be applied to the entire class of Underlying Assets on Which Lessee
has Right to Use.
(b) A short-term lease does not include an option to purchase the underlying asset.

Renewal Option – If the option of renewal of term (beyond 12 Months) is available at commencement
date –
9.2
 IND AS 116

Such option is Reasonable Certain Option is not Reasonable Certain

Not a Short Term Lease Short Term Leases

Author's Note:
Question: If renewal option was not available at commencement of lease or at commencement it
was not certain that lessee will avail the option, but after some period, lessee availed the renewal
then what? Short Term Lease continues or not?
Answer: If renewal is for 12 months or more then No Short-Term lease for the further period.
If renewal is for less than 12 months then lessee has to analyse based on nature i.e. it can be Short-
Term if no more renewal is planned in future. It can-not be Short Term if renewal is continues in
nature.

(B) Leases of Low Value Assets (Low Value Leases):

1. Individual Asset having Low Value can be exempted from Recognition criteria of Ind AS 116.
2. However, IndAS 116 does not explicitly define the leases of low-value assets.
3. The exemption for leases of low—value items intends to capture leases that are high in volume
but low in value — e.g. leases of small IT equipment (laptops, mobile phones, simple printers),
leases of office furniture etc. Ind AS 116 is silent on any threshold to determine the value for
classifying any asset as low value assets.
4. The exemption can be made on a lease-by-lease basis.
5. Individual Asset having Low Value can be Exempted from IndAS 116 only when following two
conditions are satisfied-
(i) Such Asset can provide Benefit to Lessee on its own (i.e. it is capable of giving benefit
individually) or together with other resources which are readily available.
(ii) Such Asset is not highly dependent or highly interrelated with other Assets.

Important Notes:
1. When a New Asset is typically not of a Low Value then this exemption will not be applied, example
Lease of Cars would not qualify because new car would typically not be of Low Value.
2. Sub-letting of Leased Asset - If a lessee sub-leases an asset, or expects to sub-lease an asset,
the head lease does not qualify as a lease of a low-value asset, i.e., an intermediate lessor
who subleases, or expects to sublease an asset, cannot account for the head lease as a lease of
a low-value asset.
However, Sublease is allowed for “Short Term Lease” Exemption.

9.3
 IND AS 116

PART 2 - IMPORTANT DEFINTIONS

(1) What is Lease?

A Lease is
● A contract, or part of a contract
● That provides the right to control the use of an identified asset
● For a period of time
● In exchange for consideration (lease rent).

(2) Dates under Leases –

Inception of the Lease Commencement of the Lease

Date of Lease agreement or Date of Commitment Date on which Asset is Available for Lessee
by Parties whichever is earlier.
As at this date-
As at this date, the lessee shall assess if the Lessee initially recognises a lease liability and
contract is or contains lease. related Right of Use Asset
Lessor (for finance leases) initially recognises its
net investment in the lease on the commencement
date.
In simple terms, Journal Entries are recorded
from the Commencement date.

(3) RIGHT TO CONTROL

To assess whether lessee has the right to control the use of an identified asset, an entity (lessee) shall
assess, whether it has:
(a) The right to obtain substantially all of the economic benefits from use of the identified asset;
and
(b) The right to direct the use of the identified asset.

How to determine whether customer has Right How to determine Right to Direct the Use of
to obtain substantially all of the Economic the Identified Asset?
Benefits?
Right to obtain substantially all the Economic A customer has the right to direct the use of
Benefits means customer can exclusively use the an identified asset whenever it has the right to
asset throughout that period. direct how and for what purpose the asset is
used throughout the period of use (i.e., it can
A customer can obtain economic benefits either change how and for what purpose the asset is
directly or indirectly used throughout the period of use).
for e.g., by using, holding or subleasing the asset.
The focus should be on whether the customer
has the decision-making rights that will most
affect the economic benefits that will be
derived from the use of the asset.

9.4
 IND AS 116

Author's Note:
However, Lessor may impose some of its protective rights (i.e. to protect its Assets). Such as maximum
amount of use or not to sub-lease etc. We should ignore the Protective rights imposed by Lessor while
determining whether Lessee has Right to Direct the Use or Not.

(4) IDENTIFIED ASSET

An Asset is identified only when it satisfies following conditions:
1) Asset must be physically distinct.
2) Supplier (Lessor) does not have Substantive substitution rights on Asset.
Identified asset

Asset must be physically distinct

Means either

Or
Implied at
Explicitly
Commencement
Specified
date

+
Supplier must not have substantive right to substantive
Right to Substitute the Asset
(Supplier Can-not Change the Asset)
(If Lessor / Supplier has Substantial Substitution Rights, then
Lessee does not have right to Control use of Idetified Asset
then Lease is not covered under Ind As -116)

Identified Asset must be physically distinct, be it entirely or in some portion.

For Example - A building is generally treated a physically distinct but one floor may also be considered
as physically distinct if the same can be used independently.

Substantive Substitution Rights with Supplier

Even if an asset is specified, a customer does not have the right to use an identified asset if,
at inception of the contract, a supplier has the substantive right to substitute the asset
throughout the period of use.
A supplier’s right to substitute an asset is SUBSTANTIVE when BOTH of the following
conditions are met:
(a) Supplier has the Practical ability to (b) The Supplier would Benefit
substitute alternate asset throughout Economically from substituting the
the period of use. (This means asset. (For Ex: One high cost
substituting the asset for reasons machinery with another similar low
other than operational inefficiency or cost machine so that supplier can earn
any contractual obligation.) more from the high value machine by
leasing it or selling it to third party).

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 IND AS 116

(5) LEASE TERM:

Lease Term includes any non-consecutive periods of time (for eg. 3 months in every year I will use the Vehicle
to run my business).

(6) CANCELLABLE LEASES:

If for the particular period, the terms and conditions of the contract are not enforceable then such
period is called cancellable lease.
The contract is not enforceable if:
(i) both the lessor and lessee each have the right to terminate the lease without permission from
the other party; AND
(ii) with no more than an insignificant penalty
Suppose the term of a contract is 10 years and the non-cancellable / lock-in period is 6 years. The
lease term shall be as follows:
If the termination If the termination option is with If the termination option
option is with ‘Lessor’ ‘Lessee’ is with ‘Both’ (i.e., any
party can terminate)
The lease term shall Alternative – 1 The lease term shall be 6
be 10 years. Because The lease term shall be 10 years years. Because after 6th
even after 6th year, assuming reasonable certainty. year, either party can
the lessee would be Because after the expiry of 6th year, terminate the contract
contractually bound though the lessee is not contractually without the consent of the
until 10th Year i.e. bound till 10th year, i.e., the lessee can other party and hence, the
lessee cannot refuse refuse to make payment anytime contract is not enforceable
to make the payment without lessor’s permission but, it is after 6th year ONLY in case
till the expiry of the assumed that the lessee is reasonably there is insignificant
contract and also, has certain that it will not exercise this penalty for termination.
the right to use the option to terminate. Hence, though
asset until 10th year, there is no enforceable obligation from However, alternative
unless lessor lessee’s point of view beyond 6th year answer may exist.
terminates the but, basis the said assumption, the lease
contract. term shall be 10 years.
Alternative - 2
If it is reasonably certain that lessee
will avail Termination option then Lease
Term will be only 6 Years

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 IND AS 116

PART 3 – RECOGNITION AND MEASUREMENT OF LEASE

CONTRACT IN THE BOOKS OF LESSEE

Lessee shall measure and recognise the followings in the books:

(a) RIGHT – OF – USE ASSET
(b) LEASE LIABILITY

1. INITIAL RECOGNITION AND MEASUREMENT

LEASE LIABILITY RIGHT–OF–USE ASSET
Recognise at PV of remaining lease payments to be A lessee initially measures the ROU Asset at
made over the lease term discounted using the COST.
Implicit Rate of Interest (i.e. IRR)
If Implicit rate of interest can-not be readily Cost of ROU:
determined, then take Lessee’s Incremental Initial Lease Liability XXX
Borrowing Rate. Down payment XXX
Any initial direct costs XXX
Lease Payments covers Present Values of- PV dismantling cost XXX
● Fixed Payments less Lease Incentives
● In-substance Fixed Payments Note:
● Variable Lease Payments depends on Index or Rate Lessee may be required to make payments for
● Guaranteed Residual Value construction or designing of an underlying asset
● Purchase option Price so that lessee can use it after lease
● Penalties for Terminating the Lease arrangement, these are accounted under Ind
AS 16 and are not a part of lease payments.
Lease Payments Excludes –
● Payment made for and allocated to Non-lease
Component (if accounted for separately)
● Variable Lease Payments not dependent on
Index or Rate

Journal entry in the books of lessee at Commencement

ROU Asset Dr. Sum total of all below items
To Lease liability Cr. PV of outstanding lease payments by lessee using
interest rate implicit in lease
To Bank Cr. Down Payment
To Bank / Creditor Cr. Initial direct costs incurred by lessee
To Provision for dismantling / Cr. Estimate of costs to be recognised only when lessee
removing the underlying asset incurs an obligation for these costs (Ind AS 37)

Let’s define each and every term in Lease Payments deeply-

Fixed Lease Payments An amount agreed between lessee and Lessor
In Substance Fixed Payments which may contain variability but that in substance are
Payments unavoidable. These payments are variable as per the terms given in the
agreement, but there is no genuine variability in those payments.
(i.e. Variable but
unavoidable) Example – A Lessee enters into a 10 year lease of commercial space, for
which lease payment will be Rs. 1000/- Per month unless sales are more than

9.7
 IND AS 116

Rs. 20000. If sales will be higher than 20000/- the lease payment will be
Rs. 1,00,000 pm, it is normal for a lessee to make a sale of at-least Rs.
5,00,000 pm.
Lease Incentives Payments made by a lessor to a lessee associated with a lease, or the
receivable from Lessor reimbursement or assumption by a lessor of costs of a lessee.
(such as transportation expenses)
Variable Lease Payments Only those payments will be covered which are depending on Index or a
Rate.
Eg. Payments linked to consumer price index
Payments linked to a Benchmark Interest Rate (such as Libor, PLR)
Purchase option price If the lessee is reasonably certain to exercise a purchase option, the
exercise price is included as a lease payment
Penalties for terminating If it is reasonably certain that the lessee will not terminate a lease, the
a lease lease term is determined assuming that the termination option would not be
exercised, and any termination penalty is excluded from the lease
payments. Otherwise, the lease termination penalty is included as a lease
payment.
Guaranteed Residual It is the guarantee given on the residual value of the asset. At the end of
Value (GRV) lease term, the value of the leased asset must be of this amount. If the
residual value of the asset is less than the guaranteed value; the lessee
needs to pay the balance amount (GRV less Actual Residual Value)
Discounting Rate 1st Priority – Interest Rate Implicit in the Lease (i.e. IRR) of the Lessor
2nd Priority – Lessee’s Incremental Borrowing Rate.
Interest Rate Implicit in It is the rate at which-
the Lease (i.e. IRR) PV of (LP + UGRV) = FV at Inception + IDC
(Consider always from
Lessor’s point of view)
(Refer Practical Example 2)
Lessee’s Incremental It is the rate at which Lessee can Borrow additional funds over a similar
Borrowing Rate terms, security for the same amount of underlying asset.

2. SUBSEQUENT MEASUREMENT (at Balance Sheet)

RIGHT–OF–USE ASSET:
a) At every BS date measure ROU Asset using either COST Model or REVALUATION Model (Ind AS
16).
b) Depreciation-
● Apply Ind AS 16 to depreciate ROU Asset
● Period of Depreciation is either:
⮚ Commencement Date to the end of Useful life (if ownership will be transferred to lessee
at the end of lease term or lessee has option to purchase the asset at the end of the term
if reasonable certain). Or
⮚ Commencement Date till Remaining useful life of the asset or Lease Term whichever
is lower if ownership is not getting transferred or no option to buy.

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 IND AS 116

LEASE LIABILITY:
a) Lease liability at balance sheet date shall be equal to PV of remaining lease payment at discount
rate.
b) Charge Interest Expenses (Finance Charges) on the lease liability over the lease term to unwind
the discount.
c) Re-measuring the carrying amount to reflect any reassessment or lease modifications. (such as
due to Changes in the future lease payments).
d) Interest expense is calculated as under:
Year Opening Bal. of Lease Liability Interest @ Actual Payment Closing Bal. of
(2) Discount Rate (Lease Payment) Lease Liability
(1) (3 = 2 x Rate) (4) (5 = 2 + 3 – 4)

(Refer Practical Example 1 on Lessee’s Accounting)

What are the expenses which Lessee shall transfer to its Profit and Loss
Statement?
❖ Depreciation of the ROU Asset
❖ Interest expense on the Lease Liability
❖ Variable lease payments that are not included in the lease liability (for e.g., variable lease
payments that do not depend on an index or rate)
❖ Impairment of the ROU Asset (INDAS 36)
❖ Change in Lease Liability after adjusting ROU (if ROU reduced to Zero)

Leases denominated in a Foreign Currency (Refer Practical Example 3)

● Lessee shall remeasure the foreign currency-denominated lease liability using the exchange
rate at each reporting date, like they do for other monetary liabilities.
● Any changes to the lease liability due to exchange rate changes are recognised in profit or loss.
● Because the ROU Asset is a non-monetary asset measured at historical cost, it is not
affected by changes in the exchange rate.

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 IND AS 116

3. RE-MEASUREMENT OF LEASE LIABILIITY

Ind AS 116 requires lessees to REMEASURE LEASE LIABILITIES upon a change in lease payments
on account of ANY of the following:
Unavoidable changes Changes made by lessess
(Market related changes) (Non-Market related changes)
● Change in Expected GRV ● Change in the Lease Term
● Change in future lease payments due to ● Change in assessment of an option to
change in an Index or a Rate purchase the asset
● The Variability of Payments is resolved so
that they become in-substance Fixed
Payments
Discounting Rate – Same original Discounting Discounting Rate – Revised Discounting Rate shall
Rate shall be considered while calculating be considered while calculating revised Lease
revised Lease Liability. Liability.
Journal Entry:
1. Increase in Lease Liability:
ROU Asset A/c Dr.
To Lease Liability A/c

2. Decrease in Lease Liability:

Lease Liability A/c Dr
To ROU Asset A/c

Note: If Carrying amount of ROU Asset is Zero or reduced to Zero and further reduction due
to re-measurement shall be transferred to Profit and Loss A/c.
(Refer Practical Example 4)

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 IND AS 116

PART 4 – IMPORTANT POINTS

LEASE OF MULTIPLE ASSETS: Conditions

Eg. Two or more Buildings, Building with (a) Lessee can take benefit from each Asset on its
equipment’s etc.) own or together with other resources that are
readily available to the lessee.
Each Asset shall be treated as “Separate AND
Lease Component” (i.e., separate Contract) (b) The underlying asset is not highly dependent
only when two conditions fulfilled. on, or highly interrelated with other assets.

(Example – Parking Space taken separately with

Flat Purchased)

If any one or both the conditions are not met

then, the right to use multiple assets is
considered a Single Lease Component.
CONTRACT COMBINATION Conditions:
Two or More contracts with Same party The contracts are negotiated as a package.
entered into or near the same time be OR
considered a “Single Contract” if any one of The amount of the consideration to be paid in one
these conditions are met – contract depends on the price or performance of
the other contract.
OR
All or major assets are leased for a common
objective. It means assets are dependent or
inter-related with each other.

Let us take an example: Separate contracts

entered into between lessee and lessor to lease
factory Building, Machineries, and Vehicles. The
common overall objective is to run a factory for a
commercial production purpose. In such case
individual contract to lease a land & Building or
Machineries or Vehicles would not help to
understand the single overall objective. Further
since the objective is common hence price and
performance of these assets are interrelated.

HOW TO SEPARATE LEASE Only items that contribute to securing the

COMPONENTS FROM NON-LEASE output of the asset are lease components.
COMPONENTS.
Example 1
Non-lease component means supply of A supplier may lease a truck and also operate the
other Goods or services leased asset on behalf of a customer (i.e., provide
a driver). This service is not related to securing
the use of the truck. Means truck can be given on
lease without driver’s service.

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 IND AS 116

Example 2
Payments for maintenance activities, including
common area maintenance (for e.g., cleaning the
common areas of a building, removing snow from a
car park for employees and customers) and other
goods or services transferred to the lessee (for
e.g., providing utilities or rubbish removal) are
considered as non-lease components because
they provide the lessee with a service.
NOT A SEPARATE COMPONENT OF Any payment made by lessee to lessor that relate
CONTRACT to the Lease Asset and for those activities that
(Author’s Note: Do not treat them as do not transfer separate Goods or Services to the
separate Non-Lease Component, they should lessee.
be part of Lease Payments only) (For e.g., payments made for real estate taxes
that would be owed by the lessor regardless of
whether it leased the building and regardless of
who the lessee is)
OPTIONAL EXEMPTION of using Practical Lessee has the choice to account for each
Expedient to not to separate non-lease separate lease component and non-lease
component. components as a SINGLE LEASE COMPONENT.
No need to bifurcate.
Using Practical expedient means using However, the practical expedient is not
Short Cut. permissible for lessor.

ALLOCATION OF TOTAL In the Ratio of observable Stand-alone Prices of

CONSIDERATION TO LEASE AND NON- Lease and Non-lease Component.
LEASE COMPONENTS
(if lessee doesn’t opt for practical Stand-alone Prices means the Prices at which a
expedient) customer would purchase a component of a
contract separately when available.
How to account Non-lease Component? As per the Other Applicable Standards

LEASE MODIFICATIONS

● A ‘lease modification’ is a change in the scope of a lease, or the consideration for a lease, that was
not part of the original terms and conditions of the lease.
● For e.g., adding or terminating the right to use one or more underlying assets, or extending or
shortening the contractual lease term.
● Under Lease Modification, the important question is “Do we need to make separate lease
accounting or we should adjust existing carrying amount of ROU & Lease Liability”?

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 IND AS 116

Difference Cases of Lease Modification are as under:

Step 1:
Calculation Carrying Amount of Lease Liability as on Modification date
Case 1: Increase in
Lease Term Step 2:
Calculate Revised PV of Lease Payments as per Revised Discount Rate
(Refer Practical Ex 5) for increase term

Step 3: Difference of Carrying Amount (Step 1) and Revised Amt. (Step

2) is added or deducted through ROU Asset
Case 2: Change in
Consideration without Same Steps as above (same as case 1)
change in Lease Term
(Refer Practical Ex 6)
Step 1:
Decrease the Carrying Amt. of ROU Asset Proportionately with
decrease in lease term as under:

Revised ROU Asset as per Decreased Term =

Current Carrying Amt x Remaining Revised Lease Term
Case 3: Decrease in Original Remaining Lease Term
Lease Term
Step 2:
(Refer Practical Ex 7) Decrease the carrying amount of Lease Liability as per revised lease
term with Original Discount Rate

Step 3: Difference of Step 1 and 2 is charged to Profit and Loss A/c

as under:
Lease Liability A/c Dr.
To ROU Asset A/c

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 IND AS 116

To Gain A/c

Step 4:
Remeasure the lease liability again as per revised discount rate and
remaining lease term and adjust through ROU Asset.
Step 1:
Decrease the Carrying Amt. of ROU Asset Proportionately as under:

Revised ROU Asset =

Current Carrying Amt x Revised Rights (Scope)
Original Rights (Scope)
Case 4: Decrease in
Scope of ROU Asset Step 2:
Decrease the carrying amount of Lease Liability as under:
(Refer Practical Ex 8)
Decreased Lease Liability =
Current Carrying Amt x Revised Rights (Scope)
Original Rights (Scope)

Step 3: Difference of Step 1 and 2 is charged to Profit and Loss A/c

as under:
Lease Liability A/c Dr.
To ROU Asset A/c
To Gain A/c

Step 4:
Remeasure the lease liability again as per revised discount rate and
remaining lease term and adjust through ROU Asset.
Step 1:
Calculate the Lease Liability and ROU value of additional Scope as per
Case 5: Increase in Revised Discount Rate
Scope of ROU Asset ROU Asset A/c Dr.
without stand-alone To Lease Liability A/c
price
(Refer Practical Ex 9) Step 2:
Existing ROU & Lease Liability shall be revised based on Revised
Discount Rate.

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 IND AS 116

PRESENTATION IN FINANCIAL STATEMENTS

Balance Sheet Statement of profit Statement of cash flows
or loss
ROU Assets: They are Depreciation and Principal portion of the lease liability:
presented either: Interest: - These cash payments are presented
- Separately from other Depreciation on Right within financing activities
assets (e.g., owned assets) of use asset and Interest portion of the lease liability:
OR interest expense - These cash payments are presented
- Together with other assets on lease liabilities are within financing activities
as if they were owned, presented separately Short-term leases and leases of low-
with disclosures of the (i.e., they CANNOT value assets:
balance sheet line items be combined). - Lease payments pertaining to them
that include ROU Assets (i.e., not recognised on the balance
and their amounts This is because sheet as per Ind AS 116) are
ROU Assets that meet the interest expense on
presented within operating activities.
definition of investment the lease liability is a
property are presented as component of
investment property finance costs.
Lease Liabilities: Variable lease payments not
They are presented included in the lease liability:
Separately - These are also presented within
from other liabilities under operating activities
the head Financial Liability.

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 IND AS 116

PART 5 – RECOGNITION AND MEASUREMENT OF LEASE

CONTRACT IN THE BOOKS OF LESSOR
A ‘lessor’ is defined as an entity that provides the right to use an underlying asset for a period of
time in exchange for consideration.

Classification of Lease for Lessor:

1. An Operating Lease is a lease other than a finance lease.
2. A Finance Lease is a lease that transfers substantially all the risks and rewards incidental
to ownership of an asset. Legal title may or may not eventually be transferred.

At inception, lessors shall classify the lease contract as FINANCE LEASE or OPERATING LEASE.

1. FINANCE LEASE

Situations and Indicators of Finance Lease

INDAS 116 outlines examples of situations that would normally lead to a lease being classified as a
finance lease:
1. Ownership: The lessor transfers ownership of the asset to the lessee by the end of the
lease term. (Hire Purchase)
2. Purchase Option: The lessee has the option to purchase the asset at a price that is expected
to be sufficiently lower than the fair value at the date of the option exercisability. It is
reasonably certain, at the inception of the lease, that the option will be exercised
3. Lease Term: The lease term is for the major part (at least 75%) of the economic life of
the asset even if the title is not transferred.
4. PV of MLP: At the inception of the lease the present value of the minimum lease payments
amounts to at least substantially (at least 90%) all of the fair value of the leased asset.
5. Specialised Asset: The leased assets are of such a specialized nature that only the lessee can
use them without major modifications. (i.e. customized asset for lessee’s use)

KEY CONCEPTS FOR UNDERSTANDING LESSORS ACCOUNTING

‘Gross investment in the lease’ (GIL) =
Initial Down Payment + Annual Lease Payments + GRV + UGRV
‘Net investment in the lease’ (PV of GIL)
(NIL) PV of (DP + Lease Payments + UGRV) – Initial Direct Cost
‘Unguaranteed residual value’ Total Estimated Residual Value (-) GRV
(Total Estimated Residual Value
less GRV)

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 IND AS 116

ACCOUNTING FOR FINANCE LEASE

Non-dealer Lessor Dealer or Manufacturer Lessor
Initial Recognition Initial Recognition:
Lease Receivable A/c Dr. (Net Invst. in Lease) Dealer Lessor shall record Sale at
Bank A/c Dr. (Down Payment) commencement of Lease:
To Asset (PPE) A/c (Carrying Amt.) Lease Receivable A/c Dr. (Net Invst. in Lease)
Difference in above entry is transfer to P&L a/c COGS A/c Dr. (Balancing Fig.)
To Sale A/c (Lower of FV or PV of MLP)
Year End: To Inventory A/c (Carrying Amt.)
Lease Receivable A/c Dr. Sale (-) COGS = Profit on Outright Sale
To Finance Income (P&L) A/c
Year End:
Bank A/c Dr. Same as Non-dealer Lessor’s Accounting
To Lease Receivable A/c
(Collection of Lease Rent)
Calculation of Unearned Finance Income:
Disclose Unearned Finance Income every year:
Gross Investment in Lease (-) Net Investment in Lease
Subsequent Measurement at Balance Sheet Date:
At every BS date, Lease Receivable shall be recognised at Current Net Investment in Lease (i.e. PV
of Remaining Lease Payments + Re-estimated UGRV).

UGRV shall be reviewed at-least once in a year and if there is any reduction in the estimated
UGRV the reduced amount shall be taken into account, this will result in reduction of Finance Income
of the lessor.
(Note:- Remeasurement of lease receivable account will result into gain or loss transfer to
Statement of Profit/Loss)

(Also Refer Practical Example 10 on Lessor’s Accounting)

2. OPERATING LEASE

Particulars Treatment
Initial Measurement Not Required
Recognition of Lease Bank A/c Dr.
Income Deferred Rent A/c Dr.
To Lease Rent Income A/c

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 IND AS 116

Recognise Income on SLM basis unless another systematic basis is

more representative.
Depreciation on Asset Depreciation A/c Dr.
To Asset A/c
Initial Direct Cost Add any initial direct costs incurred to the carrying amount of the
incurred by Lessor underlying asset

Variable lease payments Variable lease payments that do not depend on an Index or a Rate
are excluded in the above treatment and are instead recognised as
income when they arise. (i.e. Actual Basis)

Lease of Land and Building:

● Classify the lease of Land as Operating Lease since land normally has an indefinite economic
life.
● If lease of Building is classified as Finance Lease, the Lease Payments (including any lump-sum
upfront payments) are allocated between the land and the buildings elements in proportion
to the relative fair values.

3. LEASE MODIFICATIONS

A ‘lease modification’ is a change in the scope of a lease, or the consideration for a lease, that was
not part of the original terms and conditions of the lease (for e.g., adding or terminating the right to
use one or more underlying assets, or extending or shortening the contractual lease term).

Finance Lease Modification Operating Lease Modification

Separate Lease Not a Separate Lease
If both criteria are met, a Case 1: - Conversion from A lessor shall account for a
lessor would account it as Finance Lease into Operating modification to an operating
separate New Lease: Lease lease as a new lease from the
a) Additional Rights to use are ● No Retrospective Changes date of the modification,
Granted & ● Transfer CA of Lease considering any prepaid or
b) At Standalone Price Receivable to Asset A/c accrued lease payments relating
Asset A/c Dr. to the original lease as part of
To Lease Receivable A/c the lease payments for the new
lease.
Case 2: Other Modification
(Change in Lease Term or Lease
Payments)
Remeasure Lease Receivable
A/c with new Terms at New
Discount rate & transfer the
difference in P&L A/c
9.18
 IND AS 116

PART 6 - SUB LEASES

A ‘Sub-lease’ is defined as a transaction for which an underlying asset is re-leased by a lessee

(‘intermediate lessor’) to a third party, and the lease (‘head lease’) between the head lessor and lessee
remains in effect.
Original Lease is Called – Head Lease
Original Lessee who has given the asset on sub-lease is called – Intermediate Lessor

Example – There are two lease agreements

1. Mr. Vishal has given an Asset on Lease to Mr. Jai (this is Head Lease)
Mr. Vishal is Lessor and Mr. Jai is Lessee

2. Mr. Jai sub-leased the same asset to Mr. Ravi (Sub-Lease)

Mr. Jai is intermediate lessor and Mr. Ravi is Lessee
Here we need to understand the Accounting in the books of Mr. Jai (i.e. Original Lessee or
Intermediate Lessor).

Accounting of Sub-lease in the books of Intermediate Lessor depends on the nature of Head Lease–
1. When the head lease is a short-term lease and Intemediate Lessor has opted for exemption,
then the sublease is classified as an operating lease, this is because the Intermediate lessor
has not recognised any ROU Asset and Lease Liability in its books under Head Lease. Therefore,
intermediate can never show the sub-lease as Finance Lease
2. When the head lease has been recognised by intermediate Lessor in its books as ROU
Asset and Lease Liability then treat the sub-lease as follows:

If the sublease is classified as a ‘Finance If the sublease is classified as an

Lease’ ‘Operating Lease’
● The original lessee shall de-recognises the ● The original lessee continues to
ROU Asset and continues to account for account for the lease liability and
the original lease liability in accordance ROU asset.
with the lessee accounting model. ● Recognise Sub-lease Rent on SLM
● The original lessee shall recognises Lease basis.
Receivable A/c at Net investment in
sublease (NIL) and evaluates it for
impairment.

Presentation in the Financial Statements

● Intermediate lessors are not permitted to offset lease liabilities and lease assets that arise
from a head lease and a sublease, respectively.
● Similarly, intermediate lessors are not permitted to offset depreciation and interest expenses
& lease income relating to a head lease and a sublease of the same underlying asset, respectively.

9.19
 IND AS 116

PART 7 – SALE & LEASE BACK

A sale and leaseback transaction involves the sale of an asset and the leasing the same asset back. In
this situation, a seller becomes a lessee and a buyer becomes a lessor.

SALES AND LEASE BACK involves two transactions-

1. Sale of Asset by Seller Lessee to Buyer Lessor.
2. Lease Transaction (Already Understood earlier)

Sale Transactions (Very Important to Understand):

● First of all, determine is there an actual sale purchase of Asset.
● As per Ind AS 115, Sale and Purchase can be recognised only when control is transferred i.e. when
substantial risk and rewards are transferred.
● Hence, there would be two case scenarios as under:
If Control is Transferred If Control is NOT transferred
(Operating Lease Back) (Finance Lease Back)
If the control of an underlying asset If the control of an underlying asset is
is passed to the buyer-lessor, the NOT passed to the buyer-lessor, both
transaction is accounted for as a ‘sale the seller-lessee and the buyer-lessor
or purchase’ of the asset and a account for the transaction as a
‘lease’. ‘financing transaction’. Therefore IndAS
109 will be applied instead of IndAS 116.

(a) Accounting of Sale and Lease Back when Control is transferred:

Books of Buyer (Lessor)
The buyer-lessor accounts for the purchase of the asset in accordance with other Ind ASs based on
the nature of the asset (for e.g., Ind AS 16 for property, plant and equipment).
Books of Seller (Lessee)
Step 1 Calculate the Ratio:
PV of Lease Payment (LP)
Fair Value (FV) of Asset
Step 2 Calculate the Recognise the Lease Liability:
PV of Lease Payment at Appropriate Discount Rate
Step 3 Recognise the ROU Assets at the following amount:

ROU Asset = CA x Pv of LP
FV of Asset + Down Payment under case 3 below
Step 4 Recognise the Gain/Loss on Transferred Part of the Asset Sold.
Total Gain = Fair Value – Carrying Amount of Asset
Gain (loss) is divided into two parts:
a. Gain on transferred portion of Asset
b. Gain on retained portion of Asset
The seller-lessee shall recognise only the on transferred part by deducting the
gain on retained part from Total Gain.

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 IND AS 116

Gain on Retained Part = Total Gain x PV of LP

Fair Value of Asset
Journal Entry Cash/Bank A/c Dr.
in the books of ROU Asset A/c Dr.
seller To PPE A/c (Carrying Amt.)
To Gain on transfer of Right A/c
To Lease Liability A/c (PV of LP)
To Loan A/c (Refer Case 2 below)
CASE 1 CASE 2 CASE 3
Sale Value = Fair Value Sale Value is More Sale Value is less than
than Fair Value Fair Value
Sale Value – Fair Value Fair Value – Sale Value =
= Loan Taken Down Payment
Present Value of Total PV of all Future Total PV (-) Loan PV of all Future
Lease Payments Payments Amount Payments
Any Loan No Yes (SV – FV) No
Element?
Total Gain/Loss FV - CA FV - CA FV – CA
Any Adjustment No No FV less Sale Value is
in ROU? treated as Down Payment
& added to ROU
Practical Practical Example 12 Practical Example 13 Practical Example 14
Examples

(b) Accounting of Sale and Lease Back when Control is not transferred:
Treat the entire transaction as Finance Arrangement by Seller Lessee from buyer Lessor and apply
Ind AS 109 accounting as under: (Refer Practical Example 11)

Seller-lessee Buyer-lessor
● Do not de-recognise the Asset sold. ● Do not recognise the Asset Purchased
● Recognise Financial Liability (Loan) equal from Seller Lessee.
to sale proceeds. ● Recognise the Financial Asset
● Recognise annual finance charges on (Loan/Advance Given) at the amount
above financial liability based on equal to transfer proceeds.
appropriate discount rate. ● Recognise annual finance income on
● The discount rate (IRR) should be the rate above financial asset based on
at which the Present value of future appropriate discount rate.
outflows should be equal to current inflow
from sale proceeds.

9.21
 IND AS 116

PART 8 – TRANSITION APPROACH

An entity shall apply Ind AS 116 for annual reporting periods beginning on or after 01 April 2019.

For the purposes of the requirements of this ‘Transition’ section, the date of initial application is the
beginning of the annual reporting period in which an entity first applies Ind AS 116.
For Example – If entity applies IndAS wef FY 19-20, the Transition date means date of initial
application and it will be 01.04.2019.
There is a practical expedient provided which permits lessees and lessors to make an election of not
reassessing whether existing contracts contain a lease as defined under Ind AS 116.

Transition Options for Lessees – Under Previous GAAP, Lessee may have applied lease contract either
as Operating Lease or Finance Lease and now both of these approaches are not available under Ind AS
116. Instead Ind AS 116 requires the lessee to recognise ROU Asset and Lease Liability at PV of Lease
Payments.
Now for transition to Ind AS 116, Lessees have two options:-
1. Apply Full Retrospective Approach
2. Apply Modified Retrospective Approach

Let’s discuss the Transition treatment in the books of Lessees:-

Full Retrospective Approach
Retrospectively to each prior reporting period presented, applying IndAS 8, i.e., an entity
applies Ind AS 116 as if it had been applied since the inception of all lease contracts that
are presented in the financial statements.

If Ind AS 116 is applied at 01 April 2019, this means that, in the 31st March 2020 financial
statements, the comparative period to 31 March 2019 must be restated (assuming that
this is the only comparative period presented).
A restated opening balance sheet at 01 April 2018 will also need to be disclosed as required
by Ind AS 1.
Hence, the Balance Sheets for 3 different dates will be presented:
As at 31st March 2020, 31st March 2019 & 1st April 2018.
In simple words,
● Apply Ind AS 116 to all Lease contracts appearing on Transition Date i.e. 01.04.2018
in such a way that Ind AS 116 would have been applied from the very inception
of the lease.
● Under the full retrospective approach, the lease liability and the ROU asset are
measured on the commencement date using the incremental borrowing rate at lease
commencement date.
● Transfer the difference if any arising on application of transition provision to
Retained Earnings as on 01.04.2018.

9.22
 IND AS 116

Modified Retrospective Approach

Leases Previously Classified as Operating Leases Previously Classified as Finance
Leases under IND AS 17 or Previous GAAP Leases under IND AS 17 or Previous
GAAP
● Do not restate the comparative figures. ● The carrying amount of the ROU asset
● Recognise the cumulative effect of the and the lease liability at the date of
Ind AS 116 as on Initial Application date initial application shall be the carrying
i.e. 01.04.2019 or any other later amount of the lease asset and lease
application date. liability immediately before that date
● Recognise Lease Liability at PV of measured applying Ind AS 17.
Remaining Lease Payments, discounted ● For such leases, a lessee shall account
using the lessee’s incremental borrowing for the ROU asset and the lease liability
rate at the date of initial application. applying Ind AS 116 from the date of
● Recognise ROU Asset on a lease by lease initial application i.e. 01.04.2019 or any
basis at either – later date from which IndAS 116 is
(a) Alternative 1 - Its carrying amount as applied.
if IndAS 116 had always been applied ● Thus, a lessee will not change its initial
since the commencement date, but carrying amounts for assets and
using a discount rate based on the liabilities under finance leases existing
lessee’s incremental borrowing rate at at the date of initial application of
the date of initial application OR IndAS 116.
(b) Alternative 2 - An amount equal to
the lease liability which is recognised
at Initial application date.

● Under Alternative 1, the difference

between the Lease Liability Amount and
ROU Asset Amount shall be transferred
to Opening retained earnings.

9.23
 IND AS 116

KEY DIFFERENCES BETWEEN IND AS 116 AND AS 19

The significant differences between Ind AS 116 and AS 19 are given below:
Sr. Particulars Ind AS 116 AS 19
No.
1 Lease Under Ind AS 116, the definition of Under Ind AS 116, the
definition lease is similar to that in AS 19. But, in definition of lease is similar to
Ind AS 116, there is substantial change that in AS 19. However,
in the guidance of how to apply this guidance part given therein is
definition. The changes primarily relate different.
to the concept of ‘control’ used in
identifying whether a contract
contains a lease or not.
Ind AS 116 provides detailed guidance
on whether an arrangement contains a
lease or whether there are non-lease /
service components within the
arrangement.
2 Modifications Ind AS 116 brings in comprehensive No such comprehensive
prescription on accounting of coverage is there
modifications in lease contracts.
It permits leases, as a practical
expedient, not to assess whether the
rent concessions that occur as a direct
consequence of COVID 19 pandemic
and meet specified conditions are lease
modifications and instead, to account
for those rent concessions as if they
were not lease modifications.
3 Scope Ind AS 116 has no such scope exclusion AS 19 excludes leases of land
from its scope
4 Definition Ind AS 116 makes a distinction No such distinction has been
between ‘inception of lease’ and made in AS 19
‘commencement of lease’
5 Classification Ind AS 116 eliminates the requirement AS 19 requires a lessee to
of classification of leases as either classify leases as either
operating leases or finance leases for a finance leases or operating
lessee and instead, introduces a single leases
lessee accounting model which requires
lessee to recognise assets and
liabilities for all leases unless it applies
the recognition exemption (for leases
of low value assets or short- term
9.24
 IND AS 116

leases)
6 Sale& In Ind AS 116, the approach for As per AS 19, if a sale and
Leaseback computation of gain/loss for a leaseback transaction results
transactions completed sale is different. in a finance lease, excess, if
The amount of gain/loss should reflect any, of the sale proceeds over
the amount that relates to the right the carrying amount shall be
transferred to the buyer-lessor. deferred and amortised by the
seller- lessee over the lease
term in proportion to
depreciation of the leased
asset.
Ind AS 116 requires a seller-lessee and AS 19 does not contain such
a buyer-lessor to use the definition of specific requirement
a sale as per Ind AS 115, Revenue from
Contracts with Customers to determine
whether a sale has occurred in a sale
and leaseback transaction. If the
transfer of the underlying asset
satisfies the requirements of Ind AS
115 to be accounted for as a sale, the
transaction will be accounted for as a
sale and a lease by both the lessee and
the lessor. If not, then the seller-
lessee shall recognise a finance liability
and the buyer-lessor will recognise a
financial asset to be accounted for as
per the requirements of Ind AS 109,
Financial Instruments.
7 Treatment of
initial direct
costs
Finance lease
– lessor
accounting

Non- Interest rate implicit in the lease is Either recognised as expense

manufacturer/ defined in such a way that the initial immediately or allocated against
Non-dealer direct costs included automatically in the the finance income over the lease
finance lease receivable. term.

Manufacturer/ Same as per AS 19 seller Recognised as expense

9.25
 IND AS 116

Dealer immediately.

Operating Added to the carrying amount of the Either deferred and allocated to
lease- Lessor leased asset and recognised as expense income over the lease term in
accounting over the lease term on the same basis as proportion to the recognition of
lease income. rent income, or recognized as
expense in the period in which
incurred
8 Initial direct Ind AS 116 contains clearer definition Different guidance given
costs of ‘initial direct costs, such as
commissions and legal fees, are often
incurred by lessors in negotiating and
arranging a lease. Ind AS 116 define
initial direct costs as ‘Incremental
costs of obtaining a lease that would
not have been incurred if the lease had
not been obtained, except for such
costs incurred by a manufacturer or
dealer lessor in connection with a
finance lease.’
Further, definition of the term
‘interest rate implicit in the lease’ has
been modified in Ind AS 116.
9 Presentation As a consequence of introduction of Different guidance given
single lease model for lessees, there
are many changes in the presentation in
the three components of financial
statements viz. Balance sheet,
Statement of Profit and Loss,
Statement of Cash flows.
10 Disclosure There are a number of changes in the Different guidance given
disclosure relating to qualitative
aspects of leasing transactions. For
e.g., Entities are required to disclose
the nature and risks arising from
leasing transactions. Also, in case of
lessor, there are changes in the
disclosure of maturity analysis of
leases payments receivable.

9.26
 IND AS 116

Student Notes:-

9.27
 IND AS 116

Student Notes:-

9.28
 IND AS 41

IND AS 41
10
AGRICUITURE
“Definiteness of Purpose is the Starting
Point of all achievement”

1. DEFINITIONS

(a) Biological Asset is defined as a living animal or plant.

(b) Agricultural Produce is the harvested product (can say “Raw Material without further
processing) of the entity’s biological assets.
(c) Biological Transformation comprises the processes of growth, degeneration, production,
and procreation that cause qualitative or quantitative changes in biological asset.
(d) Agriculture Activity means Management of biological transformation of biological assets for
Sale or Conversion into agriculture produce or additional biological assets.

(e) HARVEST is the detachment of produce from a biological asset or the cessation of a biological
asset’s life processes.
(f) BEARER PLANT may be defined as a living plant that:
i. is used in the production or supply of agricultural produce;
ii. is expected to bear produce for more than one period; and
iii. has a remote likelihood of being sold as agricultural produce, except for incidental scrap
sales.

10.1
 IND AS 41

For example, tea bushes, grape vines, oil palms and rubber trees, usually meet the definition of a bearer
plant and are outside the scope of Ind AS 41 and covered under Ind AS 16.

These are Agriculture Activity These are Not Agriculture Activity

● Pharma companies grow their own plants in ● ZOO: (safari, recreational park, riding hall,
order to produce and sale drugs. etc.)
● If a company maintains Cows and Produces Milk ● Security Dogs and Animals
then this is an agricultural activity ● Fishing in River, Ocean etc
● Fish Farming ● Growing Grape vines (its is a bearer plant)
● Harvesting Grapes ● Producing wine – Inventory (Ind AS 2)
● A managed breading programme carried out to ● Natural breading that takes place in animals
produce animals for sale used in recreational activities is not a managed
activity

10.2
 IND AS 41

2. APPLICABILITY & NON – APPLICABILITY

(1) Ind AS 41 applies to the following:

a. Biological Assets relating to Agriculture activity
b. Agricultural Produce at the point of harvest relating to agriculture activity
c. Government Grants relating to agriculture activity
Author’s Note:
At the point of harvest means Only for the First Time after Harvesting.

(2) Ind AS 41 does not applies to the following:

(a) Land related to agricultural activity: for example, the land on which the biological assets
grow, regenerate and/or degenerate (Ind AS 16 may be applied);
(b) Bearer plants related to agricultural activity. Such bearer plants covered within the scope
of Ind AS 16. However, this Standard applies to the produce on those bearer plants.
(c) Government grants related to bearer plants (Ind AS 20 will be applied).
(d) Intangible assets associated with the agricultural activity, for example licenses and
rights are covered under Ind AS 38.
(e) Right of Use Assets arising from a lease of Land related to Agriculture Activity (IND
AS 116 LEASES)

The following are NOT bearer plants:

Not Bearer Plant

Plants cultivated to produce

Plants cultivated to be Agriculutural Produce when there is
Harvested as Agricultual Annual crops more than a remote likehood that
Produce the entity will also harvest and sell
the plant as Agricultural scrap sales

Example:
Example: Example: Trees that are cultivated
Trees grown for use as Maize and Wheat both for their fruit and their
lumber
lumber

10.3
 IND AS 41

AUTHOR’S NOTE:
This Standard is applied to agricultural produce, which is the harvested product of the entity’s
biological assets, only at the point of harvest. Thereafter, Ind AS 2 or another applicable Standard
is applied.

The table below provides examples of biological assets, agricultural produce, and products that are the
result of processing after harvest:
Biological assets Agricultural produce Products that are the result of
processing after harvest
Sheep Wool Yarn, carpet
Trees in a timber Felled Trees Logs, lumber
Dairy Cattle Milk Cheese
Pigs Carcass Sausages, cured hams
Cotton plants Harvested cotton Thread, clothing
Sugarcane Harvested cane Sugar
Tobacco plants Picked leaves Cured tobacco
Tea bushes Picked leaves Tea
Grape vines Picked grapes Wine
Fruit trees Picked fruit Processed fruit
Rubber trees Harvested latex Rubber products

3. RECOGNITION OF ASSETS
Entities are required to recognise a Biological Asset or Agricultural Produce at the Point of
Harvest when, and only when, ALL of the following conditions are met:
(a) The entity CONTROLS the asset as a result of past events;
(Control over biological assets or agricultural produce may be evidenced by legal ownership or
rights to control, for example legal ownership of cattle and the branding or otherwise marking
of the cattle on acquisition, birth, or weaning.)

(b) It is probable that FUTURE ECONOMIC BENEFITS associated with the asset will flow to the
entity;
(Future economic benefits are expected to flow to the enterprise from its ownership or control
of the asset) and

(c) The FAIR VALUE OR COST of the asset can be measured reliably.

10.4
 IND AS 41

4. MEASUREMENT & ACCOUNTING

1. Biological Assets
Initial Recognition At Fair Value less Cost to Sell (FVLCTS)
How to Calculate Sales Price of Biological Asset
FVLCTS (-) Transportation Cost to transport the asset born by seller
(-) Cost to sell (Transaction cost like brokerage/auctioneer’s fees born by seller)
Journal Entry at Biological Assets A/c Dr. (FVLCTS)
Initial Recognition Fair Value Loss A/c Dr. (balancing fig. P&L a/c)
To Bank A/c (Payment to buy Asset)
To Fair Value Gain A/c (balancing fig. P&L a/c)

New Born Baby Animal (Eg. Calf) at FVLCTS on Date of Birth:

Biological Asset A/c Dr.
To Gain on New Born A/c
Payment to buy Asset Purchase Price of Biological Asset (it could be different from market price)
(+) Transport Cost born by buyer to transport the asset to entity’s farm
(+) Transaction Cost (brokerage)
Subsequent At Revised Fair Value less Cost to Sell. Any change due to remeasurement is Fair
Measurement at B/s Value Gain or Loss and transfer to Profit and Loss A/c.
date
Conversion of Eg. Slaughtering of Animal to get carcass
Biological Assets into On Conversion:
Agriculture Produce Agriculture Produce A/c (Inventory) Dr. (FVLCTS)
Loss A/c Dr. (balancing fig.)
To Bank A/c (Cost of conversion)
To Biological Asset A/c (Carrying Amt.)
To Gain A/c (balancing fig.)

On Sale of Inventory:
COGS A/c Dr. (Carrying Amt.)
To Agriculture Produce (Inventory) A/c

Bank A/c Dr. (Sale Proceeds)

To Revenue from Sale A/c
Derecognition of Bank A/c Dr. (Net Amt. received on sale)
Biological Assets due Loss on Sale/Death Dr. (balancing fig.)
to Sale or Death To Biological Asset A/c (Carrying Amt.)
To Gain on Sale of Biological Asset A/c (bal. fig.)
Expenses on Biological Expenses incurred to maintain biological assets for their growth such as breeding
Assets cost, food cost, fertilizers etc. are transfer to Profit and Loss A/c

2. Agriculture Produce at Point of Harvest

Initial Recognition At Fair Value less Cost to Sell (FVLCTS)
Journal Entry at Agriculture Produce A/c Dr. (FVLCTS)

10.5
 IND AS 41

Initial Recognition To Fair Value Gain A/c

Subsequent Agriculture Produce will be treated as Inventory and Ind AS 2 shall be applicable
Measurement at B/s for subsequent measurement. Cost of such inventory for the purpose of Ind AS 2
date shall be previous measurement (i.e. FVLCTS) under Ind AS 41

3. Other Important Points

1) The fair value less cost to sell of a biological asset can change due to both physical changes
and price changes in the market.
2) It is true that the general rule in Ind AS 41 Agriculture is to measure all biological assets at fair
value less costs to sell. However, there are few exceptions:
a) The biological asset is NOT a part of agricultural activity such as guard dogs, fish caught
in the ocean, Zoo etc.
b) The biological asset is a bearer plant.
c) The fair value is not reliably measurable
When the fair value cannot be measurable, you can measure the asset at its cost less
accumulated depreciation.

5. GOVERNMENT GRANTS

GOVERNMENT
GRANT

Biological asset Biological assets measured at its

measured at its fair cost less any depreciation and
value less costs to any accumulated Impairment
sell losses

Conditional, including when a

government grant requires an
Unconditional Ind AS 20 will apply
entity not to engage in a
specified agricultural activity

Recognise as Income Treat Liability till conditions are met. As

when Receivable soon as conditions are satisfied Liability
will be transfer to Income When
(Transfer to Stament conditionas are met
of P&L Immediately)

● When Govt. Grant is received for Biological Asset which is measured at Fair Value less costs to sell
then do not ever think of deducting the grant amount from carrying amount of biological assets.
● Apply Ind AS 20 on Grants relating to “Biological assets which are not related to agricultural
activity” or “Biological assets relating to agricultural activity but measured at cost”.

10.6
 IND AS 23

IND AS 23
11
BORROWING COSTS

1. MEANING of BORROWING COSTs

Borrowing Cost is the:

(a) Interest and
(b) Other cost
that is incurred by an enterprise in connection with borrowing of funds.
The following exclusive points should be considered for the purpose of borrowing cost:
● Interest Exp. calculated using the effective interest method as described in IND AS - 109
Financial Instruments.
● Amount of Interest (finance charges) should also be included as a part of borrowing cost which
is paid or payable on lease liability recognized in accordance with IND AS 116).
● Exchange Difference arising from Foreign Currency Borrowings to the extent of difference in
Interest cost (IND AS – 21).

Author’s Note:
1. Dividend on redeemable preference share capital is borrowing cost.
2. Equity Dividend or Dividend on irredeemable preference share capital is not borrowing
cost.
3. Cost of issue of equity capital is not borrowing cost.

(Refer Practical Example 1 for Effective Rate of Interest)

11.1
 IND AS 23

2. FOREIGN EXCHANGE FLUCTUATION

(a) Foreign Exchange Loss on Foreign Currency borrowing:
Borrowing costs shall be lower of:
(i) Actual Exchange Loss; or
(ii) Saving in Interest due to foreign currency loan (difference of interest cost on local
currency loan and foreign currency loan)
Step 1 Calculate Actual Interest Cost on foreign currency loan (apply closing exchange
rate to convert into functional currency)
Step 2 Calculate Saving in Interest Cost due to foreign currency loan as under:
Interest on Loan if taken in India XXX
(-) Actual Interest on Loan on FC Loan XXX
Step 3 Calculate Actual Exchange Loss due to increase in Foreign Exchange Rate
Step 4 Lower of Step 2 or Step 3 will be Borrowing cost

(b) Foreign Exchange Gain on Foreign Currency borrowing:

(i) General rule: transfer to profit and loss directly, it is not adjustment to borrowing cost.
(ii) Exchange gain in subsequent years after previous exchange loss: The Gain to the
extent of the loss previously recognized as an adjustment should also be recognised as
an adjustment to interest i.e. deducted from borrowing cost.
(Refer Practical Example 2 & 3)

3. MEANING OF QUALIFYING ASSETS

Qualifying Asset means:
● An ASSET
● that takes Substantial period of time
● to get ready for intended use or sale.

Note 1: Normally a period of 12 months is considered to be the substantial period of time. However
it is not defined, it can be considered as per the judgement of the entity. If question is silent we can
assume that asset is taking substantial period.

Note 2: Inventories that are manufactured or produced in large quantities on a repetitive basis and
that takes substantial period of time to get ready to sale may not be qualifying asset.

4. TREATMENT OF BORROWING COSTs

As per IND AS – 23, amount of borrowing cost which is directly atributable to:
● Acquisition; (A)
● Construction; (C) or
● Production (P)
of any Qualifying Asset is Capitalized.
If any borrowing cost is not having any connection with Q.A. than such amount should be transfer to
Profit and Loss account.
11.2
 IND AS 23

5. TYPES OF BORROWINGS & BORROWING COSTS

There can be two types of borrowings which are as follows:-

A. Specific Borrowing: Loan is taken for specific qualifying asset
B. General Borrowing: Loan is not for any specific qualifying asset. It can be used for any purpose
or for multiple assets.

Specific Borrowing Cost General Borrowing Cost

Entire borrowing cost shall be capitalised from Capitalisation shall be done expenditure wise (i.e. from the
st
the date of 1 expenditure on qualifying asset. date of each expenditure on qualifying asset).
(i.e. start capitalization of entire borrowing cost
from the date of 1st expenditure irrespective of To capitalize the borrowing cost we have to calculate
expenses on different dates) weighted average of the borrowing rate (WABR) as under:

Total Borrowing Cost incurred during the year x 100

Total Borrowings O/s during the Year

Expenditure on QA x WABR (%) x Time Weight

If expenditure on qualifying asset is incurred out of specific as well as general borrowed funds then we shall
first use specific borrowings if such borrowing is available on the date of expenditure.
(Refer Practical Examples 4 to 10)

Author’s Note:
In computing the capitalisation rate for generally borrowed funds, the entity should exclude borrowing costs on
borrowings which are specifically used for the purpose of obtaining a qualifying asset until that specific asset is
ready for its intended use or sale.
Once such specific asset is ready for its intended use or sale, borrowing costs related to borrowings of such
asset shall be considered as part of general borrowing costs of the entity and be used for computation of
capitalisation rate on general borrowings.

EXPENDITURE TO WHICH CAPITALISATION RATE IS APPLIED:

Expenditure Already incurred on QA XXX
(including Borrowing cost capitalized till last year)
Add: Expenditure incurred in CY (in Cash or payable) XXX
Less: Progress Payments or Grants received during the CY (XXX)
Total Expenditure on which WABR shall be applied XXX

IMPORTANT POINTS:
(a) Once borrowing cost is capitalized there may be some possibility that recoverable amount of asset
is lowen than the carrying amount of asset hence such asset can be tested for impairment.
(b) As per IND AS 23, if any enterprise has earned temporary income by investment of unused
borrowed funds then amount of temporary income should be adjusted against total borrowing

11.3
 IND AS 23

cost and only thereafter principals of recognition should be applied.

6. CAPITALIZATION of BORROWING COSTs:

Commencement Start capitalizing Borrowing cost from the later of following dates:
of Capitalisation: a. Date of start of expenditure on A/C/P of Qualifying Asset
b. Date of start of incurring interest
c. Date when necessary activities started (Such as technical or
administrative work prior to commencement of physical contruction)
Suspension of Capitalization of Borrowing Costs shall be suspended during the extended
Capitalisation periods in which Active Development is interrupted.

Note: Borrowing costs which are related to the suspension period should be
transferred to Profit and loss.

However, if necessary activities are interrupted due to unavoidable reason

(or) temporary delays is necessary then no need to suspend the capitalization
of Borrowing cost. (eg. High water level during construction of bridge)
Cessation of ● Capitalization should cease when substantially all the activities necessary
Capitalisation to prepare the qualifying asset for its intended use or sale are complete.

● Cessation to take place in part if construction of qualifying asset is

completed in parts and a part is capable of being used separately.

Example on Commencement of Capitalization

X Ltd is commencing a new construction project, which is to be financed by borrowing. The key
dates are as follows:
(i) 15 May 20X1: Loan interest relating to the project starts to be incurred
(ii) 2 June 20X1 : Technical site planning commences
(iii) 19 June 20X1 : Expenditure on the project started to be incurred
(iv) 18 July 20X1 : Construction work commences Identify commencement date.
SOLUTION:
In the above case, the three conditions to be tested for commencement date would be: Borrowing
cost has been incurred on: 15 May 20X1
Expenditure has been incurred for the asset on: 19 June 20X1
Activities necessary to prepare asset for its intended use or sale: 2 June 20X1 Commencement
date would be the date when the above three conditions would be satisfied in all i.e., 19 June 20X1.

Example of Suspension of Capitalisation

Construction suspended between October 20X1 to January 20X2 during which period certain heavy
construction equipments under use was shifted to another site.

11.4
 IND AS 23

In this case, capitalization of borrowing costs needs to be suspended since active development is
interrupted.

Example on Cessation of Capitalisation:

H Limited, a real estate company, gives immovable property on rent. It has completed on May 31,
20X1, a commercial complex consisting of various offices that could be rented out. It expects that
the commercial complex will be completely rented out by June 30, 20X1. However, due to adverse
market conditions, only 10% of the commercial complex could be rented out by its reporting date
of March 31, 20X2. H Limited wants to capitalise the eligible borrowing costs incurred up to March
31, 20X2.

H Limited should capitalise borrowing costs only up to May 31, 20X1. The borrowing cost incurred
thereafter cannot be capitalised as the asset was ready for its intended use on May 31, 20X1. The
fact that only a small portion could be rented out by March 31, 20X2, is immaterial.

Example on Cessation of Capitalisation on some part of Asset:

An entertainment park consisting of several rides and facilities, each of which can be used
individually, is an example of a qualifying asset for which each part is capable of being usable while
construction continues on other parts. On the other side in a case of an industrial undertaking such
as a steel mill, all parts have to be completed before any earlier completed part can be put to use.

11.5
 IND AS 23

7. OTHER RELEVANT CONCEPTS

A. Capitalising borrowing cost in Group Financial Statements

● There may be a situation when the borrowings are taken by one company and qualifying
asset is developed by another company within a group.
● Borrowing cost in the consolidated financial statements shall be capitalized only when
borrowed funds are actually applied on such qualifying asset. (means check the end use of
borrowed funds)
● However, the entity carrying out the development should not capitalise any interest in its
stand-alone financial statements as it has no borrowings.
● If, however, the entity has intra-group borrowings (loan taken by subsidiary from holding)
then interest on such borrowings may be capitalised in its stand-alone financial statements
if funds are applied to qualifying asset.

B. Cessation of Capitalisation for Maturing Inventories

For maturing inventories, it is sometimes difficult to determine when the 'period of production'
ends, i.e. when inventories are being held for sale as opposed to being held to mature. Consider
the following example:

Example:
Whisky is 'mature' after three years, but goes on improving with age for many more years. Provided
that it is consistent with the entity's business model to hold such items so that they mature further,
it would seem acceptable to continue to add borrowing costs to the value of such maturing inventories
for as long as it can be demonstrated that the particular item of inventory continues to increase in
value solely on account of increasing age, rather than because of market fluctuations or inflation.
If this cannot be demonstrated, then the inventories should be regarded as held for sale and no
further borrowing costs should be capitalised.

C. Notional Borrowing Cost:

● A notional borrowing cost cannot be capitalized.
● Where an entity has no borrowings and use its own cash resources to finance the
construction of property, plant and equipment, the entity can not assume that interest
that could have been earned on that cash represents forgone benefit and could be
capitalized.

11.6
 IND AS 36

IND AS 36
12
IMPAIRMENT OF ASSETS

IMPARIMENT means Reduction in the value of Assets due to external or internal indicators such as
change in technology, physical damage etc.

1. APPLICABABILITY AND NON - APPLICABILITY:

A. Ind AS 36 is applicable to:

1. PPE (Ind AS 16)
2. Intangible Assets (Ind AS 38)
3. Investment Property (Ind AS 40)
4. Goodwill Acquired in Business Combinations (Ind AS 103)
5. Investments in Subsidiaries/JV/Associates if measured as Cost (Ind AS 27)

B. Ind AS 36 is Not Applicable to:

1. Inventories (as covered in Ind AS 2)
2. Contract assets and assets arising from costs to obtain or fulfill a contract (Ind AS 115)
3. Deferred tax assets (Ind AS 12)
4. Assets arising from employees benefits (Ind AS 19) (eg. Plan Assets/Investments at Fair Value)
5. Biological Assets measured at fair value less cost to sell (Ind AS 41)
(It means Biological Assets measured at Cost are subject to Impairmentunder this standard
only i.e. under Ind AS 36)
6. Non-current assets (or disposal groups) classified as held for sale (ascovered in Ind AS 105)
7. Financial Assets (within the scope of Ind AS 109 & 32) (eg. Shares, Debtors, Loans and
Advances etc)

2. INDICATIONS OF IMPAIRMENT
A. External indicators for Impairment of Asset: (List is not exhaustive or conclusive)
a) 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 entity have taken place due to change in
technology,market, economy or legal environment.
c) Market interest rates have increased during the period, and those increases are likely to affect
the discount rate; and
d) Book Value of Net Assets is more than Market Value Net Assets.

B. Internal source of information: (List is not exhaustive or conclusive)

a) Obsolescence or Physical damage of an asset;
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 IND AS 36

b) Asset becoming idle, plans to dispose of an asset before the previously expected date, and
reassessing the useful life of an asset as finite rather than indefinite;
c) Plans to discontinue or restructure the operation to which an asset belongs,
d) Economic performance of an asset is, or will be, worse than expected.

Indications of Impairment in case of Investment in Subsidiary; Joint Venture or

Associate
(i) The carrying amount of the investment in the separate financial statements exceeds the
carrying amounts in the consolidated financial statements of the investee’s net assets,
including associated goodwill;
For Example: Investment Value in SFS of Holding Co. is 14.50 Lacs; Valueof Net Assets
including Goodwill of Sub. in CFS is 15 Lacs out of which 90% belongs to holding’s share i.e.
13.50 lacs.
OR
(ii) The dividend declared by subsidiary exceeds the total comprehensive income of the
subsidiary, jointly controlled entity or associate in the period the dividend is declared.

3. IDENTIFYING AN ASSET THAT MAY BE IMPAIRED

Asset is impaired only when Carrying Amount is more than Recoverable Amount.
CA – RA = IMPAIRMENT LOSS
Mandatory Impairment Testing • Intangible Assets with indefinite usefullife
Annually of these Assets: • Intangible Assets not yet available for Use.
• Goodwill acquired in a Business Combination

Impairment Testing only when • PPE

any indication arise: • Investment Property

4. MEASUREMENT OF RECOVERABLE AMOUNT

Recoverable Amount Higher of Fair Value less cost to sell and Value in use.
Fair Value Fair Value shall be calculated as per Ind AS 113
Cost to Sell legal costs, stamp duty and similar transaction taxes, costs of
removing the asset, and direct incremental costs to bring an asset into
condition for its sale.

But Employees termination benefits are not cost to sell.

Value in use (VIU) Present value of the future cash flows expected to be derived from
use of an asset including disposal at the end of useful life.
Discounting Rate for VIU • Pre-tax discount rate should be used.
• Discount rate can be either weighted avg. cost of capital or entity’s

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 IND AS 36

incremental borrowing rate.

Estimating Future Cash • Reasonable and supportable assumptions should be considered
Flows for VIU • Projections should cover a maximum of 5 years unless longer period
can be justified.
• Future Cash Flows should not include:
➢ Cash inflows from receivables
➢ Cash outflows from payables
➢ Cash flows of future restructuring (including Business
acquisitions to which entity is not yet committed
➢ Cash flows expected from improving or enhancing the asset’s
performance
➢ Income tax receipts/payments
Foreign Currency Future Step 1:
Cash Flows FC Cash flows x Discount Rate relating to country of foreign currency
Step 2:
(Refer Practical Example 1) Translate Discounted cash flows using exchange rate on the date of
measurement of Value in Use.
Note:
If FVLCTS is not determinable, then value in use is considered as Recoverable Amount
If VIU is not determinable, then Recoverable amount of such asset can-not be determined. In Such
case Impairment of CGU shall be done.

Example: (on Expected Cash Flows)

Calculate expected cash flows in each of the following cases:
(a) the estimated amount falls somewhere between ₹ 50 and ₹ 250, but no amount in the range is
more likely than any other amount.
(b) the estimated amount falls somewhere between ₹ 50 and ₹ 250, and the most likely amount is ₹
100. However, the probabilities attached to each amount are unknown.
(c) the estimated amount will be ₹ 50 (10 per cent probability), ₹ 250 (30 per cent probability), or
₹ 100 (60 per cent probability).
SOLUTION
(a) the estimated expected cash flow is ₹ 150 [(50 + 250)/2].
(b) the estimated expected cash flow is ₹ 133.33 [(50 + 100 + 250)/3].
(c) the estimated expected cash flow is ₹ 140 [(50 × 0.10) + (250 × 0.30) + (100 × 0.60)].

(Also Refer Practical Example 2)

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 IND AS 36

5. IMPAIRMENT OF INDIVIDUAL ASSET

Steps to be followed for calculation and treatment of Impairment loss:

Step 1: Calculate Carrying Amount of Asset as on Balance Sheet (After charging depreciation)

Step 2: Calculate Recoverable Amount of Asset

Step 3: If Carrying Amount is higher than Recoverable Amount then difference is Impairment Loss

Step 4: Treatment of Impairment loss as under:

➢ If Asset belongs to Cost Model – Charge the Impairment loss to P&L A/c
➢ If Asset belongs to Revaluation Model – Charge the impairment loss to revaluation surplus
(OCI) if available and remaining loss to P&L A/c

Step 5: Calculate Revised Carrying Amount of Asset after Impairment for the purpose of further
depreciation in future. (CA before impairment – Impairment loss)

Journal Entry for Impairment Loss:

Impairment Loss A/c Dr. Revaluation Surplus A/c (OCI) Dr. (1st Priority)
To Asset A/c Profit and Loss A/c Dr. (Balancing Fig.)
To Impairment Loss A/c
(Refer Practical Example 3)

Important Note:
1. If impairment loss is more than carrying amount of asset, then liability should be recognised
after writing off the carrying amount.
2. Since impairment loss is not deductible under income tax, Deferred Tax affect should be
calculated after impairment, since carrying amount of asset would be different from Tax Base
of Asset. (Tax base means value of asset as per tax records) (Refer Practical Example 4)

6. IMPAIRMENT LOSS OF A CASH-GENERATINGUNIT (CGU)

INLUDING GOODWILL & CORPORATE ASSET

A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that
are largely independent of the cash inflows from other assets or groups of assets.
 Always try to impair Individual Asset first for which indication ofimpairment exist and estimate
the recoverable amount of that individual asset.
 If it is not possible to estimate the recoverable amount of the individual asset, then recoverable
amount of the cash-generating unit to which the asset belongs should be determined and apply
impairment testing of CGU.
 CGU may include current assets, goodwill, corporate assets and liabilities also.

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 IND AS 36

 Only those Assets and Liabilities should be considered in carrying amount of CGU which are
taken into account for determining Recoverable Amount (i.e. basis should be same)
 Examples of liabilities that can become part of CGU – Provision for decommissioning liabilities,
specific loans taken for CGU Assets.

Example:
A company manufactures a flavored drink from Machine A and the drink can be sold only in bottles
for which machine B is to be used. Here both machines can-not generate cash flows individually hance
they shall be clubbed together to form a CGU.

More Examples – Magazine Titles, Buses running in a different routes

Carrying Amount of CGU: Carrying Amount of PPEs of CGU

(+) Carrying Amount of Intangible Assets of CGU
(+) Carrying Amount of Current Assets of CGU
(+) Carrying Amount of Goodwill allocated to CGU
(+) Carrying Amount of Corporate Assets allocated to CGU
Corporate Assets: Assets other than goodwill that helps CGU under review and other
CGUs to generate Independent Cash Flows.
(For Ex. Head office buildings)
How to Impair Goodwill and Goodwill and Corporate Assets doesn’t generate independent cash
Corporate Assets flows hence they can-not be tested for impairment individually.

Goodwill shall be allocated to different CGUs of business that are

expected to benefit from the synergies of the business acquisition.

Corporate Assets are allocated to different CGUs on a Reasonable

basis
How to allocate Goodwill and Goodwill shall be allocated either in the ratio given in the question
Corporate Assets? (or) in the ratio of Fair Values of CGUs at the time of business
acquisition.

Corporate Assets shall be allocated either in the ratio given in the

question (or) in the ratio of following amounts of each CGU:
Carrying Amt. x Useful life

(if useful life is not given then only carrying amount of CGUs can be
used to find out ratio)
Un-allocable Goodwill and Apply Bottom up approach for Goodwill and Corporate Assets which
Corporate Assets are Allocable to CGUs.

Apply Top-down approach for Goodwill and Corporate Assets which

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 IND AS 36

are not allocable to CGUs.

Important Note Impairment Loss is never allocated to Current Assets or any other
assets on which Ind AS 36 is not applicable

Steps to Solve the Complete Question:

Approach Particulars CGU 1 CGU 2 CGU 3 Total
Carrying Amt of CGUs XXX XXX XXX XXXX
(+) Allocate Goodwill XXX XXX XXX XXXX
Bottom (+) Allocate Copr. Assets XXX XXX XXX XXXX
Up Total Carrying Amount of CGUs XXX XXX XXX XXXX
Less:
Total Recoverable Amt. of CGUs XXX XXX XXX XXXX
Impairment Loss of CGUs XXX XXX XXX XXX
Bottom (-) Allocable Goodwill XX XX XX XX
up
continued (-) then Impairment Loss allocate to XXX XXX XXX XXX
that Asset which can be tested for
impairment individually

(-) Remaining Imp. Loss is allocated to XXX XXX XXX XXX

all other Assets including Corporate
Assets in the given ratio

Revised Carrying Amt. of CGUs XXX XXX XXX XXX

Top- (+) Un-allocable Goodwill or Corporate - - - XXX
down Assets
Total Carrying Amount of Entity as a XXX
whole
(-) Recoverable Amt. of Entity as a XXX
whole
Additional Impairment Loss for Un- XXX
Top- allocable Goodwill and Corporate
down Assets only
(Do not impair CGUs since they are
already tested for impairment)

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 IND AS 36

7. NON-CONTROLLING INTEREST – IMPACT OF UN-

RECOGNISED GOODWILL

1) NCI means other shareholders of subsidiary co. not having control over subsidiary’s business.
2) NCI is calculated by Two different Methods: -

Fair Value Method Proportion of Net Assets Method

(Market Value Method)

NCI = No. of Shares held by NCI X NCI = Fair Value of Total Net Assets X
Market Price per share of Subsidiary NCI %
(Refer Practical Example 5)

3) When NCI is calculated by Fair Value method then Full Goodwill arise and such full goodwill is
included in Carrying Amt. of CGU as well as Recoverable Amount of CGU.
4) However, when NCI is calculated as per Proportionate of Net Asset Method then Partial Goodwill
arise which is attributable to Holding Company only, this means Goodwill attributable to NCI is not
recognised and not included in carrying amount of CGU.
5) Recoverable amount of CGU always includes Full Goodwill. Therefore, entity shall gross up the
goodwill to include NCI’s portion of goodwill into the carrying amount of CGU

Apply following Steps:

Particulars Amount
Carrying Amount of CGU XXX
Add:
Goodwill attributable to Holding Co. XXX
(Calculated as per Proportionate Method)
Add:
Un-recognised Goodwill (Attributable to NCI) XXX
Goodwill attributable to Parent x NCI’s Share
Parent’s Share
Total Carrying Amount of CGU XXX
Less:
Total Recoverable Amount of CGU as given in the Question XXX
Impairment Loss of CGU XXX
Allocation of Impairment Loss to Goodwill First:
➢ Impairment Loss to Parent’s Goodwill (Holding’s Share) XXX
➢ Impairment Loss to NCI’s Goodwill (NCI’s Share) XXX

No need to record impairment loss of NCI’s Goodwill since this goodwill

was unrecognized.
Remaining Impairment Loss attributable to other Assets shall be XXX
apportioned to Holding and NCI
(Refer Practical Example 6)

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 IND AS 36

8. REVERSAL OF IMPIRMENT LOSS

Indicators of reversal of Impairment Loss:

External –
• Asset’s value has increased significantly during the period;
• Significant changes with an favorable effect on the entity have taken place due to
change in technology,market, economy or legal environment.
• Market interest rates have decreased during the period, and those increases are likely
to affect the discount rate; and
Internal -
• Asset’s performance has been significantly improved. It may be because of Cost
incurred to improve or enhance the performance or Cost incurred to restructured the
operation during the period.
• Economic performance of the asset is, or will be, better than expected.
Goodwill:
An impairment loss recognised for goodwill shall not be reversed in a subsequent period.
Assets other than Goodwill:
If there is an Indication that shows Impairment Loss recognised earlier may no longer exists
or may have decreased, then entity shall revers the impairment loss and accordingly recoverable
amount is to be determined.
How to Calculate the Reversal of Impairment Loss:
Step 1: Current Carrying Amount of Asset – assume 1000/-
Step 2: Current Recoverable Amount of Asset – assume 1200/-
Step 3: Calculate Current Carrying Amount of Asset if Asset were never impaired
(assume 1150/-)
Step 4: Revised Carrying amount after reversal should be lower of Step 2 & Step 3
(Means 1150/-)
Step 5: Reversal of Impairment Loss = Step 4 – Step 1 (means 1150 – 1000 = 150)
Step 6: Current Carrying Amount (Step 1) + Reversal of I/L (Step 5) = Revised Carrying Amt.
Depreciation shall be charged on Revised Carrying Amount
(Refer Practical Example 7)
Accounting treatment of Reversal of Impairment Loss:
Asset A/c Dr.
To Impairment Loss Reversal A/c

Impairment Loss Reversal A/c Dr.

To Revaluation Surplus A/c (if available & Asset is under Revaluation model)
To Profit and Loss A/c (Balancing Fig.)
Reversal of Impairment Loss of CGU:
A reversal of an impairment loss for a cash-generating unit shall be allocated to the assets of
the unit, except for goodwill, in proportion of carrying amounts of those assets.

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 IND AS 105

IND AS 105 - NON-CURRENT

13 ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
“Limitations live only in our Minds
But if we use our imaginations, Our Possibilities become Limitless”

1. WHY IND AS105?

When a company stops continuing its business or plans to sell an asset then the users of financial
statements mainly investors should be informed about these events.
Therefore, IND AS 105 is drafted to set the requirements to be followed when above events takes
place.

2. NON-APPLICABILITY OF IND AS105?

It is very important to note that the requirements of this standard applies to ALL Non - Current
Assets, however measurement provisions shall not be applicable to:
● DTA (IND AS 12)
● Assets arising from employee benefits (IND AS 19) (eg. Plant Assets)
● Financial Assets (IND AS 109) (eg. Investment in Shares/Long term securities etc)
● Biological Assets which are measured at Fair value less cost to sell (IND AS 41)
● Contractual rights under insurance contracts (IND AS 104)
● Inventory (IND AS 2)

3. WHEN TO CLASSIFY AN ASSET AS HELD FOR SALE?

✔ An Entity should classify a non-current asset or disposal group as held for sale if:
⮚ Carrying amount will be recovered principally through a sale;
⮚ rather than continuing use.

✔ These Assets or disposal group are to be presented separately from other assets in the Balance
Sheet. For disposal group Assets and liabilities shall not be offset.
Disposal group is a new concept introduced by IND AS 105 and it represents a group of assets and
liabilities to be disposed of together as a group in a single transaction.
For example, when a company runs a few divisions and decides to sell one division, then all assets
(including PPE, inventories, deferred tax, etc.) and all liabilities of that division would represent a
disposal group.

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 IND AS 105

When will an Asset be recovered through a sale rather than Continuing use?
Two Conditions must be fulfilled:
(1) Asset/disposal group must be available for immediate sale (i.e. Ready to Sale)
(2) Sale must be highly probable (i.e. High chances of sale in future)

Asset must be available for Immediate Sale Sale must be highly Probable (5 Conditions)
In Following cases Asset will not be 1. Management must be committed to a plan to sell
considered for immediate sale: the asset (eg. Resolution is passed);
a. The asset continues to be vital for 2. An active program to find a buyer must have been
the entity’s operation; or initiated;
b. Asset is required to be renovated 3. The asset must be actively marketed for sale at a
before sale to enhance its value. price reasonable to its current fair value;
4. The sale is expected to be completed within 1 year
from the date of classification;
5. Significant changes to or withdrawal from the plan
to sell the Assets are unlikely.

Other Important Points:

1. Loss of Control in Subsidiary: An entity which has committed to a sale plan which involves loss of
control of a subsidiary shall classify all the assets and liabilities of that subsidiary as held for sale
when the criteria set out above are met.
2. Exception to the period of One year - An entity can still classify an asset (or disposal group) as
held for sale, even if the timeframe of one year to conclude the sale transaction has lapsed. For
this:
a. The delay must have been caused by the events or circumstances which are beyond the control
of the entity; and
b. There must be sufficient evidences that the entity is still committed to it selling plan.
3. Abandoned Asset: Non-current assets (or disposal group) that need to be abandoned will not
qualify to classify as held for sale because their carrying amount will be principally recovered
through continuing use in the entity’s operation rather through the sale.
There must be an “Intention to Sale”. If asset is being abandoned from use but no intention to sale
then we can-not classify an asset as held for sale”
(Asset Abandoned means stopped using the asset for some time)
4. Asset acquired exclusively with a view to subsequent disposal: When an entity acquires a
non-current asset (or disposal group) exclusively with a view to its subsequent disposal, the non-
current asset (or disposal group) is classified as held for sale at the acquisition date.
5. Criteria met after reporting period: If the criteria of held for sale are met after the reporting
period but before the date of approval of the financial statements, a non-current asset should not
be classified as held for sale. It is a Non-adjusting Event, only appropriate disclosure is required.

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 IND AS 105

Important ICAI Module Examples:

1. A property being used as a headquarters by the entity needs to be vacated before it can be sold.
The time required to vacate the building is usual and customary for sale of such assets. Hence the
criteria for classification as held for sale would be met.
In above example, if property can be vacated only after a replacement is available then this may
indicate that the property is not available for immediate sale, but only after the replacement
becomes available.
2. An entity plans to renovate some of its property to increase its value prior to selling it to a third
party. The entity is already searching for a buyer at current market values. But due to the plans
to renovate the property prior to sale, the property may not be meeting condition of available for
immediate sale.
3. An entity is committed to its selling plan of a manufacturing facility in its present condition and
so classifies it as held for sale. After a firm purchase commitment, the buyer's inspection
identifies environmental damages not previously known to exist. The entity is required by the buyer
to make good the damage, which will extend the time frame of one year to complete the sale within
one year. However, the entity has initiated actions to make good the damage and satisfactory
rectification is highly probable. In this situation exception to one year requirement will met.
4. Entity ceases to use a manufacturing plant because demand has declined. However, the plant is
maintained in a workable condition and it is expected to be brought back into use in future when
demand picks up.
It is to be treated as abandoned asset rather as held for sale because its carrying amount will be
principally recovered through continuous use, therefore the entity will not stop charging
depreciation or will not treat it as held for sale. Because its carrying amount will be recovered
principally through continuing use to the end of its economic life.
5. At the end of the reporting period, ABC Company's board of directors has approved a plan to sell
a non-current asset. The eventual disposal requires approval by a majority of company's
shareholders through a formal vote which will take place after the reporting period. At the end
of the reporting period, a majority of the company's shareholders have provided the company with
signed irrevocable agreements stating that they will vote in favour of the disposal. The 'highly
probable' test is met because the shareholders have irrevocably committed to approving the
transaction and, therefore, the vote by the shareholders is merely a formality.
6. An entity has acquired a building exclusively with a view of its subsequent disposal. The
management is highly confident that the property can be sold in one year. The property requires
refurbishing it to enhance its value which is highly probable to be completed in less than a period
of three months. The building will be classified as held for sale on the date of acquisition itself
even though it is not immediately available for sale.

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 IND AS 105

5. HOW TO ACCOUNT FOR ASSETS HELD FOR SALE?

(1) On the date of classification of Asset as held for Sale present the Asset as under:
Lower of –
• Carrying Amount of Asset / Disposal Group; or
• Fair Value less costs to sell (FVLCTS)
Note: Any reduction from carrying amount to FVLCTS is treated as impairment loss
(2) Depreciation and amortization shall be immediately stopped from the date of classification as
held for sale.
(3) Treatment of Loss - After you classify an asset as held for sale, you would recognize any
impairment loss in profit or loss only.
Fair Value Loss (P&L) A/c Dr.
To Non-current Asset A/c
Individual Assets Disposal Group
On Initial measurement – Impairment loss is to On Initial measurement – Impairment loss shall
be recognised in P&L a/c be allocated to disposal group in the following
order:
Subsequently thereafter, if fair value less cost (a) First, Carrying Amt. of Goodwill
to sell increases - Gain should be recognised only (b) Then to other assets of disposal group
to the extent of earlier cumulative impairments. pro rata on the basis of carrying amount
of each assets in the group.
(c) Do not allocate the loss to such assets
of disposal grp which are not covered
under Ind AS 105 such as inventory.

Subsequently when fair value less costs to sell

increases – Gain (reversal of impairment loss)
to the extent of goodwill
is not to be recognised. Gain on other assets is
to be recognised in P&L a/c

(4) Updated Carrying amount immediately before Classification as HFS:

● Individual Asset: Immediately before we classify any asset as held for sale, we should
measure the assets under applicable IND AS. For example, we should measure an item of
property, plant and equipment under IND AS 16.
● Disposal Group: On subsequent re-measurement of a disposal group, the carrying amounts of
any assets and liabilities that are not within the scope of the measurement requirements of
this IND AS (eg. Inventory or Financial Instruments) but are included in a disposal group
classified as held for sale, should be re-measured in accordance with applicable Ind AS (eg.
IND AS 2 or IND AS 32) before the fair value less costs to sell of the disposal group is re-
measured.
Also, the impairment loss of disposal group shall not be allocated to those assets which are

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 IND AS 105

part of disposal group but not covered within the scope of Ind AS 105

Format to Solve Questions of Disposal Group:

Step 1:
Calculate Total Impairment Loss of Disposal Group:
Total Carrying Amount at the Time of Classification as HFS XXX
(-) Total FVLCTS XXX
Impairment Loss XXX

Step 2: Allocation of Impairment Loss as under:

Goodwill Non-Current Non-Current Asset

Asset 1 2
Carrying Amt. as at BS XX XX XX
date
(-) Apply Other Ind AS XX XX XX
to disposal grp before
classification as HFS &
recognise the Loss
Carrying Amt. at the XX XX XX
time of Classification as
HFS
Allocate Impairment XX XX XX
Loss of Step 1 Upto CA of (Total Imp Loss – Loss allocated to
to Goodwill First and Goodwill goodwill) shall be apportioned in the
then to remaining Non- ratio of carrying amt of non-current
Current Assets assets)
Revised Carrying Amt. - XX XX

Practical Example 1: (Individual Non-Current Asset)

A Ltd purchased a property for ₹ 15,00,000 on 1 April 20X1. The useful life of the property is 10 years.
On 31st March 20X4, A Ltd classify the property as held for sale. The impairment testing provides the
estimated recoverable amount of ₹ 9,50,000. The fair value less cost to sell on 31 March 20X3 was ₹
9,00,000.
On 30th June 20X4, FVLCTS is 8,40,000.
On 30th September 20X4, FVLCTS is 10,00,000
Solve here:

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 IND AS 105

Practical Example 2:
✔ A ltd acquired a property for ₹ 2,00,000. After few years the cumulative depreciation on the
property is of ₹ 80,000 has been recognised and subsequently the property is classified as held
for sale under Ind AS 105.
✔ At the time of classification as held for sale it will be measured at lower of its carrying amount
which is ₹ 1,20,000 (2,00,000 – 80,000) and fair value less costs to sell as estimated at ₹
1,00,000.
✔ Accordingly, there is a write-down on initial classification of property as held for sale and
accordingly the property is carried at ₹ 1,00,000. A loss of ₹ 20,000 is recognised in profit or
loss.
✔ On next reporting date, the property’s fair value less costs to sell is estimated at ₹ 85,000.
Accordingly, a loss of ₹ 15,000 is recognised in profit or loss and the property is carried at ₹
85,000.
✔ Subsequently, the property is sold for ₹ 90,000. A gain of ₹ 5,000 is recognized in P&L.

Note: When the sale is expected to occur beyond one year, the entity should measure the costs to sell
at their present value.

6. CHANGE IN A ‘PLAN TO SALE’

☞ Earlier Classified as Held for Sale

☞ Now it ceases to classify the asset or disposal group as held for sale
☞ Re-measure the Non-current asset at Lower of –
(a) Carrying Amount of Asset if there was not classification as HFS earlier.
Original Carrying Amount before classification as held for Sale
Less - Accumulated Depreciation/Amortisation on such CA
Less - Accumulated Revaluation
OR
(b) Recoverable Amount at the date of subsequent decision not to sell

Any difference due to reclassification from held for sale to other category will be treated as gain or
loss and transfer to profit and loss account.

Practical Example 3: (Reversal of Impairment Losses)

A freehold property was originally acquired for ₹ 40,00,000. Some years later, after cumulative
depreciation of ₹ 11,00,000 has been recognised, an impairment loss of ₹ 3,50,000 is recognised, taking
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 IND AS 105

the carrying amount to ₹ 25,50,000, which represents the estimated value in use of the property.
Shortly thereafter, as a consequence of a proposed move to new premises, the freehold property is
classified as held for sale.
At the time of classification as held for sale:
· carrying amount is ₹ 25,50,000; and
· fair value less costs to sell is assessed at ₹ 25,00,000.
Accordingly, the initial write-down on classification as held for sale is ₹ 50,000 and the property is
carried at ₹ 25,00,000. Following classification as held for sale, no further depreciation is recognised.
At the next reporting date, the property market has improved and fair value less costs to sell is
reassessed at ₹ 26,50,000. The gain of ₹ 1,50,000 is less than the cumulative impairment losses
recognised to date (₹ 3,50,000 + ₹ 50,000 = ₹ 4,00,000). Accordingly, it is credited in profit or loss
and the property is carried at ₹ 26,50,000.
Six months after that, the property market has continued to improve, and fair value less costs to sell
is now assessed at ₹ 30,00,000. This further gain of ₹ 3,50,000 is, however, in excess of the cumulative
impairment losses recognised to date (₹ 3,50,000 + ₹ 50,000 – ₹ 1,50,000 = ₹ 2,50,000). Accordingly,
a restricted gain of ₹ 2,50,000 is credited in profit or loss and the property is carried at ₹ 29,00,000.
Subsequently, the property is sold for ₹ 30,00,000, at which time a gain of ₹ 1,00,000 is recognised.
An entity should recognise a gain for any subsequent increase in fair value less costs to sell of an asset,
but not in excess of the cumulative impairment loss that has been recognised either in accordance with
this IND AS or previously in accordance with IND AS 36 Impairment of Assets.

7. DISCONTINUED OPERATIONS

1) A Discontinued Operation is a component of an entity that either has been disposed of or is

classified as held for sale and:
(a) represents a separate major line of business (means different segment) or
geographical area (such as Branch) of operations; OR
(b) is part of a single co-ordinated plan to dispose of a separate major line of business or
geographical area of operations; OR
(c) is a subsidiary acquired exclusively with a view to resale.

2) Once it is identified that there is a discontinued operation, we should present it separately from
other continuing operations in our financial statements
(refer Schedule III – Statement of Profit and Loss)

3) Specific Disclosure Requirements:

a. Statement of Profit & Loss:
o The Pre Tax, Tax Amount and Post Tax profit or loss of discontinued operations, and
o The post-tax gain or loss recognized on the measurement to fair value less costs to sell or

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 IND AS 105

on the disposal of assets or disposal groups.

The analysis (details) of a above amounts shall be reported in the notes or in the statement of Profit
and Loss.
b. Balance Sheet: Present Assets and Liabilities of discontinued operation separately from
continuing operation including disclosures.

Example:
In February 20X2, PQR Limited decides to abandon all of its coal mines, which constitute a major line
of business. All work stops at the coal mines during the year ended 31 March 20X2. In the financial
statements for the year ended 31 March 20X1, results and cash flows of the coal mines are treated as
continuing operations. In the financial statements for the year ended 31 March 20X2, the results and
cash flows of the coal mines are treated as discontinued operations and PQR Limited is required to
make the disclosures as per Ind AS 105.

Example:
Company XYZ has 5 different operating segments, one of which solely produces consumer goods. All of
the consumer goods production facilities are situated in Central Europe. XYZ also has other operations
in Central Europe for other operating segments. In April 20X1, XYZ disposed of its consumer goods
segment which meets the definition of a component of a business and represents a separate major line
of business and would therefore be considered as a discontinued operation.

Example:
XYZ Company has one business segment, and it operates in the UK, the US and Australia. Each of these
operations represents a component of XYZ and a major geographical area of operations. Management
has decided to sell the US operation, which met the criteria to be classified as held for sale during the
year. The US operation should be disclosed in the XYZ's financial statements as a discontinued
operation, despite the fact that there has been no change to the number of business segments.

13.8
 INDAS 12

IND AS 12
14
INCOME TAXES

"Doubt kills more dreams than failure ever will”

1. IMPORTANT DEFINITIONS

1. Accounting Income: is the net profit or loss before tax as shown in statement of profit and loss.
(Profit before tax)
2. Taxable Income (tax loss): is the amount of the income (loss) for a period, calculated as per tax
laws.
3. Tax Base: Value of any Asset or Liability that would appear as per Tax Records (i.e. in Income Tax
Balance Sheet if we prepare it separately)
If any Asset is not Tax deductible and any Liability is not Taxable (i.e. Permanent difference) then
Tax base = Carrying Amount.
4. Current Tax: is the amount of income tax to be payable (recoverable) in respect of the taxable
income (tax loss) for a period. (Tax on Taxable Income)
5. Tax Expense (tax saving) = Current Tax +/- Deferred Tax
6. Deferred Tax is the tax on Temporary differences.
7. Temporary Differences: is a difference between the carrying amount of an Asset or Liability (as
per books) and its Tax Base (as per Tax Records).
8. Taxable Temporary Differences: are temporary differences that will result in taxable amounts
in determining taxable profits of future periods. (Tax payable in future due to expected increase
in Taxable income) It results DTL.
9. Deductible Temporary Differences: are temporary differences that will result in amounts that
are deductible in determining taxable profits of future periods. (Tax saving in future due to
expected decrease in future Taxable income) It results in DTA.

Example of Tax Base:

when we have recorded an interest receivable (Rs. 100/-) on accrual basis but this interest revenue is
taxed on a cash basis, assume cash will be received in the next year, then the tax base of interest
receivable is 0 in CY and Carrying Amt of Interest Receivable (asset) is 100/-. Why?
Because in CY we don’t record interest in Tax Balance Sheet (No Entry). But in Next Year, when we
actually receive the cash and remove the interest receivable from our books, we have to include full
amount of cash received into our tax return. At the same time, we cannot deduct anything from this
amount for tax purposes.

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 INDAS 12

2. CURRENT TAXES & Their Measurement

i.e. CURRENT TAX ASSET & CURRENT TAX LIABILITY

(a) Current tax Liability: (also known as Provision for Tax)

Current Year Tax Payable
(+) Prior Period Tax Payable
(-) Tax already Paid (TDS/Advance Tax)
(b) Current tax Assets:
Taxes Already Paid (TDS/Advance Tax)
(-) Current Year Tax Payable
(-) Prior Period Tax Payable
Note: Current Tax Asset also include any refund for which entity is eligible on carried backward
of tax loss of CY against PY Taxable Income. (Refer example below)

Example 1
An entity has paid a tax in the previous year on a profit of Rs. 5,00,000 and suffered a loss in the
current year of Rs. 6,00,000. Such loss of Rs. 6,00,000 can be adjusted against the Profit to the
extent of Rs. 5,00,000 and the entity will create Tax Asset to that extent. It is called carry
backward of losses.

(c) Tax Rate: Current tax liabilities (assets) shall be measured using the tax rates of same year
that have been enacted.
(d) An enterprise should offset assets and liabilities representing tax if the enterprise:
(a) has a legal enforceable right; (i.e. both tax asset and tax liability are levied by same tax
authority) and
(b) intends to settle the asset and the liability on a net basis.
Note:
In consolidated financial statements, a current tax asset of one entity (say Holding Co.) in a group
can-not be offset against a current tax liability of another entity (say Subsidiary Co.) of the same
group since the entities concerned doesn’t have any legally enforceable right to make or receive a
single net payment.

(e) Journal Entry of Current Tax Expense:

(i) Current Tax Expense (P&L) A/c Dr.
To Current Tax Liability A/c

(ii) Advance Tax or TDS A/c Dr.

To Bank / Debtor A/c

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 INDAS 12

3. DEFERRED TAX LIABILITY

Recognize Deferred Tax Liability on all Taxable Temporary Differences, except on initial recognition
of Goodwill, if such goodwill is not tax deductible.

Note: In tax jurisdiction, where goodwill is tax deductible, deferred tax liability should be
recognised for the taxable temporary difference
(Refer Practical Example 1)

Items of Taxable Temporary differences where DTL is created

Taxable Temporary Differences DTL recognition
though
Depreciation in books is less than Depreciation under Tax records in the current Profit and Loss
year. A/c
100% expenditure is deductible in CY on scientific research but in books it is Profit and Loss
depreciable in more than 1 year. A/c
Investment in Shares/Debentures (Financial Assets) is carried at Fair Value in Profit and Loss
Books of accounts however Tax Base is a acquisition cost. A/c (or)
Tax Base is Lower than Carrying Amount of Investments OCI
Accrued expenses with a carrying amount of Rs. 100. The related expense will be Profit and Loss
deducted for tax purposes on a cash basis in future. Tax base of the accrued A/c
expenses is nil.
Upward revaluation of PPE (Gain) as per Ind AS 16 in books, however in tax
records no such revaluation is charged to tax. OCI (Revaluation
(it will be chargeable to tax only when such Asset will be sold in future and capital Surplus)
gain would be charged or asset will generate taxable income in future against
which depreciation will not be available in tax records)
(Refer Practical Example 2)
Assets recorded under business combinations at fair value which is more than Goodwill
carrying amount of Assets (tax base of Assets) in acquiree’s books.
(Refer Practical Example 3, 4)

Example 2: (DTL due to Depreciation)

Machine Costing Rs. 100 lakhs.
Useful life = 10 years, depreciation = 10%. Tax depreciation = 20%.
At year 1 end: Book value of Machine = Rs. 90 lakhs
Tax Base of Machine = Rs. 80 lakhs therefore its Taxable Temporary difference of Rs. 10 lakhs. If
Tax Rate is 30%, DTL will be 30% of 10 lakhs i.e. 3 lakhs

Journal Entry:
Recognition of DTL Deferred Tax Expense A/c (P&L or OCI)
To Deferred Tax Liability A/c
Reversal of DTL Deferred Tax Liability A/c Dr.
To Deferred Tax Expense A/c (P&L or OCI)

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5
 INDAS 12

5. DEFERRED TAX ASSET

A deferred tax asset shall be recognized for all deductible temporary differences to the extent that
it is probable that taxable profit will be available against which the deductible temporary difference
can be utilized.

Items of Deductible Temporary differences where DTA is created

Deductible Temporary Differences DTA recognition
though
Depreciation in books is more than Depreciation under Tax records in the current Profit and Loss
year. A/c
Research Phase expenditure is fully charged to P&L in books, however it is Profit and Loss
deductible in 5 years as per Tax Law A/c
Provision for bad and doubtful debts created in books against debtors, it is Profit and Loss
disallowed under Income Tax, will be allowed in future in case of actual bad debts. A/c
Carrying Amount of debtors will be lower than Tax base.
Interest revenue received in advance, with a carrying amount of Rs 100. The Profit and Loss
related interest revenue was already taxed on a cash basis. The tax base of the A/c
interest received in advance is nil. Revenue will be recognised as income in the
next year
Assets recorded under business combinations at fair value which is less than Reduction of
carrying amount of Assets (tax base of Assets) in acquiree’s books Goodwill or
Recognition of CR
Downward revaluation of PPE (loss) as per Ind AS 16 in books, however in tax OCI (Revaluation
records no such revaluation is deductible to tax. Surplus)

Example 3 (Research Exp. Fully charged to P&L but 1/5 deduction pa allowed)

Carrying amount is nil (because entire amount is treated as an expense to determine accounting profit)
and tax base is the amount which will be deductible in future. Difference is deductible temporary
difference that results in a DTA through P&L.

DTA on Un-used Tax Losses and Tax Credits

⮚ Existence of Unused tax losses and tax credits is a strong evidence that future taxable profits may
not be available.
⮚ When an entity has a history of recent losses, the entity recognise a deferred tax asset arising
from unused tax losses only when below conditions are fulfilled.
(i) whether it is probable that the entity will have taxable profits before the unused tax losses.
(ii) whether the entity has sufficient taxable temporary differences relating to the same
taxation authority and the same taxable entity, which will result in taxable amounts against
which the unused tax losses or unused tax credits can be utilised before they expire;
(iii) whether the unused tax losses result from identifiable causes which are unlikely to recur;
14.4
 INDAS 12

(Example – Covid 19)

(iv) whether tax planning opportunities are available to the entity that will create taxable profit
in the period in which the unused tax losses or unused tax credits can be utilised.

Journal Entry:
Recognition of DTA Deferred Tax Asset A/c
To Deferred Tax Income A/c (P&L or OCI)
Reversal of DTA Deferred Tax Income A/c Dr. (P&L or OCI)
To Deferred Tax Asset A/c

6. MISC PROVISIONS ON DTA & DTL

(a) Tax Rate: Deferred tax (Asset/liabilities) shall be measured using the tax rates that are
expected to apply to that period in which such DTA/DTL would be reversible/settled.
These expected rates need to be based on tax rates or tax laws that have been enacted or
substantively enacted by the end of the reporting period.

(b) Multiple Tax Rates: In such cases, an entity measures deferred tax liabilities and deferred tax
assets using those tax rates and the tax base that are consistent with the expected manner of
recovery or settlement.
In consolidated financial statements, DTA/DTL on temporary differences on items of subsidiary
co. shall be created using Tax Rate applicable to Subsidiary co. (Refer Practical Example 5)

Example 4:
An asset has a carrying amount of Rs. 100 and a tax base of Rs. 60. A tax rate of 20% would
apply if the asset was sold and a tax rate of 30% would apply to other income.
(i) The entity recognises a deferred tax liability of Rs. 8 (Rs. 40 at 20%) if it expects to
sell the asset without further use or
(ii) a deferred tax liability of Rs. 12 (Rs. 40 at 30%) if it expects to retain the asset and
recover its carrying amount through use.

(c) An enterprise should offset assets and liabilities representing tax if the enterprise:
(i) has a legal enforceable right; (i.e. both tax asset and tax liability are levied by same
tax authority) and
(ii) intends to settle the asset and the liability on a net basis.

(d) Permanent Differences: No deferred tax Asset/Liability shall be recognized if any Asset is not
tax deductible and any Liability is not taxable. In this situation Tax Base will be assumed to be
equal to the Carrying Amount. Examples: Personal expenses of director debited in P&L but
permanently disallowed, Penalty paid debited in P&L but permanently disallowed etc.

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 INDAS 12

(e) MAT Credit: MAT Credit as per Income Tax (Sec 115 JB) recognised in books is treated as DTA.

(f) DT on Compound Financial Instruments: Carrying amount of loan liability will be lower than tax
base, DTL shall be created through Equity. (Refer Practical Example 9)

(g) Re-Assessment of Un-recognised Deferred Tax Assets: At the end of each reporting period, an
entity reassesses un-recognised deferred tax assets. The entity recognises a previously un-
recognised deferred tax asset to the extent that it has become probable that future taxable profit
will allow the deferred tax asset to be recovered.

7. RECONCILIATION

1. A numerical Reconciliation between Tax Expense and the product of accounting profit multiplied by
applicable tax rate.
2. A numerical Reconciliation between average effective tax rate (tax expense divided by accounting
profit) and the applicable tax rate.
3. Reconciliation is required in following cases:
(i) When there is any permanent differences.
(ii) When some portion of Taxable Profit is charged as per special Tax Rate.
4. Entity operating in several tax jurisdictions, reconcile the total Current Tax (aggregate of all tax
jurisdictions) with total Tax on aggregate Accounting Income as under:

Tax on Total Aggregate Accounting Income XXX

(considering Domestic Tax Rate)
Less/Add: Effect of Change in Tax Rates in several Tax Jurisdictions xxx
Less/Add: Effect of Parmanent differences in several Tax Jurisdictions xxx
Total Aggregate Current Tax XXX

(Refer Practical Example 6, 7 and 8)

8. SPECIAL SITUATIONS

CASE 1 - CREATING DEFERRED TAX ON CAPITAL GAIN IN CASE OF INDEXATION

(a) Whenever an entity recognises an asset, it expects that it will recover the carrying value of that
asset. For example, if an entity recognises an item of land at Rs 1,00,000, it expects that it will
be able to recover at least Rs 1,00,000 if that land is sold is sometime in future.
(b) The income tax provisions, assuming, provides that if this piece of land is sold after one year,
there will be an indexation benefit @ 10% per year. Thus, if the land is sold after one year, the
cost of the land will for the purpose of taxation will be assumed at ` 1,10,000 (Rs 1,00,000 + 10%).
If it is sold after two years, the cost of the land for the purpose of taxation will be assumed at

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 INDAS 12

Rs 1,21,000 (Rs 1,10,000 + 10%).

(c) The tax rate in all years continues to be flat 30%.
(d) Thus, the recovery of the carrying value of land after two years will result into a tax saving of Rs
6,300 i.e. 30% of 21000 (121000-100000).
(e) Thus, if after two and half year, land is sold for Rs 1,50,000, the entity will pay a tax of Rs 8,700
at 30% of Rs 29,000 (Rs 1,50,000 – Rs 1,21,000). If there would have been no indexation benefits,
the tax liability would have been Rs 15,000 at 30% of Rs 50,000 (Rs 1,50,000 – Rs 1,00,000).
Saving in tax is of Rs 6,300 (15,000-8,700).
(f) The entity should recognise a deferred tax asset of Rs 6,300 in this case.
(g) This principle has to be applied to each item of asset.

Note: There are controversial view in case of Indexation of land for a temporary
difference because if the land is not going to be sold in a near future particularly
in business then in such case it is not advisable to calculate temporary difference.

CASE 2 – ACQUIRER’S DEFERRED TAXES ON BUSINESS COMBINATIONS

(i) Due to business combination, Acquirer’s own Recognised DTA or Un-recognised DTA is required
to be re-assessed, since probability of realizing such DTA could change.
(ii) For example, the acquirer may be able to utilise the benefit of its unused tax losses against the
future taxable profit of the acquiree. Alternatively, as a result of the business combination it
might no longer be probable that future taxable profit will allow the deferred tax asset to be
recovered.
(iii) In such cases, such DTA should be de-recognised (if recognised earlier) or recognised (if not
recognised earlier) but it should not form part of business combination accounting and should not
affect goodwill arising due to business combination.

CASE 3 - CT & DT ARISING FROM SHARE BASED PAYMENT TRANSACTIONS

Share Based payment transaction is recognised in books on accrual basis however under tax law,
deduction will be available only when share option is actually exercised by employee.

Carrying Amount of Asset Tax Base of Asset Deferred Tax Impact

Nil Employee Expense dis-allowed DTA will be recognised in
Entire amount is expensed of in will become Asset in Tax the year of Disallowance.
the same year. Records.
DTA will be reversed in
the year when option will
be exercised.

(Refer Practical Example 10)

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 INDAS 12

CASE 4 - DISTRIBUTION OF DIVIDENDS

● In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net
profit or retained earnings is paid out as a dividend to shareholders of the entity.
● In some other jurisdictions, income taxes may be refundable or payable if part or all of the net
profit or retained earnings is paid out as a dividend to shareholders of the entity.
● In these circumstances, current and deferred tax assets and liabilities are measured at the tax
rate applicable to undistributed profits.

Example 5:
The following example deals with the measurement of current and deferred tax assets and liabilities
for an entity in a jurisdiction where income taxes are payable at a higher rate on undistributed profits
(50%) with an amount being refundable when profits are distributed. The tax rate on distributed
profits is 35%. At the end of the reporting period, December 31, 20X1, the entity does not recognise
a liability for dividends proposed or declared after the reporting period. As a result, no dividends are
recognised in the year 20X1. Taxable income for 20X1 is Rs1,00,000. The net taxable temporary
difference for the year 20X1 is Rs. 40,000.
The entity recognises a current tax liability and a current income tax expense of Rs50,000. No asset
is recognised for the amount potentially recoverable as a result of future dividends. The entity also
recognises a deferred tax liability and deferred tax expense of Rs20,000 (Rs40,000 at 50%)
representing the income taxes that the entity will pay when it recovers or settles the carrying
amounts of its assets and liabilities based on the tax rate applicable to undistributed profits.
Subsequently, on March 15, 20X2 the entity recognises dividends of Rs10,000 from previous operating
profits as a liability.
On March 15, 20X2, the entity recognises the recovery of income taxes of Rs1,500 (15% of the
dividends recognised as a liability) as a current tax asset and as a reduction of current income tax
expense for 20X2.

CASE 5 - LEASE TRANSACTION IN THE BOOKS OF LESSEE

Particulars Carrying Amount Tax Base Deferred Tax
ROU ASSET Recognised as per Ind Tax Base is Nil DTL shall be
AS 116 (No Recognised is allowed recognised
under Income Tax)
Lease Liability Recognised as per Ind Tax Base is Nil DTA shall be
AS 116 (No Recognised is allowed recognised
under Income Tax)
New DTA/DTL shall
be created

CASE 6 - TAX HOLIDAY PERIODS

Deferred tax calculation in case of tax holidays under Section 80-IA/80- IB/10A/10B of Income
tax Act
Deferred tax in respect of temporary difference which reverses during the tax holiday period is not
14.8
 INDAS 12

recognised to the extent of the entity’s gross total income exempt during the tax holiday period.

Example 6:
Y Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second year of
its operation. Depreciation temporary difference resulting in a tax liability in year 1 and 2 is Rs.200
lakhs and Rs. 400 lakhs respectively. From the third year it is expected that the temporary difference
would reverse each year by Rs.10 lakhs. Assuming tax rate of 40%, find out the deferred tax liability
at the end of the second year and any charge to the Profit and Loss account.
SOLUTION:
PARTICULARS YEAR 1 YEAR 2
Temporary Difference 200 400
Reversal in Tax Holiday Period 80 0
Reversal after Tax Holiday Period 120 400
DTL charged to P&L 48 160

Total DTL as at the end of year 2 in BS will be 48 + 160 = 208

CASE 7 - INVESTMENTS IN SUBSIDIARIES, BRANCHES, ASSOCIATES AND

INTERESTS IN JOINT VENTURE ARRANGEMENTS:

Financial Statement of Investor (Holding Co. or Investor in Associate/JV)

Carrying Amount of Investment in Subsidiary, Associate or Joint Venture may be different from its
Tax Base due to remeasurement of investments and recognition of profits in the books.
Such remeasurements are not allowed and profits are not chargeable to tax unless it is realised in cash
in the form of sale or receipt of dividend. Following are important Deferred tax impacts.
Investment in Subsidiary No Deferred Tax shall be recognised if parent has determined that
those profits will not be distributed in the foreseeable future.
Parent may controls the dividend policy of subsidiary hence the
difference in Investment Value is of permanent in nature.
Investment in Associate An investor in an associate does not control that entity and is usually
not in a position to determine its dividend policy.
Therefore, Investor shall recognise a deferred tax liability arising
from temporary difference associated with its investment in the
associate.
Investment in Joint Venture Depends on Nature of Control.
DTL shall be recognised only when Investor is not in a position to
control the entity.

CASE 8 – LEVELS OF TAXABLE INCOME

When different tax rates apply to different levels of taxable income, deferred tax assets and
liabilities are measured using the average rates that are expected to apply to the taxable profit.
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 INDAS 12

Example 7: (Different levels of taxable income)

Income & Tax Slab Tax Rates
0 – 2,50,000 Nil
2,50,000 – 5,00,000 5%
5,00,000 – 10,00,000 20%
10,00,000 above 30%
Cess 4%
● Mr. Jai has taxable income of Rs.18,00,000. Hence Tax liability based on above Tax Slab is Rs.
3,66,600.
● Weighted average tax rate = 3,66,600/18,00,000 x 100 = 20.37%
● Therefore, for Calculation of Deferred taxes, weighted avg. tax rare should be considered i.e.
20.37%

Summary of Temporary Differences and Deferred Taxes:

For Assets For Liabilities

If carrying amount > Taxable Temporary Deductible Temporary
tax base Difference Difference

Deferred Tax Liability (e.g. Deferred Tax Asset

WDV as per books > WDV as (e.g. Provision for Bonus as per
per Income Tax) books > Provision for
Bonus as per IT)
If carrying amount < Deductible Temporary Taxable Temporary
tax base Difference Difference

Deferred Tax Asset (e.g. WDV Deferred Tax Liability (e.g. Loan
as per books < WDV as per carrying amount as per books<
Income Tax) Loan carrying amounts as per
tax)
If carrying amount = tax No temporary difference No temporary difference
base

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 INDAS 12

9. DIFFERENCE BETWEEN INDAS 12 AND AS 22

Sr.No. PARTICULARS INDAS 12 AS 22

1 Approach for creating Ind AS 12 is based on balance AS 22 is based on income
Deferred Tax. sheet approach. statement approach. It
requires recognition of tax
consequences of differences
between taxable income and
accounting income.

2 Limited Exceptions for As per Ind AS 12, subject to As per AS 22, deferred tax
Recognition of Deferred limited exceptions, deferred tax assets are recognised and
Tax Asset asset is recognised for all carried forward only to the
deductible temporary differences extent that there is a
to the extent that it is probable reasonable certainty that
that taxable profit will be sufficient future taxable
available against which the income will be available against
deductible temporary difference which such deferred tax
can be utilised. assets can be realised.

Where deferred tax asset is

recognised against unabsorbed
depreciation or carry forward
of losses under tax laws, it is
recognised only to the extent
that there is virtual certainty
supported by convincing
evidence that sufficient
future taxable income will be
available against which such
deferred tax assets can be
realised.

3 Recognition of current As per INDAS 12 current and AS 22 does not specifically

and deferred tax. deferred tax are recognized as deal with this aspect.
income or as expense through
Profit and Loss a/c; OCI; Goodwill Hence Current and Deferred
or Other Equity. Tax shall always be recognized
as income or as expense
through Profit and Loss
Statement.
4 Investments in As per Ind AS 12, deferred tax AS 22 does not deal with this
subsidiaries, associates liability is recognised for all aspect.
and joint ventures taxable temporary differences
associated with investments in
subsidiaries, associates and joint
ventures, if certain conditions are
satisfied.
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 INDAS 12

5. DTA/DTL arising out of Ind AS 12 requires that deferred AS 22 does not deal with this
Revaluation of assets tax asset/liability arising from aspect.
revaluation of non-depreciable
assets shall be measured on the
basis of tax consequences from
the sale of asset rather than
through use.
6. In case of a company Ind AS 12 does not specifically AS 22 specifically provides
paying tax under section deal with this aspect guidance regarding tax rates
115JB.(MAT) to be applied in measuring
deferred tax assets/liabilities
in a situation where a company
pays tax under section 115 JB.

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 INDAS 12

Student Notes:-

14.13
 INDAS 12

Student Notes:-

14.14
 IND AS 19

IND AS 19
15
EMPLOYEE BENEFITS
“Make each day your Masterpiece”

1. EMPLOYEE BENEFITS
1) Meaning:
● Any consideration payable by employer to its employees against services rendered by them for
the employer.
● Such consideration is payable due to “contractual agreement” between employer and employee
or sometimes due to informal practices as a result of “constructive obligation”.
● Ind AS 19 covers all types of employee benefits excluding share-based payments to employees.

Constructive Obligation:
An Obligation to pay that arises out of entity’s actions rather than a contract. It may typically
occur from past conduct (i.e. Past Practices/Commitments).

2) Types of Employee Benefits:

SHORT-TERM EMPLOYEE BENEFITS, which are expected to be settled within Twelve Months after
the end of reporting period, such as wages, salaries etc.

POST-EMPLOYMENT BENEFITS, which are payable after the completion of employment such as
gratuity, pension, other retirement benefits, post-employment life insurance and post-employment
medical care etc.

OTHER LONG-TERM EMPLOYEE BENEFITS, which are payable beyond 12 months from the end of
reporting period. E.g. Long Term Bonus plans

TERMINATION BENEFITS, which are payable to employees due to termination of their services
before retirement. E.g. Retrenchment Compensation.

2. SHORT-TERM EMPLOYEE BENEFITS

(NO ACTURIAL ASSUMPTION & NO DISCOUNTING)

1) General Accounting Treatment:

Employee Benefit Expenses (Salary/Bonus) A/c Dr.
To Employee Benefits Payable A/c (Provision)

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INDAS 19

Employee Benefits Payable (Provision) A/c Dr.

To Bank A/c

2) Bonus in form of Profit Sharing:

It is also considered as an employee benefit expense if payable on satisfaction of required
conditions.
It is payable as a defined percentage of profit earned by the employer.

3) Leaves Compensation (Paid Leaves or Compensating Absence):

Employer compensates to employees for their extra services provided by them during the leave
period. Compensation can be provided in the form of either Cash or Extra leaves in the next
period.
Accumulating Paid Leaves Non-Accumulating Paid
Leaves
Unused leaves can be carried forward to the next year Unused leaves can-not be carried
forward to the next year
Vesting Leaves Non-vesting leaves (payable in
(Payable in cash) the form of excess leaves in
next year) No Accounting
Here employee is eligible for Here employee is eligible for
cash payment against unused extra leaves in the form of
leaves. Hence 100% cash carried forward of unused
expense for unused leaves are leaves.
recognised. Here it is not necessary that
employee may utilize 100%
Expenses = excess leaves allowed, hence
Total Unused Leaves employee expense is
X Avg. Salary Per Day recognised based on estimated
leaves to be utilized.

Expenses =
No. of Employees expected to
utilize the unused leaves
X No. of unused leaves
expected to be utilized by
each employee
X Avg. Salary Per Day
Avg. Salary Per Day = Total Annual Salary ÷ No. of Working Days

Example 1:
Annual Salary – 12,00,000; Total Working Days – 300; Leaves allowed in a year – 12 days; Leaves
actually taken by employee – 9 days. Unused leaves will be settled in form of cash.
15.2
 IND AS 19

Solution
1. Avg. Salary Per Day –› 12,00,000 ÷ 300 = 4,000/-
2. Cash Payable for Unused leaves –› 4,000 x 3 = 12,000/-
3. Total Employee Benefit Expense to be booked –› 12,12,000/-
Salary A/c Dr. 12,12,000
To Salary Payable A/c 12,12,000

Salary Payable A/c Dr. 12,12,000

To Bank A/c 12,12,000

Example 2:
Annual Salary – 12,00,000; Total Working Days – 300; Leaves allowed in a year – 12 days; Leaves
actually taken by employee – 9 days. Unused leaves will be settled in next year in the form of extra
leaves. It is expected that 2 out of 3 unused leaves will be utilized. Suppose, employee utilized 2
days next year out of 3 days allowed.
Solution
Current Year Next Year
No. of Days worked = 291 days No. of Days worked = 286 days
Avg. Salary Per Day –› 12,00,000 ÷ 300 = 4,000 But employee will get full salary of 12,00,000

Expected Value of Unused leaves to be utilized: Salary Payable A/c Dr. 8,000
4,000 x 2 = 8,000 Salary A/c Dr. 11,92,000
To Bank A/c 12,00,000
Total Employee Benefit Expense to be booked:
12,08,000

Salary A/c Dr. 12,08,000

To Salary Payable A/c 12,08,000

Salary Payable A/c Dr. 12,00,000

To Bank A/c 12,00,000
Worked More days – Recognised Salary for Worked lesser days – Recognised Salary for
more days lesser days

3. POST-EMPLOYMENT EMPLOYEE BENEFITS

1) Types of Post employment benefits:

a) Defined Contribution Plans (DCP): Fixed contribution by employer to the specific fund such as
EPF.
b) Defined Benefit Plans (DBP): Fixed Benefit (final amount payable) is payable by employer
directly to employee in form of contributing variable amount every year to the fund.

16.3
INDAS 19

DIFFERENCE BETWEEN DCP AND DBP

Basis of Difference Defined Contribution Plans (DCP) Defined Benefit Plans (DBP)
Entity pays fixed contributions into
Post-employment benefit
a separate entity (a fund) and will
plans other than defined
Meaning have no legal or constructive
contribution plans
obligation to pay further
(i.e. No Fixed Contribution)
contributions.
Actuarial & Investment
Risk (Benefits will be Risk in substance on the
Risk in substance on the Employee
more/less than entity.
expected)
Provident Fund Contribution by
Examples Gratuity
employer
Actuarial Assumptions Not Required Required
Not Required unless it is payable
Discounting Always Required
beyond 12 months.
Same as short term employee Apply “Projected Unit Credit”
Accounting
benefits Method

2) Accounting For Defined Benefit Plans: (Under Post Employment Benefit and Long Term
Employment Benefits)
Scope of Accounting:
a) Calculation of Defined Benefit Obligation (DBO) A/c and related Expenses
b) Calculation of Plan Assets A/c and related Incomes
c) Calculation of Actuarial Gains/Losses on DBO and Plan Assets
d) Presentation of DBO and Plan Asset in Balance Sheet
e) Presentation of Expenses (Incomes) in Profit and Loss Statement and OCI.

RECOGNITION OF DEFINED BENEFIT OBLIGATIONS (LIABILITY)

Important Steps to Step 1:
calculate annual Calculate Expected Benefits to be paid to employees
Defined Benefit Expected Final Salary x Benefit (%) x No. of Years of Service
Obligation
Step 2:
Allocate the Benefits to each year of Service (Attributed Benefits)
Step 1 ÷ No. of Years of Service

Step 3:
Calculate Current Service Cost (CSC) using discounting rate.
PV of Attributed Benefits
(PV working in upward mode)

15.4
 IND AS 19

Current Service Cost (CSC) A/c Dr. (P&L)

To DBO Payable A/c

Step 4:
Calculate Interest Cost on Opening Balance of DBO Payable using same
discount rate.
Interest Cost A/c Dr. (P&L)
To DBO Payable A/c
Actuarial Gains or Loss Due to change in financial and demographic assumptions of actuary or due
in DBO liability to change in final expected salary, no. of years of services, DBO liability
shall be remeasured with new assumptions.

Increase in DBO Liability = Actuarial Loss (OCI)

Actuarial Loss (OCI) A/c Dr.
To DBO Payable A/c
Decrease in DBO Liability = Actuarial Gain (OCI)
DBO Payable A/c Dr.
To Actuarial Gain (OCI) A/c Dr.
Past Service Cost (PSC) If there is a modification in Defined Benefits announced by employer
which results in increase of benefits for employee (i.e. additional
benefits) then DBO Liability shall be increased accordingly.

Past Service Cost (P&L) A/c Dr.

To DBO Payable A/c
Curtailment and Curtailment means cancellation of Defined Benefits of employees.
Settlement Settlement means providing compensation to employees against
cancellation of benefits. Curtailment shall reduce the liability as under:

DBO Payable A/c Dr.

To Bank A/c Dr.
To Gain on Settlement A/c (P&L)
Payment of Benefits to Whenever the employee retires, he/she will be eligible for benefits.
Employee
DBO Payable A/c Dr.
To Bank A/c Dr.

RECOGNITION OF PLAN ASSETS (INVESTMENT for DBO)

Meaning Investment made by Employer for meeting DBO liability.
It is always recognised at Fair Value.
Contribution to Plan Contribution to Plan Asset means making Investment as per actuarial
Assets assumption under:

16.5
INDAS 19

Plan Assets A/c Dr.

To Bank A/c
(contribution is paid in beginning of year or mid of year or end of year)
Benefits Paid out of When Employee is paid benefits, plan assets are realised as under:
Plan Assets
Bank A/c Dr.
To Plan Assets A/c
(Plan assets are realised in beginning of year or mid of year or end of year)
Expected Return on Interest Rate (%) X Balance of Plan Asset = Expected Return
Plan Assets (Take same discount rate of DBO if separate rate is not given)

Plan Asset A/c Dr. If contribution and benefit is made at end of year
To Exp. Return (P&L) Opening Balance of Plan Asset x Interest Rate (%)

If contribution and benefit is made at beginning of year

(Opening Balance of Plan Asset + Contribution Made – Benefits Paid) x
Interest Rate (%)

If contribution and benefit is made at mid of year

Expected Return 1 - Opening Plan Assets x Interest (%)
Expected Return 2 – Net Contribution x Six Monthly Interest (%)
Total Return

Six Monthly Rate of Expected Return as under:

[√1 + 𝑎𝑛𝑛𝑎𝑢𝑙 𝑟𝑎𝑡𝑒 - 1] x 100

If nothing is specified in question always assume that contribution is

made, and benefits are paid at end of the year.
Closing Balance of Plan Always at Fair Value provided in Question
Assets
Actuarial Gain/Loss on Any Difference in Plan Asset A/c is treated as Actuarial Gain or Loss and
Plan Assets transferred to OCI

Plan Asset A/c Dr. Actuarial Loss (OCI) Dr.

To Actuarial Gain (OCI)
To Plan Asset A/c

Calculation of DBO Payable and Plan Asset

DBO Payable Plan Asset
Opening Balance of DBO XXX Opening Balance of Plan Asset XXX
(+) Current Service Cost (CSC) XXX (+) Expected Return XXX
(+) Interest Cost XXX (+) Contribution to Plan Asset XXX
15.6
 IND AS 19

(+) Past Service Cost XXX (-) Payment of Benefits XXX

(-) Curtailment of Benefits XXX (+/-) Actuarial Gain/(loss) XXX
(-) Payment of Benefits XXX Closing Balance of Plan Asset XXX
(+/-) Actuarial Loss/(Gain) XXX
Closing Balance of DBO XXX

Presentation in Financial Statements

BALANCE SHEET STATEMENT OF PROFIT AND LOSS & OCI
Closing Balance of DBO XXX Items of P&L:
(-) Closing Bal. of Plan Asset XXX Employee Benefit Expenses
Net Defined Liability/(Asset) XXX ● Current Service Cost under Employee
Benefit Exp.
If there is Net Defined Asset, it is shown at ● Past Service Cost
lower of: ● Gain on Curtailment
(a) Actual Amount calculated as above; or Finance Cost
(b) Asset Ceiling (Realisation from Exit of ● Net Interest Cost under Employee Benefit
Plan) Exp.
(Net Interest Cost means Interest Cost on DBO
If plan asset is shown at Asset ceiling, then less Expected Return on Plan Asset)
difference is transferred to OCI (NRPL)
Items of OCI:
Not Reclassified to P&L
Actuarial Gain/Loss on DBO
Actuarial Gain/Loss on Plan Asset
Loss on Plan Asset due to Asset Ceiling
Net Remeasurement Gain/Loss

Other Important Points:

1. The discount rate shall be determined by reference to market yields at the end of reporting period
on Government Bonds.
However, foreign subsidiaries, associates, joint ventures and branches shall take discount rates by
reference to high quality corporate bonds.

2. Current/Non-Current Distinction:
This Standard does not specify whether an entity should distinguish current and non-current
portions of assets and liabilities arising from post-employment benefits.

3. Offset:
An asset relating to one plan can-not be offset against a liability relating to another plan unless the
entity:
(a) has a legally enforceable right to use a surplus in one plan to settle obligations under the
other plan; and

16.7
INDAS 19

(b) There is an intention either to settle the obligations on a net basis, or to realise the surplus
in one plan and settle its obligation under the other plan simultaneously.

4. TERMINATION BENEFITS
An entity is required to recognise a liability and expense for termination benefits in the year of
announcement of Termination Plan.
Amount paid for Termination of Employment Termination Benefit Exp A/c Dr. (P&L)
To Termination Benefits Payable A/c
Amount paid to receive services in future It’s a Normal Salary benefit

Example on Termination Benefits:

As a result of a recent acquisition, an entity plans to close a factory in ten months and, at that
time, terminate the employment of all of the remaining employees at the factory. Because the
entity needs the expertise of the employees at the factory to complete some contracts, it
announces a plan of termination as follows:
Each employee who stays and renders service until the closure of the factory will receive on the
termination date a cash payment of Rs 30,000. Employees leaving before closure of the factory
will receive Rs 10,000.
There are 120 employees at the factory. At the time of announcing the plan, the entity expects
20 of them to leave before closure. Therefore, the total expected cash outflows under the plan
are Rs. 3,200,000 (ie 20 × Rs10,000 + 100 × Rs 30,000). As required by paragraph 160, the entity
accounts for benefits provided in exchange for termination of employment as termination benefits
and accounts for benefits provided in exchange for services as short-term employee benefits.

Termination benefits
The benefit provided in exchange for termination of employment is Rs. 10,000. This is the amount
that an entity would have to pay for terminating the employment regardless of whether the
employees stay and render service until closure of the factory, or they leave before closure. Even
though the employees can leave before closure, the termination of all employees’ employment is a
result of the entity’s decision to close the factory and terminate their employment (i.e. all
employees will leave employment when the factory closes). Therefore, the entity recognises a
liability of Rs. 1,200,000 (i.e. 120 × Rs. 10,000) for the termination benefits provided in accordance
with the employee benefit plan at the earlier of when the plan of termination is announced and
when the entity recognises the restructuring costs associated with the closure of the factory.

Benefits provided in exchange for service

The incremental benefits that employees will receive if they provide services for the full ten-
month period are in exchange for services provided over that period. The entity accounts for
them as short-term employee benefits because the entity expects to settle them before twelve
months after the end of the annual reporting period. In this example, discounting is not required,
so an expense of Rs. 200,000 (i.e. Rs. 2,000,000 ÷ 10) is recognised in each month during the
service period of ten months, with a corresponding increase in the carrying amount of the liability.

15.8
 IND AS 20

IND AS 20 – ACCOUNTING FOR

16 GOVERNEMENT GRANTS AND
DISCLOSURE OF GOVT. ASSISTANCE

1. NON-APPLICABILITY

IndAS 20 does not deal with:

(i) Government participation in the ownership of the entity (i.e. Govt. acting as a Co-owner of the
entity);
(ii) Government grants that will be covered by Ind AS 41, Agriculture.
(iii) Government grants which cannot be reliably measured.
(iv) Government assistance provided in form of benefits such as Income Tax Exemptions/Holidays
etc.
(v) Transaction with Government that cannot be distinguished from the normal trading transaction
of the entity.

2. DEFINITIONS
1. Government Grants are assistance by government in the form of transfers of resources to an
entity in return for past or future compliance with certain conditions relating to the operating
activities of the entity.
2. Government Assistance is an action by government designed to provide an economic benefit
specific to an entity or range of entities (not for general public).
Example: Free technical assistance or marketing advice and the provision of guarantees are forms
of government assistance to which no value could reasonably be assigned.
3. Forgivable Loans are loans which the lender undertakes to waive repayment of loan under certain
prescribed conditions.

3. RECOGNITION OF GOVERNMENT GRANTS

Government grants, including non-monetary grants at fair value, should be recognised only when there
is reasonable assurance that:
(a) The entity will comply with the conditions attaching to them; and
(b) The grants will be received.
If there is doubt in complying with the conditions and grant is already received, then treat it
as liability:
Bank A/c Dr.
To Govt. Grant Liability A/c

16.1
 IND AS 20

4. TYPES AND TREATMENT OF GOVERNMENT GRANTS

Sr. No. Type of Grant Treatment

1. Grants related to Income (a) (first method) presented as a credit in the
(Revenue Nature) statement of profit and loss, either
separately or under a general heading such
When the Expenditure is yet to be as ‘Other income’;
incurred then grant amount should 1) Bank a/c Dr
be recognised as liability until To Def. Govt. Grant A/c
related expenditure is incurred. 2) Def. Govt. Grant A/c Dr
When such expenditure is incurred, To P&L A/c
the above liability shall be reversed.
(OR)
(b) (Second method) deducted in reporting
the related expense.
1)Bank a/c Dr
To Def. Govt. Grant A/c
2)Def. Govt. Grant A/c Dr
To Expense A/c

2. Grant for Expenses or Losses If Un-conditional Grant: Recognise directly

already incurred; to Profit and Loss a/c in the period when
or receivable
Grant for immediate financial 1) Govt. Grant Receivable A/c Dr
Support (Bailout Package)
To P&L A/c
2) Bank A/c Dr

To Govt. Grant Receivable A/c

If Conditional Grant: Deferred and Amortise

over the period of fulfillment of conditions
3. Non-Monetary Grant (a) If acquired at Concessional Price then
(In Kind) Recognise the Grant at Actual Price Paid
Example: Land received free of (acquired cost) or Fair Value.
cost or at concessional price
(b) If acquired at free of cost, then there is
an option to Recognise at either Fair Value
or Nominal Value.

Nominal Value may be Rs. 1/-

16.2
 IND AS 20

4. Grants related to Non-depreciable Conditional Grant: If it requires fulfillment of

Assets certain obligations then recognise in P&L a/c
Eg. Land/stock/cash over the period of fulfilment of obligation.

1) Bank A/c Dr

To Def. Govt. Grant A/c

2) Def. Govt. Grant A/c Dr.

To P&L A/c
(Amortised on systematic basis)

Unconditional Grant: If it doesn’t require any

fulfillment of obligations in the future period
then recognise the grant immediately in P&L
a/c.
Govt. Grant A/c Dr
To P&L A/c
5. Grants related to depreciable Option 1 – Deferred Income
assets Treat it as Deferred Income:
Eg. machine/building/vehicle 1) Bank A/c Dr

To Def. Govt. Grant A/c

DGG a/c shall be recognised in P&L a/c on a
systematic basis over the useful life of the
asset.
2) Def. Govt. Grant A/c Dr.

To P&L A/c
(Amortised on systematic basis)

Option 2 – Deduction from Cost

Should be presented by deducting the grant
amount from Carrying Amount and
depreciation shall be charged on net carrying
amount after deduction.
1) Bank A/c Dr.

To Govt. Grant A/c

2) Govt. Grant A/c Dr

To PPE A/c

16.3
 IND AS 20

6. Loans at less than market rate of Recognised and measured as per INDAS 109.
interest
Grant = Amount Received - Initial Carrying
Amt as per INDAS 109

Bank A/c Dr.

To Loan A/c (at Fair Value)
To Deferred Grant A/c (Bal. Fig.)
7. Forgivable Loans If conditions already complied then
immediately transfer to P&L a/c.
Loan A/c Dr
To P&L A/c

If conditions are required to be complied on

continuous basis then over the period of
compliance of conditions.
Deferred Grant A/c Dr
To P&L A/c

Note:
Amount contributed by government as promoters’ contribution is not treated as Govt. Grant. It is an
Equity contribution and should be directly transfer to Other Equity.

5. REPAYMENT (REFUND) OF GOVERNMENT GRANTS

If Grant was recognised If Grant was recognised as If Grant was recognised as

directly in P&L as income Deferred Income reduction from Cost of Asset
Refund of grant is debited to Refund of grant will be debited Refund of grant will be debited
Profit and loss a/c to Deferred Grant A/c to the to the same Asset A/c
extent of balance available. Any
remaining amount of refund will
be debited to Profit and loss a/c
P&L A/c Dr. Deferred Grant A/c Dr. Asset A/c Dr.
To Grant Payable/Bank A/c P&L A/c Dr. To Grant Payable/Bank A/c
To Grant Payable/Bank A/c
Calculate Revised Depreciation
on Asset for Further Years.

A government grant that becomes repayable should be accounted for as a change in accounting estimate
and be treated in accordance with Ind AS 8, “Accounting Policies and Changes in Accounting Estimates
and Errors”.

16.4
 IND AS 21

IND AS 21 –
17 THE EFFECTS OF CHANGES IN
FOREIGN EXCHANGE RATES
“You Learn More from Failure than Success”

1. WHAT IS COVERED IN IND AS 21

● Accounting for Foreign Currency Transactions.

● Translation of Financial Statements of Foreign Operations (FO) such as Foreign Subsidiary,
Associates, JV & Branch into Presentation Currency
● Intra Group Transactions between Parent and FO
● Translation of Financial Statements of Entity into a Presentation Currency.

2. KEY DEFINITIONS

Foreign Currency Any Currency other than Functional Currency of entity.

(it can be more than one)
Functional Currency Entity maintains its books in Functional Currency.

(Refer Practical Example 1 It is a currency of the Primary Economic Environment in which entity
to 4) operates. Primary economic environment will normally be the one in
which entity primarily generates and expends cash i.e. it operates.

Indicators to identify Functional Currency:

(a) Primary Indicators:
● Currency that mainly influence the Sales Price of Goods/Services
(OR)
● Currency that mainly influence the Cost of Providing
Goods/Services

(b) Secondary Indicators:

● Currency in which Funds from financing activities are raised. (e.g.
loan taken or equity raised)
(OR)
● Currency in which receipts of Operating Activities are Retained.

17.1
 IND AS 21

Note:
● An entity does not have a free choice of functional currency.
● Focus should be more on “pricing determination in which currency”,
not on “denomination of transaction in which currency”.

Presentation Currency It is a currency in which Financial Statements are presented.

Financial statements can be presented in more than one Currencies.
E.g. A company is listed in Indian Stock Exchange as well as foreign
country’s Stock exchange, has to present its financial statements in
Rupees as well as Currency of that country.
Monetary Items Assets and Liabilities which are recoverable or payable in Fixed or
determinable amount of Cash. E.g. Cash, Bank Balance, Debtors,
Creditors, Loans etc.
Non-Monetary Items Assets and Liabilities other than Monetary Items such as PPE,
Investments, Inventory, Share Capital, Goodwill etc.
Foreign Operation (FO) Any Subsidiary, Associate, JV or Branch whose operating activities
are carried in any other country.

3. TREATMENT OF FOREIGN CURRENCY TRANSACTIONS

Any Transaction undertaken in Foreign Currency such as Purchase/Sale of Goods and Services, PPE,
Borrowing or Investing:

INITIAL RECOGNITION: Recognise transaction at the SPOT RATE i.e. the Exchange rate prevailing
on transaction date.

SUBSEQUENT MEASUREMENT: (At Balance Sheet Date or Settlement Date)

Subsequent Measurement on Balance Sheet shall be done only of Assets and Liabilities which are
incurred in foreign currency:
Items How to Measure
Foreign Currency ● Translate in Exchange Rate at the Reporting Date (i.e.
Monetary Items Closing Rate)
(FCMI) ● Transfer the Exchange Difference to Profit and Loss A/c

(Refer Practical Example 5) Foreign Debtors A/c Dr.

To Ex. Gain A/c
(If debtors Increases)
Non-Monetary items These items are not restated or translated; instead they remain
measured at historical cost at the Exchange Rate at the date of transaction.
(e.g. PPE at Cost Model) (i.e. Historical Rate)

17.2
 IND AS 21

Non-Monetary items ● Translate in Exchange Rate available on the date of

measured at other than determination of Fair Value/NRV/Market Value.
cost. ● Transfer the Exchange Difference (Gain/Loss) to P&L if such
(e.g. PPE at Revaluation non-monetary item is measured through P&L such as
Model, Inventory Inventory measured at NRV or Investments measured at
measured at NRV, FVTPL
Investments measure at ● Transfer the Exchange Difference (Gain/Loss) to OCI if such
FVTPL or FVTOCI) non-monetary item is measured through OCI such as PPE at
revaluation model

(Refer Practical Example 6)

4. FINANCIAL STATEMENTS OF FOREIGN OPERATION

(Foreign Subsidiary, Associate, JV and Branch)

1. Currency of Foreign Operation:

Currency of Foreign Operation will be same as currency of Reporting Entity i.e. Holding Co. if all
the conditions are satisfied:
(a) Activities of foreign operations are carried out as an extension of that reporting entity (i.e.
as per reporting entity’s direction)
(b) Transaction of foreign operation with reporting entity are in a High Proportion/volume.
(c) Cash flows of foreign operations directly affect the cash flows of the reporting entity and
are readily available for remittance to it.
(d) Cash flows of foreign operation are not sufficient to pay its debts and other obligations.

If any of the above conditions are not satisfied, the foreign operation is treated as independent
and Functional Currency of foreign operation will be different from that of reporting entity’s
functional currency and to be determined as per the primary and secondary indicators.

2. Translation of Financial Statement of Foreign Operation:

When foreign operation prepares its financial statements in its own functional currency different
from that of reporting entity’s currency then such financial statements are translated into
presentation currency of reporting entity for the purpose of consolidation as per following rule:
All Assets and Liabilities Conversion at Closing Exchange Rate of BS date
Revenue Items (Incomes Conversion at Average Exchange Rate
and Expenses)
Share Capital and Other
Either converted amount will be given in the question or can be
Equity Items converted into actual spot rate. If spot rate is not given then
opening rate may be taken.
Inventory and Assets Lower of:
subject to Impairment (a) Cost (converted at actual spot rate) or

17.3
 IND AS 21

(b) NRV or Recoverable Amt. (converted at Ex. Rate of date of

determination of NRV or Recoverable Amt.)

Goodwill Step 1:
Calculate Goodwill in Foreign Currency value
Step 2:
Convert Goodwill into Presentation currency at Closing Exchange
Rate of BS Date
Treatment of Exchange Exchange Difference is transferred to Foreign Currency
Difference Translation Difference A/c (FCTR) through OCI.

Parent’s Share of FCTR is presented separately under Other Equity

in Consolidated Financial Statements

NCI’s Share of FCTR (if any) is added to the value of Total NCI in
Consolidated Financial Statements
Disposal of Foreign Case 1: Loss of Control
Operation Parent’s share of FCTR is reclassified to Profit and Loss A/c
e.g. Sale of subsidiary
Case 2: Disposal without Loss of Control
Proportionate share of Parent’s FCTR is transferred to NCI

3. Intra Group Transactions between Parent and Foreign Operation:

Intra Group Transactions are divided into two categories:
(a) Net Investment in Foreign Operation i.e. Long-Term Loan Transactions for which settlement is
neither planned nor likely to occur in the foreseeable future.
(b) All other Transactions such as Sale/purchase of goods/services or Short-term loans etc.

⮚ All intragroup transactions are eliminated while preparing Consolidated Financial Statements (CFS).
⮚ Exchange gains/losses arising from All other transactions (other than Net investment in Foreign
Operation) are shown in Consolidated Profit and loss, because group has real exposure to foreign
currency since one of the entities (Holding or Subsidiary) will need to obtain or sell the foreign
currency to settle the obligation of foreign currency or realised the proceeds received in foreign
currency.
⮚ Exchange gains/losses (arising from Long-term loans for which settlement is neither planned nor
likely to occur in the foreseeable future) are treated as under:
In Separate Financial Statement of FO In CFS of Group
Shown in Profit and Loss A/c since loan is a Exchange difference shall be recognized
monetary item. initially in Other Comprehensive Income (OCI)
and reclassified from equity to Profit and Loss
A/c on disposal of the Net Investment.

Example: (Disposal without Loss of Control)

A parent has 100% interest in a subsidiary for a number of years. The subsidiary has been classified
as a foreign operation and Rs. 5 million relating to the translation differences of subsidiary has been

17.4
 IND AS 21

recognised in other comprehensive income and accumulated in a separate component of equity. The
parent disposes of 30% of its interest but retains control. What would be the treatment on the
date of disposal?
Answer:
Rs. 1.5 million (5*30%) of cumulative translation exchange differences are transferred within equity
from foreign currency translation reserve to non-controlling interest. No amounts are reclassified
to profit or loss.

Example: (Disposal with Loss of Control)

A parent has 80% interest in a subsidiary for number of years. The subsidiary has been classified
as a foreign operation and Rs. 5 million have been recognized in other comprehensive income. 80%
have been accumulated in a separate component of equity and balance 20% attributed to non-
controlling interest. The parent disposes 40% of its interest resulting in loss of control. What would
be treatment on date of disposal?
Answer:
Rs. 4 million (5*80%) of cumulative translation exchange differences are transferred from equity
to profit and loss. Rs. 1 million already reflected as part of non-controlling interest are
derecognized and included in the calculation of the profit or loss on disposal.

Example: (Net Investment in Foreign Operation)

An Entity A has a foreign subsidiary B whose functional currency is Doller (B). The Functional
Currency of the entity A is Rupee. On 1st Jan, 20X6 when the exchange rate was $1 = Rs. 80. Entity
A has given loan to subsidiary B of Rs. 80,00,000. On 31st December, 20X6 the loan has not been
repaid and is regarded as a part of net investment in the foreign subsidiary, as settlement of the
loan is neither planned nor likely to occur in the foreseeable future. The exchange rate on 31st Dec,
2016 is $1 = Rs. 77 and the average rate for the year was $1 = Rs. 78. How this loan would be treated
in the entity A’s and group financial statement?
SOLUTION:
⮚ There is no exchange difference in the entity A’s financial statements, as the loan has
been made in Rupees.
⮚ In the foreign subsidiary’s financial statements, the loan is translated into its own functional
currency (dollar) at the rate of $1 = Rs. 80 i.e. $ 1,00,000 as of 1st Jan, 20X6.
⮚ At the year-end 31st Dec, 20X6, the closing rate will be used to translate this loan. This will
result in the loan being restated at $ 103896 (80,00,000 ÷ 77), giving an exchange loss of $3896,
which will be shown in the subsidiary’s (B) Profit and Loss account.
⮚ In the group financial statements, this exchange loss will be translated at the average
rate, as it is in the subsidiary’s Profit and Loss account item, giving loss of Rs.3,03,888
($ 3896 x 77). This will be recognised in the other equity through OCI. Because the loan
is not planned to be settled in the foreseeable future.

Note: Even Perpetual Debt Instrument with fixed rate of interest are also an example of “Net
Investment in Foreign Operation”.

17.5
 IND AS 21

6. TRANSLATION OF FINANCIAL STATEMENTS FROM

FUNCTIONAL TO PRESENTATION CURRENCY

All Assets and Liabilities Conversion at Closing Exchange Rate of BS date

Revenue Items (Incomes Conversion at Average Exchange Rate
and Expenses)
Share Capital and Other
Either converted amount will be given in the question or can be
Equity Items converted into actual spot rate. If spot rate is not given then
opening rate may be taken.
Inventory and Assets Lower of:
subject to Impairment (a) Cost (converted at actual spot rate) or
(b) NRV or Recoverable Amt. (converted at Ex. Rate of date of
determination of NRV or Recoverable Amt.)

Treatment of Exchange Exchange Difference is transferred to Foreign Currency

Difference Translation Difference A/c (FCTR) through OCI.

7. CHANGE IN FUNCTIONAL CURRENCY

1. Functional Currency can be changed only if there is a change to the underlying transactions,
events and conditions (ie. Change in Primary economic environment in which entity operates)
2. Translation procedures:
i. All items (Assets, Liabilities, Equity, and Expenses& Incomes) are translated into the new
functional currency using the exchange rate at the date of change.
ii. Exchange Gain/Loss will not arise.
3. Change in functional currency may be accompanied by a change in presentation currency. The
choice of presentation currency represents an accounting policy, and any change should be applied
retrospectively in accordance with Ind AS 8.

8. SPECIAL CASES

1. Dividend received by Parent Co. from Foreign Subsidiary Co.:

When dividend is declared by Holding co. shall record such dividend on accrual basis by
Subsidiary translating into SPOT Rate.
When dividend is actually paid Dividend received shall be converted into exchange rate
on another date on the date of receipt.

Difference shall be transfer to Profit and Loss A/c

17.6
 IND AS 21

2. Foreign Currency Borrowings:

Particulars Foreign Currency Exchange Conversion into
Working Rates Functional Currency
Opening Balance $ Opening Ex. Rate ₹
(+) Interest (%) $ Avg. Rate ₹
(-) Repayment $ Actual Rate ₹
Closing Balance $ (Bal. Fig.) Closing Ex. Rate ₹
Exchange Difference (Balancing Figure) ₹

3. Advance collected from Customer:

Whenever we collect advances from customer where revenue is not yet recognized & to be
recognized in future, then revenue for such advance amount shall be recognized based on exchange
rate available on date of receipt of advance. (Refer Q204 of Question Bank)

4. Measurement of Inventory Purchased in Foreign Currency at BS date:

Amount in ₹
Cost of Foreign Currency X Spot Rate of ₹ XXX
Inventory Transaction Rate
NRV in Foreign Determine NRV in Foreign Currency first and ₹ XXX
Currency then translate it into Exchange rate available
on the date of determination of NRV
Cost or NRV (Amt. in ₹) whichever is lower as per Ind AS 2 ₹ XXX

5. PPE purchased in Foreign Currency subject to Impairment Testing:

Amount in ₹
Carrying Amount Original Cost (already converted into SPOT ₹ XXX
(CA) of PPE Rate) less accumulated depreciation
Recoverable Recoverable Amount ($) x Ex. Rate on the ₹ XXX
Amount (RA) of date of Determination of RA
PPE
CA or RA (Amt. in ₹) whichever is lower as per Ind AS 36 ₹ XXX
CA – RA = Impairment Loss transfer to P&L

Example: (Impairment Testing)

A foreign currency asset amounting to Euro 200,000 is recorded at the date of purchase when the
exchange rate was ₹52 at ₹104 lacs.
The recoverable amount of the asset on the reporting date is calculated as Euro 175,000. The
exchange rate on the date of valuation was ₹ 60 to a Euro.
The carrying value of the foreign currency asset will be determined based on the recoverable amount
of the asset converted into functional currency at the exchange rate on valuation date which is ₹105
lacs.
The impairment loss of Euro 25,000 in foreign currency is not recognised.

17.7
 IND AS 21

6. Deferred Taxes on Exchange Gains/Losses:

● Tax Base of Assets and Liabilities may be different from the Carrying Amount of Assets and
Liabilities after translation under Ind AS 21.
● This difference is a Temporary difference and DTA/DTL shall be recognised.
● Recognition of DTA/DTL through P&L or OCI depends on the source of Exchange Difference.

9. SUMMARY OF EXCHANGE DIFFERENCES

Different Situations Transfer Ex. Transfer Ex.

Difference to Difference to
P&L OCI
Foreign Currency to Functional Currency:

a) Translation of FCMI Yes No

Foreign Debtors, Creditors, Borrowings

b) Translation of Non-Monetary FC Items

measured at other than Cost thru P&L e.g. Yes No
Inventory or Investment measured at
FVTPL

c) Translation of Non-Monetary FC Items

measured at other than Cost thru OCI No Yes
e.g. Upward Revaluation of PPE

d) Dividend from Foreign Subsidiary Yes No

Functional Currency to Presentation Currency:

a) Translation of F/s of Foreign Operation No Yes

by Parent Company Also some
portion in NCI

b) Net Investment in Foreign Operation No Yes

c) Translation of F/s of Entity No Yes

17.8
 IND AS 33

IND AS 33
18 "The beautiful thing about learning is
EARNINGS PER SHARE
that no one can take it away from you."

1. MEASUREMENT OF BASIC EARNINGS PER SHARE

Earning Per Share are of two types:
1) Basic EPS (BEPS)
2) Diluted EPS (DEPS)

Basic EPS is calculated as under:

Profit/Loss attributed to Equity Shareholders
Weighted Average Number of Equity Shares

Numerator for EPS – Profit/loss attributable to Equity Shareholders

Particulars Amount Remarks
Earnings Before Interest and Tax (EBIT) XXX
(-) Interest on Borrowings (XX) Actual Interest Rate or ERI if given
(-) Preliminary Exp or any other Income/Exp (XX) If not debited to P&L but required to
be charged to P&L only
Earnings Before Tax (EBT) XXX
(-) Tax Expense (XX) CT +/- DT
Earnings After Tax (EAT/PAT) XXX
(-) Preference Dividend (XX) Assume Cumulative Preference Shares
(-) Premium on Redemption/Conversion of PS (XX) Even if it deducted from Sec. Prem A/c
Profit/Loss attributable to Ordinary ESH XXX

Important Points for Numerator:

Interest at ERI Any instruments such as redeemable preference shares which are
(%) classified as Liability then dividend/interest shall be deducted as per
Effective Rate of Interest method.
Preference If Cumulative Preference Shares then deduct the dividend always
Dividend If Non-cumulative Preference Shares then deduct the dividend only
when declared.
Always assume cumulative if not specified in questions
Premium on Premium/Settlement premium on redemption or conversion of
Preference Shares preference shares and w/o from securities premium a/c or any other
reserves shall also be deducted.
Any Income or Any Income or Expenses which is otherwise required to be transferred
Expense not to Profit and Loss, but not actually recognised in profit and loss and
debited to P&L transferred to other reserves or written off from security premium

18.1
 IND AS 33

(like Preliminary exp) shall also be considered while calculating EPS.

OCI Items OCI items are not considered while calculating EPS
EPS in EPS for CFS shall be calculated as under:
Consolidated Total Profit/Loss attributed to Equity shareholders of Parent Entity
Financial Weighted average number of Equity shares

Statements (CFS)
Total Profit/Loss attributed to Equity shareholders of Parent Entity:

(Refer Practical Profit of Parent Entity (as per SFS) XXX

Example 6) Share of Parent in Profit of Subsidiary XXX

Example: (Premium on Preference Shares)

ABC Company issues 9% preference shares of FV of Rs 10 each on 1.4.20X1. Total value of the issue
is Rs 10,00,000. The shares are issued at a discount of Rs 0.50 each, for a period of 5 years and
would be redeemed at the end of 5th year. The shares are to be redeemed at Rs 11 each.
At the end of the year 3, i.e. on 31.3.20X4, company finds that it has earned good returns than
expected over last three years and can make the redemption of preference shares early. To
compensate the shareholders for two years of dividend which they need to forego, company decided
to redeem the shares at Rs 12 each instead of original agreement of Rs 11. Comment on the earnings
for the year 20X3-20X4.
Solution
In the given situation, Rs 2 per share is the excess payment made by the company amounting to Rs
2,00,000 in all. The amount of Rs 2,00,000 will be deducted from the earnings of the year 20X3-
20X4 while calculating the basic EPS of year 20X3-20X4.

Denominator for EPS – Weighted Average Outstanding Ordinary Shares

Number of Ordinary Shares are considered for Basic EPS adjusted by Time Factor (i.e. No. of
days/months for which shares were outstanding during the year as against total days/months during
the year)
Calculation of Weighted Avg. Ordinary Shares:
Particulars W.Avg. No. Remarks
No. of shares in the beginning of year
(+) No. of shares issued during the year No. of days/months from issued date
against cash consideration (Normal issue) to year end ÷ 365 days or 12 months
(-) No. of shares buyback during the year No. of days/months from BB date to
Also called treasury shares year end ÷ 365 days or 12 months
(+) No. of Bonus shares issued during the year 12/12 always
(Refer Practical Example 1 & 2)

Deciding the date for issue of shares

Sr. No Nature of transaction Effective Date when
1 General Rule From date of consideration receivable or date of
issue
2 Exchange for cash From date of consideration receivable or date of
issue
18.2
 IND AS 33

3 Voluntary reinvestment of dividend Date when Dividend is reinvested

4 Conversion of debt instrument Date of Accrual of interest is stopped
5 In lieu of interest / principal Date of Accrual of interest is stopped
6 Exchange of liability Settlement Date
7 Consideration for acquisition of asset Asset is recognised in books
8 Rendering of services When Services are rendered
9 Business combinations Acquisition date (Date of Acquisition of control)
10 Mandatory convertible instrument Date of contract/issue of convertible instrument
11 Contingently issuable shares When all necessary conditions for
conversion are satisfied

Special Cases for denominator (Weighted Average outstanding ordinary shares):

Bonus/Share ● These shares are issued without any consideration to existing shareholders
Split/consolidatio by capitalization of reserves.
n ● Such reserves are already available since beginning of previous year hence
time factor should always be considered from beginning of PY.
● PY EPS shall also be restated (calculated again) for CY disclosure purpose
by including Bonus shares in PY denominator.
Partly Paid-up ● First, check whether partly paid-up shares are entitled to dividend or not.
Shares ● If partly paid-up shares are not entitled to a dividend unless they become
fully paid up, then do not consider them in BEPS working. They are treated
(Refer Practical as potential equity shares for DEPS working.
Example 3) ● If partly paid-up shares are entitled to a dividend, then calculate weighted
average outstanding equity share capital (in ₹) instead of No. as under:

No. of Fully Paid-up shares X Face Value X Time Factor

No. of Partly Paid-up shares X Paid up Price X Time Factor
Total Weighted Avg. Equity Share Capital (in ₹)

Calculate Earnings Per Rupee (EPR):

Profit/Loss attributable to ESH ÷ Total Weighted Avg. ESC

Calculate EPS as under:

EPR (in ₹) X Paid-up price or Face Value
Right Issue (RI) Right issue of shares has bonus element hence follow the below steps:
Step 1: Calculate Theoretical Ex right price per share if not available
(Refer Practical 𝐹𝑜𝑟𝑚𝑢𝑙𝑎
Example 5) [𝐹𝑎𝑖𝑟 𝑉𝑎𝑙𝑢𝑒 (𝑏𝑒𝑓𝑜𝑟𝑒 𝑟𝑖𝑔ℎ𝑡) 𝑥 𝑁𝑜. 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒 (𝑝𝑟𝑒 − 𝑟𝑖𝑔ℎ𝑡)] + 𝑅𝑖𝑔ℎ𝑡 𝑖𝑠𝑠𝑢𝑒 𝑝𝑟𝑜𝑐𝑒𝑒𝑑𝑠
=
𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒𝑠 𝑝𝑜𝑠𝑡 𝑟𝑖𝑔ℎ𝑡

𝐶𝑢𝑚 𝑅𝑖𝑔ℎ𝑡 𝑃𝑟𝑖𝑐𝑒

Step 2: Calculate Right Factor (RF) = 𝐸𝑥 𝑅𝑖𝑔ℎ𝑡 𝑃𝑟𝑖𝑐𝑒

(Cum right price also know as Market price will be given in question)

18.3
 IND AS 33

Step 3: Weighted Average O/s Ordinary shares of current year: -

No. of shares o/s (pre-right) x RF x No. of Months till the date of RI ÷ 12
(+) No. of shares o/s (post-right) x No. of Months after RI till end of year ÷ 12
Total weighted Avg. O/s ordinary shares

Step 4: Calculate BEPS of CY as usual

Step 5: Calculate Restated BEPS of PY also by considering above RF in

weighted avg. calculation of PY
Compulsory ● Mandatory/Compulsorily Convertible instruments (convertible into Equity
convertible shares) are to be considered while calculating Basic EPS from the date of
debentures or contract i.e. from the date of issue of such instruments.
preference ● However, interest paid on such instruments shall be treated in the normal
shares way and deducted from Net Profit and Loss attributable to ESH.
● Always assume that convertible instruments are not mandatory.

(Refer Practical Example 4)

2. EPS IN CASE OF DIFFERENT DIVIDEND RIGHTS

Absolute Dividend Rights for Proportionate Dividend Rights Participating Preference

different class of Equity for different class of Equity Shareholders
Shares Shares
Here absolute dividend means Here proportionate dividend Participating Preference
additional dividend rights are rights means each class of share Shares are those preference
given in absolute amount is eligible on specified shares who are eligible to
proportion of normal dividend undistributed earnings (after
Step 1: Calculate Additional right payment of equity dividend).
Dividend Amount for each class
of Equity Shares Step 1: Assume Normal Step 1:
Dividend is “X” % Calculate Undistributed Earnings
Step 2: Calculate Total EAT XXX
Earnings excluding above step 1 Step 2: Calculate Dividend (-) Pref. Dividend (XX)
Right for each class as (-) Equity Dividend (XX)
Step 3: Calculate Normal EPS proportion to normal dividend as Undistributed Earn. XXX
based on Step 2 for each class per the given information
of Share Step 2:
Step 3: Apply Dividend Right of Allocate the undistributed
Step 4: each class to Share Capital of earnings to ESH and
EPS (for each Class) = Normal each class. Participating PSH as per the
EPS + Additional Dividend Per questions information
18.4
 IND AS 33

Share Step 4: Allocate the Total

Earnings to each class in the Step 3:
(Refer Q501) ratio of step 3 EPS for Equity Share =
Dividend distributed per share
Step 5: Calculate EPS for each (+) Allocated Undistributed
class separately. Earning Per Share

(Refer Q502) Step 4:

Earning per share for Pref.
Shareholders =
Dividend Distributed Per Share
(+) Allocated undistributed
earning per share.

(Refer Q504)

3. DILUTED EARNINGS PER SHARE

1. Diluted EPS is calculated when there are outstanding potential equity shares.

2. Potential Equity Shares are those securities which can be converted into ordinary equity shares
in future.
E.g. Convertible Preference Shares, Convertible Debentures, Share warrants, ESOPs, Call
Options, Partly paid-up shares if not eligible for dividend unless they become fully paid-up,
Contingently issuable shares

3. Diluted EPS means reduction of Basis EPS if same earnings will continue with additional no. of
shares when potential equity shares will be converted into ordinary shares.

4. Conversion into Ordinary shares may increase the Numerator and Denominator as under:
Numerator Denominator
Saving of Interest after Tax due to Increase in No. of Shares due to
conversion of Debentures. conversion of Preference shares,
Debentures, Warrants, ESOPs and
Saving of Preference Dividend due to Call Options.
conversion of Debentures.

5. Above Change in Numerator and Denominator may increase or decrease the existing Basic EPS.
If there is a Decrease in EPS = It is Diluted EPS
If there is a Increase in EPS = It is Anti Diluted EPS

6. Anti diluted EPS is not required to be reported. In that case, DEPS = BEPS

18.5
 IND AS 33

7. DEPS formulae:
Numerator Denominator
Profit/loss attributable to ESH Weighted Avg. O/s Ordinary Shares
(+) Savings due to Conversion of Potential (+) Weighted Avg. O/s Potential Eq. Shares
Equity Shares (after Tax if required)

How to Calculate DEPS - Following calculation is required:

1. Identify Potential Equity Shares first. (Whether any security which is pending for
conversion is outstanding and resources thereof have been used in the business)
2. Identify Dilutive potential equity shares by applying following steps:

Step 1: Identify Potential Equity Shares (PES) first.

Step 2: Calculate Incremental EPS for every single potential equity share as under:
Adjustment in Earnings due to Conversion of PES
Adjustment in Shares due to PES

Step 3: Arrange IEPS in Increasing Order. Lowest IEPS will get 1st Position and so on
It is called Most Dilutive PES

Step 4: Calculate DEPS as under:

Particulars Numerator Denominator EPS
a) Basic EPS XXX XXX XX
b) (+) PES with Rank 1 XXX XXX
c) Total (a+b) XXX XXX DEPS
d) (+) PES with Rank 2 XXX XXX
e) Total (c + d) XXX XXX DEPS
f) (+) PES with Rank 3 XXX XXX
g) Total (e + f) XXX XXX DEPS
h) (+) PES with Rank 4 XXX XXX
i) Total (g + i) XXX XXX DEPS

Final Diluted EPS will be lowest of All DEPS calculated as above.

Special Cases of DEPS:

Call Options, ESOPs, Earnings (Numerator) = Zero i.e. no adjustement
Share Warrants No. of Potential Eq. Shares (Denominator) =
Total Options (-) Total options x Exercise Price
Market Price

Time weight shall be from date of option granted to date of exercise

18.6
 IND AS 33

Contingently Issuable ● Shares to be issued at little or no consideration on fulfillment of

Shares future uncertain condition.
● If condition is satisfied but shares are still not issued actually, to be
considered in Basic EPS and DEPS.
● If condition is satisfied at Balance sheet date but the final compliance
date of condition is in future, treat it as potential equity and include in
DEPS only.

(Refer Practical Question 703)

Example: (Call Options)

If company issues 100 options to be exercised at Rs 45 each after 31st March 20X1. The market
value of the share on 15th April 20X1 is Rs 50 each. In such cases the holder option will be
interested in exercising the option because he will get the shares at Rs 45, when the market value
outside is Rs 50. He can sell the shares outside and get a profit of Rs 5 each on each share held,
i.e. 100 x Rs 5 = Rs 500.
On the other hand, assume that the market value of 15th April 20X1 is Rs 35 only. In such case
the holder of option/ warrant will not be interested in exercising the option because it will be a
loss making proposal for him.

In first case where the strike price of call option is less than the market value of the share it is
termed as "in the money" option whereas in second case when exercise price of call option is more
than the market value of the share it is termed as "out of the money: option.
While calculating the diluted EPS, the options/ warrants need to be considered only if they are
dilutive.

Example: (contingently issuable shares)

ABC company will issue the shares only if the company achieves the after tax profitability of 15%.
In such case, achievement of profitability is a contingent event. Therefore, company should not
include the number of shares in calculation of Basic EPS, unless company actually achieves 15%
profitability. In the F.Y. 20X0-20Xl company achieves the profitability of 13% only. The company
will not include the shares while calculating EPS. But if in 20Xl-20X2, company achieves the
profitability of 17%. Then while calculating the EPS for 20Xl-20X2 the shares will be considered
for the calculation of basic EPS even if the shares are actually not issued.

Example: (contingently issuable shares)

PQR Company entered into contract that it will issue the shares only after completion of 3 years
from the date of contract. Here the condition to be satisfied is the completion of 3 years. There
is no other condition, then passage of time. Passage of time is definite event. There is no
uncertainty involved in passage of time. Therefore, such shares will be included in the calculation
of basic EPS because there is no contingently issued shares.

18.7
 IND AS 33

4. GROUP EPS OR CONSOLIDATED EPS

1) Under Consolidated Financial Statements, Consolidated BEPS and DEPS is required to be shown.
2) Basic EPS for Consolidated financial statements is calculated as under:
Numerator Denominator
Parent’s Own Earnings Attributable to ESH Weighted Avg. O/s No. of Ordinary
(+) Equity Shares held by P in S x BEPS of S Shares issued by Parent
(+) Pref. Shares held by P in S x Pref. DPS
Total Earnings attributable to the owners of Parent

3) Diluted EPS for Consolidated financial statements is calculated as under:

Numerator Denominator
Parent’s Own Earnings Attributable to ESH Weighted Avg. O/s No. of Ordinary
Parent’s own adjustments in Earnings due to its PES Shares issued by Parent
(+) Equity Shares held by P in S x DEPS of S (+) Weighted Avg. O/s No. of PES
(+) Pref. Shares held by P in S x DEPS of S issued by Parent
(+) PES of held by P x DEPS of S Total Weighted Avg.
Total Earnings attributable to the owners of Parent
After adjusting effect of PES

(Refer Question 806)

5. PRESENTATION OF EPS

1) The Entity shall present BEPS and DEPS in the face of a Statement of Profit and Loss.
2) EPS should be presented in the following headings:
i) Basic EPS for continuing operation
ii) Basic EPS for Discontinued Operation
iii) Basis EPS for Total Business
3) EPS in case of SFS and CFS:
Sr. No. Type of Financial statements Consolidated EPS Separate EPS
1 Consolidated Must disclose Don't disclose
2 Separate Don't disclose Must disclose

4) Net Loss in Continuing Operation:

DEPS from continuing operation shall be calculated without considering Potential Equity Shares
otherwise it gets anti-diluted.

18.8
 IND AS 102

19 IND AS 102
SHARE BASED PAYMENT

1. WHAT IS SHARE BASED PAYMENT ?

Share Based Payment (SBP) is a contract between the employer and employee (or) supplier and
customer whereby employer/customer promises to pay its own equity shares or cash based on the price
of its own equity shares against Goods or Services received by them.

2. NON – APPLICABILITY

This Standard is not applicable to the following:

a. Right Issue of Equity shares to the employees in the capacity of existing shareholders;
b. Share issued under Business Combinations (Acquisitions) or Joint Ventures

3. TYPES OF SHARE BASED TRANSACTIONS

1. Equity settled Share based Payment transactions with Employees;

2. Cash settled Share based Payment transactions with Employees; and
3. Equity settled with Cash alternative – where employee have a choice between share settlement or
cash settlement.

4. IMPORTANT DEFINITIONS

1. Grant Date: Date on which Share based payment is offered or announced.

2. Vesting Condition: Conditions to be satisfied by employees to be eligible for Share Based Payment
Plans.
3. Vesting Date: Date on which employee becomes eligible for Share based payment plans (means on
this date the conditions are fulfilled)
4. Vesting Period: Period from Grant Date to Vesting Date. (It may be more than 1 year)
5. Exercise Period: This Period starts after the vesting date, during which employee can exercise
the Share based payment plan.
6. Exercise Price: Price at which employees can purchase the Share options (this is discounted price)

19.1
 IND AS 102

5. VESTING CONDITIONS

Some share-based payment transactions include VESTING CONDITIONS that must be satisfied
before any payment is made. IND AS 102 recognizes 2 types of Vesting Conditions:
1. Service Conditions:
They require the counterparty to complete a specified period of service. A service condition does
not require a performance target to be met.
2. Performance conditions:
They require the counterparty to complete a specified period of services AND specified
performance targets to be met.
Performance conditions are of two types:
1) Non-market performance conditions: exercisability of option depends on employee’s hard work
2) Market-based performance conditions: exercisability of option depends on market price of
entity’s share.
How to deal with Vesting Conditions?
Vesting Condition doesn’t exist Vesting Condition exist and given in the Question
No Vesting Condition means Share Option will be vested (eligible) only when condition is
option is vested Immediately on fulfilled during the vesting period.
grant date.
Expense is deferred and amortised during the vesting
Entire expense is recognised period based on best available estimate.
immediately in Profit and loss A/c.
If Vesting Condition is not satisfied:
Expense should not be recognised because of failure of
condition. Any expense recognised till date shall be
revered.
(Refer Practical Example 2)

All Vesting Conditions are satisfied except Market

based performance condition:
Here expense shall be recognised over the vesting
period even though the option could not be exercised
because of non fulfilment of market conditions.
(Refer Q204 of QR Question Bank Compiler)

19.2
 IND AS 102

6. EQUITY SETTLED SHARE BASED PAYMENT WITH EMPLOYEES

● Employee benefit expense is calculated based on fair value of Options announced.

● Fair value is calculated by using the Option pricing model and it is always given in the question.
● Fair value is considered on Grant Date only. Any change in fair value after the grant date is
ignored.
● Every year’s expense is calculated as under:
A No. of Employees expected to fulfill the Vesting Conditions X No. of XXXX
Options per Employee X Fair Value of option at grant date

(This is to be done every year)

B Total Vesting Period (VP) XX
(sometimes VP is estimated and revised accordingly based on changes
in the expectations)
C (A ÷ B) X No. of years lapsed till date XXXX
D Expense already Recognised till Previous Year XXXX
E Expense for the year (C – D) XXX
If this amount is negative, then it means it is to be reversed.

● Journal Entries:
1 At each year end (during vesting period)

Employee Benefit Expenses (P&L) A/c Dr.

To Share Based Payments Reserve A/c
2 When Option is exercised after Vesting Period:

Share Based Payment Reserve A/c Dr.

Bank A/c Dr.
To Equity Share Capital A/c
To Security Premium A/c
3 When Option is not vested (condition is not satisfied)

Share Based Payment Reserve A/c Dr.

To Employee Benefit Expense (P&L) A/c
4 When Option is vested but lapsed (not exercised)

Share Based Payment Reserve A/c Dr.

To Retained Earnings (General Reserves) A/c
(Refer Practical Example 1)
(Also Refer Series 200 Questions from QR Question Bank Compiler)

19.3
 IND AS 102

7. HOW TO DEAL WITH CHANGES IN EQUITY SETTLED PAYMENTS

Sometimes, an entity might change the terms of the share-based payment transaction. These are as
follows:
(a) MODIFICATION: (also known as Reprising)
● It means making some changes in the option in favor of employees.
● It increases the benefits for employees
● It is treated as a separate Plan, hence the original SBP plan is continued as it is.
● Accounting for Separate Plan:
1. Calculate incremental fair value as on the date of Repricing:
Fair Value of Modified Option as on repricing date XX
(-) Fair Value of Original Option as on repricing date XX
2. Incremental Fair Value is recognised as an additional expense from modification date to end
of vesting date on SLM basis just like original plan.
(Refer Practical Example 3) (Also Refer Series 500 Questions of QR Question Bank Compiler)

Note:
Under Modification: If the fair value of the new instrument is lower than the fair value of the
old instrument, the modification is ignored. Only original plan shall continue.

(b) CANCELLATION OF EQUITY SETTLED OPTIONS:

If an entity cancels or settles the equity instruments, then it is treated as Vested to all current
employees immediately on the date of cancellation.
Hence the entire remaining expense (unrecognized amount) is recognised immediately.
Entity shall apply following steps to account cancellation of SBP option:

Step 1: Recognise full remaining expense on the date of Cancellation of option:

Employee Benefit Expenses A/c Dr.
To Share Based Payment Reserve A/c

Step 2:
Convert SBP Reserve A/c into SBP Liability (Compensation due to cancellation) at Fair Value of
Option on the date of cancellation:
Share Based Payment Reserve A/c Dr.
To SBP Liability A/c

Step 3: Remaining Balance of SBP Reserve is reclassified to retained earnings:

Share Based Payment Reserve A/c Dr.
To General Reserve (R/E) A/c

19.4
 IND AS 102

Step 4:
Discharge the Actual Compensation at actual promised amount (which may be different from
fair value of option) and transfer the difference to Profit and loss A/c:
Share Based Payment Liability A/c Dr.
Profit and loss A/c Dr. (difference)
To Bank (Compensation paid) A/c
To Profit and Loss A/c (difference)
(Refer Series 600 Questions of QR Question Bank Compiler)

8. CASH SETTLED SHARE BASED PAYMENT PLAN

● Cash Settled Share based payment is also known as Share Appreciation Rights (SAR)
● Employees are entitled to cash payment in the future based on the increase of the entity’s share
price over specified period of time from a specified level.
● Such increase in share price is known as “Intrinsic Value” (Market Price at Exercise Date less Grant
Date Exercise Price)
● Cash Settled SBP are recognised as the Liability of the Entity since there is a cash outflow.
● The fair value of the liability must be remeasured at each reporting date until this liability is
settled and any changes of fair value are recognized in profit or loss.
● Calculation of each year’s expense is same as Equity Settled plan, however fair value of option must
be considered for each balance sheet date.
● Journal Entries:
1 At each year end (during vesting period)
Employee Benefit Expenses (P&L) A/c Dr.
To Share Based Payments Liability A/c
2 When Option is exercised after Vesting Period:
Share Based Payment Liability A/c Dr. (Carrying Amount)
To Bank A/c (Actual Payment)

Difference in above entry is transfer to P&L A/c

● Actual Payment means payment made at intrinsic value of share which is
treated as actual appreciation.
● If intrinsic value is not given then actual appreciation is calculated as follow:
Market Price on Exercise date (-) Grant Date Exercise Price
(Refer Series 300 Questions of QR Question Bank Compiler)

Note: -
Reprising shall be done only in the case of equity settled option. If the cash settled option is given
in question and question talks about reprising, then no need to recognize additional expense since
under cash option we always take revised Fair Value for liability. (Refer Q404)

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 IND AS 102

9. EQUITY SETTLED TRANSACTION WITH CASH ALTERNATIVES

Here, the entity provides choice to employees between Equity Option and Cash Option.
Apply following Steps to recognise the Expense:
Step 1: Calculate Fair Value of Equity Option as on Grant date as under:
No. of Equity Settled options offered X Fair Value for Equity Option
(Fair Value for Equity option will be given after considering any restrictions attached to that option)

Step 2: Calculate Fair Value of Cash Alternative as on Grant date as under:

No. of Options under Cash alternative X Fair Value for Cash Option

Step 3: If Fair Value of Equity Option (Step 1) is higher than Fair Value of Cash Option (Step 2),
difference will be Recognised as Expense under Equity Option over the Vesting Period as per the Fair
Value on Grant date only. (i.e. create SBP Reserve).
(If Step 2 is more than Step 1 then we shall not create SBP reserves)

Step 4: Amount equal to Step 2 will be Recognised as Expense under Cash Option over the Vesting
Period as per the Revised Fair Values as on each Balance Sheet Date. (i.e. create SBP Liability).
Now after the vesting period is over, either Equity Option or Cash option will be exercised as per the
counter party’s choice. Apply following treatment as under:
If Cash Option is exercised If Equity Option is exercised
Transfer the balance of SBP reserve to Transfer entire SBP liability to SBP Reserve:
retained earnings: SBP Liability A/c Dr.
SBP Reserve A/c Dr. To SBP Reserve A/c
To General Reserve (R/E)
Issue the Shares:
Make Payment of SBP Liability: SBP Reserve A/c Dr.
SBP Liability A/c Dr. (Carrying Amt.) To Equity Share Capital A/c
To Bank A/c (Actual Payment) To Securities Premium A/c
Difference is transfer to P&L

(Refer Series 400 Questions of QR Question Bank Compiler)

10. GROUP SHARE BASED PAYMENT PLAN

Situation 1: Parent issues its own shares for the share-based payment plan
announced by its Subsidiary co.
1. Books of Subsidiary Co.:
a) Subsidiary co. must recognize “Employees Benefit Expenses”
b) If subsidiary co. will compensate holding co. in cash, then Bank A/c will be credited.
c) The remaining balance will be transfer to “other equity” in the name of (Eg.: Contribution by
Holding Co.)

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 IND AS 102

Recognition of Expense Employee Benefit Exp. (P&L) A/c Dr.

To Bank A/c (if paid)
To Equity Contribution by Parent co. A/c

2. Books of Holding Co.:

a) That part of Employee expense which is reimbursed by subsidiary will be debited to Bank A/c
b) That part of Employee expense which is not recoverable is debited to Investment in Subsidiary
A/c.
c) The credit will be given to Equity Share Capital and Security Premium A/c.

Share Bank A/c Dr. (if Compensation received)

Settlement Investment in Subsidiary A/c Dr. (to the extent of loss)
To Equity Share Capital A/c
To Security Premium A/c

Situation 2: Subsidiary issues its own shares for the share-based payment plan
announced by its Parent co.
Books of Subsidiary Co.:
Treat Dividend Dividend Exp. A/c Dr.
distribution to Parent To SBP Reserve A/c

SBP Reserve A/c Dr.

To Equity Share Capital A/c
To Securities Premium A/c

2. Books of Holding Co.:

Recognition of Employee Employee Benefit Expense A/c (P&L) Dr.
Expense & Dividend Income To Dividend Income A/c

(Refer Series 700 Questions of QR Question Bank Compiler)

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 IND AS 102

11. SHARE BASED PAYMENT TRANSACTION WITH OTHER PARTIES

(Other than Employees)

Example: Purchase of Goods, PPE or Taking services.

Equity Settled Option Cash Settled Option

PPE/Expenses Dr. PPE/Expenses Dr.
To SBP Reserve A/c To SBP Liability A/c

SBP Reserve A/c SBP Liability A/c

To Equity Share Capital A/c To Bank A/c
To Securities Premium A/c
Services may be received on continuous basis, in that case recognise the
expense on monthly basis as per SLM.

(Refer Q101 & Q102 from QR Question Bank Compiler)

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 IND AS 7

20 IND AS 7
STATEMENT OF CASH FLOWS

1. WHY INDAS - 7?

The statement of cash flows shows:-

● the ability of any company to generate cash.
● HOW MUCH CASH the company generated over the year
● from WHERE the cash was generated
● movements in cash and cash equivalents

2. WHAT COMPRISES CASH AND CASH EQUIVELANT?

Cash comprises cash on hand (e.g., petty cash) and demand deposits (e.g., bank accounts).

Cash equivalents are short-term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value.
Here, the investment with short maturity (up to 3 months) would qualify for cash equivalent – for
example, state Treasury note. However, most shares and other equity instruments are excluded from
cash equivalents.

Under Ind AS 7 “where bank overdrafts which are repayable on demand form an integral part of an
entity’s cash management, bank overdrafts are included as a component of cash and cash equivalents.
However, Bank overdraft, in the balance sheet, will be included within financial liabilities.

3. HOW THE STATEMENT OF CASH FLOWS SHALL BE PRESENTED?

In the Cash Flow Statement, Cash flows during the period are classified by operating, investing and
financing activities.
In the notes to the financial statements, an entity shall disclose the components of cash and cash
equivalents.
STATEMENT of CASH FLOW
Particulars Amount
Cash flow from Operating Activity XXX

(+/-) Cash flow from Investing Activity XXX

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 IND AS 7

(+/-) Cash flow from Financing Activity XXX

Net cash flow XXX
(+) Opening balance of cash and cash equivalent XXX
Closing balance of cash and cash equivalent XXX

4. OPERATING ACTIVITIES

Operating activities are the principal revenue-producing activities of the entity and other activities
that are not investing or financing activities.

Cash flows from operating activities might be different for different entities.
For example, manufacturing company would report advance given for the acquisition of PPE as investing
activity, but the bank would report similar advance as an operating activity based on its specific
purpose.

Examples of Operating activities are:

● Cash receipts from the sale of goods and the rendering of services.
● Cash receipts from royalties, fees, commissions and other revenue.
● Cash payments to suppliers for goods and services.
● Cash payments to and on behalf of employees.
● Cash receipts and cash payments of an insurance entity for premiums and claims, annuities and
other policy benefits.
● Cash payments or refunds of income taxes unless they can be specifically identified with
financing and investing activities; and
● Cash receipts and payments from contracts held for dealing or trading purposes.

DIRECT AND INDIRECT METHOD

A company may select from 2 methods of reporting cash flows from operating activities:
1. Direct method: here, you need to disclose major classes of gross cash receipts and gross cash
payments; or
2. Indirect method: here, you start with the profit or loss before tax and then you adjust it for
the effect of:
o Working capital changes over the period (inventories, operating receivables, payables);
o Non-cash items (depreciation, unrealized foreign exchange gains or losses, etc.);
o Items associated with investing or financing activities.

INDIRECT METHOD (Format)

Particulars Amount
Net profit before tax XXX
(+/-) Adjustment for non-cash & non-operating item
(+) Depreciation/ Amortisation XX
(+) Bad-debts / provision for Bad-debts XX

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 IND AS 7

(+/-) Forex Gain / Loss XX

(+) Impairment loss XX
(+) Finance Cost (Interest) XX
(-) Interest Income and dividend XX
(+/-) Gain or loss on sale of any asset XX
(+) Share based payment expense (non-cash) XX
(+/-) Loss / gain on Remeasurement of financial instrument (non-cash) XX
Cash Flow before Working capital changes XXX
(+/-) Adjustment for Working capital changes
(+) Decrease in current asset XX
(-) Increase in current asset XX
(+) Increase in current liability XX
(-) Decrease in current liability XX
(-) Tax paid XX
Net cash flow from Operating activity XXX

Direct method provides more understandable information not disclosed under indirect method.
However, in reality, indirect method is far more preferred because it’s easier to get the information
based on your accounting records. (in most cases).

5. INVESTING ACTIVITIES

Investing activities are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents.

Examples of cash flows classified in investing activities are:

● Cash payments to acquire property, plant and equipment, intangibles and other long-term assets
(including capitalized development costs and self-constructed PPE);
● Cash receipts from sales of PPE, intangibles and other long-term assets;
● Cash payments to acquire and cash receipts from sales of equity or debt instruments of other
entities and interests in joint ventures (but not for trading or dealing purposes);
● Cash advances and loans made to other parties, and cash receipts from their repayment (other
than advances and loans made by a financial institution – these would go to operating part);
● Cash payments for and cash receipts from various derivative contracts except when the
contracts are held for dealing or trading purposes, or the payments are classified as financing
activities.

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 IND AS 7

6. FINANCING ACTIVITIES

Financing activities are activities that result in changes in the size and composition of the contributed
equity and borrowings of the entity.

Examples of cash flows arising from financing activities are:

● Cash proceeds from issuing shares or other equity instruments;
● Cash payments to owners to acquire or redeem the entity’s shares;
● Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or
long-term borrowings;
● Cash repayments of amounts borrowed; and
● Cash payments by a lessee for the reduction of the outstanding liability relating to a finance
lease.

7. IMPORTANT AND SPECIAL AREAS

REPORTING CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES

Cash flows from investing and financing activities shall always be reported GROSS, so no netting off.
(Unless there is an intention to settle on NET BASIS)
Example
If in the year 20X1-20X2, some land is purchased for Rs. 2.5 crores and another land is sold for Rs.
3.5 crores then while presenting the information, entity shall show separately outflow of Rs. 2.5
crores and inflow of Rs. 3.5 crores.

However, INDAS - 7 gives you 2 exceptions where you actually can present net:
● Cash receipts and payments on behalf of customers when the cash flows reflect the activities
of the customer rather than those of the entity. For example, some real estate company can
collect rents from tenants and pay them over to the property owners.
● Cash receipts and payments for items in which the turnover is quick, the amounts are large,
and the maturities are short. For example, changes in principal amounts relating to credit card
customers.
Also, financial institutions can report certain transactions on the net basis.

FOREIGN CURRENCY CASH FLOWS

● When there are foreign currency cash flows, then you need to translate them to your functional
currency by applying the exchange rate at the date of the cash flow.
● Exchange Gains/Losses recognised as per Ind AS 21 are not cash flows.
● If exchange gains/losses are related to cash or cash equivalents, then these should be presented
separately for the final reconciliation.

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 IND AS 7

Example
Entity A (Indian Company) purchased goods for resale from France during January for EUR 10,000
(Exchange rate: 1 EUR = Rs. 70) on a credit period of 4 months. It accounted for the purchase of
inventory at Rs. 7,00,000 (10,000 x 70). On 31st March, the exchange rate has changed to 1 EUR = Rs.
65. This would mean an unrealised gain due to exchange fluctuation of Rs. 50,000 (since the payables
will be recorded at Rs. 6,50,000 (at closing exchange rate).
Assuming that the inventory is unsold at that date, the movement is reported as under:
Profit Rs. 50,000
Less: Increase in Inventory Rs. (7,00,000)
Add: Increase in Payables Rs. 6,50,000
Net Cash flows from operating activities Rs. 0

INTEREST AND DIVIDEND

Financing Company Other Company
Interest Paid Operating Activities Financing Activities
Interest and Dividend Received Operating Activities Investing Activities
Dividends Paid Financing Activities Financing Activities

TAXES ON INCOME
● Generally, cash flows arising from income taxes are classified as cash flows from operating
activities.
● However, if they can be specifically identified for either financing or investing such as long term
capital gain tax on sale of property, then it should be reported under cash flows in investing or
financing activities.

PROPERTIES BUILT FOR LET OUT

● Cash payments to manufacture or acquire assets held for rental to others and subsequently held
for sale are cash flows from operating activities.
● The cash receipts from rents and subsequent sales of such assets are also cash flows from
operating activities.

OPERATIONS OF FINANCIAL COMPANIES AND BANKS

Cash flows arising from the cash advances and loans made, purchase and sale of securities and loans
for dealing or trading purposes are classified as operating activities.

INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES

● Investment in Subsidiary/Associate/Joint Venture is cash outflow under Investing Activity.
● Sale of Investment in Subsidiary/Associate/Joint Venture without loss of control is cash outflow
under Financing Activity.

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 IND AS 7

● Sale of Investment in Subsidiary/Associate/Joint Venture with loss of control is cash outflow

under Investing Activity.
● Investment entity such as Venture Capital Co. or Mutual Fund Co., if they obtain or sale any
investment then it is Operation Activity.

(Refer Practical Example 1 for All Important Adjustments at one place)

20.6