GFRS Book

FINAL COURSE
(Revised Scheme of Education and Training)
ELECTIVE PAPER : 6E
Global Financial Reporting

Standards
[Relevant for May, 2021 Examination and onwards]
CASE STUDY DIGEST
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
© The Institute of Chartered Accountants of India

This Case Study Digest has been prepared by the faculty of the Board of Studies. The objective of
this digest is to provide good number of case studies for practice to the students to enable them to
strengthen their preparation in the subject. In case students need any clarifications or have any
suggestions to make for further improvement of the material contained herein, they may write to
the Director of Studies.
All care has been taken to provide interpretations and analysis in a manner useful for the students.
However, the digest has not been specifically discussed by the Council of the Institute or any of its
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Edition : February, 2021
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Preface
Under the new scheme of Education and Training, at Final level of CA course, an Elective
paper on Global Financial Reporting Standards (GFRS) has been included. The aim to
include this paper is to produce global accountants who have knowledge of IFRS and can
contribute to the preparation of financial statements of multi-national entities by
disseminating their knowledge on IFRS.
The paper aims specialisation which can be achieved both with conceptual clarity of the
standards as well as dissemination of the acquired knowledge in the practical scenario.
With this intent, testing of the elective paper has been designed i.e. open book examination
where in case studies will be asked.
The Board of Studies (BoS) has developed the Case Study Digest to help the students with
better understanding of the subject. The case studies given herein are application oriented
and test the conceptual clarity of the standards under practical scenarios. Each case study
is a mix of MCQs and descriptive questions involving computations / application / analysis
/ evaluation / synthesis in the ratio of 40:60. In this paper, case studies have appropriate
mix of questions testing student’s ability on answering recognition, measurement,
presentation and disclosure aspects of the standards.
It is advised that before working on case studies given in the digest, be thorough with the
provisions of IFRS discussed in the GFRS Study Material. After attaining conceptual clarity
from the Study Material, students shall work-out the case studies independently before
referring the answers. In this manner, they will be able to identify the gaps in the
preparation for the examination and will be able to hone their application and analytical
skills to write the examination with confidence.
The solutions of the case studies have been worked out on the basis of certain assumptions
/ views derived from the facts given in the question or language used in the question. It
may be possible to work out the solutions to the case studies in a different manner based
on the assumption made or view taken.

While due care is taken in preparation of this Digest error free, however if any errors or
omissions are noticed, the same may be brought to the attention of the Director of Studies.
W ishing you happy reading!
iv

CASE STUDY 1
Ayushman Ltd is a manufacturer of Chemicals. As per the vision document approved by the
Board of Directors, the company embarked upon having inorganic growth plans through
acquisitions. To implement this initiative the company ventured ahead to acquire new companies
in the same sector. It identified two companies, Basti Ltd and Cinkara Ltd with similar operations
and synergies, which could help the company further for its growth in this sector.
The Statement of Financial Position of Ayushman Ltd as at 31 March 20X3 was as follows:
` in million
ASSETS
Non-current assets:
Property, plant and equipment (Note 1) 210
Investments:
– in Basti Ltd - 80% (Note 1) 180
- in Cinkara Ltd - 40% (Note 3) 52
– in Dinkar Ltd (Note 6) 15
Non-current assets 457
Current Assets:
Inventories 65
Financial assets
Trade receivables (Note 5) 55
Cash and cash equivalents 12
Current Assets 132
Total Assets 589
EQUITY AND LIABILITIES

Equity
Share capital (` 1 share) 180
Retained earnings (Note 4) 183
Other components of equity 90
Total equity 453
Non-current liabilities:
Contingent consideration (Note 1) 20

1.2 GLOBAL FINANCIAL REPORTING STANDARDS
Financial liabilities
Long-term borrowings (Note 8) 50
Deferred tax 15
Total non-current liabilities 85
Current liabilities:
Trade and other payables (Note 5) 34
Short term borrowings 17
Total current liabilities 51
Total equity and liabilities 589
The Chief Financial Officer of the company provided the following details to you and has asked
you as a Chartered Accountant to comprehend the issues involved and assist the CFO in
completing the consolidation for the entity related to new acquisitions.
Detailed notes
Note 1: On 1 October 20X1, Ayushman Ltd did a detailed financial due diligence on an entity
named Basti Ltd and went ahead to acquire 80% shares in Basti Ltd by means of a share
exchange. Ayushman Ltd issued one share for every two shares acquired in Basti Ltd.
On 1 October 20X1, the market value of an Ayushman Ltd share was ` 4 and the market value
of a Basti Ltd share was ` 1.80. The terms and conditions of the business combination
stipulates that, an additional cash payment be made to the former shareholders of Basti Ltd on
31 December 20X3 based on its post-acquisition financial performance in the first two years
since acquisition. The fair value of this additional payment was ` 20 million on 1 October 20X1.
The post-acquisition performance of Basti Ltd was such that the fair value of this payment had
increased to ` 22 million by 31 March 20X3.
The investment in Basti Ltd and the non-current liabilities of Ayushman Ltd at 31 March 20X2
include ` 20 million with respect to the additional payment due to be made on
31 December 20X3.
On 1 October 20X1 the individual financial statements of Basti Ltd showed the following
balances:
– Retained earnings to the tune of ` 41 million.
– Other components of equity ` 3 million.
As a part of the financial due diligence process, the directors of Ayushman Ltd carried out a fair
value exercise to measure the identifiable assets and liabilities of Basti Ltd at 1 October 20X1.

CASE STUDIES 1.3
The following matters emerged on completion of the exercise:

– A property, having a carrying amount of ` 50 million (depreciable amount ` 30 million),
had a fair value of ` 70 million (depreciable amount ` 33 million). The estimated future
economic life of the depreciable amount of the property at 1 October 20X1 was 30 years.
The title of the property was still held by Basti Ltd at 31 March 20X3.
– Plant and equipment, having a carrying amount of ` 60 million, had an estimated fair
value of ` 64 million. The estimated future economic life of the plant at 1 October 20X1
was four years. This plant was still under the title of Basti Ltd at 31 March 20X3.
– Inventory, having a carrying amount of ` 30 million, had an estimated market value of
` 31 million. This entire inventory had been sold since 1 October 20X1.
The fair value adjustments have not been reflected in the individual financial statements of Basti Ltd.
The Statement of Financial Position of Basti Ltd as at 31 March 20X3 was as under:
` in million
ASSETS
Non-current assets:
Property, plant and equipment 165
Investments: Nil
Non-current assets 165
Current Assets:
Inventories (Note 4) 36
Financial assets
Trade receivables 38
Current Assets 81
Total Assets 246
Equity
Share capital of ` 1 each 100
Retained earnings 67
Other components of equity 5
Total equity 172
Long-term borrowings 35
Deferred tax 9

Trade and other payables (Note 5) 23
In accordance with the group policy, in the consolidated financial statements the fair value
adjustments will be regarded as temporary differences for the purposes of computing deferred tax.
The rate of tax is 20% wherever required.
It is the group policy to value the non-controlling interest in subsidiaries at the date of acquisition
at fair value. The fair value of an equity share in Basti Ltd at 1 October 20X1 can be used for
this purpose.
Note 2 : On 1 October 20X1, the directors of Ayushman Ltd identified through Financial Due
Diligence that Basti Ltd comprised five cash-generating units and allocated the goodwill arising
on acquisition equally across each cash-generating unit. No impairment of goodwill was
apparent in the year ended 31 March 20X2.
During the year ended 31 March 20X3, four of the five cash-generating units performed very
satisfactorily and no impairment of the goodwill allocated to these units had occurred. However,
the performance of the remaining unit was below expectations. During the impairment review
carried out at 31 March 20X3 assets (excluding goodwill) having a carrying amount in the
consolidated financial statements of ` 50 million were allocated to this unit. The recoverable
amount of these assets was estimated at ` 52 million.
Note 3: On 1 April 20X2, Ayushman Ltd paid ` 52 million for 40% of the equity shares of Cinkara
Ltd, a company within the same sector where Ayushman Ltd operates. The retained earnings
of Cinkara Ltd on 1 April 20X2 were ` 60 million. According to the CFO, ignore any deferred
taxation implications of the investment by Ayushman Ltd in Cinkara Ltd. The investment in
Cinkara Ltd has not suffered any impairment since 1 April 20X2.
The Statement of Financial Position of Cinkara Ltd as at 31 March 20X3 was as under:
` in million
ASSETS
Non-current assets :
Property, plant and equipment 120
Investments: Nil
Total non-current assets 120

CASE STUDIES 1.5
Current Assets:
Inventories (Note 4) 29
Financial assets
Trade receivables (Note 5) 35
Total current assets 73
Total Assets 193

Equity
Share capital 60
Retained earnings 64
Other components of equity Nil
Total equity 124
Financial liabilities:
Long-term borrowings 30
Deferred tax 12
Financial liabilities:
Trade and other payables 21
Note 4: The inventories of Basti Ltd and Cinkara Ltd at 31 March 20X3 included spares and
components purchased from Ayushman Ltd during the year at a cost of ` 16 million to Basti Ltd
and ` 10 million to Cinkara Ltd. Ayushman Ltd generated a gross profit margin of 25% on the
supply of these components. According to the CFO, ignore any deferred tax implications on it.
Note 5: The trade receivables of Ayushman Ltd included ` 5million receivable from Basti Ltd
and ` 4 million receivable from Cinkara Ltd in respect of the purchase of spares and components
(Refer Note 4). The trade payables of Basti Ltd and Cinkara Ltd included equivalent amount
payable to Ayushman Ltd.

Note 6: Ayushman Ltd’s investment in Dinkar Ltd does not provide Ayushman Ltd sole control,
joint control or significant influence. The investment was purchased on 1 July 20X2 for
` 15 million. The investment was classified as fair value through other comprehensive income.
The fair value of the investment in Dinkar Ltd on 31 March 20X3 was ` 16 million. In the tax
jurisdiction in which Ayushman Ltd is located unrealised profits on the revaluation of equity
investments are not subject to current tax. Any such profits are taxed only when the investment
is sold.
Note 7: As per the organization policy, on 1 April 20X1, Ayushman Ltd granted 5,000 share
options to each 1,000 key employees. The options are due to vest on 31 March 20X5 provided
the employees remain in employment as at 31 March 2021. On 1 April 20X1, the directors of
Ayushman Ltd estimated that 90% of the key employees would satisfy the vesting condition.
However, actual employee turnover was such that this estimate was revised to 92% on
31 March 20X2 and 93% on 31 March 20X3.
At 1 April 20X1 the fair value of each share option was estimated at ` 1.20. This estimate was
revised to `1.25 on 31 March 20X2 and ` 1.28 on 31 March 20X3. As per CFO’s instructions,
ignore the deferred tax implications on this item.
Ayushman Ltd correctly recognised this transaction in the financial statements for the year
ended 31 March 20X2.
However, they have made no additional adjustments in the financial statements for the year
Note 8: Based on approval of the Board of Directors, on 1 April 20X2 Ayushman Ltd issued
50 million bonds of ` 1 each at par. The annual interest payable on these bonds is 5% p.a.,
payable in arrears. The bonds are redeemable at par on 31 March 20X7 or convertible (at the
option of the bond-holders) into equity shares as on that date. On 1 April 20X2 investors in
bonds with no conversion option would have required an annual rate of return of 8%. On
1 April 20X2, the directors of Ayushman Ltd included ` 50 million in long-term borrowings in
respect of the bonds. The actual interest paid of ` 2.5 million was charged as a finance cost in
Ayushman Ltd’s income statement for the year ended 31 March 20X3.
Relevant discount factors are as under: 5% 8%
Present value of ` 1 payable at the end of year 5 78.4 paise 68.1 paise
Cumulative present value of ` 1 payable at the end of years 1-5 `4.33 `3.99
Note 9: On 1 July 20X2, a local statute was passed which necessitated Ayushman Ltd to
undertake modifications to its motor vehicles to enable reduction of harmful emissions. The
modifications should have been completed by 31 December 20X2 at an estimated cost to
Ayushman Ltd of ` 3 million. In fact by 31 March 20X3 none of the vehicles had been modified
although they continued to be used. It is quite likely that Ayushman Ltd will be fined
` 0.5 million per month for the illegal use of the vehicles. The directors of Ayushman Ltd intend

CASE STUDIES 1.7
to carry out the modifications during the year ended 31 March 20X4. They expect that a penalty
will become payable very shortly as legal action has commenced against Ayushman Ltd.
Based on the aforesaid details the Chief Financial Officer wants you assist him in preparing the
consolidated Statement of Financial Position of Ayushman Ltd as at 31 March 20X3.
Please provide detailed working notes to show the flow of transactions into the consolidated
Statement of Financial Position as at 31 March 20X3.
I. Multiples Choice Questions

1. What will be the amount of provision for fine for illegal use of vehicle, which
Ayushman Ltd have to make as on 31 March, 20X3.
(a) ` 3 million
(b) ` 0.5 million
(c) ` 1.5 million
(d) ` 6 million
2. What is the deferred tax amount in consolidated financials of Ayushman Limited as at
31 March 20X3?
(a) Deferred tax asset: ` 28.57 million
(b) Deferred tax liability: ` 28.67 million
(c) Deferred tax asset: ` 28.00 million
(d) Deferred tax liability: ` 28.50 million
3. Calculate the finance cost charged in the financial year 20X2-20X3 in Statement of Profit
or Loss, for 50 million bonds issued on 1 April 20X2.
(a) ` 2.5 million
(b) ` 3.522 million
(c) ` 1.995 million
(d) Nil, since the interest payable on bonds is to be routed through Retained earnings
4. Calculate the charge of share based payment to be recognised in statement of profit or
loss for the financial year 20X2-20X3.
(a) ` 1.38 million
(b) ` 2.79 million
(c) ` 1.41 million
(d) ` 5.58 million

5. What would be the increase in value of Investment in Dinkar Limited, during the period
financial year 20X2-20X3 to be shown in Other Comprehensive Income?
(a) ` 0.8 million
(b) ` 1.0 million
(c) ` 16 million
(d) ` 15.8 million
II. Descriptive Questions

6. You are required to prepare the consolidated statement of financial position of
Ayushman limited at 31 March 20X3, after consideration of each stated issue
mentioned in the case study.
ANSWER TO CASE STUDY 1
I. Answers to Multiple Choice Questions

1 Option (c) ` 1.5 million
Reason:
` 0.5 million per month x 3 month = ` 1.5 million
2 Option (b) Deferred tax liability: ` 28.67 million
Reason:
Refer W.N.10
3 Option (b) ` 3.522 million
Reason:
Refer W.N.7
Reason:
Refer W.N.6
5 Option (a) ` 0.8 million
Reason
` in million
Fair value of Investment in Dinkar Ltd. as on 1.7.20X2 15.00
Fair value of Investment in Dinkar Ltd. as on 31.3.20X3 16.00

CASE STUDIES 1.9
Increase in value of investment 1.00

Less: Tax @ 20% (0.20)
Net increase in value 0.80
II. Answers to Descriptive Questions

6. Consolidated Statement of Financial Position of Ayushman Ltd at 31 March 20X3
` in million
ASSETS
Non-current assets:
Property, plant and equipment (W.N.13) 397.35
Goodwill (W.N.3) 43.60
Investment in associate (W.N.10) 52.60
Other investments in Dinkar Ltd (15 + 1) 16.00
Total non-current assets 509.55
Current Assets:
Inventories (W.N.14) 97.00
Financial assets
Trade receivables (W.N.15) 88.00
Cash and cash equivalents (12 + 7) 19.00
Total current assets 204.00
Total Assets 713.55
Equity attributable to equity holders of the parent
Share capital 180.00
Retained earnings (W.N.6) 186.05
Other components of equity (W.N.9) 99.78
465.84
Non-controlling interest (W.N.5) 39.50
Total equity 505.34
Non-current liabilities
Long-term borrowings (45.05 (W.N.8) + 35) 80.05
Deferred tax liability (W.N.11) 28.67
Total non-current liabilities 108.72

Trade and other payables (W.N.16) 52.00
Contingent consideration 22.00
Short-term borrowings (17 + 7) 24.00
Provision for fines 1.50
Total current liabilities 99.50
Total equity and liabilities 713.55
Working Notes:
Shareholding ratio
Ayushman Ltd. Parent
Basti Ltd. Subsidiary 80 million shares/100 million shares = 80% holding by
Ayushman Ltd.
Cinkara Ltd. Associate 40% holding by Ayushman Ltd.
1. Statement showing changes in the net assets value of Basti Ltd.
1 October Change 31 March
20X1 20X3
` in million ` in million ` in million
Share capital 100.00 - 100.00
Retained earnings 41.00 26.00 67.00
Other components of equity 3.00 2.00 5.00
Property adjustment – see below 20.00 (0.15) 19.85
Plant and equipment adjustment (W.N.2) 4 (1.50) 2.50
Inventory adjustment 1.00 (1.00) Nil
Deferred tax on fair value adjustments (5.00) 0.53 (4.47)
(W.N.12)
Net assets for the consolidation 164.00 25.88 189.88
The post-acquisition increase in net assets is ` 25.88 million (` 189.88 million –

` 164.00 million). ` 2 million of this increase relates to other components of equity,
the balance of ` 23.88 million relates to retained earnings.

CASE STUDIES 1.11
2. Post-acquisition depreciation adjustments

Depreciation for the property = ` 0.15 million [(` 33 million – ` 30 million) x 1.5/30]
The closing adjustment is ` 19.85 million (` 20 million – ` 0.15 million)
Depreciation for the plant and equipment = ` 1.5 million [(` 64 million – ` 60 million) x 1.5/4]
The closing adjustment ` 2.5 million (` 4 million – ` 1.5 million)
3. Goodwill on consolidation (Basti Ltd)
` in million
Cost of investment:
Share exchange (80 million shares x ½ x ` 4 per share) 160.00
180.00
Fair value of non-controlling interest at date of acquisition
(20 million shares x ` 1.80 per share) 36.00
216.00
Net assets at 1 October 20X1 (W.N.1) (164.00)
Goodwill before impairment 52.00
Impairment (W.N.4) (8.40)
Goodwill after impairment 43.60
4. Impairment of goodwill
` in million
Carrying value of assets in cash generating unit 50.00
Allocated goodwill (20% x ` 52 million) (W.N 3) 10.40
Carrying amount of assets of CGU 60.40
Recoverable amount of assets of cash generating unit (52.00)
Goodwill impairment taken to W.N.3 8.40
5. Non-controlling interest in Basti Ltd
` in million
Fair value on date of acquisition (W.N.3) 36.00
20% of post-acquisition increase in net assets (` 25.88 million (W.N 1) 5.18
20% of goodwill impairment (` 8.4 million x 20%) (W.N.4) (1.68)
Carried to Statement of Financial Position 39.50

6. Retained earnings
` in million
Ayushman Ltd 183.00

Charge for share based payment for the period (W.N.7) (1.41)
Additional finance cost on bonds (3.52 – 2.50) (W.N.8) (1.02)
Provision for penalty for illegal operation of vehicles (0.5 x 3 month) (1.50)
Increase in fair value of contingent consideration
(` 22 million – ` 20 million) (2.00)
Basti Ltd (80% x ` 23.88 million) (W.N.1) 19.10
Cinkara Ltd [ (40% x (64–6)] 1.60
Unrealised profits on sales to Basti Ltd (16 million x 25%) (4.00)
Unrealised profits on sales to Cinkara Ltd (10 million x 25% x 40%) (1.00)
80% of impairment of goodwill on acquisition of Basti Ltd
(` 8·4 million (W.N.4) x 80%) (6.72)
7. Share based payment charge
` in
million
Expected total cost [(5,000 options x 1,000 employees x 93% x ` 1.20)] 5.58
Amount that should be recognized to date (2/4 x 5.58 million) 2.79
Recognised in draft financial statements (5,000 option x 1,000 employee x
92% x ` 1·20 x ¼) (1.38)
So additional amount to be recognized in Statement of Profit or Loss (2.79-1.38) 1.41
8. Convertible bonds
` in million
Liability element [(` 2·5 million x 3.99 + (` 50 million x 0.681)] 44.03

Equity component (balancing figure) 5.97
Total Proceeds 50.00
Opening liability 44.03

Finance cost for the period (8%) 3.52
Actual interest paid (2.50)
Closing liability 45.05

CASE STUDIES 1.13
9. Other components of equity
` in million
Ayushman Ltd 90.00

Add: Revaluation of investment in Dinkar Ltd
[(1 million – (20% (deferred tax) x 1million)] 0.80
Add: Share based payment (W.N.7) 1.41
Add: Convertible bonds (W.N.8) 5.97
Basti Ltd (80% x ` 2 million) (W.N.1) 1.60
10. Investment in Cinkara Ltd
` in million
Cost 52.00
Share of post-acquisition profits (W.N.6) [40% x (64-60)] 1.60
Unrealised profits (W.N.6) [10 x 25% x 40%] (1.00)
11. Deferred tax liability
` in million
A Ltd + B Ltd (15 + 9) 24.00

On revaluation of investment in D Ltd (W.N.9) 0.20
On fair value adjustments (W.N.12) 4.47
12. Deferred tax on fair value adjustments
1 October 20X1 31 March 20X3

` in million ` in million
Land adjustment 20.00 19.85
Plant and equipment adjustment 4.00 2.50
Inventory adjustment 1.00 Nil
Net taxable temporary differences 25.00 22.35
Related deferred tax (20%) 5.00 4.47

13. Property, plant and equipment
` in million
Ayushman Ltd 210.00

Basti Ltd 165.00
Fair value adjustment of property (W.N.2) 19.85
Fair value adjustment of plant and equipment (W.N.2) 2.50
14. Inventories
` in million
Ayushman Ltd 65.00
Basti Ltd 36.00
Less: Unrealised profits on sales to Basti Ltd (16 million x 25%) (4.00)
15. Trade and other receivables

` in million
Ayushman Ltd 55.00
Basti Ltd 38.00
93.00
Less: Inter-company adjustment (5.00)
16. Trade and other payables

` in million
Ayushman Ltd 34.00
Basti Ltd 23.00
57.00
Less: Inter-company adjustment (5.00)

CASE STUDY 2
BC Ltd is a listed entity. On 10 April 20X3, it announced various employee incentive schemes,
setting out the names of the employees, the objective of the scheme and a deadline by which
individual agreements will be executed. To avoid hardships / misunderstanding among the
beneficiaries of the scheme, the terms were customized to each individual employee depending
on the type of department they were attached with. The details of the schemes were as below:
Name of Details of the scheme
Employee
A A is the head of technical department. The department deals with projects
on business process and cost re-engineering, which are executed to
achieve annual targets on reduction in turnaround time (TAT) and cost
savings - with A spearheading these activities. The Board of Directors of
BC Ltd approved a resolution for the ESOP to A on 15 April 20X3, obtained
shareholder resolution at the AGM on 18 April 20X3 when the fair value of
the shares was ` 1520 per share. The terms of the agreement were later
finalized in consultation with the CEO and the agreement was drafted and
signed by A in the presence of the CEO on 20 April 20X3.
The agreement provided for issue of 50,000 shares every quarter end,
subject to achieving a quarterly 5% cost savings (duly certified by internal
auditor) compared to previous quarter. The shares were issued at a price
of ` 950 per share and the value of the option was calculated using the
binomial option model as Rs 300 per share, based on the underlying fair
value of ` 1520 per share. A is required to exercise the option within
30 September 20X4 and is required to be in employment till that date. As
at 31 March 20X4, A was successful in achieving the 5% target only for the
last quarter ending 31 March 20X4. Share based payment expense of
` 150 lacs was recognized based on the above terms.
B B is the head of finance department. The entity is challenged with the
availability of funds for its regular working capital needs, on account of
difficulty in obtaining certain required collaterals and guarantees for
obtaining the loans. As such, BC Ltd entered into an agreement with B on
20 April 20X3 wherein 10,000 shares were agreed to be issued at ` 875 per
share, when fair value was determined (after considering the terms and
conditions of the agreement) at ` 1505 per share. The option to purchase
the shares was to be exercised on or before 30 September 20X4. The
shares were to be issued if the loan was obtained by 31 March 20X4. By
31 March 20X4, the loan was formally sanctioned - which was a sufficient
compliance of the performance condition. However, on the same day to
avoid any confrontation with A (who is very influential), BC Ltd raised the
exercise price of the share to ` 900 per share. As a result, the option

valuation reduced from ` 345 per share on 20 April 20X3 to ` 296 per share.
B was continuing with formal employment on that date. A share-based
payment expense was recognized for ` 29.60 lacs for the period ending
31 March 20X4 on account of the agreement with B.
C C is the head of Corporate Branding and Development. On 15 April 20X3,
vide a signed agreement, he was provided with a scheme which entails
payment of cash at the rate of ` 2.50 lacs for every 1% increase in share
price of the entity. As an alternative, C can also choose to be issued
equivalent number of shares at the rate of ` 900 per share when the fair
value of the shares (taking in to account the terms and conditions of the
offer) was ` 1508 per share. The option was valued at ` 324 per share
which is equivalent to the fair value of the cash alternative on
15 April 20X3. During the year the share prices rose by 5%.
During the previous year ending 31 March 20X3, BC Ltd had acquired controlling stake in
GD Ltd that included assuming the related employee obligations arising in both present and
future reporting periods. During the takeover, the following employee obligations were
assumed:
Employee Particulars
D D was eligible to an issue of 15,000 shares at their fair value commencing
1 April 20X1 when the fair value of the shares was ` 300 per share in the
acquired entity, based on the condition that he remains in employment for a
period of 5 years. The fair value of the option was determined to be ` 60
per share.
On acquisition date of 31 March 20X3, BC Ltd modified the agreement with
D to provide for issue of 4,000 shares at ` 1,000 per share when fair value
on the acquisition date was ` 1,480 per share of BC Ltd. This resulted in
an option valued at ` 275 per share. The condition was further revised to
provide that the employee should remain in employment until 1 April 20X7.
E E was eligible to an issue of 12,500 shares at nil exercise price commencing
1 April 20X1 when the fair value of the shares was ` 300 per share in the
acquired entity, based on the condition that he remains in employment for a
period of 5 years. The fair value of the option was determined to be ` 60
per share.
On acquisition date of 31 March 20X3, BC Ltd modified the agreement with E to
provide for issue of 4,000 shares at ` 1,050 per share when fair value on the
acquisition date was ` 1,480 per share of BC Ltd. This resulted in an option
valued at ` 275 per share. The condition was further revised to provide that
the employee should remain in employment until 1 April 20X5.

CASE STUDIES 2.3
On 1 November 20X3, BC Ltd also entered into an agreement with an advisor (a separate
corporate entity) for provision of advisory services over a period of 1 year in connection with an
IPO and share buybacks to be done in November 20X4. The advisor is entitled to issue tax
invoices every quarter, based on number of hours billed. However, the agreement provides for
issue of equivalent number of equity shares of the parent of BC Ltd in India at the fair value on
the date of the agreement. The number of shares to be issued is, however, determined and
agreed between the parties every quarter until final settlement (which is only 30 October 20X4).
During the year up to 31 March 20X4 a total of ` 69 lacs were billed by the advisor. The shares
are required to be brought on-market and issued. Tax deduction is allowed only on final
settlement on 30 October 20X4.
As part of the Employee Share Purchase Plan (ESPP), the following employees were eligible
(on the below given terms and conditions):
Employee Terms and Conditions
T T was eligible to be issued 14,500 shares at an exercise price of ` 890 per
share. The agreement was signed on 1 June 20X3, when the fair value of the
option was ` 350 per share. The agreement provides for a loan equal to the
total exercise price of the shares, subject to T remaining in employment for
2 years from the date of the grant. The shares will be held in a separate
employee benefit trust that is not controlled by BC Ltd, until the time these
shares get issued to T who will be eligible to receive dividends from the
shares. On completion of the stipulated two years of employment, T will be
able to exercise the option for a period of 1 year from the completion date. At
that time, T may either be required to pay up the exercise price of the shares
or allow the option to lapse. If T discontinues employment, then the shares
will revert to BC Ltd with T not being eligible to any share or its future
dividends. No requirement to repay the loan by T at any time during the period
of the option.
V V is eligible to be issued 14,500 shares at an exercise price of ` 890 per
share. The agreement was signed on 1 June 20X3 when the fair value of the
option was ` 350 per share. The agreement provides for a loan equal to the
total exercise price of the shares, subject to T remaining in employment for
5 years from the date of the grant. An amount of ` 1,29,00,000 was therefore
transferred to the employee at the time of the agreement being signed. The
loan carries an interest of 12% p.a. and requires settlement in equal annual
installments of principal at every anniversary of the agreement. The
accumulated interest is payable only at the end of the term. The agreement
provides that if the loan is not repaid, then BC Ltd is able to recover the
amount from the salary and other non-statutory dues in addition to certain
properties mentioned in the agreement as collaterals.
M M is eligible to a zero-interest rate loan of ` 96 lacs corresponding to 11,000
shares. M can avail the loan any time during the period of 1 year from the

date of agreement that was signed on 1 June 20X3, subject to being in

employment for the said term. As required by the terms, M makes an upfront
payment of a commitment fee of ` 1.65 lacs. The loan will be provided under
a separate agreement. It is not possible to obtain fair valuation for this loan
commitment due to non-availability of reliable information. However, it has
been ascertained that M is looking for a career outside the organization and
as such management is not likely to keep the loan offer open to M.
I. Multiple Choice Questions

1. What is the grant date for the ESOP arrangement with A?
(a) 10 April 20X3
(b) 18 April 20X3
(c) 15 April 20X3
(d) 20 April 20X3
2. Total amount recognized in equity under the ESOP arrangement with C will be:
(a) Nil
(b) ` 12.50 lacs
(c) Determined by the split accounting method
(d) Determined when more information is given
3. In the consolidated financial statements of the group, the arrangement with the advisor
gives rise to:
(a) Equity-settled share based payment
(b) Cash-settled share based payment
(c) Hybrid arrangement
(d) None of the above
4. In the case of employee M, the loan commitment fee should be
(a) Recognised as an adjustment to the effective interest rate
(b) Recognised immediately in profit or loss account
(c) Recognised straight-lined over the commitment window
(d) Recognized as revenue as and when the performance obligation is satisfied.

CASE STUDIES 2.5
5. Changes to the deferred tax arising from business combination impacts:

(a) Statement of Profit or Loss
(b) Other Comprehensive Income
(c) Goodwill
(d) No changes – no impact.

6. Analyse and comment in brief the accounting of each of the ESOPs and ESPPs launched
or acquired during the year.

1. Option (d) 20th April 20X3
Reason:
As per definition of ‘grant date’ given in Appendix A of IFRS 2, the grant date is:
The date at which the entity and another party (including an employee) agree to a
share‑based payment arrangement, being when the entity and the counterparty have
a shared understanding of the terms and conditions of the arrangement. At grant date
the entity confers on the counterparty the right to cash, other assets, or equity
instruments of the entity, provided the specified vesting conditions, if any, are met. If
that agreement is subject to an approval process (for example, by shareholders), grant
date is the date when that approval is obtained.
The grant date is when both parties agree to a share-based payment arrangement.
The word ‘agree’ is used in its usual sense, which means that there must be both an
offer and acceptance of that offer. Hence, the date at which one party makes an offer
to another party is not grant date. The date of grant is when that other party accepts
the offer. Here acceptance by the party is later to approval by the shareholders
resolution. Hence grant date will be the later date.

2. Option (a) Nil

Reason:
As per para 37 of IFRS 2, the entity shall first measure the fair value of the debt
component, and then measure the fair value of the equity component - taking into
account that the counterparty must forfeit the right to receive cash in order to receive
the equity instrument. The fair value of the compound financial instrument is the sum
of the fair values of the two components.
However, share‑based payment transactions in which the counterparty has the choice
of settlement are often structured so that the fair value of one settlement alternative is
the same as the other. For example, the counterparty might have the choice of
receiving share options or cash‑settled share appreciation rights. In such cases, the
fair value of the equity component is zero, and hence the fair value of the compound
financial instrument is the same as the fair value of the debt component. Conversely,
if the fair values of the settlement alternatives differ, the fair value of the equity
component usually will be greater than zero, in which case the fair value of the
compound financial instrument will be greater than the fair value of the debt
component.
3. Option (a) Equity-settled share-based payment

Reason:
As per para 43B of IFRS 2, the entity receiving the goods or services shall measure
the goods or services received as an equity‑settled share‑based payment transaction
when:
(a) the awards granted are its own equity instruments, or
(b) the entity has no obligation to settle the share‑based payment transaction.
The entity shall subsequently remeasure such an equity‑settled share‑based payment
transaction only for changes in non‑market vesting conditions. In all other
circumstances, the entity receiving the goods or services shall measure the goods or
services received as a cash‑settled share‑based payment transaction.
4. Option (d) Recognized as revenue as and when the performance obligation is
satisfied
Reason:
As per para B4.5.3 of IFRS 9, fees that are not an integral part of the effective interest
rate of a financial instrument and are accounted for in accordance with IFRS 15 include:

CASE STUDIES 2.7
(a) fees charged for servicing a loan;

(b) commitment fees to originate a loan when the loan commitment is not measured
in accordance with paragraph 4.2.1(a) of IFRS 9 and it is unlikely that a specific
lending arrangement will be entered into; and
(c) loan syndication fees received by an entity that arranges a loan and retains no
part of the loan package for itself (or retains a part at the same effective interest
rate for comparable risk as other participants). (IFRS 9.B5.4.3)
5. Option (c) Goodwill
Reason:
As per para 66 of IAS 12, temporary differences may arise in a business combination. In
accordance with IFRS 3, an entity recognises any resulting deferred tax assets (to the
extent that they meet the recognition criteria in paragraph 24) or deferred tax liabilities
as identifiable assets and liabilities at the acquisition date. Consequently, those deferred
tax assets and deferred tax liabilities affect the amount of goodwill or the bargain
purchase gain the entity recognises. However, in accordance with paragraph 15(a), an
entity does not recognise deferred tax liabilities arising from the initial recognition of
goodwill.

6. Accounting for ESOP and ESPP scheme
Accounting for the arrangement with each employee is as described below:
Employee Accounting
A ⇒ This is an equity settled share-based arrangement, with a grant

date being 20 April 20X3 i.e. the date when both BC Ltd and the
employee (viz. A) have shared understanding of the terms and
conditions of the agreement (Refer Appendix A to IFRS 2 -
definition of grant date)
⇒ Fair value of equity instruments to be issued on the grant date
should therefore, be valued on 20 April 20X3 with reference to the
quoted price of the shares in the relevant stock market. This value
should however be valued after adjustments for the terms and
conditions in the agreement. (Refer para B2 of IFRS 2)
⇒ The entity’s accounting of the arrangement with A is, therefore,
incorrect because of wrong determination of grant date and date

of measurement of fair value which is relevant for determination

of the share-based payment expense for the period;
⇒ Achievement of cost savings is a performance condition and is a
vesting condition, which is to be considered in determining the
number of equity instruments that will ultimately vest in the
employee.
⇒ In this case, only 50,000 shares vest as at 31 March 20X4.
B ⇒ This is an equity settled share-based arrangement with a grant

date being 20 April 20X3 i.e. the date when both BC Ltd and the
employee have shared understanding of the terms and conditions
of the agreement (Refer Appendix A to IFRS 2 - definition of grant
date)
⇒ Fair value of equity instruments to be issued on the grant date
should, therefore, be valued on 20 April 20X3 with reference to
the quoted price of the shares in the relevant stock market. This
value should however be valued after adjustments for the terms
and conditions in the agreement. (Refer para B2 of IFRS 2)
⇒ The agreement has been varied such that the fair value of the
option is reduced (as a result of increase in the exercise price).
⇒ As per para B44a of IFRS 2, if the modification reduces the fair
value of the equity instruments granted, measured immediately
before and after the modification, the entity shall not take into
account that decrease in fair value and shall continue to measure
the amount recognised for services received as consideration for
the equity instruments based on the grant date fair value of the
equity instruments granted.
⇒ An entity should inter alia recognize at a minimum, the services
received measured at the grant date fair value of the equity
instruments granted, unless those equity instruments do not vest
because of failure to satisfy a vesting condition (other than a
market condition) that was specified at grant date.
⇒ Hence, irrespective of the modification, the share based payment
expense is to be recorded for the grant date fair value @ ` 345
for the entire 10,000 shares that have vested, due to satisfaction
of the vesting condition which is a performance condition.
C ⇒ The agreement provides for a choice of settlement to the

counterparty (i.e. employee) and hence is required to be

CASE STUDIES 2.9
accounted for as a compound financial instrument as per para 37

of IFRS 2.
⇒ The vesting condition is a market condition and accordingly is to
be considered in determining the fair value of the options in
addition to the terms and conditions of the contract as per para
21 of IFRS 2.
⇒ The entity shall account separately for the goods or services
received or acquired in respect of each component of the
compound financial instrument. For the debt component, the
entity shall recognise the goods or services acquired, and a
liability to pay for those goods or services, as the counterparty
supplies goods or renders service, in accordance with the
requirements applying to cash‑settled share‑based payment
transactions. For the equity component (if any), the entity shall
recognise the goods or services received, and an increase in
equity, as the counterparty supplies goods or renders service, in
accordance with the requirements applying to equity‑settled
share‑based payment transactions.
⇒ Since the equity instruments to be issued is equal to the fair value
of the cash alternative i.e. ` 12.50 lacs (2.50 x 5), the fair value
of equity component is zero.
⇒ At the date of settlement, the entity shall remeasure the liability
to its fair value. If the entity issues equity instruments on
settlement rather than paying cash, the liability shall be
transferred direct to equity, as the consideration for the equity
instruments issued.
⇒ If the entity pays in cash on settlement rather than issuing equity
instruments, that payment shall be applied to settle the liability in
full. Any equity component previously recognised shall remain
within equity. By electing to receive cash on settlement, the
counterparty forfeited the right to receive equity instruments.
However, this requirement does not preclude the entity from
recognising a transfer within equity, ie a transfer from one
component of equity to another.
D ⇒ In this case, the vesting term has been modified on the acquisition
date of the business combination. As required by para B58 of
IFRS 3, the pre-combination service costs must be determined by

apportioning the total fair value of the acquisition date of the

acquiree to the pre-combination vesting term.
⇒ The post combination expense is recognized as the difference
between (a) the fair value of the replacement award and (b) the
pre-combination cost.
⇒ The total vesting term is the greater of (a) the total vesting term
[i.e. 6 years] and (b) the original vesting period [i.e. 5 years].
⇒ Thus, the total fair value on 31 March 20X3 of the options issued
by BC Ltd (4000 x 275 = ` 11 lacs) relating to pre-combination
period is ` 3 lacs and the post combination cost is ` 8 lacs. (Refer
Working Note)
⇒ The pre-combination cost is included as part of the consideration
for the business combination, while the post combination cost will
be expensed in the post combination financial statements of
BC Ltd.
E ⇒ In this case, the vesting term has been modified on the acquisition
date of the business combination. As required by para B58 of
IFRS 3, the pre-combination service costs must be determined by
apportioning the total fair value of the acquisition date of the
acquiree to the pre-combination vesting term.
⇒ The post combination expense is recognized as the difference
between (a) the fair value of the replacement award and (b) the
pre-combination cost.
⇒ The total vesting term is the greater of (a) the total vesting term
[i.e. 4 years] and (b) original vesting period [i.e. 5 years].
⇒ Thus, the total fair value on 31 March 20X3 of the options issued
by BC Ltd (4000 x 275 = ` 11 lacs) relating to pre-combination
period is ` 3 lacs and the post combination cost is ` 8 lacs. (Refer
Working Note)
⇒ The pre-combination cost is included as part of the consideration
for the business combination, while the post combination cost will
be expensed in the post combination financial statements of
BC Ltd.
T ⇒ The agreement with T is one of a limited recourse loan, where

effectively BC Ltd is issuing an option to purchase shares at below
fair value.
⇒ No loan is to be recognized as a financial asset.

CASE STUDIES 2.11
⇒ This is an equity settled share-based payment, for which expense

has to be recognized in Profit or Loss as per the fair value of the
options on 1 June 20X3.
⇒ When the shares are issued, the credit is given to share capital -
with cash being debited.
V ⇒ The agreement with V is a full recourse loan, requiring full

repayment of the amount outstanding as loan, which is disbursed
in cash upfront.
⇒ The interest is assumed to be in line with the market interest rates
and hence does not as such create any additional remuneration
to be accounted as an employee benefit as per IAS 19.
⇒ The loan has to be recognized as a financial asset and measured
at amortised cost as per para 4.1.2 of IFRS 9.
M ⇒ The loan is yet to be disbursed and is not expected to be released

in future, on account of resignation expected by M.
⇒ The amount of ` 1.65 lacs is to be accounted as per para 4.2.1(d)
of IFRS 9 and para B5.4.3 of IFRS 9 ie as per IFRS 15 which
states that such commitment fee is recognised as and when the
performance obligation is satisfied.
Working Note
Statement of computation w.r.t Pre combination and Post combination cost
Employees
D E
Fair value of the option issued by BC ` 275 ` 275
Number of options issued 4,000 Units 4,000 Units
Total fair value of the replacement awards (A) ` 11 lacs ` 11 lacs
Vesting term as per original award 5 years 5 years
Vesting term as per replacement award 6 years 4 years
Vesting term (as per IFRS 3.B58) - Greater of original
vesting term and the new total vesting period (B) 6 years 5 years
Remaining vesting term as at 31 st March 20X3 4 years 3 years

Pre-combination term (C) 2 years 2 years

Fair value of the option issued by acquiree ` 60 ` 60
Number of options issued by acquiree 15,000 12,500
Total fair value of the acquiree award (D) ` 9 lacs ` 7.5 lacs
Fair value allocation to pre-combination term -
forming part of consideration [(D/ B) x C] (E) ` 3 lacs ` 3 lacs
Post combination fair value (A) – (E) = (F) ` 8 lacs ` 8 lacs

CASE STUDY 3
Jackson Ltd does business of manufacturing generator parts and generator sets for industrial
and home use. They report their financial statements under International Financial Reporting
Standards. While in the process of closing the books for the year ended 31 March 20X4, the
Chief Financial Officer of the company identified a few transactions and asked for your
assistance to show proper treatment.
On 1 April 20X3, Jackson Ltd purchased some land for ` 10 million. Jackson Ltd purchased the
land in order build a Plant for manufacturing generator parts. During the six months from
1 April 20X3 to 30 September 20X3, Jackson Ltd incurred costs totaling ` 3.5 million in preparing
the land and erecting the structure of the Plant. This process caused some damage to the land
for making it suitable for setting up the Plant. Jackson Ltd began operations on 1 October 20X3
and the directors estimate that the Plant site would have useful economic life of 10 years from
that date.
Jackson Ltd is legally obliged to rectify the damage caused to the land for setting up the Plant.
The directors estimate that the costs of this rectification after 10 years on 30 September, will be
as follows:
(i) ` 3 million to rectify the damage caused by the preparation of the land for setting up the
Plant.
(ii) ` 0.2 million for each year to rectify the damage caused owing to effluent generated out
of the production process of the Plant.
Following this rectification work the land could potentially be sold to a third party for no less than
its original cost of ` 10 million.
An annual discount rate appropriate for this project is 12%. The present value of ` 1 payable
in 10 years’ time with an annual discount rate of 12% is 32.2 paise. The present value of
` 1 payable in 9½ years’ time with an annual discount rate of 12% is 34.1 paise.
On 31 March 20X1, Jackson Ltd purchased 80% of the equity of Kaplan Ltd for ` 190 million.
The fair values of the net assets of Kaplan Ltd that were included in the consolidated statement
of financial position of Jackson Ltd at 31 March 20X1 were measured at ` 200 million (their fair
values at that date). It is the group policy to value the non-controlling interest in subsidiaries at
the date of acquisition at its proportionate share of the fair value of the subsidiaries’ identifiable
net assets.
On 31 March 20X4, Jackson Ltd carried out its annual review of the goodwill on consolidation
of Kaplan Ltd for evidence of impairment. No impairment had been evident when the reviews
were carried out on 31 March 20X2 and 31 March 20X3. The review involved allocating the
assets of Kaplan Ltd into three cash-generating units and computing the value in use of each
unit. The carrying values of the individual units before any impairment adjustments are given
below:

Unit A Unit B Unit C

` in million ` in million ` in million
Intangible assets 30 10 -
Property, Plant and Equipment 80 50 60
Current Assets 60 30 40
Total 170 90 100
Value in use of unit 180 66 104
It was not possible to meaningfully allocate the goodwill on consolidation to the individual cash
generating units but all the other net assets of Kaplan Ltd are allocated in the table shown
above.
The intangible assets of Kaplan Ltd have no ascertainable market value but all the current assets
have a market value that is at least equal to their carrying value. The value in use of Kaplan
Ltd as a single cash-generating unit on 31 March 20X4 is ` 350 million.
On 1 December 20X3, Jackson Ltd as a part of its expansion plan, opened a new Plant for
manufacturing genset parts in an area designated by the government as an economic
development area.
On that day, the government provided Jackson Ltd with a grant of ` 30 million to assist it in the
development of the factory.
This grant was provided in three parts:
(i) ` 6 million of the grant was a payment by the government as an inducement to
Jackson Ltd to begin developing the factory. No conditions were attached to this part of
the grant.
(ii) ` 15 million of the grant related to the construction of the factory at a cost of ` 60 million.
The land was leased so the whole of the ` 60 million is depreciable over the estimated
40 year useful life of the factory.
(iii) The remaining ` 9 million was received subject to keeping at least 200 employees
working at the factory for a period of at least five years. If the number drops below 200
at any time in any financial year in this five year period, then 20% of the grant is repayable
in that year.
From 1 December 20X3, 220 workers were employed at the factory and estimates are that this
number is unlikely to fall below 200 over the relevant five year period.
Jackson Ltd planned the Plant under construction being financed through ` 8 million of debt and
of which ` 6 million is a construction loan directly on the Plant. The rest is financed by the
general debt of the company. Jackson Ltd would put to use the Plant when it is completed.
The debt structure of Jackson Ltd is as under:
` in million
– Construction loan @ 11% 6

CASE STUDIES 3.3
– Long term debenture @ 9% 9

– Long term subordinated debenture @ 10% 3
The debentures and subordinated debentures were issued at the same time.
On 1 July 20X3, Jackson Ltd decided to sell one of its divisions following a recent change in its
geographical focus. The proposed sale would involve the buyer acquiring the non-monetary
assets (including goodwill) of the division, with Jackson Ltd collecting any outstanding trade
receivables relating to the division and settling any current liabilities.
On 1 January 20X4, the carrying amounts of the relevant assets of the division were as follows:
– Purchased goodwill ` 0.6 million.
– Property, plant and equipment (average remaining estimated useful life two years)
` 2 million.
– Inventories ` 1 million.
From 1 January 20X4, Jackson Ltd began to actively market the division and has received a
number of serious enquiries.
On 1 January 20X4, the directors estimated that they would receive ` 3·2 million from the sale
of the division. Since 1 January 20X4, market conditions have improved and on 30 April 20X4
Jackson Ltd received and accepted a firm offer to purchase the division for ` 3·3 million. The
sale is expected to be completed on 30 June 20X4.
` 3·3 million can be assumed to be a reasonable estimate of the value of the division on
31 March 20X4.
During the period from 1 January 20X4 to 31 March 20X4, inventories of the division costing
` 0.8 million were sold for ` 1.2 million. At 31 March 20X4, the total cost of the inventories of
the division was ` 0.9 million. All of these inventories have an estimated net realisable value
that is in excess of their cost.
Further, on 1 January 20X4, Jackson Ltd acquired 30% of the shares of Tintin Ltd. The
investment was accounted for as an associate in Jackson Ltd’s consolidated financial
statements. Both Jackson Ltd. and Tintin Ltd. have an accounting year end of 31 March 20X4.
Jackson Ltd has no other investments in associates.
Net profit for the year in Tintin’s income statement for the year ended 31 March 20X4 was
` 0.23 million. It declared and paid dividend of ` 0.1 million on 1 March 20X4. No other
dividends were paid in the year.

1. What would be the treatment for grant of ` 15 million related to the construction of the
factory at a cost of ` 60 million?
(a) ` 15 million grant in respect of the plant and equipment should be recognized
immediately in the income statement, since the company is certain to build the
factory.

(b) Deduct the grant received from the cost of the asset and depreciate the net
carrying value over its useful economic life.
(c) Show the grant as a deferred credit and leave the initial carrying value of the
property at ` 60 million. Thereafter the deferred credit would be released to the
income statement at the end of 40th year.
(d) 0.375 million is to be credited in 20X3-20X4 in the income statement over 40 year
period as deferred grant income.
2. What would be the treatment of grant of ` 6 million received from the government as an
inducement to Jackson Ltd to begin developing the factory?
(a) Grant relating to an inducement to begin developing the factory can be recognized
immediately in the Statement of Profit or Loss.
(b) 0.15 million amount is to be credited each year in the income statement over
40 year period.
(c) 1.2 million amount is to be credited each year in the income statement over
40 year period.
(d) Net off the grant received against the cost of the asset and depreciate the net
figure over its useful economic life.
3. What would be the treatment for grant of ` 9 million which was received with a condition
to keep at least 200 employees working at the factory?
(a) ` 0.6 million would be recognized in the income statement for the current period
ending 31 March, 20X4.
(b) ` 1.8 million would be recognized in the income statement for the current period
(c) ` 9 million would be recognized in the income statement for the period when at
least 200 workers are employed in factory.
(d) ` 0.225 million amount is to be credited each year in the income statement over
40 year period.
4. How will the possibility of refund of government grant with respect to ` 9 million be
recognised in the books of Jackson Ltd.?
(a) Current liability
(b) Provision
(c) Contingent liability
(d) Nothing is required
5. What amount will be shown as an inflow in respect of earnings from the associate in the
statement of cash flows of Jackson Limited for the year ended 31 March 20X4?
(a) ` 0.020 million

CASE STUDIES 3.5
(b) ` 0.026 million

(c) ` 0.030 million
(d) ` 0.046 million

6. What is the implication of rectification of damage of land mentioned in the case study?
What is the relevant provision related to this concept under IFRS?
7. Show treatment of impairment of goodwill as per the details provided in the case study?
8. Based on the debt structure of the organization, calculate the following:
(1) total interest payable during the year ended 31 March, 20X4
(2) the capitalized interest cost to be recorded as an asset in the Statement of
Financial Position
(3) amount of interest expense to be reported on the income statement.
9. Explain the disclosure requirement related to sale of division and the treatment of
property held for sale and discontinued operations?

1. Option (b) Deduct the grant received from the cost of the asset and depreciate
the net carrying value over its useful economic life
Reason:
The grant of ` 15 million in respect of the plant and equipment should be recognized over
the 40 year life of the factory. IAS 20 allows this to be done in two ways:
The first way is to deduct the grant amount in calculating the carrying amount of the asset
and depreciate the net figure over its useful economic life. In the instant case only four
months of depreciation would be charged because the factory was not brought into use
until 1 December 20X3.
Therefore, the depreciation worked out would be ` 0.375 million [(60-15) x 1/40 x 4/12)]
for 20X3-20X4.
Accordingly, the Property, Plant and Equipment would be shown under Statement of
Financial Position as ` 44.625 million (45 – 0.375).

The second way is to show the grant as a deferred credit and leave the initial carrying
value of the property at ` 60 million. Therefore, the depreciation in the current year
would be ` 0.5 million (60 million x 1/40 x 4/12).
Property, Plant and Equipment of ` 59.50million (60 million – 0.50 million) would be
shown in the Statement of Financial Position.
The deferred credit would be released to the income statement over the same 40 year
period as the asset is depreciated so the amount included in the Statement of Profit or
Loss for the current year 20X3-20X4 would be ` 0.125 million (15 million x 1/40 x 4/12).
The remaining deferred credit of ` 14.875 million (` 15 million – ` 0.125 million) would
be shown in the Statement of Financial Position as deferred income under liabilities.
` 0.375 million (` 15 million x 1/40) would be in current liabilities and the balance of
` 14.50 million (` 14.875 million – ` 0.375 million) would be in non-current liabilities.
2. Option (a) Grant relating to an inducement to begin developing the factory can
be recognized immediately in the Statement of Profit or Loss
Reason:
Accounting for government grants is dealt with by IAS 20 ‘Accounting for Government
Grants and Disclosure of Government Assistance’. The basic principle of IAS 20 is that
grants should be recognized as income over the periods necessary to match them with
the related costs for which they are intended to compensate, on a systematic basis. That
part of the grant relating to an inducement to begin developing the factory (` 6 million)
was received without any conditions and so can be recognized immediately in the
Statement of Profit or Loss.
3. Option (a) ` 0.6 million would be recognized in the income statement for the
current period ending 31 March, 20X4
Reason
The basic recognition principle for the ` 9 million employment grant would be similar to
grant for building. This means that ` 0.60 million (` 9 million x 1/5 x 4/12) would be
recognized in the income statement for the current period, with the balance of
` 8.40 million (` 9 million – ` 0.60 million) shown as deferred income. ` 1.80 million
(` 9 million x 1/5) would be shown under current liabilities, with the balance of
` 6.60 million (` 8.40 million – ` 1.80 million) under non-current liabilities.
The issue of possible repayment depends on how likely, or otherwise, it is that repayment
will occur. If, as seems to be the case here, repayment is possible, but unlikely, then the
possibility of repayment would be disclosed as a contingent liability. If repayment were
considered probable, then a liability would need to be recognized. Any amount repayable
would create a separate liability, with an equal and opposite transfer from deferred

CASE STUDIES 3.7
income. If the deferred income balance is insufficient then any excess would be charged
from in the Statement of Profit or Loss.
5. Option (c) ` 0.03 million
Reason:
As per para 37 of IAS 7, when accounting for an investment in an associate, a joint
venture or a subsidiary accounted for by use of the equity or cost method, an investor
restricts its reporting in the statement of cash flows to the cash flows between itself and
the investee, for example, to dividends and advances.
Accordingly,
Dividend paid by Associate Tintin Ltd = ` 0.10 million
Jackson’s share of dividend 30% x ` 0.10 million = ` 0.030 million
This is the amount that should appear in the statement of cash flows of Jackson Ltd. as
this is the share of Jackson Ltd.’s dividend from the Associate Tintin Ltd.

6. The treatment related to the transactions of Jackson Ltd, under relevant IFRS is
explained as under:
In accordance with the principles of IAS 16 ‘Property, Plant and Equipment’, costs of
` 13.5 million (` 10 million + ` 3.5 million) will be debited to property, plant and equipment
as cost of Plant.
From 1 October 20X3, an obligation exists to rectify the damage caused by the Plant and
this obligation should be provided for.
The amount provided is the present value of the expected future payment, which is
` 0.966 million (` 3 million x 0.322).
The amount provided is debited to property, plant and equipment and credited to
provisions at 1 October 20X3.
The costs of Plant (excluding the land) will be ` 4.466 million (` 3.5 million +
` 0.966 million).
This cost will be depreciated over a 10-year period, giving a charge in the current period
of ` 0.223 million in the current year (` 4.466 million x 1/10 x 6/12).
The closing balance in property, plant and equipment is ` 14.243 million (` 13.5 million
+ ` 0.966 million – ` 0.223 million).
As the date of settlement of the liability draws closer the discount unwinds.

The unwinding of the discount in the current year is ` 0.058 million (` 0.966 million x
12% x 6/12).
The land rectification process itself creates an additional liability based on the damage
caused by the reporting date.
The additional amount provided is ` 0.034 million (` 0.20 million x 6/12 x 0.341).
This additional provision causes an extra charge to the statement of comprehensive
income.
The carrying amount of the provision at the year-end is ` 1.058 million (` 0.966 million +
` 0.058 million + ` 0.034 million).
7. The goodwill on consolidation of Kaplan Ltd that is recognized in the consolidated
statement of financial position of Jackson Ltd is ` 30 million (` 190 million – 80% x
` 200 million). This can only be reviewed for impairment as part of the cash generating
units to which it relates. Since here the goodwill cannot be meaningfully allocated to the
units, the impairment review is in two parts.
Units A and C have values in use that are more than their carrying values. However, the
value in use of Unit B is less than its carrying amount. This means that the assets unit
B are impaired by ` 24 million (` 90 million – ` 66 million). This impairment loss will be
charged to the income statement.
Assets will be written down on a pro-rata basis as shown in the table below: ` in million
Asset Impact on carrying value
Existing Impairment Revised
Intangible assets 10 (4) 6
Property, plant and equipment 50 (20) 30
Current assets 30 Nil* 30
Total 90 (24) 66
*The current assets are not impaired because they are expected to realize at least their
carrying value when disposed of.
Following this review, the three units plus the goodwill are reviewed together. The impact
of this is shown in the following table, given that the recoverable amount of the business
as a whole is ` 350 million.
` in million
Component Impact of impairment review on carrying value
Existing Impairment Revised
Goodwill (see below) 37.50 (23.50) 14.00
Unit A 170.00 Nil 170.00

CASE STUDIES 3.9
Unit B 66.00 Nil 66.00

Unit C (revised) 100.00 Nil 100.00
Total 373.50 (23.50) 350.00
As per Appendix C of IAS 36, given that the subsidiary is 80% owned the goodwill must
first be grossed up to reflect a notional 100% investment. Therefore, the goodwill will be
grossed up to ` 37.50 million (` 30 million x 100/80). The impairment loss of
` 23.50 million is all allocated to goodwill, leaving the carrying values of the individual
units of the business as shown in the table immediately above.
The table shows that the notional goodwill that relates to a 100% interest is written down
by ` 23.50 million to ` 14.00 million. However, in the consolidated financial statements
the goodwill that is recognized is based on an 80% interest so the loss that is actually
recognized is ` 18.80 million (` 23.50 million x 80%) and the closing consolidated
goodwill figure is ` 11.20 million (` 14.00 million x 80%) or (` 30 million – ` 18.80 million).
8. According to para 8 of IAS 23 “Borrowing Costs”, an entity shall capitalize borrowing
costs that are directly attributable to the acquisition, construction or production of a
qualifying asset as part of the cost of that asset.
Other borrowing costs should be recognized as an expense in the period in which they
are incurred.
A qualifying asset is an asset that takes substantial period of time to get ready for its
intended use or sale. (para 5)
Based on above the treatment is as under:
Calculation of total interest payable during the year
11% of ` 6.00 million + 9% of ` 9.00 million +10% of ` 3.00 million) = ` 1.77 million
Capitalized interest cost to be recorded as an asset in the Statement of Financial
Position:
Effective interest rate on debentures and subordinated debentures:
[{(` 9 million/ ` 12 million) x 9%} + {(` 3 million / ` 12 million) x 10%}] = 9.25%
Effective interest rate on construction loan = 9.25%
Capitalized interest rate would be
= [(` 6 million/ 0.11) + (` 2 million / 0.925)]
= ` 6.60 million + ` 0.185 million
= ` 0.845 million

Amount of interest expense to be reported in Income Statement:

= ` 1.77 million – ` 0.845 million
= ` 0.925 million
9. The decision to offer the division for sale on 1 January 20X4 means that from that date
the division is classified as held for sale. The division is available for immediate sale, is
being actively marketed at a reasonable price, and the sale is expected to be completed
within one year.
The consequence of this classification is that the assets of the division will be measured
at the lower of their existing carrying amounts and their fair value less costs to sell. In
this case, this means measuring the assets of the division at ` 3·2 million on
1 January 20X4.
The reduction in carrying value of the assets of ` 0.40 million (` 2 million + ` 1 million +
` 0.60 million – ` 3.2 million) will be treated as an impairment loss and allocated to
goodwill, leaving a carrying amount for goodwill of ` 0.20 million (` 0.60 million –
` 0.40 million).
The increased expectation of the selling price of ` 0.10 million (` 3.3 million –
` 3.2 million) will be treated as a reversal of an impairment loss. However, since this
reversal relates to goodwill, it cannot be recognised.
The assets of the division need to be presented separately from other assets in the
statement of financial position. Their major classes of assets classifies as held for sale
should be separately disclosed, either in the statement of financial position or in the
notes.
The property, plant and equipment should not be depreciated after 1 January 20X4, so
it’s carrying value at 31 March 20X4 will be ` 2 million. The inventories of the division
will be shown at their year-end cost of ` 0.90 million.
The division will be regarded as a discontinued operation in the year ended
31 March 20X4. It represents a separate line of business and is held for sale at the year
end.
The statement of comprehensive income should disclose, as a single amount, the post-
tax profit or loss of the division and the impairment loss arising on the re-measurement
of the division on classification as held for sale. Further analysis of this single amount
may be presented in the notes or in the statement of comprehensive income. If it is
presented in the statement of comprehensive income it shall be presented in a section
identified as relating to discontinued operations, ie separately from continuing operations.

CASE STUDY 4
You are the Finance Manager of Giant Ltd., an Indian company preparing financials under
Accounting Standards notified by the Companies (Accounting Standards) Rules, 2006 as
amended (hereinafter referred to as IGAAP) and follows 31 March as its year end.
The CFO of the Company informs you that the Company wants to adopt IFRS on voluntary basis
from the year ended 31 March, 20X7. Accordingly, the Company will be required to:
- Restate its comparative consolidated statement of financial position as per IFRS as on
31 March, 20X6.
- Present its opening consolidated statement of financial position as per IFRS as on
1 April, 20X5 i.e. transition date.
You have the Consolidated Statement of Financial Position of Giant Ltd. as at 31 March, 20X6
and 1 April, 20X5 prepared under IGAAP as follows:
(` in lakhs)
Particulars 31 March, 20X6 1 April, 20X5

Shareholders’ funds:
Equity Share Capital (face value of ` 100 each) 17,000 17,000
Reserves and Surplus 13,258 10,800
Minority Interest 5,110 4,845
Non-current Liabilities:
Long term borrowings 9,750 4,750
Deferred Tax Liabilities (net) 1,335 1,178
Other long-term liabilities - 1,740
Long-term provisions 2,201 2,367
Short term borrowings 5,060 5,011
Trade payables 2,626 1,894
Other current liabilities 5,581 4,768
Short-term provisions 1,342 1,000
TOTAL 63,263 55,353

ASSETS
Non-current assets:
Property, Plant & Equipment
Tangible assets 21,792 19,138
Intangible assets 5,345 5,598
Goodwill on consolidation 5,945 5,945
Non-current investments 10,150 10,150
Long-term loans and advances 3,918 1,615
Current assets:
Current investments 3,730 1,080
Inventories 2,818 2,514
Trade receivables 4,392 3,746
Cash and bank balances 285 260
Short-term loans and advances 4,888 5,307
TOTAL 63,263 55,353
The above financials include the following:

(1) Borrowings include 8% Optionally Convertible Debentures (OCD) issued on
1 October, 20X5 for ` 5,000 lakhs. These debentures are convertible into equity shares
of Giant Ltd. at the option of the holder at the end of the tenure of 5 years in the ratio of
1:1 i.e. each OCD will be converted to one equity share. Interest is paid annually on
30 September, each year. The market rate for issue of debentures without a conversion
option is 10%. Accrued interest is included under Other Current Liabilities.
(2) Investments consist of the following. These are measured at cost in the financials of
Giant Ltd. (` in lakhs)
Nature of investment Current/Non- 31 March, 20X6 1 April, 20X5
current Cost Fair Cost Fair value
value
Debt oriented mutual fund Current 1,200 1,350 1,080 1,210
Equity oriented mutual fund Current 2,530 2,682 - -
Equity shares of Strategy Non-current 5,400 5,620 5,400 5,550
Ltd. not held for trading (in
the books of Dwarf Ltd.)

CASE STUDIES 4.3
Redeemable Debentures Non-current 3,000 3,050 3,000 3,070

@ 10% coupon
Optionally convertible Non-current 1,750 1,740 1,750 1,720
preference shares @ 9%
Total 13,880 14,442 11,230 11,550
Any diminution in value was considered as temporary and was not given effect.
(3) On 20 November, 20X4, Giant Ltd. paid interim dividend of ` 1 per equity share. On
31 March, 20X6, the Board of the Company has proposed dividend at ` 1.5 per equity
share. The proposed dividend is included in short-term provisions.
Giant Ltd. is considering electing for the following exemptions on first-time adoption of
IFRS, if permissible.
(a) Consider the fair value of property comprising of a building as deemed cost. The fair
value as on 1 April, 20X5 was ` 6,000 lakhs. On this date, the cost less accumulated
depreciation of the property was ` 4,750 lakhs and the remaining useful life was
20 years. Based on the recent structural report obtained by the Company, the
remaining useful life of the building is 15 years as on 31 March, 20X7. This was the
only building in this particular class of assets within Property, Plant and Equipment.
The carrying amount of all other items of Property, Plant and Equipment qualify as
carrying cost in accordance with IAS 16.
(b) Restate past business combinations from 1 April, 20X3. It had acquired a 60% stake in
an unrelated entity, Dwarf Ltd. on 1 April, 20X4. It had applied purchase method for
accounting the acquisition. The break-up of the net assets of Dwarf Ltd. recorded as on
1 April, 20X4 is as follows: (` in lakhs)
Particulars Book value Fair value
Plant and equipment (remaining life-10 years) 6,262 8,140
Investments in equity instruments of Strategy 5,400 5,130
Ltd. (60% stake)
Trade receivables 303 303
Trade payables and other current liabilities 290 290
Total net assets acquired 11,675 13,283
Giant Ltd. had recognized these assets at book value.

The purchase consideration was as follows:
(i) 70 lakhs shares at ` 100 each of Giant Ltd.
(ii) Cash of ` 5,800 lakhs payable over a period of three years as below:

Date of payment Amount (` in lakhs)

31 March, 20X5 2,320
31 March, 20X6 1,740
31 March, 20X7 1,740
The amount is disclosed under Other long-term liabilities and Other current
liabilities.
You can assume the amount of payment in the next 12 months as the current
portion. The discount rate on similar liabilities can be considered as 10%.
(iii) Giant Ltd. shall pay an additional consideration at 20% of the Earnings Before
Interest and Tax (EBIT) of Dwarf Ltd. contingent upon the EBIT reaching specified
levels at the end of the year 20X7-20X8. Under IGAAP, this amount shall be
recognised when payable.
The fair value of the consideration is as follows:
Date (` in lakhs)
1 April, 20X4 500
31 March, 20X5 505
31 March, 20X6 507
The changes in fair value are not on account of new information obtained about facts and
circumstances that existed as of the acquisition date.
Giant Ltd. incurred legal and professional fees of ` 150 lakhs in connection with the
acquisition of Dwarf Ltd. and debited these costs in the goodwill amount while accounting
under IGAAP.
It had recognized goodwill at ` 5,945 lakhs and minority interest (non-controlling interest)
at ` 4,670 lakhs as on 1 April 20X4. Giant Ltd. has chosen the policy to measure the
non-controlling interest at their proportionate share of net assets under IFRS.
On 31 March, 20X3, it had merged its subsidiary, Miniature Ltd. in which it held 70%
stake. It had accounted for the assets and liabilities taken over using the Pooling of
Interest method. The break-up of the net assets of Miniature Ltd. recorded as on
31 March, 20X3 is as follows: (` in lakhs)
Particulars Book value Fair value
Plant and equipment (remaining life-5 years) 1,361 1,200
Trade receivables 109 105
Trade payables and other current liabilities 70 70

CASE STUDIES 4.5
The remaining shareholders were issued 4,20,000 equity shares at ` 100 per share of
Giant Ltd. No goodwill or capital reserve was recognised on this transaction.
Answer the following questions for transition of financial statements of Giant Ltd. from
IGAAP to IFRS:

1. What is the starting point for reconciliation of net worth for Giant Ltd. as on 1 April, 20X5
and 31 March, 20X6 respectively?
(a) IGAAP based net worth of ` 30,258 lakh; IGAAP based net worth of
` 27,800 lakh
(b) IGAAP based net worth of ` 27,800 lakh; IGAAP based net worth of
` 30,258 lakh
(c) IFRS based net worth of ` 28,648.81 lakh; IFRS based net worth of
` 31,161.26 lakh
(d) IFRS based net worth of ` 31,161.26 lakh; IFRS based net worth of
` 28,648.81 lakh.
2. What is the share of Giant Ltd. interest due to change in acquisition date fair values of
Dwarf Ltd. as on 1 April, 20X5 and 31 March, 20X6 respectively?
(a) ` 139.32 lakhs; ` 68.64 lakhs
(b) ` 92.88 lakhs; ` 45.76 lakhs
(c) ` 68.64 lakhs; ` 139.32 lakhs
(d) ` 45.76 lakhs; ` 92.88 lakhs.
3. What is the total finance cost on deferred consideration till 31 March, 20X6? Consider
discount factor upto 3 decimals.
(a) ` 485.29 lakhs
(b) ` 301.82 lakhs
(c) ` 947.14 lakhs
(d) ` 787.11 lakhs.
4. With respect to Optionally Convertible Debentures, what is the finance cost to be charged
to Statement of Profit or Loss (as per IFRS) on 31 March, 20X6?
(a) ` 200 lakhs
(b) ` 462 lakhs
(c) ` 231 lakhs
(d) ` 400 lakhs.

5. With respect to Optionally Convertible Debentures, what is the finance cost charged to
Statement of Profit or Loss (as per IGAAP) on 31 March, 20X6?
(a) ` 200 lakhs
(b) ` 462 lakhs
(c) ` 231 lakhs
(d) ` 400 lakhs.
II. Descriptive Question

6. In the books of Giant Ltd., you are required to prepare the following:
- Opening IFRS consolidated statement of financial position as on 1 April, 20X5.
- Comparative IFRS consolidated statement of financial position as on
31 March, 20X6.
Support your answer with detailed workings. You may ignore deferred tax implications
for the above.

1. Option (b) IGAAP based net worth of ` 27,800 lakh; IGAAP based net worth of
` 30,258 lakh
Reason:
Calculation of net worth as per AS (IGAAP) (` in lakh)
As on 31.3.20X6 As on 1.4.20X5
Share capital 17,000 17,000
Add: Reserves and surplus 13,258 10,800
30,258 27,800
2. Option (a) ` 139.32 lakhs; ` 68.64 lakhs

Reason:
Changes in Non-controlling Interest due to change in the acquisition date fair values
(` in lakhs)
(i) Fair valuation for investment 490.00 420.00

CASE STUDIES 4.7
(ii) Additional Depreciation on property,

plant and equipment (375.60) (187.80)
114.40 232.20
Giant Ltd.’s shares at 60% 68.64 139.32
NCI’s share at 40% 45.76 92.88
3. Option (d) ` 787.11 lakhs

Reason:
Present value of deferred consideration to be paid in cash (` in lakh)
31.3.20X5 2320 0.909 2108.88
31.3.20X6 1740 0.826 1437.24
31.3.20X7 1740 0.751 1306.74 4852.86
Finance cost on deferred consideration as on 31.3.20X5 = 4,852.86 x 10% = 485.29
Finance cost on deferred consideration as on 31.3.20X6 =
(4,852.86 + 485.29 – 2,320) x 10% = 301.82
787.11
4. Option (c) ` 231 lakhs
Reason:
As per IFRS, optionally convertible debentures is a compound financial instrument
(` in lakh)
Present value of principal paid in the 5th year (5,000 lakhs x 0.621) 3,105
Annuity value of interest payable (5,000 x 8% x 3.79) 1,516
Total liability component 4,621
Finance cost on liability component = ` 231 lakhs (4,621 x 10% x 6/12)
5. Option (a) ` 200 lakhs
Reason:
As per IGAAP, accrued interest on optionally convertible debentures for 6 months is =
5,000 lakhs x 8% x 6/12 = ` 200 lakhs

II. Answer to Descriptive Question

6. Consolidated Statement of Financial Position of Giant Ltd.
(All figures are ` in lakhs)
Particulars Note As at As at
No. 31 March, 20X6 1 April, 20X5
ASSETS
(1) Non-current assets
(a) Property, Plant and Equipment 1 24,481.90 22,078.20
(b) Goodwill on consolidation 2 4,383.06 4,383.06
(c) Other Intangible assets 5,345 5,598
(d) Financial Assets
(i) Investments 3 10,360 10,270
(ii) Loans and advances 3,918 1,615
(2) Current assets
(a) Inventories 2,818 2,514
(b) Financial Assets
(i) Investments 4 4,032 1,210
(ii) Trade receivables 4,392 3,746
(iii) Cash and cash equivalents 285 260
(iv) Loans 4,888 5,307
Total Assets 64,902.96 56,981.26
(1) Equity
(a) Equity Share capital 17,000 17,000
(b) Other Equity
- Equity component of 5 379 -
compound financial instrument
- Retained Earnings 6 13,782.26 11,648.81
(c) Non-controlling interest 7 5,798.96 5,581.08

CASE STUDIES 4.9
LIABILITIES
(2) Non-current liabilities
(a) Financial Liabilities
Borrowings 8 9,371 4,750
(b) Provisions 2,201 2,367
(c) Deferred tax liabilities (Net) 1,335 1,178
(d) Other non-current liabilities 9 507 1,639.65
(payment due for Acquisition
of business combination)
(3) Current liabilities
(a) Financial Liabilities
(i) Borrowings 5,060 5,011
(ii) Trade payables 2,626 1,894
(b) Other current liabilities 10 5,755.74 4,911.72
(c) Provisions 11 1,087 1,000
Total Equity and Liabilities 64,902.96 56,981.26
Notes to the Financial Statements (All figures are ` in lakhs)

1. Property Plant and Equipment
31.3.20X6 1.4.20X5
Balance as per IGAAP 21,792 19,138
Add: Increase in fair value of PPE as on 1,250 1,250
1.4.20X5 (6,000 -4,750)
Less: Short depreciation (62.50)
Add: Retrospective increase on application of 1,878 1,878
IFRS 3 and IFRS 1
Less: Short depreciation on increased value on (187.80) (187.80)
1.4.20X5
Less: Short depreciation on increased value on
31.3.20X6 (187.80)
24,481.90 22,078.20

2. Goodwill on consolidation
31.3.20X6 1.4.20X5
Less: Decrease in value due to retrospective
restatement of Business combination (1,561.94) (1,561.94)
4,383.06 4,383.06
3. Non-current investment
31.3.20X6 1.4.20X5
Less: Decrease in value due to retrospective (270)
restatement of Business combination
[W.N.5b(iv)]
Add: Increase in Fair value of Equity shares of 220 420
Strategy Ltd. not held for trading (in the
books of Dwarf) (on 31.3.20X6 = 5,620-
5,400) (on 1.4.20X5 = 5,550-5,130)(W.N.3)
Less: Decrease in Fair value of Optionally
convertible preference shares (W.N.3) (10) (30)
10,360 10,270
4. Current investment
31.3.20X6 1.4.20X5
Less: Cost of Debt oriented mutual fund (1,200) (1,080)
Add: Fair value of Debt oriented mutual fund 1,350 1,210
Less: Cost of Equity oriented mutual fund (2,530)
Add: Fair value of Equity oriented mutual fund 2,682
4,032 1,210
5. Equity component in Optionally Convertible Debentures = ` 379 lakhs (W.N.1)

6. Retained Earnings
31.3.20X6 1.4.20X5

CASE STUDIES 4.11
Less: Difference on account of change in accrued -

interest on Optionally Convertible Debentures
(231-200) (W.N.1) (31)
Add: Increase in fair value of current investment
1.4.20X5 = (1,210-1,080) 31.3.20X6 =
(1,350-1,200) + (2,682-2,530) 302 130
Add: Difference in fair value and cost of non
current investment 1.4.20X5 = (refer W.N.3)
31.3.20X6 = (5,620-5,400) - (1,750 – 1,740) 210 390
Add: Proposed dividend not declared till 31.3.20X6 255
Add: Increase in the fair value of the PPE on the 1,250 1,250
transition date
Less: Short Depreciation on revaluation of building (62.50)
property
Add/Less: Difference on account of retrospective
restatement of business combination
[W.N.5b(iv)] 1,878 (150)
Less: Increase in NCI (W.N.5b(iv)) (643.20)
Less: Increase in share of NCI due to change in
value of assets [W.N.5b(vii)] (45.76) (92.88)
Increase in non-current liability as on 1.4.20X5 (505)
Less: Increase in Fair value of contingent
consideration 1.4.20X5 = (505-500)
31.3.20X6 = (507-505) [W.N.5b(viii)[ (2) (5)
Less: Interest @ 10% on 2 nd instalment (1437.24 x (143.72)
10%)
Less: Interest @ 10% on 3rd instalment
1.4.20X5 = (1,306.74 x 10%) (130.67)
31.3.20X6 = (1,437.41 x 10%) (143.74)
Less: Short depreciation on account of fair value of
PPE 1.4.20X5 = 31.3.20X6 = [(187.80
+187.80)] (375.60) (187.80)
Less: Finance cost on deferred consideration of
` 2,320 (211.12)
Less: Decrease in goodwill on consolidation (1,561.94)
13,782.26 11,648.81

7. Non-controlling interest
31.3.20X6 1.4.20X5
Add: Restatement as per IFRS (W.N.5b(iv)) 643.20 643.20
Add: Changes in NCI’s share subsequent to
acquisition date 45.76 92.88
5,798.96 5,581.08
8. Long-term borrowing- Optionally Convertible Debentures

31.3.20X6 1.4.20X5
Less: Cost of Optionally Convertible Debentures (5,000) -
Add: PV of Optionally Convertible Debentures
(liability component) (W.N.1) 4,621 -
9,371 4,750
9. Other non-current liability

31.3.20X6 1.4.20X5
Balance as per IGAAP - 1,740
Less: Adjustment on account of restatement of
business combination [W.N.5b(iv)] (736.02)
(947.14 – 211.12)
Add: Value as per IFRS (1,306.74 x 10%) 130.67
Add: Contingent consideration (500+5) 507 505
507 1,639.65
10. Other current liabilities

31.3.20X6 1.4.20X5
Less: Accrued interest as per IGAAP (W.N.1) (200) -
Add: Accrued interest as per IFRS on PV of
Optionally Convertible Debentures (liability
component) 231

CASE STUDIES 4.13
Add: Interest @ 10% on deferred payment

[W.N.5b(ix)] 143.74 143.72
5,755.74 4,911.72
11. Short term provision

31.3.20X6 1.4.20X5
Less: Reversal of proposed dividend not
declared till 31.3.20X6 (170 lakhs equity
shares x ` 1.5) (255) -
1,087 1,000
Working Notes: (All figures are ` in lakhs)

1. Optionally Convertible Debentures is a compound financial instrument
Particulars (` in lakhs)
Present value of principal paid in the 5th year
(5,000 lakhs x 0.621) 3,105
Annuity value of interest payable (5,000 x 8% x 3.79) 1,516
Total liability component 4,621
Less: Consideration paid 5,000
Residual – equity component 379
Therefore, Long term borrowings of 31 March, 20X6 which includes

` 5,000 lakhs of OCD will be deducted and liability component of ` 4,621 lakhs
will be added. Further, from other current liabilities, accrued interest for
6 months on OCD of ` 200 lakhs (5,000 lakhs x 8% x 6/12) will be deducted and
` 231 lakhs (4,621 x 10% x 6/12) will be added. The net effect of change in
interest value ` 31 lakhs (231 lakhs – 200 lakhs) will be reflected in the P&L.
2. Investments appearing in the Consolidated Statement of Financial Position of
Giant Ltd.
S. Nature of Current / Basis as per 31 March, 1 April,
No. Investment Non-current IFRS 20X6 20X5
1. Debt oriented Current FVTPL 1,350 1,210
mutual fund
2. Equity oriented Current FVTPL 2,682
mutual fund

3 Equity shares of Non-current FVTPL 5,620 5,550

Strategy Ltd. not
held for trading
(in the books of
Dwarf Ltd.)
4. Redeemable Non-current Amortised 3,000 3,000
Debentures @ cost (Here
10% coupon cost is
assumed as
amortised
cost)
5. Optionally Non-current FVTPL 1,740 1,720
convertible
preference
shares @ 9%
Treatment on 1 April, 20X5

Non-current investment will be increased by ` 390 lakhs [(` 5,550 lakhs –
` 5,130 lakhs) – (1,750 – 1720)]
Current investment will increase by ` 130 lakhs (1,210 – 1,080)
Retained earnings (P&L) will be credited by ` 520 lakhs (390 + 130)
Treatment on 31 March, 20X6
Non-current investment will be increased by ` 210 lakhs [(` 5,620 lakhs –
` 5,400 lakhs) – (1,750 – 1740)]
Current investment will increase by ` 302 lakhs
[(1,350- 1,200) + (2,682- 2,530)]
Profit and Loss will increase by ` 512 lakhs (210 + 302)
3. Interim dividend paid during on 20 November 20X4 is declared during the year
20X4-20X5. Hence it does not require adjustment.
4. Proposed dividend of ` 1.5 per share ie. (1.5 x 170 lakhs shares= 255 lakhs)
proposed on 31 March, 20X6 shall not be included in the short-term provisions
of 31 March, 20X6. (Refer Note 11). Also it should not be deducted from
Reserves and surplus of 31 March, 20X6.
5. Application of first time adoption of IFRS
(a) PPE Adjustments
In accordance with paragraph D5 of IFRS 1, a first-time adopter may
value any of its PPE at fair value as deemed cost on the transition date.

CASE STUDIES 4.15
Since in the question, it is mentioned that all other items of PPE qualify
as carrying cost as per IAS 16, the entity can consider fair value of
Building property as its deemed cost. (Refer Note 1 & 6 for calculation
and impact)
(b) Retrospective restatement of business combination on first time adoption of the
standard
(i) Calculation of purchase consideration as per IFRS 3 ` in lakhs
70 lakhs shares of ` 100 each 7,000

Cash paid over the years
31.3.20X5 2,320 0.909 2,108.88
31.3.20X6 1,740 0.826 1,437.24
31.3.20X7 1,740 0.751 1,306.74 4,852.86
Contingent consideration 500
12,352.86
(ii) Calculation of NCI by proportionate share of net assets

Net assets of Dwarf Ltd. = ` 13,283 lakhs
NCI = ` 13,283 lakhs x 40% = ` 5,313.20 lakhs
(iii) Calculation of Goodwill as per IFRS 3
Goodwill = Purchase consideration + NCI – Net assets
= 12,352.86 + 5,313.20 – 13,283 = 4,383.06
Acquisition date cost of ` 150 lakhs shall be expensed.
Contingent consideration shall be measured at fair value at each reporting date
and changes in fair value shall be recognized in profit or loss.
(iv) Retrospective restatement of Business combination as on 1.4.20X4
` in lakhs
Difference IGAAP IFRS
Purchase consideration 447.14 12,800* 12,352.86
Less: Net asset 1,608 11,675 13,283
2,055.14 1,125 (930.14)
Add: NCI (643.2) 4,670 5,313.20

1,411.95 5,795 4,383.06

Add: Acquisition cost 150 150
Goodwill 1,561.94 5,945 4,383.06
*Purchase consideration as per IGAAP = 7,000 + 5,800 = 12,800.

Journal entry for the above as on 1.4.20X4 ` in lakhs
PPE 1,878
Shareholders of Dwarf Ltd. (CL + NCL) [W.N.5b(ix)] 947.14
Retained Earnings 150
To Investment 270
To NCI 643.20
To Goodwill on consolidation 1,561.94
To Contingent consideration 500
(v) Values of Property and Equipment ` in lakhs
Difference IGAAP IFRS

As on 1.4.20X4 6,262 8,140
Less: Depreciation (routed through RE) (187.80) (626.20) (814)
Value as on 1.4.20X5 5,635.80 7,326
Less: Depreciation (routed through P&L) (187.80) (626.20) (814)
Value as on 31.3.20X6 5,009.60 6,512
(vi) Investment in equity instruments of Strategy Ltd.

Fair valuation of investment in equity as on 1 April, 20X4 = 5,400 – 5,130= 270
Fair valuation gain on investment as on1 April, 20X5 = 5,550 – 5,130= 420
Fair valuation gain on investment for the year
ending 31 March, 20X6 = 5,620 – 5,550 = 70

CASE STUDIES 4.17
(vii) Changes in Non-controlling Interest due to change in the acquisition date

fair values (` in lakhs)
Adjustments 31 March 1 April
20X6 20X5
(i) Fair valuation for investment 490.00 420.00
(ii) Additional Depreciation on property, plant and
equipment (375.60) (187.80)
114.40 232.20
Giant Ltd.’s shares at 60% 68.64 139.32
NCI’s share at 40% 45.76 92.88
(viii) Increase in the fair value of contingent consideration

31.3.20X6 1.4.20X5
Value at the beginning 505 500
Add: Increase in FV (balancing figure)
adjusted through Retailed Earnings (RE) 2 5
Value at the end 507 505
(ix) Unwinding of deferred instalment forming part of purchase consideration

S. Instalment Instalment Instalment Total
No. paid on paid on paid on
31.3.20X5 31.3.20X6 31.3.20X7
a Instalment to be 2,320 1,740 1,740 5,800
paid
b PV @ 10% 2,108.88 1,437.24 1,306.74 4,852.86
discounting
factor
c Difference to be 211.12 302.76 433.26 947.14
routed through
RE
d Interest @ 10%
for 20X4-20X5 - 143.72 130.67 274.394
to be routed
through RE

e Short/Long term 1,580.96 1,437.41

liability as on - (STL) (LTL)
1.4.20X5 (b+d)
f Interest @ 10% 159.04 143.74
for 20X5-20X6
to be routed
through Profit
and loss
g Short term - 1,581.15
liability as on (STL)
31.3.20X6 (e+f)
(c) For common control business combination
Under IFRS 3, accounting for common control is done as per pooling of interest
method. Since the same method is followed as per IGAAP also, there will not be any
change in the transition date Statement of Financial Position on account of it. Also
Giant Ltd. has elected to restate past business combinations from 1 April, 20X3.
Therefore, business combinations taken place earlier to this date should not be
restated.

CASE STUDY 5
Flywing Airways Ltd. is a company which manufactures aircraft parts and engines and sells
them to large multinational companies like Boeing and Airbus Industries. The company
prepares financial statements under International Financial Reporting Standards.
The Chief Financial officer of the company Mr. Laurel needs your help in closing the books and
prepare the financial statements. He has asked his accountant Mr. Hardy to explain you the
transactions for the year ended 31 March 20X3. Mr. Hardy is confused as to how he should
treat the transactions.
On 1 April 20X2, the company began the construction of a new production line in its aircraft
parts manufacturing shed.
Costs relating to the production line are as follows:
Details Amount
` in million
Costs of the basic materials (list price ` 12.5 million less 20% trade discount) 10.00
Recoverable goods and services tax incurred but not included in the 1.00
purchase cost
Employment costs of the construction staff for three months till 30 June 20X2 1.20
Other overheads directly related to the construction 0.90
Payments to external advisors relating to the construction 0.50
Expected dismantling and restoration costs 2.00
The production line took two months to make ready for use and was brought into use on
31 May 20X2.
The other overheads were incurred during the two months period ended on 31 May 20X2. They
included an abnormal cost of ` 0.3 million caused by a major electrical fault.
The production line is expected to have a useful economic life of eight years. After 8 years,
Flywing Airways Ltd. is legally required to dismantle the plant in a specified manner and restore
its location to an acceptable standard. The amount of ` 2 million included in the cost estimates
is the amount that is expected to be incurred at the end of the useful life of the production line.
The appropriate discounting rate is 5%. The present value of ` 1 payable in 8 years at a discount
rate of 5% is approximately ` 0.68.
Four years after being brought into use, the production line will require a major overhaul to
ensure that it generates economic benefits for the second half of its useful life. The estimated
cost of the overhaul, at current prices, is ` 3 million.

The Company computes its depreciation charge on a monthly basis.

No impairment of the plant had occurred by 31 March 20X3.
On 1 July 20X2, Flywing Airways Ltd. acquired 75% of the equity shares of Bolton Ltd. and
gained control of Bolton Ltd. Bolton Ltd. has 12 million equity shares in issue. Details of the
purchase consideration are as follows:
– On 1 July 20X2, Flywing Airways Ltd. issued two shares for every three shares acquired
in Bolton Ltd. On 1 July 20X2, the market value of an equity share in Flywing Airways
Ltd. was ` 6·50 and the market value of an equity share in Bolton Ltd. was ` 6·00.
– On 30 June 20X3, Flywing Airways Ltd. will make a cash payment of ` 7·15 million to the
former shareholders of Bolton Ltd. who sold their shares to Flywing Airways Ltd. on
1 July 20X2. On 1 July 20X2, Flywing Airways Ltd. would have needed to pay interest
at an annual rate of 10% on borrowings.
– On 30 June 20X4, Flywing Airways Ltd. may make a cash payment of ` 30 million to the
former shareholders of Bolton Ltd. who sold their shares to Flywing Airways on
1 July 20X2. This payment is contingent upon the revenues of Flywing Airways growing
by 15% over the two-year period from 1 July 20X2 to 30 June 20X4. On 1 July 20X2, the
fair value of this contingent consideration was ` 25 million. On 31 March 20X3, the fair
value of the contingent consideration was ` 22 million.
On 1 July 20X2, the carrying values of the identifiable net assets of Bolton Ltd. totalled
` 60 million. On 1 July 20X2, the fair values of these net assets totalled ` 70 million. The rate
of deferred tax to apply to temporary differences is 20%.
During the nine months ended on 31 March 20X3, Bolton Ltd. had a poorer than expected
operating performance. Therefore, on 31 March 20X3 it was necessary for Flywing Airways Ltd.
to recognize an impairment of goodwill arising on acquisition of Bolton Ltd., amounting to 10%
of its total computed value.
During the year ended 31 March 20X3, Flywing Airways Ltd. provided consultancy services to
a customer regarding the installation of a new production system related aircraft parts. The
system has caused the customer considerable problems, so the customer has taken legal action
against the Company on the loss of profits that has arisen as a result of the problems with the
system. The customer has claimed damages to the tune of ` 1.6 million.
The legal department of Flywing Airways Ltd. considers that there is a 25% chance the claim
can be successfully defended. The legal department further stated that they are reasonably
confident the Company is covered by insurance against these types of loss. The legal
department planned to raise a claim as soon as the outcome of the case is confirmed.
Mr. Hardy feels nothing needs to be provided for this claim as the Company is suitably covered
against any possible losses.

CASE STUDIES 5.3
Flywing Airways Ltd. delivered a quantity of aircraft components to a customer on

31 December 20X2. The invoiced amount was ` 500,000. The Company expected to receive
payment on 28 February 20X3. However, no cash was received till 31 March 20X3. On
30 April 20X3, the credit control department informed that the customer has major cash flow
problems because of the failure of one of its projects, sometime in February 20X3.
They have agreed to allow the customer to settle the debt until 31 March 20X4, by which time
the customer is confident that the cash flow problems will be resolved.
Though Flywing Airways Ltd. currently expects that an annual interest of 6% (i.e. effective
interest rate) can be received against any money lent out, yet it allowed this customer an interest
free payment period.
Flywing Airways Ltd. also has an Associate company, Flyjet Limited. Following are the
information of Flyjet Limited for the year ended 31 March 20X3:
Particulars ` in million
Net Income after taxes 120
Decrease in accounts receivables 20
Depreciation 25
Increase in inventory 10
Increase in accounts payable 7
Decrease in wages payable 5
Tax charge for the year (including deferred tax liabilities) 15
Profit from sale of land 2
You are required to assist Mr. Hardy the accountant and Mr. Laurel the CFO on account of the
above transaction for the year ended 31 March 20X3.

1. Which of the following items need to be capitalized in determining the cost of Production
Line?
(a) Abnormal cost of ` 0.3 million
(b) Recoverable GST of ` 1 million
(c) Initial estimate of the costs of dismantling and removing the item and restoration
of site of ` 2 million
(d) Initial estimate of the costs of dismantling and removing the item and restoration
of site of ` 1.36 million

2. Calculate the company’s associate Flyjet Ltd.’s cash flow from operations?
(a) ` 158 million
(b) ` 170 million
(c) ` 174 million
3. What accounting treatment should be done in Flywing Airways Ltd.’s books for the year
ending 31 March 20X3, as the customer has taken legal action against the Company on
the loss of profits that has arisen as a result of the problems with the system?
(a) Nothing needs to be provided for claim instituted by the customer as the Company
is suitably covered against any possible losses.
(b) Provision of ` 1.6 million should be recognised with a corresponding charge to
profit or loss.
(c) Provision of ` 0.4 million as per best possible outcome should be recognised with
a corresponding charge to profit or loss.
(d) Contingent Liability would be disclosed in the 31 March 20X3 financial statements.
Charge to profit or loss if any would be recognised in the period when the claim is
settled.
4. Which IFRS / IAS are applicable for accounting treatment at the year ended
31 March 20X3, in transaction of aircraft components delivery to a customer as on
December 20X2.
(a) IAS 37 / IFRS 9
(b) IAS 10 / IAS 32
(c) IFRS 9 / IAS 37
(d) IFRS 9 / IAS 10
5. Calculate the closing balance of trade receivable as at 31 March, 20X3 for the transaction
related to aircraft components sold to a customer on 31 December 20X2.
(a) ` 0.5 million
(b) ` 0.472 million
(c) ` 0.445
(d) ` Nil

CASE STUDIES 5.5

6. Determine how much amount should be recognized in the statement of financial position
and statement of profit or loss for the year ended 31 March, 20X3 with respect to the
construction of production line.
7. Compute the impairment of goodwill on acquisition of Bolton Ltd. under both the methods
permitted in the relevant IAS / IFRS for the initial computation of the non-controlling
interest in Bolton Ltd. at the date of acquisition. Also state the accounting of such
impairment of goodwill.

1. Option (d) Initial estimate of the costs of dismantling and removing the item and
restoration of site of ` 1.36 million
Reason:
As per para 16(c) of IAS 16, elements of cost of PPE includes the initial estimate of the
costs of dismantling and removing the item and restoring the site on which it is located,
the obligation for which an entity incurs either when the item is acquired or as a
consequence of having used the item during a particular period for purposes other than
to produce inventories during that period.
2. Option (b) ` 170 million
Reason:
Cash flow from operating activities – Indirect method
Net Income after taxes 120
Depreciation 25
Profit from sale of land (2)
Tax charges for the year (deferred tax liabilities) 15
158
Decrease in accounts receivables 20
Increase in inventory (10)
Increase in accounts payable 7
Decrease in wages payable (5)
Cash flow from operations 170

3. Option (b) Provision of ` 1.6 million should be recognized with a corresponding

charge to profit or loss.
Reason:
In accordance with IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’
the claim made by the customer needs to be recognised as a liability in the financial
statements for the year ended 31 March 20X3.
The standard stipulates that a provision should be made when, at the reporting date:
– An entity has a present obligation arising out of a past event.
– There is a probable outflow of economic benefits.
– A reliable estimate can be made of the outflow.
Since, all three of the above conditions are satisfied here, a provision is required to be
made.
The provision should be measured at the amount the entity would rationally pay to
settle the obligation at the reporting date.
Where there is a range of possible outcomes, the individual most likely outcome is
often the most appropriate measure to use.
In this case, a provision of ` 1.6 million seems appropriate, with a corresponding
charge to profit or loss.
The insurance claim against our supplier is a contingent asset.
IAS 37 states that contingent assets should not be recognised until their realization is
virtually certain, but should be disclosed where their realization is probable.
Therefore, the contingent asset would be disclosed in the 31 March 20X3 financial
statements. Any credit to profit or loss arises when the claim is settled.
4. Option (d) IFRS 9 / IAS 10
5. Option (b) ` 0.472 million
Reason: for 4 & 5
We do need to take account of the information regarding the financial difficulties of the
customer because these arose prior to 31 March 20X3. IAS 10 ‘Events after the
Reporting Date’, would classify such an event as adjusting since it provides additional
evidence of conditions existing at the reporting date. In this case the additional
information relates to evidence of impairment of a financial asset.
IFRS 9 ‘Financial Instruments’ requires financial assets to be reviewed at each
reporting date for evidence of impairment. Such evidence exists here because

CASE STUDIES 5.7
although the customer is expected to pay the amount due the payment date has been
deferred. As per para B5.5.33 of IFRS 9, for a financial asset that is credit-impaired at
the reporting date, but that is not a purchased or originated credit-impaired financial
asset, an entity shall measure the expected credit losses as the difference between
the asset’s gross carrying amount and the present value of estimated future cash flows
discounted at the financial asset’s effective interest rate. Any adjustment is recognized
in the profit or loss as an impairment gain or loss. Further, Para B5.5.44 provides that
expected credit losses shall be discounted to the reporting date, not to the expected
default or some other date, using the effective interest rate determined at initial
recognition or an approximation thereof.
In such circumstances, IFRS 9 requires that the financial asset be re-measured at the
present value of the expected future receipt, discounted (in the case of a trade
receivable) at a current commercial rate of interest. Therefore, in the financial
statements for the year ended 31 March 20X3, asset should be measured at
` 0.472 million (` 0.5 million/1.06) and an impairment loss of ` 0.028 million
(` 0.5 million – ` 0.472 million) recognised in profit and loss.
In the year ended 31 March 20X4, interest income of ` 0.028 million (` 0.472 x 6%)
should be recognised in profit and loss.

6. Pursuant to IAS 16 - Property, Plant and Equipment, it is incorrect to show the
recoverable goods and services taxes as part of the cost of property, plant and
equipment. The standard stipulates that only irrecoverable taxes should be capitalized
to the cost of the asset.
IAS 16 stipulates that the future overhaul is regarded as a separate component of
property, plant and equipment for depreciation purposes.
Statement showing computation of cost of production line
Purchase cost 10.00
Goods and services tax – recoverable goods and services tax not -
included
Employment costs during the period of getting the production line 0.80
ready for use
Other overheads – abnormal costs of ` 0.3 million has been excluded 0.60
Payment to external advisors – directly attributable cost 0.50
Dismantling costs – recognized at present value (2 million x 0.68) 1.36
Total 13.26

Value of asset carried to Statement of Financial Position
Gross value from computation above 13.26
Less: Depreciation (W.N.1) (1.70)
Net book value – carried to Statement of Financial Position 11.56
Provision for dismantling cost carried to Statement of Financial Position

Non-current liabilities 1.36
Add: Finance cost (W.N.2) 0.06
Net book value – carried to Statement of Financial Position 1.42
Extract of Statement of Profit or Loss

Depreciation (W.N.1) 1.70
Finance cost (W.N.2) 0.06
Amounts carried to Statement of Profit & Loss 1.76
Working Note:
1. Calculation of depreciation charge
Particulars ` in
million
T he asset is split into two depreciable components out of the total
capitalization amount of 13.26 million:
Depreciation for ` 3 million with a useful economic life of four years
(3 million x ¼ x 10/12). 0.63
This is related to a major overhaul to ensure that it generates
economic benefits for the second half of its useful life
Depreciation for ` 10.26 million (13.26 – 3.00) with an useful
economic life of eight years will be : ` 10.26 million x 1/8 x 10/12 1.07
Total (To Statement of Profit or Loss for the year ended 31 March
20X3) 1.70

CASE STUDIES 5.9
2. Finance costs
Unwinding of discount (income statement – finance cost)
1.36 x 5% x 10/12 0.06
To Statement of Profit & Loss for the year ended 31st March 20X3 0.06
7. Computation of Purchase consideration in business combination

` in million
Share exchange (12 million x 75% x 2/3 x ` 6.50) 39.00
Deferred consideration (7.15 million / 1·10) 6.50
Purchase Consideration 70.50
Computation of Non-controlling Interest under
Method I: NCI measured at Fair value
Method II: NCI measured at proportionate share of identifiable net assets
Method I Method II
Purchase Consideration 70.50 70.50
Add: Non-controlling interest at date of acquisition:
At fair value – 3 million x ` 6.00 18.00
% of net assets – 68.00 (working) x 25% 17.00
88.50 87.50
Less: Net assets at the date of acquisition (Refer W.N.) (68.00) (68.00)
Goodwill on acquisition 20.50 19.50
Impairment @ 10% 2.05 1.95
Where the NCI is measured at fair value, the impairment should be attributed partly to
retained earnings (` 1.54 million) and partly to NCI (` 0.51 million). The allocation is
normally based on the group structure ie 75 : 25.
Where the NCI is measured at proportionate share of net assets, the impairment should
be attributed wholly to retained earnings.

Working Note:
Net assets at the date of acquisition
` in million
Fair value at acquisition date 70.00
Deferred tax liability on fair value adjustments [20% x (70.00 – 60.00)] (2.00)
68.00

CASE STUDY 6
RK Super Markets Ltd. owns a chain of retail stores across 16 different locations in the twin
cities of Hyderabad and Secunderabad. For the year ended 31 March 20X2, your firm of
chartered accountants has been engaged for the stock audit assignment which comprises of the
following:
(a) Physical stock take at all store locations
(b) Verification of inventory valuation reports submitted by each store-in-charge and
approval of the same
(c) Report to management regarding the final inventory value as on 31 March 20X2 and
(d) Report to the statutory auditors based on the final inventory valuation report after the
changes as surfaced during the stock audit
A team of 32 articled assistants and four chartered accountants have been deployed by your
firm to carry out the assignment. The physical stock take began at store location at 6 AM and
went on till 10 PM, as the management couldn’t afford to close the stores for more than one
working day. The assignment was executed well on the day of physical stock take and the team
along with the CAs gathered for the queries and observations for the next 3 days.
Retail method of valuation is applied to most of the stock items except for the items mentioned
below which have been valued on the basis of FIFO or Weighted Average Cost.
Following observations were made by the team:
Store No. E004
I - Expired items:
Personal care category – Hand wash packs containing 20 units each (15 packs) had an expiry
date of February, 20X2. Cost-to-company (CTC) of each pack (20 units each) is ` 1,200. The
same has been valued as inventory at net realisable value (NRV) with 2% more than the cost,
because the supplier has an obligation to take back the expired stock with additional 2% over
the cost.
The similar observation was made in the following stores which had the stock from the same
lot:
Store No. No. of packs

E001 14
S003 18
W002 17

N001 11
N002 13
N003 09
II – Quantity mismatch: (compiled across all the stores)

Item Category Description Reported Qty Actual Qty ` Cost per
code UoM*
R-510101 Snacks Biscuits 1,689 boxes 1,589 boxes 1,190
R-511012 Snacks Namkeen 851 boxes 681 boxes 1,890
R-522104 Beverages Coke 1,809 cases 1,691 cases 1,300
S-144109 Grains Wheat 1851 gunny bags 1681 gunny 630
bags
S-143118 Cooking Oil Soyabean 5 Ltr 5,140 cans 5,014 cans 585
D-189107 Hygiene Detergent 2,018 boxes 1,973 boxes 705
Soap
D-125109 Hygiene Dishwash Bars 1,619 boxes 1,508 boxes 647
D-119120 Hygiene Sanitary Pads 1,819 boxes 1,718 boxes 1,200
P-121113 Kitchenware NS Kadhai 561 units 516 units 329
P-713114 Baby care Diapers 819 packs 759 packs 490
*Unit of measurement
III – Valuation policies and actual observations (compiled for each test case based on
samples)
1. Stock held under safe custody for free items to be claimed by customers (on offers) have
been valued at zero. Customers have a right to claim the free item within 14 days from
date of invoice. If the time limit of 14-day exceeds, the claim is foregone by the customer.
Majority of the free items require online registration by the buyers for participation in the
contest conducted by the respective brand which needs to be done by the buyers within
3 days from the date of invoice.
Observations:
(a) A few items were found written “Not for sale. This item needs to be given free
along with ……”. The cost of such items was included in the list of miscellaneous
goods with a value of ` 5,80,000.
(b) Out of it a few items under this category were found damaged. The replacement
cost of such items would be ` 1,50,000.

CASE STUDIES 6.3
2. Grains and pulses are valued at cost on FIFO basis except for rice which is valued on
weighted average cost basis.
Observations:
(a) Following discrepancies were observed in the valuation of rice –
Quantity (gunny Weighted Value of inventory Value of inventory
bags) avg. cost per as per WAC as reported
Unit formula
156 ` 719 1,12,164 1,25,174
107 ` 926 99,082 1,02,182
101 ` 1,139 1,15,039 1,29,017
114 ` 2,619 2,98,566 3,19,105
(b) Discrepancies pertaining to other grains and pulses were as follows:

Quantity Cost per Unit based Value of inventory Value of inventory
(gunny on FIFO calculation as per FIFO as reported
bags)
162 ` 2019 3,27,078 3,41,658
171 ` 1630 2,78,730 2,94,975
139 ` 2618 3,63,902 3,77,941
181 ` 1325 2,39,825 2,58,649
152 ` 2214 3,36,528 3,51,880
3. Snacks and Beverages are valued at weighted average cost.
Observations:
(a) Following discrepancies were noted in the valuation of snacks
Quantity Weighted avg. Value of inventory Value of inventory as
(boxes) cost per box as per WAC reported
formula
166 ` 703 1,16,698 1,20,018
167 ` 653 1,09,051 1,13,727
171 ` 813 1,39,023 1,42,443
169 ` 809 1,36,721 1,40,101
170 ` 715 1,21,550 1,24,270

(b) Valuation of beverages also had the following deviations

Quantity Weighted avg. Value of inventory Value of inventory
(12-bottles pack) cost per pack as per WAC as reported
formula
301 ` 612 1,84,212 1,87,523
315 ` 615 1,93,725 1,98,765
319 ` 627 2,00,013 2,04,798
325 ` 630 2,04,750 2,10,925
311 ` 633 1,96,863 2,03,705
IV – Other observations:
Two items of inventory belong to the own brand of the company. They get the items
manufactured from various housewives on per unit cost basis. Following process is followed in
respect of such own-brand items:
1. Daliya (broken wheat) is procured from housewives who process the whole wheat given
by the company. Cost of tools required for the same are borne by the housewives which
is a nominal investment of ` 3,000 each.
2. Turmeric powder is also procured in the similar manner where raw turmeric is given to
housewives who process the same to return in powder form.
3. Packaging of both these products is done at company’s central packing location in
Kondapur village near Hyderabad.
4. The stock of wheat with housewives on the date of valuation was 1200 kgs and that of
raw turmeric 150 kgs. The stage of completion of process at the place of housewives
can’t be determined.
5. The payment of housewives work is done based on return of goods after the process and
quality check at the central packing location on daily basis at the rate of ` 6 / kg of Daliya
and ` 25 / kg of turmeric powder.
6. Goods that are packed for final sale from the stores are dispatched on weekly basis to
the respective stores.
7. Rent of ` 60,000 per month paid for the packing location is amortised over the number
of units packed during the month. A normal capacity per day is 150 kgs of turmeric
powder packed into 200 grams each and 1200 kgs of daliya packed into 500 grams and
1 kg in the ratio of 2:1 of total stock produced. Number of working days in a year should
be assumed as 300 days, though the total days of the year should be considered as
360 days.

CASE STUDIES 6.5
8. The packing unit has 20 workers and a quality manager. The average salary cost of the
packing unit is ` 3,25,000 per month. Depreciation of packing tools and other
miscellaneous assets at the packing unit is ` 1,80,000 per annum.
9. Direct cost of packaging works out to ` 1.5 per packing unit of turmeric powder and
` 2.15 and 3.25 of Daliya packing units of 500 grams and 1 kg pack respectively.
On the date of physical verification, the packing unit had a stock of five days as per normal
capacity of each product.

1. In personal care category, hand-wash item has been _____________ by ___________
keeping in view the valuation principles in IFRS.
(a) Undervalued, ` 2,328
(b) Undervalued, ` 2,823
(c) Overvalued, ` 2,328
(d) Overvalued, ` 1,18,728
2. Since the company has a right to return the expired goods to respective suppliers, it will
be treated as
(a) Expense
(b) Loss of inventory
(c) Other Current Asset – Receivables from the Suppliers
(d) Income
3. The replacement cost of goods that need to be given as free items to customers shall be
treated as _________ as per the principles of IFRS.
(a) Provision of ` 1,50,000
(b) Contingent liability of ` 1,50,000
(c) Loss of inventory of ` 1,50,000
(d) Expense of ` 1,50,000
4. The inventory cost of turmeric powder and daliya of RK brand shall not include the
following:
(a) Cost of manpower at the packing unit
(b) Cost of tools used by the housewives in processing the goods
(c) Depreciation of packing tools and other assets at the packing centre
(d) Rent of the packing centre

5. During the year, the packing unit was closed for a month due to unforeseen
circumstances. Due to which the normal capacity utilisation for the year was
11 months / 12 months instead of 100%. Will it have any impact of the amount of
depreciation allocated to packed units? How will the depreciation amount be allocated
during the year?
(a) No. Total depreciation of ` 1,80,000 will be allocated to the packed units
(b) Yes. Depreciation of ` 1,65,000 will be allocated to the packed units and ` 15,000
will be recognised as expenses
(c) Yes. Total depreciation of ` 1,80,000 will be recognised as expenses
(d) No. Depreciation of ` 1,62,000 will be allocated to the packed units and ` 18,000
will be recognised as expenses.

6. Based on the deviations observed during the physical stock take, calculate the amount by
which closing inventory is overvalued at RK Super Markets Ltd. Exclude the stock of own-
brand goods, while calculating the same.
7. News of health threat in particular brand noodles were going viral on social media since
29 March 20X2. On 2 April 20X2, the Supreme Court ordered a ban on the sale of such
noodles with immediate effect until the investigations are complete which in all probability
would take around 6 months’ time. However, the existing stock will not be useful for sale.
Line no. 2 and 3 in snacks category given in 3(a) refer to two different varieties of the
noodles of that brand. What will be the treatment of that stock if the NRV is zero and the
cost of safe disposal is ` 20,000? As per the agreement with the supplier the goods once
sold by the supplier will be under the risk of the retailer.
8. If the average cost of raw material for daliya and turmeric powder is ` 27.25 per kg and
` 105.50 per kg what is the value of inventory of turmeric powder and daliya of RK brand
assuming that the cost of packing material in stock on the valuation date was ` 21,907 and
` 14,148 respectively for daliya and turmeric powder and allocation of fixed overheads is
done in the ratio of 2:1 for daliya and turmeric?

1. Option (d) Overvalued ` 1,18,728
Reason:
As per para 6 of IAS 2, inventories are assets:
(a) Held for sale in the ordinary course of business;

CASE STUDIES 6.7
(b) In the process of production for such sale; or

(c) In the form of materials or supplies to be consumed in the production process
or in the rendering of services.
Expired items are held for return to respective vendors and does not fit into any criteria
above for recognition as inventory.
Hence the entire valuation done at NRV is overvalued inventory calculated as below:
Total expired stock of Hand wash packs is (15 + 14 +18 +17+ 11 +13 +9) = 97 packs
Total cost of 97 packs = ` 1,200 per pack x 97 packs = ` 1,16,400
Valuation done at NRV = `1,16,400 x 102% = ` 1,18,728
2. Option (c) Other Current Asset – Receivables from the Suppliers
Reason:
The company has a contractual right to return the expired goods at cost + 2%, the
entire amount of expired stock in the category at the NRV shall be recognised as
receivables from supplier.
3. Option (a) Provision of ` 1,50,000
Reason:
As per para 10 of IAS 37, a provision is a liability of uncertain timing or amount. Further,
para 14 says, a provision shall be recognised when:
a) An entity has a present obligation (legal or constructive) as a result of a past
event;
b) It is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
c) A reliable estimate can be made of the amount of the obligation.
In the instant case, it is not clear as to how many customers will actually do the needful
to claim the free item and within the prescribed time limit. However, the maximum
amount of liability that may arise assuming all customers will do the needful can be
estimated reliably. Hence a provision should be recognised.
4. Option (b) Cost of tools used by the housewives in processing the goods
Reason:
Para 10 of IAS 2 specifies that the cost of inventories shall comprise all costs of
purchase, costs of conversion and other costs incurred in bringing the inventories to
their present location and condition.

Further para 12 also elaborates on the examples of cost of conversion. Accordingly, in

the instant case the cost of tools owned by the housewives does not fit in since the
cost is not incurred by the company hence not forming part of the cost of inventory.
5. Option (b) Yes. Depreciation of ` 1,65,000 will be allocated to the packed units and
` 15,000 will be recognised as expenses
Reason:
Para 13 of IAS 2 clarifies that the amount of fixed overhead allocated to each unit of
production is not increased because of low production or idle plant. Unallocated
overheads are recognised as an expense in the period in which they are incurred.
Accordingly, the rate of allocation per unit will remain same based on the normal
capacity. Any unallocated depreciation due to idle plant is to be recognised as an
expense during the year.
In the instant case depreciation for the whole year is ` 1,80,000 and hence the per unit
allocation cost of depreciation would be:
Particulars `
Depreciation per annum (given) (a) ` 1,80,000
Normal capacity Refer Working Note (b) 8,25,000 packs
Depreciation per packing unit (a) / (b) = (c) 0.21818
Actual production units (8,25,000 / 12) x 11 (d) 7,56,250
Depreciation allocated (c) x (d) = (e) 1,65,000 (approx.)
Unallocated depreciation (a) – (e) = (f) 15,000
recognised as expense
Calculation of normal capacity:

Turmeric powder – (150 kg x 1,000 grams) / 200 grams each = 750 packs
Daliya 1,200 kg in the ratio of 2:1 = 800 kg and 400 kg
500 grams packs = (800 kg x 1,000 grams) / 500 grams each = 1,600 packs
1 kg packs = (400 kg x 1,000 grams) / 1,000 grams each = 400 packs
Total no. of packed units = 2,750 per day x 300 days = 8,25,000 packs

6. As per para 9 of IAS 2, inventories shall be measured at the lower of cost and net
realisable value.

CASE STUDIES 6.9
Based on the audit observations, below is the calculation of overvaluation of inventory of

RK Super Market Ltd. of all stores in toto:
Category/Item Valuation as per Valuation done Over-valuation
IFRS principles by the company (in `)
Personal care – hand- Zero (Refer MCQ 1) 1,18,728 118,728
wash
Due to quantity (W.N.1) 10,43,457
mismatch
Not-for-sale items (free) Zero 580,000 5,80,000
Rice (W.N.2) 624,851 675,478 50,627
Grains & pulses (W.N.3) 15,46,063 16,25,103 79,040
Snacks (W.N.4) 623,043 640,559 17,516
Beverages (W.N.5) 979,563 10,05,716 26,153
Total 19,15,521
Working Notes:
1. Valuation difference due to quantity mismatch:
Item code Category Description Reported Qty Actual Qty Difference ` Cost Difference
per UoM [(1) – (2)] x (3)
(1) (2) (3)
R-510101 Snacks Biscuits 1,689 boxes 1,589 boxes 100 boxes 1,190 1,19,000
R-511012 Snacks Namkeen 851 boxes 681 boxes 170 boxes 1,890 3,21,300
R-522104 Beverages Coke 1,809 cases 1,691 cases 118 cases 1,300 1,53,400
S-144109 Grains Wheat 1,851 gunny 1,681 gunny 170 gunny 630 1,07,100
bags bags bags
S-143118 Cooking Oil Soyabean 5 Ltr 5,140 cans 5,014 cans 126 cans 585 73,710
D-189107 Hygiene Detergent 2,018 boxes 1,973 boxes 45 boxes 705 31,725
Soap
D-125109 Hygiene Dishwash Bars 1,619 boxes 1,508 boxes 111 boxes 647 71,817
D-119120 Hygiene Sanitary Pads 1,819 boxes 1,718 boxes 101 boxes 1,200 1,21,200
P-121113 Kitchenware NS Kadhai 561 units 516 units 45 units 329 14,805
P-713114 Baby care Diapers 819 packs 759 packs 60 packs 490 29,400
Total 10,43,457
2. Overvaluation of Rice gunny bags

Valuation of Rice gunny bags as per IFRS principles (1,12,164 + 99,082 +
1,15,039 + 2,98,566) = ` 6,24,851
Valuation of Rice gunny bags done by the companies (1,25,174 + 1,02,182 +
1,29,017 + 3,19,105) = ` 6,75,478

Overvaluation = Valuation done by the company - Valuation as per IFRS

= ` 6,75,478 – ` 6,24,851 = ` 50,627
3. Overvaluation of Grains and pulses gunny bags
Valuation of Grains and pulses gunny bags as per IFRS principles (3,27,078 +
2,78,730 + 3,63,902 + 2,39,825 + 3,36,528) = ` 15,46,063
Valuation of Grains and pulses gunny bags done by the companies (3,41,658 +
2,94,975 + 3,77,941 + 2,58,649 + 3,51,880) = ` 16,25,103
= ` 15,46,063 – ` 16,25,103 = ` 79,040
4. Overvaluation of Snacks boxes
Valuation of Snacks boxes as per IFRS principles (1,16,698 + 1,09,051 + 1,39,023
+ 1,36,721 + 1,21,550) = ` 6,23,043
Valuation of Snacks boxes done by the companies (1,20,018 + 1,13,727 +
1,42,443 + 1,40,101 + 1,24,270) = ` 6,40,559
= ` 6,40,559 – ` 6,23,043 = ` 17,516
5. Overvaluation of Beverages packs
Valuation of Beverages packs as per IFRS principles (1,84,212 + 1,93,725 +
2,00,013 + 2,04,750 + 1,96,863) = ` 9,79,563
Valuation of Beverages packs done by the companies (1,87,523 + 1,98,765 +
2,04,798 + 2,10,925 + 2,03,705) = ` 10,05,716
= ` 10,05,716 – ` 9,79,563 = ` 26,153
7. Para 3 of IAS 10 defines events after the reporting period as those events that occur between
the end of the reporting period and the date when the financial statements are approved by
the Board of Directors in case of a company. Further it identifies two types of events –
(a) Adjusting events – those that provide evidence of conditions that existed at the
end of the reporting period; and
(b) Non-adjusting events – those that are indicative of conditions that arose after the
reporting period.
Further, para 8 states that an entity shall adjust the amounts recognized in its financial
statements to reflect adjusting events after the reporting period.
Since news for health threat in noodles brand went viral on 29 March, 20X2 and Supreme
Court ordered ban on 2 April, 20X2 i.e. before the authorisation of the financial

CASE STUDIES 6.11
statements, this is an adjusting event. Therefore, the item of inventory shall be written
down to NRV which is zero.
Also, a liability should be recognised for safe disposal of such item to the tune of
` 20,000.
So, the carrying amount of inventory should be reduced by ` 2,48,074 (109,051 +
139,023) assuming that correction is done as per principles of valuation laid down in
IAS 2.
8. Inventory valuation of own-brand products – RK
Particulars Working / Daliya Turmeric
reference Powder
Raw material for processing with 1,200 kg x 27.25 32,700
housewives (1 day stock) 150 kg x 105.5 15,825
Finished Goods (5 days stock) (W.N.2) 2,23,200 1,03,500
Packing material (Given) 21,907 14,148
Allocation of fixed overhead ` 69,167
(W.N.3) 2:1 46,111 23,056
Total 3,23,918 1,56,529
Working Notes:
1. Stock of finished goods
Particulars Stock of Stock of packs
packs per day for 5 days
Turmeric powder (200 gms pack) 750 3,750
Daliya (500 gms pack) 1,600 8,000
Daliya (1 kg pack) 400 2,000
2,750 13,750
2. Raw material, processing cost (paid to housewives) and packing material
cost for finished goods
Particulars Working/ Per day For 5 Days
reference Daliya Turmeric Daliya Turmeric
Raw material for Daliya 1,200 x 27.25 32,700 1,63,500
Raw material for Turmeric 150 x 105.5 15,825 79,125
powder
Processing cost for Daliya 1,200 x 6 7,200 36,000
Processing cost for Turmeric 150 x 25 3,750 18,750
powder
Packing material for Daliya (1,600 x 2.15) 4,740 23,700
+ (400 x 3.25)

Packing material for Turmeric

powder 750 x 1.5 1,125 5,625
2,23,200 1,03,500
So, raw material and processing cost of Daliya for 5 days is ` 2,23,200 and
Raw material and processing cost of Turmeric Powder for 5 days is ` 1,03,500
3. Calculation of fixed overheads
a. Rent of packing centre = ` 60,000 per month
Number of units packed in a year = 8,25,000 packs (as computed for
MCQ 5)
Number of units packed in a month = 8,25,000 / 12 months = 68,750
packs
Number of units packed in 5 days = (68,750 packs / 25 days) x 5
days = 13,750 packs
Rent for 5 days = (` 60,000 / 68,750 packs) x
13,750 packs = ` 12,000
b. Direct labour = (3,25,000/30 days) x 5 days = ` 54,167
c. Depreciation of miscellaneous assets
= 13,750 packs x 0.21818 (as computed for MCQ 5) = ` 3,000
Total fixed overheads to be allocated = ` 12,000 + ` 54,167 + ` 3,000 = ` 69,167

CASE STUDY 7
The income statements and summarised statements of changes in equity of Apricot Ltd.,
Baxter Ltd. and Caramel Ltd. for the year ended 31 March 20X4 are given below:
Income Statements Apricot Ltd. Baxter Ltd. Caramel Ltd.
` ’000 ` ’000 ` ’000
Revenue 470,000 4,34,000 2,26,000
Cost of sales (2,56,000) (2,18,000) (1,76,000)
Gross profit 214,000 2,16,000 50,000
Distribution costs (18,000) (17,000) (15,000)
Administrative expenses (19,000) (16,000) (17,000)
Investment income 37,300 Nil Nil
Finance cost (68,000) (65,000) (44,000)
Profit/(loss) before tax 146,300 1,18000 (26,000)
Income tax expense (41,000) (33,000) Nil
Profit/(loss) for the year 1,05,300 85,000 (26,000)
Summarised Statement of Changes in Equity

Balance on 1 April 20X3 5,40,000 3,90,000 1,92,000
Comprehensive income for the year 1,05,300 85,000 (26,000)
Dividends paid on 31 December 20X3 (52,000) (40,000) Nil
Balance on 31 March 20X4 5,93,300 4,35,000 1,66,000
Additional Information:
(All amounts are in ‘000, unless otherwise stated)
On 1 October 20X2, Apricot Ltd. purchased 75,000 of 1,00,000 equity shares in Baxter Ltd.
Details of the share purchase were as follows:
– Apricot Ltd. issued two new equity shares for every three shares acquired in Baxter Ltd.
On 1 October 20X2 the market value of an Apricot Ltd.’s share was ` 6 and the market
value of a Baxter Ltd.’s share was ` 3·20.
– Apricot Ltd. agreed to make additional cash payment of ` 1 for every share acquired in
Baxter Ltd. to be paid on 30 September 20X4. This payment is contingent on the profits
of Baxter exceeding a cumulative target in the two-year period ending
30 September 20X4. The fair value of this contingent payment was ` 55,000 on
1 October 20X2. The fair value had risen to ` 58,000 by 31 March 20X3 and to ` 64,000

by 31 March 20X4. The directors of Apricot Ltd. correctly accounted for this contingent
consideration in its financial statements for the year ended 31 March 20X3 but no
changes have been made to the carrying value of the contingent consideration since
31 March 20X3.
– Apricot Ltd. incurred legal and professional costs of ` 5,000 connected with the
acquisition; ` 2,400 of these costs related to the cost of issuing shares. Apricot Ltd.
correctly accounted for these acquisition costs in its financial statements for the year
Apricot Ltd. decided to value the non-controlling interest in Baxter Ltd. at the date of acquisition
at fair value in its consolidated financial statements. The market value of a Baxter Ltd. share at
that date was used to calculate the fair value of the non-controlling interest.
The equity of Baxter Ltd. as shown in its own financial statements at 1 October 20X2 was
` 3,00,000. At that date the property, plant and equipment (PPE) of Baxter Ltd. had a carrying
value of ` 2,40,000 and a fair value of ` 2,80,000. The estimated future useful economic life of
the PPE of Baxter Ltd. was four years from 1 October 20X2. No disposals of PPE occurred
between 1 October 20X2 and 31 March 20X4.
On 1 October, 20X2, the directors estimated that the internally generated brand name of Baxter
Ltd. had a fair value of ` 30,000 and a future useful economic life of 30 years.
All depreciation and amortisation is charged on a monthly basis and presented in cost of sales.
On 31 March 20X3 and 31 March, 20X4 the goodwill on consolidation of Baxter Ltd. was
reviewed for impairment. No impairment of the goodwill was required as a result of the review
on 31 March 20X3. Baxter Ltd. is regarded as a single cash generating unit for impairment
purposes. On 31 March 20X4, Baxter Ltd.’s recoverable amount was estimated as ` 5,50,000.
Any impairment of goodwill is charged to cost of sales.
On 1 October 20X3, Apricot Ltd. purchased 40% of the equity shares of Caramel Ltd. for
` 75,000 in cash. This purchase allowed Apricot Ltd. to exercise a significant influence over
Caramel Ltd. No material differences between the market value and the book value of the net
assets of Caramel Ltd. were apparent at the date of the share purchase. On 31 March, 20X4
an impairment review was conducted resulting in an impairment required of ` 1800.
Baxter Ltd. supplies products to Apricot Ltd. and Caramel Ltd. Sales of the products to Apricot
Ltd. and Caramel Ltd. during the year ended 31 March 20X4 were as follows (all sales were
made at a mark-up of 33-1/3% on cost):
– Sales to Apricot Ltd. ` 18,000.
– Sales to Caramel Ltd. ` 12,000.

CASE STUDIES 7.3
At 31 March 20X4 and 31 March, 20X3, the inventories of Apricot Ltd. and Caramel Ltd. included
the following amounts in respect of goods purchased from Baxter Ltd.
Amount in inventory of
31 March 20X4 (` ‘000) 31 March 20X3 (` ‘000)

Apricot Ltd. 3,600 2,100
Caramel Ltd. 2,700 Nil
At 1 April 20X3, Apricot Ltd. had two equity investments that it designated as fair value through
other comprehensive income in accordance with IFRS 9 Financial Instruments. At the date of
acquisition:
Name Original cost Fair value at 31st March 20X3 Fair value at 31st March 20X4
` ‘000 ` ‘000 ` ‘000
Daimler Ltd. 12,000 15,000 NA
Ecostar Ltd. 11,000 14,000 15,400
On 31 January, 20X4, Apricot Ltd. disposed of its investment in Daimler Ltd. for ` 19,500 and
showed a profit on sale of as part of investment income. Apart from recording the receipt of
dividend income no other entries have been made in the financial statements for the year ended
31 March 20X4 regarding the investment in Ecostar Ltd. Both investments had been correctly
treated in the financial statements for the year ended 31 March 20X3.
On 1 April 20X3, Apricot Ltd. issued 3,00,000 loan notes of ` 1 per note at par. The loan notes
entitled the holders to an interest payment of 5 paise per note, payable annually in arrears. The
loan notes are repayable at par on 31 March 20X8. As an alternative to repayment the holders
can elect to convert the notes into equity shares in Apricot Ltd. On 1 April 20X3, investors in
non-convertible notes expect an annual return of 8%. You are given the following discount
factors:
Discount rate Present value of Re.1 payable
At the end of year 5 Cumulatively at the end of years 1–5
5% 78·4 paise ` 4·33
8% 68·1 paise ` 3·99
On 1 April, 20X3, the directors of Apricot Ltd. recorded a loan liability of ` 3,00,000 and in the
year ended 31 March 20X4, a finance cost of ` 15,000 (3,00,000 x 5 paise) in respect of these
notes.
During the year ended 31 March 20X4, Apricot Ltd. began production at three newly acquired
chemical factories. The normal production process at each factory results in environmental
damage through generation and disposal of effluent. Apricot Ltd. has a policy of only rectifying

such damage when legally required to do so. Details of the damage caused at the three sites
up to and including 31 March 20X4 are as follows:
Factory Damage caused by 31 March Clean-up legislation in place at

20X4 (` ’000) 31 March 20X4?
A 3,000 Yes
B 1,000 No
C 2,000 No but legislation passed since year end with
retrospective effect
No provision for environmental damage has been made in the financial statements. Any
appropriate provision should be reported as part of cost of sales.

1. Calculate the finance cost of convertible loan notes issued by Apricot Limited, for the
period ending 31 March 20X4.
(a) ` 21,132
(b) ` 24,000
(c) ` 15,000
(d) ` 13,208
2. Calculate the amount of goodwill impairment as at 31 March 20X4, related to acquisition
of Baxter Limited.
(a) ` 1,18,500
(b) ` 53,500
(c) ` 3,500
(d) ` 32,000
3. Compute the share of associate Caramel Limited, which Apricot Limited must incorporate
in its books for the period ending 31 March 20X4
(a) Loss- ` 5,200
(b) Loss- ` 7,000
(c) Loss- ` 10,400
(d) Loss- ` 26,000
4. Calculate the amount which should be shown in other comprehensive income for the
period ending 31 March 20X4 on account of equity investment made by Apricot Ltd.

CASE STUDIES 7.5
(a) Gain of ` 1,400

(b) Gain of ` 4,500
(c) Gain of ` 4,425
(d) Gain of ` 5,900
5. On conversion of a convertible instrument at maturity, the entity derecognizes the liability
component and recognizes it as
(a) Expense
(b) A separate liability
(c) Equity
(d) Income

6. Draw consolidated Statement of Profit & Loss and Other Comprehensive Income of
Apricot Ltd. for the period ended 31 March 20X4. Also prepare Consolidated Statement
of Changes in Equity of the entity for the year ended 31 March 20X4.

1. Option (a) ` 21,132
Reason: Refer working note 8
2 Option (c) ` 3,500
3. Option (b) Loss ` 7000

4 Option (d) ` 5,900

5 Option (c) Equity


6. (a) Consolidated Statement of Profit & Loss and other comprehensive income for
the year ended 31 March 20X4
` ’000
Revenue (W.N.1) 886,000

Cost of sales (W.N.2) (482,145)
Gross profit 403,855

Distribution costs (18,000 + 17,000) (35,000)
Administrative expenses (19,000 + 16,000) (35,000)
Investment income (W.N.6) 2,800
Finance cost (W.N.7) (139,132)
Share of losses of associate (W.N.9) (7,000)
Profit before tax 190,523

Income tax expense (41,000 + 33,000) (74,000)
Net profit for the year 116,523

Other comprehensive income (W.N.10) 5,900
Comprehensive income for the year 122,423
Net profit attributable to:

Non-controlling interest (W.N.11) 17,464
Controlling interest 99,059
Net profit for the year 116,523
Comprehensive income attributable to

Non-controlling interest 17,464
Controlling interest 104,959
Comprehensive income for the year 122,423

CASE STUDIES 7.7
(b) Consolidated statement of changes in equity for the year ended 31 March
20X4
Controlling Non- Total

interest controlling
interest
` ’000 ` ’000 ` ’000
Balance at 1 April 20X3 (W.N.12 &

W.N.13) 602,850 101,125 703,975
Comprehensive income for the year 104,959 17,464 122,423
Equity component of convertible
bonds (W.N.14) 35,850 35,850
Dividends (52,000) (10,000) (62,000)
Balance at 31 March 20X4 691,659 108,589 800,248
Working Notes:
1. Computation of Consolidated Revenue
` ‘000
Apricot Ltd + Baxter Ltd (4,70,000 + 4,34,000) 9,04,000
Sales from Baxter Ltd to Apricot Ltd. (see note 1) (18,000)
8,86,000
2. Cost of Sales
` ’000
Apricot Ltd + Baxter Ltd 474,000
Sales from Baxter Ltd. to Apricot Ltd. (18,000)
Environmental provision (3,000 + 2,000) 5,000
Unrealised profit adjustments:
Baxter Ltd: (1/4 (3,600 – 2,100)) 375
Caramel Ltd: (1/4 x 2,700 x 40%) 270
Extra depreciation (W3) 11,000
Change in the fair value of contingent consideration
(` 64,000 – ` 58,000 – see note 2) 6,000
Impairment of goodwill (W4) 3,500
482,145

Note 1 On partial elimination of profits on transactions between associates

and group-entities
IAS 28 ‘Investments in Associates’, requires partial elimination of unrealised
profits on transactions between associates and group entities. Profits can only be
included to the extent that they relate to the non-group share. This means that the
group share of such profits is eliminated and an adjustment of ` 270 is required
to profit in this case (see working 2 above).
The standard does not specify exactly how such an adjustment should be reported
in the consolidated statement of comprehensive income. Accordingly, there are
two possible approaches to eliminate this unrealized profit discussed as under:
1. The first approach would be to reduce consolidated revenue by the group
share of the profit that relates to the inventory that is unsold by Caramel
Ltd at the year-end. Accordingly, the consolidated revenue would be
reduced by the profit portion of 270 thousand and the Consolidated
Revenue would be reported as [4,70,000 + 4,34,000 – 18,000 (intragroup
sales) – 270 (unrealised profit relating to inventory unsold by Caramel Ltd
at the year end]
2. The second approach would be to make the required adjustment in the
Cost of Sales figure, where the amount of 270 thousand would be added
to the Consolidated Cost of Sales.
We have followed the second approach since we choose not to make any
adjustments to the Consolidated Revenue apart from elimination of intra-group
transactions.
Note 2
The change in fair value of the contingent consideration could have alternatively
be shown in other sections of the statement of comprehensive income – for
example as an administration cost.
3. Computation of additional depreciation and amortization charges for the
year 20X3-20X4
` ‘ 000
Depreciation of PPE – ¼ x (` 2,80,000 – ` 2,40,000) 10,000
Amortisation of brand – 1/30 x ` 30,000 1,000
Depreciation & amortisation charges for a year 11,000

CASE STUDIES 7.9
4. Impairment of goodwill on acquisition of Baxter Ltd.
` ’000
Carrying value of Baxter Ltd in the consolidated
financial statements at 31 March 20X4 (from
Statement of Changes in Equity): 435,000
Per own financial statements
Fair value adjustments:
PPE – [(` 2,80,000 – ` 2,40,000) x (2·5/4 years)] 25,000
Brand – [`30,000 x (28·5/30 years)] 28,500
Goodwill (W5) 65,000
Carrying value of Baxter Ltd. 5,53,500
Recoverable amount (5,50,000)
Impairment of goodwill 3,500
5. Goodwill on acquisition of Baxter Ltd as on 1 October 20X2
` ’000 ` ’000
Purchase consideration:
Fair value of consideration given:
Share exchange – 75,000 x 2/3 x ` 6 3,00,000
Contingent consideration 55,000
Acquisition costs Nil 3,55,000
Add: Fair value of non-controlling 80,000
interest – 25,000 x ` 3·20 4,35,000
Less: Fair value of net assets of Baxter
Ltd at 1 October 20X2:
Per own financial statements 3,00,000
Fair value adjustment – PPE
( ` 2,80,000 – ` 2,40,000) 40,000
Fair value adjustment – brand 30,000 (3,70,000)
Goodwill 65,000
6. Computation of consolidated investment income
` ’000
Apricot Ltd + Baxter Ltd 37,300
Dividend received from Baxter Ltd (75% x 40,000) (30,000)

Profit on disposal recorded to be treated in

accordance with IFRS. 9 (4,500)
In consolidated statement of comprehensive income 2,800
7. Computation of consolidated finance costs
` ‘ 000
Apricot Ltd + Baxter Ltd (68,000 + 65,000) 1,33,000
Finance cost of convertible loan notes incorrectly
recorded by Apricot Ltd. (15,000)
Correct finance cost of convertible loan notes (W8) 21,132
In consolidated statement of comprehensive income 1,39,132
8. Finance costs of convertible loan notes
` ‘ 000
Liability element of compound financial instrument at
1 April 20X3 (3,00,000 x 5% x `3·99) + (300,000 x `0·681) 2,64,150
So finance cost at 8% (264,150 x 0·08) 21,132
9. Share of losses of associate
` ’ 000
Total loss after tax of Caramel Ltd (26,000)
Share of loss of Apricot Ltd. ((26,000) x 40% x 6/12) in
Caramel Ltd. (5,200)
Impairment loss on investment in Associate, Caramel Ltd. (1,800)
Total loss of Apricot Ltd. In Caramel Ltd. As on 31st March 20X4 (7,000)
10. Other comprehensive income
` ’000
Gain on revaluation of investment in Ecostar Ltd
(15,400 – 14,000) 1,400
Profit on disposal to be treated in accordance with
IFRS 9 4,500
5,900

CASE STUDIES 7.11
11. Non-controlling interest in Baxter Ltd.
` ’000
Net profit of Baxter Ltd 85,000
Unrealised profit on intercompany sales (375 + 270) (W2) (645)
Extra depreciation and amortisation (W3) (11,000)
Impairment of goodwill of Baxter Ltd (W4) (3,500)
69,855
Non-controlling interest (25%) 17,464
12. Consolidated equity at 1 April 20X3 ₹ ‘000
Baxter Apricot
Opening Equity per own records 5,40,000
Post-acquisition as per own records
(390,000 – 300,000) 90,000
Extra depreciation and amortisation (11,000
(W.N.3) x 0·5) (5,500)
84,500
Group share (75%) 63,375
Unrealised profit on opening inventory
(1/4 x 2,100) (525)
602,850
13. Non-controlling interest in opening equity of Baxter Ltd.
` ’000 ` ’000
Fair value of non-controlling interest at the date 80,000
of acquisition (W5)
Consolidated post-acquisition increase in equity 84,500
from date of acquisition to start of the period
(W12)
Non-controlling interest (25%) 21,125
Total 1,01,125

14. Equity element of convertible bonds
` ’000
Total issue proceeds 3,00,000
Liability component (W8) (2,64,150)
Equity component 35,850

CASE STUDY 8
Bean Ltd. is a diversified group having multiple business interests in many countries. The group
publishes its financial statements in International Financial Reporting Standards.
During closure of books for the year ended 31 March 2X19, certain transactions were highlighted
by the group finance team. The Finance Controller is confused on the treatment of these
transactions under International Financial Reporting Standards and needs your assistance.
On 1 April 2X18, Bean Ltd. began joint construction of a pipeline with another investor. Bean
Ltd. and the other investor have signed a contract that provides for joint operation and ownership
of the pipeline. All of the ongoing expenditure, comprising maintenance plus borrowing costs,
was to be shared equally. The pipeline was completed and ready for use on 1 October 2X18,
at which date its estimated useful economic life was 20 years.
The pipeline was first used on 1 January 2X19. The total cash cost of constructing the pipeline
was ` 40 million. This cost was partly financed by a loan of ` 10 million taken out on
1 April 2X18. The loan carries interest at an annual rate of 10% with interest payable in arrears
on 31 March each year. Between 1 January 2X19 and 31 March 2X19, it was necessary to
spend ` 400,000 on maintenance costs.
On 1 April 2X18, Bean Ltd. purchased some land for ` 10 million (including legal costs of
` 1 million) in order to construct a new factory. Construction work commenced on 1 May 2X18.
Bean Ltd. incurred the following costs in connection with its construction:
– Preparation and leveling of the land – ` 300,000.
– Purchase of materials for the construction – ` 6·08 million in total.
– Employment costs of the construction workers – ` 200,000 per month.
– Overhead costs incurred directly on the construction of the factory – ` 100,000 per
month.
– Ongoing overhead costs allocated to the construction project using Bean Ltd.’s normal
overhead allocation model – ` 50,000 per month.
– Income received during the temporary use of the factory premises as a car park during
the Construction period – ` 50,000.
– Costs of relocating employees to work at the new factory – ` 300,000.
– Costs of the opening ceremony on 31 January 2X19 – ` 150,000.
The factory was completed on 30 November 2X18 (which is considered as substantial period of
time) and production began on 1 February 2X19. The overall useful life of the factory building
was estimated at 40 years from the date of completion. However, it is estimated that the roof

will need to be replaced 20 years after the date of completion and that the cost of replacing the
roof at current prices would be 30% of the total cost of the building.
At the end of the 40-year period, Bean Ltd. has a legally enforceable obligation to demolish the
factory and restore the site to its original condition. The directors estimate that the cost of
demolition in 40 years’ time (based on prices prevailing at that time) will be ` 20 million. An
annual risk adjusted discount rate which is appropriate to this project is 8%. The present value
of Re.1 payable in 40 years’ time at an annual discount rate of 8% is 4·6 paise.
The construction of the factory was partly financed by a loan of ` 17·5 million taken out on
1 April 2X18. The loan was at an annual rate of interest of 6%.
During the period 1 April 2X18 to 31 August 2X18 (when the loan proceeds had been fully
utilised to finance the construction). Bean Ltd. received investment income of ` 100,000 on the
temporary investment of the proceeds.
On 1 April 2X18, Bean Ltd. raised loan finance from European investors. The investors
subscribed for 50 million €1 loan notes at par. Bean Ltd. incurred incremental issue costs of
€ 1 million. Interest of € 4 million is payable annually on 31 March, starting on 31 March 2X19.
The loan is repayable in € after 10 years on 31 March 2X28 at a premium and the effective
annual interest rate implicit in the loan is 10%. The appropriate measurement basis for this loan
is amortized cost. Bean Ltd. uses INR (`) as its functional currency.
Relevant exchange rates are as follows:
– 1 April 2X18 – € 1 = ` 82.00.
– 31 March 2X19 – € 1 = ` 85.00
– Average for year ended 31 March 2X19 – € 1 = ` 83.00
On 1 April 2X17 Bean Ltd. granted share options to 200 senior executives. The options will vest
on 31st March 2X20 subject to the following conditions:
– Each executive will be entitled to 1,000 options if the cumulative profit in the three-year
period from 1 April 2X17 to 31st March 2X20 exceeds ` 30 million. If the cumulative profit
for this period is between ` 35 million and ` 40 million, then 1,500 options will vest. If
the cumulative profit for the period exceeds ` 40 million, then 2,000 options will vest.
– If an executive leaves during the three-year vesting period, then management would
forfeit any rights of share options to those executives.
– Notwithstanding the above, no options will vest unless the share price at 31st March 2X20
exceeds ` 5.

CASE STUDIES 8.3
Details of the fair value of the shares and share options at relevant dates are as follows:
Date Fair value of Bean Ltd.’s each share Fair value of each option
` `
1 April 2X17 4.00 0.50
31 March 2X18 4.40 0.60
31 March 2X19 4.60 0.75
The estimate of the cumulative profit for the three-year period ending 31 March 2X20 was
revised each year as follows:
Date Expected profit for the three-year period
` million
1 April 2X17 32
31 March 2X18 39
31 March 2X19 45
On 1 April 2X17, none of the relevant executives were expected to leave in the three-year period
from 1 April 2X17 to 31 March 2X20 and none left in the year ended 31 March 2X18. However,
10 executives left unexpectedly on 31 December 2X18. None of the other executives are
expected to leave before 31 March 2X20. Bean Ltd. correctly reflected this arrangement in its
financial statements for the year ended 31 March 2X18.

1. Suppose the company has issued preference shares that are redeemable at the option
of the holder. Three months before the end of the year, it was probable that the holders
would require redemption. Which one of the following is the appropriate classification for
the annual payment of ` 12,000 to preference shareholders at year-end?
(a) Dividend ` 12,000
(b) Interest expense ` 12,000
(c) Dividend ` 3,000, interest expense ` 9,000
(d) Dividend ` 9,000, interest expense ` 3,000
2. At the end of the 40-year period, Bean Ltd. has a legally enforceable obligation to
demolish the factory and restore the site to its original condition. Cost of demolition cost
recognised as a provision would be:
(a) ` 20.0 million

(b) ` 9.2 million

(c) ` 0.92 million
(d) ` 10.0 million
3. Pursuant to IAS 21, any one of the following factors will not be used in determining the
entity’s functional currency:
(a) The currency that primarily influences the prices at which goods and services are
sold
(b) The currency in which the costs of the entity are mainly denominated
(c) The currency which is used mostly for international trading in that industry
(d) The currency in which funds from financing are generated
4. Calculate the closing balance of loan finance at period end which the Bean limited has
raised from European investors.
(a) ` 4,241.5 million
(b) ` 4,141.7 million
(c) ` 4,165.0 million
(d) ` 4,084.7 million
5. Calculate the exchange difference of loan finance from European investors to be
recognized in profit or loss for the given period.
(a) Gain - ` 156.8 million
(b) Loss - ` 156.8 million
(c) Loss - ` 223.5 million
(d) Gain - ` 223.5 million

6. Show treatment on Joint Arrangement with respect to borrowing cost, cost of asset, its
depreciation and Statement of Profit or Loss for the year ending 31 March 2X19.
7. Compute the carrying amount of the factory as at 31 March 2X19, depreciation and
carrying amount as at 31 March 2X19.
8. Compute treatment related to share based payment to be included under Statement of
Profit & Loss, comprehensive income and statement of financial position at
31 March 2X19.

CASE STUDIES 8.5

1. Option (b) Interest expense ` 12,000
Reason:
Under IAS 32, the redeemable preference shares are classified as a liability from the
date of issue because the holder has the right to demand redemption. Therefore, the
instruments are a liability and the payment for the year is classified as interest. The
probability of conversion makes no difference to the classification of the instruments.
2. Option (c) ` 0.92 million
Reason:
Demolition cost recognised as a provision - Where an obligation must recognize as part
of the initial cost.
The present value of Re.1 payable in 40 years’ time at an annual discount rate of 8% is
4·6 paise. Hence the working is as under:
USD 20 Million x 4.6/100 = 0.92 million
3. Option (c) The currency which is used mostly for international trading in that
industry
4. Option (a) ` 4,241.5 million
5. Option (b) Loss-` 156.8 million
Reason for 4 & 5:
IAS 21 – The Effect of Changes in Foreign Exchange Rates
The initial measurement of the loan in € is € 49 million (€ 50 million – € 1 million).
The finance cost in € is € 4·9 million (€49 million x 10%).
The closing balance of the loan in € is € 49·9 million (€ 49 million + € 4·9 million – € 4
million).
IAS 21 – The Effect of Changes in Foreign Exchange Rates – stipulates that foreign
currency transactions are initially recorded at the rate of exchange in force when the
transaction was first recognized.
Therefore, the loan would initially be recorded at ` 4,018 million (€ 49 million x 82).
The finance cost would be recorded at an average rate for the period since it accrues
over a period of time.
The finance cost would be ` 406.7 million (€ 4·9 million x 83).

The actual payment of interest would be recorded at ` 340 million (€ 4 million x 85).
The loan balance is a monetary item, so it is translated at the rate of exchange at the
reporting date. Hence, the closing loan balance is ` 4,241.5 million (€ 49·9 million x 85).
The exchange differences that are created by this treatment are recognized in profit or
loss.
In this case, the exchange difference is
[(` 4018 million + ` 406.7 million – ` 340 million) – ` 4, 241.5 million] = ` 156.8 million.
This exchange loss is taken to Statement of Profit or Loss.

6. As provided in IFRS 11 ‘Joint Arrangements’, this is a joint arrangement because two or
more parties have joint control of the pipeline under a contractual arrangement.
The arrangement will be regarded as a joint operation because Bean Ltd and the other
investor have rights to the assets and obligations for the liabilities of this joint
arrangement.
This means that Bean Ltd and the other investor will each recognize 50% of the cost of
constructing the asset in property, plant and equipment.
The borrowing cost incurred on constructing the pipeline should, under the principles of
IAS 23 – Borrowing Costs, be included as part of the cost of the asset for the period of
construction.
In this case, the relevant borrowing cost to be included is ` 0.5 million.
(` 10 million x 10% x 6/12).
The total cost of the asset is ` 40·5 million (` 40 million + ` 0.5 million).
` 20.25 million is included in the property, plant and equipment of Bean Ltd and the same
amount in the property, plant and equipment of the other investor.
The depreciation charge for the year ended 31 March 2X19 will therefore be
` 1.0125 million (` 40.5 million x 1/20 x 6/12).
` 0.50625 million will be charged in the Statement of profit or loss of Bean Ltd and the
same amount in the Statement of profit or loss of the other investor.
The other costs relating to the arrangement in the current year totaling ` 0.9 million
(finance cost for the second half year of ` 0.5 million plus maintenance costs of
` 0.4 million) will be charged to the Statements of profit or loss of Bean Ltd and the other
investor in equal proportions – ` 0.45 million each.

CASE STUDIES 8.7
7. Computation of the cost of the factory
Particulars ` in
million
Purchase of land - both the purchase of land and the associated legal
costs are direct costs of constructing the factory 10.00
Preparation and leveling - A direct cost of constructing the factory 0.300
Cost of materials - A direct cost of constructing the factory 6.08
Employment costs of construction workers - A direct cost of constructing
the factory for a seven-month period 1.40
Direct overhead costs - A direct cost of constructing the factory for a
seven-month period 0.70
Allocated overhead costs - Not a direct cost of construction Nil
Income from use as a car park - Not essential to the construction so
recognised directly in profit or loss Nil
Relocation costs - Not a direct cost of construction Nil
Opening ceremony - Not a direct cost of construction Nil
Finance costs - Capitalize the interest cost incurred in an eight-month
period (purchase of land would not trigger off capitalization since land is
not a qualifying asset. Infact, the construction started from 1 May 2X18) 0.6125
Investment income on temporary investment of the loan proceeds - Must
offset against the amount capitalized (0.10)
Demolition cost recognised as a provision - Where an obligation must
recognize as part of the initial cost 0.92
Total 19.9125
Computation of accumulated depreciation

Total depreciable amount 9.9125
All of the net finance cost of (0.6125-0.10) has been allocated to the
depreciable amount – as above
Depreciation of roof : 9.9125 x 30% x 1/20 x 4/12 0.04956
Depreciation of remainder : 9.9125 x 70% x 1/40 x 4/12 0.05782
Total depreciation 0.10738

Computation of carrying amount
Total depreciable amount 19.9125
Depreciation 0.10738
Carrying amount 19.80512
8. In accordance with IFRS 2 ‘Share Based Payment’, amount included in statement of

financial position at 31 March 2X19
Particulars Amount
Number of executives - Expected to continue till 31.3.2X20 190 Nos
Options vesting for each executive - Use expected number based on 2000
latest estimates as a non-market vesting condition
Impact of expected share price - This is a market-based vesting None
condition and is ignored for this purpose
Fair value of option - Use fair value on grant date per IFRS 2 ` 0·50
Proportion vesting - Two years through a three-year vesting period 2/3
Included in equity – (190 x 2,000 x ` 0·50 x 2/3) ` 126,667
Amount included in Statement of profit or loss and other comprehensive income for the
year ended 31 March 2X19
Particulars Amount (`)
Cumulative amount recognised in equity at 31 March 2X19 126,667
Amount recognised in previous years – (200 x 1,500 x ` 0·50 x 1/3) (50,000)
Included in current year’s profit or loss 76,667

CASE STUDY 9
Buildwell Ltd. is a diversified business group operating in multiple business segments across
Europe, United States and Asia Pacific. It maintains its books of accounts and publishes its
annual consolidated financial statements under International Financial Reporting Standards.
The central finance team has been working on closing the books of accounts and generating
consolidated financial statements for the year ended 31 March 20X3. You are the Finance
Controller and your assistants want your views for finalization of financial statements.
On 1 April 20X2, Buildwell Ltd. completed the manufacture of some inventory at a total cost
of ` 8,00,000. In order to be suitable for sale in the ordinary course of business, the
completed inventory needed to be stored in controlled conditions for a two-year period. The
inventory is expected to sell for ` 12,00,000 after the two-year storage period. On the same
day, Buildwell Ltd. sold the inventory to Black Ltd., a bank for ` 8,10,000. For this sale, Black
Ltd. charged Buildwell Ltd. an administration fee of ` 10,000. Buildwell Ltd. retained physical
custody of the inventory and ensured that the inventory is stored in the appropriate conditions.
As per the agreement with Black Ltd., Buildwell Ltd. would indemnify Black Ltd. against any
losses caused by theft or inappropriate storage of the inventory. Buildwell Ltd. has the option
to repurchase the inventory on 31 March 20X4 for ` 933,120. On 1 April 20X2, Black Ltd.
would have required an annual return of 8% on loans made to customers such as
Buildwell Ltd.
One of the directors of Buildwell Ltd., Mr. Ben Jones has informed Central Finance team that
on 1 January 20X3, his spouse acquired a controlling interest in one of Buildwell Ltd.’s major
suppliers, Candour Ltd.
Mr. Jones seemed to think that this would have implications on the financial statements of
Buildwell Ltd. However, your assistant in Central Finance is not clear about its
implications/treatment while finalizing the financial statements.
Buildwell Ltd. has been purchasing goods from Candour Ltd. ` 1·5 million per month of the
year ended 31 March 20X3. As per the financial statements of Buildwell Ltd., this is a
significant amount. While checking all the purchase transactions it was found that all the
purchases from Candour Ltd. were made at normal market rates.
On 1 April 20X2, Buildwell Ltd. had also leased a machine from Donovan Ltd. on a three-year
lease. The expected future economic life of the machine on 1 April 20X2 was eight years. If
the machine breaks down, then under the terms of the lease, Donovan Ltd. would be required
to repair the machine or provide a replacement.

Donovan Ltd. agreed to allow Buildwell Ltd. to use the machine for the first six months of the
lease without the payment of any rental as an incentive to Buildwell Ltd. to sign the lease
agreement. After this initial period, lease rentals of ` 210,000 were payable six-monthly in
arrears, the first payment falling due on 31 March 20X3.
On 1 June 20X2, Buildwell Ltd. decided to dispose of the business and current and non-
current assets of one of its divisions related to Speciality chemicals business which it had
acquired several years ago. This disposal does not involve Buildwell Ltd. withdrawing from a
particular market sector. The carrying values on 1 June 20X2 of the assets to be disposed of
were as follows:
Particulars ` in Million
Goodwill 10.0
Property, Plant and Equipment 20.0
Patents and trademarks 8.0
Inventories 15.0
Trade Receivables 10.0
None of the assets of the business had suffered impairment as at 1 June 20X2. At that date
the inventories and trade receivables of the business were already stated at no more than
their recoverable amounts.
Buildwell Ltd. offered the business for sale at a price of ` 46·5 million, which was considered
to be reasonably achievable. Buildwell Ltd. estimated that the direct costs of selling the
business would be ` 5,00,000. These estimates have not changed since 1 June 20X2 and
Buildwell Ltd. estimates that the business will be sold by 31 March 20X3 at the latest.
One of the subsidiaries of Buildwell Ltd. submitted to Central Finance its Summarized
Statement of Profit or Loss and Statement of Financial Position.
Summarized Statement of Profit or Loss for the year ended 31 March 20X3
Net sales 25,200,000
Less: Cash cost of sales (19,200,000)
Depreciation (600,000)
Salaries & wages (2,400,000)
Operating expenses (1,400,000)
Provision for taxation (880,000)

CASE STUDIES 9.3
Net Operating Profit 720,000

Non-recurring income – profit on sale of equipment 120,000
840,000
Retained earnings and profit brought forward 1,518,000
2,358,000
Dividends declared and paid during the year (720,000)
Profit & loss balance as on 31 March 20X3 1,638,000
Summarized Statement of Financial Position
Assets 31 March 31 March

20X2 20X3
Property, Plant and Equipment:
Land 480,000 960,000
Buildings and Equipment 3,600,000 5,760,000
Current Assets
Cash 600,000 720,000
Inventories 1,680,000 1,860,000
Trade Receivables 2,640,000 960,000
Advances 78,000 90,000
Total Assets 9,078,000 10,350,000
Liabilities & Equity
Share capital 3,600,000 4,440,000
Surplus in profit & loss 1,518,000 1,638,000
Trade Payables 2,400,000 2,340,000
Outstanding expenses 240,000 480,000
Income tax payable 120,000 132,000
Accumulated depreciation on buildings and equipment 1,200,000 1,320,000
Total 9,078,000 10,350,000
The original cost of equipment sold during the year 20X2-20X3 was ` 720,000.
Analyze the transactions mentioned above and show the treatment in line with relevant IFRS.


1 Calculate the current liability of leased machine from Donovan Ltd. to be shown in the
statement of financial position as at 31 March 20X3.
(a) ` 70,000
(b) ` 1,40,000
(c) ` 3,50,000
(d) ` 4,20,000
2. Compute the value of Speciality chemical division’s Goodwill at the date of
classification after re-measurement.
(a) ` 7.3 million
(b) ` 10 Million
(c) ` Nil
(d) ` 8 million
3. Calculate the closing balance of Speciality chemical division’s asset – Property, Plant
and Equipment at the period end.
(a) ` 21 million
(b) ` 17.36 million
(c) ` 6 million
(d) ` 15 million
4. Suppose financial statements of Buildwell Ltd. included an investment in associate at
` 66,00,000 in its consolidated statement of financial position at 31 March 20X2. At
31 March 20X3, the investment in associate had increased to ` 67,50,000.
Buildwell Ltd.’s pre-tax share of profit in the associate was ` 4,20,000, with a related
tax charge of ` 1,80,000. The net amount was included in the consolidated income
statement for the year ended 31 March 20X3.
There were no impairments to the investment in associate, or acquisitions or disposals
of shares during the financial year.
What is the amount of the cash flow related to investment in associate for inclusion in
the consolidated Statement of cash flows for the year ended 31 March 20X3?
(a) Cash inflow of ` 90,000
(b) Cash inflow of ` 240,000

CASE STUDIES 9.5
(c) Cash outflow of ` 90,000

(d) Cash inflow of ` 420,000
5. Buildwell Ltd.’s another subsidiary reported net income of ` 25 million, which equals
the company’s comprehensive income. The company has no outstanding debt. Using
the following information from the comprehensive statement of financial position
(` in millions), what cashflow should the Buildwell Ltd.’s subsidiary report, as financing
activity in the statement of cash flows?
Extract of Statement of Financial Position 31.03.20X2 (`) 31.03.20X3 (`)
Equity share capital 100 100
Further issue of equity shares 100 140
Retained earnings 100 115
Total shareholders’ equity 300 357
(a) Issuance of equity shares ` 240 million; dividends paid ` 10 million

(b) Issuance of equity shares ` 100 million; dividends paid ` 10 million
(c) Issuance of equity shares ` 140 million; dividends paid ` 10 million
(d) Issuance of equity shares ` 40 million; dividends paid ` 10 million

6. With respect to ‘sale of inventory by Buildwell Ltd. to Black Ltd.’, how much amount
should be recognized in the Statement of profit or loss and Statement of financial
position for the year ended 31 March 20X3. Also show the classification of calculated
amount as current or non-current in the Statement of financial position.
7. How the effect of acquisition of controlling interest in Candour Ltd. by Mr. Ben Jones
is to be reflected in the financial statements for the year ending 31 March 20X3.
8. Work out a cash flow statement for the year ended 31 March 20X3.

1. Option (a) : ` 70,000
Reason:
In accordance with the principles of IFRS 16 ‘Leases’ the lease of the machine is an
operating lease because the risks and rewards of ownership of the machine remain

with Donovan Ltd. The lease is for only three years of the eight-year life and Donovan
Ltd is responsible for breakdowns, etc.
Therefore, Buildwell Ltd will recognize lease rentals as an expense in the statement of
profit or loss. IFRS 16 stipulates that this should normally be done on a straight-line
basis.
The total lease rentals payable over the whole lease term are ` 10,50,000 (` 2,10,000
x 5). Therefore, the charge for the current year is ` 3,50,000 (` 10,50,000 x 1/3).
The difference between the charge for the period (` 350,000) and the rent actually paid
(` 210,000) will be shown as a liability in the statement of financial position at 31 March
20X3. This amount will be ` 1,40,000.
` 70, 000 (2 x ` 2,10, 000 – ` 3,50, 000) of this liability will be current and ` 70,000
non-current.
2. Option (c) : ` Nil
3. Option (d) : ` 15 million
Reason for 2 & 3
Pursuant to the provisions of IFRS 5 ‘Non-current Assets Held for Sale and
Discontinued Operations’ the business would be regarded as held for sale from 1 June
20X2. The held for sale criteria apply because the business is being actively marketed
at a reasonable price and the sale is expected to be completed within one year of the
date of classification. Given this classification, IFRS 5 requires that the assets be
separately classified under current assets in the statement of financial position. No
further depreciation would be charged on these assets.
The assets will be measured at the lower of their current carrying amounts at the date
of classification and their fair value less costs to sell. In this case, the total carrying
amount after re-measurement will be ` 46 million (` 46·5 million – ` 0·5 million).
The impairment loss of ` 17 million (` 63 million – ` 46 million) will first be allocated
to goodwill taking its carrying amount to nil.
None of the remaining impairment loss will be allocated to inventories or trade
receivables since their recoverable amounts are at least equal to their existing carrying
amounts.
The remaining impairment loss of ` 7 million (` 17 million – ` 10 million) will be
allocated to the property, plant and equipment and the patents on a pro-rata basis.
The closing carrying amounts of the property, plant and equipment and the patents will
be ` 15 million and ` 6 million respectively.

CASE STUDIES 9.7
4. Option (a) : Cash inflow of ` 90,000

Reason:
Statement of investment in associates
Opening balance of investment in Associate 66,00,000
Add: Share of profit in Associate [4,20,000-1,80,000] 240,000
Less: Cash flow (dividend paid by Associate) (balancing figure) (90,000)
Closing balance of investment in Associate 67,50,000
5. Option (d) Issuance of equity shares ` 40 million; dividends paid ` 10 million
Reason:
Issuance of equity shares including further issue of equity shares (240 – 200)
= ` 40 million
Dividends paid worked out as under:
Particulars ` million
Opening retained earnings 100
Add: Net income 25
Less: Cash dividend paid (balancing figure) (10)
Closing retained earnings 115
Hence cash dividend paid ` 10 million.

6. The transaction related to revenue is governed by the principles of IFRS 15 ‘Revenue
from Contracts with Customers’.
One of the conditions imposed by IFRS 15 for recognizing the revenue from the sale
of goods is that the control of ownership has to be passed to the ‘buyer’.
Since Buildwell Ltd. continue the custody of the goods and the fact that it has the option
to repurchase it on 31 March 20X4 makes the probability high that the control is to be
continued with Buildwell Ltd. only. Accordingly, based on the circumstances of the
case, it is apparent that this is a financing transaction.
Therefore, the goods will remain in inventory at cost – being their manufactured cost
of ` 8,00,000 plus one year’s storage costs (or their net realisable value, whichever is
lower). The net proceeds of ` 8,00,000, being a financial liability, is accounted for
under the principles of IFRS 9 ‘Financial Instruments’.

Under IFRS 9, most financial liabilities are measured at amortized cost using the
effective interest method. The finance cost for the period would be ` 64,000
(` 8,00,000 x 8%). This would be shown in the Statement of profit or loss.
The closing financial liability would be ` 8,64,000 (` 8,00,000 + ` 64,000). This would
be shown as a current liability since the ‘repurchase’ occurs on 31 March 20X4 –
12 months after the reporting date.
7. In accordance with IAS 24 ‘Related Party Disclosures’, effective 1 January 20X3,
Candour Ltd. would be regarded as a related party of Buildwell Ltd. This is because
Candour Ltd. is controlled by the close family member of one of Buildwell Ltd.’s key
management personnel (Refer para 9 of IAS 24).
This means that from 1 January 20X3, the purchases from Candour Ltd. would be
regarded as related party transactions.
As per the provisions of para 18 of IAS 24, transactions with related parties need to be
disclosed in the notes to the financial statements, together with the nature of the
relationship. It is irrelevant whether or not these transactions are at normal market
rates. As per para 23 of the standards, disclosures that related party transactions were
made on terms equivalent to those that prevail in arm’s length transactions are made
only if such terms can be substantiated.
The disclosure is required to state that Candour Ltd., controlled by the spouse of a
director, supplied goods to the value of ` 4·5 million (3 x ` 1·5 million) in the current
accounting period.
8. Statement of Cash Flows for the year ended 31 st March 20X3
(Indirect method)
Particulars ` `
Cash flow from operating activities:
Net Profit before taxes and extraordinary items 16,00,000
(7,20,000+8,80,000)
Add: Depreciation 6,00,000
Operating profit before working capital changes 22,00,000
Increase in inventories (1,80,000)
Decrease in trade receivables 16,80,000
Advances (12,000)
Decrease in trade payables (60,000)
Increase in outstanding expenses 2,40,000
Cash generated from operations 38,68,000

CASE STUDIES 9.9
Less: Income tax paid (Refer W.N.4) (8,68,000)

Net cash from operations 30,00,000
Cash from investing activities:
Purchase of land (4,80,000)
Purchase of building & equipment (Refer W.N.2) (28,80,000)
Sale of equipment (Refer W.N.3) 3,60,000
Net cash used for investment activities (30,00,000)
Cash flows from financing activities:

Issue of share capital 8,40,000
Dividends paid (7,20,000)
Net cash from financing activities: 1,20,000
Net increase in cash and cash equivalents 1,20,000
Cash and cash equivalents at the beginning 6,00,000
Cash and cash equivalents at the end 7,20,000
Working Notes:
1. Building & Equipment Account
Particulars ` Particulars `
To Balance b/d 36,00,000 By Sale of assets
To Cash/bank (purchases)(bal. fig) 28,80,000 By Balance c/d 7,20,000
57,60,000
64,80,000 64,80,000
2. Building & Equipment Accumulated Depreciation Account

To Sale of asset (acc. 4,80,000 By Balance b/d 12,00,000
depreciation) By Profit & Loss A/c
To Balance c/d 13,20,000 (provisional) 6,00,000
18,00,000 18,00,000
3. Computation of sale price of Equipment

Particulars `
Original cost 7,20,000
Less Accumulated Depreciation 4,80,000

Net cost 2,40,000

Profit on sale of assets 1,20,000
Sale proceeds from sale of assets 3,60,000
4. Provision for tax Account

To Bank A/c 8,68,000 By Balance b/d 1,20,000
To Balance c/d By Profit & Loss A/c
1,32,000 (provisional) 8,80,000
10,00,000 10,00,000

CASE STUDY 10
You are a Chartered Accountant. You are offered a two month assignment at XYZ Ltd., an
Indian listed manufacturing company producing wind turbines. Your job is to assist with the
preparation of the year end consolidated accounts.
XYZ Ltd. has grown substantially over the last number of years as the demand for renewable
energy has grown. It primarily manufactures medium-sized turbines on a supply only basis.
In the past year, however, XYZ Ltd. has expanded into the supply and maintenance of large-
scale wind turbines used in wind farms. These contracts are generally much larger than the
contracts XYZ Ltd. has dealt with to date.
XYZ Ltd. is exploring possibilities of listing its securities at an overseas stock exchange. The
financial reporting requirements related to such listing include submission of financial
statements as per IFRS.
XYZ Ltd. has owned shares in PQR Ltd. for many years, another Indian company
manufacturing solar panels for installation on the roofs of residential properties.
At the office you meet General Manager (Accounts) who has the accounts almost complete
they just need to be consolidated. He informs you that the Financial Controller mentioned that
the company should value non-controlling interests at fair value at acquisition. General
Manager (Accounts) gives you a copy of the latest draft financial statements (Appendix 1), a
document detailing investment in other companies (Appendix 2) and outstanding issues that
are needed to be adjusted.
Outstanding issues:
1. During the year, XYZ Ltd. purchased $ 1,02,00,000 of specialist raw materials from an
American company. Purchase took place and was recognized in the financial
statements on 1 December 20X1 when the exchange rate was $ 1: ` 65. The supplier
has provided XYZ Ltd. with 6 month interest-free credit. At the reporting date of
31 March 20X2, the exchange rate was $ 1: ` 66. As at 31 March 20X2, 60% of the
materials purchased were still in inventory in XYZ Ltd.
2. XYZ Ltd. offers a warranty on a number of its smaller sized supply only turbines. The
turbines come with the warranty and is not sold separately anywhere. XYZ Ltd. has
therefore made a provision of ` 5,10,000 for warranty claims. This represents 2% of
total gross margin on this class of sales for the year ended 31 March 20X2. All turbines
in this class are sold at a gross profit margin of 30%. In the past, 2% of these turbines
have been validly returned during the warranty period. XYZ Ltd. provides a full refund
on return of the faulty turbine, which is then scrapped. The warranty covers any

problems that occur with the turbine in the first 6 months following sale, and sales have
occurred evenly throughout the year.
3. During the year, XYZ Ltd. completed its first supply and maintain contract. The turbines
were supplied and operational on 31 January 20X2. The contract was for ` 3,91,00,000
and its terms included a provision that XYZ Ltd. maintains the turbines for a period of
five years from the initial date of operation.
If the turbines had been delivered on a supply and fit only contract they would have
cost ` 3,40,00,000. The maintenance contract on a wind farm of this size would
normally be ` 17,00,000 per annum. XYZ Ltd. has been paid in full for this contract
and included the full ` 3,91,00,000 as revenue in the draft accounts for 31 March 20X2.
4. Given the strong growth expected by XYZ Ltd. management is concerned about the
possibility of key employees leaving. With this in mind, XYZ Ltd. introduced a share
option scheme on 1 April 20X0 for all employees at manager level and above.
500 employees were eligible for the scheme. Each employee is entitled to 300 options
to purchase equity shares at ` 34 per share, the fair value of each option at 1 April 20X0
was ` 9.01. The options vest on 31 March 20X3 if the employees continue to work for
XYZ Ltd. during the three-year period. At 31 March 20X1, 495 of the staff were still
employed and 480 were expected to be employed at the vesting date. XYZ Ltd.’s share
price on 31 March 20X1 was ` 35.7 and the fair value of each option was ` 9.18. By
31 March 20X2, 490 of the staff were still employed and 475 were expected to be
employed at the vesting date. XYZ Ltd.’s share price on 31 March 20X2 was ` 37.4 and
the fair value of each option was ` 9.35. No entries have ever been made to record the
share stock option scheme.
5. XYZ Ltd.’s revaluation surplus relates to its main manufacturing property. The property
is leased with 40 years remaining on the lease. On 31 March 20X2, its carrying value
was ` 9,60,00,000 with ` 24,00,000 of depreciation having been charged to cost of
goods sold during the year. Due to falling property prices the fair value of the property
at 31 March 20X2 was judged to be ` 8,40,00,000.
Note: Impact on taxation may be ignored.
Appendix 1:
Draft Statements of Profit or Loss and Other Comprehensive Income
for the Year Ended 31 March 20X2.
XYZ Ltd. PQR Ltd.
Revenue A 421.6 164.9
Cost of goods sold 136 81.6

CASE STUDIES 10.3
Selling and Distribution expenses 34 10.2

Administration expenses 20.4 5.1
Finance costs 17 1.7
Total Expenses B 207.4 98.6
Profit before Tax A-B 214.2 66.3
Tax expense (42.5) (13.6)
Profit for the year 171.7 52.7
Total comprehensive income for the year 171.7 52.7
Draft Statements of Financial Position as at 31 March 20X2
XYZ Ltd. PQR Ltd.

Assets ` in million ` in million
Non-current assets
Property, plant and equipment 450.5 76.5
Intangible assets 25.5 3.4
Investment property 37.4
Investment in PQR Ltd. 13.6
A 527 79.9
Current assets
Inventories 187 47.6
Trade Receivable 102 42.5
Prepayments 1.7
Cash 56.1 30.6
B 346.8 120.7
Total Assets A+B 873.8 200.6
Equity and Liabilities
Issued share capital ` 1 ordinary shares 255 27.2
Share premium 13.6 0
Retained earnings 280.5 130.9
Revaluation surplus 10.2 5.1
Total equity C 559.3 163.2
Non-current liabilities 265.2 30.6

Current liabilities 49.3 6.8

D 314.5 37.4
Total equity and liabilities C+D 873.8 200.6
Appendix 2:
Investments in other companies
Investment in PQR Ltd.
XYZ Ltd. purchased 6.8 million ordinary shares in PQR Ltd. on 31 March 20XX. At that
date the equity and liabilities of PQR Ltd. were as follows:
` in million
• Issued share capital ` 1 ordinary shares 27.2
• Retained earnings 30.6
• Revaluation surplus 1.7
During the year, PQR Ltd. sold goods to XYZ Ltd. for ` 25,50,000. These goods had
cost PQR Ltd. ` 17,00,000. XYZ had goods worth ` 20,40,000 (at cost to XYZ Ltd.) in
inventory at the reporting date. XYZ Ltd.’s accounts payable include an amount of
` 17,00,000 owing to PQR Ltd. (this agreed with the balance in PQR Ltd.’s books).

1. What is the amount of exchange loss/gain to be recognized on 31 March 20X2 in relation
to purchase of raw material from American Company?
(a) ` 10.2 Million exchange loss
(b) ` 6.12 Million exchange loss
(c) Nil
(d) ` 3.4 Million exchange loss
2. At what amount should warranty provision be increased in books of accounts on
31 March 20X2?
(a) ` 0.255 Million
(b) ` 0.51 Million
(c) ` 0.34 Million
(d) ` 0.85 Million

CASE STUDIES 10.5
3. Out of contract revenue of ` 3,91,00,000 what should be segregation of maintenance

contract and supply contract?
(a) ` 3,91,00,000 only for maintenance and supply contract (no segregation required)
(b) Maintenance contract ` 78,20,000, Supply contract ` 3,12,80,000

(c) Maintenance contract ` 51,00,000, Supply contract ` 3,40,00,000
(d) Maintenance contract ` 85,00,000, Supply contract ` 3,06,00,000
4. What is the amount of contract revenue that should be recognized on 31 March 20X2?
Also state out of contract revenue of ` 3,91,00,000, what amount of deferred income
should be recognized on 31 March 20X2?
(a) ` 39.1 million; Current liability ` 703,448, Non-current liability ` 2,696,551
(b) ` 35.7 million; Current liability ` 1,700,069, Non-current liability ` 6,516,931
(c) ` 31.54 million; Current liability ` 1,564,000, Non-current liability ` 5,995,330
(d) ` 30.883 million; No liability
5. What amount of annual charge on account of share option reserve should XYZ Ltd. had
recognized on 31 March 20X1? What is the annual charge on account of share option
reserve for the year ending 31 March 20X2?
(a) ` 432,480; ` 423,470
(b) ` 440,640; ` 447,610
(c) ` 454,410; ` 432,480
(d) ` 450,500; ` 440,640
6. Pass the necessary entry for share option scheme introduced for all the employees on
April 1, 20X0 with reference to relevant IFRS.
7. Prepare the consolidated statement of profit or loss and other comprehensive income
and the consolidated statement of financial position of XYZ Ltd. group for the year ended
31 March 20X2 in accordance with relevant IFRS.


1. Option (a) : ` 10.2 Million exchange loss
Reason:
XYZ Ltd purchased raw materials from American company. As XYZ Ltd agreed the value
of the contract in US dollars rather than in their functional currency, the Indian rupee,
XYZ Ltd is subject to exchange rate risks. Any movement in the Indian rupee to US
dollar exchange rate between the transaction date and the date the contract is settled
will give rise to either an exchange gains or loss in accordance with IAS 21.
The contract will initially be recorded in Indian rupee at the spot rate on
1 December 20X1, the date of the contract. As no payment has been made to the
American supplier by 31 March 20X2 the contract must be translated at the 31 March
spot rate to calculate the gain or loss on foreign exchange, as illustrated below:
Date Transaction currency Exchange Functional currency
amount rates amount
$ in million ` in million
1.12.20X1 10.2 65 663
31.3.20X2 10.2 66 (673.2)
Exchange loss 10.2
2. Option (c) : ` 0.34 million

Reason:
Warranty on supply only wind turbines
Warranty is an assurance warranty so warranty provisions is governed by IAS 37
Provisions, Contingent Liabilities and Contingent Assets. The potential warranty claims
meet the criteria to be recognised as a provision:
• A present obligation as a result of a past event.
• A probable outflow of economic benefits.
• It may be reliably measured.
IAS 37 requires large populations of events, such as warranties, to be measured at
probability weighted value. The warranty covers problems arising in the first 6 months
after purchase.

CASE STUDIES 10.7
Warranty claim covers 2% of gross margin, whereas customers are refunded the full
selling price. As the goods are scrapped it is assumed XYZ Ltd has no potential for re-
imbursement from its supplier regarding the faulty goods.
A calculation of warranty provision is set out below:
2% of annual gross margin is ` 5,10,000 therefore 100% of annual gross margin must
be ` 2,55,00,000
%age Annual Product Percentage Warranty
sales under expected to provision
warranty at be returned
31 March
20X2
` in million ` in million ` in million ` in million
Gross margin 30% 25.5
Selling price 100% 85 42.5 2% 0.85
The warranty provision should therefore be increased by ` 0.34 million (` 0.85 million –
` 0.51 million). As the provision is expected to be used in the next 6 months no discounting
is required.
3. Option (b) : Maintenance contract ` 7,820,000, Supply contract ` 31,280,000
Reason:
Value of individual contracts ` in million
Supply and fit contract 34 m
Maintenance contract 8.5 m
42.5 m
Less: Value of combined contract (39.1 m)
Discount 3.4 m
Apply the discount to each individual component of the contract on pro-rata basis based
on its individual fair value as follows.
` in million
Fair value of turbines (34/42.5) x 39.1 31.28
Fair value of maintenance contract (8.5/42.5) x 39.1 7.82
39.1

4. Option (c) ` 31.54 million; Current liability ` 15,64,000, Non-current liability

` 59,95,330
Reason:
As we have received full payment for the maintenance contract, but it still has 58 months
still to run, we must record the payment received in advance as deferred income, splitting
it between amounts to be received in less than one year and greater than one year.
Revenue recognised on 31.3.20X2 ` in million
Turbines 31.28
Maintenance contract (7.82 x 2/60) 0.26067
31.54067
Liability- current and non-current
` in million
Deferred income < 1 year [7.82 x (12 months/ 60 months)] 1.564
Deferred income > 1 year [7.82 x (60-12-2 months/ 60 months)] 5.99533
Journal Entry
Revenue (39.1-31.54067) Dr. 7.55933
To Deferred income < 1 year 1.564
To Deferred income > 1 year 5.99533
5. Option (a) : ` 4,32,480; ` 4,23,470

Reason
The relevant calculations for computation of annual charge on account of share option
reserve are shown below:
Year-end Number Expected FV of Expected Year Cumulative Recognition Annual
options number of option cost charge to date charge
employees
31.3.20X1 300 480 9.01 1,297,440 1 432,480 0 432,480
31.3.20X2 300 475 9.01 1,283,925 2 855,950 432,480 423,470

6. The share option scheme would be governed by IFRS 2 ‘Share Based Payments’, under
this IFRS all entities are required to recognise share based payments in their financial

CASE STUDIES 10.9
statements, XYZ Ltd should therefore have recognised this in their 20X0-20X1 financial
statements also. The consequences of failing to report the share option scheme in the
20X0-20X1 financial statements will be determined by IAS 8 accounting policies, changes
in accounting estimates and errors.
The share option scheme is an equity settled transaction, XYZ Ltd is receiving services
from the staff in return for the granting of the share options. They must therefore measure
the fair value of the share options at the grant date and charge the expected cost through
the statement of profit or loss.
The failure to recognise the share option scheme in the 20X0-20X1 financial statements
is a prior period error. According to IAS 8 material prior period errors should be corrected
retrospectively as soon as discovered by restating the comparatives for the prior periods
presented. XYZ Ltd must therefore restate the comparatives, which will impact the
retained earnings brought forward.
The relevant calculations and adjustments to the financial statements are shown below:
Year-end Number Expected FV of Expected Year Cumulative Recognition Annual
options number of option cost charge to date charge
employees
31.3.20X1 300 480 9.01 1,297,440 1 432,480 0 432,480
31.3.20X2 300 475 9.01 1,283,925 2 855,950 432,480 423,470
Journal Entry
` in million
Administrative expenses Dr. 0.42347
Retained earnings Dr. 0.43248
To Share option reserve 0.85595
7. Working Notes:
1. Investment in associate (as per equity method)
` in million
Cost 13.6
Less: Share of post-acquisition profits and reserves
Balance as on 31.3.20X2
Retained Earnings 130.9
Revaluation surplus 5.1 136
Pre-acquisition balance
Retained Earnings 30.6

Revaluation surplus 1.7 (32.3)

103.7
Share of XYZ Ltd. (103.7 x 25%) 25.925
39.525
2. Provision for unrealised profit – associate
` in million
Total sale Remain in investment
Selling price 150% 2.55 2.04
Profit 50% 0.85 0.51
Cost price 100% 1.70 1.53
• Provision for unrealised profit = ` 0.51 million x 25% = ` 0.1275 million

• Reduce closing inventory and retained earnings by unrealised profit
• Inter-company balances between parent and associate are not eliminated.
3. Share of profit of associate
` in million
Profit as per Statement of Comprehensive Income (52.7 x 25%) 13.175
Less: Unrealised profit (0.1275)
13.0475
4. Adjustment entry required to be passed for exchange loss

The exchange loss of ` 10.2 million will increase the accounts payable balance
of the statement of financial position and be charged as an expense in the
statement of profit or loss and other comprehensive income.
As per IAS 2 Inventories, the goods still held in inventory at 31 March 20X3 must
be valued at the lower of their cost and net realisable value. Assuming no
damage or impairment has occurred regarding these goods, they should be
recorded at the spot rate on the date of purchase, as this is the cost to XYZ Ltd.
There will therefore be no change to the inventory value. The exchange loss is
a finance cost. The adjustment required in the financial statements is therefore:
Administration Expenses 10.2
To Accounts Payable 10.2

CASE STUDIES 10.11
5. Adjustment entry required for warranty provision

The adjustment required to the financial statements is therefore:
Warranty provision – cost of goods sold 0.34
To Warranty provision – current liabilities 0.34
6. Adjustment entry for revaluation of property

Revaluation of property
According to IAS 16 Property, Plant and Equipment all purchased items of
property, plant and equipment are initially recognised at cost, after this an entity
may choose to apply the cost model, where PPE is carried at cost less
accumulated depreciation, or the revaluation model, where an item of PPE is
carried at re-valued amount.
If the revaluation model is used the entire class of PPE to which that asset
belongs must be re-valued. The frequency of revaluation depends on the
movements in the fair value of the items being re-valued, but where there are
significant movements in fair value annual revaluations may be required.
In this instance there has been a significant movement in fair value, the
manufacturing property must therefore be re-valued to ` 84 million. The
decrease must reduce the previous re-valuation surplus related to the
manufacturing property to zero, with any remaining decrease recognised
immediately in the statement of profit or loss for the period.
The relevant calculations and adjustments to the financial statements are shown
below:
31 March 20X1
` in million
Opening Book Value 98.4
Depreciation (2.4)
Carrying value 96
Revaluation (84)
Revaluation loss 12

Journal Entry
Revaluation surplus 10.2
Profit or loss A/c (Revaluation of property, plant 1.8
and equipment)
To Property, plant and equipment 12
Statement of Profit & Loss Account & Other comprehensive income

For the year ending 31 March 20X2 (` in million)
WTM Exchange Warranty Maint. Share Property WTM Associate Consolidate
Loss Contract Option Reval
Revenue 421.6 -7.55933 414.04067 414.04067
Less: Cost of goods sold -136 -0.34 -136.34 -136.34
Selling and Distribution expenses -34 -34 -34
Administration Expenses -20.4 -10.2 -0.42347 -31.02347 -31.02347
Finance Costs -17 -17 -17
Share of Profit of Associate 13.0475 13.0475
Profit before Tax 214.2 -10.2 -0.34 -7.55933 -0.42347 195.6772 13.0475 208.7247
Tax expense -42.5 -42.5 -42.5
Profit for the year 171.7 -10.2 -0.34 -7.55933 -0.42347 153.1772 13.0475 166.2247
Other Comprehensive income -1.8 -1.8 -1.8
Total Comprehensive income for 171.7 -10.2 -0.34 -7.55933 -0.42347 -1.8 151.3772 13.0475 164.4247
the Year
Statement of Financial Position

As on 31 March 20X2 ` in million
WTM Exchange Warranty Maint. Share Property WTM Associate Consolidate
Loss Contract Option Reval
ASSETS
Non-current assets
Plant, property and 450.5 -12 438.5 438.5
equipment
Intangible assets 25.5 25.5 25.5
Investment Property 37.4 37.4 37.4
Investment in PQR Ltd 13.6 13.6 25.925 39.525
527 515 25.925 540.925
Current assets
Inventories 187 187 -0.1275 186.8725
Trade Receivable 102 102 102

CASE STUDIES 10.13
Prepayments 1.7 1.7 1.7

Cash 56.1 56.1 56.1
346.8 346.8 -0.1275 346.6725
Total Assets 873.8 861.8 25.7975 887.5975

Issued share capital 255 255 255
Share Premium 13.6 13.6 13.6
Retained earnings 280.5 -10.2 -0.34 -7.55933 -0.85595 -1.8 259.74472 25.7975 285.54222
Share option reserve 0.85595 0.85595 0.85595
Revaluation Surplus 10.2 -10.2 - -
Total Equity 559.3 529.20067 554.99817
Non-current liabilities 265.2 5.99533 271.19533 271.19533
Current liabilities 49.3 10.2 0.34 1.564 61.404 61.404
Total Liabilities 314.5 332.59933 332.59933
Total equity and liabilities 873.8 861.8 887.5975
XYZ Ltd Group Consolidated Statement of Profit or Loss and Other Comprehensive
Income
for the Year Ended 31 March 20X2
` in million
Revenue 414.04067
Share of profit of Associate 13.0475
A 427.08817
Cost of goods sold 136.34
Selling and Distribution expenses 34
Administration expenses 31.02347
Finance costs 17.00000
B 218.36347
Profit before Tax A-B 208.7247
Tax expense (42.5)
Profit for the year 166.2247
Other comprehensive income (1.8)
Total comprehensive income for the year 164.4247

XYZ Ltd Group

Consolidated Statement of Financial Position as at 31.3.20X2
` in million
ASSETS
Non-current assets
Property, plant and equipment 438.5
Intangible assets 25.5
Investment property 37.4
Financial Assets
Investment in PQR Ltd 39.525
540.925
Current assets
Inventories 186.8725
Financial Assets
Trade Receivable 102
Cash 56.1
Prepayments 1.7
346.6725
Total Assets 887.5975
Issued share capital ` 1 ordinary shares 255
Other Equity
Share premium 13.6
Retained earnings 285.54222
Share option reserve 0.85595
Revaluation surplus -
Total equity 554.99817
Non-current liabilities 271.19533
Current liabilities 61.404
332.59933
Total equity and liabilities 887.5975

CASE STUDY 11
Johansen Ltd. is a big business group in Northern Europe with diversified business interest. It
maintains its books under International Financial Reporting Standards. While closing the books
of company for the financial year ending 31 March 20X2, John Davies the Financial Controller
of the organization came across certain transactions and is not sure how to treat them in the
financial statements. You are a Chartered Accountant and John approaches you to help him
out.
On 1 April 20X1, it acquired a new subsidiary, Bosman Ltd., purchasing all 150 million shares
of Bosman Ltd. The terms of the sale agreement included the exchange of four shares in
Johansen Ltd. for every three shares acquired in Bosman Ltd. On 1 April 20X1, the market
value of a share in Johansen Ltd. was ` 10 and the market value of a share in Bosman Ltd.
` 12.00.
The terms of the share purchase included the issue of one additional share in Johansen Ltd. for
every five acquired in Bosman Ltd. if the profits of Bosman Ltd. for the two years ending 31
March 20X2 exceeded a target figure. Current estimates are that it is 80% probable that the
management of Bosman Ltd. will achieve this target.
Legal and professional fees associated with the acquisition of Bosman Ltd. shares were
` 12,00,000, including ` 2,00,000 relating to the cost of issuing shares. The senior management
of Johansen Ltd. estimate that the cost of their time that can be fairly allocated to the acquisition
is ` 2,00,000. This figure of ` 2,00,000 is not included in the legal and professional fees of
` 12,00,000 mentioned above.
The individual Statement of Financial Position of Bosman Ltd. at 1 April 20X1 comprised net
assets that had a fair value at that date of ` 1,200 million. Additionally, Johansen Ltd. considered
Bosman Ltd. possessed certain intangible assets that were not recognized in its individual
Statement of Financial Position:
• Customer relationships – reliable estimate of value ` 100 million. This value has been
derived from the sale of customer databases in the past.
• An in process research and development project that had not been recognised by
Bosman Ltd. since the necessary conditions laid down in International Financial
Reporting Standards for capitalisation were only just satisfied at 31 March 20X2.
However, the fair value of the whole project (including the research phase) is estimated
at ` 50 million.
• Employee expertise – estimated value of Director employees of Bosman Ltd. is
` 80 million.
• The market value of a share in Johansen Ltd. on 31 March 20X2 was ` 11.

On 1 March 20X2, the company embarked on a major staff training campaign. The training was
provided during March 20X2. The campaign was outsourced to an external agency. The
company paid ` 4 million to the agency on 1 March 20X2 and will be required to pay a further
` 2 million on 1 June 20X2 if its employees achieve specified performance targets related to the
training in the year ended 31 March 20X2.
The directors consider that it will be possible for the employees to achieve these targets.
However even with the campaign the targets will be very difficult to achieve.
On 1 April 20X1, company granted 50 executives, call options to purchase up to 5000 shares
each on 1 April 20X3. This was partly a means of deterring them from leaving as the options
only vest if the executives are still employed on 1 April 20X3. According to Director Human
Resources, they estimate 90% of the executives will remain with us for the two year period and
exercise their options in full. Information on options is as under:
(a) The option price is ` 20 per share
(b) The market value of each share was ` 15 on 1 April 20X1 and ` 18 on 31 March 20X2.
(c) The market value of the share option was ` 2 on 1 April 20X1 and ` 2.20 on
31 March 20X2.
On 1 October 20X1, Johansen Ltd. subscribed for 40 million ` 1 loan notes in Carlton Ltd. The
loan notes were issued at 90 paise and were redeemable at ` 1.20 on 30 September 20X6.
Interest is payable on 30 September in arrears at 4% of par value. This represents an effective
annual rate of return for Johansen Ltd. of 9·9%.
Johansen Ltd.’s intention is to hold the loan notes until redemption. Until 30 April 20X2 Carlton
Ltd. was a successful company with a good reputation for settling all its liabilities at their due
dates.
However, due to an event which occurred on 30 April 20X2, three of Carlton Ltd.’s major
customers became insolvent and this caused liquidity problems for Carlton Ltd. During
May 20X2 Carlton Ltd. entered into negotiations with all its creditors, including Johansen Ltd.
Johansen Ltd. agreed to forego the interest payments due on 30 September 20X2 and 20X3,
with the payments from 30 September 20X4 onwards resuming as normal.
On 1 January 20X2, the directors of Johansen Ltd. decided to terminate production at one of
the company’s divisions. This decision was publicly announced on 31 January 20X2. The
activities of the division were gradually reduced from 1 April 20X2 and closure is expected to be
complete by 30 September 20X2.
At 31 January 20X2, the directors prepared the following estimates of the financial implications
of the closure:
(i) Redundancy costs were initially estimated at ` 2 million. Further expenditure of
` 8,00,000 will be necessary to retrain employees who will be affected by the closure but
remained with Johansen Ltd. in different divisions. This retraining will begin in early July
20X2. Latest estimates are that redundancy costs will be ` 1·9 million, with retraining
costs of ` 8,50,000.

CASE STUDIES 11.3
(ii) Plant and equipment having an expected carrying value at 31 March 20X2 of ` 8 million
will have a recoverable amount ` 1·5 million. These estimates remain valid.
(iii) The division is under contract to supply goods to a customer for the next three years at
a predetermined price. It will be necessary to pay compensation of ` 6,00,000 to this
customer. The compensation actually paid, on 31 May 20X2, was ` 5,50,000.
(iv) The division will make operating losses of ` 3,00,000 per month in the first three months
of 20X2-20X3 and ` 2,00,000 per month in the next three months of 20X2-20X3. This
estimate proved accurate for April 20X2 and May 20X2.
(v) The division operates from a leasehold premise. The lease is a non-cancellable
operating lease with an unexpired term of five years from 31 March 20X2. The annual
lease rentals (payable on 31 March in arrears) are ` 1·5 million. The landlord is not
prepared to discuss an early termination payment.
Following the closure of the division it is estimated that Johansen Ltd. would be able to
sub-let the property from 1 October 20X2.
Johansen Ltd. could expect to receive a rental of ` 3,00,000 for the six-month period from
1 October 20X2 to 31 March 20X3 and then annual rentals of ` 5,00,000 for each period
ending 31 March 20X4 to 31 March 20X7 inclusive. All rentals will be received in arrears.
Any discounting calculations should be performed using a discount rate of 5% per annum.
You are given the following data for discounting at 5% per annum:
Present value of `1 received at the end of year 1 = ` 0·95
Present value of `1 received at the end of year 1–2 inclusive = ` 1·86

1. What would be the initial measurement of financial instruments as subscription of loan
notes in Carlton Ltd.?
(a) ` 40 million
(b) ` 37.782 million
(c) ` 38.4 million
(d) ` 36 million
2. What would be the closing balance of financial instruments (as subscription of loan notes
in Carlton Ltd.) as on 31 March 20X2?
(a) ` 37.6 million


(c) ` 37.782 million
(d) ` 36.182 million
3. What would be the amount of non-current asset as classification in the Statement of
financial position with respect to subscription of loan notes in Carlton Ltd.?
(a) ` 37.782 million
(c) ` 34.518 million
(d) ` 40 million
4. What is the nature of event which occurred on 30 April 20X2, wherein three of
Carlton Ltd.’s major customers became insolvent and thus causing liquidity problems for
Carlton Ltd.?
(a) Non adjusting event
(b) Adjusting event
(c) Prior period error
5. How much provision should be made in the financial statements of 31 March 20X2 with
respect to onerous contract - Leasehold Premises?
(a) ` 45,20,000
(b) ` 45,10,000
(c) ` 64,80,000
(d) ` 19,70,000

6. Compute the goodwill on consolidation of Bosman Ltd. that will appear in the
consolidated Statement of Financial Position of Johansen Ltd. at 31 March 20X2 with
necessary explanation of adjustments therein.
7. Explain whether staff training program will be treated as an intangible assets under
specifications laid down by the relevant IFRS and also discuss its recognition aspect.
8. What will be the treatment of call options granted to executives as on 31 March 20X2?
9. Compute the amounts that will be included in the Statement of Profit or Loss for the year
ended 31 March 20X2 in respect of the decision to close the division of Johansen Ltd.

CASE STUDIES 11.5

1 Option (d) ` 36 million
Reason for 1, 2 and 3:
In accordance with IFRS 9 ‘Financial Instruments’ entities are required to measure
financial assets at either amortized cost or fair value depending on the reason for holding
them and the nature of the expected returns from the asset.
In the instant case, amortized cost should be used because Johansen Ltd.’s objective is
to hold the assets to collect the contractual cash flows associated with it and those cash
flows consist solely of the repayment of principal and interest by Carlton Ltd.
The asset will initially be measured at ` 36 million (` 40 million x 90 paise).
The finance income for the six months to 31 March 20X2 will be ` 1·782 million (` 36
million x 9·9% x 6/12).
The closing asset will be ` 37·782 million (` 36 million + ` 1·782 million).
This asset will be split into its current and non-current portions.
The interest payment due on 30 September 20X2 of ` 1·6 million (` 40 million x 4%) will
be a current asset.
The remaining asset of ` 36·182 million (` 37·782 million – ` 1·6 million) will be non-
current.
4 Option (a) Non adjusting event
Reason:
The information regarding the financial difficulty of Carlton Ltd is an event after the
reporting period. It is a non-adjusting event as it gives evidence of conditions arising
after the end of the reporting period. Since April 20X2, Carlton was a successful
company, there were no sign of its non-capability of paying dues. Hence, liquidity
problem arose after April, 20X2 will be considered as non-adjusting event. Therefore,
the financial statements are not adjusted but Johansen Ltd should disclose the nature
of the event and an estimate of its financial effect as non-disclosure could influence
the economic decisions users of the financial statements might make.

5 Option (b) ` 45,10,000

Reason:
The net cost of fulfilling the contract is [(` 15,00,000 x 4·32) – (` 3,00,000 x 0·95 –
` 5,00,000 x (4.32 – 0.95))] = ` 45,10,000

6. Calculation of purchase consideration:
Market value of shares issued (150 million x 4/3 x ` 10) 2,000
Initial estimate of market value of shares to be issued (150 million x 300
1/5 x ` 10)
Incremental acquisition costs other than the issue cost of shares 1
Total consideration 2,331
Contingent consideration is recognized in full if payment is probable. Incremental costs

associated with the acquisition, other than the issue costs of financial instruments, can
be included in the cost of the investment. Where material, future consideration is
measured at the present value of the amount payable. In the case of shares to be issued,
this is represented by the share price.
Statement of fair value of identifiable net assets at the date of acquisition
As per Bosman Ltd.’s Statement of Financial Position 1,200
Fair value of customer relationships 100
Fair value of research and development project 50
Total net assets acquired 1,350
As per IAS 38 ‘Intangible assets’, intangible assets can be recognized separately from
goodwill provided they are identifiable, are under the control of the acquiring entity, and
their fair value can be measured reliably.
Customer relationships that are similar in nature to those previously traded, pass these
tests but employee expertise fail the ‘control’ test. Both the research and development
phases of in process project can be capitalised provided their fair value can be measured
reliably.

CASE STUDIES 11.7
Statement of computation of goodwill

Fair value of consideration given 2,331
Fair value of net assets acquired (1,350)
Goodwill on acquisition 981
As per para 58 of IFRS 3, changes in the fair value of contingent consideration that the
acquirer recognises after the acquisition date are measurement period adjustments to be
dealt with in accordance with paragraphs 45–49.
As per para 48 of IFRS 3, the acquirer recognises an increase (decrease) in the amount
by means of a decrease (increase) in goodwill.
Accordingly, the changes in the fair value of contingent consideration is recorded as an
adjustment to goodwill as follows:
Goodwill Dr. ` 30 million
To Contingent consideration ` 30 million
7. As per IAS 37 ‘Provisions, Contingent Liability and Contingent Assets’, it appears that
the future payment of ` 2 million is possible, but unlikely. Therefore, it would be
appropriate to disclose the possibility of repayment as a contingent liability, rather than
actually recognizing it.
IAS 38 ‘Intangible assets’ states that before an intangible asset can be recognized, it
must meet the definition of an intangible asset and have a cost or value that can be
measured reliably.
The definition of an intangible asset requires that the item is identifiable (can be disposed
of separately without disposing of the entire business or arising from contractual or other
legal rights) and that the identifiable asset can be expected to produce a source of
economic benefits that the entity can control.
IAS 38 specifically states that the cost or value of an assembled workforce cannot be
recognized as an intangible asset. Training expenditure seems to fail these tests.
Therefore, the payment of ` 4 million to the agency should be recognized as an expense
in the Statement of Profit or Loss.
8. As per IFRS 2 ‘Share Based Payment’ the granting of options to senior executives is a
share based payment and will need to be recognized as remuneration expenses. The
amount to be charged as an expense is measured at fair value of goods and services
provided as consideration for the share based payment or at the fair value of share based
payments whichever can be more reliably measured.
For measurement purposes, in case of employee share options, the market value of the
options on the day these are granted is used as this can be measured reliably.

As at 1 April 20X1, when these options were granted, the market value was ` 2, the
remuneration expenses therefore would be:
5,000 shares x 50 employees x 90% x ` 2 = ` 4,50,000 for two year period.
Hence, for the year ended 31 March 20X2 the entry would be:
Share based payment remuneration expense Dr. ` 2,25,000
To Equity share based payment reserve ` 2,25,000
9. As per IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’, closure of a
division is a restructuring exercise. IAS 37 states that a constructive obligation to
proceed with the restructuring arises when at the reporting date the entity has:
– Commenced activities connected with the restructuring; or
– Made a public announcement of the main features of the restructuring to those
affected by it. In this case a public announcement has been made and so a
provision will be necessary at 31 March 20X2.
This will result in the following charges to the statement of profit & loss:
(i) Estimate of redundancy costs of ` 1.9 million is the best estimate of the
expenditure at the date the financial statements are authorized for issue.
Changes in estimates after the reporting date are taken account of for this purpose
as an adjusting event after the reporting date. No charge is necessary for the
retraining costs as these are not incurred in 20X1-20X2 and cannot form part of a
restructuring provision as they are related to the ongoing activities of the entity.
(ii) Impairment of plant and equipment of ` 6·5 million is although not strictly part of
the restructuring provision the decision to restructure before the yearend means
that related assets need to be reviewed for impairment. In this case the
recoverable amount of the plant and equipment is only ` 1·5 million. As per
IAS 36 ‘Impairment of Assets’, property, plant and equipment should be written
down to this amount, resulting in a charge of ` 6·5 million to the income statement.
(iii) For compensation for breach of contract of ` 0.55 million, same principle applies
here as applied to the redundancy costs.
(iv) No charge is recognized in 20X1-20X2 with respect to future operating losses of
20X2-20X3. Future operating losses relate to future events and provisions are
made only for the consequences of past events.
(v) IAS 37 states that an onerous contract is one for which the expected cost of
fulfilling the contract exceeds the benefits expected from the contract. Provision
is made for the lower of the expected net cost of fulfilling the contract and the cost
of early termination (not available in this case).
The net cost of fulfilling the contract is
` 4.51 million [` 1.5 million x 4·32 – ` 0.3 million x 0·95 – ` 0.5 million x (4·32 –
0·95)].

CASE STUDY 12
G Ltd., a listed entity and owned 90% by J Ltd. (the other shareholder being V Ltd.), has been
served with a court order on 1 July 20X2 for installing certain infrastructural facilities and
equipment required for environmental and other statutory compliance at its facility in Kanpur
and which G Ltd. had failed to comply since 20XX. G Ltd. has other such manufacturing
facilities in many parts of India. The time limit for compliance of this court order is 15 months
from the date of the order (i.e. 30 September 20X3) and if not complied with, G Ltd. may have
to remove its existing plant on the grounds of failure to comply with the requirement to produce
goods as per Government’s rules and regulations. The financial year ending for the entity is
31 March of every year. G Ltd. has five subsidiaries (all within India). The financial
statements for the year ending 31 March 20X3 have been authorized for issue on
15 May 20X3.
G Ltd. is in dire need of funds for the above compliance since its liquidity as well as financial
position does not look good in 20X2. Due to its history of past multiple defaults on loans from
various banks, obtaining funds is more difficult for G Ltd. Considering the lack of local funding
avenues, G Ltd. has approached its parent J Ltd. based in a country from where outflow of
funds by way of equity investment in general have been under scanner during the last one
year by way of stringent rules and regulations. Hence the parent has assigned all its trade
and loan receivables for a consideration of $ 1 such that G Ltd. is able to collect all the
receivables. As per their initial trade terms, these receivables are collectible over a period
ranging from 90 days to 12 months (being related parties). However, the procedural delays
are expected to cost an additional time of 2 months until credit into G Ltd.’s bank account.
G Ltd.’s analysis reveals that more than 75% of the receivables are with due dates falling
between 9-12 months from the date of initial recognition i.e. most of them are due only after
31 March 20X3. Amidst all this lies also a concern that the parent’ country might also tighten
the screws on many other categories of outflows in the coming months but not sure if this will
include collection of receivables (especially if these are assigned like the ones to G Ltd.).
Management of G Ltd has already been actively involved in or looking out for disposing two
of its subsidiaries X Ltd. and Y Ltd. for improving its liquidity and streamlining its operations.
The current status of the disposal plans regarding these two subsidiaries is as below:
X Ltd., This is a dormant entity whose directors have been till date exploring possibilities
Delhi of various types of business after shutting down its operations in 20XX. No plans
of revival have surfaced yet. Management of G Ltd. has already entered into a
binding sale agreement on 1 May 20X2 for all its assets (i.e. only building and
PPE – Refer table below) with a buyer from a different industry despite being
able to find buyers in the same industry who only offered a low sale price. The
agreement provides for a sale completion date on 30 April 20X3 and a maximum

time up to 31 May 20X3 because the buyer has approached G Ltd. for making
certain customized modifications in the building structure (i.e. fit outs and other
renovations) to suit its purpose. PPE is agreed to be acquired as such. These
activities will be funded in advance by the buyer and adjusted against the final
and revised selling price which is fixed at ` 185 Lacs. Management of G Ltd.
estimates that the required fit out works will require heavy demolition works
involved and sourcing of appropriate contractors for the job. As a result, it is
impossible to have the fit-outs completed by 31 May 20X3. However, it is noted
that the agreement also provides for refund of all monies received by G Ltd. till
date if the sale is not completed on or before 31 May 20X3. As on
31 March 20X3, G Ltd. has completed the required demolition works but is
unsure about the availability of contractors for the fit out works and the possibility
of completing before 31 May 20X3.
Y Ltd., Y Ltd. is active in its operations since its commencement in 20XX. The
Cochin necessary board resolution for the disposal of this operation has been passed
on 1 February 20X3. As this is private company, no further formalities such as
resolution in AGM is required for proceeding. The situation as at 31 March 20X3
is that advertisements have been given in the local newspapers and magazines
regarding the offer for sale. The price offered is ` 475 Lacs based on a valuation
report obtained from an independent valuation agency. Two prospective buyers
have responded with counter offers which are acceptable to management
although other terms of sale have been evaluated.
Note: The year 20XX is the year prior to the year 20X0.
X Ltd. only has a PPE (cost model) with book value of ` 75 lacs (fair value less costs to sell
is ` 60 lacs determined to be the recoverable amount) and building (cost model) is ` 150 lacs
(fair value less costs to sell is ` 120 lacs determined to be the recoverable amount) as at
31 March 20X3. The non-current assets of Y Ltd. as on 31 March 20X3 (no liabilities
outstanding) are as below:
Item Y Ltd. (` in lacs)
Book value
Building (cost less depreciation) 175
Freehold Land (on revaluation model) 255
Plant and Machinery (cost less depreciation) 65
Investment in listed entities (fair value through P/L) 14
TOTAL 509
Fair value less cost to sell of total non-current assets of Y Ltd. is ` 475 lacs. The fair values
of Freehold land and Investment in listed entities are equivalent to their respective book
values, beyond which they cannot be impaired.

CASE STUDIES 12.3
The group was a lessee in respect of various operating leases that have already been
accounted as per IFRS 16 in the current year. Given the uncertainty of the situation around
G Ltd., management of the entity is holding discussions on the following leases in which
G Ltd. is a lessee. Below is the position as on 31 March 20X3:
The lease agreement provides for an option to renew the lease at
the end of the first term that commenced on 1 July 20X0 and ends
on 30 June 20X3. The lease can be renewed for another two years
ending 30 June 20X5. The agenda of the AGM to be conducted on
30 April 20X3 contains an item in relation to this lease. The lease
Lease of Building at rent is ` 50,000 per month payable in advance. At the inception of
MG Street the lease, G Ltd. had received an upfront cash subsidy under a
Government scheme towards lease costs incurred for conducting
the operations and as part of the scheme it was obliged to hold the
lease for the entire period of 5 years i.e. including the renewal
period. Post the court order the subsidy has been withdrawn and
now management finds that the lease costly to continue.
This service apartment in Kanpur is situated close to the
controversial plan. The lease agreement was for a non-cancellable
term of two years ending 30 June 20X4 at a rent of ` 25,000 per
month in advance. Management had decided to classify the lease
as of low value on initial recognition. No renewal options exist in
Lease of service
this lease. However, if the lessee early terminates the lease, it has
apartment at Tagore
to pay a penalty equal to ` 2,50,000. Management has decided to
Street
terminate the lease by giving immediately a one-month notice to the
landlord. Current market interest rate for borrowings for any term
longer than one year is 7.5%. This decision of management is
because post the court order fiasco a lot of senior executives have
left, and the service apartment is no more in need
As at 31 March 20X3, G Ltd. had the following financial assets in its Statement of Financial
Position:
Item Book Fair value Management position
value (` in lacs)
(` in lacs)
Equity shares of 13 13 They are presently measured at fair value
ABC Ltd. (listed) through OCI through an irrevocable
election. Given management’s concerns
about an impending liquidity crisis, it has
been decided to optimize returns from the
investment by cashing in on price
fluctuations. No amounts lying in OCI.
Assume that conditions required for
reclassification are satisfied.

Trade 56 56 Management expects to collect all of them.

receivables But if there is a compulsion to shut down
(acquired from this operation, G Ltd. will re-assign the
Parent) foreign receivables back to Parent for their
contractual outstanding balances.
Corporate Bonds 29 35 They are presently measured at amortized
in D Ltd. cost. Assume that conditions required for
reclassification are satisfied and if required
for liquidity, these bonds will be sold in the
market.
Bonds issued by 15 15 These bonds are maturing on
the parent 31 August 20X3 and measured at fair value
country’s through OCI. Recently the Government
Government backed securities suffered a price decline
post the Government’s stringent norms and
investment downgrading and not expected
to recoup any time in the short future.
However, given stable rating for these
bonds, the maturity amount is expected to
be fully collected. To avoid capital erosion
and look for possible returns on the capital,
management decided to wait till maturity.
These bonds were bought in 20X0 at a fair
value of ` 11 lacs.
G Ltd. had the following investments in associate H Ltd. (a foreign listed entity) which is being
equity accounted in the consolidated financial statements of the group. As at 31 March 20X3,
the status of the investments held is as below:
10,000 Equity G Ltd. has a nominee director on the board of H Ltd. Following the
shares of ` 100 news of the court order, the other members on the board have
each notified a resolution to remove the nominee director of G Ltd. who is
believed to be the reason for the disaster in G Ltd. This has caused
a decline in the fair value of the investment in the associate while
there is an uncertainty of a worthy substitution. All material sale /
purchase contracts with G Ltd. have been immediately terminated.
10% Unsecured These debentures carry an annual redemption feature and maturing
Debentures issued on 30 June 20X4. However, since G Ltd. was in default of certain
at face value of conditions subsequent in the investment agreement that included the
` 10 lacs said statutory compliance ordered by Indian Court, H Ltd. is not
obliged any more to honour the repayment schedule until G Ltd.
complies with the requirements of the statute as ordered by the court.
Such conditions were included to comply with the obligations
imposed by that foreign Government to eliminate environmental and

CASE STUDIES 12.5
quality issues faced in that country due to products originating from

the Kanpur plant. As a result, it is unclear whether and when the full
amount will be settled as no negotiations are likely in this regard.
On 30 April 20X3, a Government-sponsored interim inspection was conducted that discovered

zero progress on the satisfaction of the court obligation. As a result of this, ` 12 lacs have
been slapped on the directors as penalty for non-compliance. Management has gone on
appeal in a higher court pleading on the grounds of non-availability of funds to complete the
project and request extension of time. Although the legal counsel opines it is probable that
G Ltd. will escape the levy of any amount of penalty it is highly unlikely that extension of time
will be granted.
Post the filing of announcement at the National Stock Exchange regarding the results of the
inspection on 1 May 20X3, the demand for stock of inventories (80,000 kgs) distributed from
Kanpur plant to various stockists / distributors spiraled downwards. On 10 May 20X3
aggrieved stockists and distributors have demanded a compensation of ` 17.50 lacs for the
decline in the net realizable value of those inventories. In response to it, on the same day,
G Ltd. issued its own 15,000 shares whose current market value is ` 120 per share. V Ltd.,
the non-controlling shareholder of G Ltd. has agreed to take over the stock of inventories
(1,00,000 kgs) at their current book value of ` 85 lacs (estimated NRV of ` 65 lacs on
31 March 20X3) lying unsold at the Kanpur facility in lieu of any cash dividend payable in that
period. This has been officially communicated on 22 May 20X3 though management of G Ltd.
was unofficially aware of the minutes of J Ltd.’s AGM held on 14 May 20X3 containing
resolution to take over the inventories.

1. What will be the total impairment loss calculated for the buildings held by X Ltd. and
Y Ltd.?
(a) ` 50 lacs
(b) ` 52 lacs
(c) ` 55 lacs
(d) ` 57 lacs
2. What will be the lease liability as on 31 March 20X3 for MG Street Building lease
(assuming IBR of 8.5% and time value of money exist in the determined lease term)?
(a) ` 1,50,000
(b) ` 1,48,938(approx.)
(c) ` 1,23,3501 (approx.)
(d) None of these

3. What is the amount recognized in Profit or loss for the period ending 31 March 20X3 on
account of Tagore street lease?
(a) ` 2,50,000
(b) ` 3,59,126
(c) Nil
(d) ` 3,75,000
4. Calculate the absolute net impact on OCI for the year ended 31 March 20X3.
(a) ` 6 lacs
(b) ` 2 lacs
(c) ` 4 lacs
(d) Nil
5. Calculate the amount of year-end adjustments for inventory to P/L for the year ended
31 March 20X3?
(a) ` 18 lacs
(b) ` 85 lacs
(c) ` 20 lacs
(d) ` 12 lacs

6. You are required by management of G Ltd. to provide a complete advice on accounting
implications regarding management’s decision to sell X Ltd. and Y Ltd. Give reasons
for your advice with reference to relevant IFRS with a brief note on any other
accompanying requirement in IFRS 5. You are not required to calculate the impairment
loss for the limited purpose of this question part.
7. As a close aide of management, proactively advise them on the accounting implications
of their decisions or likely decisions regarding leases and investments (including in
associates). Give brief and precise advice. You are not required to carry out the
calculations for the limited purpose of this question part.
8. What are the implications of the various events that occurred after 31 March 20X3 on
the current year financials? Also briefly provide the accounting requirement in the
immediate next reporting period with relevant IFRS reference? You are not required
to carry out the calculations for the limited purpose of this question part.

CASE STUDIES 12.7

1. Option (c) ` 55 lacs
Reason:
Impairment loss of Building X: (` in lacs)

Fair value of building 120
Book value 150
Impairment 30
Y Ltd. is a cash generating unit (CGU). Hence, as per para 104 of IAS 36, total
impairment loss will be prorate allocated to all the assets of CGU.
Impairment loss of Building Y:
Fair value of building Book value Prorated impairment
Building 175 25
PPE 65 9
Total 240 34
Fair value less costs to sell of the above 206
disposal group
Impairment of the disposal group 34
Total Impairment loss of Buildings = 30 lacs + 25 lacs = 55 lacs
2. Option (b) ` 1,48,938

Reason:
Remaining Months Rent (`) PV (`)

April 20X3 50,000 50,000
May 20X3 50,000 49,646
June 20X3 50,000 49,292
Lease liability 1,48,938

3. Option (a) ` 2,50,000

Reason:
Amount recognized in the profit or loss will be the amount of penalty which lessee will
pay to terminate the lease
4. Option (a) ` 2 lac
Reason:
` 2 lac is arrived by net of Corporate Bonds in D Ltd and Foreign Govt. Bonds
reclassification (6 lac – 4 lac)
5. Option (a) : ` 20 lac
Reason:
` 20 lac is calculated as indicator of impairment of inventory as at 31 March 20X3.

6. The accounting implication arising from the selling decisions in relation to X Ltd and
Y Ltd depends on the classification of these two entities as per IFRS 5. The first key
consideration is whether these two entities are individually a ‘disposal group’ that meet
the criteria for classification as held for sale as per paragraph 6-8 (including paragraph
9 if applicable) and if yes then the next verification is whether they are a discontinued
operation as defined in IFRS 5.
The assets of X Ltd being only Building and PPE are to be disposed off in a single
transaction and hence are a ‘disposal group’ as per IFRS 5. Although it is given that
X Ltd is being held for recovering its carrying amount through sale rather than
continuing use (paragraph 6), one of its main asset i.e. building is not being held for
sale in its current condition i.e. it requires additional fit outs before being sold. Also
the sale is not highly probable despite there being an agreement in place. Hence the
disposal group of X Ltd cannot be classified as held for sale (paragraph 7). Given the
results of impairment testing have led to a recoverable amount lesser than the carrying
amount, both the PPE and building have to be individually impaired as per para 59-60
of IAS 36.
In the case of Y Ltd, the assets form a disposal group as they are to be disposed of in
a single transaction. The criteria for being classified as held for sale is satisfied since
the assets are sold in their current condition and their sale is highly probable (given
the board resolution, active marketing plan and faster acceptable offers from buyer)
within one year from 1 February 20X3 i.e. date of classification as held for sale.

CASE STUDIES 12.9
The next step is to determine whether the results of Y Ltd are to be presented as a
discontinued operation separate from other continuing operations as per IFRS 5.
Appendix A defines discontinued operation and disposal group as below:
“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 or geographical area of
operations, (b) is part of a single coordinated 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”
Y Ltd is a separate component of G group since its operations and cash flows are
distinctly identifiable and is also to be classified as held for sale as per our analysis in
previous paragraph. It also represents a separate geographical area of operation
(being located in Cochin). Hence the results of Y Ltd for the year ending
31 March 20X3 have to be presented as those of a discontinued operation as per
paragraph 33 of IFRS 5.
Further, since it is within the scope of IFRS 5, the requirements of impairment
accounting are governed by paragraphs 18-23 of IFRS 5 which require calculation of
impairments as applicable to a cash generating unit in paragraphs 104 and 122 of
IAS 36. Thus, the impairment calculated for individual assets in Y Ltd (CGU) are bound
to be different from what they would be if they are calculated as if they are individual
assets as per IAS 36. Since the fair value less costs to sell is less than the carrying
amount of the disposal group, impairment has to be accordingly calculated and
recognized in P/L.
7. Following the decision of management regarding the leases, the following are the
accounting implications:
MG Street lease
Since the lease has become costlier, renewal of the lease is no more a prudent
decision. As such there is no reasonable certainty that the renewal option will be
exercised. Hence the lease term has to be revised by excluding the renewal term from
the initial assessment of 5 years as per para 21(b) of IFRS 16. This will be reflected
in the form of a reduction in the amount of lease liability initially recognized with a
corresponding impact on the related ROU asset (refer para 39-40(a) of IFRS 16).
Lease of service apartment at Tagore Street
As per para 68 of IAS 37, if the unavoidable cost of meeting the lease obligation (i.e.
lease rent) exceeds the expected economic benefits from captive use of the service
apartment for essential and productive purposes, the contract is an onerous contract.
Here, amount recognized in profit and loss for the period ending 31 March 20X3 on

account of Tagore street lease would be the lower of PV of future ease payments and
penalty amount.
Calculation of future lease payment and its present value:
Months Rent (`) PV (`)

April 20X3 25,000 25,000.00
May 20X3 25,000 24,844.72
June 20X3 25,000 24,690.41
July 20X3 25,000 24,537.05
August 20X3 25,000 24,384.64
September 20X3 25,000 24,233.19
October 20X3 25,000 24,082.67
November 20X3 25,000 23,933.09
December 20X3 25,000 23,784.44
January 20X4 25,000 23,636.71
February 20X4 25,000 23,489.89
March 20X4 25,000 23,344.00
April 20X4 25,000 23,199.00
May 20X4 25,000 23,054.91
June 20X4 25,000 22,911.71
TOTAL 3,75,000 3,59,126
Lower of ` 3,59,126 and ` 2,50,000 is ` 2,50,000

Hence penalty being lower of cost of performance is ` 2,50,000.
The entity has to provide for the present obligation measured as the lower of cost of
fulfilling it (i.e. present value of future rent payments) and any compensation or
penalties arising from terminating the lease (i.e. the ` 2.50 lacs specified in the
contract).
Investments held by the entity
Item IFRS/IAS Impact
Ref.
Equity shares of IFRS 9.5.6.7 There is a change in the business model
ABC Ltd (listed) from FVOCI to FVTPL due to being held for

CASE STUDIES 12.11
trading. As no amounts are lying in OCI, no

impact arises due to reclassification
Trade receivables IFRS 9.4.1.2 No impact as only the contractual balance is
(acquired from expected to be collected by holding till
Parent) maturity or by re-assigning to parent.
Corporate Bonds in IFRS 9.5.6.4 There is a change in the business model
D Ltd from Amortised cost to FVOCI. Uplift in
carrying amount of ` 6 lacs recognized in
OCI.
Bonds issued by the IFRS 9.5.6.5 There is a change in the business model
parent country’s from FVOCI to Amortised cost. An amount
Government of ` 4 lacs being the accumulated gain in
OCI is removed from OCI and adjusted to
Financial asset. This adjustment affects OCI
but does not affect profit or loss.
10000 Equity shares IAS 28.22(b) Loss of significant influence over the entity.
of ` 100 each Fair value of the investment must be
recomputed with any gain or loss to be
immediately recognized in P/L.
10% Unsecured IAS 28.38 To be included as part of the investment in
Debentures issued the associate as the settlement is no more
at face value of planned nor likely to occur in the
` 10 lacs foreseeable future and accounted as per
equity method instead of as a financial asset
per IFRS 9.
8. As per paragraph 3 of IAS 10,

“Events after the reporting period are those events, favourable and unfavourable, that
occur between the end of the reporting period and the date when the financial
statements are authorised by the Board of Directors in case of a company, and, by the
corresponding authorizing authority in case of any other entity for issue.”
Events after the reporting period are of two types viz. (1) adjusting event and (2) non-
adjusting event. Adjusting events are those that provide evidence of conditions that
existed at the end of the reporting period and as such require adjusting the carrying
amount of assets and liabilities for the effect of such events. Non-adjusting events are
those that are indicative of conditions that arose after the reporting period and hence
only require disclosures to their effect.
Thus, any event that occurs between 1 April 20X3 and 15 May 20X3 is regarded as an
event after reporting period for the purpose of IAS 10.
Below table summarises the position regarding the various year end events:

Event Type as per Impact

IAS 10
Penalty resulting Adjusting This is an adjusting event as it is indicative of
from the event conditions (i.e. non-compliance) that already
inspection existed on 31 March 20X3. There is a present
obligation which is not expected to result in
outflow of resources embodying economic
benefits. So no provision is required as per para
14 of IAS 37.
Distributors Non - The claim arose due to fall in demand for
claim Adjusting inventories that occurred post the
event announcement of the results of the inspection.
It is an event after reporting period and does not
require adjustment to any values as at
31 March 20X3 as per para 10 of IAS 10.
However, in the next reporting period a share-
based payment expense has to be recognized at
the fair value of the equity instruments issued as
the fair value of goods is not reliably available
as per para 7 of IFRS 2.
V Ltd.’s take- Not an event The official communication of the decision of
over of for this take over that can be regarded as authentic for
inventories reporting the purpose of accounting occurred only after
period the date of authorization of financial statements
for issue i.e. 15 May 20X3.
In the next reporting period a distribution
expense has to be recognized with a
corresponding dividend payable which will be
fair valued with reference to the fair value of the
inventories and reversed when settled.
Changes in fair value of dividend payable are
recognized in Profit or Loss (Refer IFRS 10).

CASE STUDY 13
Economy of Pune once depended heavily on auto industry and SMEs providing ancillary parts
or services to the auto industry. Even today, the city’s economy has a major share of auto
industry. However, with the advent of IT corridors in 3 different parts of the city’s outskirts,
the economy of Pune has grown significantly through Software and Information Technology
services in the recent times. Almost every major IT company of the country has its office(s)
in Pune including the likes of TCS, Infosys, Wipro, Tech Mahindra and so on. Even some
foreign MNCs also have their facilities in Pune like Capgemini, Cisco, and Atos etc.
Significant portion of the workforce for IT industry is drawn from Telangana and Andhra
Pradesh even though people come from various parts of the country to work in Pune.
People from various parts of Andhra Pradesh have easy access to Hyderabad which has
excellent connectivity not only within the country but also outside the country. According to
a study published by an IT industry association, on an average about 5,000 people migrate
every month from Telangana and Andhra Pradesh to Pune. Since many of them travel for the
first time to Pune they either have their parents, relatives or friends with them.
Travel from Hyderabad to Pune is popular and most economical through Indian Railways
which take on an average 12 hours of travel time except Shatabdi Express which takes about
8 hours. Both the cities are also well-connected through flights but only a few people travel
by flight. Another way is to travel by road which takes about 10 hours’ time.
There have been many representations to the Indian Railways to start special train service
between the two cities which will reach in 8 hours’ time and will not have any halts in between.
However, there has been no action on this front from the Ministry of Railways.
Two years ago, National Highways Authority of India (NHAI) had floated a Request for
Proposal (RFP) which sought to build, operate and transfer an express highway between Pune
and Hyderabad on the lines of the express highway that was built between Mumbai and Pune.
The proposed express highway between Pune and Hyderabad has a new route that will cover
the distance in 409 kms as against the existing routes which are about 550 kms on an average.
The new express highway aims to reduce the travel time between the two cities to merely
5 hours if the average speed is assumed to be 80 kmph.
Charminar Expressways Ltd. is a company engaged in the business of BOT (build, operate
and transfer) of express ways. It gets contracts either directly from the Government of India
through NHAI or from Private Infrastructure companies like L&T Ltd., who have won the
contracts from the Government bodies. The company had submitted its proposal and has
won the contract from NHAI.
The proposed express highway has 11 tunnels that cover a distance of about 19 kms and
8 bridges (to cross over rivers, canals or other water-based areas) covering a distance of

around 17 kms. Except these, the express highway will have normal (plain) road throughout
the route.
The estimated cost of construction of Express Highway is as follows:
Nature of road Cost per km (` in crore)

Normal (plain) road 2.95
Tunnel road 3.78
Bridge road 4.58
The cost/km above includes material, labour and overhead expenses from the beginning to
the end of construction period which is expected to be 20 months from the date of
commencement.
The Asian Development Bank (ADB) has agreed to finance 50% of the estimated project cost
(excluding interest cost on any loans obtained for the said project) at a nominal interest of 3%
per annum. Government of Telangana has agreed to grant 8% of the actual project cost
(excluding interest cost on any loans obtained for the said project) since it will help the people
of the state in employment opportunities. Also, Government of Maharashtra has agreed to
grant 12% of the actual project cost (excluding interest cost on any loans obtained for the said
project) since the proposed route will also help people of Solapur which has an entry and exit
tolls in the express highway leading to Pune and Hyderabad. Moreover, the Central
Government has agreed to grant 10% of the actual project cost (excluding interest cost on
any loans obtained for the said project).
Thus, 30% of the project cost is coming through Government Grants which will be credited to
the Escrow account within 7 working days from the day the loan from ADB is disbursed. ADB
agreed to disburse the loan on the day construction starts. For the remaining 20% of the
project cost, the company shall take a commercial loan from any nationalized bank for which
the bank guarantee shall be provided by NHAI. Commercial Bank also agreed to disburse the
loan on the day construction starts. ADB has agreed to charge interest from the day the
project is completed / inaugurated and not during the construction phase. Also ADB provides
moratorium for the said interest free period which means annual repayments are not to be
paid in this interest free period. However, the nationalized bank shall continue to charge
interest from the date of disbursement at the rate of 10% p.a. Effective interest rate in respect
to ADB is 1.47% p.a.
Charminar Expressways Ltd. has a reputation for timely completion of projects. This project
was not an exception.
Following were the key terms of the contract:
1. Operator shall have sole responsibility of constructing the Express Highway as per the
technical specifications given by the Grantor.

CASE STUDIES 13.3
2. Operator shall manage the day-to-day administration and execution of the project till
completion of the Express Highway and handover of the same to the Grantor.
3. Operator shall have an absolute right to collect toll from vehicles using the Express
Highway for 21 years from the date of first commercial use of the Express Highway.
4. Operator shall repay the loan from ADB within 20 years along with interest cost from
the toll collected by it. Annual equated repayment installment for 20 year loan @ 3%
would be ` 45.44 crore (approx.).
5. Operator shall also repay the commercial loan from nationalized bank within 10 years
along with interest cost from the toll collected by it. Annual equated repayment
installment for 10 year loan @ 10% would be ` 40.68 crore (approx.).
6. Operator shall handover the Express Highway to the Grantor at the end of 21 years at
a nominal cost of ` 5 Lacs.
7. Operator shall manage the cost of maintenance and administration of toll stations
during the contract term on its own without any financial support from the Grantor.
The construction was started on 1 April 20X2 and was completed in 24 months. The Prime
Minister was invited to do the inauguration of service and make it open to the public at large
immediately after the completion.
Following toll charges were levied by the Operator in consultation with the Grantor:
Two and Three Wheelers not allowed.
Vehicle Type Entire route Solapur Entry/Exit

Car/Jeep/SUV ` 650 ` 350
Truck/Bus/Van ` 1150 ` 600
Goods Carrier/Heavy Trucks ` 2050 ` 1100

1. The Operator can recognise the cost of constructing the Express Highway as Property
Plant & Equipment for 21 years and derecognise the same in the year in which it is
handed over to the Grantor.
(a) The statement is false since the Operator can recognise the cost of constructing
the Express Highway as property, plant and equipment for 11 years only when
the loan to nationalised bank is prepaid
(b) The statement is false since the Operator can recognise the cost of constructing
the Express Highway as property, plant and equipment for 10 years only

(c) The statement is false as the contract does not give any right to the operator to
control the use of Express highway
(d) The statement is true provided the related liabilities are also recognised by the
Operator.
2. In this contract, the Operator has an absolute right to collect toll from users. This right
can be recognized by the Operator as _____________.
(a) A financial asset
(b) An intangible asset
(c) Can’t be recognised as an asset since the value can’t be measured
(d) Contingent asset
3. Borrowing cost incurred by the Operator shall be treated as _______ during the
construction phase of the Express highway.
(a) Expense
(b) Part of intangible asset (capitalised)
(c) Deferred revenue expenditure till the Express Highway is ready for public use
(d) Part of Property, plant & equipment (capitalised)
4. As part of the disclosures required for Service Concession Arrangement, which of the
following is not required to be disclosed for a reporting period by the Operator?
(a) Revenue recognised from the Service Concession Arrangement
(b) Profit or loss from the Service Concession Arrangement during the year
(c) Classification of service arrangement
(d) Sources of funding the construction of a public service utility
5. Since the value of intangible asset received as consideration for provision of
construction services by the operator is difficult to determine as it varies on the basis
of actual toll collection from the users, what should be the best way to measure the
value of intangible asset?
(a) Fair value of similar express highway built elsewhere in the country
(b) Cost incurred in building the Express highway till the same is open to public use
(c) Toll charges per vehicle multiplied by the number of vehicles

CASE STUDIES 13.5
(d) Estimated cost of construction as funded by various Government grants and

bank finance.

6. The nationalised bank had sanctioned a commercial loan of ` 250.006 crore for
10 years as a term loan. The entire amount of the loan was used for procurement of
various construction materials like cement, steel etc.
Compute the amount at which intangible asset shall be recognized in the books of the
operator as on the date of completion of construction activity i.e. the date of
inauguration.
7. Following data is available for the first year of operation (public use of the express
highway).
For the entire route:
Type of vehicle No. of vehicles % of return of those
entered vehicles which entered
Car/Jeep/SUV 2,24,189 96
Truck/Bus/Van 55,109 99
Goods Carrier/Heavy Trucks 27,519 100
For Solapur Entry and Exit only:
Type of vehicle No. of vehicles % of return of those

entered vehicles which entered
Car/Jeep/SUV 1,15,803 95
Truck/Bus/Van 28,601 99
Goods Carrier/Heavy Trucks 14,149 100
Disclose the amount of revenue recognized during the year from the Service
Concession Arrangement.
8. If the cost of toll collection and overall supervision of the Express Highway for the first
year was 10% of the actual toll collected (as per data given above), evaluate the
amount of profit or loss incurred in the first year by the operator on the intangible asset?


1. Option (c) The statement is false as the contract does not give any right to the
operator to control the use of Express highway
Reason:
As per IFRIC 12, in a service concession arrangement, infrastructure within the scope
of Service Concession Arrangement shall not be recognized as property, plant and
equipment of the operator because the contractual service arrangement does not
convey the right to control the use of the public service infrastructure to the operator.
The operator has access to operate the infrastructure to provide the public service on
behalf of the grantor in accordance with the terms specified in the contract.
2. Option (b) An intangible asset
Reason:
Para 17 of IFRIC 12 says that the operator shall recognise an intangible asset to the
extent that it receives a right to charge the users of the public service. A right to charge
users of the public service is not an unconditional right to receive cash because the
amounts are contingent on the extent that the public uses the service.
Hence the same can’t be recognized a financial asset but an intangible asset.
3. Option (b) Part of intangible asset (capitalised)
Reason:
Borrowing cost during the construction period shall be capitalized as part of the
qualifying asset as per IAS 23. This is further supported by Para 22 of IFRIC 12 which
says that borrowing costs attributable to the arrangement shall be recognized as an
expense in the period in which they are incurred unless the operator has a contractual
right to receive an intangible asset (a right to charge users of public service). In this
case borrowing costs attributable to the arrangement shall be capitalized during the
construction phase of the arrangement in accordance with IAS 23.
4. Option (d) Sources of funding the construction of a public service utility
Reason:
Disclosure requirements in Service Concession Arrangement as per SIC 29 does not
refer to sources of funding the infrastructure.

CASE STUDIES 13.7
5. Option (b) Cost incurred in building the Express highway till the same is open
to public use
Reason:
Para 47 of IAS 38 ‘Intangible Assets’ says that in order to recognise an intangible asset
the cost of the asset has to be measured reliably. It further says that the fair value of
an intangible asset is reliably measurable if:
a) The variability in the range of reasonable fair value measurements is not
significant for that asset or
b) The probabilities of the various estimates within the range can be reasonably
assessed and used when measuring fair value.
If an entity is able to measure reliably the fair value of either the asset received or the
asset given up, then the fair value of the asset given up is used to measure cost unless
the fair value of the asset received is more clearly evident.
In the instant case measuring the cost incurred for the asset is more reliable than
measuring the value of toll that can be collected.

6. Computation of cost of intangible asset:
Distance of normal (plain) road = Total length of Express Highway – Total distance
of tunnel – Total distance of bridges
= 409 km- 19 km – 17 km = 373 km
Estimated cost of Express Highway:
Normal (plain) road 373 km x 2.95 crore 1,100.35 crore

Add: Tunnel road 19 km x 3.78 crore 71.82 crore
Add: Bridges 17 km x 4.58 crore 77.86 crore
1250.03 crore
Actual cost of construction = 99.02% of the estimate

= 1250.03 x 99.02% = ` 1237.78 crore.
Sources of finance:
(a) Government grants: Since the operator has no liability towards these grants,
the same shall be deducted from cost of the public infrastructure for the purpose
of Service Concession Arrangement.

Since Government grant was based on estimated cost the value of grants was–
30% x ` 1250.03 crore = ` 375 Crore.
(b) By Banks
Since ADB will charge interest from inauguration date, nothing will be capitalised
as per IAS 23.
However, the borrowing cost of loan from nationalized bank shall be added to
the cost as per the requirement of IAS 23 read with IFRIC 12.
Commercial loan from nationalised Bank = 1250.03 x 20% = ` 250 crore
The borrowing cost of ` 250 crore (loan amount) for 19 months (construction
period) at 10% would be: (` 250 crore x 10%) / 12 month x 19 month =
` 39.58 crore.
So, the cost of construction would be: (1237.78 – 375) + 39.58 = ` 902.36 crore
7. Revenue disclosure
During the year the company has recognised a revenue of ` 66.89 crore from the
service concession arrangement of building Express Highway from Pune and
Hyderabad with Entry / Exit to Solapur.
Working Notes: (not part of the disclosure)
Toll collection during the 1 st year of operations:
(i) For the entire route:
Type of Vehicle No. of %age of Return Total Toll Toll
vehicles return Vehicles vehicle Tariff collected
entered vehicles using (`)
(1) (2) (3) (4) = (2) the (6) (7) = (5) x
x (3) Express (6)
Highway
(5) = (2)
+ (4)
Car/Jeep/SUV 2,24,189 96% 2,15,221 4,39,410 650 28,56,16,500
Truck/Bus/Van 55,109 99% 54,558 1,09,667 1,150 12,61,17,050
Goods Carrier/
Heavy Trucks 27,519 100% 27,519 55,038 2,050 11,28,27,900
52,45,61,450

CASE STUDIES 13.9
(ii) For Solapur Entry and Exit only:

Type of Vehicle No. of %age of Return Total Toll Toll
vehicles return Vehicles vehicle Tariff collected
entered vehicles (4) = (2) using (`) (7) = (5) x
(1) (2) (3) x (3) the (6) (6)
Express
Highway
(5) = (2)
+ (4)
Car/Jeep/SUV 1,15,803 95% 1,10,013 2,25,816 350 7,90,35,600
Truck/Bus/Van 28,601 99% 28,315 56,916 600 3,41,49,600
Goods Carrier/
Heavy Trucks 14,149 100% 14,149 28,298 1100 3,11,27,800
14,43,13,000
So, total revenue collected during the first year of operation was ` 66,88,74,450 or
` 66.89 crore.
8. During the year the company has recognised a revenue of ` 66.89 crore from the
service concession arrangement.
The loss before tax from the service concession arrangement:
Particulars ` in crore
Revenue from Service Concession Arrangement 66.89
Less: Borrowing cost paid to ADB (W.N.1) (10.75)
Borrowing cost paid to Nationalised Bank (W.N.2) (14.6)
Toll collection and Supervision cost @ 10% of revenue (6.69)
Amortization cost (W.N.3) (42.97)
Profit (loss) before tax (8.12)
Working Notes:
1. Borrowing cost on ADB loan:
Loan amount ` (1,250.03 x 50%) = 625.015 crore
EMI for 20 year loan at 3% would be ` 3.5 crore (as given in the scenario).
Total repayment amount would be (20 years x 12 month x 3.5 crore per month)
= ` 840 crore

Interest element would be (840 crore - 625.015 crore) ` 214.985 crore.

So, on the equated cost basis, the annual interest cost for year 1 would be
= 214.985 crore / 20 year
= ` 10.75 crore
2. Borrowing cost on Nationalised Bank loan:
Loan amount ` 250 crore
EMI for 10 year loan at 10% would be ` 3.3 crore.
Total repayment amount would be (10 year x 12 month x 3.3 crore)
= ` 396 crore
Interest element would be (396 crore – 250 crore) is ` 146 crore.
So, on equated cost basis, the annual interest cost for year 1 would be
= 146 crore / 10 year = ` 14.6 crore
3. Amortization cost:
Cost of intangible asset is ` 902.36 crore.
This asset will be amortized over a period of 21 years (the right to collect tolls).
So the annual amortization cost would be = 902.36 crore / 21 years
= 42.97 crore

CASE STUDY 14
Blue Ocean Limited is a company involved in manufacturing of industrial and medical gases and
equipment’s across various countries. It reports financial statements following International
Financial Reporting Standards.
You are a Chartered Accountant and the Board of Directors has appointed your firm to close
their books as at 31 March 20X2. On reviewing the accounting records and information of the
company, you come across a list of issues which need to be dealt with as per the provisions of
International Financial Reporting Standards.
Blue Ocean Limited is in the process of negotiating the acquisition of specialized machinery
related to Air Separation Unit for industrial gases business. The following activities are carried
out by the project team of Blue Ocean Limited for installing new machinery:
(1) A special site has to be prepared for the machinery installation. Hence the old site was
dismantled and re-prepared for the new machinery at the cost of ` 1 million. Scrap
recovered from this process was sold for ` 80 thousand. Cost of construction of the
special site is ` 6 million.
(2) Negotiations were successful and it was decided that the old machinery which had
carrying cost of ` 5 million but was now valued at ` 4 million will be exchanged for new
specialized machinery valued at ` 20 million. The difference itself will be settled in cash.
(3) It spent ` 0.4 million on freight and ` 0.3 million on installation.
(4) It spent materials worth ` 0.3 million and wages of ` 0.12 million on the trial run.
(5) Machinery was finally installed but owing to low capacity utilization, it incurred loss of
` 1 million.
(6) Blue Ocean Limited incurred costs of ` 0.5 million for launching the product.
The Company holds a trademark with a carrying value of ` 1.7 million, which it uses to produce
consumer goods. It is expected that the products will continue to be in demand for the
foreseeable future, and the trademark has an indefinite life. At 31 March 20X2, based on a
report by an independent expert, it is estimated that the recoverable amount of the trademark is
only ` 1.6 million.
The Company acquired Bigben Llc during the year. The assets were valued at ` 5 million and
the liabilities at ` 3 million. The purchase consideration was agreed at ` 1.5 million. The net
assets acquired are worth ` 2.0 million, but the Company paid only ` 1.5 million for them. Blue
Ocean Ltd. reassessed the fair values. It found that a contingent liability for a pending tax

litigation in respect of Bigben Llc was likely to be paid ` 0.3 million. The fair value of purchase
consideration was still found to be ` 1.5 million.
The financial statements of Blue Ocean Ltd. for the year ended 31 March 20X2 are under
preparation. The rate of tax that applies to all companies in Blue Ocean group is 25%.
The deferred tax liability of Blue Ocean Ltd. at 31 March 20X1 was ` 2 million. This liability
related to taxable temporary differences for property, plant and equipment of ` 8 million.
At 31 March 20X2, the carrying value of property, plant and equipment was ` 44 million and its
tax base was ` 27 million. The carrying value of ` 44 million incorporates a surplus of
` 6 million that arose as a result of a property revaluation on 31 March 20X2. This property
revaluation had no effect on the tax base of the property. This property has not been previously
revalued.
Since December 20XX, Blue Ocean Ltd. has been carrying out a project to develop a more
efficient production process. On 1 October 20X1, the project was assessed and found to be at
a stage that justified capitalizing future costs incurred on the project. Accordingly, an intangible
asset of ` 9 million was included in the draft statement of financial position as on
31 March 20X2. Amortisation is expected to begin sometime in the year ended 31 March 20X3.
All expenditure on the project qualifies for tax relief as the expenditure is incurred.
On 1 March 20X2, Blue Ocean Ltd. sold goods to one of its subsidiaries for ` 4 million. The
goods cost the Company ` 3 million to manufacture. Prior to 31 March 20X2 the subsidiary sold
40% of the goods to a non-group company for ` 2.2 million.
On 31 March 20X2, Blue Ocean Ltd. borrowed ` 20 million from a non-group company. The
financial liability is not designated as fair value through profit and loss. Blue Ocean Ltd. incurred
costs of ` 1 million in connection with the borrowing and this qualified for tax relief in the year
There were no other temporary differences affecting Blue Ocean group at 31 March 20X2.
Blue Ocean Limited has created employee goodwill by recognizing its retirement benefit
package. An independent management consultant estimated the value of the goodwill at
` 5 million. In addition, company recently purchased a patent that was developed by a
competitor. The patent has an estimated useful life of five years.
During the year ended 31 March 20X2, Blue Ocean group changed its accounting policy for
depreciating property, plant and equipment, so as to apply components approach fully, whilst at
the same time adopting the revaluation model.
In years before 20X1-20X2, Blue Ocean group’s asset records were not sufficiently detailed
to apply a components approach fully. At the end of 31 March, 20X1, management

CASE STUDIES 14.3
commissioned an engineering survey, which provided information on the components held

and their fair values, useful lives, estimated residual values and depreciable amounts at the
beginning of 20X1-20X2.
The results are shown as under:
Property, plant and equipment at the end of 31 March 20X1
` in million
Cost 25,000
Depreciation (14,000)
Net book value 11,000
Depreciation expense for 20X1-20X2 (on old basis) 1,500
Some results of the engineering survey:
Valuation 17,000
Estimated residual value 3,000
Average remaining asset life (years) 7
However, the survey did not provide a sufficient basis for reliably estimating the cost of those
components that had not previously been accounted for separately, and the existing records
before the survey did not permit this information to be reconstructed.
The board of directors considered how to account for each of the two aspects of the accounting
change. They determined that it was not practicable to account for the change to a fuller
component approach retrospectively, or to account for that change prospectively from any
earlier date than the start of 20X1-20X2.
Also, the change from a cost model to a revaluation model is required to be accounted for
prospectively. Therefore, management concluded that it should apply Blue Ocean group’s new
policy prospectively from the start of 20X1-20X2.
Blue Ocean group’s tax rate is 25%.
A subsidiary of Blue ocean limited namely, Fantasy Ltd. produced a place of antivirus software
and declared it as ‘open’ software. Anybody can download it for free from the internet and
anyone can make changes to it. Fantasy Ltd. has spent ` 5 million in developing the software.

1. Should Blue Ocean Limited report the goodwill with respect to retirement benefit package
and patent purchased from its competitor, in its Statement of financial position?
Goodwill Patent
(a) Yes No
(b) No Yes
(c) No No
(d) Yes Yes.
2. What should be the treatment of antivirus software produced by Fantasy Limited?

(a) The software will be treated as intangible asset and amortized over its useful life
(b) The software will be tested for impairment depending on its recoverable value in
future
(c) The amount spent on the software will be capitalized under IAS 16
(d) The software cost would be charged to revenue.
3. What would be the carrying amount of trademark as at 31 March 20X2 which it has been
using to produce consumer goods?
(a) ` 1.7 million
(b) ` 1.6 million
(c) ` 0.1 million
(d) None of the above.
4. What will be the amount of net assets Bigben Llc acquired by Blue Ocean Limited as at
31 March 20X2?
(a) ` 5.0 million
(b) ` 2.0 million

(c) ` 1.7 million
(d) ` 3.0 million.

CASE STUDIES 14.5
5. How much amount would be recognised in Statement of Profit or Loss for the period
ending 31 March 20X2 for the transaction related to acquisition of Bigben Llc. by Blue
Ocean Limited?
(a) Profit of ` 0.2 million
(b) Loss of ` 0.2 million
(c) Profit of ` 0.5 million

(d) None of the above, as profit or loss in such cases is not recognised in Statement
of Profit or Loss.

6. Calculate the total cost of the new asset, as per IFRS, to be recognized in the books and
also explain treatment of payout of cash on exchange of old machinery with the help of
a Journal entry.
7. Compute the charge or credit for deferred tax that will appear in the consolidated
Statement of Profit or Loss of Blue Ocean Ltd. for the year ended 31 March 20X2.
Support your figures with relevant explanations.
8. Compute the impact of change in accounting policy related to change in carrying amount
of Property, Plant & Equipment under revaluation method and impact on taxes based on
the basis of information provided. Show the impact of each item affected on financial
statements by the analysis of stated issue.

1. Option (b) No; Yes
Reason:
As per para 49 of IAS 38 ‘Intangible Assets’, internally generated goodwill shall not be
recognised as an asset. In some cases, expenditure is incurred to generate future
economic benefits, but it does not result in the creation of an intangible asset that meets
the recognition criteria in this Standard. Such expenditure is often described as
contributing to internally generated goodwill. Internally generated goodwill is not
recognised as an asset because it is not an identifiable resource (ie it is not separable

nor does it arise from contractual or other legal rights) controlled by the entity that can
be measured reliably at cost
The recognition of an item as an intangible asset requires an entity to demonstrate that
the item meets:
(a) the definition of an intangible asset and
(b) the recognition criteria
This requirement applies to costs incurred initially to acquire or internally generate an
intangible asset and those incurred subsequently to add to, replace part of, or service it.
Since patent meets this requirement, it should be presented in Statement of financial
position accordingly.
2 Option (d) The software cost would be charged to revenue
Reason:
As per IAS 38 ‘Intangible Assets’, an intangible asset shall be recognised if, and only if:
(a) it is probable that the expected future economic benefits that are attributable to
the asset will flow to the entity; and
(b) the cost of the asset can be measured reliably
The software cost would be charged to revenue as no future economic benefits will flow
to the entity from it. Hence, it does not meet the criteria laid down under IAS 38
‘Intangible Assets’.
Reason:
In accordance with IAS 38 ‘Intangible assets’, the value of the trademark will not be
amortized since its useful life is indefinite. However, it will be tested for impairment
annually. The recoverable amount is ` 1.6 million (` 0.1 million less than the carrying
value of ` 1.7 million).
Therefore, there is an impairment loss of ` 0.1 million. This amount will be deducted
from the carrying value and recognized in the statement of profit or loss as at
30th September 20X2.

CASE STUDIES 14.7
5. Option (a) Profit of ` 0.2 million

Reason:
Computation of reassessed net assets is as under:
Total Assets (A) 5.0
Liabilities 3.0
Add: Contingent liabilities 0.3
Total revised liabilities (B) 3.3
Net Assets (A-B) = (C) 1.7
Purchase consideration (D) 1.5
Gain on bargain purchase (C –D ) = (E) 0.2
The reassessed net assets acquired are worth ` 1.7 million; purchase consideration,
` 1.5 million. There is an excess of ` 0.2 million (gain on bargain purchase), which would
be immediately recognized in Statement of Profit or Loss.

6. Cost to be capitalized of new specialized machinery:
Cost of construction of new site 6.00
Cost of new machinery 20.00
Cost of installation 0.30
Freight 0.40
Trial run cost 0.42
Total cost of Machinery 27.12
Note: The dismantling cost of ` 1 million must have been added in capitalization of the
older machinery, hence cannot be capitalized along with the new specialised machinery.
The New Machinery is valued at the fair value given in the case study. Accordingly, entry
of acquisition of new machinery will be:
` in million
New Machinery Dr. 20.00
Loss on old Machinery (` 5.00 – ` 4.00) Dr. 1.00

To Old Machinery 5.00

To Bank 16.00
Trial run costs are included in the cost of the machinery as it is incurred to ensure that
the machine is in working condition.
Cost of launching amounting to ` 5 lac and the initial loss amounting to ` 1 million are
not to be recognized as cost of the machinery.
7. The excess of carrying value over the tax base of PPE creates a taxable temporary
difference of ` 17 million (` 44 million – ` 27 million) and a deferred tax liability of
` 4.25 million. The liability in 20X0-20X1 was ` 2 million, so the increase of ` 2.25 million
(` 4.25 million – ` 2 million) is charged to the Income statement. However, the portion
of deferred tax liability that relates to the property revaluation should be charged against
other comprehensive income instead of income statement profit. This is ` 1.5 million
(` 6 million x 25%), which reduces the deferred tax expense in the Statement of Profit or
Loss to ` 0.75 million (` 2.25 million – ` 1.5 million). Hence deferred tax expense of
` 0.75 million and ` 1.5 million is to be charged in Statement of Profit or Loss and Other
Comprehensive Income respectively.
The intangible asset has a carrying value of ` 9 million. As it has already qualified for
tax relief, it has a tax base of ` nil. Therefore, taxable temporary difference of
` 2.25 million (` 9 million x 25%) will be charged to the Statement of Profit or Loss as an
expense.
The consolidated accounts will be adjusted for the unrealized profit of ` 0.6 million
[(` 4 million – ` 3 million) x 60 %]. This will reduce the group inventory from ` 2.4 million
(60% x ` 4 million) to ` 1.8 million (` 2.4 million – ` 0.6 million) and will reduce group
profit by ` 0.6 million. However, the tax charge in the consolidated income statement is
based on the individual company accounts, which include the unrealized profit.
Therefore, a temporary difference of ` 0.6 million x 25% = ` 0.15 million. This is a
deferred tax asset resulting in a credit to the Income statement which can be recognized
against the larger deferred tax expense.
The loan will be recorded in the financial statements at ` 19 million, net of the issue costs
of ` 1 million. The issue costs will then affect the income statement by way of a reduction
in future finance costs. However, the tax relief has already been given to these costs.
There lies a taxable temporary difference as the issue costs have a carrying amount of
` 1 million and tax base as ` Nil. This results in a deferred tax liability of ` 0.25 million
(` 1 million x 25%) charged to the Statement of Profit or Loss.

CASE STUDIES 14.9
The overall charge for deferred tax that will appear in the Statement of Profit or
Loss would be:
Deferred tax liability on excess of carrying value of PPE 0.75
Deferred tax liability on intangible assets (9 million x 25%) 2.25
Deferred tax liability on loan (1 million x 25%) 0.25
Total deferred tax liability: 3.25
Less: Adjustment of deferred tax asset on unrealized profit on group
inventory (0.15)
Net deferred tax liability 3.10
8. As per IAS 8 ‘Accounting Policies, Accounting Estimates and Errors, prospective

application of a change in accounting policy has to be done since retrospective
application is not practicable.
Property, plant and equipment at the end of 31st March,20X2: ` in million
As per the engineering survey:
Valuation of PPE 17,000
Estimated residual value 3,000
Average remaining asset life (years) 7
Depreciation expense on existing property, plant and equipment
for 20X1-20X2 (new basis) (17,000 – 3,000) / 7 2,000
From the start of 20X1-20X2, Blue Ocean group changed its accounting policy for
depreciating property, plant and equipment, so as to apply components approach, whilst
at the same time adopting the revaluation model. Management takes the view that this
policy provides reliable and more relevant information because it deals more accurately
with the components of property, plant and equipment and is based on up-to-date values.
The policy has been applied prospectively from the start of the year 20X1-20X2 because
it was not practicable to estimate the effects of applying the policy either retrospectively
or prospectively from any earlier date. Accordingly, the adoption of the new policy has
no effect on prior years.

The impact on the financial statements for 20X1-20X2 would be as under:
Increase the carrying amount of property, plant and equipment at 6,000
the start of the year (17,000-11,000)
Increase the opening deferred tax provision (6,000 x 30%) 1,800
Create a revaluation surplus at the start of the year (6,000 – 1,800) 4,200
Increase depreciation expense by (` 2,000 – ` 1,500) 500
Reduce tax expense on depreciation (30%) 150

CASE STUDY 15
Mr. H is a Chartered Accountant and is working in GHI & Co., Chartered Accountants as a
Manager. GHI & Co. has recently been approached by A Ltd. for providing advice on certain
accounting matters (discussed below). A Ltd. is in the business of manufacturing industrial
chemicals. It has a registered office in New Delhi and is listed on the Bombay Stock Exchange
(BSE). It is considering the possibilities of listing its securities at London Stock Exchange for
which it needs to submit its financial statements prepared under International Financial
Reporting Standards (IFRS).
Following is the brief facts about the transactions entered into by the company for which an
accounting advice is sought:
(a) Under the scheme of demerger of B Ltd. effective from 1 April 2XX9, pharma division of
B Ltd. has been demerged into C Ltd. The main intention of setting up C Ltd. is to
construct and maintain various pharma projects demerged from B Ltd. A Ltd. holds 51%
stake ownership and B Ltd. holds 49% stake ownership in C Ltd. The operations of
C Ltd. are conducted through the Board of Directors who are nominated by A Ltd. and
B Ltd. in equal proportion. A Ltd. has the exclusive right over the construction/structural
design of the pharma projects. B Ltd. does not have any control over making structural
changes. Further, all the cheques irrespective of value are processed and approved by
A Ltd. Also, all product pricing decisions and marketing strategy are solely undertaken
at the discretion of A Ltd. and do not require any approval from B Ltd.
(b) A trust named “ABC Foundation” has been formed on 1 April 2XX1. This trust has been
recognised under Section 80G of the Income-tax Act, 1961. The core objectives of the
trust are promoting education, training and research. Decision will be taken by the
majority and the composition of trustees has effectively only three members (namely
Mr. X, Mr. Y and Mr. Z) who are closely related to A Ltd. and who actively participate in
the operations and management of A Ltd. Apart from them, the other seven trustees are
independent to A Ltd. and does not have any relation with Mr. X and Mr. Y.
A Ltd. has constructed five schools and transferred the same to ABC Foundation on an
arm’s length price. A Ltd. has been benefited from economies of scale and synergy
benefits by selling these schools. There are no continuing benefits from these schools.
A Ltd. has contributed ` 10 crores during the financial year 2X12-2X13 to the trust on
account of statutory compliances under the Companies Act and claimed 50% eligible
deduction under Section 80G of the Income-tax Act,1961. Employees of A Ltd. get a
discount of 20% on school fees paid by them towards education of their children at these

schools. The discount is not provided by ABC Foundation, instead the cost is borne by
A Ltd.
Also the trustees may dissolve the trust by a unanimous decision and on dissolution, the
assets of the trust will be transferred to a recognised trust under Section 80G of the
Income-tax Act, 1961.
(c) A Ltd. has a wholly owned subsidiary D Ltd. D Ltd. faces financial crisis now and then.
A Ltd. being a parent company, often helps D Ltd. by providing interest free loan. During
the year, A Ltd. has provided ` 10 lacs interest-free loan to D Ltd. The current market
rate of interest for similar loan is 10% p.a. These loans are provided by A Ltd. either to
be repaid on demand or after fixed term depending upon the agreement.
(d) A Ltd. manufactures wide range of industrial chemicals. A Ltd. always strives to purchase
machines with latest technology which can result in an efficient production of these
chemicals so as to minimise wastages, manufacture more quantities from existing inputs,
or reduce input consumption for manufacturing same quantities of output. Estimated
useful lives of machineries purchased, vary significantly from 5 years to 25 years. On
purchase of new machines, old machines have to be disposed of. For disposing old
machines and equipment, which can be further used by some other party, A Ltd. invites
bids. If machine can be used in other countries and can fetch good value, global tender
is also floated. Details of such invitations are published on the company’s website and
in leading newspapers, for interested parties to view details of such bids invited by the
company.
A synthesis gas compressor along with auxiliaries and spares pertaining to mechanical
instrument installed in one of the plant costing ` 13,00,00,000 was purchased 25 years
back and used thereon for 25 years. After being decommissioned, compressor was kept
as a stand-by for a further period of 2 years and continued to be classified under ‘plant
and machinery’. However, the asset had reached its residual value before 2XX3 itself
(at 25 years) and no further depreciation was charged on compressor. In March 2XX5,
it was decided to sell the compressor and as a result, it was reclassified to ‘assets held
for disposal’. As on 31 March 2XX5, details of compressor are as follows:
Particulars Amount
Gross Block ` 130,453,617
Accumulated depreciation as on 31 March 2XX5 ` 123,930,936
Written down value as on 31 March 2XX5 ` 6,522,681

CASE STUDIES 15.3
Following entries were passed in books of A Ltd. on 31 March 2XX5, to reclassify the
asset into ‘assets held for disposal’:
Assets held for disposal A/c Dr. ` 6,522,681

Accumulated depreciation A/c Dr. ` 123,930,936
To Plant and machinery A/c ` 130,453,617
Since 31 March 2XX5, this compressor is classified as ‘assets held for disposal’.
Simultaneously, management floated a Global e-auction, inviting bids from potential
parties specifically in USD. As on 31 March 2XX5, fair value of such asset was estimated
to be ` 1,61,00,000. U Ltd. quoted USD 54,00,000. Based on such high bid, A Ltd.
proceeded to sell the compressor to U Ltd. At a later stage, U Ltd. claimed that bid
amount was in ` and not in USD, consequently, A Ltd. refused to sell the compressor to
him. This resulted in dispute between A Ltd. and U Ltd. and consequently A Ltd. filed a
case in the Court against U Ltd. in 2XX8. U Ltd. is of the view that since A Ltd. committed
to sell the asset to him, such asset should be sold to it only, whereas A Ltd. contends
that since market value of such compressor is approximately ` 1,65,00,000, then it
cannot sell such asset for ` 54,00,000 only, which is approximately 1/3rd of market value
of the compressor. The Court directed both the parties to approach the arbitrator and
issued a stay order on A Ltd., restricting it to sell the concerned asset to any other party,
till the matter is resolved. Arbitrator is expected to give his verdict in July 2X14.
(e) A Ltd. is installing a new machinery in its plant. The machinery was purchased from
R Ltd. It has incurred these costs:
• Basic price (as per supplier’s invoice plus taxes)- ` 20,00,000
• Initial delivery and handling costs- ` 4,00,000
• Cost of site preparation- ` 2,00,000
• Interest charges paid to supplier of plant for deferred credit- ` 50,000
• Present value of estimated dismantling costs to be incurred after 10 years-
` 1,00,000
• Operating losses before commercial production- ` 2,00,000
(f) An asset was acquired at a cost of ` 1,50,000. The carrying amount is ` 70,000 after an
impairment write down of ` 30,000 and cumulative depreciation of
` 50,000. Depreciation rate for accounting and tax laws is equal. Impairment loss is not
deductible to tax. Tax rate applicable to A Ltd. is 30%.

(g) A Ltd. has taken an unsecured general purpose loan on 1 April 2X12. The loan was
utilised to finance the construction of a new building (to be used as store) which meets
the definition of a qualifying asset in IAS 23. Construction of the store building
commenced on 1 May 2X12 and it was completed and ready for use on
28 February 2X14, but did not open for trading until 31 March 2X14. During the year,
A Ltd. suspended the construction of the new building for a two-month period during
July, 2X13 – August, 2X13.
(h) A Ltd. is developing a new process. During 2X13, expenditure incurred was
` 10,00,000, of which ` 8,00,000 were incurred before 1st June 2X13 and
` 2,00,000 were incurred between 1st June 2X13 and 31st March 2X14. At
1st June 2X13, the process met the criteria for recognition as an intangible asset. The
fair value of the know-how in the process is ` 5,00,000 on 31st March, 2X14.
(i) A Ltd. has granted certain share options to one of its director on the condition that the
director will not work with the competitor of the reporting entity (i.e. non-compete clause)
for a period of at least three years. The fair value of the award at the date of grant,
including the effect of the ‘non-compete’ clause, is ` 1,50,000.
Based on the facts given above, CFO of A Ltd. wants advice from GHI & Co., Chartered
Accountants on the below accounting matters:

1. At what amount, the new machinery purchased from R Ltd. should be recognised?
(a) ` 20,00,000
(b) ` 29,50,000
(c) ` 27,50,000
(d) ` 27,00,000
2. What should be the deferred tax on asset referred to in (f) above?
(a) Deferred tax asset of ` 9,000
(b) Deferred tax liability of ` 9,000
(c) No deferred tax should be recognised
(d) More information required to assess deferred tax implications
3. In case of construction of new building, for how many months, the interest should be
capitalised in accordance with the principles of IFRS?

CASE STUDIES 15.5
(a) 23 months
(b) 22 months
(c) 21 months
(d) 20 months
4. What should be the accounting for expenditure incurred on developing new process by
A Ltd. under IFRS?
(a) Intangible asset of ` 5,00,000; expense of ` 5,00,000
(b) Intangible asset of ` 10,00,000; expense of Nil
(c) Intangible asset of ` 2,00,000; expense of ` 8,00,000
(d) Intangible asset of ` 5,00,000; expense of ` 8,00,000
5. Which of the following accounting treatment is correct in relation to the share options
given to one of the directors of A Ltd.?
(a) A Ltd. should recognise an expense of ` 1,50,000 over the period of three years
and cannot reverse the expense recognised even if the director goes to work for
a competitor and loses the share options.
(b) A Ltd. should recognise an expense of ` 1,50,000 over the period of three years
and can reverse the expense recognised in case the director goes to work for a
competitor and loses the share options.
(c) A Ltd. should recognise an expense of ` 1,50,000 immediately and cannot reverse
the expense recognised even if the director goes to work for a competitor and
loses the share options.
(d) A Ltd. should recognise an expense of ` 1,50,000 immediately and can reverse
the expense recognised in case the director goes to work for a competitor and
loses the share options.

6. Whether the following entities are subsidiaries of A Ltd. to be consolidated?
(a) C Ltd.
(b) ABC Foundation
Provide appropriate reasoning for your answer considering the guidance under IFRS.

7. How the interest-free loan should be accounted for under IFRS financial statements of
A Ltd. and D Ltd. in the following scenarios:
(a) The loan is repayable on demand.
(b) The loan is repayable after 3 years.
Provide necessary journal entries in both cases.
8. What will be the accounting implication under IFRS on A Ltd. in relation to the asset
‘synthesis gas compressor’ held by the company, i.e.,
(a) Whether such compressor can be classified under ‘non-current assets held for
sale’ in A Ltd.’s IFRS financial statements?
(b) How non-current assets held for sale should be measured?
Provide appropriate reasoning for your answer considering the guidance under IFRS.
Take necessary assumptions, if required.

1. Option (d) ` 27,00,000
Reason:
Basic price (as per supplier’s invoice plus taxes) ` 20,00,000
Initial delivery and handling costs ` 4,00,000
Cost of site preparation ` 2,00,000
Interest charges paid to supplier of plant for deferred credit (since -
there is no qualifying asset)
Present value of estimated dismantling costs to be incurred after ` 1,00,000
10 years
Operating losses before commercial production -
Cost of machinery ` 27,00,000

CASE STUDIES 15.7
2. Option (a) Deferred tax asset of ` 9,000

Reason:
Particulars Carrying Tax base Temporary

amount difference
At acquisition ` 1,50,000 ` 1,50,000 Nil
Accumulated depreciation (` 50,000) (` 50,000) Nil
Impairment loss (` 30,000) Nil (` 30,000)
Tax rate 30%

Deferred tax asset ` 9,000
3. Option (d) 20 months

Reason:
Capitalisation under IAS 23 will commence from the date when the expenditure is
incurred (1 May 2X12) and must cease when the asset is ready for its intended use
(28 February 2X14); in this case a 22-month period. However, interest cannot be
capitalised during a period where development activity is suspended ie for the period
of two months from July, 2X13 to August, 2X13.
4. Option (c) Intangible asset of ` 2,00,000; expense of ` 8,00,000
Reason:
Research expenditure Expense as incurred

Development expenditure • Expense if the recognition criteria for intangible
assets are not met
• Capitalise once the recognition criteria are met
• Past expense cannot be capitalised
5. Option (c) : A Ltd. should recognise an expense of ` 1,50,000 immediately and

cannot reverse the expense recognised even if the director goes to
work for a competitor and loses the share options.
Reason:
The ‘non-compete’ clause is a non-vesting condition, because A Ltd. does not receive
any services. On the grant date, A Ltd. should immediately recognise a cost of
` 1,50,000, as the director is not providing any future services. A Ltd. cannot reverse
the expense recognised, even if the director goes to work for a competitor and loses the
share options, because the condition is a non-vesting condition.

II. Answers to the Descriptive Questions

6. (a) In the present case, majority consent is required to conduct the relevant activities
of C Ltd. A Ltd. has majority voting rights and decisions will be taken by the
majority shareholders and A Ltd. also controls the relevant activities of C Ltd. by
having control over costing, budgeting, pricing and marketing of the project.
A Ltd. exercises control over this entity, it is exposed to variable returns from its
involvement with C Ltd. and has the ability to affect those returns through its power
over C Ltd. Therefore, considering the guidance under IFRS 10, A Ltd. might have
to consolidate C Ltd. as its subsidiary.
(b) Since only three trustees out of ten, are closely related to A Ltd. who actively
participate, and all trustees participate in their own capacity. Hence, A Ltd.
doesn’t have power over the trust. Further, donation given by A Ltd. to trust will
never flow back to A Ltd. even in case of dissolution and discount allowed on
tuition fee is also not material and not being borne by ABC Foundation. Hence,
A Ltd. doesn’t have any direct exposure, or rights, to variable returns of the trust.
On analysis of the above facts and guidance available under IFRS 10, A Ltd.
neither has power nor has exposure to variable returns. Thus, considering the
requirement under IFRS 10, control could not be established. Thus, A Ltd. cannot
consolidate ABC Foundation as its subsidiary under IFRS.
7. According to IFRS 9 criteria, A Ltd. and D Ltd. will classify the loan asset and liability,
respectively, at amortised cost.
Scenario (a)
Since the loan is repayable on demand, it has fair value equal to cash consideration
given. A Ltd. and D Ltd. should recognize financial asset and liability, respectively, at the
amount of loan given. Upon, repayment, both the entities should reverse the entries that
were made at the origination. It may be noted that this accounting outcome will not apply
when there is evidence that the loan is repayable after a period of time, but is disguised
as being repayable on demand. Consideration should be given to the substance of the
arrangement.
Journal entries in the books of A Ltd.
At origination
Loan to D Ltd. A/c Dr. ` 10,00,000
To Bank A/c ` 10,00,000

CASE STUDIES 15.9
On repayment
Bank A/c Dr. ` 10,00,000
To Loan to D Ltd. A/c ` 10,00,000
Journal entries in the books of D Ltd.
At origination
Bank A/c Dr. ` 10,00,000
To Loan from A Ltd. A/c ` 10,00,000
On repayment
Loan from A Ltd. A/c Dr. ` 10,00,000
To Bank A/c ` 10,00,000
Scenario (b)
Both A Ltd. and D Ltd. should recognise financial asset and liability, respectively, at fair
value on initial recognition, i.e., the present value of ` 10,00,000 payable at the end of 3
years using discounting factor of 10%, i.e., ` 7,51,000. The difference between the loan
amount and its fair value is treated as an equity contribution to the subsidiary. This
represents a further investment by the parent in the subsidiary.
Journal entries in the books of A Ltd.
At origination
Loan to D Ltd. A/c Dr. ` 7,51,000
Investment in D Ltd. A/c Dr. ` 2,49,000
To Bank A/c ` 10,00,000
During periods to repayment- to recognise interest

Year 1
Loan to D Ltd. A/c Dr. ` 75,100
To Interest income A/c ` 75,100
Year 2

Year 3
Note- Interest needs to be recognised in statement of profit or loss. The same cannot
be adjusted against capital contribution recognised at origination.
On repayment
Bank A/c Dr. ` 10,00,000
To Loan to D Ltd. A/c ` 10,00,000
Journal entries in the books of D Ltd.

At origination
Bank A/c Dr. ` 10,00,000
To Loan from A Ltd. A/c ` 7,51,000
To Equity Contribution in A Ltd. A/c ` 2,49,000
During periods to repayment- to recognise interest

Year 1
Interest expense A/c Dr. ` 75,100
To Loan from A Ltd. A/c ` 75,100
Year 2
Year 3
On repayment
Loan from A Ltd. A/c Dr. ` 10,00,000
To Bank A/c ` 10,00,000

CASE STUDIES 15.11
Working Note:
Years Amount outstanding Interest Amount outstanding

(opening) (closing)
Beginning of year 1 - ` 7,51,000
End of year 1 ` 7,51,000 ` 75,100 ` 8,26,100
End of year 2 ` 8,26,100 ` 82,610 ` 9,08,710
End of year 3 ` 9,08,710 ` 91,290 ` 10,00,000
8. (a) In present case, the said compressor’s carrying amount will be recovered
principally through sale and not through its continuing use. Further, the asset is
retired from active use and it is kept idle, hence compressor is available for
immediate sale in its present condition. Since the time, compressor was classified
as ‘assets held for disposal’, A Ltd. was committed to sell the compressor and for
such sale it invited global bids as well to fetch good price for such compressor.
A Ltd. always had the intention of selling it immediately on receiving good price
for the compressor. On receipt of bid from the buyer U Ltd., A Ltd. initiated
procedure to sell the compressor to him, but due to disagreement regarding
currency of sales consideration at a later stage, a dispute arose between both the
parties and the matter was taken to the Court, which later got transferred to the
Arbitrator. Also a stay order has also been issued by the Court, restricting A Ltd.
to sell the asset to any other party till the matter is resolved by the arbitrator, with
whom case is currently pending. As a result, A Ltd. is not able to sell the
compressor till the matter is resolved, pursuant to High Court’s stay order. Till
date, A Ltd. has complied with all the orders/ instructions received from the Court
/ arbitrator and is awaiting arbitrator’s verdict on this matter, which is expected to
be July 2X14. As on today, subject to the stay order, A Ltd. is still committed to
sell the compressor. The compressor is currently not in use, but kept it idle, ready
for sale. Hence, based on the facts of the case and considering the principles
under IFRS 5, it can be said that A Ltd. is committed to sell the compressor but
due to factors beyond the control of A Ltd., i.e., stay order from the Court, it is
restricted from selling the compressor till the matter is resolved by the assigned
arbitrator. Hence, till the matter is resolved, compressor should be classified as
‘non-current assets held for sale’.
(b) As on 31 March 2X11, in Indian GAAP audited financial statements of A Ltd.,
compressor is classified as ‘assets held for disposal’ and valued at lower of net
book value (carrying amount) and net realisable value, i.e., ` 6,522,681 in the

present case. As per the guidance under IFRS 5, non-current assets held for sale
should be measured at lower of carrying amount and fair value less costs to sell.
There is a difference between the term ‘net realisable value’ and ‘fair value less
costs to sell’, i.e., net realisable value is an exit price for an asset, whereas fair
value less costs to sell is an entry price, i.e., price to be paid for acquiring an
asset. Considering the facts in the present case, one can infer that ‘fair value less
costs to sell’ is greater than ‘net realisable value’. Hence, in the opening IFRS
Statement of financial position of A Ltd., compressor should be valued at carrying
amount, since on 31 March 2X11, carrying amount is less than net realisable value
and net realisable value is less than fair value less costs to sell.

CASE STUDY 16
A Ltd. is an automotive supplier and is in the business of manufacturing components and

parts to be used by various automotive companies.
It has a registered office in New Delhi and is listed on the Bombay Stock Exchange (BSE). It
is considering the possibilities of listing its securities at London Stock Exchange for which it
needs to submit its financial statements prepared under International Financial Reporting
Standards (IFRS).
The Accountant of A Ltd. is facing certain issues while preparing its financial statements
based on IFRS. The company approached ABHI & Co. Chartered Accountants. Mr. Harsh of
ABHI & Co. Chartered Accountants was given the assignment to deal with the client
A Ltd. and help the company in the preparation of financial statements based on IFRS. Harsh
has approached CFO of A Ltd. to discuss the issues.
The CFO of A Ltd. gave brief facts about the transactions entered into by the company to
Harsh and wants an advice on the below accounting matters:
(a) F Ltd. (subsidiary of A Ltd.) had entered into a loan agreement with UV Bank on
18th December 20X1 to borrow a sum of ` 100 crores at the rate of 12% per annum
compounded monthly. As per the agreement, A Ltd. had provided a guarantee to the
bank in respect of the loan facility extended by the bank to F Ltd. for which no
consideration was charged by A Ltd. from its subsidiary. F Ltd. has defaulted on
repayment of an instalment to UV Bank pending on 31 March 20X3, however, as
explained by the management of F Ltd. and as per the communication with UV Bank,
F Ltd. has made good the default on loan after payment of penal interest and there has
been no financial impact on the guarantee extended by A Ltd. A Ltd. in its financial
statements based on Indian GAAP has disclosed the guarantee given as ‘contingent
liability’. Fair value of financial guarantee obligation is ` 2 crores.
(b) Besides manufacturing plants, A Ltd. has various other assets, not used for operational
activities, e.g., freehold land, townships in different locations, excess of office space
rented to ABC, etc. Also, A Ltd. has some land, which are kept vacant as per the
government regulations which require that a specified area around the plant should be
kept vacant.
The details of these assets are as under:
Property Details
A Ltd.’s A Ltd.’s registered office in Delhi, is a 15 storey building, of which only
office 3 floors are occupied by A Ltd., whereas remaining floors are given on
building rent to other companies. These agreements are usually for a period of
(registered 3 years. According to A Ltd., such excess office space will continue to
office) be let out on lease to external parties and have no plans to occupy it,
at least in near future.

Flats in As regards township in Location 1, there are approximately 2,000 flats

Township in the said township. It was built primarily for A Ltd.’s employees,
located in hence, approximately 80% of the flats are allotted to employees and
location 1 remaining flats are either kept vacant or given on rent to other external
parties. A lease agreement is signed between A Ltd. and an individual
party for every 12 months being 1 April to 31 March. The lease entered
is a cancellable lease (cancellable at the option of any of the parties).
Also, besides monthly rent, additional charges are levied by A Ltd. on
account of electricity, water, cable connection, etc.
According to A Ltd., there is no intention of selling such excess flats or
allotting it to its employees.
Flats in There are 1,000 flats in location 2 township, of which:
township • 400 flats are given to employees for their own accommodation.
located in
• 350 flats are given on rent to Central Government and State
location 2 Government for accommodation of their employees. Average
lease period being 12 months with cancellable clause in lease
agreements.
• 250 flats are kept vacant.
Hostel 60 rooms in the hostel have been let out to G Ltd., for giving
located in accommodation to their personnel. Lease agreement is prepared for
location 1 every 11 months and renewable thereafter. Besides the monthly rent
amount, some charges are levied towards water, electricity and other
amenities, e.g., cable connection, etc.
Land in In 20X4, A Ltd. purchased a plot of land on the outskirts of a major city.
location 1 The area has mainly low-cost public housing and very limited public
transport facilities. The government has plans to develop the area as
an industrial park in 5 years’ time and the land is expected to greatly
appreciate in value if the government proceeds with the plan. A Ltd.
has not decided what to do with the property.
Land in A portion of land has been leased out to C Ltd. for its manufacturing
location 1 operations. Land has been given on lease on a lease rental of
` 10 lacs p.a. with a lease term of 25 years.
Land in A portion of the land has been given on rent to D Ltd. which has
location 2 constructed a petrol pump on such land. It has been leased for a period
of 40 years and renewed for a further period of 40 years.
(c) A Ltd. has 10,000 units of raw material inventory as at 31 March 20X5 with carrying
amount of ` 100 each. The current market value of that raw material is ` 95 each. A
Ltd. intends to use the raw material to manufacture a component to be used by an
automotive company. A Ltd. estimates costs to completion and sale to be ` 50 each and
selling price for the component is estimated to be ` 160 each.

CASE STUDIES 16.3
(d) An item of equipment X was acquired by A Ltd. on 1 April 20X3 for ` 100,000 having an
estimated useful life of 10 years, with a residual value of zero. The asset is depreciated
on a straight line basis. The asset was revalued to ` 104,000 on
31 March 20X5.
(e) A Ltd. has an investment property on 6th floor of a building in New Delhi with a floor area
of 5,000 square feet. A Ltd. has adopted a fair value policy for its investment property.
Similar properties in the same locality have been sold at prices which amount to
` 12,500, ` 12,550, ` 12,600, ` 12,700 and ` 12,900 per square feet during the past
month.
(f) One of the plant of A Ltd. is situated in north-east India and the State Government
provides interest-free loans for 3 years to aid investment in the region. On 1 April 20X4,
A Ltd. received an interest-free loan of ` 50 lacs for the project. The fair value of the
loan is ` 40 lacs.
(g) On 1 July 20X4, A Ltd. was engaged in the development of a property in Rajasthan, which
is expected to take five years to complete, at a cost of ` 600 lacs. For this purpose, a
bank loan of ` 600 lacs with an effective interest rate at 10% was taken out on
1 July 20X4. The amount of loan was fully drawn from the bank. However, during the
year 20X4-20X5, the construction was not in full swing. Therefore, A Ltd. invested its
surplus fund from such loan for the time being. Interest income earned on the unapplied
funds during the period 20X4-20X5 was ` 14,00,000.
(h) A Ltd. acquired a customer portfolio from XYZ Ltd. at a price of ` 13 lacs. There are no
legal contracts with customers to protect the interest of A Ltd. However, exchange
transactions for similar non-contractual customer relationships (other than as part of a
business combination) exist in the market.
(i) On 31 March 20X5, A Ltd. has given a loan to V Ltd. with low credit standing, but still at
an acceptable level for A Ltd.
Harsh requires your assistance on the above issues to arrive at the conclusion.

1. What will be the annual depreciation charge on equipment X for years 3 to 10 and the
amount of the revaluation surplus that can be transferred to retained earnings annually?
(a) Annual depreciation charge will be ` 10,000 and an annual transfer of
` 3,000 can be made from revaluation surplus to retained earnings.
(b) Annual depreciation charge will be ` 10,000, however, annual transfer from
revaluation surplus to retained earnings is not permitted.
(c) Annual depreciation charge will be ` 13,000 and an annual transfer of
` 3,000 may be made from revaluation surplus to retained earnings.

(d) Annual depreciation charge will be ` 13,000, however, annual transfer from
2. What will be the fair value of the 6 th floor investment property in a building in New Delhi
if A Ltd. wishes to compute the fair value using mid-value approach within a bid-ask
spread?
(a) ` 6,35,00,000
(b) ` 6,32,50,000
(c) ` 6,30,00,000
(d) ` 6,27,50,000
3. What would be the accounting for recognition of interest free loan of ` 50 lacs from State
Government?
(a) Bank A/c Dr. ` 50 lacs
To Loan A/c ` 50 lacs
(b) Bank A/c Dr. ` 40 lacs
(c) Bank A/c Dr. ` 50 lacs
To Government grant (deferred income) A/c ` 10 lacs
(d) Bank A/c Dr. ` 50 lacs
To Government grant (income) A/c ` 10 lacs
4. What should be the amount of interest to be capitalised on the development of property
in Rajasthan for year ended 31 March 20X5 under IFRS?
(a) ` 46 lacs
(b) ` 60 lacs
(c) ` 45 lacs
(d) ` 31 lacs
5. What loss allowance should be recognised by A Ltd. in its financial statements in relation
to loan given to V Ltd.?
(a) No loss shall be recognized by A Ltd.
(b) 12-month expected credit losses
(c) Lifetime expected credit losses
(d) A Ltd. has a choice between option (b) and (c) above

CASE STUDIES 16.5

6. What should be the accounting treatment of corporate guarantees in the separate
financial statements of A Ltd. and F Ltd. and consolidated financial statements of group
prepared under IFRS?
Provide your answer from both the views i.e. when guarantee is not considered an
integral part of the loan and when guarantee is considered an integral part of the loan. If
the guarantee is not considered an integral part of the loan, then the fair value of loan
liability component may be assumed ` 98 crores.
7. Determine the classification of properties referred to in (b) above which are not held for
operational purposes, with appropriate justification in the financial statements of A Ltd.
considering the principles of IFRS.
8. At what amount 10,000 units of raw material referred to in (c) above be carried at on
31 March 20X5?
9. How should customer portfolio acquired by A Ltd. should be recognised in its IFRS
financial statements?

1. Option (c) Annual depreciation charge will be ` 13,000 and an annual transfer of
Reason
The annual depreciation charge for years 3 to 10 will be ` 13,000 (i.e. 104,000/ 8).
The amount that may be transferred from revaluation surplus to retained earnings in
accordance with para 41 of IAS 16 will be the difference between the depreciation
expense based on historic cost (i.e., ` 10,000), and the depreciation expense based
on the revalued amount (i.e., ` 13,000). So an annual transfer of ` 3,000 may be made
from revaluation surplus to retained earnings as the asset is used by an entity.
2. Option (a) ` 6,35,00,000
Reason
The mid-value is 12,700 per square feet [12,500 + 12,900) x ½]. This would value the
property at ` 6,35,00,000 (12,700 x 5,000).

3. Option (c)
Bank A/c Dr. ` 50 lacs
To Government grant (deferred income) A/c ` 10 lacs
4. Option (d) ` 31,00,000

Reason
Total interest charge for the year ended 31 March 20X5 is ` 45,00,000 (600 lacs x 10%
x 9/12). Amount to be capitalised is ` 31,00,000 (i.e., ` 45,00,000 – 14,00,000).
5. Option (b) 12-month expected credit losses
Reason
Under the general model of IFRS 9, all assets need to have a loss allowance.
Allowance covers either 12-month or lifetime expected credit losses depending on
whether the asset’s credit risk has increased significantly. Since the loan has just been
granted and there has not been a significant increase in credit risk, an allowance
equal to 12-month expected credit losses is appropriate.

6. In accordance with IFRS 9, a financial guarantee contract meets the definition of an
insurance contract and if an issuer applies accounting to such contracts which is
applicable to insurance contracts, in such a case issuer may elect to apply either the
requirements of IFRS 17 or IFRS 9 to such financial guarantee contracts.
A Ltd. in its Indian GAAP financial statements has disclosed the contract as corporate
guarantees under contingent liabilities. Hence, the criteria of previous assertion of this
contract as an insurance contract is not met. Hence, as provided above, since the criteria
of insurance contract is not met, the said transaction will be covered under IFRS 9 and
not under IFRS 17 and the company needs to measure the financial guarantee given by
at its fair value.
Measurement of financial guarantee under IFRS 9
Evaluation is required with regards to guarantee given by A Ltd., i.e., whether it is an
integral part of the loan or not.
Guarantee is an integral part of the loan if the guarantee provided to the lender forms
part of the overall terms of the loan (i.e., if the loan were to be assigned by the lender to
a third party, the guarantee would transfer with it). If the guarantee is provided to the
lender separate and apart from the original borrowing such that it does not form part of
the overall terms of the loan (i.e., if the loan were to be assigned by the lender to a third

CASE STUDIES 16.7
party, the guarantee would not transfer with it), then such guarantee is a separate unit of
account.
I. Accounting in the books of A Ltd.
The same will not affect the recognition in the books of A Ltd. The recognition of
financial guarantee is independent to the fact whether the guarantee is a separate
unit of account or is not a separate unit of account. Therefore, irrespective of
whether the guarantee is considered a separate unit of account, A Ltd. recognises
the fair value of the financial guarantee in its separate financial statements as
follows:
Investment in subsidiary A/c Dr. ` 2 crores
To Financial guarantee obligation A/c ` 2 crores
II. Accounting in the books of F Ltd.

With respect to the recognition of financial guarantee contracts, F Ltd. has an
accounting policy choice to be applied consistently:
(a) View I- Guarantee is not an integral part of the loan and F Ltd. should
perform mirror accounting of what has been done by A Ltd. in its separate
financial statements.
(b) View II- Guarantee is an integral part of the loan
If the guarantee is integral to loan, the subsidiary is not required to recognise the
value of guarantee separately, instead it will be included in the loan liability.
However, if the guarantee is not an integral part of the loan, then the subsidiary is
required to recognize the value of guarantee separately as a capital contribution.
A. If the guarantee is an integral part of the loan: If the guarantee provided
to the lender forms part of the overall terms of the loan (i.e., if the loan were
to be assigned by the lender to a third party, the guarantee would transfer
with it), F Ltd. should recognise the liability at fair value, including the value
of the guarantee provided by the parent (` 100 crores) as follows:
Cash A/c Dr. ` 100 crores
To Loan liability A/c ` 100 crores
B. If the guarantee is not an integral part of the loan: If the guarantee is
provided to the lender separate and apart from the original borrowing such
that it does not form part of the overall terms of the loan (i.e., if the loan
were to be assigned by the lender to a third party, the guarantee would not
transfer with it), F Ltd. should recognise the liability at fair value without the

guarantee (assumed ` 98 crores) with the difference being recognised as

a capital contribution, as follows:
Cash A/c Dr. ` 100 crores
To Capital contribution A/c ` 2 crores
III. Accounting in the consolidated financial statements
Irrespective of whether the guarantee is considered a separate unit of account,
the financial guarantee is not separately recognised in the consolidated financial
statements of A Ltd.
In consolidated financial statements, the entry passed in separate financial
statements of the parent will be reversed.
Financial guarantee obligation A/c Dr. ` 2 crores
To Investment in subsidiary A/c ` 2 crores
The consolidated group incurred a financial liability with a fair value of
` 100 crores (due to the guarantee of the parent) and therefore, the consolidated
statement of financial position includes only that liability, measured on an
amortised cost basis.
In case F Ltd. (subsidiary) has accounted the loan considering the guarantee as
not an integral part of the loan, then in consolidated financial statements, besides
reversal of the entry passed by the parent company, the entry passed in F Ltd.
(subsidiary company) with respect to capital contribution by A Ltd. for ` 2 crores
shall be eliminated by transferring the same to loan liability as follows:
Capital contribution A/c Dr. ` 2 crores
7.
Property Classification of properties not held for operational purpose
A Ltd.’s Excess portion of office space has been given on lease to earn rental
office income. Out of 15 storey building, only 3 floors are occupied by A Ltd.
building Such excess office space was constructed for the purpose of letting it
(registered out. According to A Ltd., such excess office space will continue to be
office) let out on lease to external parties and have no plans to occupy it, at
least in near future. Further, office space given on rent, although in
same building, is separately identifiable from other owner-occupied
portion and hence can be sold separately (if required). Hence, the
excess space will qualify to be an investment property.

CASE STUDIES 16.9
Flats in Excess flats have been given on lease to earn rental income.
Township According to A Ltd., there is no intention of selling such excess flats
located in or allotting it to its employees. Further, flats given on rent, can be
location 1 sold separately from flats occupied by A Ltd.’s employees as they are
separately identifiable. A Ltd. also charges its lessees on account of
ancillary services, i.e., water, electricity, cable connection, etc., but
the monthly charges in such cases are generally not significant as
compared to rental payments. Hence flats given on rent should qualify
to be an ‘investment property’.
With regards to the flats kept vacant, A Ltd. has to evaluate the
purpose of holding these flats, i.e., whether these would be kept for
earning rentals or will it be allotted to its future employees. In case
they are held for earning rentals, it would be classified as an
investment property; and if they are held for allotment to future
employees, it would form part of property, plant and equipment.
Flats in 350 flats are given on lease to earn rental income and assuming that
township management intends to let out these flats on rent in future, such flats
located in should be classified as an ‘investment property.
location 2 With regards to the flats kept vacant, A Ltd. has to evaluate the
purpose of holding these flats, i.e., whether these would be kept for
earning rentals or will it be allotted to its future employees. In case
they are held for earning rentals, it would be classified as an
investment property; and if they are held for allotment to future
employees, it would form part of property, plant and equipment.
Hostel Rooms in a hostel have been let out to G Ltd. to be used by its
located in personnel. A Ltd. also charges G Ltd. on account of ancillary services,
location 1 i.e., water, electricity, cable connection, etc., but the monthly charges
in such cases are generally not significant as compared to rental
payments. Hence, it should be classified as an ‘Investment property’.
Land in Although management has not determined use for property after the
location 1 park’s development takes place, yet in the medium-term the land is
held for capital appreciation. As per IAS 40, if an entity has not
determined that it will use the land either as owner-occupied property
or for short term sale in the ordinary course of business, then it will be
considered as land held for capital appreciation. Therefore,
management should classify the property as an investment property.
Land in Since the land is held with an intention of giving it on lease and
location 1 earning capital appreciation over a period, it should be classified as
‘Investment property’.
Land in Since the land is held with an intention of giving it on lease and
location 2 earning capital appreciation over a period, it should be classified as
‘Investment property’.

8. Net realisable value of one unit of raw material = Sale price - cost to completion and sale
= ` 160 – ` 50 = ` 110
Carrying value of raw material = ` 100

Inventory of raw material will be kept at lower of costs and net realisable value.
Thus, inventory of raw material will be kept at ` 100 per unit, i.e., total of ` 10,00,000 for
10,000 units.
9. A Ltd. should recognise the customer portfolio as an intangible asset considering the
below guidance under para 16 of IAS 38:
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 protect, or other ways to
control, the relationships with customers or the loyalty of the customers to the entity, the
entity usually has insufficient control over the expected economic benefits from customer
relationships and loyalty for such items (eg portfolio of customers, market shares,
customer relationships and customer loyalty) to meet the definition of intangible assets.
In the absence of legal rights to protect customer relationships, exchange transactions
for the same or similar non-contractual customer relationships (other than as part of a
business combination) provide evidence that the entity is nonetheless able to control the
expected future economic benefits flowing from the customer relationships. Because
such exchange transactions also provide evidence that the customer relationships are
separable, those customer relationships meet the definition of an intangible asset.

CASE STUDY 17
Rainbow Limited is a large manufacturing company that has already adopted IFRS, during the
financial year 20X3-20X4. The company is in the process of preparing its financial statements
as per IFRS for the financial year 20X4-20X5. Some new developments have taken place
during the year and the company is keen that the appropriate accounting treatment and
disclosures under IFRS are determined and highlighted to the Board of Directors. Rainbow
Limited's CFO has sought your assistance and shared the following details with you:
Rainbow Limited is carrying out various projects for which the company has either received
government financial assistance or is in the process of receiving the same. The company has
received two grants of ` 1,00,000 each, relating to the following ongoing research and
development projects:
(i) The first grant relates to the "Clear River Project" which involves research into the
effect of various chemicals waste from the industrial area in Madhya Pradesh.
However, no major steps have been completed by Rainbow Limited to commence this
research as at 31 March, 20X5.
(ii) The second grant relates to the commercial development of a new equipment that can
be used to manufacture eco-friendly substitutes for existing plastic products. Rainbow
Limited is confident of the technical feasibility and financial viability of this new
technology which will be available for sale in the market by 1 April 20X6.
In September 20X4, due to the floods near one of its factories, the entire production was lost
and Rainbow Limited had to shut down the factory for a period of 3 months. The State
Government announced a compensation package for all the manufacturing entities affected
due to the floods. As per the scheme, Rainbow Limited is entitled to a compensation based
on the average of previous three months' sales figure prior to the floods, for which the
company is required to submit an application form on or before 30 June, 20X5 with necessary
audited figures. The financial statements of Rainbow Limited are to be adopted on
31 May 20X5, and thus the claim form would not have been filed with the State Government
before adopting of financial statements.
Four years ago, Rainbow Limited had acquired a commercial property for ` 40 crores and
immediately leased out the same to Turquoise Limited on an operating lease basis. The
annual rental as per the agreement was determined to be ` 4 crores. As per the terms of the
lease agreement, the lessee can cancel the lease by giving three months' notice in writing to
the company. Turquoise Limited gave a notice on 1 October 20X4 to vacate the property from
1 January, 20X5. Rainbow Limited uses fair value model for recognition and measurement of
investment property. The fair value of such property was ` 58 crores as on 1 January, 20X5.
On receiving such notice, Rainbow Limited has started the process of bifurcating the property
into 10 identical units of equal size and sell it in the ordinary course of business. The

company has incurred `12 crores as the expenses towards such conversion 31 March, 20X5.
The bifurcation process is still in progress as at that date and the company estimates that
they need to spend a further of ` 8 crores to complete the project, after which each of these
units could fetch ` 10 crores.
Rainbow Limited had on 1 April, 20X3 granted 1,000 share options each to 2,000 employees.
The options are due to vest on 31 March, 20X6 provided the employee remains in employment
till 31 March, 20X6.
On 1 April, 20X3, the Directors of Company estimated that 1,800 employees would qualify for
the option on 31 March, 20X6. This estimate was amended to 1,850 employees on
31 March, 20X4 and further amended to 1,840 employees on 31 March, 20X5.
On 1 April, 20X3, the fair value of an option was ` 1.20. The fair value increased to ` 1.30
as on 31 March, 20X4 but due to challenging business conditions, the fair value declined
thereafter. In September 20X4, when the fair value of an option was ` 0.90, the Directors
repriced the option and this caused the fair value to increase to ` 1.05. Trading conditions
improved in the second half of the year and by 31 March, 20X5 the fair value of an option was
` 1.25. Rainbow Limited decided that additional cost incurred due to repricing of the options
on 30 September, 20X4 should be spread over the remaining vesting period from
30 September, 20X4 to 31 March, 20X6.
On 1 April, 20X4, the company issued a convertible bond that matures in five years. The
bond can be converted into ordinary shares at any time. Rainbow Limited has calculated that
the liability and equity components of the bond are` 80 lakhs for the liability component and
` 20 lakhs for the equity component, giving a total amount of the bond of ` 1 crore. The
interest rate on the bond is 8% and local tax legislation allows a tax deduction for the interest
paid in cash. The local tax rate is 30%.
In order to fund an upcoming project, Rainbow Limited borrowed ` 5 crores from a scheduled
bank during 20X4-20X5. The loan carries market interest rate and is repayable in 3 years.
Given that the company invested a significant amount of time preparing the loan
documentation and obtaining necessary approvals, Rainbow Limited has requested the bank
to include an extension option. Accordingly, if the company so requires, it will have the option
to extend the period of the loan at market rates prevailing at that date.
On 1 January, 20X5, Rainbow Limited acquired a 60% stake in Shadow Limited. The cash
consideration payable was ` 1 crore to be paid immediately, and ` 1.21 crores after two years.
The fair value of net assets of Shadow Limited at acquisition date was ` 3 crores.
Rainbow Limited has calculated that its cost of capital is 10%. Non-controlling interest is
measured at the proportionate share of identifiable net assets.
Rainbow Limited had purchased equipment P on 1 st April, 20X3 for ` 1 lakh and this had an
estimated useful life of 10 years, with a residual value of zero. The asset is depreciated on a
straight line basis. On 31 March, 20X5, Rainbow Limited has revalued equipment P to
` 1.04 lakhs.

CASE STUDIES 17.3
Rainbow Limited has a current asset of ` 60,000 related to interest receivable. The related
interest revenue will be taxed on cash basis when it is received.
Answer the following questions based on the facts given above.

1. Calculate the deferred tax liability arising on the convertible bond as at the 2 year
(a) ` 30,00,000
(b) ` 2,40,000
(c) ` 6,00,000
(d) ` 24,00,000
2. Calculate the amount of goodwill / gain on bargain purchase arising upon acquisition
of Shadow Limited.
(a) ` 1 crore gain on bargain purchase
(b) ` 80 lakhs gain on bargain purchase
(c) ` 20 lakhs goodwill
(d) ` 41 lakhs goodwill
3. The three year term loan obtained from the bank contains an option to extend the period of
the loan at market rates prevailing at that date. State which of the following is correct:
(a) It is not an embedded derivative.
(b) It is an embedded derivative closely related to the loan.
(c) It is an embedded derivative but not closely related to the loan, so it needs to
be separately accounted for.
(d) It is an embedded derivative but not closely related to the loan, so no further
accounting is required.
4. What is the annual depreciation charge on equipment P for years 3 to 10 and what is the
amount of revaluation surplus that can be transferred to retained earnings annually?
(a) Annual depreciation charge will be ` 10,000 and an annual transfer of ` 3,000
can be made from revaluation surplus to retained earnings.
(b) Annual depreciation charge will be ` 10,000, however, annual transfer from

(c) Annual depreciation charge will be ` 13,000 and an annual transfer of ` 3,000
may be made from revaluation surplus to retained earnings.
(d) Annual depreciation charge will be ` 13,000, however, annual transfer from
5. What will be the tax base of interest receivable and how will the same be treated in the
financial statements prepared as per IFRS?
(a) ` 60,000 and Deferred Tax Assets
(b) ` Nil and Deferred Tax Assets
(c) ` 60,000 and Deferred Tax Liability
(d) ` Nil and Deferred Tax Liability

6. Suggest the suitable accounting treatment, if any, for the two grants received and the
flood-related compensation in the books of accounts of Rainbow Limited as on
31 March, 20X5.
7. With regards to the property previously leased to Turquoise Limited, is Rainbow Limited
allowed to change the classification of investment property? If yes, then analyse the
accounting implications of the bifurcation currently in progress under the relevant IFRS
and prepare a note on the classification, measurement and disclosure as at
31 March, 20X5.
8. Suggest the suitable accounting treatment for share options as on 31 March, 20X5.

1. Option (C) ` 6,00,000
Reason:
Liability recognised in the book at ` 80,00,000. However, in tax records, it is
recognised at ` 1,00,00,000. Hence, it leads to deductible temporary difference of
` 20,00,000 on which DTL will be calculated at ` 6,00,000 (20,00,000 x 30%).
2. Option (C) ` 20,00,000 goodwill

CASE STUDIES 17.5
Reason:
Total consideration paid:
Cash 1 cr
PV of deferred consideration (1.21 x 0.826) 1 cr
2 cr
NCI by Proportionate Share Method 3 cr x 40% = 1.20 cr
Calculation of goodwill:
Proportionate Share Method (` in crore)
Net Identifiable Assets Dr. 3.00
Goodwill (Balancing figure) Dr. 0.20
To Consideration payable 2.00
To Non–controlling Interest 1.20
3. Option (B) It is an embedded derivative closely related to the loan.

Reason:
The extension option meets the definition of derivative as per Appendix A of IFRS 9,
Financial Instruments.
As per paragraph B4.3.5(b) of IFRS 9, an option or automatic provision to extend the
remaining term to maturity of a debt instrument is not closely related to the host debt
instrument unless there is a concurrent adjustment to the approximate current market
rate of interest at the time of the extension. If an entity issues a debt instrument and
the holder of that debt instrument writes a call option on the debt instrument to a third
party, the issuer regards the call option as extending the term to maturity of the debt
instrument provided the issuer can be required to participate in or facilitate the
remarketing of the debt instrument as a result of the call option being exercised.
As at the time of exercise of extension option, the interest rates are adjusted to the
current market rates prevailing at that time, the embedded derivative is closely related
to the host debt contract. As the embedded derivative is closely related to the host
contract, it is not to be separately accounted at fair value through profit or loss.
4. Option (C) Annual depreciation charge will be ` 13,000 and an annual transfer of
Reason:
Original depreciation = ` 1,00,000 / 10 years = ` 10,000 p.a.
Carrying value of equipment P = ` 1,00,000 – (10,000 x 2 years) = ` 80,000
Revalued amount of equipment P = ` 1,04,000

Revised depreciation = ` 1,04,000 / (10-2) years = ` 13,000

Excess depreciation = ` 13,000 - ` 10,000 = ` 3,000 routed through Retained Earnings.
Paragraph 41 of IAS 16 inter alia states that some of the revaluation surplus may be
transferred as the asset is used by an entity. In such a case, the amount of the surplus
transferred would be the difference between depreciation based on the revalued carrying
amount of the asset and depreciation based on the asset’s original cost. Transfers from
revaluation surplus to retained earnings are not made through profit or loss.
5. Option (D) ` Nil and Deferred Tax Liability
Reason:
The tax base of an asset or liability is the amount attributed to that asset or liability for
tax purposes. Here the amount attributed for tax purpose is nil, the tax base of the
interest receivable will be nil.
Therefore, the temporary difference is ` 60,000 – Nil = ` 60,000.
Since this temporary difference will be recovered or settled in future, it is a taxable
temporary difference, which will lead to creation of deferred tax liability.

6. Accounting treatment for
1. First Grant
The first grant for ‘Clear River Project’ involving research into effects of various
chemicals waste from the industrial area in Madhya Pradesh, seems to be
unconditional as no details regarding its refund has been mentioned in the
question. Even though the research has not been started nor any major steps
have been completed by Rainbow Limited to commence the research, the grant
will be recognised immediately in profit or loss for the year ended
31 March, 20X5.
Alternatively, in case, the grant is conditional as to expenditure on research, the
grant will be recognised over the years the expenditure is being incurred and
recognised in the books of Rainbow Limited.
2. Second Grant
The second grant related to commercial development of a new equipment is a
grant related to depreciable asset. As per the information given in the question,
the equipment will be available for sale in the market from 1 April, 20X6. Hence,
by that time, grant relates to the construction of an asset and should be initially
recognised as deferred income.

CASE STUDIES 17.7
The deferred income should be recognised as income on a systematic and

rational basis over the asset’s useful life.
The entity should recognise a liability on the statement of financial position for
the years ending 31 March, 20X5 and 31 March, 20X6. Once the equipment
starts being used in the manufacturing process, the deferred grant income of
` 1,00,000 should be recognised over the asset’s useful life to compensate for
depreciation costs.
Alternatively, as per IAS 20, Rainbow Limited would also be permitted to offset
the deferred income of ` 1,00,000 against the cost of the equipment as on
1 April, 20X6.
3. For flood related compensation
Rainbow Limited will be able to submit an application form only after
31 May, 20X5 ie in the year 20X5-20X6. Although flood happened in
September, 20X4 and loss was incurred due to flood related to the year
20X4-20X5, the entity should recognise the income from the government grant
in the year when the application form related to it is submitted and approved by
the government for compensation.
Since, in the year 20X4-20X5, the application form could not be submitted due
to adoption of financials with respect to sales figure before flood occurred,
Rainbow Limited could not recognise the grant income as it has not become
receivable as on 31 March, 20X5.
7. Classification: As per para 57 of IAS 40, an entity shall transfer a property to, or
from, investment property when, and only when, there is a change in use. A change
in use occurs when the property meets, or ceases to meet, the definition of investment
property and there is evidence of the change in use. In isolation, a change in
management’s intentions for the use of a property does not provide evidence of a
change in use. Since, the investment property is bifurcated for developing of units
which will be sold in the ordinary course of business, the reclassification of investment
property as inventory on 1 January, 20X5 is permissible under IAS 40.
Since, Rainbow Limited uses fair value model for recognition and measurement of
investment property, para 59 of IAS 40 will be applicable. As per para 59 of IAS 40,
for a transfer from investment property carried at fair value to owner-occupied property
or inventories, the property’s deemed cost for subsequent accounting in accordance
with IAS 2 shall be its fair value at the date of change in use. Hence, on reclassification
on 1 January, 20X5, property will be measured at fair value ie ` 58 crores.

Measurement: The additional costs of ` 12 crore for developing the units which were
incurred up to and including 31 March, 20X5 would be added to the cost of inventory
to give a closing cost of ` 70 crore (58 crore + 12 crore).
The total selling price of the units is expected to be ` 100 crore (10 units x ` 10 crore).
Since the further costs to develop the units total ` 8 crore, the net realisable value of
inventory (consisting of 10 units) would be ` 92 crore (` 100 crore - ` 8 crore). The
inventory (consisting of 10 units) will be measured at a cost of ` 70 crore (cost
` 70 crore or NRV ` 92 crore whichever is less).
Disclosure: “During the year, the operating lease has been cancelled with respect to
investment property. On the date of cancellation of the operating lease, the company
has started the process of bifurcating the property into 10 identical units of equal size
to sell in the ordinary course of business. Hence, Rainbow Limited has reclassified the
property as inventory on the date of cancellation, which was measured on
reclassification at fair value. Later, at the reporting date the inventory has been
measured at cost or NRV whichever is less. The units are shown as inventory under
current assets in the Statement of financial position.”
8. Paragraph 27 of IFRS 2 requires the entity to recognise the effects of modifications that
increase the total fair value of the share-based payment arrangement or are otherwise
beneficial to the employee.
If the repricing increases the fair value of the equity instruments granted, paragraph
B43(a) of Appendix B requires the entity to include the incremental fair value granted (ie
the difference between the fair value of the repriced equity instrument and that of the
original equity instrument, both estimated as at the date of the modification) in the
measurement of the amount recognised for services received as consideration for the
equity instruments granted.
If the repricing occurs during the vesting period, the incremental fair value granted is
included in the measurement of the amount recognised for services received over the
period from the repricing date until the date when the repriced equity instruments vest,
in addition to the amount based on the grant date fair value of the original equity
instruments, which is recognised over the remainder of the original vesting period.
Accordingly, the amounts recognised in years 1 and 2 are as follows:
Year Calculation Compensation Cumulative
expense for compensation
period expense
` `
1 [1,850 employees × 1,000 options × ` 1.20] × 1/ 3 7,40,000 7,40,000
2 (1,840 employees × 1,000 options × [(` 1.20 × 8,24,000 15,64,000
2 /3)
+ {(` 1.05 - 0.90) × 0.5/1.5}] – 7,40,000

CASE STUDY 18
Makers Ltd. is engaged in the business of manufacturing a number of products including

moulds, dies and machinery. They have a wide customer base in automobile, infrastructure,
construction and other sectors both within India and abroad.
Typically, a contract is entered into for sale of each product and consideration is received on
the event of delivery of goods to the customer place. The cost of each mould is ` 400 and the
selling price is ` 450. The terms of the contract entitle the customer to return any unused
moulds within 30 days and receive a full refund. The Company estimates that the costs of
recovering the mould will be immaterial and expects that the returned moulds can be resold at
a profit. The company has sold a total of 10,000 moulds during the month ended 31 March,
20X4. From past experience, Makers Ltd expects that 3% of the moulds will be returned during
the current year.
On 1 April, 20X3, Makers Ltd. raised a long-term loan from foreign investors. The investors
subscribed for 6 million Foreign Currency (FCY) loan notes at par. Makers Ltd. incurred
incremental issue costs of FCY 2,00,000. Interest of FCY 6,00,000 is payable annually on
31 March, starting from 31st March, 20X4. The loan is repayable in FCY on 31 March, 2024
at a premium and the effective annual interest rate implicit in the loan is 12%. The appropriate
measurement basis for this loan is amortised cost. Relevant exchange rates are as follows:
- 1 April, 20X3 - FCY 1 = ` 2.50.
- 31 March, 20X4 – FCY 1 = ` 2.75.
- Average rate for the year ended 31 Match, 20X4 – FCY 1 = ` 2.42. The functional
currency of the group is Indian Rupee,
Makers Ltd. acquired 65% of shares on 1 June, 20X3 in D Limited which is engaged in
production of components of machinery. D Limited has 1,00,000 equity shares of ` 10 each.
The quoted market price of shares of D Limited was ` 12 on the date of acquisition. The fair
value of D Limited's identifiable net assets as on 1 June, 20X3 was ` 80,00,000.
Makers Limited paid ` 50,00,000 in cash and issued 50,000 equity shares as purchase
consideration on the date of acquisition. The quoted market price of Makers Limited on the
date of issue is ` 25 per share.
Makers Limited also agrees to pay additional consideration of ` 15,00,000, if the cumulative
profit earned by D Limited exceeds ` 1,00,00,000 over the next three years. On the date of
acquisition, D Limited assessed and determined that it is considered probable that the extra
consideration will be paid. The fair value of this consideration on the date of acquisition is
` 9,80,000. D Limited incurred ` 1,50,000 in relation to the acquisition. Makers Ltd. measures
Non-controlling interest at fair value.

Additional information:
Makers Ltd. has identified five segments (denoted as A to E below, for ease of reference)
Segment Sales Total Sales Profit Assets
Exports Domestic
A 1,20,00,000 - 1,20,00,000 10,00,000 20,00,00,000
B 2,50,00,000 80,00,000 3,30,00,000 30,00,000 5,00,00,000
C 4,50,00,000 - 4,50,00,000 50,00,000 7,00,00,000
D 2,70,00,000 60,00,000 3,30,00,000 30,00,000 10,00,00,000
E 40,00,000 50,00,000 90,00,000 20,00,000 15,00,00,000
TOTAL 13,20,00,000 1,40,00,000 57,00,00,000
Makers Ltd. does not have taxable income as per the applicable tax laws, but pays 'Minimum
Alternate Tax’ (MAT) based on its books profits. The tax paid under MAT can be carried forward
for the next 10 years and as per the Company's projections submitted to its bankers, it is in a
position to get credit for the same by the end of eighth year. Makers Ltd. is recognising the
MAT credit as a current asset under IGAAP. The amount of MAT credit as on 31 March, 20X3
is ` 8,50,00,000 and as on 31 March, 20X4 is ` 9,75,00,000.
The company has an identifiable asset QR with a carrying amount of ` 10,00,000. Its
recoverable amount is ` 6,50,000. The tax base of QR is ` 8,00,000 and the tax rate is 30%.
Impairment losses are not tax deductible. Makers Ltd. expects to continue to earn profits in
future.
Makers Ltd. acquired the trademark for a product from ABC Ltd. 10 years back for ` 8,00,000.
The trademark is expected to have an indefinite useful life. The carrying amount as on
1 April, 20X3 is ` 8,00,000. Now due to competition, the sales of the product have declined
by 25%. The management has made assessment and has ascertained that the trademark will
continue to have indefinite useful life. The recoverable amount is ascertained as ` 6,00,000.
Answer the following questions:

1. Based on the quantitative threshold, which of the above segments A to E would be
considered as reportable segments?
(a) Segment C
(b) Segments C, D and B
(c) Segments B, C, D and E
(d) All segments are reportable segments

CASE STUDIES 18.3
2. For the identifiable asset QR, what would be the impact on the deferred tax asset/
liability at the end of the period?
(a) Nil impact.
(b) Deferred tax asset will have a closing balance of ` 1,05,000.
(c) Deferred Tax asset will have a balance of ` 60,000.
(d) Deferred tax asset will have a balance of ` 45,000.
3. In respect of the trademark with indefinite life, Makers Ltd. seeks your advice on the
appropriate treatment from following:
(a) The entity can continue with the same carrying amount of ` 8,00,000.
(b) The entity can adopt amortisation for the amount of ` 6,00,000.
(c) The entity has to test the asset for impairment, as an external unfavourable
event had occurred and reduce the carrying amount to ` 6,00,000.
(d) The entity is required to test the trademark for impairment every year and
accordingly, the carrying amount will be reduced to ` 6,00,000.
4. Under IFRS, MAT credit will be recognised in the books as
(a) Current tax
(b) Deferred Tax Asset
(c) Deferred Tax liability
(d) Will not be recognised at all.
5. What will be the amount of deferred tax on account of MAT be recognised in the books
of Makers Ltd. for the year 20X3-20X4?
(a) Nil
(b) ` 9,75,00,000
(c) ` 8,50,00,000
(d) ` 1,25,00,000

6. Analyse the terms of the revenue contracts with customers for sale of moulds as per
applicable IFRS. Determine the amount of revenue, refund liability and the asset to be
recognized by Makers Ltd. for the said contracts explaining the reasons for your
answers. Also provide the necessary journal entries.

7. What would be the appropriate accounting treatment for the Foreign Currency loan in
the books of Makers Ltd. for the FY 20X3-20X4? Calculate the initial measurement
amount for the loan, finance cost for the year, closing balance and exchange gain/loss.
8. How will the acquisition of D Ltd. be accounted by Makers Limited, under IFRS 3?
Prepare detailed workings and pass the necessary journal entries.

1. Option (D) All segments are reportable segments
Reason
As per paragraph 13 of IFRS 8, an entity shall report separately information about an
operating segment that meets any of the following quantitative thresholds:
(a) Its reported revenue, including both sales to external customers and
intersegment sales or transfers, is 10 per cent or more of the combined revenue,
internal and external, of all operating segments.
(b) The absolute amount of its reported profit or loss is 10 per cent or more of the
greater, in absolute amount, of (i) the combined reported profit of all operating
segments that did not report a loss and (ii) the combined reported loss of all
operating segments that reported a loss.
(c) Its assets are 10 per cent or more of the combined assets of all operating
segments.
Accordingly, quantitative thresholds are calculated below:
Segments A B C D E Reportable
segments
% segment sales to 9.09% 25% 34.09% 25% 6.82% B, C, D
total sales
% segment profit to 7.14% 21.43% 35.71% 21.43% 14.29% B, C, D, E
total profits
% segment assets 35.09% 8.77% 12.28% 17.54% 26.32% A, C, D, E
to total assets
Hence, all segments i.e; A, B, C, D, E are reportable segments.

CASE STUDIES 18.5
2. Option (D) Deferred tax assets will have a balance of ` 45,000

Reason :
As per IAS 36, the revised carrying amount of asset QR would be ` 6,50,000
The tax base of asset QR is given as ` 8,00,000
Carrying base of asset = ` 6,50,000
Tax base of asset = ` 8,00,000
(Impairment losses not deducted from tax base as they are not tax deductible)
Since tax base is greater than carrying amount of asset, DTA would be created on the
temporary difference of ` 1,50,000 ie ` 1,50,000 x 30% = ` 45,000
3. Option (D) The entity is required to test the trademark for impairment every year
and accordingly, the carrying amount will be reduced to ` 6,00,000.
Reason :
An intangible asset with an indefinite useful life should not be amortised.
In accordance with IAS 36, an entity is required to test an intangible asset with an
indefinite useful life for impairment by comparing its recoverable amount with the
carrying amount
(a) annually; and
(b) whenever there is an indication that the intangible asset may be impaired.
Since in the given case, management has made assessment and has ascertained that
the trademark will continue to have indefinite useful life, so amortization is still not
allowed on such intangible asset. However, impairment loss would arise as the
recoverable amount is less than the carrying amount.
4. Option (b) Deferred Tax Asset
5. Option (d) ` 1,25,00,000
Reason for 4 and 5

MAT credit as on 31 st March 20X4 of ` 9,75,00,000 will be presented in the Statement
of financial position as Deferred Tax Asset. DTA in the current year will be
` 1,25,00,000 (` 9,75,00,000 – ` 8,50,00,000)

6. The entity applies the requirements in IFRS 15 to the portfolio of 10,000 moulds because
it reasonably expects that the effects on the financial statements to the portfolio would

not differ materially from applying the requirements to the individual contracts within the
portfolio. Since the contract allows a customer to return the products, the consideration
received from the customer is variable.
The entity considers on constraining estimates of variable consideration to determine
whether the estimated amount of variable consideration of ` 43,65,000 (` 450 x 9700
moulds not expected to be returned) can be included in the transaction price. The entity
determines that although the returns are outside the entity's influence, it has significant
experience in estimating returns for this product and customer class. In addition, the
uncertainty will be resolved within a short time frame (ie the 30-day return period). Thus,
the entity concludes that it is highly probable that a significant reversal in the cumulative
amount of revenue recognised (i.e. ` 43,65,000) will not occur as the uncertainty is
resolved (i.e. over the return period).
The entity estimates that the costs of recovering the moulds will be immaterial and
expects that the returned moulds can be resold at a profit.
Upon transfer of control of the 10,000 moulds, the entity does not recognise revenue for
the 300 moulds that it expects to be returned. Consequently, in accordance with
paragraphs 55 and B21 of IFRS 15, the entity recognises the following:
(a) Revenue of ` 43,65,000 (` 450 × 9700 moulds not expected to be returned);
(b) A refund liability of ` 1,35,000 (` 450 refund × 300 moulds expected to be
returned); and
(c) A return asset of ` 1,20,000 (` 400 × 300 moulds for its right to recover products
from customers on settling the refund liability).
Journal Entries
` `
Trade Receivables (Customer) Dr. 45,00,000
To Revenue 1,35,000
To Refund liability 43,65,000
(Being revenue recognised for the assured value and
liability created for variable consideration)
Return asset Dr. 1,20,000
To Cost of goods sold 1,20,000
(Being right to recover products from customers on settling
the refund liability is accounted for)

CASE STUDIES 18.7
7. Initial carrying amount of loan in books

Loan amount received = 60,00,000 FCY
Less: Incremental issue costs = (2,00,000) FCY
58,00,000 FCY
IAS 21 “The Effect of Changes in Foreign Exchange Rates” states that foreign currency
transactions are initially recorded at the rate of exchange in force when the transaction
was first recognized.
Loan to be converted in ` = 58,00,000 FCY x ` 2.50/FCY
= ` 1,45,00,000
Therefore, the loan would initially be recorded at ` 1,45,00,000
Calculation of amortized cost of loan (in FCY) at the year end:
Period Opening Interest at Cash Flow Closing Financial
Financial Liability 12% (FCY) (FCY) Liability (FCY)
(FCY) B C A+B-C
A
20X3-20X4 58,00,000 6,96,000 6,00,000 58,96,000
The finance cost in FCY is 6,96,000

The finance cost would be recorded at an average rate for the period since it accrues
over a period of time.
Hence, the finance cost for financial year 20X3-20X4 is ` 16,84,320 (ie. 6,96,000 FCY x
` 2.42 / FCY)
The actual payment of interest would be recorded at 6,00,000 FCY x ` 2.75 =
` 16,50,000
The loan balance is a monetary item so it is translated at the rate of exchange at the
reporting date.
So, the closing loan balance in ` is 58,96,000 FCY x ` 2.75 / FCY = ` 1,62,14,000
The exchange differences that are created by this treatment are recognized in profit or
loss.
In this case, the exchange difference is ` 16,79,680 [ie 1,62,14,000 - (1,45,00,000 +
16,84,320 – 16,50,000)]

8. Computation of Goodwill / Capital reserve on consolidation as per IFRS 3

Particulars `
Cost of investment:
Share exchange (50,000 x 25) 12,50,000
Cash consideration 50,00,000
Contingent consideration 9,80,000
Consideration transferred at date of acquisition [A] 72,30,000
Fair value of non-controlling interest at date of acquisition
(1,00,000 x 35% x ` 12) [B] 4,20,000
Total [C] = [A] + [B] 76,50,000
Net assets acquired at date of acquisition [D] (80,00,000)
Capital Reserve [D] – [C] 3,50,000
In a business combination, acquisition-related costs (including stamp duty) are expensed

in the period in which such costs are incurred and are not included as part of the
consideration transferred. Therefore, ` 1,50,000 incurred by D Ltd. in relation to
acquisition, will be ignored by Makers Ltd.
Journal entry at the date of acquisition by Makers Limited as per IFRS 3:
` `
Identifiable net assets Dr. 80,00,000
To Equity share capital (50,000 x 10) 5,00,000
To Securities Premium (50,000 x 15) 7,50,000
To Cash 50,00,000
To Provision for contingent consideration to D Ltd. 9,80,000
To Non-controlling Interest 4,20,000
To Gain on bargain purchase 3,50,000
Or
` `
Identifiable net assets Dr. 80,00,000
To Purchase consideration 72,30,000
To Non-controlling Interest 4,20,000
To Gain on bargain purchase 3,50,000
Note: Since ` 1,50,000 is incurred by D Ltd., no entry is passed for it in the books of
Makers Ltd.

CASE STUDY 19
Kapsch Telecom Inc. is an American corporation that outsources some of its product
engineering work to SasTech Ltd. in India. Both the parties have a long-term business
relationship with each other – probably since more than 15 years.
In those 15 years, there have been multiple changes in management of both the parties. Kapsch
has undergone many changes in the ownership and leadership in the last decade or so. In the
outsourcing industry, it’s a customary practice to request the customers for rate increase due to
inflation and other factors that are specific to the contract.
Off-late there have been many instances of dissatisfaction from the customer due to attrition
rate. Attrition refers to number of people leaving a company or a team. Attrition in the team is
one of the biggest problems for Kapsch due to process-related hassles like interview of the
replacement candidates, access to the file-sharing system and a few other factors.
SasTech Ltd. has been pressured for delivery and also forced to cut down the bill rate thereby
reducing the profit margins. SasTech has an Offshore Development Centre (ODC) of 500 FTEs
(Full-time employees) and an onsite support of Ten FTEs who work at the Kapsch location in
USA.
ODC is a specific designated area within the company’s premises. It requires special access to
both employees and visitors who wish to enter into the ODC area. Even employees who are
part of the same company but belong to team(s) other than the ODC can’t enter the ODC area
with their regular access card. Internet and other IT security is also special to the ODC through
a dedicated leased-line which has a probability of 0.4% downtime.
Last contract with Kapsch, reviewed by both the parties, was almost 3 years ago. As a finance
prime at SasTech Ltd., you have been asked by the Business Head to work closely with the
Delivery Head and the legal team to look into the financial aspects of the contract.
Multiple scenarios were worked out and many rounds of discussion happened but there was no
satisfactory response from both the parties towards the closure of negotiation. Finally, after 4
months of continuous follow-up, con-calls and the intervention of SasTech’s CEO, the following
key terms were agreed and accepted by both the parties: (simplified extracts)
1. The monthly bill rate per FTE shall stand revised to USD 4,400 from USD 4,200 earlier
for standard billing hours of 1,920 per annum per ODC FTE.
2. Bill rate for Onsite FTEs shall stand revised to USD 11,000 per month from USD 10,500
earlier.
3. SasTech shall provide a buffer headcount of 10% (earlier 7%) of the total FTEs working
in the ODC.

(Buffer headcount is usually kept as replacement for any absent FTEs or loss of working
hours due to any reason. The Buffer headcount is also trained on the job for the
eventuality of attrition in the project. Buffer headcount is not billed to the client but
absorbed as direct contract cost.)
4. Other terms and conditions of the contract shall remain the same except that the following
new terms will be inserted through Annexure which shall form an integral part of the
contract:
a. Performance Bonus will be payable to SasTech at the rate of 10% of the quarterly
billing done if the average billed hours of the ODC exceed 520 hours per FTE per
quarter and the attrition rate is below 5% during that quarter.
b. Attrition Penalty will be payable by SasTech as per the following table:
Attrition Rate during the quarter Attrition Penalty as a percentage of
in the ODC Quarterly billing done
6% to 8% 3.5%
8% to 10% 4.5%
10% to 12% 6.0%
More than 12% 10.0%
5. The process of the timesheet approval shall remain the same except that the Project
Manager of Kapsch in USA shall have a final approval authority. (Earlier, ODC manager
in SasTech used to aggregate and ratify the timesheet and get the same approved by
the Onsite lead of SasTech in USA and the same was counter-approved by the Project
Manager from Kapsch. Now the project manager is changed since last 2 years.)
6. Billing will continue to be done on a quarterly basis and the credit period shall remain as
45 days from the end of last calendar day of the quarter for which billing is done.
7. SasTech shall continue to invoice at standard bill hours on a quarterly basis even when
the actual billable hours as per final timesheet are more or less than the standard hours
per FTE per month unless the actual billable hours fall below 150 per month per FTE. In
that case the billing shall be done on actual billable hours. Actual billable hours are also
used for billing in the quarter when SasTech is eligible for performance bonus.
8. Performance Bonus, if any, shall be billed separately within 20 working days from the
end of the quarter in which such bonus becomes payable as per the contract.
9. Penalty, if any, shall be deducted from the latest quarterly bill received by Kapsch after
the end of the relevant quarter.
10. Both the parties to the contract shall endeavour to close the approval process of billable
hours within 7 working days from the end of each quarter.

CASE STUDIES 19.3
11. Work done by Buffer FTEs, if any, shall not be counted for billing.
Following is the timesheet and attrition data for four quarters since the renewed contract has
come into force.
Period Hours Hours approved Attrition
approved by by Kapsch rate
SasTech
Quarter 1 Financial Year 20X1-20X2 2,41,500 2,41,415 6.0%
Revenue from Kapsch accounts for more than 20% of the total revenue of SasTech Ltd. every
year. However, Kapsch was not shown as a separate reportable segment until last audited
annual financials of the company.
Since SasTech is a listed company on Bombay Stock Exchange as well as National Stock
Exchange, the company has to publish quarterly financial information after the limited review of
the auditors. The carrying amount of SasTech’s ODC asset (for Kapsch) is ` 1,29,00,000 (after
considering impact of contract with Kapsch during the year) as on 31 March 20X2.
As a finance prime your help is required by the head of R2R (Record to report) team during
each of the quarter close before the financial information is submitted to the auditors for limited
review.

1. The Head of R2R was not aware of this latest contract with Kapsch in so much of details.
You have discussed with him the main points of the contract including the Performance
Bonus and Attrition Penalty. The Consideration agreed by both the parties in this contract
is _________
(a) Variable and requires allocation to distinct performance obligation
(b) Variable but does not require specific allocation to distinct performance obligation
(c) Composite consideration
(d) Composite consideration with distinct performance obligations
2. SasTech Ltd. has decided to make provision for attrition penalty at the beginning of each
quarter instead of booking that amount as loss in the case of liability of pay penalty.
Historically, Kapsch ODC has seen at attrition rate of 7%. If the same attrition percentage
is used for provision of attrition penalty what will be the provision amount for
Q1 FY 20X1-20X2? Assume standard billing hours of 1920 per annum per FTE in ODC.

(a) USD 2,30,000

(b) USD 2,31,000
(c) USD 2,32,000
(d) USD 2,33,000
3. “Now that the contract has changed substantially and Kapsch accounts for about 20% of
company’s revenue we may have to show this as a separate operating segment”, said
the Head of R2R at SasTech Ltd. In view of the principles of IFRS, what is your view?
(a) Since there is only one such contract, separate reportable segment treatment is
not called for.
(b) Head of the R2R team is right. It needs to be reported as a separate segment.
(c) Just a disclosure as special contract is required.
(d) Provision for Attrition Penalty is required.
4. The company is likely to get performance bonus for Quarter 2 Financial year 20X1-20X2.
The final approval of timesheet has been received from Kapsch on 6 th working day from
the end of the quarter. Compute the amount of performance bonus that can be
recognized as revenue before the financial information is passed on to the auditors for
limited review.
(a) USD 7,21,377
(b) USD 7,10,000
(c) USD 7,30,000
(d) USD 7,40,000
5. What are the two factors that compelled the organisation to treat Kapsch contract as a
separate reportable segment?
(a) Final approval process for timesheet and attrition
(b) Performance bonus and attrition penalty
(c) Threshold for segment recognition and total contract revenue
(d) Standard hours mentioned in the contract.

6. If SasTech Ltd. has reported this contract as a separate reportable segment “Revenue
from special contracts”, prepare “Notes to account” to disclose the amount of adjustments
made on account of performance bonus and attrition penalty for Financial Year
20X1-20X2. Working notes should be part of your answer but not the part of disclosure.
For calculation purposes assume 1 USD = ` 65.

CASE STUDIES 19.5
7. If final approval for timesheet for Q2 FY X1-X2 was not received as on the date of
preparing financials but received subsequently due to delay from Kapsch (as the
concerned person was travelling), should the company recognise the performance bonus
as Unbilled Revenue (classified as current asset in the Statement of financial position)
or treat it as a revenue? Justify your answer citing specific reference from relevant IFRS
and facts of the case.
8. As on 31 March 20X2, the ODC has no other liability except the provision for attrition
penalty for Quarter 4 Financial Year 20X1-20X2. Disclose the amount of Segment
revenue, Segment assets and Segment liabilities under “Revenue from Special
Contracts” if there are no other contracts of similar nature for SasTech Ltd. For
calculation purposes assume 1 USD = ` 65.

1. Option (a) Variable and requires allocation to distinct performance obligation
Reason:
Para 85 of IFRS 15 Revenue from contracts with customers,
Variable amount should be allocated entirely to a performance obligation or to a distinct
good or service as part of single performance obligation if both the following conditions
are satisfied:
a) Variable payment relates specifically to entity’s efforts to satisfy performance
obligation or transfer the distinct good or service
b) Such allocation is consistent with the object of Para 73 keeping in mind all of the
performance obligations and payment terms in the contract.
Since performance bonus and attrition penalty both are variable in nature, the company
needs to allocate the consideration separately for each variable element.
2. Option (b) USD 2,31,000
Reason:
Monthly billing rate per FTE for standard hours is USD 4400, so for 500 FTEs the billing
per quarter would be USD 4400 x 500 x 3 = 66,00,000. Based on the attrition penalty
table, applicable percentage for 7% attrition would be 3.5%. So, 66,00,000 x 3.5% =
231,000

3. Option (b) Head of the R2R team is right. It needs to be reported as a separate
segment.
Reason:
As per para 5 of IFRS 8,
An operating segment is a component of an entity:
(a) That engages in business activities from which it earns revenues and incur
expenses
(b) Whose operating results are regularly reviewed by the entity’s chief operating
decision maker to make decisions about resources to be allocated to the segment
and assess its performance and
(c) For which discrete financial information is available.
Looking at the substance of the case, this contract calls for a treatment of separate
operating segment.
4. Option (a) USD 7,21,377
Reason:
Hourly bill rate as per standard hours = USD 4400 x 12 /1920 = USD 27.5 per hour.
No. of billed hours as per final approval = 262319
Billing for the quarter = 2,62,319 x USD 27.5 = USD 72,13,772.5
Performance bonus at the rate of 10% = USD 7,21,377.25
5. Option (b) Performance bonus and attrition penalty
Reason:
The performance bonus and attrition penalty affect the certainty cash flows from the
contract which also make the contract significantly different from other customer
contracts of the company.

6. Notes to Accounts for adjustments on account of variable components:
Contract Value xxxxxxx
Adjustments on account of variable components:
Less: Attrition Penalty (4,83,02,719)
Add: Performance Bonus 4,68,89,521
Net adjustments (14,13,198)

CASE STUDIES 19.7
Working Note: (not part of disclosure)

Quarter Billable hours ODC invoice amount Performance Attrition Penalty
(1) in ODC (3) Bonus (5)
(2) (4)
1 160 x 500 x 3 = 240000 x 27.5 x 65 = Not eligible 42,90,00,000 x 3.5%
2,40,000 42,90,00,000 = 150,15,000
2 2,62,319 (as per 2,62,319 x 27.5 x 65 = (3) x 10% = Not liable
final approval) 46,88,95,213 4,68,89,521
3 160 x 500 x 3 = 2,40,000 x 27.5 x 65 = Not eligible 42,90,00,000 x 4.5%
2,40,000 42,90,00,000 = 193,05,000
4 2,23,500 (as per 2,23,500 x 27.5 x 65 = Not eligible 39,95,06,250 x 3.5%
final approval) 39,95,06,250 = 139,82,719
1,72,64,01,463 4,68,89,521 483,02,719
7. Since invoice cannot be raised without final approval, the bonus element can’t be treated
as revenue. However, based on the substance of the case, the company can treat the
same as unbilled revenue and show it as part of current assets in the Statement of
financial position as on the end of Quarter 2 Financial Year 20X1-20X2. However, the
unbilled amount and final billed revenue may vary since Kapsch many times approve less
hours than the hours approved by SasTech.
Facts of the case:
There’s a contractual right of the company to be entitled for performance bonus since the
company has in-principle satisfied the basic condition and thus has fulfilled its
performance obligation under the contract.
Requirement of relevant IFRS:
Para 105 of IFRS 15, when either party to the contract has performed, an entity shall
present the contract in the Statement of financial position as a contract asset or a contract
liability, depending on the relationship between the entity’s performance and the
customer’s payment. An entity shall present any unconditional rights to consideration
separately as a receivable.
Application and justification:
Since the company has already provided the services and met the basic conditions of
eligibility for performance bonus the same can be recognized as unbilled revenue. The
act of getting the formal approval is only a matter of time and hence does not impair
the substance of the case. As per the principles of IFRS 15, the company has fulfilled
its performance obligations by rendering the required services to the customer and also
satisfied the criteria for performance bonus by keeping the attrition lower than the
threshold and also by making its employees more than the standard number of working
hours.

8. Segment Information:
Special Contracts:
This segment consists of contracts with customers which have special performance
obligations which are different from other contracts in terms of nature, timing, amount
and certainty of revenues and cash flows from the contracts.
Particulars `
Segment Revenue 1,81,07,88,265
Segment Assets 1,29,00,000
Segment Liabilities 1,39,82,719
Working Notes (not part of disclosure):

1. Segment Revenue
` `
Onsite 10 (FTEs) x 12 (months) x USD 8,58,00,000
11,000 x 65 (` per USD) =
ODC (as per working notes in answer for
Q.6 above) –
Invoice Value 1,72,64,01,463
Less: Adjustments (net) on account of
variable components (14,13,198)
Net ODC revenue (as per para 50-54 of
IFRS 15) 1,72,49,88,265
Total Contract Revenue 1,81,07,88,265
2. Segment Assets refer to ODC’s carrying value of assets as given in the case ie
` 1,29,00,000.
3. Segment liability is the provision for Attrition Penalty for Q4 FY X1-X2 which has
been worked out as per working notes in answer for Q.6 above ie. ` 1,39,82,719.

CASE STUDY 20
Your advisory client Gamma Limited is engaged in manufacturing and retail activities. The group
holds investments in different entities as follows:
♦ Gamma Limited holds 100% investment in G Limited and D Limited;
♦ G Limited and D Limited hold 60% and 40% in GD Limited respectively.
♦ Delta Limited is a 100% subsidiary of GD Limited
Gamma Limited is in the process of preparation of the consolidated financial statements of the
group for the year ending 31 March, 20X4 and the extract of the same is as follows:
Particulars Attributable to Non-controlling Total

Gamma Limited interest (` in ‘000)
Profit for the year 39,000 3,000 42,000
Other Comprehensive Income 5,000 Nil 5,000
Total Comprehensive Income 44,000 3,000 47,000
The long-term finance of the company comprises of the following:

(i) 2,00,000 thousand equity shares at the beginning of the year and the company has
issued 50,000 thousand shares on 1 July, 20X3 at full market value.
(ii) 80,000 thousand irredeemable preference shares. These shares were in issue for the
whole of the year ended 31 March, 20X4. The dividend on these preference shares is
discretionary.
(iii) ` 1,80,000 thousand of 6% Convertible Debentures issued on 1 April, 20X2 and
repayable on 31 March, 20X6 at par. Interest is payable annually. As an alternative to
repayment at par, the holder on maturity can elect to exchange their Convertible
Debentures for 1,00,000 thousand ordinary shares in the company. On 1 April, 20X2,
the prevailing market interest rate for four-year Convertible Debentures which had no
right of conversion was 8%. Using an annual discount rate of 8%, the present value of
` 1 payable in five years is 0.74 and the cumulative present value of ` 1 payable at the
end of years one to five is 3.31.
In the year ended 31 March, 20X4, Gamma Limited declared an ordinary dividend of 0.10 paise
per share and a dividend of 0.05 paise per share on the irredeemable preference shares.
While preparing the financial statements for the year ended 31 March, 20X4, Gamma Limited
has observed two issues in the previous year IFRS financial statements (i.e. 31 March, 20X3)
which are as follows:

Issue 1:
The company had presented certain material liabilities as non-current in its financial statements
for periods as on 31 March, 20X3. While preparing annual financial statements for the year
ended 31 March, 20X4, management discovers that these liabilities should have been classified
as current. The management intends to restate the comparative amounts for the prior period
presented (i.e., as at 31 March, 20X3).
Issue 2:
The company had charged off certain expenses as finance costs in the year ended
31 March, 20X3. While preparing annual financial statements for the year ended
31 March, 20X4, it was discovered that these expenses should have been classified as other
expenses instead of finance costs. The error occurred because the management inadvertently
misinterpreted certain facts. The entity intends to restate the comparative amounts for the prior
period presented in which the error occurred (i.e., year ended 31 March, 20X3).
Additional information:
Gamma Ltd. granted share options to one of its technical directors on the condition that he will
not work with a competitor (i.e., non-compete clause) for a period of three years. The fair value
of the award at the date of the grant is ` 200 thousand, including the effect of the non-compete
clause. The share options have been vested immediately.
Gamma Ltd. has inventory of raw material Y of 10,000 units as at 31 March, 20X4 with a carrying
amount of ` 100 each. The current market value of that raw material is ` 95 each. Gamma Ltd.
will use the raw material to manufacture a component for a customer. The conversion cost for
making the finished goods would be ` 130 each. Gamma Ltd. estimates costs to completion
and sale of ` 50 each and a selling price for the component is estimated to be ` 290 each.
Gamma Limited sold a machinery Z for ` 900 thousand to a new customer. To get into long
term relationship with the customer, the terms of sale also include after sales service to be
provided for next three years free of cost. The company also sells the sales service contract
separately where the customer buys it after the initial warranty period at ` 100 thousand.
Fresho Ltd. is one of the recently acquired subsidiary of Gamma Ltd. It has to adopt IFRS for
the first time as at 31 March, 20X4, with 1 April, 20X2 as the date of transition. As at
31 March, 20X2, the value of raw material inventories was incorrectly reported due to an error.
The amounts are significant.
Answer the following questions based on the facts given in the case study above:

1. At what value the raw material Y be measured in the books of Gamma Ltd. as per
applicable IFRS?

CASE STUDIES 20.3
(a) ` 950 thousand.

(b) ` 1,100 thousand.
(c) ` 1,000 thousand.
(d) ` 1,600 thousand.
2. How should the revenue be recognised in the books of account for the sale of machinery
Z?
(a) ` 900 thousand is to be recognised as revenue in the year of sale.
(b) ` 900 thousand is to be recognised at the end of three years after sale.
(c) ` 900 thousand is to be recognised in the year of sale and ` 100 thousand to be
spread over next three years.
(d) ` 810 thousand is to be recognised in the year of sale and ` 90 thousand to be
spread over next three years.
3. With respect to Fresho Ltd. state whether the error should be reported in the IFRS
financial statements and how to rectify it?
(a) Fresho Ltd. shall report the impact of the error as a correction to Statement of
Profit or Loss for the comparative period i.e., the year ended 31 March, 20X3.
(b) The correction shall be reflected in a reconciliation as at the end of the first IFRS
reporting period i.e., as at 31 March, 20X3.
(c) The impact of the correction is significant and it shall be amortized on a rational
and systematic basis in the first two periods of IFRS reporting i.e., years ended
31 March, 20X3 and 31 March, 20X4.
(d) The first IFRS financial statements shall distinguish the correction of errors from
changes in accounting policies and reported as part of the reconciliations as at
1 April, 20X2.
4. What is the correct accounting treatment under IFRS for the share options granted to
Gamma Ltd.'s technical director?
(a) Gamma Ltd. should recognise an expense of ` 200 thousand over the period of
three years and cannot reverse the expense recognised even if the director goes
to work for a competitor and loses the share options.
(b) Gamma Ltd. should recognise an expense of ` 200 thousand over the period of
three years and can reverse the expense recognised in case the director goes to
work for a competitor and loses the share options.

(c) Gamma Ltd, should recognise an expense of ` 200 thousand immediately and
cannot reverse the expense recognised even if the director goes to work for
(d) Gamma Ltd. should recognise an expense of ` 200 thousand immediately and
can reverse the expense recognised in case the director goes to work for a
5. The CFO of Gamma Ltd. is trying her best to understand the high level differences
between IFRS and US GAAP. Which of the following is the correct hierarchy under US
GAAP hierarchy for determining the selling price of a deliverable?
(a) First, the Vendor-Specific Objective Evidence must be used, if available. If not,
then Third Party Evidence is used. If neither prices are available, then the entity
must make its Best Estimate of Selling Price.
(b) First, the Best Estimate of Selling Price must be used, if available. If not, then
Vendor-Specific Objective Evidence is used. If neither prices are available, then
the entity must obtain Third Party Evidence.
(c) First, Third Party Evidence must be used, if available. If not, then Vendor-Specific
Objective Evidence is used. If neither prices are available, then the entity must
make its Best Estimate of Selling Price.
(d) First, Third Party Evidence must be used, if available. If not, then Vendor-Specific
Objective Evidence is used. If neither prices are available, then the entity must
use Cost plus a Reasonable Margin.

6. Firstly, Gamma Limited wants you to suggest whether GD Limited can avail the
exemption from the preparation and presentation of consolidated financial statements as
per applicable IFRS?
Secondly, consider this alternative scenario. All other facts remain the same as above,
but G Limited and D Limited are both owned by an Individual (say, Mr. X) instead of
Gamma Limited. Explain whether GD Limited can avail the exemption from the
preparation and presentation of consolidated financial statements.
7. Based on the details of long term finance provided above, help Gamma Limited compute
the following:
(i) the finance cost of convertible debentures and closing balance as on
31 March, 20X4 to be presented in the consolidated financial statements.
(ii) the basic and diluted earnings per share for the year ended 31 March, 20X4.
Assume that income tax is applicable to Gamma Limited and its subsidiaries at 25%.

CASE STUDIES 20.5
8. What is your analysis and recommendation in respect of the issues noted with the
previously presented set of financial statements for the year ended 31 March, 20X3?

1. Option (c) ` 1,000 thousand
Reason
As per para 32 of IAS 2, materials and other supplies held for use in the production of
inventories are not written down below cost if the finished products in which they will
be incorporated are expected to be sold at or above cost. However, when a decline in
the price of materials indicates that the cost of the finished products exceeds net
realisable value, the materials are written down to net realisable value. In such
circumstances, the replacement cost of the materials may be the best available
measure of their net realisable value.
Here, the NRV of each unit of finished goods is ` 240 (ie ` 290 – ` 50), which is more
than the cost of finished goods ie ` 230 (ie. ` 100 + ` 130). Hence the raw material
will be valued at cost ie ` 100 each. Thus, the total cost of raw material will be
` 10,00,000 (ie ` 10,000 x ` 100)
2. Option (d) ` 810 thousand is to be recognised in the year of sale and
` 90 thousand to be spread over next three years.
Reason
As per para B29 of IFRS 15, if a customer has the option to purchase a warranty
separately, the warranty is a distinct service because the entity promises to provide
the service to the customer in addition to the product that has the functionality
described in the contract. In those circumstances, an entity shall account for the
promised warranty as a performance obligation and allocate a portion of the transaction
price to that performance obligation based on stand-alone selling prices as follows:
Total value after including sales service = ` 900 thousand + ` 100 thousand
= ` 1,000 thousand
Sales price of machinery recognised immediately = ` 900 thousand x (` 900 / 1,000)
= ` 810 thousand
Sales service recognised over three years = ` 900 thousand x (` 100 / 1,000)
= ` 90 thousand

3. Option (d) The first IFRS financial statements shall distinguish the correction of
errors from changes in accounting policies and reported as part of
the reconciliations as at 1 April, 20X2.
Reason
Refer para 26 of IFRS 1 which states that if an entity becomes aware of errors made
under previous GAAP, the reconciliations required by paragraph 24(a) and (b) shall
distinguish the correction of those errors from changes in accounting policies.
4. Option (c) Gamma should recognise an expense of ` 200 thousand immediately
and cannot reverse the expense recognised even if the director goes
to work for a competitor and loses the share options.
Reason
The non-compete clause is a non-vesting condition and Gamma Ltd. does not receive
any future services.
5. Option (a) First, the Vendor-Specific Objective Evidence must be used, if
available. If not, then Third Party Evidence is used. If neither prices
are available, then the entity must make its best estimate of selling
price.
Reason
Two of the most common revenue recognition issues relate to (1) the determination of
when transactions with multiple deliverables should be separated into components and
(2) the method by which revenue gets allocated to the different components.
US GAAP requires arrangement consideration to be allocated to elements of a
transaction based on relative selling prices. A hierarchy is in place which requires
VSOE of fair value to be used in all circumstances in which it is available. When VSOE
is not available, third-party evidence (TPE) may be used. Lastly, a best estimate of
selling price may be used for transactions in which VSOE or TPE does not exist. The
residual method of allocating arrangement consideration is no longer permitted under
US GAAP (except under software industry guidance) but continues to be an option
under IFRS. Under US GAAP and IFRS, estimated selling prices may be derived in a
variety of ways, including cost plus a reasonable margin.

6. As per paragraph 4(a) of IFRS 10, an entity that is a parent shall present consolidated
financial statements. This IFRS applies to all entities, except as follows:
A parent need not present consolidated financial statements if it meets all the following
conditions:

CASE STUDIES 20.7
(i) it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity

and all its other owners, including those not otherwise entitled to vote, have been
informed about, and do not object to, the parent not presenting consolidated
financial statements;
(ii) its debt or equity instruments are not traded in a public market (a domestic or
foreign stock exchange or an over-the-counter market, including local and regional
markets);
(iii) it did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organisation for the purpose of issuing
any class of instruments in a public market; and
(iv) its ultimate or any intermediate parent produces financial statements that are
available for public use and comply with IFRS, in which subsidiaries are
consolidated or are measured at fair value through profit or loss in accordance
with this IFRS.
In accordance with the above, it may be noted that as per paragraph 4(a)(i) above, a
parent need not present consolidated financial statements if it is a:
♦ wholly-owned subsidiary; or
♦ is a partially-owned subsidiary of another entity and all its other owners, including
those not otherwise entitled to vote, have been informed about, and do not object
to, the parent not presenting consolidated financial statements.
Although GD Limited is a partly-owned subsidiary of G Limited, it is the wholly-owned
subsidiary of Gamma Limited (and therefore satisfies the condition 4(a)(i) of IFRS 10
without regard to the relationship with its immediate owners, i.e. G Limited and D
Limited). Thus, GD Limited being the wholly owned subsidiary fulfils the conditions as
mentioned under paragraph 4(a)(i) and is not required to inform its other owner D Limited
of its intention not to prepare the consolidated financial statements.
Thus, in accordance with the above, GD Limited may take the exemption given under
paragraph 4(a) of IFRS 10 from presentation of consolidated financial statements.
In Alternative Scenario, where both G Limited and D Limited are owned by an individual
Mr. X, then GD Limited is ultimately wholly in control of Mr. X (i.e., an individual) and
hence it cannot be considered as a wholly owned subsidiary of an entity.
This is because IFRS 10 makes use of the term ‘entity’ and the word 'entity’ includes a
company as well as any other form of entity. Since, Mr. X is an ‘individual’ and not an
‘entity’, therefore, GD Limited cannot be considered as wholly owned subsidiary of an
entity.

Therefore, in the given case, GD Limited is a partially-owned subsidiary of another entity.

Accordingly, to avail the exemption under paragraph 4(a), its other owner, D Limited
should be informed about and do not object to GD Limited not presenting consolidated
financial statements. Further, for the purpose of consolidation of G Limited and D
Limited, GD Limited will be required to provide relevant financial information as per IFRS.
7. (i) Calculation of the liability and equity components on 6% Convertible
debentures:
Present value of principal payable at the end of 4th year (1,80,000 thousand x 0.74)
= ` 1,33,200 thousand
Present value of interest payable annually for 4 years
= (1,80,000 thousand x 6% x 3.31) = ` 35,748 thousand
Total liability component = ` 1,68,948 thousand
Therefore, equity component = ` 1,80,000 thousand – ` 1,68,948 thousand
= ` 11,052 thousand
Calculation of finance cost and closing balance of 6% convertible
debentures ` in 000
Year Opening Finance cost Interest paid Closing
balance of loan @ 8% @ 6% balance of loan
A b = a x 8% c d=a+b-c
31.3.20X3 1,68,948 13,515.84 10,800 1,71,663.84
31.3.20X4 1,71,663.84 13,733.11 10,800 1,74,596.95
Finance cost of convertible debentures for the year ended 31.3.20X4 is

` 13,733.11 thousand and closing balance as on 31.3.20X4 is ` 1,74,596.95
thousand.
(ii) Calculation of Basic EPS ` in 000
Profit for the year 39,000
Less: Dividend on preference shares (80,000 x 0.05) (4,000)
35,000
Weighted average number of shares = 2,00,000 + {50,000 x (9/12)}

= 2,37,500 thousand shares
Basic EPS = ` 35,000 thousand / 2,37,500 thousand shares
= ` 0.147 per share

CASE STUDIES 20.9
Calculation of Diluted EPS ` in 000

Profit for the year 39,000
Less: Dividend on preference shares (80,000 x 0.05) (4,000)
35,000
Add: Finance cost (as given in the above table) 13,733.11
Less: Tax @ 25% (3,433.28) 10,299.83
45,299.83
Weighted average number of shares = 2,00,000 + {50,000 x (9/12)} + 1,00,000

= 3,37,500 thousand shares
Diluted EPS = ` 45,299.83 thousand / 3,37,500
thousand shares
= ` 0.134 per share
8. As per paragraph 41 of IAS 8, errors can arise in respect of the recognition,
measurement, presentation or disclosure of elements of financial statements. Financial
statements do not comply with IFRS if they contain either material errors or immaterial
errors made intentionally to achieve a particular presentation of an entity’s financial
position, financial performance or cash flows. Potential current period errors discovered
in that period are corrected before the financial statements are approved for issue.
However, material errors are sometimes not discovered until a subsequent period, and
these prior period errors are corrected in the comparative information presented in the
financial statements for that subsequent period.
Issue 1
In accordance with para 41, the reclassification of liabilities from non-current to current
would be considered as correction of an error under IAS 8. Accordingly, in the financial
statements for the year ended 31 March, 20X4, the comparative amounts as at
31 March 20X3 would be restated to reflect the correct classification.
IAS 1 requires an entity to present a third Statement of financial position as at the
beginning of the preceding period in addition to the minimum comparative financial
statements, if, inter alia, it makes a retrospective restatement of items in its financial
statements and the restatement has a material effect on the information in the Statement
of financial position at the beginning of the preceding period. Accordingly, the entity
should present a third Statement of financial position as at the beginning of the preceding
period, i.e., as at 1 April, 20X2 in addition to the comparatives for the financial year
20X2-20X3.

Issue 2
In accordance with para 41, the reclassification of expenses from finance costs to other
expenses would be considered as correction of an error under IAS 8. Accordingly, in the
financial statements for the year ended 31 March, 20X4, the comparative amounts for
the year ended 31 March, 20X3 would be restated to reflect the correct classification.
IAS 1 requires an entity to present a third Statement of financial position as at the
beginning of the preceding period in addition to the minimum comparative financial
statements if, inter alia, it makes a retrospective restatement of items in its financial
statements and the restatement has a material effect on the information in the Statement
of financial position at the beginning of the preceding period.
In the given case, the retrospective restatement of relevant items in statement of profit
or loss has no effect on the information in the Statement of financial position at the
beginning of the preceding period (1 April, 20X2). Therefore, the entity is not required to
present a third Statement of financial position.

CASE STUDY 21
Sai Caterers Pvt. Ltd., is a Panvel based company in the business of corporate catering for
more than 15 years. The Directors of the company are thinking about setting up a Dairy Unit
to fulfil the company’s need for fresh milk in its daily service to the clients. They thought
Karjat, a place between Mumbai and Pune, is the best place for the project site since it has
ample of water resources and green feed around.
For its 100+ corporate clients, the company estimates that on an average they need around
2500 litres of milk every day. Currently, the milk is being procured from multiple sources and
the average cost per litre works out to be ` 38.89
As a finance consultant, you’re invited to the Board Meeting of the company where the final
decision is to be taken by the Board of Directors. You witness the following during the board
meeting: (text marked in italics)
Director -1
“Well, we need to know the economics of cows better before we get into this completely.”
Director -2
“A cow gives milk for 6 months during the year so based on our need, we to have double
the no. of cows to meet the annual sourcing need.”
Director -1
“Double the number? How does that help?”
Director -2
“We need to procure half the number who’s ready for milking and half the number which
will be ready over the next 6 months. Each cow can reproduce at least once
14-18 months depending on the milk production level from the date of calving. Normally,
there is dry-run of 60 days before calving. For commercial purpose, let’s consider that
each cow will have a milking period of 8 months or about 5000 litres per cow per annum.
So, based on that we’ll do the working with the help of our finance consultant.”
Director-1
“Alright. Sounds good. If the number of cows increase and the milk produced is more
than what we require in business, we might sell the same at market rates”
Finance Consultant (you)
“Well, I’ve a different take on that. Instead of mass-marketing at the market rates, you
may consider premium pricing direct-to-home delivery. The advantage you have is, over

the last 10 years, you have got good connections with CXOs of many clients. Everybody
needs fresh milk. A normal packet milk that is available in mass-market is at least 7
days before it reaches the consumer. We can assure same-day delivery and the premium
price can be about ` 90 per litre”
Director -1
“Fantastic”
Director- 2
“Excellent idea! Let me think about the brand.”
The meeting goes and it ends with the following two major decisions:
1. The company will borrow 50% of Capex for setting-up in-house dairy unit and complete
the project by 1 February 20X1.
2. Based on milk production levels being more than the captive consumption, the company
shall launch “Godhan” a premium milk brand to market it to upper middle class market.
You come back from the meeting to your office and think through the next steps. In the next
week you have gone to the office of the client and have worked out the additional details:
A milking cow costs about ` 60,000. On an average a cow produces about 20 litres of milk per
day, however, a cow can produce milk only for 8 months in a year. The management has decided
to buy 200 cows to avoid initial hiccups in procurement target.
The set-up costs are as follows:
` in lacs
Land 150
Civil structure (useful life 15 years) 65
Milking equipment and other tools (useful life 7 years) 50
The recurring expenses are:

• Manpower cost – ` 15,000 per month per head.
One person is required for every 10 cows to manage the daily operations.
One project manager will be exclusively appointed for this at a cost of ` 65,000 per
month.
• Daily feed to Cows – Each cow needs a daily intake of green and dry feed worth
` 150
• Medical expenses – In addition to food, the cows also need a routine medical check-
up once in a month it costs about ` 200 per cow.

CASE STUDIES 21.3
• Distribution cost – Clients of the company (both for catering business and Godhan)
are located within a radius of 60 kilometres from the project site. A suitable and
economic cost of transportation worked out by the operations team with the help of
finance team reveals that an average cost of distribution per litre per day works out to
be ` 2.7.
• Electricity and other office overheads at the site – ` 25,000 per month
Case status as on 31 March 20X1 – Project implemented and in-house procurement plan is
working.
Depreciation on project assets was provided for 2 months as 31 March 20X1
As on 31 March 20X2, the no. of cows has gone down to 195 and there are 90 calves of which
54 are female. Each male calve has a market value of ` 8,000 and a female calve can fetch
` 6,000 with no cost to sell as buyers would come over to the site to buy the calves. 5 cows
which died while calving were buried.
The supply of milk during the year was as follows:
Period Actual production Requirement for Internal usage
Quarter 1 2,27,505 2,27,500
Quarter 2 2,41,040 2,39,200
Quarter 3 2,42,880 2,39,200
Quarter 4 2,39,400 2,34,000
The milk required for catering business was transferred by the milk procurement unit @
` 35 per litre for accounting purposes.
As per the company’s plan, ‘Godhan’ was launched in June, 20X1. Surplus of 1 st quarter was
supplied to the Directors at free of cost. However, from Q2 of Financial Year 20X1-20X2,
95% of the surplus milk was sold at the premium price.
Direct expenses of Godhan related marketing and manpower was `15 per litre. The remaining
5% of surplus milk was distributed to directors for free.

1. What is the carrying amount of Property, plant and Equipment of milk procurement project
(rounded off to nearest lacs) as on 31 March 20X1?
(a) ` 385 Lacs
(b) ` 384 Lacs
(c) ` 383 Lacs
(d) ` 382 Lacs

2. Assuming that the value of land was appreciated by 10% during fair value exercise, what
is the carrying amount of Project PPE (rounded off to nearest lacs) as on 31 March 20X2?
(a) ` 390 Lacs (approx.)
(b) ` 391 Lacs (approx.)
(c) ` 392 Lacs (approx.)
(d) ` 393 Lacs (approx.)
3. What is sales value of milk sold under the brand “Godhan”?
(a) ` 9.54 Lacs
(b) ` 9.34 Lacs
(c) ` 9.44 Lacs
(d) Can’t be determined
4. If there’s any unsold stock of milk packets under the brand “Godhan”, its valuation shall
be done as per:
(a) IAS 2 ‘Inventories’
(b) IAS 41 ‘Agriculture’
(c) IAS 16 ‘Property, Plant and Equipment’
(d) IFRS 8 ‘Operating Segment’
5. The carrying amount of cattle feed as on 31 March 20X2 would be:
(a) Cost or NRV whichever is lower
(b) Fair value less costs to sell
(c) Cost
(d) Only fair value

6. Based on the financial information given in the case, prepare Statement of Profit or Loss
of the milk procurement unit ie. the project site for the year ended 31 March 20X2. Draw
the Statement for Profit or Loss till profit before tax level by ignoring the Notes to
Accounts.

CASE STUDIES 21.5

1. Option (c) ` 383 Lacs
Reason:
Carrying value as on 31 March 20X1:
` in lacs
Cows 120.00
Land 150.00
Civil structure (useful life 15 [65 – {(65 lacs / 15 year x 12 month) x 2 64.28
years) month}]
Milking equipment and other [50-{(50 lacs / 7 year x 12 month) x 2 48.81
tools (useful life 7 years) month}]
2. Option (a) ` 390 Lacs (approx.)

Reason:
Opening Additions Deletions Fair value Depreciation Closing
Balance adjustments for 12 balance
1.4.20X1 months
` in lacs ` in lacs ` in lacs ` in lacs ` in lacs ` in lacs
Cows 120 (3.24 + (5 x 0.60) - - 123.12
2.88) 6.12 3.00
Land 150 15 165.00
Civil
structure 64.28 4.33 59.94
(useful life
15 years)
Milking
equipment
and other 48.81 7.14 41.67
tools
(useful life
7 years)
389.73

3. Option (b) - ` 9.34 Lacs

Reason:
Period Actual production Target Surplus Directors Sold Sales value
(` in lakh)
Q1 2,27,505 2,27,500 5 5 - -
Q2 2,41,040 2,39,200 1,840 92 1,748 1.57
Q3 2,42,880 2,39,200 3,680 184 3,496 3.15
Q4 2,39,400 2,34,000 5,400 270 5,130 4,62
9,34
Sales value is calculated @ ` 90 per litre.

4. Option (a) IAS 2 ‘Inventories’
Reason:
As per para 3 of IAS 41, IAS 41 is applied to agricultural produce, which is the harvested
produce of the entity’s biological assets, at the point of harvest. Thereafter, IAS 2
Inventories or another applicable Standard is applied. Hence for unsold stock IAS 2 will
be applied.
5. Option (b) Fair value less costs to sell
Reason:
Since cattle feed is covered under IAS 41 ‘Agriculture’, the valuation shall be fair value
less costs to sell.

6. Statement of Profit or Loss of Sai Caterers Pvt. Ltd. (Milk Procurement Unit)
For the year ended 31 March, 20X2
Particulars Figures as at the end of
current reporting
period
` in lacs
I Revenue from operations:
Revenue - From inter-segment transfers 328.97
Revenue – Direct sales 9.34
II Other Income -
III Total Income (l + Il) 338.31

CASE STUDIES 21.7
IV EXPENSES
Cost of materials consumed:
Daily feed for cows 109.50
Medical expenses on cows 4.80
Employee benefits expense 43.80
Depreciation expenses 11.47
Other expenses:
Office overheads 3.00
Distribution cost 25.67
Marketing cost for Godhan 1.56
Total expenses (lV) 199.80
V Profit/(loss) before tax (I-IV) 138.51
Working Notes:
1. Employee benefits:
No. of employees required to manage cows = 20
Cost (` 15,000 x 20 x 12 month) `36.00 lacs
Add: Cost of project manager (` 65,000 x 1 x 12 month) `7.80 lacs
Total employee cost `43.80 lacs
2. Cost of daily feed:

` 150 x 200 cows x 365 days = ` 109.50 lacs
3. Medical cost:
` 200 x 200 cows x 12 months = ` 4.80 lacs
4. Distribution cost:
` 2.7 per litre for internal consumption
Total milk supplied during the year – 9,50,825 litres (2,27,505 + 2,41,040 +
2,42,880 + 2,39,400)
So, cost of distribution = 9,50,825 litres x ` 2.7 = ` 25.67 lacs
5. Marketing cost related to Godhan:
Milk sold under the brand – 10,374 litres (1,748 + 3,496 + 5,130)

Marketing Cost per litre (as given) ` 15

So, marketing cost = ` 15 x 10,374 litres = ` 1.56 lacs
6. Office overheads:
` 25,000 per month (given), so annually ` 3 lacs
7. Depreciation:
Refer answer to MCQ 2 above. According to it depreciation for the year = ` 11.47
lacs
8. Revenue
Revenue from Godhan (direct sales) – Milk sold – 10,374 litres at ` 90 per litre
= ` 9.34 lacs
Milk consumed internally = 9,39,900 litres.
Inter-segment transfers of milk is @ ` 35 per litre
So, internal revenue would be = 9,39,900 litre x ` 35.00 = `328.97 lacs

CASE STUDY 22
Creative Engineering Pvt. Ltd. is a company engaged in the business of making kitchen
equipment that are either customized according to customer needs or standardised based on
minimum requirement of customers in general.
Right from customization of gas stoves to large utensils there is a range of products
manufactured and supplied. Since many institutional buyers do not know what will be the best
arrangement for them, the company also does consultancy in this regard and visiting the
facility of the buyer is an essential activity in that case.
In the general purpose category most of the customers are either restaurants or hotels
although the size varies. In customised category most of the customers are Trusts of
Temples, Gurudwaras and NGOs who supply free food to the visitors. Usually these
customers also need a consultancy before buying the equipment.
Your firm is a statutory auditor of the company and you’re one of the team members who is
doing the audit for Financial Year 20X1-20X2. During the audit you have been provided with
customer contracts for verification and audit of revenue. The extracts of some of the customer
contracts executed during the year are given below:
• Contract No. 123: Value – ` 51 Lacs
Contractual rights and responsibilities - Trust
The trust has a right to terminate the contract any time before the actual equipment is
installed in the designated facility. The company can however invoice for the actual
cost of the raw material used for the equipment plus 10% of the cost of raw material as
cancellation fee.
Termination
Termination notice by either party shall be given at least 7 days in advance through
email followed by a formal notice of termination.
• Contract no. 134: Value – ` 81 Lacs
Payment terms:
The trust shall pay the contractual value as follows:
` 5 lacs Consultancy – before final meeting on design
` 35 lacs within 1 month from final meeting on design
` 30 lacs within 2 months from final meeting on design

Balance amount – within 15 days from installation

Exit clause:
Both the parties to the contract shall be out of the contractual obligations when:
(a) Installation is complete and successful trial is demonstrated to the NGO
(b) All payments for contract value has been received by the company
(c) Sign-off document is signed by both the parties
• Contract no. 152: Value – ` 101 Lacs
Uncertainty clause:
1. The NGO intends to commission the project in its entirety. However, there are
a few uncertainties with regard to one or two locations where the equipment may
not be required if the NGO decides to call off the branch operations in those
locations. This will not affect the contract value.
2. Those locations are in the interiors of Rajasthan and Bihar State.
3. In the eventuality of any decision of the NGO in this regard, the same shall be
communicated to the company in writing.
4. Any further understanding between the NGO and the company in this regard
shall be final and shall not be affecting the rest of this contract.
Since this contract no. 152 involved execution at different locations across the country, the
company had tied-up with different vendors who could help in manufacturing and supply of
equipment as per the design specifications given by the company. The aggregate amount
payable to such vendors was ` 30 Lacs.
The uncertainty clause was indeed invoked during the year. Accordingly, the NGO informed
the company that a location in Bihar has been called off. The NGO also requested for a
discount of ` 10 lacs on the contract value to which the Board of Directors of the company
have responded positively and accepted the same.
Apart from the contractual revenue from the Customized Equipment, the company had a
revenue of ` 212 lacs from generic customers who did not require any consultancy.
There were 19 contracts during the year where the company could only realise consultancy
fee as the customers backed-off on the execution either because they thought the cost was
higher or they postponed the implementation. The average consultancy fee for each contract
was ` 5 lacs and the revenue from consultancy services alone was 12% of the total revenue

CASE STUDIES 22.3
for Financial Year 20X1-20X2. The company had executed totally 21 contracts (full-fledged
from consultancy to execution) during the year.

1. The company’s operating segments as per IFRS 8 would be:
(a) Generic Equipment, Customized Equipment and Consultancy Services
(b) Generic Equipment and Customized Equipment
(c) Restaurants, Trusts and NGOs
(d) Restaurants and Trusts
2. What is the value of Consultancy Segment revenue and the overall revenue of the
company (excluding other income if any) for Financial Year 20X1-20X2?
(a) ` 95 Lacs and ` 697 lacs (approx.)
(b) ` 95 Lacs and ` 792 lacs (approx.)
(c) ` 95 Lacs and ` 887 lacs (approx.)
(d) ` 95 Lacs and ` 802 lacs (approx.)
3. What is the approximate value of revenue from customized equipment segment?
(a) ` 580 lacs
(b) ` 212 lacs
(c) ` 485 lacs
(d) ` 697 lacs
4. What is the value of revenue recognized from Contract No. 152 if the actual amount
received by the company at various dates is ` 92 Lacs? The sign-off document is also
signed by both the parties before 31 March, 20X2 and it is established that there are
no dues from both the parties.
(a) ` 91 Lacs
(b) ` 92 Lacs
(c) ` 62 Lacs
(d) ` 61 Lacs
5. If Sign-off document was not signed by both the parties in Contract No.152 as on the
date of Statement of financial position but signed subsequently on 15 April 20X2, what

would be treatment of ` 11 Lacs that was received as last milestone payment on

15 March 20X2? As on 14 March 20X2, ` 81 Lacs was already received and
recognised as revenue. Installation and successful trials were done as on
10 March 20X2.
(a) ` 10 Lacs as Revenue and ` 1 Lac as liability
(b) ` 11 Lacs as liability

(c) ` 11 Lacs as revenue
(d) ` 11 Lacs as ‘Advance from customer’
6. If Contract No. 123 was terminated by the customer with sufficient due notice in writing,
what will be the accounting treatment of revenue? The cost incurred by the company
for procurement of raw material was ` 26 Lacs. Allocable indirect cost was ` 5 Lacs.
The customer had already made an advance payment of ` 5 Lacs which the company
has accounted as revenue from consultancy fee. If the customer has honoured the
rest of the contract by exercising the right to terminate before actual installation,
compute the revenue from Contract No. 123 and make necessary disclosures as per
para 113 of IFRS 15.
7. (i) In case of Contract no. 134, the installation and successful trial was achieved
on 20 March 20X2 and the last instalment payment of ` 11 Lacs was received
on 2 April 20X2 and the sign-off document was signed by both the parties on
10 April 20X2. Will the revenue of ` 11 Lacs be recognized as on
31 March 20X2?
(ii) If the company had similar situations of totally 11 contracts and the amount thus
received after the Statement of financial position date was ` 101 Lacs what are
the necessary disclosures as required by IFRS 15?
8. Make a note, forming part of Notes to accounts, in respect of Operating Segments.
Restrict yourself on calculation of only revenue amount from each segment.

CASE STUDIES 22.5

1. Option (a) Generic Equipment, Customized Equipment and Consultancy
Services
Reason:
Since there have been many contracts which could not go through beyond the stage of
consultancy, the service in itself is an operating segment. Further, the case study also
mentions that revenue from consultancy constituted 12% of the overall revenue for the
year, so, by thresholds criteria also, it becomes a reportable operating segment.
2. Option (b) ` 95 Lacs and ` 792 lacs (approx.)
Reason:
Information about consultancy segment is given as 19 contracts and an average
revenue of ` 5 lacs so it amounts to 19 x 5 lacs = ` 95 lacs
If ` 95 lacs is 12% of the total revenue,
Then the total revenue would be 95 / 0.12 = ` 791.67 Lacs or ` 792 lacs (approx.)
3. Option (c) ` 485 lacs
Reason:
As calculated above, the total revenue is ` 791.67 lacs. It’s given that revenue from
Consultancy Services segment is ` 95 Lacs and that from Generic Equipment is
` 212 lacs, the balance revenue would pertain to Customized Equipment segment
which is ` 791.67 lacs – (` 95 lacs + ` 212 lacs) = ` 484.67 lacs or ` 485 lacs (approx.).
4. Option (b) ` 92 Lacs
Reason:
Total contract value = ` 101 Lacs. Discount on account of cancellation of one location
was ` 10 Lacs so, the actual revenue receivable was ` 91 Lacs (101-10).
However, the actual amount received from the client was ` 92 Lacs. Since the sign-
off documents is signed and there’s no obligation from the company’s point of view,
the extra amount of ` 1 lac received can be recognised as revenue as per IFRS 15.

Para 15 of IFRS 15 says the following:

“….the entity shall recognise consideration received as revenue only when either of
the following events has occurred:
(a) The entity has no remaining obligations to transfer goods or services to the
customer and all or substantially all, of the consideration promised by the
customer has been received by the entity and is non-refundable; or
(b) The contract has been terminated and the consideration received from the
customer is non-refundable.”
` 30 lacs is the cost of earning revenue and hence should not be deducted from
revenue.
5. Option (a) ` 10 Lacs as Revenue and ` 1 Lac as liability
Reason:
Recognition criteria as per Para 9 are met. Except that the extra ` 1 lac received may
need to be returned before signing the final Sign-off document.

6. Original revenue estimate from Contract No. 123 – ` 51 Lacs
Actual Cost incurred for raw material ` 26 Lacs
Add: 10% Cancellation fee ` 2.6 Lacs
Actual revenue that can be recognised from Contract No. 123 ` 28.6 Lacs
Out of which the company has recognized as Consultancy Revenue
since the client has already paid it ` 5 lacs
Remaining revenue to be recognised from the Contract ` 23.6 Lacs
Disclosure as per Para 113 of IFRS 15 ‘Revenue from Contracts with Customers’
“During the year, the company had a contract with a customer for a value of ` 51 Lacs.
Due to some unforeseen circumstances the contract was terminated before actual
delivery and hence the contractual receivables were impaired substantially.
The actual revenue recognised from the contract was ` 28.6 Lacs.

CASE STUDIES 22.7
The direct cost incurred for the contract on raw materials was ` 26 Lacs and indirect
cost allocated for labour and overheads were about ` 5 Lacs. Hence the total
impairment loss from the contract was as follows:
Revenue recognised ` 28.6 Lacs
Less: Direct cost ` 26.0 Lacs
Indirect cost ` 5.0 Lacs ` 31.0 lacs
Actual Loss from the contract ` 2.4 Lacs
7. Looking at the substance over form principle of accounting the revenue of ` 11 Lacs
should be recognized as on 31 March 20X2 because the installation and trial were
successful and the contractual value is clear. Just that the sign-off document is to be
signed. Since there was no objection from customer from the date of trial till the date
of book closure and also the amount has been received on 2 April, 20X2, the revenue
of ` 11 Lacs should be recognized as on the date of Statement of financial position.
Disclosure with respect to IFRS 15
During the year the company has executed several contract with customers for
customized equipment. Contract revenue is recognised when the following criteria are
met:
(a) Our contract with the customer is approved and commercial value is clear.
(b) Customized Equipment has been successfully delivered, installed and trial done
to the satisfaction of the customer.
(c) It is probable that the customer will pay the due amount within a reasonable
time.
The company ensures that the substance of relevant accounting standard is followed
while recognising revenue from customer contracts.
During the year, the company has recognized full revenue from contracts which have
been successfully executed – goods delivered, installed and trial done successfully to
the satisfaction of the client. However, sign-off documents were pending to be signed
as on the date of Statement of financial position which were subsequently done on or
before 15 April 20X2 for all such contracts where full revenue was recognized by the
company.

8. As per para 22 of IFRS 8, following is disclosed about an entity:

The company operates in mainly 3 segments:
♦ Generic Equipment
♦ Customized Equipment and
♦ Consultancy Services
Customers of the Generic Segment are from the similar business environment. They
are either restaurants, hotels or resorts who need Equipment of different size and
shape and do not need any consultancy services.
Customers from Customized Equipment Segment are usually the Trusts of Religious
Institutions or Non-Government Organisations (NGOs) that distribute free food to either
the visitors or the school children who are supported by such Institutions or NGOs.
Consultancy Services constitutes a separate segment because it meets the threshold
of 10% or more of the total revenue of the entity. Many of our customers stop at the
level of consultancy services although some had to plan for the same and a few
customers come with an intention of only consultancy from the company.
The segment revenue is disclosed below:
Reportable Segment Segment Revenue % of Total
(` in lacs) Revenue
Generic Equipment 485 61.24%

Customized Equipment 212 26.77%
Consultancy Services 95 11.99%
792 100%

GFRS CASE STUDY 23
Monsoon Limited is engaged in various businesses. One of the business is of manufacturing

sugar and chemicals. The Company has taken a term loan for ` 5 crores from State Bank to
buy certain plant and machinery during the year ended 31 March 20X2. The loan is repayable
over a period of 5 years. The terms and conditions of the loan agreement requires the company
to maintain a current ratio of 1.33 : 1 and debt-equity ratio of 1 : 2. If these loan covenants fall
below this level, then the bank has a right to recall the entire loan.
The Loan outstanding as on 31 March, 20X3 was ` 4.25 crores. The current ratio of Monsoon
Limited was 1 : 1 and debt equity ratio was 0.5 : 2. State Bank has sent a notice on 5 April 20X3
demanding repayment of loan, on account of breach of terms of the loan agreement. The
financials were signed on 10 May, 20X3.
On receiving the notice, the CFO of Monsoon Limited negotiated with the bank and ensured to
rectify the breach. As a result, on 25 April, 20X3, the Bank has agreed not to recall the loan
and allowed the Company to achieve the contracted current and debt-equity ratio by 20X5.
Monsoon Limited has adopted revaluation model since 1 April, 20X1 to measure one of its class
of Property plant and equipment (PPE) and have revalued the PPE as follows:
(i) As on 1 April, 20X1–PPE has been revalued up by ` 3,00,000.
(ii) As on 31 March, 20X2–PPE has been revalued down by ` 3,60,000
(iii) As on 31 March, 20X3–PPE has been revalued up by ` 5,00,000
During the year 20X2-20X3, Monsoon Limited bought a private jet for the use of its top ranking
officials. The cost of the private jet is ` 15 crores and has a composite useful life of 9 years.
The engine of the jet has a useful life of 7 years. The private jet’s tyres are replaced every
3 years. The Company is following straight line method of depreciation.
Monsoon Limited acquired, on 30 September, 20X2, 70% of the share capital of Mark Limited,
an entity registered as company in Germany. The functional currency of Monsoon Limited is
` and its financial year end is 31 March, 20X3.
The fair value of the net assets of Mark Limited was 23 million EURO and the purchase
consideration paid is 17.5 million EURO on 30 September, 20X2.
The exchange rates as on 30 September, 20X2 was 82 `/EURO and at 31 March, 20X3 was
84 `/EURO.
Mark Limited sold goods costing 2.4 million EURO to Monsoon Limited for 4.2 million EURO
during the year ended 31 March 20X3. The exchange rate on the date of purchase by

Monsoon Limited was 83 `/EURO. The entire goods purchased from Mark Limited are unsold
as on 31 March 20X3.
Monsoon Limited is undertaking reorganization. Under the plan, part of the entity’s business
will be demerged and will be transferred to a separate entity, Season Limited. This also will
involve a transfer of part of the pension obligation to Season Limited. Due to this, Season
Limited will have a deductible temporary difference for the year ended 31 March 20X3. It is
anticipated that Season Limited will be loss making for the first eleven years of its existence,
but thereafter it will become a profitable entity. The future forecasted profit is based on
estimates of sales to inter-group companies.
Monsoon Limited also has a subsidiary in USA, which adopted US GAAP. It has valued its
inventory under LIFO method for Income Tax purposes.
Monsoon Limited holds some vacant Land for which the use is not yet determined. The Land is
situated in a prominent area of the city where lot of commercial complexes are coming up and
there is no legal restriction to convert the land into a commercial land. The Company is not
interested in development the land to a commercial complex as it is not its business objective.
Currently the land has been let out as a parking lot for the commercial complexes around. The
Company has classified the above property as investment property.
Monsoon Limited holds equity shares of a private company. In order to determine the fair value
of the shares, the company used discounted cash flow method as there were no similar shares
available in the market.

1. How the long-term loan from State Bank has to be classified in the financials for the year
ended 31 March 20X3 in case Monsoon Limited has not negotiated with the bank for
rectification of breach?
(a) Other current liabilities
(b) Current financial liability
(c) Non-current financial liability
(d) Other non-current liability
2. After negotiation with State Bank, how the long-term loan has to be classified in the
financials for the year ended 31 March 20X3?
(a) Other current liabilities
(b) Current financial liability
(c) Non-current financial liability
(d) Other non-current liability

CASE STUDIES 23.3
3. With reference to usage of revaluation model to class of PPE, how will the increase in
year 20X2-20X3 be recognized in the financials of Monsoon Limited?
(a) ` 5,00,000 is credited to other comprehensive income.
(b) ` 60,000 is credited to profit and loss account and ` 4,40,000 is credited to other
comprehensive income.
(c) ` 60,000 is credited ton other comprehensive income and ` 4,40,000 is credited
to profit and loss account.
(d) ` 5,00,000 is credited to profit and loss account.
4. With respect to private jet purchased during the year 20X2-20X3, what is the useful life
to be considered?
(a) 9 years of composite useful life
(b) 7 years useful life for the engine, 3 years useful life for the tyres, and 9 years
useful life to be applied for the balance cost of the jet.
(c) 3 years useful life, based on conservatism (the lowest useful life of all the parts of
the jet).
(d) 7 years useful life, based on simple average of useful lives of all major
components of the jet.
5. What would be the useful life of the private jet for the purpose of depreciation if the said
company is following US GAAP?
(a) 9 years of composite useful life
(b) 7 years useful life for the engine, 3 years useful life for the tyres, and 9 years
useful life to be applied for the balance cost of the jet.
(c) 3 years useful life, based on conservatism (the lowest useful life of all the part of
the jet).
(d) 7 years useful life, based on simple average of useful lives of all major
components of the jet.

6. (i) On acquisition of Mark limited, what is the value at which the goodwill / capital
reserve has to be recognized in the financial statements of Monsoon Limited as
on 31 March 20X3?
(ii) Determine the unrealized profit to be eliminated in the preparation of consolidated
financial statements of Monsoon Limited and Mark Ltd.

7. Should Season Limited recognize the deductible temporary difference as a deferred tax
asset?
8. Discuss the implication of adopting of US GAAP by a subsidiary in USA, both from the
point of view of US GAAP and also from the point of view of its consolidation with the
parent company which follows IFRS.
9. What would be the fair value of the land for the purpose of disclosure under IFRS. Also
state that on what basis will the land be fair valued under IFRS?
10. Determine under which level of fair value hierarchy does ‘discounted cash flow method’
will fall? What will be your answer if the quoted price of similar companies were available
and can be used for fair valuation of the shares.

1. Option (b) Current financial Liability
2. Option (b) Current financial Liability
Reason for 1 & 2

Para 74 of IAS 1 “Presentation of Financial Statements” states that when an entity
breaches a provision of a long-term loan arrangement on or before the end of the
reporting period with the effect that the liability becomes payable on demand, it
classifies the liability as current, even if the lender agreed, after the reporting period
and before the authorisation of the financial statements for issue, not to demand
payment as a consequence of the breach. An entity classifies the liability as current
because, at the end of the reporting period, it does not have an unconditional right to
defer its settlement for at least twelve months after that date.
3. Option (b) ` 60,000 is credited to profit and loss account and ` 4,40,000 is
credited to other comprehensive income.
Reason
Para 39 of IAS 16 states that if an asset’s carrying amount is increased as a result of
a revaluation, the increase shall be recognised in other comprehensive income and
accumulated in equity under the heading of revaluation surplus. However, the increase
shall be recognised in profit or loss to the extent that it reverses a revaluation decrease
of the same asset previously recognised in profit or loss.

CASE STUDIES 23.5
4. Option (b) 7 years useful life for the engine, 3 years useful life for the tyres, and
9 years useful life to be applied for the balance cost of the jet.
Reason
As per para 43 of IAS 16, each part of an item of property, plant and equipment with a
cost that is significant in relation to the total cost of the item shall be depreciated
separately.
Further, para 44 of IAS 16 states that an entity allocates the amount initially recognised
in respect of an item of property, plant and equipment to its significant parts and
depreciates separately each such part.
Hence, the useful life of the significant component of each asset is determined
separately for computing depreciation for the private jet.
5. Option (a) 9 years of composite useful life
Reason
US GAAP generally does not require the component approach of depreciation.

6. (i) Para 47 of IAS 21 requires that goodwill arose on business combination shall be
expressed in the functional currency of the foreign operation and shall be
translated at the closing rate in accordance with paragraphs 39 and 42.
In this case, the amount of goodwill will be as follows:
Net identifiable asset Dr. 23 million
Goodwill (bal. fig.) Dr. 1.4 million
To Bank 17.5 million
To NCI (23 x 30%) 6.9 million
Thus, goodwill on reporting date would be 1.4 million EURO x ` 84 -= ` 117.6.
(ii) Determination of unrealized profit for elimination from consolidated
financial statements
Sale price of inventory = 4.20 million EURO
Unrealised profit on it = 1.80 million EURO (4.20 million - 2.40 million)
Exchange rate as on date of purchase of inventory = 83 `/EURO
Unrealised profit on it = 1.80 million x 83 `/ EURO = ` 149.40 million

Para 39 of IAS 21 inter alia states that income and expenses for each statement
presenting profit or loss and other comprehensive income (ie including
comparatives) shall be translated at exchange rates at the dates of the
transactions.
In the given case, purchase of inventory is an expense item shown in the
statement of profit or loss. Hence, the exchange rate on the date of purchase
of inventory is taken for calculation of unrealized profit which is to be eliminated
on the event of consolidation.
7. It might be difficult to place significant reliance on internal management projections
where an entity will be loss making for the first eleven years of its existence. Projections
become more subjective, the greater the period that is considered for sufficient taxable
profits. However, if an entity is reliably able to project future taxable profits, then it can
recognise deferred tax assets.
In the given situation, it is assumed that the future forecast of the entity to earn taxable
profit on estimates of sales to inter-group companies is probable. Hence, the deferred
tax asset could be recognised in the standalone financial statements of Season Ltd.
However, in the consolidated financial statements of the group wherein Season Ltd. is a
member, should not recognise the deferred tax asset as sales to inter-group company
and profit thereon will be eliminated.
Alternatively, para 27 of IAS 12 inter alia states that an entity recognises deferred tax
asset only when it is probable that taxable profits will be available against which the
deductible temporary differences can be utilised.
In the given case, it is not probable that Season Limited will earn taxable profits in the
future. Also, the forecasted profit is based on sales to inter-group only. Hence, the
management of Season Limited should not recognise any deferred tax asset as future
probability is not certain.
8. Under US GAAP, a variety of inventory costing methodologies such as LIFO, FIFO,
and/or weighted-average cost are permitted. For companies using LIFO for US income
tax purposes, the book/tax conformity rules also require the use of LIFO for book
accounting/reporting purposes. However, as per IFRS the use of LIFO is precluded.
Further, as per para 19 of IFRS 10, a parent shall prepare consolidated financial
statements using uniform accounting policies for like transactions and other events in
similar circumstances. As per para B87 of the standard, if a member of the group uses
accounting policies other than those adopted in the consolidated financial statements for
like transactions and events in similar circumstances, appropriate adjustments are made

CASE STUDIES 23.7
to that group member’s financial statements in preparing the consolidated financial

statements to ensure conformity with the group’s accounting policies.
Since Monsoon Ltd. is a parent company who will be preparing the consolidated financial
statements as per IFRS, it has to remeasure the inventory of USA based subsidiary
company as per the inventory method and accounting policies followed by Monsoon Ltd.
9. As per para 27 of IFRS 13, a fair value measurement of a non‑financial asset takes into
account a market participant’s ability to generate economic benefits by using the asset
in its highest and best use or by selling it to another market participant that would use
the asset in its highest and best use.
Para 28 states that the highest and best use of a non‑financial asset takes into account
the use of the asset that is physically possible, legally permissible and financially
feasible, as follows:
(a) A use that is physically possible takes into account the physical characteristics of
the asset that market participants would take into account when pricing the asset
(eg the location or size of a property).
(b) A use that is legally permissible takes into account any legal restrictions on the use
of the asset that market participants would take into account when pricing the asset
(eg the zoning regulations applicable to a property).
(c) A use that is financially feasible takes into account whether a use of the asset that
is physically possible and legally permissible generates adequate income or cash
flows (taking into account the costs of converting the asset to that use) to produce
an investment return that market participants would require from an investment in
that asset put to that use.
Para 29 states that highest and best use is determined from the perspective of market
participants, even if the entity intends a different use. However, an entity’s current use
of a non‑financial asset is presumed to be its highest and best use unless market or
other factors suggest that a different use by market participants would maximise the
value of the asset.
To protect its competitive position, or for other reasons, an entity may intend not to use
an acquired non‑financial asset actively or it may intend not to use the asset according
to its highest and best use. Nevertheless, the entity shall measure the fair value of a
non‑financial asset assuming its highest and best use by market participants.
In the given case, the highest best possible use of the land is to develop a commercial
complex. Although the developing a business complex is against the business objective

of the entity, it does not affect the basis of fair valuation as IFRS 13 does not consider
an entity specific restriction for measuring the fair value.
Also, its current use as a parking lot is not the highest best use as the land has the
potential of being used for building a commercial complex.
Therefore, the fair value of the land is the price that would be received when sold to a
market participant who is interested in developing a commercial complex.
10. As per para 86 of IFRS 13, unobservable inputs shall be used to measure fair value to
the extent that relevant observable inputs are not available, thereby allowing for
situations in which there is little, if any, market activity for the asset or liability at the
measurement date. Para 87 states that the unobservable inputs shall reflect the
assumptions that market participants would use when pricing the asset or liability,
including assumptions about risk.
In the given case, Monsoon Limited adopted discounted cash flow method, commonly
used technique to value shares, to fair value the shares of the private company as there
were no similar shares traded in the market. Hence, it falls under Level 3 of fair value
hierarchy.
Para 82 of IFRS 13 states that Level 2 inputs include the following:
(a) quoted prices for similar assets or liabilities in active markets.
(b) quoted prices for identical or similar assets or liabilities in markets that are not
active.
(c) inputs other than quoted prices that are observable for the asset or liability.
If an entity can access quoted price in active markets for identical assets or liabilities of
similar companies which can be used for fair valuation of the shares without any
adjustment, at the measurement date, then it will be considered as observable input and
would be considered as Level 2 inputs.

CASE STUDY 24
You are a Chartered Accountant (CA) employed as a financial accountant with XYZ Ltd. (XYZ),
an Indian listed company that manufactures and distributes electronic components for the
telecommunications sector. XYZ Ltd is exploring possibilities of listing its securities at an
overseas stock exchange, therefore, prepares consolidated financial statements up to 31 March
each year under IFRS. Utkarsh hands you a folder (Appendix 1) containing the first draft of the
consolidated financial statements for the year ended 31 March 20X6. He wants to pay a
dividend this year but, although we have cash in the bank, Rahul, finance director, claims the
debit on the consolidated retained earnings prohibits this.
XYZ has formed a strategic partnership with MNO Ltd (MNO). MNO is a newly formed start-up
company which has yet to prepare any financial statements. To show our commitment to this
partnership we subscribed for 10,000 ` 1 ordinary shares in MNO for ` 1.20 each. Professional
fees of ` 3,000 was incurred on this transaction. MNO has 1,00,000 shares in issue and no
dividends have been paid during the year. Rahul has informed me that it will not be possible
for us to obtain a reliable fair value for this investment until at least another twelve months.
Utkarsh wants you to go ahead and prepare some revised figures for me to present at the board
in two days’ time.
ABC & co confirmed that Rahul works in an office that provides services to MNO and he has no
involvement in the services provided. A legal fee of ` 25,000 was paid to ABC during the year
ended 31 March 20X6. There are following unresolved issues which require your review:
Outstanding Issues
1. On 1 January 20X6, XYZ acquired 25,000 shares at ` 1 per share in JKL Ltd., a listed
company that supplies raw materials for the manufacture of microchips. At
31 March 20X6, their market value had risen to ` 2 per share, and a gain has been
recognised in the consolidated Draft Statement of Comprehensive Income (against
operating expenses) for the increase in value. XYZ has made an irrevocable election at
the commencement date of investment, to measure equity instruments at FVOCI.
2. (i) XYZ holds 100% of the ordinary shares of PQR, acquired several years ago. The
strategy behind the acquisition was to develop new revenue streams, including
the design of new microchips. PQR has performed well but one of its major
assets, an item of equipment, suffered a significant and unexpected deterioration
in performance. Management expect to be able to use the machine for a further
four years after 31 March 20X6, but at a reduced level. The equipment will be
scrapped after four years. The financial accountant for PQR has produced a set
of cash-flow projections for the equipment for the next four years, ranging from

optimistic to pessimistic. Rahul thought that the projections were too conservative
and intended to use the highest figures each year. These were as follows:
` ʼ000
Year ended 31 March 20X7 276
Year ended 31 March 20Y0 114
The above cash inflows should be assumed to occur on the last day of each
financial year. The pre-tax discount rate is 9%. The machine could have been
sold at 31 March 20X6 for ` 5,04,000, net of selling expenses. The machine had
been re valued previously, and at 31 March 20X6 an amount of ` 36,000 was held
in revaluation surplus in respect of the asset. The carrying value of the asset at
31 March 20X6 was ` 660,000. The Indian government has indicated that it may
compensate the company for any loss in value of the assets up to its recoverable
amount.
(ii) On 1 April 20X1, XYZ acquired a freehold manufacturing building. The land
element in the purchase price was ` 6,72,000 and the building element
` 24,00,000. The useful life of the building was estimated at 20 years. Since
1 April 20X1 there has been no change in the value of land. At 31 March 20X3,
the building element was re valued to ` 27,00,000 and the remaining useful life
was unchanged. On 31 March, 20X6, the open market value of the building was
determined at ` 19,80,000. The remaining useful life again remained unchanged.
No accounting entries have yet been made in respect of the freehold building for
the year ended 31 March 20X6.
3. XYZ issued ` 4,80,000 4% redeemable preference shares on 1 April 20X5 at par. Interest
is paid annually in arrears and the first payment of ` 19,200 was made on
31 March 20X6 and debited directly to retained earnings. The bonds are redeemable for
a cash amount of ` 7,20,000 on 31 March 20X8. The effective rate of interest on the
redeemable preference shares is 18% per annum. The proceeds of the issue have been
recorded within equity as this reflects the legal nature of the shares and the board of
directors intends to issue new equity shares over the next two years to build up cash
resources to redeem the preference shares.
4. One of the senior engineers at XYZ has been working on a process to improve
manufacturing efficiency and, consequently, reduce manufacturing costs. This is a major
project and has the full support of XYZʼs board of directors. The senior engineer believes
that the cost reductions will exceed the project costs within twenty four months of their
implementation. Regulatory testing and health and safety approval was obtained on

CASE STUDIES 24.3
1 June 20X5. This removed uncertainties concerning the project, which was finally
completed on 20 April 20X6. Costs of ` 18,00,000, incurred during the year to
31 March 20X6, have been recognised as an intangible asset. An offer of ` 7,80,000 for
the new technology has been received and rejected by XYZ. Utkarsh believes that the
project will be a major success and has the potential to save the company ` 12,00,000
in perpetuity. Director of research at XYZ, Neha, who is a qualified electronic engineer,
is seriously concerned about the long term prospects of the new process and she is of
the opinion that competitors will have developed new technology which might have
replaced the new process within four years. She estimates that the present value of
future cost savings will be ` 9,60,000 over this period. After that, she thinks that there
is no certainty about its future.
5. M Ltd, another 100% wholly owned subsidiary of XYZ, started speculative office property
development in March 20X5. The cost of development to 31 March 20X6 was
` 27,60,000. A valuer inspected the property at 31 March 20X6 and valued it at
` 28,80,000 in its condition at that date. The directors intend to sell the property to a
buyer outside the group, and so it has been classified as an investment property. The
gain has been recognised in the profit before tax in the Draft Statement of
Comprehensive Income. A post-it on the page Utkarsh gave you earlier, suggested that
Rahul was considering that because the property development was speculative with no
contract, the property should not be classified as an investment property.
Appendix 1:
Draft Consolidated Statement of Comprehensive Income for `
the year ended 31 March 20X6
Revenue 1,45,20,000
Cost of sales (72,00,000)
Gross profit 73,20,000
Profit from operations 61,20,000
Finance costs (6,00,000)
Profit on disposal of asset 4,80,000
Gains on investment property 1,20,000
Profit before taxation 61,20,000
Income tax (18,00,000)
Profit for the year 43,20,000
Other comprehensive income -
Total comprehensive income for the period 43,20,000

Draft Consolidated Statement of Financial Position as at 31 March 20X6
`
ASSETS
Non-current assets
Property, plant and equipment 42,00,000
Investment property 28,80,000
Goodwill and other intangibles 24,00,000
Financial assets (Note 1) 90,000
Current assets 24,30,000
Total assets 1,20,00,000
Ordinary share capital 36,00,000
Revaluation surplus 5,64,000
Preference share capital 4,80,000
Retained earnings (3,60,000)
Equity 42,84,000
Borrowings 15,96,000
Current liabilities 61,20,000
Total equity and liabilities 1,20,00,000
Note 1: ` 90,000 in respect of financial assets available for resale as mentioned in

outstanding issue 1 of the case study.

1. Calculate the total impairment loss in Profit or Loss of XYZ Ltd. for the year ending
31 March 20X6.
(a) ` 5,75,892
(b) ` 35,892
(c) ` 5,40,000
(d) ` 5,88,108

CASE STUDIES 24.5
2. What is the recoverable amount of impaired machine of PQR as at 31 March, 20X6?

(a) ` 5,04,000
(b) ` 5,07,600
(c) ` 5,88,108
(d) ` 6,60,000
3. Calculate the impairment loss of building on 31 March, 20X6?
(a) ` 2,70,000
(b) ` 3,15,000
(c) ` 3,24,000
(d) Nil
4. Calculate the closing balance of 4% redeemable preference shares as at 31 March 20X6.
(a) Nil
(b) ` 4,80,000
(c) ` 67,180
(d) ` 5,47,200
5. How much intangible asset will be capitalised during the year 20X5-20X6?
(a) ` 18,00,000
(b) ` 15,00,000
(c) Nil
(d) ` 12,00,000

6. Provide the accounting treatment and discuss the impact of outstanding issues (1-5)
above in the Consolidated Statement of Comprehensive Income and the Consolidated
Statement of Financial Position.
7. Prepare the revised consolidated statement of comprehensive income for the year ending
31 March 20X6, after the incorporation of mentioned issues/adjustments.

ANSWERS TO CASE STUDY 24

1. Option (a) ` 5,75,892
Reason
Total Impairment loss in Profit or Loss = ` (35,892 + 5,40,000) = ` 5,75,892
Refer Issue 2 and Issue 4 of descriptive answer 6 for further details.
2. Option (c) ` 5,88,108
Reason :
Impairment of the machine in PQR:
The appropriate discount rate to use in calculating value in use is 9% pre-tax.
Year ended Cash flow (`) Discount factor Amount (`)
31 March 20X7 2,76,000 0.917 2,53,092
31 March 20X8 1,92,000 0.842 1,61,664
31 March 20X9 1,20,000 0.772 92,640
31 March 20Y0 1,14,000 0.708 80,712
5,88,108
The recoverable amount is the higher of value in use and fair value less costs to sell.
The recoverable amount is therefore `5,88,108.
3. Option (a) ` 2,70,000
Reason :
Land is not depreciated as it has an indefinite life. Land should be shown in the statement
of financial position at its original cost of ` 6,72,000. The building element was
recognised at cost of ` 24,00,000.
Carrying amount before the revaluation on 31st March 20X3 would have been ` 21,60,000
(` 24,00,000 – two years depreciation ` 2,40,000). The buildings element should then
be revalued upwards to ` 27,00,000 and the surplus over carrying amount of ` 5,40,000
recognised in other comprehensive income and credited to revaluation surplus.
Depreciation would now be ` 1,50,000 (` 27,00,000/18).
{Note: Management could elect to make an annual transfer of ` 30,000 from revaluation
surplus to retained earnings through the statement of changes in equity}

CASE STUDIES 24.7
On the 31 March 20X6 the following balances should be included in the Statement of
financial position.
`
Land 672,000
Building ` 27,00,000 – three yearsʼ depreciation at ` 150,000 per annum 2,250,000
The buildings element open market value is now only ` 19,80,000 and an impairment
loss of ` 2,70,000 should be recognised.
4. Option (d) ` 5,47,200
Reason:
Under IAS 32 ‘Financial Instruments: Presentation’, these instruments should be
classified as financial liabilities because there is a contractual obligation to deliver cash.
The preference shares should be accounted for at amortised cost using the effective
interest rate of 18% as follows:
1 April, 20X5 Interest @18% Paid at 4% 31 March, 20X6
` ` ` `
20X5-20X6 480,000 86,400 (19,200) 547,200
5. Option (b) ` 15,00,000

Reason:
An amount of ` 15,00,000 (` 18,00,000 x 10/12) should be capitalised in the SFP
representing the expenditure since 1 June. The expenditure incurred prior to 1 June
(2/12 x ` 18,00,000) should be recognised as an expense, retrospective recognition as
an asset is not allowed.

6. Treatment of outstanding issues:
Issue 1
The gain on holding the shares in JKL is ` 1 per share, so ` 25,000 for 25,000 shares.
However, the gain has been incorrectly recognised. IFRS 9 Financial Instruments
requires that where financial assets are classified as equity, gains or losses arising from
changes in fair value should be recognised in other comprehensive income. The effect
on the financial statements is to remove the gain of ` 25,000 from profit before interest
and tax, because it will be recognised instead in other comprehensive income. There is
no change in equity.

Issue 2
(i) Impairment of the machine in PQR
The appropriate discount rate to use in calculating value in use is 9% pre-tax.
Year ended Cash flow ` Discount factor Amount `
31 Mar 20X7 2,76,000 0.917 2,53,092
31 Mar 20X8 1,92,000 0.842 1,61,664
31 Mar 20X9 1,20,000 0.772 92,640
31 Mar 20Y0 1,14,000 0.708 80,712
5,88,108
The recoverable amount is the higher of value in use and fair value less costs to
sell. The recoverable amount is therefore ` 5,88,108. Impairment of ` 6,60,000
- ` 5,88,108 = ` 71,892
The impairment loss must first be set off against any revaluation surplus in relation
to the same asset. Therefore, the revaluation surplus of ` 36,000 is eliminated
against impairment loss, and the remainder of the impairment loss (` 35,892) is
charged to profit and loss.
Any compensation by government would be accounted for as such when it
becomes receivable. At this time, the government has only stated that it may
reimburse the company and therefore credit should not be taken for any potential
government receipt.
(ii) Freehold manufacturing building
Land is not depreciated as it has an indefinite life. Land should be shown in the
statement of financial position at its original cost of ` 6,72,000. The building
element was recognised at cost of ` 24,00,000.
Carrying amount before the revaluation on 31 March 20X3 would have been
` 21,60,000 (` 24,00,000 – two years depreciation ` 2,40,000). The buildings
element should then be revalued upwards to ` 27,00,000 and the surplus over
carrying amount of ` 5,40,000 recognised in other comprehensive income and
credited to revaluation surplus.
Depreciation would now be ` 1,50,000 (` 27,00,000/18).
{Note: Management could elect to make an annual transfer of ` 30,000 from
revaluation surplus to retained earnings through the statement of changes in
equity}

CASE STUDIES 24.9
On the 31 March 20X6 the following balances should be included in the Statement
of financial position.
`
Land 672,000
Building ` 27,00,000 – three yearsʼ
depreciation at ` 150,000 per annum) 2,250,000
The buildings element open market value is now only ` 19,80,000 and an
impairment loss of ` 2,70,000 should be recognised. As the loss is less than the
revaluation surplus on the related asset, the entire loss should be recognised in
other comprehensive income and set off against the revaluation surplus, so that it
now becomes ` 2,70,000 (` 5,40,000 – ` 2,70,000).
The adjustment necessary is therefore:
` `
Depreciation (SCI) Dr. 150,000
To Accumulated Depreciation (SFP) 150,000
Impairment loss (OCI) Dr. 270,000
To Non-current assets 270,000
Issue 3
The preference shares provide the holder with the right to receive a predetermined
amount of annual dividend out of profits of the company, together with a fixed amount on
redemption. Whilst the legal form is equity, the shares are in substance debt. The fixed
level of dividend is interest and the redemption amount is the equivalent to the repayment
of a loan.
Under IAS 32 ‘Financial Instruments: Presentation’ these instruments should be
classified as financial liabilities because there is a contractual obligation to deliver cash.
The preference shares should be accounted for at amortised cost using the effective
interest rate of 18% as follows:
1 April, 20X5 Interest @18% Paid at 4% 31 March, 20X6
` ` ` `
20X5-20X6 480,000 86,400 (19,200) 547,200
An amount of ` 5,47,200 should be included in borrowings (non-current liabilities) and a

finance charge of ` 86,400 included within profit or loss. Equity should be reduced by
both the ` 480,000 proceeds of issue and the ` 67,200 i.e. total by ` 5,47,200.


` `
Equity –preference shares (SFP) Dr. 4,80,000
Finance costs (SCI) Dr. 86,400
To Equity – retained earnings (SFP) 19,200
To Borrowings (SFP) 5,47,200
Issue 4
IAS 38 Intangible Assets requires an intangible asset to be recognised if, and only if,
certain criteria are met. Regulatory approval on 1 June 20X5 was the last criterion to be
met, the other criteria have been met as follows:
• Intention to complete the asset is apparent as it is a major project with full support
from board
• Finance is available as resources are focused on project
• Costs can be reliably measured
• Benefits expected to exceed costs – (2 years)
• An amount of ` 15,00,000 (` 18,00,000 x 10/12) should be capitalised in the
Statement of Financial Position representing the expenditure since 1 June. The
expenditure incurred prior to 1 June (2/12 x ` 18,00,000) should be recognised
as an expense, retrospective recognition as an asset is not allowed.
IAS 36 Impairment requires an intangible asset not yet available for use to be tested for
impairment annually. A cash flow of ` 12,00,000 in perpetuity would clearly have a
present value in excess of ` 12,00,000 and hence there would be no impairment.
However, the research director is technically qualified so impairment tests should be
based on her estimate of a four-year remaining life and so a present value of the future
cost savings of ` 9,60,000 should be considered. This is greater than the offer received
(fair value less costs to sell) of ` 7,80,000 and should be used as the recoverable amount.
The carrying amount should be reduced to ` 9,60,000 and an impairment loss of
` 5,40,000 would be recognised in the profit and loss for the year.
` `
Operating expenses- development expenditure Dr. 3,00,000
Operating expenses –impairment of intangible Dr. 5,40,000
To Intangible assets – development expenditure 8,40,000

CASE STUDIES 24.11
Issue 5
The office property development is clearly speculative and therefore there is no
contractual purchaser. Because of the intent to sell the building upon completion, it
should be reclassified as inventory rather than an investment property. It needs to be
recognised under IAS 2.
Inventory should be recognised at lower of cost and NRV, so at 31 March 20X6 the
development should be measured at ` 27,60,000 cost. The gain of ` 1,20,000 should
be derecognised.
` `
Inventory Dr. 27,60,000
Gain on investment property Dr. 1,20,000
To Investment property 28,80,000
7. Revised consolidated statement of comprehensive income for the year ended

31 March 20X6
` ` ` ` ` ` `
Draft Issue 1 Issue 2 Issue 3 Issue 4 Issue 5 Final
Revenue 1,45,20,000 1,45,20,000
Cost of sales (72,00,000) (72,00,000)
Gross profit 73,20,000 - - - - - 73,20,000
Operating (12,00,000) (25,000) (1,50,000) - (3,00,000) - (16,75,000)
expenses
Impairment costs - - (35,892 ) - (5,40,000) - (5,75,892)
Profit from 61,20,000 (25,000) (1,85,892) - (8,40,000) - 50,69,108
operations
Finance costs (6,00,000) (86,400) (6,86,400)
Profit on disposal 4,80,000 - - - - - 4,80,000
of asset
Gain on 1,20,000 (1,20,000) -
investment
property
Profit before 61,20,000 (25,000) (1,85,892) (86,400) (8,40,000) (1,20,000) 48,62,708
taxation
Income tax (18,00,000) (18,00,000)
Profit for the year 43,20,000 (25,000) (1,85,892) (86,400) (8,40,000) (1,20,000) 30,62,708

Other
comprehensive
income
Revaluations - - (36,000) - - - (36,000)
- - (2,70,000) - - - (2,70,000)
Changes in fair - 25,000 - - - - 25,000
value of equity
instruments at
FVOCI
Total 43,20,000 - (4,91,892) (86,400) (8,40,000) (1,20,000) 27,81,708
comprehensive
income for the
period

CASE STUDY 25
Mega Energy India Limited is a diversified company dealing in various business and has many
subsidiaries too. One of its main business was generation of energy through various resources.
It is preparing its financial statements under IFRS for the year ended 31 March, 20X4. You are
appointed as the IFRS consultant in Mega Energy India Limited. The Company had some
queries in accounting of certain transactions that are required to be presented in the financials.
As a consultant to the Company, advise the company on the following issues:
1. Uttar Pradesh State Government holds 60% shares in Mega Energy India Limited and
55% shares in Super Power India Limited. Mega Energy India Limited has two
subsidiaries namely P Limited and Q Limited. Super Power India Limited has two
subsidiaries namely A Limited and B Limited. Mr. KM is one of the key management
personnel in Mega Energy India Limited.
2. Mega Energy India Limited grants 150 shares to each employee on 1 April 20X2. There
were 300 employees as on that date. The shares will vest in the following manner:
(a) As on 31 March 20X3 if the profit for the year increases 15% more than the profit
for the year ended 31 March 20X2 Or
(b) As on 31 March 20X4 if the Profit for the year ended 31 March 20X3 increases
10% more than the profit for the year ended 31 March 20X2.
The employees should remain in service during the vesting period.
The fair value per share as on the grant date is ` 325. The Profit for the year ended
31 March 20X3 increased by 12% as compared to the profit for the year ended
31 March 20X2.
During the year ended 31st March, 20X3, 25 employees left the organisation. Also, it was
predicted that further 35 employees will leave in the following year. However, only
28 employees left during the year ended 31 March 20X4.
3. One of the recently acquired subsidiary XYZ limited of Mega Energy India Limited has to
present its first financials under IFRS for the year ended 31 March 20X4. The transition
date is 1 April 20X2.
The following adjustments were made upon transition to IFRS:
(a) XYZ limited opted to fair value its land as on the date of transition. The fair value
of the land as on 1 April 20X2 was ` 10 crores. The carrying amount as on
1 April 20X2 under the existing GAAP was ` 4.5 crores.

(b) XYZ limited has recognised a provision for proposed dividend of ` 78 lacs during
the year ended 31 March 20X2. It was written back as on opening Statement of
financial position date.
(c) XYZ limited fair values its investments in equity shares on the date of transition.
The increase on account of fair valuation of shares is ` 75 lacs.
(d) XYZ limited has an Equity Share Capital of ` 80 crores and Redeemable
Preference Share Capital of ` 25 crores.
(e) The reserves and surplus as on 1 April 20X2 before transition to IFRS was
` 95 crores representing ` 40 crores of general reserve and ` 5 crores of capital
reserve acquired out of business combination and balance is surplus in the
Retained Earnings.
(f) The company identified that the preference shares were in nature of financial
liabilities.
(g) The company elected not to restate its earlier business combinations.
4. Mega Energy India Limited and Fuel Limited are partners of a joint operation engaged in
the business of mining precious metals. The entity uses a jointly owned drilling plant in
its operations.
During the year ended 31 March 20X4 an inspection was conducted by the government
authorities in the mining fields. The inspection authorities concluded that adequate
safety measures were not followed by the entity. As a consequence, a case was filed
and a penalty of ` 50 crores have been demanded from Mega Energy India Limited.
The legal counsel of the company has assessed the demand and opined that appeals
may not be useful, and the appeal orders will be unfavourable to the joint arrangement.
Out of ` 50 crores (to be paid by Mega Energy India Limited), ` 30 crore will be
reimbursed by Fuel Limited later, as per the terms of the Joint Operation Agreement. At
the year end, actual reimbursement was not received from the Fuel Limited.
5. A factory owned by Mega Energy India Limited was destroyed by fire. Mega Energy India
Limited lodged an insurance claim for the value of the factory building, plant, and an
amount equal to one year’s net profit. During the year there were a number of meetings
with the representatives of the insurance company.
Finally, before the year-end, it was decided that Mega Energy India Limited would receive
compensation for 90% of its claim. Mega Energy India Limited received a letter that the
settlement cheque for that amount had been sent, but it was not received before the
reporting date.
6. Mega Energy India Limited has issued 10,00,000, 9% cumulative preference shares. The
Company has arrears of ` 15 crores of preference dividend as on 31 March 20X4, it

CASE STUDIES 25.3
includes current year arrears of ` 1.75 crores. The Company did not declare any dividend
for equity shareholders as well as for preference shareholders.
Further Mega Energy India Limited has also issued certain optionally convertible
debentures, which are outstanding as at the year end.
7. Mega Energy India Limited also operates in the travel industry and incurs costs unevenly
through the financial year. Advertising costs of ` 40 lacs were incurred on 1 July 20X3,
and staff bonuses are paid at year-end based on sales. Staff bonuses are expected to
be around ` 400 lacs for the year; of that a sum of ` 60 lacs would relate to the period
ending 30 September 20X3.

1. With respect to a joint operation engaged in the business of mining precious metals, how
will the liability be disclosed in the books of Mega Energy India Limited?
(a) Provision for ` 20 crores and a contingent liability for ` 30 crores
(b) Contingent liability for ` 50 crores
(c) Provision for ` 30 crores and a contingent liability for ` 20 crores
(d) Provision for ` 50 crores.
2. How should Mega Energy India Limited treat the insurance claim against loss of fire in
its financial statements?
(a) Record 90% of the claim as a receivable as it is virtually certain that the contingent
asset will be received.
(b) Do not make any adjustments in the financials and only disclose the contingent
asset in the notes on accounts.
(c) Wait until next year when the settlement cheque is actually received and not
recognize or disclose this receivable at all since at year-end it is a contingent
asset.
(d) Record 100% of the claim as a receivable at year-end as it is virtually certain that
the contingent asset will be received and adjust the 10% next year when the
settlement check is actually received.
3. What is the amount of preference dividend to be reduced from profit or loss for the year
for calculating basic Earnings Per Share?
(a) ` 15 crores
(b) ` 1.75 crores
(c) ` 13.25 crores
(d) Noting, as no dividend has been declared by the entity.

4. For the purposes of computation of weighted average number of shares (to arrive at
diluted EPS) when should the dilutive potential shares (optionally convertible debentures)
be deemed to have been converted into shares?
(a) At the start of the period.
(b) The date of issue of the potential shares
(c) At the start of the period or, if issued later, then the date of issue of the potential
shares
(d) At the end of the period.
5. With respect to point 7, what costs should be included in the entity's financial report for
the quarter ended 30 September 20X3?
(a) Advertising costs ` 40 lacs; staff bonuses ` 100 lacs
(b) Advertising costs ` 10 lacs; staff bonuses ` 100 lacs
(c) Advertising costs ` 10 lacs: staff bonuses ` 60 lacs
(d) Advertising costs ` 40 lacs; staff bonuses ` 60 lacs

6. With respect to point 1,
(a) Determine the entities to whom exemption from disclosure of related party
transactions is to be given in the books of Mega energy India Limited. Also
examine the transactions and with whom such exemption applies.
(b) What are the disclosure requirements for the entity which has availed the
exemption?
7. Determine the employee benefit expenses to be accounted for each year. Also, pass the
necessary journal entries.
8. What is the balance of total equity (Equity and other equity) as on 1 April 20X2 after
transition to IFRS. Show reconciliation between total equity as per existing GAAP and
as per IFRS to be presented in the opening Statement of financial position of XYZ limited
as on 1 April 20X2. Ignore deferred tax impact.

CASE STUDIES 25.5

1 Option (d) Provision for ` 50 crores
Reason
As per para 53 of IAS 37, ‘Provisions, Contingent Liabilities and Contingent Assets’,
when some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party, the reimbursement shall be recognised when, and only
when, it is virtually certain that reimbursement will be received if the entity settles the
obligation. The reimbursement shall be treated as a separate asset. The amount
recognised for the reimbursement shall not exceed the amount of the provision. In the
statement of profit or loss, the expense relating to a provision may be presented net of
the amount recognised for a reimbursement.
In the given case since Mega Energy Limited will record provision by ` 50 crores in its
books and ` 30 crores will be reimbursed by Super Power India Limited. Hence
` 50 crore will be recognised as provision and ` 30 crore is disclosed as a contingent
asset, if it is virtually certain that reimbursement will be received if the entity settles the
obligation.
2 Option (a) Record 90% of the claim as a receivable as it is virtually certain that
the contingent asset will be received
Reason
As per para 35 of IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’,
contingent assets are assessed continually to ensure that developments are
appropriately reflected in the financial statements. If it has become virtually certain
that an inflow of economic benefits will arise, the asset and the related income are
recognised in the financial statements of the period in which the change occurs. If an
inflow of an economic benefits has become probable, an entity discloses the contingent
asset.
In the given case, the settlement of the claim was conveyed by a letter from the
insurance company that also stated that the settlement check was sent for 90% of the
claim. Mega Energy India Limited should record 90% of the claim as a receivable as
it is virtually certain that the contingent asset will be received.

3 Option (b) ` 1.75 crores

Reason
As per para 14(b) of IAS 33 ‘Earnings per Share’, the after-tax amount of preference
dividends that is deducted from profit or loss is the after-tax amount of the preference
dividends for cumulative preference shares required for the period, whether or not the
dividends have been declared. The amount of preference dividends for the period does
not include the amount of any preference dividends for cumulative preference shares
paid or declared during the current period in respect of previous periods.
In the given case the amount of preference dividends of ` 1.75 crore declared for the
year ended 31 March 20X4 (i.e. the current period) is to be deducted from profit or loss
for calculating EPS.
4. Option (c) At the start of the period or, if issued later, then the date of issue of
the potential shares
Reason
As per para 36 of IAS 33 ‘Earnings per Share’, for the purpose of calculating diluted
earnings per share, the number of ordinary shares shall be the weighted average
number of ordinary shares calculated in accordance with paragraphs 19 and 26, plus
the weighted average number of ordinary shares that would be issued on the
conversion of all the dilutive potential ordinary shares into ordinary shares. Dilutive
potential ordinary shares shall be deemed to have been converted into ordinary shares
at the beginning of the period or, if later, the date of the issue of the potential ordinary
shares.
In the given case, dilutive potential ordinary shares shall be deemed to have been
converted into ordinary shares at the beginning of the period or, if issued later then the
date of the issue of the potential ordinary shares.
5 Option (d) Advertising costs ` 40 lacs; staff bonuses ` 60 lacs
Reason
As per para 39 of IAS 34 ‘Interim Financial Reporting’, costs that are incurred unevenly
during an entity’s financial year shall be anticipated or deferred for interim reporting
purposes if, and only if, it is also appropriate to anticipate or defer that type of cost at
the end of the financial year.
A bonus is anticipated for interim reporting purposes if and only if,
(a) The bonus is a legal obligation or past practice would make the bonus a
constructive obligation for which the entity has no realistic alternative but to make
the payments and

CASE STUDIES 25.7
(b) a reliable estimate of the obligation can be made.

Accordingly, in the given case, while advertising costs cannot be deferred, bonus
expenses are accrued relating to the period to which they relate.

6. (a) As per para 18 of IAS 24, ‘Related Party Disclosures’, if an entity has had related
party transactions during the periods covered by the financial statements, it shall
disclose the nature of the related party relationship as well as information about
those transactions and outstanding balances, including commitments, necessary
for users to understand the potential effect of the relationship on the financial
statements.
However, as per para 25 of the standard, a reporting entity is exempt from the
disclosure requirements in relation to related party transactions and outstanding
balances, including commitments, with:
(i) a government that has control or joint control of, or significant influence
over, the reporting entity; and
(ii) another entity that is a related party because the same government has
control or joint control of, or significant influence over, both the reporting
entity and the other entity.
According to the above paras, for Entity Mega Energy India Limited’s financial
statements, the exemption in paragraph 25 applies to:
(i) transactions with Uttar Pradesh State Government; and
(ii) transactions with Entities Super Power India Limited and Entities P, Q, A
and B.
Similar exemptions are available to Entities Super Power India Limited, P, Q, A
and B, with the transactions with UP State Government and other entities
controlled directly or indirectly by UP State Government.
However, that exemption does not apply to transactions with Mr. KM. Hence, the
transactions with Mr. KM needs to be disclosed under related party transactions.
(b) As per para 26 of the standard, if a reporting entity applies exemption of disclosing
transactions with the government, it shall disclose the following about the
transactions and related outstanding balances referred to in paragraph 25:
(a) the name of the government and the nature of its relationship with the
reporting entity (i.e. control, joint control or significant influence);

(b) the following information in sufficient detail to enable users of the entity’s
financial statements to understand the effect of related party transactions
on its financial statements:
(i) the nature and amount of each individually significant transaction; and
(ii) for other transactions that are collectively, but not individually,
significant, a qualitative or quantitative indication of their extent.
Accordingly, in the given case, Mega Energy India Limited, Super Power India
Limited, P Limited, Q Limited, A Limited and B Limited should make following
disclosures:
(a) the name of the government – Uttar Pradesh State Government
(b) and the nature of its relationship – Subsidiary of Uttar Pradesh State
Government.
7. Since the earnings of the entity is non-market related, hence it will not be considered in
fair value calculation of the shares given. However, the same will be considered while
calculating number of shares to be vested.
Determination of expenses for each year ended on:
20X3 20X4
a Total employees 300 300
b Cumulative- Employees left (Actual) (25) (53)
c Employees expected to leave in the next year (35) (-)
d Year end – No. of employees (a-b-c) 240 247
e Shares per employee 150 150
f Fair value of share at grant date 325 325
g Vesting period 1/2 2/2
h Cumulative expenses (d x e x f x g) 58,50,000 1,20,41,250
i Expenses to be recognised (h-h of previous year) 61,91,250
Journal Entries
31 March 20X3 `
Employee benefits expenses Dr. 58,50,000
To Share based payment reserve (equity) 58,50,000
(Equity settled shared based payment expected vesting
amount)

CASE STUDIES 25.9
Profit and Loss A/c Dr. 58,50,000

To Employee benefits expenses 58,50,000
(Employee benefits expenses transferred to P&L A/c)
31 March 20X4
Employee benefits expenses Dr. 61,91,250
To Share based payment reserve (equity) 61,91,250
(Equity settled shared based payment expected vesting
amount)
Profit and Loss A/c Dr. 61,91,250
To Employee benefits expenses 61,91,250
(Employee benefits expenses transferred to P&L A/c)
Share based payment reserve (equity) Dr. 1,20,41,250
To Share Capital (150 x 247 x 100*) 37,05,000
To Securities Premium A/c 83,36,250
(Share capital Issued)
*Assumed that each share was of ` 100 each.

8. Computation of balance total equity as on 1 April 20X2 after transition to IFRS
` in crore
Share capital- Equity share Capital 80
Other Equity
General Reserve 40
Capital Reserve 5
Retained Earnings (95-5-40) 50
Add: Increase in value of land (10-4.5) 5.5
Add: Derecognition of proposed dividend 0.78
Add: Increase in value of Investment 0.75 57.03 102.03
Balance total equity as on 1 April 20X2 after transition
to IFRS 182.03

Reconciliation between Total Equity as per existing GAAP and IFRS to be presented in
the opening Statement of financial position as on 1 April 20X2
` in
crore
Equity share capital 80
Redeemable Preference share capital 25
105
Reserves and Surplus 95
Total Equity as per existing GAAP 200
Adjustment due to reclassification
Preference share capital classified as financial liability (25)
Adjustment due to derecognition
Proposed Dividend not considered as liability as on 1 April 20X2 0.78
Adjustment due to re-measurement
Increase in the value of Land due to re-measurement at fair value 5.50
Increase in the value of investment due to re-measurement at fair
value 0.75 6.25
Equity as on 1 April, 20X2 after transition to IFRS 182.03

CASE STUDY 26
You are a qualified Chartered Accountant at XYZ Ltd, an Indian listed company which is
exploring possibilities of listing its securities at an overseas stock exchange. The financial
reporting requirements related to such listing include submission of financial statements as
per IFRS. Therefore, XYZ Ltd prepares its financial statements in accordance with
International Financial Reporting Standards (IFRS) upto 31 March each year. You report to
Anuj, the Financial Controller of XYZ Ltd.
Anuj called you to enquire about the consolidated financial statements. The financials
disclosed that on 1 July 20X1, XYZ Ltd acquired 800,000 ordinary shares in ABC Ltd on
incorporation at par (` 1 per share). The remaining shares were subscribed for in equal
proportions by two other companies: PQR Ltd and MNO Ltd. The issued share capital of
ABC Ltd at date of acquisition of the shares was two million shares.
Anuj advised the Board of Directors of XYZ Ltd to go into an agreement with a goal that all
key working and money related choices would require the consistent assent of each of the
three parties. XYZ Ltd had not entered in any past contractual agreements of a comparable
sort and, from past discussions, you realize that Anuj is exploring the possibility to apply
proportionate consolidation. You need to guarantee that the accounting treatment embraced
will be suitable in future years.
Anuj told you, “I noticed your draft statement of comprehensive income has not taken into
account the acquisition of the shares in ABC Ltd, although, it looks to me as though it should
be treated as an associate company. What do you think? The directors have requested an
estimate of consolidated profit for the board meeting next week. Also, I will need some sort of
explanation as to why you are making your adjustments: you and I both know that there is a
lot of professional judgement involved in the application of some of the IFRS.”
Further, there are certain outstanding issues which require consideration while making
final consolidated financials:
1. XYZ Ltd acquired a trade mark at a cost of ` 68,00,000 on 1 April 20X1. At that date the
patent had an estimated useful life of 20 years. In the draft financial statements at
31 March 20X2, the trade mark is shown at ` 88,40,000 as per the advise of a brand
valuation firm. An increase in fair value has been recognized in other comprehensive
income and carried as a revaluation surplus within equity.
2. On 1 April 20X1, XYZ Ltd acquired 34,000 listed 4% ` 1 preference shares at their fair
value (which was par value) in RST Ltd that are redeemable on 31 March 20X5.
Transactions costs were negligible. The effective interest rate on preference shares is
6% and preference dividends are paid annually on 31 March each year. The market
value of one preference share on 31 March 20X2 was ` 1.05. The board minute

authorizing this investment recorded the decision to hold these preference shares until
redemption and instructed cash flow forecasts to be prepared on this basis. Furthermore,
the investment has not been made with the intention of making short-term profit.
3. XYZ Ltd acquired a non-current asset on 1 April 20X1. This non-current asset is located
in an industrial development area and cost ` 1,02,00,000. The asset is expected to last
five years. An impairment review was carried out on 31 March 20X2 and the projected
cash flows relating to this asset were as follows:
Year ended 31 March 31 March 31 March 31 March

20X3 20X4 20X5 20X6
Cash flows 9,52,000 15,13,000 17,00,000 18,70,000

(`)
XYZ Ltd uses a discount rate of 5% in relation to cash flows and the Indian government
has indicated that it may pay compensation for any loss of value for the assets up to
20% of impairment loss, if any.
4. On 1 April 20X1, XYZ Ltd signed a six-year lease for one of its properties, the lessee
agreeing to pay ` 2,04,000 per quarter in advance. XYZ Ltd had acquired the property
for using it as its administrative office five years earlier for ` 34,00,000 (land element
costing ` 3,40,000). The useful life of the building was estimated at 34 years. XYZ Ltd
vacated the property on 1 April 20X1 and its fair value at that date was estimated at
` 64,60,000. At 31 March 20X2, the property’s fair value was estimated at ` 61,20,000.
XYZ Ltd had not leased out any properties in the past. XYZ Ltd. wants to follow the
revaluation model for this property.
5. The revenue included in the draft consolidated statement of comprehensive income
includes sales to EFG Ltd (subsidiary of XYZ Ltd with 80% shareholding) of ` 25,50,000,
all invoiced at cost plus 25%. On 31 March 20X2, the inventory included ` 6,37,500 in
respect of such goods.
6. XYZ Ltd has a corporate office in Mumbai held under a lease. A specific requirement of
the lease is that the asset is returned in good condition. The lease was signed on
31 March 20X2 and will last for four years. In order to meet the requirements of lease,
the board of directors of XYZ Ltd have agreed to refurbish the office building in four years
time at a cost of ` 42,50,000. This figure includes the renovation of the building’s exterior
and is based on current price levels. Due to severe cold weather, XYZ Ltd will also have
to spend ` 3,40,000 at the end of next year on renovating the building. The directors are
of the opinion that this expenditure will reduce, by an equivalent amount, against the
overall refurbishment costs payable at the end of the lease term. Relevant discount rate
applicable in this case is 10%. No entries have been made for the above expenditure in
the financial statements.

CASE STUDIES 26.3
7. On 1 April 20X1, fair value of the assets of XYZ Ltdʼs defined benefit plan were valued
at ` 20,40,000 and the present value of defined obligation was ` 21,25,000. On
31 March, the plan received contributions from XYZ Ltd amounting to ` 4,25,000 and
paid out benefits of ` 2,55,000. The current service cost for the financial year ending
31 March 20X2 is ` 5,10,000. An interest rate of 5% is to be applied to the plan assets
and obligations. The fair value of planʼs assets at 31 March 20X2 was ` 23,80,000, and
the present value of defined benefit obligation was ` 27,20,000. No accounting entries
have been made for the year ended 31 March 20X2.
Appendix 1:
Draft Consolidated Statement of Comprehensive Income for the year ended
31 March 20X2
`
Revenue 3,71,87,500
Cost of Sales (2,18,02,500)
Gross Profit 1,53,85,000
Suspense (12,75,000)
Profit from operations 1,20,27,500
Dividend from ABC Ltd 1,70,000
Finance Costs (80,41,000)
Profit before taxation 41,56,500
Tax (12,46,100)
Profit for the year 29,10,400
Other comprehensive income
Revaluation 20,40,000
Total comprehensive income for the year 49,50,400
Attributable to
Owners of XYZ Ltd 39,61,000
NCI 9,89,400
49,50,400

Note 1:
The results from ABC Ltd financial statements for the six months ended 31 March 20X2
are as follows:
`
Revenue 54,40,000
Cost of Sales (25,50,000)
Gross Profit 28,90,000
Taxation (2,63,500)
Profit for the period 13,51,500
The current draft consolidated statement of comprehensive income includes the

dividends received from ABC Ltd during the year. No other amounts have been
recognized in respect of ABC Ltd. A dividend of ` 4,25,000 was paid by ABC Ltd on
24 March 20X2.
1. At what amount, trademark should be valued on 31 March, 20X2?

(a) ` 88,40,000
(b) ` 68,00,000
(c) ` 64,60,000
(d) ` 83,98,000
2. What should be the carrying value of Non- current asset at 31 March, 20X2, which was
acquired on 1 April, 20X1?
(a) ` 81,60,000
(b) ` 52,86,405
(c) ` 1,50,00,000
(d) ` 1,02,00,000
3. How much amount of compensation receivable from Indian Government should be
recognized on 31 March 20X2?
(a) ` 5,75,000

CASE STUDIES 26.5
(b) No provision
(c) ` 9,83,000
(d) ` 8,33,000
4. Which model can be used to calculate the carrying value of one of its property leased
under six year lease agreement on 1 April 20X1?
(a) Cost model only
(b) Fair value model only

(c) Either of the two
(d) Fair value model if cost is higher than fair value, else cost model
5. How much amount of provision should be recognized at 31 March 20X2 for the corporate
office held on lease in Mumbai?
(a) ` 3,40,000
(b) ` 32,11,810
(c) ` 29,79,590
(d) ` 45,90,000
II. Descriptive Question
6. Prepare the consolidated statement of comprehensive income for the year ending 31
March 20X2 after the incorporation of necessary adjustments by providing required
workings. Also explain the accounting treatment for each of the outstanding issues as
stated in case study.
ANSWERS TO CASE STUDY 26

1. Option (c) ` 64,60,000
Reason :
Trademarks are intangible assets. IAS 38 Intangible Assets rules about measurement
subsequent to initial recognition that, an intangible asset can be measured using the
revaluation model only if it is traded in the market where the items are homogeneous.

Each trademark by definition is unique, so IAS 38 is explicit that trademarks should not
be measured using the revaluation model.
The trademark should be measured at its cost of ` 68,00,000 and then amortized over
twenty years. ` 3,40,000 should be recognized as an expense in the profit/loss for the
current period and the asset be measured at ` 64,60,000 in the Statement of Financial
Position. ` 20,40,000 increase in fair value should be reversed out of other
comprehensive income and further, the revaluation surplus in respect of this asset should
be zero.
2. Option (b) ` 52,85,000

Reason:
IAS 36 states that if an assetʼs value is higher than its recoverable amount, an impairment
loss has occurred. The impairment loss should be written off to profit and loss for the
year.
The carrying value of non-current assets at 31 March 20X2 is cost less depreciation:
` 1,02,00,000 – (` 1,02,00,000/5) = ` 81,60,000
This needs to be compared to the value in use at 31 March 20X2, using a discount rate
of 5%, is calculated as:
Year ended 31 March 31 March 31 March 31 March Total

20X3 20X4 20X5 20X6
Cash flows (`) [A] 9,52,000 15,13,000 17,00,000 18,70,000
Discount rate [B] 0.952 0.907 0.864 0.823
Value (`) [A x B] 9,06,304 13,72,291 14,68,800 15,39,010 52,86,405
The value in use of ` 52,86,405 is below the carrying value, so the carrying value must
be written down to `52,85,000
3. Option (b) No provision
Reason:
The treatment of the compensation received in the form of reimbursements is governed
by IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Reimbursements
from governmental indemnities are recorded in profit or loss when the compensation
becomes receivable, and the receipt is treated as a separate economic event from the
item it was intended to compensate for. In this case, receipt is uncertain and this no credit
can be taken for compensation of 20% of the impairment loss.

CASE STUDIES 26.7
4. Option (c) Either of the two
Reason :
On 1 April 20X1 when the property was vacated by XYZ Ltd and leased out, it should be
reclassified from property, plant and equipment to investment property and accounted
for under IAS 40 Investment Property. Since it has not previously leased out any
properties, XYZ Ltd may adopt its accounting policy from any of the two options permitted
under IAS 40 i.e. cost model and revaluation model.
5. Option (c) ` 29,79,590

Reason :
IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that a provision
should be recognised only if there is a present obligation resulting from a past event.
The terms of lease contract implies that XYZ Ltd has an obligation to incur expenditure
in order to return the building to lessor in good condition. The past obligating event would
appear to be the signing of lease. Thus, there is a strong case for recognising a provision
for the expenditure.
Following is the computation of the expense to be recognised:
Year Payment PVF @ 10% Present value
1 ` 3,40,000 0.909 ` 3,09,060

2 - 0.826 -
3 - 0.751 -
4 ` 39,10,000 0.683 ` 26,70,530

Grand total ` 29,79,590
Adjustment entry:
Statement of Comprehensive Income Dr. ` 29,79,590
To Provision (SFP) ` 29,79,590

26.8
II. Answer to Descriptive Question

6. Revised Consolidated Statement of Comprehensive Income for the year ended 31 March 20X2
` ` ` ` ` ` ` ` ` `
Draft WN1 Issue 1 Issue 2 Issue 3 Issue 4 Issue 5 Issue 6 Issue 7 Final
Revenue 3,71,87,500 21,76,000 - - - 8,16,000 -25,50,000 - - 3,76,29,500
Cost of Sales -2,18,02,500 -10,20,000 - - - - 24,22,500 -29,79,590 - -2,33,79,590
Gross Profit 1,53,85,000 11,56,000 - - - 8,16,000 -1,27,500 -29,79,590 - 1,42,49,910
Operating expenses -20,82,500 -5,10,000 -3,40,000 - - - - - -5,10,000 -34,42,500
Impairment loss - - - - -28,73,595 - - - - -28,73,595
Suspense -12,75,000 - - - - - - - - -12,75,000

Profit from operations 1,20,27,500 6,46,000 -3,40,000 - -28,73,595 8,16,000 -1,27,500 -29,79,590 -5,10,000 66,58,815
Dividend from ABC Ltd 1,70,000 -1,70,000 - - - - - - - -
Finance costs -80,41,000 - - 2,040 - - - - -4,250 -80,43,210
Loss on investment - - - - - -3,40,000 - - - -3,40,000
property
Profit before taxation 41,56,500 4,76,000 - 3,40,000 2,040 -28,73,595 4,76,000 -1,27,500 -29,79,590 -5,14,250 -17,24,395
Income tax -12,46,100 -1,05,400 - - - - - - - -13,51,500
Profit (loss) for the year 29,10,400 3,70,600 -3,40,000 2,040 -28,73,595 4,76,000 -1,27,500 -29,79,590 -5,14,250 -30,75,895
Other comprehensive - - - - - - - - - -
income
Revaluations 20,40,000 - -20,40,000 - - 35,10,000 - - - 35,10,000
GLOBAL FINANCIAL REPORTING STANDARDS
Re-measurement - - - - - - - - -1,65,750 -1,65,750

defined benefits
Total comprehensive 49,50,400 3,70,600 -23,80,000 2,040 -28,73,595 39,86,000 -1,27,500 -29,79,590 -6,80,000 2,68,355
income for the period
Attributable to
Owners of XYZ Ltd 39,61,000 3,70,600 -23,80,000 2,040 -28,73,595 39,86,000 -1,02,000 -29,79,590 -6,80,000 -6,95,545
NCI 9,89,400 - - - - - -25,500 - - 9,63,900
CASE STUDIES 26.9
Working Notes:
1. Jointly controlled entity
XYZ Ltd subscribed 40% (800,000 / 20,00,000) equity capital of ABC Ltd. The
remaining equity interest (30% each) is shared by two other shareholders.
Despite the different shareholdings, all three shareholders have agreed that key
decisions require unanimous consent by all three parties. This meets the definition
of joint control.
The entity should be classified as a joint venture in accordance with IFRS 11,
‘Joint Arrangements’. Therefore, XYZ Ltd can reflect its interest in the joint
venture at cost plus share of post-acquisition total comprehensive income. No
goodwill arises as shares acquired on incorporation of ABC Ltd.
XYZ Ltd’s share of dividend from ABC Ltd (40% of ` 4,25,000) should be removed
from Statement of Comprehensive Income and be replaced with it’s share of
profits (40% x ` 13,51,500)
Treatment of outstanding issues:
Issue 1:
Trademarks are intangible assets. IAS 38 Intangible Assets rules about
measurement subsequent to initial recognition that, an intangible asset can be
measured using the revaluation model only if it is traded in the market where the
items are homogeneous. Each trademark by definition is unique, so IAS 38 is
explicit that trademarks should not be measured using the revaluation model.
The trademark should be measured at its cost of ` 68,00,000 and then amortized
over twenty years. ` 3,40,000 should be recognized as an expense in the
profit/loss for the current period and the asset be measured at ` 64,60,000 in the
Statement of Financial Position. ` 20,40,000 increase in fair value should be
reversed out of other comprehensive income and further, the revaluation surplus
in respect of this asset should be zero.
Issue 2:
The shares are listed on a recognized stock market. The board minute provides
evidence of the intention and ability to hold these shares until redemption, so they
should be held to maturity. This asset should initially be measured at fair value
being the cost of ` 34,000 (shares issued at par). Subsequently they should be
measured at amortized cost using the effective interest rate.
Preference shares balance as at 31 March should be measured at initial amount
recognized plus any income less any payments of principal sum (including
dividend receipts) as:

`
Fair value at acquisition (34,000 x ` 1) 34,000
Add: Interest income at effective rate (34,000x6%) 2,040
Less: Interest/dividends received (34,000 x 4%) (1,360)
34,680
In the consolidated Statement of Financial Position at 31 March 20X2 the held to

maturity asset should be presented within non-current assets (redemption is still
3 years away) and measured at ` 34,680.
Issue 3:
IAS 36 states that if an assetʼs value is higher than its recoverable amount, an
impairment loss has occurred. The impairment loss should be written off to profit
and loss for the year.
The carrying value of non-current assets at 31 March 20X2 is cost less
depreciation:
` 1,02,00,000 – (` 1,02,00,000/5) = ` 81,60,000
This needs to be compared to the value in use at 31 March 20X2, using a discount
rate of 5%, is calculated as:
Year ended 31 March 31 March 31 March 31 March Total
20X3 20X4 20X5 20X6
Cash flows (`) [A] 9,52,000 15,13,000 17,00,000 18,70,000
Discount rate [B] 0.952 0.907 0.864 0.823
Value (`) [A x B] 9,06,304 13,72,291 14,68,800 15,39,010 52,86,405
The value in use of ` 52,86,405 is below the carrying value, so the carrying value
must be written down, thereby giving rise to an impairment loss of ` 28,73,595.
Issue 4:
Under the revaluation model, the property should be measured at fair value at
1 April 20X1. Depreciation on the property is (` 34,00,000 –` 3,40,000)/34 =
` 90,000 per annum. On 1 April 20X1, the propertyʼs carrying value is ` 29,50,000
(` 34,00,000 – (` 90,000 x 5)) and the surplus of ` 35,10,000 (` 64,60,000 –
` 29,50,000) should be recognized as revaluation surplus under IAS 16 in other
comprehensive income. No depreciation should be recognized under this model
but the decrease in fair value over the year of ` 3,40,000 (` 64,60,000 –
` 61,20,000) should be recognized in profit/loss, along with the rental income of
` 8,16,000.

CASE STUDIES 26.11
Issue 5:
The inter-group sales of ` 25,50,000 should be eliminated from both - revenue
and cost of sales. The unrealised profit of ` 1,27,500 (25/125 x 6,37,500) should
be included in XYZ Ltd cost of sales.
Issue 6:
IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ states that a
provision should be recognised only if there is a present obligation resulting from
a past event. The terms of lease contract implies that XYZ Ltd has an obligation
to incur expenditure in order to return the building to lessor in good condition. The
past obligating event would appear to be the signing of lease. Thus, there is a
strong case for recognising a provision for the expenditure.
Following is the computation of the expense to be recognised:
Year Payment PVF @ 10% Present value
1 ` 3,40,000 0.909 ` 3,09,060
2 - 0.826 -
3 - 0.751 -
4 ` 39,10,000 0.683 ` 26,70,530
Grand total ` 29,79,590
Adjustment entry:
Statement of Comprehensive Income Dr. ` 29,79,590
To Provision (SFP) ` 29,79,590
Issue 7:
Reconciliation of assets and obligation
Assets Obligations
` `
Fair value/present value at 1 April 20X1 20,40,000 21,25,000
Interest @ 5% 1,02,000 1,06,250
Current service cost 5,10,000
Contributions received 4,25,000
Benefits paid (2,55,000) (2,55,000)
Return on gain (assets) (balancing figure) 68,000

Acturial Loss (balancing figure) 2,33,750

Closing balance as at March 31,20X2 23,80,000 27,20,000
Following will be recognised as:

-In the Statement of Comprehensive Income: `
Current service cost 5,10,000
Net interest on net defined liability (1,06,250–1,02,000) 4,250
-In the Statement of Financial Position: `

Net defined liability (` 27,20,000 – ` 23,80,000) 3,40,000
-In other comprehensive income: `

Loss on defined benefit obligation (2,33,750)
Gain on plan assets 68,000
(1,65,750)

CASE STUDY 27
BD Limited is into various business whether its construction, manufacturing or trading of

commodities. BD Limited and its one of the subsidiary have entered into various transactions
accounting of which needs to be analysed in detail from the perspective of IFRS. You being an
IFRS expert, CFO of the company have appointed you to analyse the transaction based on
following details:
1. BD Limited is engaged in the business of developing malls and leasing out them to its
customers. The Company has an ongoing project in Kerala. It had borrowed
` 75,00,00,000 from a Bank to meet the project expenses.
The construction of the qualifying assets was suspended for a period of 10 days on
completion of each floor for the concrete to settle. Further there was a delay of two
months due to extreme floods in Kerala during which the active development of the
project was interrupted.
There was a further delay of 15 days in completion due to rectification of the faulty electric
wirings which was discovered during final inspection.
The Mall consisted of five phases. BD Limited has substantially completed all the work
with regard to Phase I, II and III on 5 March 20X3 and with regard to Phase IV and V on
20 March 20X3.
The Company has carried out minor modifications based on specifications of the Lessee
and handed over the shops to Lessees of Phase I, II and III on 10 April 20X3 and to the
lessees of Phase IV and V on 15 April 20X3
2. BD Limited is also into manufacturing of passenger vehicles. The time between
purchasing of underlying raw materials to manufacture the passenger vehicles and the
date the entity completes the production and delivers to its customers is 11 months.
Customers settle the dues after a period of 8 months from the date of sale.
3. BD Limited purchased a trademark during the year ended 31 March 20X3. BD Limited
has incurred following cost in connection with the trademark:
S. No. Particulars Amount (`)
1. One-time trademark purchase price 8,50,000
2. Non-refundable taxes 38,000
3. Training sales personnel on use of the new trademark 45,000
4. Research expenditures associated with the purchase of the 58,000
new trademark

5. Legal costs incurred to register the trademark 22,000

6. Salaries of the administrative personnel 1,05,000
4. BD Limited issued 9% cumulative preference shares of ` 10 each on 15 September 20X2

which are redeemable after 10 years.
5. BD Limited is also engaged in the business of trading commodities. The company’s main
asset are investments in equity shares, preference shares, bonds, non-convertible
debenture (NCD) and mutual funds.
The Company collects the periodical income (i.e. interest, dividend, etc.) from the
investments and regularly sells the investment in case of favourable market conditions.
Such investments have been classified as non-current investments in the financial
statements.
Also, the company buys and sells equity shares of companies for earning short term
profits from the stock market.
The CFO of the company classified all the non-current investments as Fair Value Through
Other Comprehensive Income (FVTOCI) and all the current investments as Fair value
Through Profit and Loss (FVTPL).
6. Following is the Statement of Financial Position of XY Limited, one of the subsidiary of
BD Limited for the year ended 31 March 20X3 (` in lacs)
20X3 20X2
ASSETS
Non-current Assets
Property, plant and equipment 13,000 12,500
Intangible assets 50 30
Other financial assets 145 170
Deferred Tax Asset (net) 855 750
Other non-current assets 800 770
Total Non-current assets 14,850 14,220
Current Assets
Financial assets
Investments 2,300 2,500
Cash and cash equivalents 220 460

CASE STUDIES 27.3
Other current assets 195 85

Total Current assets 2,715 3,045
Total Assets 17,565 17,265
Equity
Equity share capital 300 300
Other equity 12,000 8,000
Total equity 12,300 8,300
Liabilities
Long term borrowings 2,000 5,000
Other non-current liabilities 2,740 3,615
Total non-current liabilities 4,740 8,615
Current liabilities
Trade payables 150 90
Bank Overdraft 75 60
Other current liabilities 300 200
Total current liabilities 525 350
Total liabilities 5,265 8,965
Total Equity and Liabilities 17,565 17,265
Additional Information:
(1) Profit after tax for the year ended 31 March 20X3 - ` 4,450 lacs
(2) Interim Dividend paid during the year - ` 450 lacs
(3) Depreciation and amortisation charged in the statement of profit and loss during
the current year are as under -
(a) Property, Plant and Equipment - ` 500 lacs
(b) Intangible Assets - ` 20 lacs
(4) During the year ended 31 March 20X3 two machineries were sold for ` 70 lacs.
The carrying amount of these machineries as on 31 March 20X3 is ` 60 lacs.

(5) Income taxes paid during the year ` 105 lacs.

(6) Other non-current/current assets/liabilities are related to business operations of
XY Limited

1. When should the capitalisation of borrowing cost of a mall in Kerala be suspended?
(a) When there is a temporary delay for allowing the concrete to settle, which is a
necessary part of getting the asset ready for its intended use or sale.
(b) During the extended period for rectifying faulty wires, in which active development
is interrupted but substantial technical and administrative work has been carried
out.
(c) When all the activities necessary to prepare the Mall for its intended lease to
customers are complete.
(d) During the extended period in which active development is interrupted due to
floods and substantial technical and administrative work has not been carried out.
2. When shall BD Limited cease to capitalise the borrowing costs incurred with respect to
the Mall?
(a) On 20 March 20X3 for the entire mall
(b) On 15 April 20X3 for the entire mall
(c) On 5 March 20X3 for Phase I, II and Ill; 20 March 20X3 for Phase IV and V
(d) On 10 April 20X3 for Phase I, II and III; 15 April 20X3 for Phase IV and V.
3. What is the Operating Cycle of manufacturing business of passenger vehicles business?
(a) 11 months
(b) 12 months
(c) 19 months
(d) 8 months
4. What is the value of trademark to be recognised in the books of BD Limited in accordance
with IFRS?
(a) ` 11,18,000
(b) ` 10,73,000
(c) ` 9,55,000
(d) ` 9,10,000

CASE STUDIES 27.5
5. Out of the following disclosures given by BD Limited, which disclosure is not required
under relevant IFRS?
(a) Fair value of similar intangible assets used by its competitors.
(b) Reconciliation of carrying amount at the beginning and the end of the year.
(c) Contractual commitments for the acquisition of intangible assets.
(d) Useful lives of the intangible assets.

6. Evaluate whether 9% cumulative preference shares issued by BD Limited are in nature
of financial liability or equity instrument. Also, state the treatment of dividend paid to the
preference shareholders under IFRS.
7. With respect to trading commodities business-
(a) Can BD Limited classify the equity shares previously held under current
investment as FVTOCI if the company decides to hold them for more than one-
year (i.e. classify it as non-current)?
(b) BD Limited had classified NCDs with a maturity period of less than twelve months
from the reporting period as current. This has been classified as FVTPL by the
CFO of the company. The Company wants to know whether these NCDs can be
recognized as FVTOCI?
8. Using the above information of XY Limited, construct a statement of cash flows under
indirect method.

1. Option (d) During the extended period in which active development is
interrupted due to floods and substantial technical and administrative
work is not being carried out.
Reason:
As per para 20 of IAS 23 ‘Borrowing Costs’, an entity shall suspend capitalisation of
borrowing costs during extended periods in which it suspends active development of a
qualifying asset.
Para 21 states that an entity does not normally suspend capitalising borrowing costs
during a period when it carries out substantial technical and administrative work. An

entity also does not suspend capitalising borrowing costs when a temporary delay is a
necessary part of the process of getting an asset ready for its intended use or sale.
In the given case, the entity shall suspend capitalisation of borrowing costs during the
period of floods as the active development of the project was interrupted and no
substantial technical and administrative work was carried out.
2. Option (c) 5 March 20X3 for Phase I, II and Ill; 20 March 20X3 for Phase IV and V
Reason:
As per para 22 of IAS 23 ‘Borrowing costs’, an entity shall cease capitalising borrowing
costs when substantially all the activities necessary to prepare the qualifying asset for
its intended use or sale are complete.
Further, para 24 states that when an entity completes the construction of a qualifying
asset in parts and each part is capable of being used while construction continues on
other parts, the entity shall cease capitalising borrowing costs when it completes
substantially all the activities necessary to prepare that part for its intended use or sale.
In the given case, BD substantially completes all the activities necessary to prepare
Phases I, II and III of the mall for its intended use on 5 March 20X3 and with regard to
phase IV and V on 20 March 20X3.
3. Option (c) 19 months
Reason:
Inventory and debtors need to be classified in accordance with the requirement of
paragraph 66(a) of IAS 1 ‘Presentation of Financial Statements’ which provides that an
asset shall be classified as current if an entity expects to realise the same or intends
to sell or consume it in its normal operating cycle.
In this case, time lag between the purchase of inventory and its realization into cash in
19 months (11 months + 8 months). Both inventory and the debtors would be classified
as current if the entity expects to realise these assets in its normal operating cycle.
4. Option (d) ` 9,10,000
Reason:
Particulars `
One-time trademark purchase price 8,50,000
Non-refundable taxes 38,000
Legal costs incurred to register the trademark 22,000
Value of trademark to be recognised in the financials 9,10,000

CASE STUDIES 27.7
As per para 27 of IAS 38, ‘Intangible Assets’, the cost of a separately acquired
intangible asset comprises:
(a) its purchase price, including import duties and non‑refundable purchase taxes,
after deducting trade discounts and rebates; and
(b) any directly attributable cost of preparing the asset for its intended use.
Accordingly, in the present case, the cost of intangible will be ` 9,10,000. Training
costs and general administrative overheads are not considered as directly attributable
costs of an intangible asset. Expenditure during research phase has to be expensed
in the year it is incurred.
5. Option (a) Fair value of similar intangible assets used by its competitors
Reason:
As per para 118 of IAS 38, Intangible Assets’, an entity shall disclose the following for
each class of intangible assets, distinguishing between internally generated intangible
assets and other intangible assets:
(a) whether the useful lives are indefinite or finite and, if finite, the useful lives or
the amortisation rates used;
(b) the amortisation methods used for intangible assets with finite useful lives;
(c) the gross carrying amount and any accumulated amortisation (aggregated with
accumulated impairment losses) at the beginning and end of the period;
(d) the line item(s) of the statement of comprehensive income in which any
amortisation of intangible assets is included;
(e) a reconciliation of the carrying amount at the beginning and end of the period
Accordingly, in the given case, BD Limited is not required to disclose the fair value of
similar intangible assets used by its competitors.

6. In determining whether a preference share is a financial liability or an equity instrument,
an issuer assesses the particular rights attached to the share to determine whether it
exhibits the fundamental characteristic of a financial liability or an equity instrument.
(A) Redeemable preference shares at a specified date
This contains a financial liability because the issuer has an obligation to transfer
financial assets to the holder of the share. The potential inability of an issuer to
satisfy an obligation to redeem a preference share when contractually required to
do so, whether because of a lack of funds, a statutory restriction or insufficient

profits or reserves, will not negate the obligation. Hence, classified as ‘financial
liability’.
(B) Distributions on preference shares
Another important point for consideration is whether the company has an
obligation to make payments of dividend i.e., whether dividend on such
preference shares are cumulative or non-cumulative.
Where dividends are cumulative, one needs to assess the key terms of the
instrument to check if the entity has a contractual obligation. In cases where the
preference shares entitled to dividend which is payable such that entity does not
have an unconditional right to defer payment, then this provides the
shareholders with a lender’s return on the amount invested. This obligation is
also not negated if the entity is unable to pay such dividend for lack of funds or
insufficient distributable profits. Therefore, the obligation to pay dividend meets
the definition of financial liability.
Conclusion: In the given case, 9% Cumulative Preference shares redeemable after 10
years provides for mandatory fixed dividend payments and redemption of preference
shares by BD Ltd. for a fixed amount at a fixed future date. Since there is a contractual
obligation to deliver cash (for both dividends and repayment of principal) to the preference
shareholder that cannot be avoided, the instrument is a financial liability in its entirety.
Treatment of dividend paid to preference shareholders under IFRS
The classification of a financial instrument as a financial liability or an equity instrument
determines whether interest, dividends, losses and gains relating to that instrument are
recognised as income or expense in profit or loss. Interest, dividends, losses and gains
relating to a financial instrument or a component that is a financial liability shall be
recognised as income or expense in profit or loss.
Since 9% cumulative preference shares are classified as financial liability, the dividend
thereon will be considered in the nature of interest and accordingly be charged to Profit
and Loss as part of finance cost.
7. (a) It seems that the equity shares are acquired for the purpose of selling it in the
near term and therefore are held for trading. Such investments have been
appropriately classified as subsequently measured at fair value through profit or
loss. Such investments in equity shares cannot be classified as subsequently
measured at fair value through other comprehensive income. The option to
measure investment in equity shares at fair value through other comprehensive
income has to be made at initial recognition. Therefore, equity shares that were
held for trading previously cannot be reclassified to fair value through other
comprehensive income due to change in business model to not held for trading.

CASE STUDIES 27.9
(b) In absence of contractual terms of NCDs, it is assumed that the contractual terms
give rise on specified dates to cash flows that are solely payment of principal and
interest on the principal outstanding. The business model also includes sales of
these instruments on a regular basis. Hence, these instruments will be classified
as measured at FVTOCI. Therefore, such NCD investments shall be classified as
subsequently measured at Fair Value through Other Comprehensive Income. The
classification does not change based on whether the investment is current or non-
current at the end of the reporting period. It seems the company has previously
classified these investments at fair value through profit or loss (FVTPL). The
company must rectify this by reclassifying as FVTOCI.
8. Statement of Cash Flows
` in lacs
Cash flows from Operating Activities
Net Profit after Tax 4,450
Add: Tax Paid 105
4,555
Add: Depreciation & Amortisation (500 + 20) 520
Less: Gain on Sale of Machine (70-60) (10)
Less: Increase in Deferred Tax Asset (855-750) (105)
4,960
Change in operating assets and liabilities
Add: Decrease in financial asset (170 - 145) 25
Less: Increase in other non-current asset (800 - 770) (30)
Less: Increase in other current asset (195 - 85) (110)
Less: Decrease in other non-current liabilities (3,615 – 2,740) (875)
Add: Increase in other current liabilities (300 - 200) 100
Add: Increase in trade payables (150-90) 60
4,130
Less: Income Tax (105)
Cash generated from Operating Activities 4,025
Cash flows from Investing Activities
Sale of Machinery 70

Purchase of Machinery [13,000-(12,500 – 500-60)] (1,060)

Purchase of Intangible Asset [50-(30-20)] (40)
Sale of Financial asset - Investment (2,500 – 2,300) 200
Cash outflow from Investing Activities (830)
Cash flows from Financing Activities
Dividend Paid (450)
Long term borrowings paid (5,000 – 2,000) (3,000)
Cash outflow from Financing Activities (3,450)
Net Cash outflow from all the activities (255)
Opening cash and cash equivalents (460 – 60) 400
Closing cash and cash equivalents (220 – 75) 145

CASE STUDY 28
All India Private Limited is IFRS compliant multinational company which is engaged in various
businesses. While preparing the financial statements as per IFRS, the company is facing certain
challenges in doing the accounting as per IFRS, for which it requires your guidance.
All India Private Limited has spent ` 15,00,000 in developing a new product during the year
ended 31 March, 20X4. The development costs incurred were recognised as an intangible asset
in accordance with IAS 38. For the purposes of computing the taxable income, these expenses
are allowable in full in the year of incurring the expenses. At the year end, the Company
recognised an impairment loss of ` 75,000 against the intangible asset.
All India Private Limited is planning to dispose of a collection of assets during the year ended
31 March, 20X3. The entity designates these assets as a disposal group, and the carrying
amount of these assets immediately before classification as held for sale was
` 75,00,000. Upon being classified as held for sale the assets were valued to ` 68,00,000.
However, subsequently the Company also received an external valuation at ` 60,00,000.
Out of the assets classified as held for sale there were machineries for which active market was
not available at present. All India Private Limited anticipates that it might take
2 more years to sell the asset in the market. Meanwhile the strategy team of the company had
found that the assets can be leased out to contractors for short term. Thus, these machineries
no longer satisfy the criteria of an asset held for sale.
All India Private Limited acquired 100% of the share capital of Global Tech Limited for a
consideration of 20 million EURO on 30 September 20X3. The fair value of the net assets of
Global Tech at that date was 11 million EURO. The functional currency of All India Private
Limited is Indian Rupee. The exchange rates as on 30 September 20X3 was 85 `/EURO and
on 31 March 20X4 was 89 `/EURO.
All India Private Limited is also engaged in manufacturing of various types of chocolates. A
common base mixture is prepared in a huge mixing bowl from where it is sent though pipes to
various compartments of machine for adding flavouring agents and other ingredients and then
poured into moulds. The chocolates are then packed neatly by the machine and which are in
turn sealed in cartons and then are sent through trucks for distribution. The various types of
chocolate include Vanilla filling, strawberry filling, cashew chew, roasted almond, fruit and nut,
crunchy crackle, the classic, jelly belly, etc. Each of the flavours are performing well individually
and were contributing significantly towards the Company's revenue.

All India Private Limited values its human resources and takes good measures for the well-being
and future of its employees. It contributes to an industrial pension plan that provides a pension
arrangement for its employees. It is a popular plan among the employers of the same industry.
The Company does not have any obligation other than payment of annual contribution. Under
this scheme the contribution is received from various employers and it is in turn used to
compensate the employees of those companies after their retirement.
All India Private Limited, Southern Constructions Limited and Concrete India Limited joined
together to develop a project of luxurious holiday villas along the back waters of Bay of Bengal.
The land for the project was arranged by All India Private Limited. Concrete India Limited
supplied the raw materials like Cement, bricks, stones, rods, required for construction. Southern
Constructions Limited took care of the labour required for construction of villas and interior
decoration.
The common costs like site approval, registration, site preparation is borne equally by all the
three parties.
In the contractual agreement it was mentioned that the profit from sale of villa will be shared
equally after setting off the expenses incurred for developing the project.
All India Private Limited holds 35% of total equity shares of Meru Limited, an associate company.
The value of investments in Meru Limited on 31 March 20X3 is ` 3,00,00,000 in the consolidated
financial statements of All India Private Limited. All India Private Limited sold goods worth
` 3,50,000 to Meru Limited. The cost of goods sold is ` 3,00,000. Out of these goods costing
` 1,00,000 to Meru Limited were in the closing stock of Meru Limited.
During the year ended 31 March 20X4 the profit and loss statement of Meru Limited showed a
loss of ` 1,00,00,000.
One of the businesses of All India Private Limited is of developing light weight and medium
weight guns for the Indian defense industry. All India Private Limited acquired 48% of shares
in Kay Limited, a company engaged in advanced research in weapons. All India Private Limited
acquired shares in Kay Limited to substantiate their position in the industry.
The remaining 52% of shares are held by the key management personnel of the Company Kay
Limited. The management of Kay Limited consists of eleven people who are experts in the fields
of advanced weapons and are core of the Company.
All India Private Limited has the option to purchase remaining 52% at any time by paying
6 times the market price of the share. But on purchase of the shares it is highly possible that
the key management personnel will leave the company.

CASE STUDIES 28.3

1. How would the reduction in the value of the assets on classification as held for sale be
treated in the financial statements?
(A) The entity should recognise a loss of ` 15,00,000 immediately before classifying
the disposal group as held for sale.
(B) The entity should recognise an impairment loss of ` 15,00,000.
(C) The entity should recognise an impairment loss of ` 7,00,000.
(D) The entity should recognise a loss of ` 7,00,000 immediately before classification
as per relevant IFRS and then recognise a loss of ` 8,00,000 against assets held
for sale.
2. Suggest the suitable treatment for the machinery kept under the group ‘held for sale’ out
of the following:
(A) Continue to measure the machineries at their current carrying value.
(B) Measure the machineries at lower of their carrying amount before the asset was
classified as held for sale (as adjusted for subsequent depreciation, amortisation,
or revaluations) and its recoverable amount at the date of the decision not to sell.
(C) Re-measure the machineries at their fair value.
(D) Recognise the machineries at their carrying amount prior to its classification as
held for sale as adjusted for subsequent depreciation, amortisation, or
revaluations.
3. What is the tax base of the intangible asset?
(A) ` 15,00,000
(B) ` 75,000
(C) ` 14,25,000
(D) `0
4. What will be the value of goodwill in the books of All India Private Limited as on
31st March, 20X4 on acquisition of Global Tech Limited?
(A) ` 765 million
(B) ` 935 million

(C) ` 800 million

(D) ` 801 million
5. Should the Company classify the different types of chocolates into different segments?
(A) Yes, the Company should classify the different types of chocolates into different
segments as they contribute significantly towards the Company's revenue.
(B) No, the given information is not adequate to determine whether the different types
of chocolates should be classified as different segments.
(C) No, there is no need to create different segments for each type of chocolate since
the nature of the product, production process, type of customers and the method
of distribution are common.
(D) Yes, the Company should classify the different types of chocolates into different
segments as they consist of different raw materials, have their own customer base
and are capable of generating significant revenue individually.

6. Identify the nature of the employee benefit plan taken by the company with reference to
IFRS.
7. Identify the type of joint arrangement among All India Private Limited, Southern
Constructions Limited and Concrete India Limited as per IFRS.
8. (A) What is the value of investment in Meru Limited as on 31 March 20X4 in the
consolidated financial statements of All India Private Limited, if equity method is
adopted for valuing the investments in associates?
(B) Will your answer be different if Meru Limited had earned a profit of ` 1,50,00,000
and declared a dividend of ` 75,00,000 to the equity shareholders of the
Company?
9. (A) State whether All India Private Limited has control over Kay Limited.
(B) What will be your answer if All India Private Limited had 51% shares in Kay Limited
and Kay Limited can start the research, development and production of weapon
only with the stringent approval process of the defense ministry of the Central
Government.

CASE STUDIES 28.5

1 Option (D) :
Reason
As per para 18 of IFRS 5, ‘Non‑current Assets Held for Sale and Discontinued
Operations’, immediately before the initial classification of the asset (or disposal group)
as held for sale, the carrying amounts of the asset (or all the assets and liabilities in
the group) shall be measured in accordance with applicable IFRS.
Further, para 20 states that, an entity shall recognise an impairment loss for any initial
or subsequent write‑down of the asset (or disposal group) to fair value less costs to sell.
Accordingly, in the given case a loss of ` 7,00,000 should be recognised in accordance
with relevant IFRS prior to the classification of assets to assets held for sale and a loss
of ` 8,00,000 should be recognised in accordance with IFRS 5.
2. Option (B) :
Reason
As per para 27 of IFRS 5 ‘Non‑current Assets Held for Sale and Discontinued
Operations’, the entity shall measure a non‑current asset (or disposal group) that
ceases to be classified as held for sale (or ceases to be included in a disposal group
classified as held for sale) at the lower of:
(a) its carrying amount before the asset (or disposal group) was classified as held
for sale, adjusted for any depreciation, amortisation or revaluations that would
have been recognised had the asset (or disposal group) not been classified as
held for sale, and
(b) its recoverable amount at the date of the subsequent decision not to sell.
Accordingly, in the given case, the machineries are measured at lower of their carrying
amount before the asset was classified as held for sale (as adjusted for subsequent
depreciation, amortization or revaluations) and its recoverable amount at the date of
the decision not to sell.

3. Option (D) :
Reason
As per para 7 of IAS 12 ‘Income Taxes’, the tax base of an asset is the amount that will
be deductible for tax purposes against any taxable economic benefits that will flow to an
entity when it recovers the carrying amount of the asset.
In the given case, since the entire cost of intangible asset is fully allowed as expense for
tax purposes, the tax base will be nil.
4. Option (D) :
Reason
Any goodwill arising on the acquisition of a foreign operation and any fair value
adjustments to the carrying amounts of assets and liabilities arising on the acquisition
of that foreign operation shall be treated as assets and liabilities of the foreign
operation. Thus, they shall be expressed in the functional currency of the foreign
operation and shall be translated at the closing rate.
Accordingly, in the given case goodwill arising on acquisition of Global Tech Limited
should be translated at the closing rate.
Goodwill on acquisition date = 9 million EURO (20 million EURO – 11 million EURO)
Goodwill on reporting date = 9 million EURO x ` 89 / EURP = ` 801 million
5. Option (C) :
Reason
As per aggregation criteria given in para 12 of IFRS 8, ‘Operating Segments’, operating
segments often exhibit similar long‑term financial performance if they have similar
economic characteristics. For example, similar long‑term average gross margins for
two operating segments would be expected if their economic characteristics were
similar. Two or more operating segments may be aggregated into a single operating
segment if aggregation is consistent with the core principle of the IFRS, the segments
have similar economic characteristics, and the segments are similar in each of the
following respects:
(a) the nature of the products and services;
(b) the nature of the production processes;
(c) the type or class of customer for their products and services;

CASE STUDIES 28.7
(d) the methods used to distribute their products or provide their services; and
(e) if applicable, the nature of the regulatory environment, for example, banking,
insurance or public utilities.
In the given case, since all the factors such as nature of the product, production
process, type of customers, method of distribution and regulatory requirements are
common, there is no need to create different segment for each type of chocolate.

6. Under defined contribution plans, an entity agrees to contribute a limited amount to the
fund as its legal or constructive obligation. Thus, the amount of the post-employment
benefits received by the employee is determined by the amount of contributions paid by
an entity (and perhaps also the employee) to a post-employment benefit plan or to an
insurance company, together with investment returns arising from the contributions; and
as a result of this, actuarial risk (which means that benefits will be less than expected)
and investment risk (that assets invested will be insufficient to meet expected benefits)
falls on the employee and not on the entity like in defined benefit plan.
Further Multi‑employer plans are defined contribution plans (other than state plans) or
defined benefit plans (other than state plans) that:
(a) pool the assets contributed by various entities that are not under common control;
and
(b) use those assets to provide benefits to employees of more than one entity, on the
basis that contribution and benefit levels are determined without regard to the
identity of the entity that employs the employees.
In the given case, All India Private Limited alongwith other employees contribute to the
plan and the plan pays the pension to the employees on retirement from the common
pool of the asset. Also the company has no obligation after contributing annually to the
industrial pension plan. Hence, it is a multi-employer plan under the defined contribution
scheme.
7. Paragraphs 15-17 of IFRS 11 state as follows:
A joint operation is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the assets, and obligations for the liabilities, relating to the
arrangement. Those parties are called joint operators.

A joint venture is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement. Those parties are called
joint venturers.
An entity applies judgement when assessing whether a joint arrangement is a joint
operation or a joint venture. An entity shall determine the type of joint arrangement in
which it is involved by considering its rights and obligations arising from the arrangement.
An entity assesses its rights and obligations by considering the structure and legal form
of the arrangement, the terms agreed by the parties in the contractual arrangement and,
when relevant, other facts and circumstances.
As per para B16 of the standard, a joint arrangement that is not structured through a
separate vehicle is a joint operation. In such cases, the contractual arrangement
establishes the parties’ rights to the assets, and obligations for the liabilities, relating to
the arrangement, and the parties’ rights to the corresponding revenues and obligations
for the corresponding expenses.
In the present case, the arrangement among All India Private Limited, Southern
Constructions Limited and Concrete India Limited is not structured through a separate
vehicle. All the three entities have joint control over the arrangement of land, supply of
material and labour for the purpose of construction activity ie development project of
luxurious holiday villas. They will be sharing profit from sale of villas and common costs
and also incur their own separate costs. Accordingly, the arrangement is a joint
operation.
8. (a) Value of investment in Meru Limited as on 31 March 20X4 as per equity
method in the consolidated financial statements of All India Private Limited
`
Cost of investment 3,00,00,000
Less: Share in post-acquisition loss (1,00,00,000 x 35%) (35,00,000)
Less: Unrealised gain on inventory left unsold with Meru
Limited [{(50,000/3,50,000) x 1,00,000} x 35%] (5,000)
Carrying value as per equity method 2,64,95,000
(b) Value of investment in Meru Limited as on 31 March 20X4 as per equity

method in the consolidated financial statements of All India Private Limited
`
Cost of investment 3,00,00,000

CASE STUDIES 28.9
Add: Share in post-acquisition profit (1,50,00,000x 35%) 52,50,000

Less: Unrealised gain on inventory left unsold with Meru
Limited [{(50,000/3,50,000) x 1,00,000} x 35%] (5,000)
Less: Dividend (75,00,000 x 35%) (26,25,000)
Carrying value as per equity method 3,26,20,000
9. As per para 7 of IFRS 10, an investor controls an investee if and only if the investor has
all the following:
1. Power over the investee
As per para 10 of the standard, an investor has power over an investee when the
investor has existing rights that give it the current ability to direct the relevant
activities, i.e. the activities that significantly affect the investee’s returns.
2. Exposure, or rights, to variable returns from its involvement with the
investee
As per para 15 of the standard, an investor is exposed, or has rights, to variable
returns from its involvement with the investee when the investor’s returns from its
involvement have the potential to vary as a result of the investee’s performance.
3. The ability to use its power over the investee to affect the amount of the
investor’s returns
An investor is exposed, or has rights, to variable returns from its involvement with
the investee when the investor’s returns from its involvement have the potential to
vary as a result of the investee’s performance. The investor’s returns can be only
positive, only negative or both positive and negative.
Based on the above guidance, following can be concluded:
(a) All India Private Limited has acquired 48% in Kay Limited. The purpose of
acquiring the shares by All India Private Limited is to substantiate their
position in the industry. Kay Limited is a specialist entity that is engaged
in advanced research in weapons. Acquiring Kay Limited will help All India
Private Limited to gain access to their research which would complement
All India Private Limited’s operations and business of developing light
weight and medium weight guns.
The key management personnel who holds 52% shares of Kay Limited
are key for running Kay Limited’s business of advanced research and will
help All India Private Limited to acquire the market through ground

breaking advanced researches of Kay Limited. In case of acquisition of

52% stake of Kay Limited, the key management personnel may leave the
organisation and in such a situation All India Private Limited will not enjoy
any economic benefit or infact will lose the benefit of unique technical
knowledge of those 11 experts.
Hence, All India Private Limited would not be able to use its power over
Kay Limited to affect the amount of its returns which is one of the
essential criteria to assess the control, so there is no control of All India
Private Limited on Kay Limited.
(b) Even though All India Private Limited has acquired 51% stake in Kay
Limited yet it does not have power over Kay Limited as it would not be able
to exercise its existing rights that give it the current ability to direct the
relevant activities, i.e. the activities that significantly affect the investee’s
returns. In other words, the relevant activity of Kay Limited is advance
research in weapons which will help All India Private Limited to substantiate
their position. However, the research, development and production will
start only after stringent approval process of the defense ministry of the
Central Government. Thus, regulations prevent All India Private Limited to
direct the relevant activity of Kay Limited which ultimately lead to prevent
All India Private Limited to have control.

CASE STUDY 29
Free Bird Limited, is currently engaged in different business segments and is also looking to
expand its operations. The Company is also exploring investment from an overseas investor to
carry out the expansion plan. During the month of April 20X4, an overseas investor showed
interest to acquire 51% stake in Free Bird Limited and has appointed an independent consultant
to carry out the due diligence of Free Bird Limited. As per one of the conditions of Memorandum
of Understanding (MoU), the Company is required to submit its financial statements for the year
ended 31st March, 20X4 as per IFRS.
Free Bird Limited is in the process of computation of the deferred taxes as per applicable
IFRS and wants guidance on the tax treatment for the following:
The Company had acquired 40% in GK Limited for an aggregate amount of ` 45 crore. The
shareholding gives Free Bird Limited significant influence over GK Limited but not control and
therefore the said interest in GK Limited is accounted using the equity method. Under the equity
method, the carrying value of investment in GK Limited was ` 70 crore on
31st March, 20X3 and ` 75 crore as on 31st March, 20X4. As per the applicable tax laws, profits
recognised under the equity method are taxed if and when they are distributed as dividend or
the relevant investment is disposed of. Consider tax rate of 20%.
The Company measures its head office property using the revaluation model. The property is
revalued every year as on 31 March. On 31 March 20X3, the carrying value of the property
(after revaluation) was ` 40 crore whereas its tax base was ` 22 crore. Carrying amount of
property in the books of the company on 31 March 20X3 was equal to the carrying amount of
the property as per tax records. During the year ended 31 March 20X4, the Company charged
depreciation in its Statement of Profit or Loss of ` 2 crore and claimed a tax deduction for tax
depreciation of ` 1.25 crore. On 31 March 20X4, the property was revalued to ` 45 crore. As
per the tax laws, the revaluation of Property, Plant & Equipment does not affect taxable income
at the time of revaluation. Consider tax rate at 20%.
During the year, Free Bird Limited delivered manufactured products to customer K. The
products were faulty and on 1 October 20X3 customer K commenced legal action against the
Company claiming damages in respect of losses due to the supply of faulty product. Upon
investigating the matter, Free Bird Limited discovered that the products were faulty due to
defective raw material procured from supplier F. Therefore, on 1 December 20X3, the Company
commenced legal action against F claiming damages in respect of the supply of defective raw
materials.
Free Bird Limited has estimated that it's probability of success of both legal actions, the action
of K against Free Bird Limited and action of Free Bird Limited against F, is very high.

On 1 October 20X3, Free Bird Limited has estimated that the damages it would have to pay K
would be ` 5 crore. This estimate was revised to ` 5.2 crore as on 31 March 20X4 and
` 5.25 crore as at 15 May 20X4. This case was eventually settled on 1 June 20X4, when the
Company paid damages of ` 5.3 crore to K.
On 1 December 20X3, Free Bird Limited had estimated that it would receive damages of
` 3.5 crore from F. This estimate was revised to ` 3.6 crore as at 31 March 20X4 and
` 3.7 crore as on 15 May 20X4. This case was eventually settled on 1 June 20X4 when F paid
` 3.75 crore to Free Bird Limited. Free Bird Limited in its financial statements for the year ended
31 March 20X4, provided ` 3.6 crore. The financial statements were authorised by the Board
of Directors on 26 April 20X4.
On 1 April 20X3, Free Bird Limited purchased 10 lakh options to acquire shares in
KS Ltd., a listed entity. The Company paid ` 0.25 per option which allows the Company to
purchase shares in KS Ltd. for a price of ` 2 per share. The exercise date for the option was
31 December 20X3. On 31 December 20X3, when the market value of a share in KS Ltd. was
` 2.6 per share, the Company exercised all its options to acquire shares in KS Ltd.
In addition to the purchase price, the Company has also incurred directly attributable cost of
` 1 lakh for purchase of 10 lakh shares in KS Ltd. The Company has classified these shares
as trading portfolio. However, the Company has not disposed of any of the shares in KS Ltd.
between 31 December 20X3 to 31 March 20X4.
The market value of the shares of KS Ltd. as on 31 March 20X4 is ` 2.90 per share.
Free Bird Limited acquired 100% of Coal Private Limited, on 1 January 20X3. The fair value of
the purchase consideration was ` 10 crore consisting of ordinary shares of ` 100 each of Free
Bird Limited. The fair value of the net assets acquired was ` 7.5 crore. At the time of the
acquisition, the value of the ordinary shares of Free Bird Limited and the net assets of Coal
were only provisionally determined. On 30 November 20X3 it was finally determined that the
fair value of Free Bird Limited's shares was ` 11 crore and the fair value of net assets of Coal
was ` 8 crore. However, the directors of Free Bird Limited have seen the fair value of the
company's shares decline since 1 January 20X3, and wanted to adopt the fair value of the
shares as of 1 February 20X4, which will result in the fair value of consideration being valued
at ` 9 crore.
One of the subsidiaries of Free Bird Limited started its business in India with Indian Rupee as
its functional currency. After several years, the entity expanded and started exporting its product
to Europe. During the year ended 31 March 20X3 only 30% of the business was conducted in
Euro. By the end of 31 March 20X4, 90% of the business was conducted with Europe and the
transaction were denominated in Euro. The raw materials required (for the products to be
exported to Europe) are all imported materials and the purchase transactions are denominated
in Euro.

CASE STUDIES 29.3
Free Bird Limited has constructed a mall earlier. A portion of a mall is renovated by constructing
a food court, spa and gaming zone so as to increase the footfalls in the mall. The food court
and gaming zone are expected to result in a significant increase in sales for the shops and
outlets of the mall.
Free Bird Limited previously had a defined pension plan (a defined benefit pan) under which the
employees who joined before 1 April 20X0 were enrolled. With respect to employees who joined
on or after 1 April 20X0 were all enrolled in the industrial pension plan. The Company found
that the industrial pension plan was more beneficial to the employees than the defined pension
plan. Hence, during 20X3-20X4 it decided to shift all the employees from defined pension plan
to the industrial pension plan. The entity paid ` 5 crore to the employees who in turn agreed to
forfeit the pension entitlement from the defined pension plan. The liability recognised in the
financials, for the year ended 31 March 20X3, with respect to the pension liability was ` 7 crore.
You being the consultant of the company and having expertise in IFRS, are required to guide
on accounting treatment of the abovementioned issues.

1. What is the value of purchase consideration and fair value of net assets of Coal Private
Limited as at the date of acquisition?
(A) Purchase consideration ` 11 crore, net asset value ` 8 crore.
(B) Purchase consideration ` 10 crore, net asset value ` 7.5 crore.
(C) Purchase consideration ` 9 crore, net asset value ` 8 crore.
(D) Purchase consideration ` 11 crore, net asset value ` 7.5 crore.
2. What will be the functional currency of the subsidiary of Free Bird Limited for the year
20X3-20X4?
(A) Changed to Euro at the end of financial year 20X3-20X4, if it is considered that
the underlying transactions, events and conditions of business have changed.
(B) Changed to Euro at the beginning of financial year 20X3-20X4, if it is considered
that the underlying transactions, events and conditions of business have changed.
(C) Changed to Euro at the end of financial year 20X2-20X3, if it is considered that
the underlying transactions, events and conditions of business have changed.
(D) The functional currency remains to be Indian Rupee.
3. What should be the accounting treatment for the cost incurred for the renovation?
(A) Expenses incurred for food court and gaming zone should be charged to
statement of profit or loss;

(B) Expenses incurred for food court, spa and gaming zone should be charged to
statement of profit or loss;
(C) Expenses incurred for food court, spa and gaming should be capitalised;
(D) Expenses incurred for food court and gaming should be capitalised.
4. What is the entry to be passed in the books of account as on 31 March 20X4 with respect
to legal action commenced by customer K on the company?
(A) Statement of Profit or Loss A/c Dr. ` 5.2 crore
To Current Liability A/c ` 5.2 crore
(B) Statement of Profit or Loss A/c Dr. ` 5.3 crore
To Non-Current Liability A/c ` 5.3 crore
(C) Statement of Profit or Loss A/c Dr. ` 5.25 crore
(D) Other Comprehensive Income A/c Dr. ` 5.2 crore
5. What will the accounting treatment of the action of Free Bird Limited against supplier F
as per applicable IFRS?
(a) Asset receivable shall be recognised for ` 3.75 crore
(b) Asset receivable shall be recognised for ` 3.70 crore
(c) Asset receivable shall be recognised for ` 3.60 crore
(d) It will be considered as contingent assed which will not be recognised in the books.

6. How should this be accounted in the financials for the year ended 31 March 20X4?
7. With respect to GK Limited, what will be the deferred tax and where will it be impacted?
8. Compute the deferred tax liability as on 31 March 20X4 and the charge/credit to the
Statement of Profit or Loss and/or Other Comprehensive Income on head office property.
9. The Company has requested you to suggest the accounting treatment of the above
arrangement and transaction of acquisition of shares in KS Ltd.

CASE STUDIES 29.5

1. Option (A) : Purchase consideration ` 11 crore, net asset value ` 8 crore.
Reason:
In the given case the measurement period ends by 1 January 20X4 (being one year
from the date of acquisition) and accordingly, the entity cannot adjust the accounting
with 1 February 20X4 values. The provisional accounting has to be corrected with the
details available as on 30 November 20X3.
As per para 45 of IFRS 3, if the initial accounting for a business combination is
incomplete by the end of the reporting period in which the combination occurs, the
acquirer shall report in its financial statements provisional amounts for the items for
which the accounting is incomplete. During the measurement period, the acquirer shall
retrospectively adjust the provisional amounts recognised at the acquisition date to
reflect new information obtained about facts and circumstances that existed as of the
acquisition date and, if known, would have affected the measurement of the amounts
recognised as of that date. During the measurement period, the acquirer shall also
recognise additional assets or liabilities if new information is obtained about facts and
circumstances that existed as of the acquisition date and, if known, would have resulted
in the recognition of those assets and liabilities as of that date. The measurement
period ends as soon as the acquirer receives the information it was seeking about facts
and circumstances that existed as of the acquisition date or learns that more
information is not obtainable. However, the measurement period shall not exceed one
year from the acquisition date.
2. Option (A) : Changed to Euro at the end of financial year 20X3-20X4, if it is
considered that the underlying transactions, events and conditions of
business have changed.
Reason
As per para 9 of IAS 21, ‘The Effects of Changes in Foreign Exchange Rates’, the
primary economic environment in which an entity operates is normally the one in which
it primarily generates and expends cash.
Further, para 13 states that an entity’s functional currency reflects the underlying
transactions, events and conditions that are relevant to it. Accordingly, once
determined, the functional currency is not changed unless there is a change in those
underlying transactions, events and conditions.
In the given case, since the events and conditions have been changed during the year

ended 31 March 20X4, the entity can change to Euro at the end of financial year
20X3-20X4.
3. Option (D) : Expenses incurred for food court and gaming should be capitalised.
Reason
Paragraph 7 of IAS 16 ‘Property, Plant and Equipment’, requires that the cost of an
item of property, plant and equipment shall be recognised as an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will flow to
the entity; and
(b) the cost of the item can be measured reliably.
Further as per paragraph 10 of IAS 16, an entity evaluates under this recognition
principle all its property, plant and equipment cost at the time they are incurred. These
costs include costs incurred initially to acquire or construct an item of property, plant
and equipment and costs incurred subsequently to add to, replace part of, or service
it.
In view of the above, since it is probable that the construction of food court and gaming
zone will result into flow of future economic benefits to the entity in the form of increase
in sales and the cost of construction can be measured reliably, accordingly, the
subsequent cost of construction of food court and gaming zone should be capitalised
in the cost of mall as an item of property, plant and equipment.
4. Option (A) : Statement of Profit or Loss A/c Dr. ` 5.2 crore
Reason
Free Bird Limited is required to make provision for the claim from customer K as per
IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ since the claim is a
present obligation as a result of delivery of faulty goods manufactured. Also, it is
probable that an outflow of resources embodying economic benefits will be required to
settle the obligations. Further, a reliable estimate of ` 5.2 crore can be made of the
amount of the obligation while preparing the financial statements as on
31 March, 20X4.

CASE STUDIES 29.7
5. Option (D): It will be considered as contingent asset only and shall not be
recognized.
Reason
As per para 31 of IAS 37, Free Bird Limited shall not recognise a contingent asset.
Here the probability of success of legal action is very high but there is no concrete
evidence which makes the inflow virtually certain. Hence, it will be considered as
contingent asset only and shall not be recognized in the financial statements of
31 March, 20X4.

6. The discontinuation of old defined pension plan is a curtailment event. Free Bird Limited
is supposed to recognised gain or loss on settlement when the legally bind agreement
has been reached, that eliminates all further legal or constructive obligations for the
benefits provided under the pension plan in exchange for lump sum payment.
As per para 109 of IAS 19 ‘Employee Benefits’, the gain or loss on a settlement is the
difference between:
(a) the present value of the defined benefit obligation being settled, as determined on
the date of settlement
(b) the settlement price, including any plan assets transferred and any payments
made directly by the entity in connection with the settlement.
Accordingly, Free Bird Limited recognises a settlement gain of ` 2 crore (ie ` 7 crore –
` 5 crore) in its financial statements for the year ended 31 March 20X4.
7. DTL created on accumulation of undistributed profits as on 31.3.20X4
Carrying Value as Tax Taxable Total Deferred Charged to
value per tax base temporary tax liability @ P&L during
records differences 20% the year
a b c d E= b-d F = e x 20% g
31 March 70 crore 45 crore 45 crore 25 crore 5 crore 5 crore
20X3
31 March 75 crore 45 crore 45 crore 30 crore 6 crore 1 crore
20X4 (6 crore – 5
crore)

8. (a) In case defer tax is created only on account of depreciation

Carrying Value as Tax base Taxable / Total Credit to
value per tax (deductible) Deferred P&L
without records temporary tax during
revaluation difference liability/ the year
(asset) @
20%
A b c d E= b-d F=ex g
20%
31 March 22 crore 22 crore 22 crore nil nil nil
20X3
Less: (2 crore) (1.25
Depreciation crore)
for the year
20X3-20X4
Carrying value 20 crore 20.75 20.75 (0.75 crore) DTA (0.15 DTA
as on 31 crore crore crore) (0.15
March 20X4 crore)
(b) Computation of tax effect taking into account the revalued figures and
adjusting impact of tax effect on account of difference in depreciation
S. Carrying Value Tax Taxable / Total Credit Charged
No. value after as per base (deductible) Deferred to P&L to OCI
revaluation tax temporary tax during during
records difference liability/ the the year
(asset) @ year
20%
a b c d E= b-d F=ex g h
20%
I 31 March 20X3 40 crore 22 crore 22 18 crore DTL 3.6 - DTL 3.6
crore crore crore
IV Revalued again 45 crore 20.75 20.75 24.25 crore DTL 4.85 DTA DTL 5
on 31.3.20X4 (It crore crore crore (0.15 crore
is assumed that (22- crore) (Refer
revaluation has 1.25) (Refer Note
been done after table below) [5
taking into (a) DTL (B/F)
consideration the above) – 0.15
impact of DTA =
depreciation for 4.85 DTL]
the current year)
V Additional DTL 1.25 DTA DTL (1.40
DTL/DTA crore (0.15 crore)
required during crore) (Refer
the year (IV-I) (Refer Note
table below)
(a))

CASE STUDIES 29.9
Note:
As per para 65 of IAS 12 ‘Income Taxes’, when an asset is revalued for tax purposes and
that revaluation is related to an accounting revaluation of an earlier period, or to one that
is expected to be carried out in a future period, the tax effects on account of revaluation
of asset and the adjustment of the tax base are recognised in other comprehensive
income in the periods in which they occur.
Here, it is important to understand that only the tax effects on account of revaluation of
asset and the adjustment of the tax base are recognised in other comprehensive income.
However, tax effects on account of depreciation of asset and the adjustment of the tax
base are recognized in profit and loss.
Accordingly, first of all the tax effect has been calculated assuming that there is no
revaluation (Refer Table (a) above). Later the DTA arrived due to difference in
depreciation is adjusted with the DTL created due to revaluation. DTA of ` 0.15 crore on
account of depreciation will be charged to Profit and Loss and DTL of ` 1.40 crore will
be charged to OCI. Net effect in the year 31.3.20X4 will be DTL 1.25 crore
(DTL 1.4 crore – DTA 0.15 crore) [Refer Table (b) above].
9. The option to acquire shares in KS Ltd. would be regarded as a derivative financial
instrument. This is because the value of the option depends on the value of an underlying
variable (KS Ltd.’s share price). As per paragraph 4.1.4 and 4.2.1 of IFRS 9 ‘Financial
Instruments’, all derivatives are measured at fair value. On 1 April 20X3, when Free Bird
Limited purchased 10 lakh options to acquire shares in KS Ltd. at ` 0.25 per option, Free
Bird Limited will recognise Option Asset for ` 2.5 lakh by passing the following journal
entry:
Option on KS Ltd. shares Dr. ` 2.5 lakh
To Bank ` 2.5 lakh
Free Bird Limited shall measure the option at fair value at the end of every reporting
period and also before exercise. The increase in share price on exercise date
represents fair value of the option as the time value is zero on exercise date.
Therefore, Free Bird Limited will measure the option at ` 6 lakh [10 lakh option x
(2.6 – 2)] and recognise fair value gain of ` 3.5 lakh in profit or loss.
The following journal entry will be passed:
Option on KS Ltd. shares Dr. ` 3.5 lakh
To Fair value gain ` 3.5 lakh
On exercise of the option on 31 December 20X3, Free Bird Limited will pay ` 20 lakh
for 10 lakh shares of KS Ltd and the option derivative will be converted to shares of
KS Ltd. Therefore, Free Bird Limited will pass the following entry:

Investment in KS Ltd. equity shares Dr. ` 26 lakh

To Bank ` 20 lakh
To Option on KS Ltd. shares ` 6 lakh
Paragraph 5.1.1 of IFRS 9 ‘Financial Instruments’ requires that the transaction costs shall
be added to fair value if the financial asset is measured at other than fair value through
profit or loss.
In the given case, ` 1 lakh incurred by Free Bird Limited for acquiring equity shares of
KS Ltd. will not be added to the fair value of the equity shares of KS Ltd. This is because
equity shares of KS Ltd. are classified at fair value through profit or loss in accordance
with paragraph 4.1.4 of IFRS 9 Financial Instruments. Therefore, Free Bird Limited shall
recognise ` 1 lakh incurred on acquisition of equity shares of KS Ltd. in profit or loss as
on 31 March 20X4.
The investment is included in the statement of financial position at 31 March 20X4 as a
current asset at its fair value of ` 29 lakh. The increase in fair value of ` 3 lakh is taken
to the profit and loss.

CASE STUDY 30
XYZ Ltd is an Indian listed company that manufactures and distributes top-of-the-range security
equipment. XYZ Ltd is exploring possibilities of listing its securities at an overseas stock
exchange. The financial reporting requirements related to such listing include submission of
financial statements as per IFRS. Therefore, XYZ Ltd prepares consolidated financial
statements in accordance with International Financial Reporting Standards (IFRS) up to
31 March each year.
As a newly qualified Chartered Accountant, you commenced employment with XYZ Ltd three
months ago. You understand that General Manager (Accounts), was working on the draft
consolidated financial statements for the year ended 31 March 2X18. Vivek, Managing Director
has given you a folder (appendix 1) containing extracts from the first draft of the consolidated
financial statements for the year ended 31 March 2X18.
He asks you to provide explanation of accounting adjustments, together with any calculations
required. Vivek further informs you that IFRS are making increasing use of fair values.
However, the board of directors is anxious to use historic cost wherever possible to reduce the
volatility within the financial statements. It was suggested by a director that the company make
more use of a ‘true and fair override’ where appropriate. There is something similar in IFRS,
and it is advised to make use of that in the preparation of the financial statements. Vivek hands
you a folder marked ‘outstanding issues’.
Outstanding Issues: (All figures are ` in thousand)
1. On 1 July 2X17, XYZ Ltd acquired 7,200 thousand shares of ABC Ltd out of 9,600
thousand issued ` 1 ordinary shares. The purchase consideration comprised:
♦ An issue of four shares in XYZ Ltd for everyone share acquired in ABC Ltd. On
1 July 2X17, XYZ Ltd.’s market share price was ` 5.4.
♦ A payment of ` 12,000 thousand in cash, deferred until 1 July 2X20. An
appropriate discount rate is 8% per annum.
On 1 July 2X17, the carrying value of ABC Ltd.’s net assets amounted to ` 1,68,000
thousand. This was equivalent to the fair value of net assets acquired, except in respect
of ABC Ltd.’s internet domain name. The domain was registered several years ago and
is maintained by the payment of a small annual fee which is recognised in administrative
expenses. However, in June 2X17 ABC Ltd was offered ` 4,800 thousand by a company
in the United Kingdom for the domain name, an offer which was subsequently refused.
The directors of ABC Ltd were of the opinion that the domain name has an indefinite
useful life. XYZ Ltd prefers to measure NCI using the proportionate method wherever
possible. The draft consolidated financial statements (appendix 1) include 28,800

thousand ` 1 ordinary shares recognised in ordinary share capital, with a corresponding

figure of ` 28,800 thousand debit included in intangible assets.
ABC Ltd.’s profit for the year (attributable to ordinary shareholders) amounted to
` 9,600 thousand, which is yet to be accounted.
2. In order to persuade a large retail bank to purchase a new security system, XYZ Ltd
offered a deferred payment contract. The security system, with a selling price of
` 4,800 thousand, was delivered to the customer on 1 April 2X17. The bank paid 20%
of the selling price on that particular date. The balance will become payable on
1 April 2X19. The applicable finance charge is 8% per annum. The draft consolidated
statement of profit or loss and other comprehensive income includes
` 4,800 thousand in revenue with respect to this transaction.
3. The following information is provided in respect to the defined benefit pension plan
operated by XYZ Ltd for the year ended 31 March 2X18:
` ’000
Fair value of planned assets at 1 April 2X17 5,400
Present value of obligation at 1 April 2X17 6,660
Current service costs 864
Benefits paid 1,036
Contributions paid 738
Fair value of plan assets 31 March 2X18 7,884
Present value of obligation at 31 March 2X18 10,036
The yield on blue chip corporate bonds at 1 April 2X17 was 5% and all benefits and
contributions were to be paid on 31 March 2X18. On 1 April 2X17, the pension plan
was amended to provide additional benefits, effective from that date. The present
value of the additional benefits on 1 April 2X17 amounted to ` 630 thousand.
4. One of the senior engineers at XYZ Ltd has been working on a process to improve
manufacturing efficiency and, consequently, reduce manufacturing costs. The senior
engineer believes that the cost savings will exceed the project costs within twelve months
of their implementation. Regulatory testing and health and safety approval was obtained
on 1 June 2X17 and the project was finally completed on 10 April 2X18. Costs of
` 3,600 thousand, incurred uniformly during the year to 31 March 2X18, have been
recognised as an intangible asset. An offer for the new technology of ` 1,680 thousand
has been received and rejected by the company. Vivek Singhania believes that the
project will be a major success and has the potential to save the company
` 2,400 thousand in perpetuity. The director of research at XYZ Ltd is not convinced
about the long-term prospects of the new process and is of the opinion that competitors

CASE STUDIES 30.3
will develop similar technology within five years. It is estimated that the present value of
future cost savings will be ` 2,280 thousand over this period. After that, there is no
certainty about its future.
5. On 1 April 2X17, XYZ issued 3% loan notes with a nominal value of ` 900 thousand.
They were issued at a 5% discount and issue costs of ` 15.60 thousand were incurred.
The loan notes will be repayable at a premium of 10% after four years.
6. There was an incident on 1 November 2X17 at the main manufacturing plant that led to
six personal injury compensation claims. If these claims are successful, it is likely that a
further two staff who were also injured will make claims. XYZ Ltd.’s lawyers estimate
that it is probable that the claims will succeed and that the estimated average cost of
each pay will be ` 30 thousand.
General Manager (Accounts) has made a note in the file indicating that in order to avoid
adverse publicity, the lawyers have recommended that XYZ Ltd settles the personal injury
claims out of court as quickly as possible at their estimated amount for all eight
employees injured. The personal injury claim is in advanced stages and XYZ Ltd’s
insurance company has agreed to refund the costs of the claim once the claims have
been settled. An additional three employees have made claims for stress, rather than
injury, arising from the accident. If these claims were to be successful, the lawyers have
estimated that the likely pay-out would be around ` 12 thousand per employee. However,
the lawyers have stated that they believe it would be very unlikely that these employees
will win such a case.
7. One of the machines was damaged due to negligence by a worker. Although damaged,
the machine can still function at around 80% of original capacity, which is still in excess
of the capacity of the attached conveyor belt. For this reason, the management has
decided against repairing or replacing the grinder. The machine was depreciated to a
net book value of ` 5,000 thousand at 31 March 2X18. There is no active market for the
machine. The machine does not generate cash inflows that are independent of cash
inflows from other assets or groups of assets. It has been written down by 20% of the
net book value to ` 4,000 thousand. This reflects 20% reduction in operating capacity,
with the impairment loss posted to other expenses.
8. On 1 April 2X13, XYZ Ltd. acquired a freehold manufacturing building. The land element
in the purchase price was ` 5,600 thousand and the building element ` 20,000 thousand.
The useful life of the building was estimated at 20 years. Since 1 April 2X13 there has
been no change in the value of land. At the 31 March 2X15, the building element was
revalued to ` 22,500 thousand and the remaining useful life was unchanged. On 31
March 2X18, the open market value of the building was determined at ` 16,500 thousand.
The remaining useful life again remained unchanged. No accounting entries have yet
been made in respect of the freehold building for the year ended 31 March 2X18.

APPENDIX 1:
XYZ Ltd Group
Draft Consolidated Statement of Profit or Loss and Other Comprehensive Income for
the year end 31 March 2X18
` ’000
Revenue 15,888
Cost of sales (10,590)
Gross profit 5,298
Distribution expenses (3,084)
Administrative expenses (960)
Profit from operations 1,254
Finance costs (120)
Profit before taxation 1,134
Income tax (255.6)
Profit for the year 878.4
Other comprehensive income -
Total comprehensive income for the period 878.4
XYZ Ltd Group

Draft Consolidated Statement of Financial Position as at 31 March 2X18
ASSETS `’000
Non-current assets
Intangibles 2,99,372
Property, plant and equipment 9,43,200
12,42,572
Current assets
Inventories 34,822
Trade receivables 54,844
Cash and cash equivalents 28,584
1,18,250
Total assets 13,60,822

CASE STUDIES 30.5

Ordinary share capital 12,00,000
Revaluation surplus 1,080
Retained earnings 75,440
Equity 12,76,520
Loans 12,302
Current liabilities 72,000
Total equity and liabilities 13,60,822

1. What will be the carrying amount of intangible asset developed by senior engineers of
XYZ Ltd on 31 March 2X18?
(a) ` 3,600 thousand
(b) ` 3,000 thousand
(c) ` 1,680 thousand
(d) ` 2,280 thousand
2. At what amount finance cost should be recognized in relation to issue of loan notes
and by what amount should 3% loan notes be recognized on 31 March 2X18??
(a) ` 64.757 thousand; ` 877.157 thousand
(b) ` 76.457 thousand; ` 888.857 thousand
(c) ` 60.856 thousand; ` 873.256 thousand
(d) ` 87.257 thousand; ` 899.657 thousand
3. With what amount should XYZ Ltd recognize the personal injury claim compensation as
on 31 March 2X18?
(a) ` 240 thousand
(b) ` 276 thousand
(c) Nil
(d) ` 216 thousand

4. What should be the total revenue recognized for the security system sold to Bank?
(a) ` 4,800 thousand
(b) ` 4,513 thousand
(c) ` 960 thousand
(d) ` 4,250 thousand
5. With what amount should P&L Account and OCI be debited/credited on account of
defined benefit pension plan?
(a) ` 1,224 thousand; ` (406 thousand)
(b) ` 360 thousand; ` (136 thousand)
(c) ` 594 thousand; ` (1,036 thousand)
(d) ` 1,494 thousand; ` 332 thousand

6. Prepare the necessary journal entries to make adjustment for acquisition of ABC Ltd.
with reference to relevant IFRS and show all the relevant workings clearly.
7. Whether any adjustment is required to be made in the books of accounts in relation to
freehold manufacturing building and damaged machine, as referred to in outstanding
issues 7 and 8. Explain with reasons and pass necessary journal entries, if any.
8. In so far as the information provided allows, prepare a revised Consolidated Statement
of Profit or Loss and Other Comprehensive Income for the year end 31 March 2X18.

1. Option (d) : ` 2,280 thousand
Reason
IAS 38 ‘Intangible Assets’, requires an intangible asset to be recognised if, and only if,
certain criteria are met. Regulatory approval on 1 June 2X17 was the last criterion to be
met, the other criteria have been met as follows:
♦ Intention to complete the asset is apparent as it is a major project with full
support from the board
♦ Finance is available as resources are focused on project

CASE STUDIES 30.7
♦ Costs can be reliably measured

♦ Benefits expected to exceed costs
An amount of ` 3,000 thousand (` 3,600 thousand x 10/12) should be capitalised in the
Statement of Financial Position representing the expenditure since 1 June 2X17. The
expenditure prior to 1 June of ` 600 thousand (2/12 x ` 3,600 thousand) should be
recognised as an expense, retrospective recognition as an asset is not allowed.
IAS 36 ‘Impairment of Assets’, requires an intangible asset not yet available for use to
be tested for impairment annually. A cash flow of ` 2,400 thousand in perpetuity would
clearly have a present value in excess of ` 1,200 thousand and hence there would be no
impairment. However, the research director is technically qualified so impairment tests
should be based on her estimate of a five-year remaining life and a present value of the
future cost savings of ` 2,280 thousand. This is greater than the offer received (fair value
less costs to sell) of ` 1,680 thousand and should be used as the recoverable amount.
The carrying amount should be reduced to this amount and an impairment loss of ` 720
thousand recognised in the profit and loss for the year.
` ‘000 ` ‘000
Operating expenses- development expenditure Dr. 600
Operating expenses – impairment of intangible Dr. 720
To Intangible assets-development expenditure 1320
2. Option (c) : ` 60.856 thousand; ` 873.256 thousand
Reason
IFRS 9 ‘Financial Instruments’, financial assets can be measured at fair value through
profit and loss or at amortised cost. Amortised cost is the cost of an asset or liability
adjusted to give a constant effective interest rate over the life of the asset or liability.
Financial assets not carried at FVTPL are subject to an impairment test. A financial
asset measured at amortised cost applies only to debt instruments and must be
designated upon initial recognition. Here, the financial assets initially measured at fair
value less transaction costs. IFRS 9 requires debt instruments to meet two tests
(business model test and cash flow test) to be measured at amortised cost.
Amount that loan notes should be measured on 1 April 2X17:
Proceeds ` 900 thousand x 95% = ` 855 thousand
Issue costs ` (15.60 thousand)
` 839.40 thousand

Calculation of IRR
Year Cash Outflow Present value of cash Present value of cash
` ‘000 outflow @ 7% outflow @ 9%
` ‘000 ` ‘000
1 27 ` 25.233 ` 24.770
2 27 ` 23.582 ` 22.725
3 27 ` 22.040 ` 20.848
4 1,017 ` 775.864 ` 720.468
` 846.719 ` 788.811
IRR = 7% + [(846.719 - 839.40) / (846.719 - 788.811)] x (9 - 7) = 7.25% (approx.)

Year Balance on1 Interest @ Paid Balance on 31
` ‘000 April 7.25% ` ‘000 March
` ‘000 ` ‘000 ` ‘000
2X17-2X18 839.4 60.86 (27) 873.26
2X18-2X19 873.26 63.31 (27) 909.57
2X19-2X20 909.57 65.94 (27) 948.51
2X20-2X21 948.51 68.77 (1017) 0.278*
* Difference is due to rounding off.
Statement of Profit or Loss and Other Comprehensive Income– for year-ended 31 March
2X18 – finance costs ` 60.856; Statement of Financial Position – 31 March 2X18
` 873,260
3. Option (a) : ` 240 thousand
Reason
There should be a provision made for the personal injury claims amounting to
8 x ` 30 thousand = ` 240 thousand
Legal claim
During the year an accident at one of the company’s manufacturing plants caused a
number of employees to suffer injury. This provision is to cover personal injury claims
made by individuals concerned. This provision is based on lawyers’ best estimate of
the likely amount at which the claims can reasonably be settled. It is hoped that the
claims will be settled in the next financial year. It is expected that the full amount of
these claims will be reimbursed by the insurance company following their payment.

CASE STUDIES 30.9
Contingent liability
Following the accident a number of employees have made claims for undue stress.
Based on lawyers’ advice the company does not believe these claims will be
successful. If such case was to be successful, the estimated pay-out would be
` 36 thousand.
4. Option (b) : ` 4,513 thousand
Reason
When an extended period of credit is offered to customer (a retail bank), there are two
performance elements i.e. first, the goods on the date of sale, and second, financing
income. Future receipts from the bank should be discounted to their present value at
the imputed interest rate, in this case 8%.
The customer paid ` 960 thousand on 1 April 2X17 (` 4,800 thousand x 20%). At that
date the present value of the amount receivable on 1 April 2X19 was
(` 4,800 thousand x 80%) x 0.857 = ` 3,290 thousand.
Revenue to be recognised in respect of this transaction in the year ended
31 March 2X18:
` ‘000
Sale of goods (` 960 thousand + ` 3.29 m) 4,250
Financing income (` 3,290 thousand x 8%) 263 4,513
Carrying amount of receivable (` 3,290 thousand x 1.08) 3,553
5. Option (a) : ` 1,224 thousand ; ` 406 thousand
Reason
Asset Obligation P&L OCI
`’000 `’000 `’000 `’000
At 1 April 2X17 Opening Balances 5,400 6,660
Debit Credit
Current service cost SPLOCI obligation (864) (864)
Past service costs SPLOCI obligation 630 (630)
Benefits paid Obligation Asset (1036) (1036)
Contributions paid Asset Bank 738
Yield Asset P&L
finance 270 270
Total 5,372 7,118
Re-measurement Asset OCI 2,512 2,512

- fair value gain on asset

re - measurement
Actuarial loss on OCI Obligation
obligation 2918 (2918)
At 31 March 2X18 closing balances – 7,884 10,036 (1,224) (406)
A&O
The net obligation in the Statement of Financial Position at 31 March is
` 2,152 thousand (10,036 thousand – 7,884 thousand).

6. Acquisition of ABC Ltd
The acquisition of 7,200 thousand out of 9,600 thousand shares currently in issue does
appear to confer control upon XYZ Ltd, because 75% of the ordinary shares were
acquired and there is no indication to the contrary. From 31 March 2X17, therefore,
ABC Ltd should be consolidated as a subsidiary, with 100% of revenue, assets, expenses
and liabilities recognised in the consolidated financial statements, along with the non-
controlling interest of 25%. Assets and liabilities should be recognised at fair value of
acquisition. The domain name in ABC Ltd appears to meet the criteria for recognition as
an intangible asset under IAS 38 ‘Intangible Assets’. It is clearly separable (can be sold
and purchased separately) and it arises from contractual rights. The recent bid for it
suggests that its fair value is ` 4,800 thousand, and this should be added to the existing
total of net assets to give a revised figure of ` 1,72,800 thousand.
An intangible asset with an indefinite life should be tested annually for impairment. No
amortisation adjustment is required.
An adjusting accounting entry is required in respect of the initial issue of shares by
XYZ Ltd. It was correct to recognise ` 28,800 thousand ordinary share capital but an
adjustment is also required to share premium, 28,800 thousand shares at the then current
market price of ` 5.4 results in a purchase consideration of ` 1,55,520 thousand. A credit
to the share premium (155,520 thousand – 28,800 thousand) of
` 126,720 thousand is required. The investment (intangible) should be reversed and
replaced with goodwill on consolidation.
Purchase consideration also comprises deferred consideration which will be payable in
cash on 1 July 2X20. This should be recognised on acquisition at a discounted value,
calculated as follows:
` 12,000 thousand x 1 /(1.08)3 = ` 9,525.987 thousand. This discount should be unwound
until the date of payment on 1 July 2X20. Each year the amount unwound should be
recognised as a finance cost in profit or loss. For the nine months ended 31 March 2X18 the
finance cost should be: ` 9,525.987 thousand x 8% x 9/12 = ` 571.559 thousand.

CASE STUDIES 30.11
This amount should be added to the deferred consideration liability:

` 9,525.987 thousand + ` 571.559 thousand = ` 10,097.546 thousand.
Goodwill should be calculated as follows:
` ‘000
28,800 thousand New shares at ` 5.4 155,520.000
Deferred consideration 9,525.987
165,045.987
Non-controlling interest (NCI) (` 172,800 thousand x 25%) 43,200.000
208,245.987
Less: Fair value of net assets on the date of acquisition (172,800.000)
Goodwill 35,445.987
Journal Entries
` ‘000 ` ‘000
Consolidated assets and liabilities (SOFP) Dr. 172,800
Goodwill (SOFP) Dr. 35,445.987
To Investment in bright (intangibles) 28,800
To Share premium 126,720
To Non-controlling interest (SOFP) 43,200
To Deferred consideration (SOFP) 9,525.987
Finance cost (SPLOCI) Dr. 571.559
To Deferred consideration (SOFP) 571.559
Profit of the year in the consolidated financial statements should be increased by ABC
Ltd.’s profits for the period since acquisition (i.e. post-acquisition profits): ` 9,600
thousand x 9/12 = ` 7,200 thousand. Out of this, ` 5,400 thousand is attributable to XYZ
Ltd, and ` 1,800 thousand to NCI.
7. Accounting for damaged machine
Impairment of the machine would be governed by IAS 36 ‘Impairment of Assets’. The
aim of IAS 36 is to ensure that non-current assets or cash generating units are carried at
value no more than their recoverable amount. The recoverable amount is the higher of
fair value less costs of disposal and its value in use.
In the present case, there is no method of assessing the fair value less costs of disposal
of the machine (since there is no active market for the machine), we should therefore use
the value in use. Also, the machine does not generate cash inflows that are independent
of cash inflows from other assets or groups of assets. We should, therefore, consider
the value in use for the cash generating unit to which the machine belongs. While the
crushing machines capacity has been reduced by 20%, it can still operate at faster

speeds than the attached conveyor belt. The production line has therefore not been
impaired and no impairment loss should be recognised for the machine.
The relevant adjustments to the financial statements should be made:
` ‘000 ` ‘000
Property, plant and equipment Dr. 1,000
To Administrative expenses 1,000
(Being adjustment made for reversal of
impairment loss)
Accounting for freehold manufacturing building
Land is not depreciated as it has an indefinite life. Land should be shown in the statement
of financial position at its original cost of ` 5,600 thousand. The building element was
recognised at cost of ` 20,000 thousand.
Carrying amount before the revaluation on 31 March 2X15 would have been
` 18,000 thousand (` 20,000 thousand – two years depreciation
` 2,000 thousand). The buildings element should then be revalued upwards to
` 22,500 thousand and the surplus over carrying amount of ` 4,500 thousand recognised
in other comprehensive income and credited to revaluation surplus.
Depreciation would now be ` 1,250 thousand (` 22,500 thousand / 18 years).
Management could elect to make an annual transfer of ` 250 thousand from revaluation
surplus to retained earnings through the statement of changes in equity.
On 31 March 2X18, the following balances should be included in the statement of
financial position:
Land ` 5,600 thousand
Building ` 18,750 thousand (i.e., ` 22,500 thousand – three year
depreciation at ` 1,250 thousand p.a.)
The open market value of buildings element is now only ` 16,500 thousand and an
impairment loss of ` 2,250 thousand should be recognised. As the loss is less than the
revaluation surplus on the related asset, the entire loss should be recognised in other
comprehensive income and set off against the revaluation surplus.
` `
‘000 ‘000
Depreciation (statement of comprehensive income) Dr. 1,250
To Accumulated depreciation (statement of financial 1,250
position)
Impairment (other comprehensive income) Dr. 2,250
To Non-current assets (statement of financial position) 2,250

8. Revised Draft Consolidated Statement of Profit or Loss and Other Comprehensive Income
for the year end 31 March 2X18
Adjustment
`'000 `'000 `'000 `'000 `'000 `'000 `'000 `'000 `'000 `'000
Draft 1 2 3 4 5 6 7 8 Final
Revenue 15,888 7,200 (287) 22,801
Cost of Sales (10,590) (10,590)
Gross Profit 5,298 12,211
Distributive expenses (3,084) (3,084)

Administrative expenses (960) (1,494) (1,320) (240) 1,000 (1,250) (4,264)
Profits from operation 1,254 4,863
Finance costs (120) (571.559) 270 (60.856) (482.415)
CASE STUDIES
Profit before taxation 1,134 4,380.585

Income tax (255.6) (255.6)
Profit for the year 878.4 4,124.985
Other Comprehensive income (406) (2,250) (2,656.00)
Total Comprehensive income for the
period 878.4 1,468.985
Profit (loss) attributable to the group (331.015)
Profit attributable to NCI 1,800 1,800
30.13
Working Note:
Adjustment entry needed to be passed to correct the revenue recognized by XYZ Ltd in
respect of transaction with Bank.
XYZ Ltd has recognised ` 4,800 thousand in revenue in respect of this transaction and
therefore an adjustment of ` 287 thousand (4,800 - 4,513) is required.
` ’000 ` ’000
Revenue (SPLOCI) Dr. 287
To Trade receivables 287

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FINAL COURSE

(Revised Scheme of Education and Training)

Global Financial Reporting

CASE STUDY DIGEST

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Edition : February, 2021

Committee/Department : Board of Studies

Price (All Modules): : `

Published by : The Publication Department on behalf of The Institute of

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

W ishing you happy reading!

© The Institute of Chartered Accountants of India

Non-current assets 457

Current Assets 132

Total Assets 589

EQUITY AND LIABILITIES

Total equity 453

© The Institute of Chartered Accountants of India

Total non-current liabilities 85

Total current liabilities 51

Total equity and liabilities 589

© The Institute of Chartered Accountants of India

The following matters emerged on completion of the exercise:

© The Institute of Chartered Accountants of India

Total non-current assets 120

© The Institute of Chartered Accountants of India

Total current assets 73

Total Assets 193

EQUITY AND LIABILITIES

Total equity 124

Total non-current liabilities 42

Total current liabilities 27

Total equity and liabilities 193

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

I. Multiples Choice Questions

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II. Descriptive Questions

ANSWER TO CASE STUDY 1

I. Answers to Multiple Choice Questions

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Increase in value of investment 1.00

II. Answers to Descriptive Questions

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The post-acquisition increase in net assets is ` 25.88 million (` 189.88 million –

© The Institute of Chartered Accountants of India

2. Post-acquisition depreciation adjustments

© The Institute of Chartered Accountants of India

Ayushman Ltd 183.00

Carried to Statement of Financial Position 186.05

7. Share based payment charge

So additional amount to be recognized in Statement of Profit or Loss (2.79-1.38) 1.41

Liability element [(` 2·5 million x 3.99 + (` 50 million x 0.681)] 44.03

Opening liability 44.03

© The Institute of Chartered Accountants of India

9. Other components of equity

Ayushman Ltd 90.00

Carried to Statement of Financial Position 99.78

10. Investment in Cinkara Ltd

Carried to Statement of Financial Position 52.60

11. Deferred tax liability

A Ltd + B Ltd (15 + 9) 24.00