| Chapter 7: Financial Instruments

(B) Present value of interest [300,000 x 3.17] (4 years cumulative 10% discount 951,000
factor)
Total present value of debt component (A) + (B) 2,821,000
Issue proceeds from convertible debentures 5,000,000
Value of equity component 2,179,000

Journal entry at initial recognition:

Particulars Dr. Amount(₹) Cr. Amount(₹)
Bank A/c Dr. 5,000,000
To 6% debenture A/c (liability component) 2,821,000
To 6% debenture A/c (equity component) 2,179,000
(Being disbursement recorded at fair value)

Question 54 Hedge Accounting (MTP April’21)

Besides construction activity, Buildings & Co. Limited is also engaged in the trading of Copper. On
1st April, 20X1, it had 100 kg of copper costing Rs. 70 per kg - totalling Rs. 7000. The Company has
a scheduled delivery of these 100 kgs of copper to its customer on 30th September, 20X1 at the
rate of USD 100 on that date. To protect itself from decline in currency exchange rate (USD to
Rs.), the entity hedges its position by entering into currency futures contract for equivalent
currency units at Rs. 76 / USD. The future contract mature on 30th September, 20X1. The
management performed an assessment of hedge effectiveness and concluded that the hedging
relationship qualifies for cash flow hedge accounting. The entity determines and documents that
changes in fair value of the currency futures contract will be highly effective in offsetting
variability in cash flow of currency exchange. On 30th September, 20X1, the entity closes out its
currency futures contract. On the same day, it also sells its inventory of copper at USD 100 when
the spot rate is Rs. 72 / USD.

You are required to prepare detailed working and pass necessary journal entries for the sale of
copper and the corresponding hedge instrument taken by the company. Pass the journal entries as
on the initial date (i.e., 1st April 20X1), first quarter end reporting (i.e. 30th June 20X1) and date
of sale of copper and settlement of forward contract (i.e. 30th September 20X1).

Assume the exchange rates as follows and yield @ 6% per annum.

Date Future price for 30th September 20X1 delivery (Rs. / USD)
1 st April, 20X1 76
30th June, 20X1 74
30th September, 20X1 71

Solution
Calculation of discounting factor based on yield @ 6% p.a
Date Spot Rate at Forward Rate for Delivery (Rs. / USD) Discount
indicated date 30th September 20X1 factor @6% p.a on quarter basis
1 st April, 20X1 76 0.971

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 | Chapter 7: Financial Instruments

30th June, 20X1 74 0.985

30th Sep, 20X1 72 71 1
Determination of fair value change 1st April, 20X1 30th June, 20X1 30th Sep, 20X1
A Nominal value in Rs. @ Rs. 76 / USD 7600 7600 7600
B Nominal value in USD (100 kg for USD 100) 100 100 100
C Forward rate for 30th September, 20X1 76 74 71
D Value in Rs. (b x c) 7600 7400 7100
E Difference (a-d) 0 200 500
F Discount factor (as calculated in the above) 0.971 0.985 1
G Fair value (e x f) 0 197 500
H Fair value change for the period 0 197 303*
* 500 – 197= 303

Journal Entries
1st April, 20X1
- No entry as initial fair value is zero -

30th June, 20X1

Future Contract Dr 197
To Cash Flow Hedge Reserve (Other Equity)-OCI 197
(Being Change in Fair Value of Hedging Instrument recognised in
OCI accumulated in a separate component in Equity)

30th Sep,2021
Future Contract Dr 303
To Cash Flow Hedge Reserve (Other Equity)-OCI 303
(Being change in fair value of the hedging instrument recognised in
OCI)

30th Sep,2021
Bank/Trade Receivable Dr 7,200
To Revenue from Contracts with Customers 7,200
(Being sale of 100 kgs. of copper for USD 100 recognised at spot
rate of Rs. 72 for USD 1)

30th Sep, 2021

Cash Flow Hedge Reserve (Other Equity) – OCI Dr 500
To Revenue from Contracts with Customers 500
(Being fair value change in forward contract reclassified to
profit and loss and recognised in the line item affected by the
hedge item)

30th Sep,2021
Bank/Cash Dr 500
To Future Contract 500

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 | Chapter 15: Ind AS 115

Question 125(RTP May’19/ MTP Oct’19/ MTP Oct’20) (10 Marks)

KK Ltd. runs a departmental store which awards 10 points for every purchase of ₹ 500 which can be
discounted by the customers for further shopping with the same merchant. Unutilised points will
lapse on expiry of two years from the date of credit. Value of each point is ₹ 0.50. During the
accounting period 2019-2020, the entity awarded 1,00,00,000 points to various customers of which
18,00,000 points remained undiscounted. The management expects only 80% will be discounted in
future of which normally 60-70% are redeemed during the next year.
The Company has approached your firm with the following queries and has asked you to suggest the
accounting treatment (Journal Entries) under the applicable Ind AS for these award points:
a) How should the recognition be done for the sale of goods worth ₹ 10,00,000 on a particular
day?
b) How should the redemption transaction be recorded in the year 2019-2020? The Company
has requested you to present the sale of goods and redemption as independent transaction.
Total sales of the entity is₹ 5,000 lakhs.
c) How much of the deferred revenue should be recognized at the year-end (2019-2020)
because of the estimation that only 80% of the outstanding points will be redeemed?
d) In the next year 2020-2021, 60% of the outstanding points were discounted. Balance 40%
of the outstanding points of 2019-2020 still remained outstanding. How much of the deferred
revenue should the merchant recognize in the year 2020-2021 and what will be the amount
of balance deferred revenue?
e) How much revenue will the merchant recognized in the year 2021-2022, if 3,00,000 points
are redeemed in the year 2021-2022?
Solution:
a) Points earned on ₹ 10,00,000 @ 10 points on every ₹ 500 = [(10,00,000 / 500) x 10] = 20,000
points.
Value of points = 20,000 points x ₹ 0.5 each point = ₹ 10,000
Revenue recognized for sale of ₹ 9,90,099 [10,00,000 x (10,00,000/10,10,000)]
goods
Revenue for points deferred ₹ 9,901 [10,00,000x (10,000/10,10,000)]

Journal Entry
Bank A/c Dr 10,00,000
To Sales A/c 9,90,099
To Liability under Customer Loyalty Programme 9,901

b) Points earned on ₹ 50,00,00,000 @ 10 points on every ₹ 500

= [(50,00,00,000/500) x 10] = 1,00,00,000 points.
Value of points = 1,00,00,000 points x ₹ 0.5 each point = ₹ 50,00,000

Revenue recognized for sale of goods

= ₹ 49,50,49,505 [50,00,00,000 x (50,00,00,000/50,50,00,000)] Revenue for points
= ₹ 49,50,495 [50,00,00,000 x (50,00,000/ 50,50,00,000)]

Journal Entry in the year 2019

Bank A/c Dr 50,00,00,000
To Sales A/c 49,50,49,505
To Liability under Customer Loyalty Programme 49,50,495

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 | Chapter 15: Ind AS 115

(On sale of Goods)

Liability under Customer Loyalty Programme Dr 42,11,002

To Sales A/c 42,11,002
(On redemption of (100 lakhs -18 lakhs) points)

Revenue for points to be recognized

Undiscounted points estimated to be recognized next year 18,00,000 x 80% = 14,40,000 points
Total points to be redeemed within 2 years = [(1,00,00,000-18,00,000) + 14,40,000] = 96,40,000
Revenue to be recognised with respect to discounted point = 49,50,495 x
(82,00,000/96,40,000) = 42,11,002

c) Revenue to be deferred with respect to undiscounted point in 2019-2020 = 49,50,495 –

42,11,002 = 7,39,493

d) In 2020-2021, KK Ltd. would recognize revenue for discounting of 60% of outstanding points as
follows: Outstanding points = 18,00,000 x 60% = 10,80,000 points

Total points discounted till date = 82,00,000 + 10,80,000 = 92,80,000 points

Revenue to be recognized in the year 2020-2021

= [{49,50,495 x (92,80,000 / 96,40,000)} 42,11,002] = ₹ 5,54,620.

Liability under Customer Loyalty Programme Dr ₹ 5,54,620

To Sales A/c ₹ 5,54,620
(On redemption of further 10,80,000 points)

The Liability under Customer Loyalty programme at the end of the year 2020-2021 will be ₹
7,39,493 – ₹ 5,54,620 = ₹ 1,84,873.

e) In the year 2021-2022, the merchant will recognize the balance revenue of ₹ 1,84,873
irrespective of the points redeemed as this is the last year for redeeming the points. Journal
entry will be as follows:
Liability under Customer Loyalty Programme Dr ₹1,84,873
To Sales A/c ₹1,84,873
(On redemption of balance points)

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