CA Final November 2023 Suggested Answers Paper 1 Financial Reporting (Old Scheme)

FOR CA FINAL EXAM PREPARATION

CA Final 2023
Suggested Answers ·
Paper 1 Financial
Reporting (Old
Scheme)
EXAM YEAR TYPE

CA Final 2023 Suggested Answers
SUBJECT DATE

Paper 1 Financial Reporting (Old Scheme) November 2023

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 1 : FINANCIAL REPORTING

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Question No. 1 is compulsory. Candidates are required to answer any four questions from

om notes should form part of the respective answers.
the remaining five questions.

c. Working em
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Question 1
The lextracts of the Balance Sheets of Hammer Ltd. and its subsidiary Sleek Ltd. as ona
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a31g March, 2023 are given below:
st

Particulars Note Hammer Ltd. Sleek Ltd.
No. (` ) (` )
I. ASSETS
A. Non-Current Assets

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Property, Plant and Equipment 1 6,00,000 3,25,000

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Intangible Assets 1,25,000 75,000

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Investments 6,25,000 1,25,000
B. Current Assets
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Inventories
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Financial Assets
Trade receivables 3,25,000 2,90,000
Cash and Cash equivalents 1,50,000 3,50,000
Total Assets 19,50,000 13,25,000
II EQUITY AND LIABILITIES

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A. Equity

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c. o 5,50,000 m 3,75,000
Equity Share Capital ( ` 10 each) 10,00,000

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Other Equity 3

las B. Non- Current Liabilities
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ag Financial Liabilities
Borrowings 4 - 1,00,000

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2 FINAL EXAMINATION: NOVEMBER, 2023

C. Current Liabilities
Financial Liabilities
Short term borrowings
Bank Overdraft 1,00,000 50,000
Trade Payables 3,00,000 3,00,000
Total Equity and Liabilities 19,50,000 13,25,000

Notes to Accounts

Note Particulars Hammer Ltd. Sleek Ltd.
No. (` ) (` )
1. Property, Plant and Equipment
(a) Plant and Machinery 2,00,000 1,25,000
(b) Furniture and Fittings 4,00,000 2,00,000
6,00,000 3,25,000
2. Intangible Assets
Goodwill 1,25,000 75,000
3. Other Equity
(a) General Reserve 2,00,000 1,25,000
(b) Retained Earnings 3,50,000 2,50,000
5,50,000 3,75,000
4. Borrowings
8% Debentures of ` 100 each - 1,00,000

Additional information:
Hammer Ltd. acquired 20,000 equity shares of Sleek Ltd. on 1 st April, 2022 at a cost of
` 2,40,000 and further acquired 17,500 equity shares on 1 st October, 2022 at a cost of
` 1,92,500;
The 8% debentures of Sleek Ltd. includes debentures held by Hammer Ltd. of nominal value
of ` 35,000. These were acquired by Hammer Ltd. on 1 st January, 2022 at a cost of ` 84,000;
The retained earnings of Sleek Ltd. had a credit balance of ` 75,000 as on 1 st April, 2022. On
that date the balance of General Reserve was ` 50,000;

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PAPER – 1 : FINANCIAL REPORTING 3

- Sleek Ltd. had paid dividend @ 10% on its paid-up equity share capital out of the balance
of retained earnings as on 1 st April, 2022 for the financial year 2021-2022. The entire

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dividend received by Hammer Ltd. was credited in its statement of profit and loss;

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- As per the resolution dated 28 th February 2023, Sleek Ltd. had allotted bonus shares

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@ 1 equity share for every 10 shares held out of its general reserve. The accounting
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effect has not been given;

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- Trade receivables of Hammer Ltd. includes bills receivables of ` 2,00,000 drawn upon
Sleek Ltd. Out of this, bills of ` 50,000 have been discounted with bank;
- During the financial year 2022-2023, Hammer Ltd. purchased goods from Sleek Ltd., of
` 25,000 at a sales price of ` 30,000, 40% of these goods remained unsold on
31st March, 2023;
- On 1st October, 2022, machinery of Sleek Ltd. was overvalued by 20,000 for which
necessary adjustments are to be made. Depreciation is charged @ 10% per annum:

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- The parent company i.e., Hammer Ltd. has adopted an accounting policy to measure

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non-controlling interest at fair value (quoted market price) applying Ind AS 103. Assume

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the fair value per equity share of Sleek Ltd. at ` 11 on the date when control of
Sleek Ltd. was acquired by Hammer Ltd.

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You are required to prepare a consolidated balance sheet, as per Ind AS, of Hammer Ltd. and
its subsidiary Sleek Ltd. as at 31 st March, 2023. (20 Marks)
Answer
Consolidated Balance Sheet of Hammer Ltd. as at 31 st March, 2023

Notes No. ` in
lakhs

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Assets

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Non-current assets
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1 .9,06,000
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se1 2,00,000
Property, plant and equipment

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Intangible assets

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a 1 2,33,500
ag Investment
Current assets
Inventories 1 2,83,000

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4 FINAL EXAMINATION: NOVEMBER, 2023

Financial assets
Trade receivables 1 4,65,000
Cash and cash equivalents 1 5,00,000
Total 25,87,500
Equity and Liabilities
Equity
Share capital - Equity shares of ` 10 each 2 10,00,000
Other equity 3 7,47,750
Non-controlling interest (W.N.) 1,74,750
Non-current liabilities:
Financial liabilities
Borrowings 1 65,000
Current Liabilities:
Financial liabilities
Bank Overdraft 1 1,50,000
Trade payables 1 4,50,000
Total 25,87,500

Notes to Accounts
Note 1: Assets and Liabilities `
Particulars Hammer Ltd. Sleek Ltd. Adjustments Total
Property, Plant and Equipment 6,00,000 3,25,000 -20,000 +1,000 9,06,000
Intangible Assets 1,25,000 75,000 2,00,000
Investments 1,92,500* 1,25,000 -84,000 2,33,500
Inventories 1,25,000 1,60,000 -2,000 2,83,000
Trade Receivables 3,25,000 2,90,000 -1,50,000 4,65,000
Cash and Cash Equivalents 1,50,000 3,50,000 5,00,000
Borrowings 0 1,00,000 -35,000 65,000
Bank Overdraft 1,00,000 50,000 1,50,000
Trade Payables 3,00,000 3,00,000 -1,50,000 4,50,000

*6,25,000 – 2,40,000-1,92,500

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PAPER – 1 : FINANCIAL REPORTING 5

Note 2: Equity Share Capital

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1,00,000 equity shares of ` 10 each, fully paid 10,00,000

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10,00,000

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Note 3: Consolidated Other Equity

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General Reserve W.N.1 2,28,125

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aCapital Reserve
Retained W.N.1
W.N.2
3,64,625
1,55,000
7,47,750

Working Notes:
1. Consolidated Other Equity

Particulars General Reserve Retained Earnings

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Standalone - Hammer Ltd. 2,00,000 3,50,000

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Less: Fair Value Loss of existing stake

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[2,40,000 - (20,000 x 11)] (20,000)

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agProfits
Less: Loss on cancellation of debentures (49,000)
Add: Share in Post-acquisition 28,125 83,625
2,28,125 3,64,625

2. Computation of Goodwill or Bargain Purchase for (75% stake)
(i) Computation of net worth (net identifiable assets) as on 1 st October, 2022

Share Capital 5,00,000

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Pre-acquisition Retained Earnings (after adjusting downward 1,17,500

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revaluation of machinery)
c. 37,500
c. o Pre-acquisition General Reserve
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se 50,000
s em Bonus issue*
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gla Net Identifiable assets
a 7,05,000

a *Note: Bonus shares issued in 1:10 ratio i.e. ` 50,000 and bonus issue has not
been accounted for yet. The opening balance of the general reserve is ` 50,000
while the closing balance is ` 1,25,000 which implies that ` 75,000 have been

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6 FINAL EXAMINATION: NOVEMBER, 2023

transferred during the year and this amount should be allocated between pre and
post-acquisition based on time proportion. Therefore, the general reserve on the
date of acquisition will be ` 50,000 + 50% of ` 75,000 i.e. ` 37,500 = ` 87,500.
Here, it should be noted that the date of bonus issue is 28 th February, 2023 and
bonus amount is ` 50,000. Since the balance of post-acquisition general reserve
(50% of ` 75,000 i.e. ` 37,500) is insufficient, it is assumed that bonus shares are
issued from pre-acquisition general reserve i.e. balance on the date of acquisition
assuming that transfer to general reserve, in general, is an appropriation of profit
which is done at the end of the year. This implies that outstanding balance in
general reserve at the time of bonus issue is the opening balance.

However, one may assume otherwise like insufficient post-acquisition balance of
` 12,500 (50,000 – 37,500) has only been adjusted through pre-acquisition share
of ` 87,500 or first adjustment of bonus issue has been done and later bifurcation
of remaining balance has been done into pre and post-acquisition. In such a case
balance of consolidated general reserve (post-acquisition), net worth, bargain
purchase and NCI will undergo a change.

(ii) Computation of bargain purchase i.e capital reserve

Net worth or Net identifiable assets 7,05,000
Purchase consideration (1,92,500 + 2,20,000) 4,12,500
NCI [12,500 shares x ` 11 (i.e. ` 1,92,500 / 17,500
shares)] 1,37,500 5,50,000
Bargain purchase (capital reserve) 1,55,000

3. Non-Controlling Interest A/c (at Fair Value)

NCI at fair value as on 1 st October, 2023 1,37,500
Post-acquisition General Reserve 9,375
Post-acquisition Retained Earnings 27,875
NCI at fair value as on 31 st March, 2023 1,74,750

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4. Analysis of Other Equity

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(i) General Reserve

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Closing balance as on 31 st March, 2023 1,25,000

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m Profit transferred during the year s
Less: Opening Balance pre (50,000)

seFor 6 months till 30 September, 2022 l a
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Net 75,000

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th pre 37,500
For 6 months from 1 October, 2022 to 31 March, 2023 post
st st 37,500
Total pre-acquisition reserve (50,000 + 37,500) pre 87,500
Less: Bonus issue pre (50,000)
Balance General Reserve pre 37,500
Share of Hammer Ltd. in pre-acquisition reserve (75%) pre 28,125
Share of NCI in pre-acquisition reserve (25%) pre 9,375

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. (25%)
Share of Hammer Ltd. in post-acquisition reserve (75%) post 28,125

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Share of NCI in post-acquisition reserve post 9,375

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31g March, 2023
(ii) Retained Earnings (RE)

Closing balance as on a st 2,50,000
Less: Opening balance 75,000
Less: Dividend @10% (50,000) pre (25,000)
During the year 2,25,000
For 6 months till 30 th September, 2022 pre 1,12,500
For 6 months from 1 st October 2022 to 31 st March, 2023 post 1,12,500

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c. (2,000)
Add: Saving in Depreciation (W.N.5) 1,000
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c. o em 1,11,500
Less: Unrealised Gain [(30,000-25,000) x 40%]

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Net post-acquisition RE
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post
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las agpre
ag Total pre-acquisition RE (25,000 + 1,12,500) 1,37,500
Less: Downward revaluation of machinery (20,000)
pre 1,17,500

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8 FINAL EXAMINATION: NOVEMBER, 2023

Share of Hammer Ltd. in pre-acquisition RE (75%) pre 88,125
Share of NCI in pre-acquisition RE (25%) pre 29,375
Share of Hammer Ltd. in post-acquisition RE (75%) post 83,625
Share of NCI in post-acquisition RE (25%) post 27,875

5. Plant and Machinery balance as on 31 st March 2023

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Balance as on 31.3.2023 as given in question (after depreciation) 1,25,000
Less: Downward revaluation less depreciation saving (19,000)*
1,06,000

*Saving in depreciation = ` 20,000 - ` 19,000 = ` 1,000.
Question 2
(a) As per the provisions of section 135 of the Companies Act, 2013 read with relevant rules,
circulars and notifications related to 'Corporate Social Responsibility' (CSR), discuss the
following situations:
(i) A company is formed under section 8 of the Companies Act, 2013 to undertake
charitable activities. The management of the Company is of the opinion that since
all the activities of the Company are charitable in the normal course of business,
the CSR provisions are not applicable to it. You are required to advise whether the
CSR provisions are applicable to the Company. The Company fulfils all the criteria
listed in section 135 of the Companies Act, 2013.
(ii) C Limited is covered under the provisions of section 135 of the Companies Act,
2013. The Company fulfils all the criteria listed in section 135 of the Companies
Act, 2013. It has a holding company H Limited and a subsidiary company
S Limited. Neither H Limited nor S Limited fulfils the criteria listed in section 135
of the Companies Act, 2013. Advise whether H Limited and S Limited are required
to comply with the provisions of section 135 of the Companies Act, 2013.
(iii) For the financial year 2020-2021, CBC Ltd. was within the purview of CSR
provisions as per the Companies Act, 2013 as its net profit for the financial year
exceeded ` 5 crores. It also satisfied the 'net worth' and 'turnover' criteria. The
Company duly discharged its CSR obligations in the financial year 2021 -2022.
However, due to adverse market conditions during the financial year 2021 -2022,
the turnover fell below ` 1,000 crores and the Company incurred a loss. Its net

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PAPER – 1 : FINANCIAL REPORTING 9

worth also fell below ` 500 crores. The Company is of the opinion that CSR
provisions are no longer applicable to it with effect from the financial year

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2021-2022. Discuss.

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(iv) An office building is constructed exclusively for the CSR activities under section

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135 of the Companies Act, 2013 of the Company. The entire expenditure is treated
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as revenue expenditure and charged to statement of profit and loss. Discuss
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whether the treatment of charging cost of construction of the aforesaid building to

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statement of profit and loss is correct. Whether any disclosures as per
Schedule III of the Companies Act, 2013 have to be made? (8 Marks)
(b) XYZ Limited is a sales and marketing company in amusement and entertainment domain.
It negotiates and agrees in advance with four famous amusement parks to purchase their
tickets for online sale through its payment gateway to general public. The negotiated
rates are at a discount when compared with the price of tickets sold directly by
amusement parks to the general public. XYZ Limited is free to determine its sale price
of the ticket. As part of the agreement, XYZ Limited will also assist the amusement

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parks/general public with respect to services provided by the amusement parks to the

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general public. However, each amusement park will continue to be responsible for

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fulfilling its / their obligation associated with the ticket, including solutions to dissatisfied

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customers. For XYZ Limited, there is no credit risk as payment is collected from
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customers beforehand. However, it carries an inventory risk as tickets have to be
purchased in advance and unsold tickets are loss to XYZ Limited. Discuss whether XYZ
Limited is a principal or an agent? (6 Marks)
(c) Whether the following expenses shall form part of ‘costs incurred to obtain a contract'.
Give reasons:
(i) Commission paid only upon successful signing of the contract;
(ii) Legal fees for drafting the terms of the arrangement/ agreement;

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(iii) Travel expenses of a sales person pitching for a new client contract;

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(vi) Commission paid to sales manager which is based on contracts
(6 Marks)

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10 FINAL EXAMINATION: NOVEMBER, 2023

Answer
(a) (i) Section 135 of the Companies Act applies to every company meeting the specified
criteria. As per section 2(20) of the Companies Act, ‘company’ means a company
incorporated under the Companies Act or under any other previous company law.
This implies that companies set up for the purposes of CSR / public welfare are
also required to comply with the provisions of CSR since they are incorporated
under the Companies Act.
Further, as per clause 2(d) of the Companies (Corporate Social Responsibility
Policy) Rule, 2014, “Corporate Social Responsibility (CSR)” means the activities
undertaken by a Company in pursuance of its statutory obligati on laid down in
section 135 of the Act in accordance with the provisions contained in these rules
but shall not include activities undertaken in pursuance of normal course of
business of the company except research work. Therefore, though all the activiti es
of the company are charitable in nature, they are activities in the normal course of
their business. Hence, those activities do not constitute activities of corporate
social responsibility.
Based on the above discussions, since the company formed under section 8 of the
Companies Act, 2013 is a company under the Companies Act, 2013 and fulfills the
criteria prescribed under section 135(1) of the Companies Act, 2013, CSR
provisions will be applicable to it.
(ii) Any company incorporated under the Act, which fulfills the criteria on a standalone
basis, irrespective of its status of holding or subsidiary, needs to comply with CSR
provisions. Since neither H Limited nor S Limited fulfils the criteria listed in section
135(1) of the Companies Act, 2013, H Limited and S Limited both are not required
to comply with the requirements of Section 135 relating to CSR.
(iii) Section 135(1) of the Companies Act requires that any company fulfilling the net
worth / turnover / net profit criterion in the immediately preceding financial year shall
constitute a Corporate Responsibility committee and sub-section (5) requires such
company to incur 2% of the average profit of the last three years. It is only a
computational requirement. Applicability of CSR provisions is based on meeting
any of the limits in the ‘immediately preceding year’. As the company does not meet
the limits in the financial year 2021-2022, the company is not required to fulfill the
CSR obligations in the financial year 2022-2023.

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PAPER – 1 : FINANCIAL REPORTING 11

(iv) In cases where an expenditure of revenue nature is incurred on any of the activities
mentioned in Schedule VII to the Act by the company on its own, the same should be

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charged as an expense to the statement of profit and loss. In case the expenditure

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incurred by the company is of such nature which may give rise to an ‘asset’, a question

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may arise as to whether such an ‘asset’ should be recognised by the company in its
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balance sheet. In this context, it would be relevant to note the definition of the term

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‘asset’ as per the Conceptual Framework for Financial Reporting in accordance with
Ind AS issued by ICAI. As per the Conceptual Framework, an ‘asset’ is a “resource
controlled by an enterprise as a result of past events from which future economic
benefits are expected to flow to the enterprise”. Hence, in cases where the control of
the ‘asset’ is transferred by the company, it should not be recognised as ‘asset’ in its
books and such expenditure would need to be recognized as an expense in the
statement of profit and loss as and when incurred.
Rule (7) of the Companies (Corporate Social Responsibility) Rules, 2014 provides for

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transfer of any capital asset created by the company to (i) a company established

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under section 8 of the Act, or a Registered Public Trust or Registered Society, having

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charitable objects and CSR Registration Number under sub-rule (2) of rule 4; or (ii)

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beneficiaries of the said CSR project, in the form of self-help groups, collectives,

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entities; or (iii) a public authority. Proviso to rule (7) further provides that if the asset
has been created prior to amendment of the Companies (Corporate Social
Responsibility Policy) Amendment Rules, 2021, shall within a period of one hundred
and eighty days from such commencement shall transfer the same as stated above.
Since, the company has charged the expenses on construction of building to the
Statement of Profit and Loss as expenses, it is assumed that the control of the asset
has been transferred. Accordingly, the company has to disclose in its financial

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statements as about it under CSR activities as per General Instructions for

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Preparation of Statement of Profit and Loss under Schedule III to the Companies

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eunder
Act, 2013.

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General Instructions for Preparation of Statement of Profit and Loss

la Section 135, the following shall be disclosed about CSR a
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III to the Companies Act, 2013, requires that in case of companies

ag activities:
(i) amount required to be spent by the company during the year,
(ii) amount of expenditure incurred,

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12 FINAL EXAMINATION: NOVEMBER, 2023

(iii) shortfall at the end of the year, if any
(iv) total of previous years shortfall, if any
(v) reason for shortfall, if any
(vi) nature of CSR activities,
(vii) details of related party transactions, e.g., contribution to a trust controlled by
the company in relation to CSR expenditure as per relevant Accounting
Standard,
(viii) where a provision is made with respect to a liability incurred by entering into a
contractual obligation, the movements in the provision during the year shall be
shown separately.
(b) To determine whether the entity’s performance obligation is to provide the specified
goods or services itself (i.e. the entity is a principal) or to arrange for another party to
provide those goods or services (i.e. the entity is an agent), the entity considers the
nature of its promise. The entity determines that its promise is to provide the customer
with a ticket, which provides the right to enter the particular amusement park on a
particular date. The entity considers the following indicators for assessment as principal
or agent under the contract with the customers:
(a) the entity is primarily responsible for fulfilling the contract, which is providing the
right to enter the amusement part. However, the entity is not responsible for
providing the services in amusement park, which will be provided by the amusement
park owner.
(b) the entity has inventory risk for the tickets because they are purchased before they
are sold to the entity’s customers and the entity is exposed to any loss as a result
of not being able to sell the tickets for more than the entity’s cost.
(c) the entity has discretion in setting the sales prices for tickets to its customers.
The entity i.e. XYZ Limited concludes that its promise is to provide a ticket (i.e. a right
to enter the amusement park on a particular date) for the customer. On the basis of the
indicators, the entity concludes that it controls the ticket before it is transferred to the
customer. Thus, the entity concludes that it is a principal in the transaction and
recognises revenue in the gross amount of consideration to which it is entitled in
exchange for the tickets transferred.

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PAPER – 1 : FINANCIAL REPORTING 13

(c) Table showing expenses whether forming part of ‘Cost to obtain a Contract’

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S.No. Cost Capitalize or Reason

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expense / cost to

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obtain a contract

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i Commission paid Capitalize/Yes Assuming the entity expects to

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only upon recover the cost, the commission

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successful signing is incremental since it would not
of a contract have been paid if the parties
decided not to enter into the
arrangement just before signing.
ii Legal fees for Expense/No If the parties walk away during
drafting terms of negotiations, the costs would still
agreement be incurred and therefore are not
incremental costs of obtaining
the contract.

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Alternatively, it can be

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‘Capitalised / Yes’, due to the
Capitalize/Yes

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absence of words “to approve &

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sign” i.e. if the agreement is

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approved and signed, then is an
incremental cost which needs to
be capitalised.
iii Travel expenses Expense/No Because the costs are incurred
for a salesperson regardless of whether the new
pitching a new contract is won or lost, the entity
client contract expense out the costs, unless
they are expressly reimbursable.

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iv Salaries for Expense/No Salaries are incurred regardless

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salespeople of whether contracts are won or

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working lost and therefore are not

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exclusively on incremental costs to obtain the

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clients

a v Bonus based on
quarterly sales
Capitalize/Yes Bonuses based solely on sales
are incremental costs to obtain a
contract.

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14 FINAL EXAMINATION: NOVEMBER, 2023

S.No. Cost Capitalize or Reason
expense / cost to
obtain a contract
vi Commission paid Capitalize/Yes The commissions are
to sales manager incremental costs that would not
based on contracts have been incurred had the entity
obtained not obtained the contract.

Question 3
(a) A consumer products entity, Entity A Limited (lessee) enters into a lease agreement with
Entity B Limited (lessor) for a dedicated production line to manufacture one of its store -
brand household products for a period of three years. Entity A Limited has agreed to
order a minimum 1,00,000 units per month and to make a payment to Entity B Limited
as per the following agreed rates:
(i) ` 240 per unit if the ordered quantity is between 1,00,000 to 1,20,000 units;
(ii) ` 246 per unit if the ordered quantity is between 1,20,001 to 1,50,000 units.
As per the terms of the agreement, Entity A Limited has the exclusive right to use the
production line. Entity B Limited cannot use the specified production line for any other
customer. The type of household product is specified in the contract. Entity A Limited
issues instructions to Entity B about the quantity and timing of products to be delivered.
If the production line is not producing the household product for Entity A, it remains idle.
Entity B Limited operates and maintains the production line on a daily basis. Entity
A Limited has estimated that for manufacturing each unit, Entity B Limited incurs an
average cost of ` 195. Further, the observable stand-alone price for the rent of the
production line is ` 60,00,000 per month. Entity A Limited's incremental borrowing rate
at the commencement date of the lease is 10% per annum.
Entity A Limited concludes that the arrangement contains a lease as per Ind AS 116. It
also elects not to apply the practical expedient in paragraph 15 of Ind AS 116 of not to
separate the non-lease component(s) from the lease component(s). Accordingly, it
separates non-lease components from lease components.
You are required to:
(i) Analyse the above and identify lease component(s) and non-lease
component(s);

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PAPER – 1 : FINANCIAL REPORTING 15

And at the commencement of the lease:

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(ii) Compute and allocate the consideration into lease component(s) & non -lease

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component(s);

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(iii) Compute the lease liability (the present value factor @ 10% per annum of 2.49 for

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3 years may be adopted);
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(iv) Determine the recognition / treatment of lease component(s) and non -lease

a(b) The following details are available for Hydra Limited as at 31 March 2023:
component(s). (8 Marks)
st

Disposal Group Carrying Amount Carrying amount
at the reporting as remeasured
data before immediately before
classification as classification as
held for sale held for sale

m 7,50,000
co
(Amount in ` ) (Amount in ` )
Goodwill
m. 7,50,000

s e
a
Property, Plant and Equipment (carried 23,00,000 20,00,000

Building (carried at cost) a
at revalued amounts)
g l 28,50,000 28,50,000
Investment in Equity Instruments 12,00,000 11,00,000
Inventory 9,00,000 7,50,000

Hydra Limited estimates that the fair value less costs to sell of the disposal group is
` 65,00,000.
State, as per applicable Ind AS, how and at what amount of loss should Hydra Limited

o m
c
recognize 'disposal group' before classifying it as held for sale. Also compute the

m m.
c. o (c) N Ltd. is engaged in the business of manufacturing of bottles for both,sepharmaceutical
impairment loss if any, and how it should be allocated by Hydra Limited. (8 Marks)

s em companies and non-pharmaceutical companies. It has a whollya owned subsidiary,
l
H Ltd., which is engaged in the business of pharmaceuticals.g H Ltd. purchases the
l a a
ag pharmaceutical bottles from its parent company. The demand of H Ltd. is very high and
hence to cater to its shortfall, H Ltd. also purchases the bottles from other companies.
Purchases are made at competitive prices.

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16 FINAL EXAMINATION: NOVEMBER, 2023

N Ltd. sold pharmaceuticals bottles to H Ltd. for Euro 24 lakhs on 1 st February, 2023.
The cost of these bottles was ` 1660 lakhs in the books of N Ltd. at the time of sale. As
at 31 st March, 2023, all these bottles were lying as closing stock in the books of H Limited.
Also as at 31 st March, 2023, the entire amount against the supply of these bottles was
payable by H Ltd.
The functional currency of:
- H Limited is Euro; and
- N Limited is INR.
Following additional information is available:
Exchange rate on 1 st February, 2023 1 Euro = ` 83
Exchange rate on 31 st March, 2023 1 Euro = ` 85

Provide the journal entries in the books of N Ltd. and H Ltd. on the transaction date(s)
as well as 31 st March, 2023, if any. Assume net realizable value of stock was always
equal to its cost. (4 Marks)
Answer
(a) (i) and (ii) Identification of lease and non-lease components and allocation of
consideration into these components
In the given case, the agreement contains a lease component (production line) and
a non-lease component (job work). As Entity A has not elected to apply the practical
expedient as provided in paragraph 15 of Ind AS 116, it will separate the lease and
non-lease components and allocate the total consideration to the lease and non -
lease components in the ratio of their relative stand-alone selling prices.
As Entity A is required to purchase a minimum of 1,00,000 units per month at the
rate of ` 240 per unit, there is in substance fixed payment of ` 2,40,00,000 per
month – although the payments are structured as variable lease payments, there is
no genuine variability in those payments as Entity A is required to purchase a
minimum quantity 1,00,000 units per month, i.e., for ` 2,40,00,000 per month.
The observable stand-alone price for lease component (which is factory rent) is
` 60,00,000. The observable stand-alone price of non-lease component (which is
job work charges) is ` 1,95,00,000 (` 195 x 1,00,000 units).

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PAPER – 1 : FINANCIAL REPORTING 17

Entity A is required to allocate the total consideration per month as follows:

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Observable standalone price: Lease component ` 60,00,000

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Observable standalone price: Non-lease component
o
` 1,95,00,000
c. o
c
. component as a percentage of observable prices em
s
Total ` 2,55,00,000

mLease
e (` 60 lakh / ` 255 lakh) x 100 l a
s
23.53%

a
l Allocation of consideration to lease component a g
ag ` 56,47,200
(` 2,40,00,000 x 23.53%)
Non-lease component (` 2,40,00,000 – ` 56,47,200) ` 1,83,52,800

(iii) Computation of lease liability
The total allocation for a year will be ` 6,77,66,400 (` 56,47,200 x 12)
As Entity A's incremental borrowing rate is 10%, it discounts lease payments using

m
this rate and the lease liability at the commencement date is calcu lated as follows:

c. o
Lease Liability at commencement date = ` 6,77,66,400 x 2.49 = ` 16,87,38,336.

e m
s liability amounting to ` 16,87,38,336 as at
(iv) Accounting treatment of lease components and non-lease components

l a
agbased on lease payments amounting to ` 56,47,200 per
(a) Entity A recognises lease
commencement date
month.
(b) The remaining amount of ` 1,83,52,800 (` 2,40,00,000 – ` 56,47,200) which
is attributable to job work charges is recognised in the statement of profit and
loss as and when incurred.
(b) Statement showing calculation of disposal group immediately before classifying it
as held for sale
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Disposal Group Carrying amount Carrying amount

c. o m
at the reporting as remeasured

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date before immediately before

s la
classification as classification as

la
held for sale
a g held for sale

ag Goodwill
`
7,50,000
`
7,50,000
Property, Plant and Equipment (carried 23,00,000 20,00,000
at revalued amounts)

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18 FINAL EXAMINATION: NOVEMBER, 2023

Building (carried at cost) 28,50,000 28,50,000
Investment in Equity Instruments 12,00,000 11,00,000
Inventory 9,00,000 7,50,000
Total 80,00,000 74,50,000

The entity should recognise the loss of ` 5,50,000 (` 80,00,000 - ` 74,50,000), in
accordance with applicable Ind AS, immediately before classifying it as held for sale.
Computation and allocation of impairment loss
The entity estimated that fair value less costs to sell of the disposal group amounts to
` 65,00,000.
Since the entity has classified a disposal group as held for sale it should measure it at
the lower of its carrying amount ` 74,50,000 and fair value less costs to sell ` 65,00,000
which comes to ` 65,00,000.
The entity should recognises an impairment loss of ` 9,50,000 (` 74,50,000 –
` 65,00,000) when the disposal group is initially classified as held for sale.
The Inventory and Investment are remeasured as per Ind AS 2 and Ind AS 109 at not
more than fair value at the date of remeasurement immediately classified as held for
sale.
Therefore, this impairment loss of ` 9,50,000 is allocated to remaining assets in the
proportion of their carrying value other than inventory and investment in equity
instrument. Firstly, the impairment loss reduces the amount of goodwill in the disposal
group. Then, the remaining impairment loss of ` 2,00,000 (` 9,50,000 – ` 7,50,000) is
used to other assets pro-rata based on the carrying amount of those assets as follows:
Table showing the allocation of impairment loss
Disposal Group Carrying amount as Allocated Carrying
remeasured Impairment amount after
immediately before Loss allocation of
classification as Impairment
held for sale (as per Loss
applicable Ind AS)
` ` `
Goodwill 7,50,000 (7,50,000) -
Property, Plant and 20,00,000 (82,474) 19,17,526
Equipment (carried at
revalued amounts)

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PAPER – 1 : FINANCIAL REPORTING 19

Building (carried at cost) 28,50,000 (1,17,526) 27,32,474
Investment in Equity 11,00,000 - 11,00,000

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c. o
Instruments

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Inventory 7,50,000 - 7,50,000

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em treatment in the books of N Ltd. (Functional Currency INR) s
Total 74,50,000 (9,50,000) 65,00,000

s g l a
lNaLtd. will recognize sales of ` 1,992 lakhs (24 lakhs Euro x ` 83)
(c) Accounting

g a
a Profit on sale of inventory = ` 1,992 lakhs – ` 1,660 lakhs = ` 332 lakhs.
On balance sheet date, receivable from H Ltd. will be translated at closing rate i.e.
1 Euro = ` 85.
Therefore, unrealised forex gain will be recorded in standalone profit and loss of
` 48 lakhs [i.e. (` 85 - ` 83) x 24 lakhs]
Journal Entries

om Dr.
(` in lakhs) (` in lakhs)
1 st February, 2023 H Ltd. A/c
To Salesm
.c 1,992

s e recorded on 1,992

g l
(Being revenue
a
a
initial recognition)
31st March, 2023 H Ltd. A/c Dr. 48
To Foreign exchange
difference (unrealised) 48
(Being foreign exchange
difference recorded at year end)
Accounting treatment in the books of H Ltd. (Functional currency EURO)

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H Ltd. will recognize inventory on 1 st February, 2023 of Euro 24 lakhs which will also be

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its closing stock at year end.

c. o Journal Entry
s em
s em l a
la a24glakhs
(in Euros) (in Euros)

ag 1 st February, 2023 Purchase
To N Ltd.
Dr.
24 lakhs

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20 FINAL EXAMINATION: NOVEMBER, 2023

Question 4
(a) Ore Exploration Ltd. is engaged in the manufacturing of drilling and mining equipment
for over last 25 years. The management of the company is planning to expand the
manufacturing activities for which funds are needed. On 1 st April, 2019, to meet out the
financial requirement Ore Exploration Ltd. issued 50,000, Compulsory Convertible
Cumulative Preference Shares (CCCPS) of ` 100 each. These preference shares carry
a coupon rate of 12% p.a. and is payable every year. The Company has substantial
profits for payment of preference dividend. Under the terms of instrument, every two
preference shares are convertible into 1 equity share of ` 100 each at the end of 4 th year.
The prevailing annual market interest rate for a similar debt without conversion option is
15% per annum. The transaction cost of completing the issue process of the instrument
is 3% of the proceeds. The effective interest rate is 16.60% per annum.
You are required to:
(i) Compute the liability and equity component;
(ii) Provide the ‘liability' ledger account for various years at amortized cost using the
effective interest rate;
(iii) Pass necessary accounting entries for the whole period.
Note: Use the following present values of Re. 1 at different discounting factors for the
purpose of calculation, wherever required.

Year 1 2 3 4
13% 0.8850 0.7831 0.6931 0.6133
15% 0.8696 0.7561 0.6575 0.5718
18% 0.8475 0.7182 0.6086 0.5158

(14 Marks)
(b) Discuss the cost constraint on useful financial information.
OR
Discuss the characteristics of good financial statements  . (6 Marks)


PS: Read ‘Financial Statements’ as ‘Financial Information’.

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PAPER – 1 : FINANCIAL REPORTING 21

Answer

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(a) This is a compound financial instrument with two components – liability representing

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present value of future cash outflows (i.e. dividend) and balance represents equity

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component.

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(i) Computation of Liability & Equity Component

l a s ag
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Particulars Cash Flow Discount Net present

a
Factor @ 15% Value
1 April, 2019
st 0 1 0.00
31st March, 2020 Dividend 6,00,000 0.8696 5,21,760
31st March, 2021 Dividend 6,00,000 0.7561 4,53,660
31st March, 2022 Dividend 6,00,000 0.6575 3,94,500
31st March, 2023 Dividend 6,00,000 0.5718 3,43,080

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Total Liability 17,13,000

.
Component

s em
Total Proceeds 50,00,000
Total Equity
g l a
Component (Bal fig)
a 32,87,000

a. Allocation of transaction costs

Particulars Amount Allocation of Net Amount
3% transaction
cost
Liability Component 17,13,000 51,390 16,61,610

m
Equity Component 32,87,000 98,610 31,88,390

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Total Proceeds 50,00,000
.c o
1,50,000 48,50,000

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em
b. Accounting for liability at amortised cost:

s g l a
la
Initial accounting = Present value of cash outflows less transaction costs
Subsequent accounting = At amortised cost, ie,ainitial fair value adjusted
-

ag -
for interest and repayments of the liability.

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22 FINAL EXAMINATION: NOVEMBER, 2023

Opening Interest Cash Closing
Financial @ 16.60% Flow Financial
Liability Liability
A B A+B-C
C
1 st April, 2019 16,61,610 - - 16,61,610
31st March, 2020 16,61,610 2,75,827 6,00,000 13,37,437
31st March, 2021 13,37,437 2,22,015 6,00,000 9,59,452
31st March, 2022 9,59,452 1,59,269 6,00,000 5,18,721
31st March, 2023 5,18,721 81,279* 6,00,000 -

* Difference of ` 4,829 (i.e. 86,108 – 81,279) is due to approximation.
(ii) Preference Shares (Liability) Account
Date Particulars Amount Date Particulars Amount
31.3.2020 To Bank 6,00,000.00 1.4.2019 By Bank 16,61,610.00
31.3.2020 To Balance c/d 13,37,437.00 31.3.2020 By Finance Cost 2,75,827.00
19,37,437.00 19,37,437.00
31.3.2021 To Bank 6,00,000.00 1.4.2020 By Balance b/d 13,37,437.00
31.3.2021 To Balance c/d 9,59,452.00 31.3.2021 By Finance Cost 2,22,015.00
15,59,452.00 15,59,452.00
31.3.2022 To Bank 6,00,000.00 1.4.2021 By Balance b/d 9,59,452.00
31.3.2022 To Balance c/d 5,18,721.00 31.3.2022 By Finance Cost 1,59,269.00
11,18,721.00 11,18,721.00
31.3.2023 To Bank 6,00,000.00 1.4.2022 By Balance b/d 5,18,721.00
31.3.2023 By Finance Cost 81,279.00
6,00,000.00 6,00,000.00

(iii) Journal Entries to be recorded for entire term of arrangement
Date Particulars Debit Credit
1.4.2019 Bank A/c Dr. 48,50,000
To Preference Shares (Liability) A/c 16,61,610
To Equity Component of Preference shares A/c 31,88,390
(Being compulsorily convertible preference shares issued.
The same are divided into equity component and liability
component as per the calculation)

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PAPER – 1 : FINANCIAL REPORTING 23

31.3.2020 Preference Shares (Liability) A/c Dr. 6,00,000
To Bank A/c 6,00,000

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c. o
(Being dividend at the coupon rate of 12% paid to the

m
c. o To Preference Shares (Liability) A/c Dr.
shareholders)

em
s
31.3.2020 Finance cost A/c 2,75,827

m
e (Being interest as per EIR recorded) l a
s
2,75,827

g a
l 31.3.2021 Preference Shares (Liability) A/c ag
a
Dr. 6,00,000
To Bank A/c 6,00,000
(Being dividend at the coupon rate of 12% paid to the
shareholders)
31.3.2021 Finance cost A/c Dr. 2,22,015
Preference Shares (Liability) A/c 2,22,015
(Being interest as per EIR recorded)
31.3.2022 Preference Shares (Liability) A/c Dr. 6,00,000
To Bank A/c
m
(Being dividend at the coupon rateoof 12% paid to the
6,00,000

. c
em
shareholders)
31.3.2022 Finance cost A/c
a s
l recorded)
Dr. 1,59,269

(Being interest as a gEIR
Preference Shares
per
(Liability) A/c 1,59,269

31.3.2023 Preference Shares (Liability) A/c Dr. 6,00,000
To Bank A/c 6,00,000
(Being dividend at the coupon rate of 12% paid to the
shareholders)
31.3.2023 Finance cost A/c Dr. 81,279
To Preference Shares (Liability) A/c 81,279

om
(Being interest as per EIR recorded)

m c. 25,00,000
c. o
31.3.2023 Equity Component of Preference shares A/c Dr. 31,88,390

m
se 6,88,390
To Equity Share Capital A/c

s em la
To Securities Premium A/c

la
(Being Preference shares converted in equity shares and
a g
ag
remaining equity component is recognised as securities
premium)

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24 FINAL EXAMINATION: NOVEMBER, 2023

(b) Either
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.
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 Ind AS, 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 Ind AS. In most situations, assessments are
based on a combination of quantitative and qualitative information.
Because of the inherent subjectivity, different individual’s assessments of the costs and
benefits of reporting particular items of financial information will vary. Therefore, ICAI
seeks to consider costs and benefits in relation to financial reporting generally, and not
just in relation to individual reporting entities.
(b) OR
Characteristics of good financial information are:
1. Relevance
“Relevant financial information”
• Is financial information with (a) predictive value or (b) confirmatory value or
both
• Makes it capable of making a difference in decisions made by users
• Makes it relevant financial information
Financial information has predictive value if it can be used as an input to processes
employed by users to predict future outcomes. Financial information need not be a
prediction or forecast to have predictive value. Financial information with predictive
value is employed by users in making their own predictions.
Financial information has confirmatory value if it provides feedback about (confirms
or changes) previous evaluations.
The characteristic of ‘relevance’ also includes the concept of materiality.
Information is material if omitting, misstating or obscuring it could reasonably be

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PAPER – 1 : FINANCIAL REPORTING 25

expected to influence decisions that the primary users of general-purpose financial
reports make on the basis of those reports, which provide financial information

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about a specific reporting entity.

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2. Faithful Representation

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e a
To be useful, financial information must also faithfully represent the substance of

s l
a ag
the phenomena that it purports to represent. In many circumstances, the substance
l
ag
of an economic phenomenon and its legal form are the same. If they are not the
same, providing information only about the legal form would not faithfully represent
the economic phenomenon.
To be a perfectly faithful representation, a depiction would have following three
characteristics:
 Complete: A complete depiction includes all information necessary for a user
to understand the phenomenon being depicted, including all necessary
descriptions and explanations.

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 Neutral: A neutral depiction is without bias in the selection or presentation of

emexercise of prudence. Prudence is the exercise
financial information.
Neutrality is supported by s
la judgements under conditions of uncertainty. The
the

g
a means that assets and income are not overstated and
of caution when making
exercise of prudence
liabilities and expenses are not understated.
 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. In
this context, free from error does not mean perfectly accurate in all respects.

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Question 5

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(a) A Ltd. announced a stock appreciation right (SAR) on 1 st April, 2020 for each of its
m
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employees. The scheme gives the employees the right to claim cash payment equivalent

s em g la
to an excess of market price of Company’s shares on exercise date over the exercise

gla a
price of ` 250 per share in respect of 100 shares, subject to a condition of continuous

a employment of 3 years. The SAR is exercisable after 31st March, 2023 but before
30th June,2023. The fair value of SAR was:
- ` 42 in 2020-2021;

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26 FINAL EXAMINATION: NOVEMBER, 2023

- ` 46 in 2021-2022; and
- ` 48 in 2022-2023.

In 2020-2021, the company estimates that 2% of its employees shall leave the Company
annually. This was revised to 3% in 2021-2022. Actually:
- 15 employees left the company in 2020-2021;

- 10 employees left the company in 2021-2022; and
- 8 employees left the company in 2022-2023.
The SAR therefore actually vested in 492 employees on 30 th June, 2023  and when SAR
was exercised, the intrinsic value was ` 50 per share.
Compute, by fair value method, the SAR expense for financial years;
- 2020-2021;
- 2021-2022;
- 2022-2023;
- 2023-2024.
Also provide SAR ledger from inception till closure. Discuss whether this account is in
the nature of liability or equity? (8 Marks)
(b) Haymond Limited has three segments H, M & D. The following information is provided
for the year ending 31 st March, 2023: All amounts are in ` Lakhs

Particulars Segments Head Office
H M D
Sales to M 500 - -
Sales to D - 5 -
Other Sales (Domestic) 10 - -
Sales (Export) 680 170 40
Operating Profit /(Loss) before tax 30 5 (8)


PS: Read ‘30th June, 2023’as 31 st March, 2023’.

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PAPER – 1 : FINANCIAL REPORTING 27

Reallocated cost from Head Office 4 2 2

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Interest cost 2 3 1

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Fixed Assets  20 4 12 5

.c o em
s
Net Current Assets 12 4 9 3

e m l a
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Long Term Liabilities 2 1 12 2

a
l Information:
ag (i) Share Capital amounts to ` 40,00,000
Other

(ii) Reserve & Surplus amounts to ` 12,00,000
Prepare segment information as per Ind AS 108. (8 Marks)
(c) Beauty Ltd. purchased a patent right of a face-wash on 1 st April, 2020 for ` 4,20,000;
which has a legal life of 10 years. Due to the highly competitive nature of the product,

m
the management of the company estimates a useful life of only 6 years. Straight line

. co
amortization is determined by the management to be the best method. As at

em
1 st April, 2021, management is uncertain that the process can actually be made

l a s
economically feasible and decides to write down the patent to an estimated market value

ag
of ` 2,00,000 and also decides to amortize it over 2 years. As at 1 st April, 2022, having
perfected the related production process, the asset is now appraised at a value of
` 3,50,000. Furthermore, the estimated useful life is now believed to be 3 more years.
You are required to determine the value of intangible asset at the end of financial year:
- 2020-2021;
- 2021-2022;

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c. (4oMarks)
- 2022-2023.

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c. o Answer m
Also, discuss the treatment of revaluation gain in financial year 2022-2023.

em l a se
las a g
g
(a) Number of employees at the grant date to whom the SARs were granted = 492 + 15 +

a 10 + 8 = 525 employees


PS: Read ‘Fixed Assets’ as ‘Non-current Assets’.

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28 FINAL EXAMINATION: NOVEMBER, 2023

The amount recognized as an expense in each year and as a liability at each year -end
is as follows:

Year Expense Liability Calculation of Liability
` `
31st March, 2021 6,86,000 6,86,000 [(525-15) x 0.98 x 0.98) x 100 x 42 x
1/3]
31st March, 2022 8,01,333 14,87,333 [{(525-15-10) x 0.97x 100 x 46 x 2/3}
– 6,86,000]
31st March, 2023 8,74,267 23,61,600 [525-15-10-8] x 48 x 100-1487333
30th June, 2023 (98,400)* 0 [(492 x 100 x 50) - 23,61,600]

*Difference of opening liability ` 23,61,600 and actual liability paid ` 24,60,000 [(492 x
100 x 50) - 23,61,600] is recognised to Profit and loss i.e. ` 98,400.
SAR Ledger
Date Particular Amount Date Particular Amount
31.3.2021 To Balance 6,86,000 31.3.2021 By Employee
c/d benefits expenses 6,86,000
6,86,000 6,86,000
31.3.2022 To Balance 14,87,333 1.4.2021 By Balance b/d 6,86,000
c/d
31.3.2022 By Employee
benefits expenses 8,01,333
14,87,333 14,87,333
31.3.2022 To Balance 23,61,600 1.4.2022 By Balance b/d 14,87,333
c/d
31.3.2023 By Employee
benefits expenses 8,74,267
23,61,600 23,61,600
30.6.2023 To Bank 24,60,000 1.4.2022 By Balance b/d 23,61,600
30.6.2023 By Employee
benefits expenses 98,400
24,60,000 24,60,000

SAR Account is in the nature of liability because it is a cash settled share-based
transaction which is summed up on payment of cash to the employees at the end of the
exercise period.

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(b) (A) Information about operating segment

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(1) The company’s operating segment comprise: H, M & D

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(2) Segment revenue, results and other information

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Segment Information / Report

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(All amounts are ` in lakhs)

a Reportable
Segments
Head Office/ Total
Unallocated
H M D items
1. Segment Revenue
Sales:
Domestic 10 − − − 10
Export 680 170 40 − 890

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External Sales 690 170 40 900

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em1,190 175
Inter-segment sales 500 − − 505

Less: Inter-segment sales as (500)
Total Sales 40 1,405

Total Sales / Revenue ag
l 690 (5)
170
−
40
− (505)
900
2. Results
Segment result 30 5 (8) 27
Reallocated cost (4) (2) (2) (8)
Profit from operation before 26 3 (10) 19
interest, taxation and Exceptional
items
Finance cost (Interest expense) (2) (3) (1)
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(6)

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Profit before tax and exceptional 24 0 (11)
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items

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3. Information in relation to

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assets and liabilities
12a
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ag Reportable segment non-current
assets
20 4 5 41

Reportable segment net current 12 4 9 3 28
assets

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30 FINAL EXAMINATION: NOVEMBER, 2023

Total Assets 32 8 21 8 69
Non-current liabilities 2 1 12 2 17

B. Geographical Information

` in lakhs
Domestic Sales Export Sales Total
External sales 10 890 900

(c) Value as on 31 st March 2021
Original cost ` 4,20,000
Less: Amortisation (4,20,000 / 6 years) (` 70,000)
Net carrying value as on 31 st March 2021 ` 3,50,000
Value as on 31 st March 2022
On 1 st April 2021, the downward revaluation is recorded by writing down the asset to the
estimated value of ` 2,00,000, which necessitates a ` 1,50,000 charge to profit & loss
(carrying value ` 3,50,000 less fair value ` 2,00,000).
Amortisation provided for the financial year 2021-2022 is ` 1,00,000 (` 2,00,000/2)
Net value as on 31 st March 2022 = ` 2,00,000 – ` 1,00,000 = ` 1,00,000.
Value as on 31 st March 2023
As on 1 st April 2022, the carrying value of the patent is ` 1,00,000.
Revalued amount of patent is ` 3,50,000.
Out of total revaluation gain of ` 2,50,000, ` 1,50,000 will be charged to profit & loss
and balance amount of ` 1,00,000 (` 2,50,000 – ` 1,50,000) will be credited to
revaluation reserve.
Amortisation provided for the financial year 2022-2023 is ` 1,16,667 (` 3,50,000 / 3)
Net value as on 31 st March 2023 = ` 3,50,000 – ` 1,16,667 = ` 2,33,333.
Question 6
(a) Diamond Limited is transitioning to Ind AS. It has certain investments in Ruby Limited's
Convertible Debt Instruments, which are currently (on the date of transition to Ind AS)
exercisable and would provide Diamond Limited with a controlling stake over
Ruby Limited on exercise of the conversion rights. Diamond Limited evaluated that

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Ruby Limited should be treated as its subsidiary under Ind AS. Hence it would require
consolidation in its Ind AS Consolidated Financial Statements. Ruby Limited was not

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considered as a Subsidiary, Associate or a Joint Venture under Previous GAAP.

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How should Ruby Limited be consolidated on transition to Ind AS. Assume that

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Diamond Limited has opted to avail the exemption from retrospective re -statement of
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past business combinations as per applicable Ind AS? (5 Marks)

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(b) Poor Limited borrowed 120 Lakhs from a Scheduled Bank. The terms of loan are as
under:
- Rate of Interest @ 10% per annum, payable yearly
- Tenure of Loan 12 Years.
- Principal to be paid at the end of tenure i.e. 12 th Year.
Poor Limited defaulted in payment of Interest in year 5, 6, 7 and 8. A loan reschedule
agreement took place at the end of 9 th year with the Bank. As per the agreement,

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Poor Limited is required to pay ` 220 Lakhs at the end of 10 th year. The default continued
till the end of 10 th year.
c
. Ind AS:
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e of the 10th Year.
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You are required to calculate as per relevant
(i) Book Value of the Loan at theaend
gl to the Bank on Account of Rescheduling.
(ii) Additional amount to beapaid
(assume interest is compounded in the case of default). (5 Marks)
(c) A shipping company is required by law to bring all its ships into dry dock every 5 years
for a major inspection and overhaul. Overhaul expenditure might at first sight seem to
be repair to the ships but is actually a cost incurred in getting the ship back into a
seaworthy condition. As such the costs must be capitalised.

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A ship that cost ` 40 Crore with 20-year life must have a major overhaul every 5 years.

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The estimated cost of the first overhaul is ` 10 Crores.

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(i) the depreciation charged for first five years;

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(ii) the carrying amount at the end of 5 year. th (5 Marks)
(d) HG Incredibles Limited had in the recent past made a right issue. In its offer document
to its members, it had projected a surplus of ` 50 crores during the year ending
31.03.2023. The draft result for the year ended 31.03.2023, prepared on the hitherto

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32 FINAL EXAMINATION: NOVEMBER, 2023

followed accounting policies and presented for perusal of the Board of Directors showed
a surplus of ` 5 Crores. The Board in consultation with the Managing Director, decided
on the following:
(i) Value year-end Inventory at Works Cost ( ` 40 Crores) instead of hitherto method
of valuation of inventory at Prime Cost ( ` 20 Crores);
(ii) Not to provide for "After Sales Expenses" during the warranty period. Till the last
year, provision for 1% of Sales used to be made under the concept of "matching of
costs against revenue" and actual expenses used to be charged against provision.
The Board now decided to account for expenses as and when actually they are
incurred. Sales during the year was ` 800 Crores;
(iii) Provide depreciation for the year on Straight Line Method on account of substantial
additions in Gross Block during the year, instead of on Reducing Balance Method,
which was hitherto adopted. As a consequence, ` 21 Crores depreciation is now
less charged than it would have been provided under the old method. ( ` 67 Crores
on Reducing Balance method and ` 46 Crores in Straight Line Method).
(iv) Provide for other than temporary fall in the value of investments, which fall took
place in last 6 years, amounting to ` 12 Crores.
Discuss the above situations as per applicable Ind AS, particularly Ind AS 8. Whether
the above are changes in accounting policies or changes in estimates? (5 Marks)
Answer
(a) Ind AS 101 prescribes an optional exemption from retrospective restatement in relation
to past business combinations. Ind AS 101 prescribes that when the past business
combinations are not restated and a parent entity had not consolidated an entity as a
subsidiary in accordance with its previous GAAP (either because it was not regarded as
a subsidiary or no consolidated financial statements were required un der previous
GAAP), then the subsidiary’s assets and liabilities would be included in the parent’s
opening consolidated financial statements at such values as would appear in the
subsidiary’s separate financial statements if the subsidiary were to adopt th e Ind AS as
at the parent’s date of transition. For this purpose, the subsidiary’s separate financial
statements would be prepared as if it was a first-time adopter of Ind AS i.e. after applying
the relevant first-time adoption mandatory exceptions and voluntary exemptions. In
other words, the parent will adjust the carrying amount of the subsidiary’s assets and
liabilities to the amounts that Ind AS would require in the subsidiary’s balance sheet.
The deemed cost of goodwill equals the difference at the date of transition between:

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(a) the parent’s interest in those adjusted carrying amounts; and

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(b) the cost in the parent’s separate financial statements of its investment in the

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subsidiary.

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The measurement of non-controlling interest and deferred tax follows from the

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e be noted here that the above exemption is available only under those gl
measurement of other assets and liabilities.
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lcircumstances where the parent, in accordance with the prev ious GAAP, has nota
may

a presented consolidated financial statements for the previous year; or where the
consolidated financial statements were prepared in accordance with the previous GAAP,
but the entity was not treated as a subsidiary, associate or joint vent ure under the
previous GAAP.
(b) (i) Computation of book value of the loan at the end of 10th year
= ` 1,20,00,000 x 1.10 x 1.10 x 1.10 x 1.10 x 1.10 x 1.10

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= ` 2,12,58,732 (i.e. adding interest for 5 th to 10 th year)

emthe end of the 10 year = ` 2,20,00,000
(ii) Computation of additional amount to be paid to bank on rescheduling

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laon rescheduling = ` 2,20,00,000 - ` 2,12,58,732
Rescheduled amount to be paid at th

a g
Additional amount to be paid
= ` 7,41,268
(c) (i) Computation of depreciation charged for the first 5 years
The depreciation charge for the first five years of the asset’s life will be as follows:
Overhaul Ship (other than overhaul
component component)

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(` in crores) (` in crores)

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Cost 10 30

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Years 5 20

s em Depreciation per year 2
gla
1.50

gla Total accumulated depreciation for the first five years will be -
a
a = (` 2 crores + ` 1.50 crores) x 5 years
= ` 17.50 crores

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34 FINAL EXAMINATION: NOVEMBER, 2023

(ii) Computation of carrying amount of the ship at the end of 5 th year
Carrying amount of the ship at the end of 5 th year = ` 40 crores - ` 17.50 crores
= ` 22.50 crores
(d) (i) Paragraph 36(a) of Ind AS 2, ‘Inventories’, specifically requires disclosure of ‘cost
formula used’ as a part of disclosure of accounting policies adopted in measurement
of inventories.
Accordingly, a change in cost formula is a change in accounting policy. The entity
should apply the change in the accounting policy retrospectively. For retrospective
application of a change in accounting policy, adjust the opening balance of each
affected component for the earliest prior period presented and the other
comparative amounts disclosed for each prior period presented as if the new
accounting policy had always been applied. Usually, the adjustment is made to
retained earnings.
Income tax effect due to change in accounting policy will be accounted for in
accordance with Ind AS 12.
(ii) Here, since the question talks about making of provision, it is assumed that
assurance warranty has been provided by the entity. Further, providing for 1%
against after sales expenses is an accounting policy decision. Now since, the
company has decided not to make provision for such expenses but to account for
the same as and when expenses are incurred, there is a change in accounting
policy decision.
The change in accounting policy is accounted for retrospectively. For retrospective
application of a change in accounting policy, adjust the opening balance of each
affected component for the earliest prior period presented and the other
comparative amounts disclosed for each prior period presented as if the new
accounting policy had always been applied. Usually, the adjustment is made to
retained earnings.
Income tax effect due to change in accounting policy will be accounted for in
accordance with Ind AS 12.
(iii) Determination of depreciation method involves an accounting estimate and thus
depreciation method is not a matter of an accounting policy. Accordingly, as per
Ind AS 16, a change in depreciation method should be accounted for as a change
in accounting estimate in accordance with Ind AS 8. Change in accounting estimate

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is accounted for prospectively. However, the effect of the change is recognised as
income or expense of the year in which the change is made. The effect, if any, on

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future periods is recognised as income or expense in those future periods.

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(iv) Accounting for investment made by the entity falls under the purview of Ind AS 109

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‘Financial Instruments’. As per Ind AS 109, subsequent measurement of financial

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instruments is done on following basis:

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(a) Measured at Amortised cost

(c) Measured at Fair value through Profit or Loss (FVTPL)
In case the entity has subsequently measured its financial asset i.e. investment on
the basis of FVTOCI or FVTPL, then change in fair value would have been recorded
earlier in previous reporting period too. In such a case, there is no change in
accounting policy or accounting estimate. However, if the entity had not accounted

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for previous changes in its books, then it is an error. If the material error occurred

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before the earliest prior period presented, an entity shall, unless impracticable,

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correct the same retrospectively in the first set of financial statements approved for

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issue after their discovery by restating the opening balances of assets, liabilities

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and equity for the earliest prior period presented. Further, fair value change is to
be accounted for at every reporting date. Hence, restatement of the comparative
amounts for the prior period(s) presented in which the error occurred is also
required to be done.
Further, if an entity reclassifies any financial asset, it must do so prospectively from
reclassification date. The entity shall not restate any previously recognised gains,
losses (including impairment gains or losses) or interest. Reclassification of
financial asset will be accounted for in accordance with the guidance given in

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Ind AS 109.

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