Analysis of Financial Statements

18
ANALYSIS OF FINANCIAL
STATEMENTS
LEARNING OUTCOMES
After studying this chapter, you would be able to:

 Examine the key features of the financial statements and its relevancy for
better reporting.
 Examine the key factors to be kept in mind in the preparation of financial
statements.
 Follow the best practices in the preparation of financial statements.
 Analyse the common mistakes incurred by the preparers of the financial

statements in the presentation of financial statements with respect to
Schedule III and Accounting Standards.
 Rectify the mistakes found in the financial statements by addressing the
issues and prescribing the correct presentation and disclosures.
© The Institute of Chartered Accountants of India

18.2 FINANCIAL REPORTING
CHAPTER OVERVIEW
Analysis of Financial Statements
Characteristics of good Best Practices Common Illustrations

financial statements Defects in FS
Compliance
Schedule III
True and fair view Complete Disclosure
Relevance
Simple and specific Disclosure of
Balance
Understand ability Sheet Items
Transparency
Consistency
Materiality
Disclosure of
Regulatory Compliance Statement of
Integration of Notes Profit and
Loss Items
Universality
Disclosure of
significant Disclosure of
accounting Other Items
of Financial
Disclosures of key Statements
estimates and
judgements Other
Constituents
Integrated approach of Financial
Statements
Consolidated
Financial
Statements
Based on AS Based on Ind AS

ANALYSIS OF FINANCIAL STATEMENTS 18.3
1. INTRODUCTION
Business is important organ of society that helps in its overall development. A typical business
has a variety of stakeholder that include its employees, owners, banks, trade associations,
government, general public and so on. These stakeholders, particularly investors are keenly
interested in knowing about the financial well-being of business organisations.
Financial reporting is an important means of communication for entities to disseminate information
of its operations to various stakeholders. With the increased focus on governance the significance
of financial reporting has exponentially increased. The importance of robust financial reporting
cannot be emphasized enough. As India and Indian enterprises move ahead in the growth path
at much faster pace and exposure of Indian entities to global environment expands, ever
increasing complexities of transactions throws up newer challenges in financial reporting and
related guidance. Presentation and disclosures, in this context, are assuming greater significance
as enterprises aim to achieve excellence in financial reporting. Today, there are a number of
requirements mandated by the regulators. It has now become imperative for entities to keep pace
with the fast evolving requirements in the area of financial reporting.
The financial statements are a source of critical communication between an entity and the
investors and other stakeholders. They act as the barometer to assess the performance, both
past and future, for any enterprise. Decades back when enterprises were mostly proprietary
owned, the financial statements were simpler in content and were presented annually just to
provide the historical data. However, with globalization and increased dependence on technology,
where companies are expanding both horizontally and vertically, many even spanning across
geographies; the number of stakeholders – be it be investors, suppliers, employees, or even tax
authorities, have increased manifold.
The financial statements are supplemented with the disclosures which are the key source of
information and help the users in interpreting the financial statements in a better manner in taking
appropriate decisions. Therefore, one can say that disclosures are added for good reasons.
Disclosures are not the only requirement which will make a financial statement to be a good
financial statement. The presentation and the compliance of formats are also the important factors
which are taken into consideration while evaluation a financial statement.
This chapter enumerates some of the practices currently being followed in financial reporting and
sets out suggested ‘best practice’ to enhance the quality of financial reporting to enable preparers
of financial statements in benchmarking their financial statements. It intends to bring to the notice
of the preparers and reviewers of the financial statements some common errors or omissions
which they shall avoid while preparing the financial statements.

2. FINANCIAL STATEMENTS OF CORPORATE ENTITIES

The format and content of the financial statements for companies is required to be in accordance
with Schedule III to the Companies Act, 2013. Further, there are several additional disclosure
requirements both with respect to the balance sheet and statement of profit and loss.
Certain industries have formats specified by their industry regulators, which need to be followed
by them. This fact has also been recognised in the Companies Act, 2013 in the proviso to Section
129(1) which implies that the format set out in Schedule III will not be applicable to insurance
companies and banking companies. The formats for these companies are prescribed by specific
regulators.
In terms of format, Schedule III only prescribes the vertical format of balance sheet and does not
provide the alternative of using the horizontal format. Further, Schedule III sets out the minimum
requirements for disclosure on the face of the balance sheet and the statement of profit and loss.
It allows line items, sub-line items and sub-totals to be presented as an addition or substitution on
the face of the financial statements when such presentation is relevant to an understanding of the
company’s financial position or performance or to cater to industry/sector-specific disclosure
requirements or when required for compliance with the amendments to the Companies Act or
under the Accounting Standards. Schedule III now requires all disclosures to be made as a part
of the notes.
Apart from granting an overriding status to the Accounting Standards, cognizance has also been
given to the requirements of Accounting Standards in the format of the balance sheet and
accordingly elements such as deferred tax assets and intangible assets have been included in the
balance sheet. Also, it has been clearly stated that the disclosure requirements specified in Part
I and Part II of the Schedule III are in addition to and not in substitution of the disclosure
requirements specified in the notified Accounting Standards. The terms used in Schedule III are
to be considered as per the notified Accounting Standards.
One of the pertinent aspect which needs to be considered in the preparation of financial
statements with regard to Schedule III is that it does not prescribe the accounting treatment to be
adopted by the entity; it only prescribes the format and content. Consequently, the fact that a
particular item has been included in the format of the balance sheet in Schedule III does not imply
that the particular item can be recognized in the balance sheet. Schedule III prescribes only
presentation and not treatment which is a subject matter of Accounting Standards, which has also
been specifically acknowledged in Schedule III.
3. CHARACTERISTICS OF GOOD FINANCIAL

STATEMENTS
In the Indian scenario, the ICAI has been the recognized accounting body issuing generally
accepted accounting policies, and has made the standards mandatory for enterprises operating

within India. Recently, ICAI has issued the converged set of Ind AS that is adopted by MCA, and
many large entities are already in the transition phase for adoption.
The key features to any set of financial statements are:

1. True and fair view of the affairs of the enterprise: This is the most important feature of
any set of financial statements. The user of the financial statements depends fully on the
same and hence the reliability factor is supreme.
2. Relevance: The financial statements should provide the relevant information for the period it
is presented. There is no point in presenting historical data of past several years that is may
be redundant as of date. The key here is that the user of the financial statements should be
in a position to take independent decision after reading the financial statements. This decision
can be different for different users – for an investor the decision whether to hold the shares
of the enterprise will stem from the set of statements, for a senior employee of the company
it can be the future growth prospects of the company etc. But what is important is that the
users should be empowered to make decisions through the financial statements
3. Understandability: For the user to make sense, the financial statements should be readable
and content lucid to digest. Even a layman should be able to read the same, and understand
the basic information, if not the accounting policies and procedures.
4. Consistency: The users of the financial statements will be benefitted only if the statements
are released in periodic intervals and in standard formats. Else, the entire purpose of
furnishing financials will be defeated. That’s the reason that laws are prescribed for
presentation formats and periodicity.
5. Regulatory Compliance: Needless to say, the tax authorities, market regulators etc rely
hugely on financial statements to understand and gauge the compliances met by the
enterprise.
6. Universality: Last but not the least; the financial statements should be comparable both
within the industry and outside. So financial statements by two different companies should
look in similar lines if both are engaged in, say, manufacturing steel. Likewise, the financials
of a company manufacturing steel in India should be comparable to the set of financial
statements of a company based out of US engaged in the similar line of business.
The need to have the above key characteristics have brought the accounting bodies world over to
come together to have a set of common standards for better integration and harmonization of
accounting principles and practices.

True and
fair view of
the affairs of
the
enterprise
Universality Relevance
Good Financial
Statements
Regulatory Understand
Compliance ability
Consistency
4. BEST PRACTICES - APPLICABLE TO ALL COMPANIES

Following are some of the practices, if followed by the preparers of the financial statements, it
would lead to better presentation and disclosure and will also serve the meaningful purpose for
various stakeholders in understanding the functioning, financial position and financial performance
of the entity and in appropriate decision making:
1. Compliance
Financial reporting is a regulated activity and compliance with the requirements is a must.
Comply with the standards and regulations but also ensure your financial statements are an
effective part of your wider communication with your stakeholders. It should be simple and
understandable without any change in the interpretation.
Example :
It would not be appropriate to term ‘other than temporary diminution’ as ‘permanent diminution’
in case of investments in line with the requirements of Accounting Standard (AS) 13,
Accounting for Investments,
Example :
Usage of the term ‘remaining maturity’ instead of ‘original maturity’ while describing cash and
cash equivalents.

2. Complete
The information disclosed in the financial statements should be complete and should not lead
to any further cross questioning in the mind of the users. Ensure consistency of disclosures
across the financial statements.
Example :
Where the accounting policy states that “Balances of debtors, creditors and loans and
advances are subject to reconciliations and confirmations”. This indicates that these balances
may or may not be appropriately stated as well as raising questions regarding the
appropriateness of the audit process.
Example :
In one case, it was observed that there were loans given to a subsidiary company which was
disclosed as a part of disclosures made in compliance with Clause 32 of the equity listing
agreement. However, there was no disclosure of the same loans under related party
disclosures.
3. Simple and specific

• Draft your notes, accounting policies, commentary on more complex areas in simple and
plain English. Ensuring that there are no vague or ambiguous notes.
Example :
The definition of a derivative and a hedged item and how the company uses such items:
“A derivative is a type of financial instrument the company uses to manage risk. It is
something that derives its value based on an underlying asset. It's generally in the form
of a contract between two parties entered into for a fixed period. Underlying variables,
such as exchange rates, will cause its value to change over time. A hedge is where the
company uses a derivative to manage its underlying exposure. The company's main
exposure is to fluctuation in foreign exchange risk. We manage this risk by hedging forex
movements, in effecting the boundaries of exchange rate changes to manageable,
affordable amounts.”
• Make your policies clear and specific.

• Ensure that there should not be any vague or ambiguous notes, with no further information
or explanation which may lead to misinterpretation of information.
• Reduce generic disclosures and focus on company specific disclosures that explain how
the company applies the policies.

Example :
A note stated “Land not registered in the name of the company has been given for the use
of group companies”. However, there are no disclosures regarding such lease elsewhere
in the financial statements. This leads to ambiguity regarding whether the land has been
capitalized in the books of account or not.
A better disclosure would be to include this note in the note relating to fixed assets with
an asterix against land and a note which states “Land includes area measuring XX acres,
towards which the registration process is still in progress. This land has been given on
lease to group companies.”
4. Transparency
In preparation of financial statements many a times certain assumptions, or other bases are
taken. Disclose those assumptions and bases transparently, so that they users are not misled.
Rather such transparency shall provide useful additional information and substantiate your
decision/judgement.
5. Materiality
• The lack of clarity in how to apply the concept of materiality is perceived to be one of the
main drivers for overloaded financial statements. Make effective use of materiality to
enhance the clarity and conciseness of your financial statements.
• Information should only be disclosed if it is material. It is material if it could influence
users’ decisions which are based on the financial statements.
• Your materiality assessment is the ‘filter’ in deciding what information to disclose and what
to omit.
• Once you have determined which specific line items require disclosure, you should assess
what to disclose about these items, including how much detail to provide and how best to
organise the information.
Example: Capital Commitments

A company has committed to purchase several items of property, plant and equipment.
Individually each purchase is immaterial. However, the total amounts to a material
commitment for the company and therefore some disclosure should be made regarding
this commitment.
Example : New Revenue Stream
A company in the software sector has communicated to its stakeholders a strategic
intention to focus its new development efforts in cloud-based solutions. In a particular
financial year cloud-based revenues are less than 5% of the total but have grown rapidly.

The company therefore decides to provide separate disclosure about this revenue
stream in accordance with Ind AS 108 ‘Operating Segments’ even though other revenue
streams of similar size are typically combined into ‘other revenue.’
6. Integration of Notes
• Notes cover the largest portion of the financial statements. They are an effective tool of
communication and have the greatest impact on the effectiveness of your financial
statements.
• Group notes into categories, place the most critical information more prominently or a
combination of both.
• Integrate your main note of a line item with its accounting policy and any relevant key
estimates and judgements.
Example: Inventories
1. Accounting Policy
Inventories are stated at the lower of cost and net realisable value. Cost includes all
expenses directly attributable to the manufacturing process as well as suitable portions of
related production overheads, based on normal operating capacity. Costs of ordinarily
interchangeable items are assigned using the first in, first out cost formula. Net realisable
value is the estimated selling price in the ordinary course of business less any applicable
selling expenses.
2. Significant Estimation of Uncertainty
Management estimates the net realisable values of inventories, taking into account the
most reliable evidence available at each reporting date. The future realisation of these
inventories may be affected by future technology or other market-driven changes that may
reduce future selling prices.
3. Inventories consist of the following: (` in crores)
31 March 20X2 31 March 20X1
Raw materials and consumables 7,000 6,000
Merchandise 11,000 9,000
18,000 15,000
• Ensuring that the accounting policies are disclosed in one place and not scattered
across various notes.

For example, in one case it was observed that the policy of recognizing 100% depreciation
on assets costing less than ` 5,000 was specified in the note on fixed assets, rather than
in the accounting policy for fixed assets.
7. Disclosure of Significant Accounting Policies
• The financial statements should disclose your significant accounting policies. Disclose
only your significant accounting policies – remove your non-significant disclosures that do
not add any value.
• Your disclosures should be relevant, specific to your company and explain how you apply
your policies.
• The aim of accounting policy disclosures is to help your investors and other stakeholders
to properly understand your financial statements.
• Use judgement to determine whether your accounting policies are significant, considering
not only the materiality of the balances or transactions affected by the policy but also other
factors including the nature of the company’s operations.
Example:
Taxable temporary differences arise on certain brands and licenses that were acquired in past
business combinations. Management considers that these assets have an indefinite life and
are expected to be consumed by use in the business. For these assets deferred tax is
recognised using the capital gains tax applicable on sale.
8. Disclosures of Key Estimates and Judgements

• Effective disclosures about the most important estimates and judgements enable
investors to understand your financial statements.
• Focus on the most difficult, subjective and complex estimates.
• Include details of how the estimate was derived, key assumptions involved, the process
for reviewing and an analysis of its sensitiveness.
• Provide sufficient background information on the judgement, explain how the judgement
was made and the conclusion reached.
9. Integrated Approach
• Financial statements are just one part of your communication with the stakeholders. An
annual report typically includes financial statements, a management commentary and
information about governance, strategy and business developments, CSR Reporting,
Business Responsibility Reporting etc. There is also a growing trend towards integrated
reporting.

• To ensure overall effective communication consider the annual report as a whole and
deliver a consistent and coherent message throughout.
• Ind AS 1 also acknowledges that one may present, outside the financial statements, a
financial review that describes and explains the main features of the company’s financial
performance and financial position, and the principal uncertainties it faces.
• Many companies also present, outside the financial statements, reports and statements
such as environmental reports and value added statements, particularly in industries in
which environmental factors are significant and when employees are regarded as an
important user group.
• Even though the reports and statements presented outside financial statements are
outside the scope of AS / Ind AS, they are not out of the scope of regulation.
Example :
CSR disclosures, as required by the Companies Act, 2013. in section 134 and Schedule
VII.
5. COMMON DEFECTS IN FINANCIAL STATEMENTS OF

CORPORATE ENTITIES
5.1 General Observations on Schedule III Disclosure
S. Title Observation on the basis of the Points to remember
No. review of some published
financial statements
1. Cross references Many a times cross references to Against each item, give the
the notes to accounts are not appropriate cross
given which makes it difficult to reference to the respective
understand whether the related note in the financial
disclosure are made. Schedule III statements, if any
permits giving the additional
information, if any, in notes to the
accounts with proper linking.
2. Corresponding At times, the amounts for the Instruction 5 in the ‘general
amounts for previous reporting period are not instructions for preparation
immediately presented, particularly in of balance sheet and
preceding footnotes / notes to accounts, Statement of Profit and
reporting period which is not in compliance with Loss of a company’ in
the requirements of Schedule III Schedule III, states ‘Except


in the case of the first
Financial Statements laid
before the company (after
its incorporation) the
corresponding amounts
(comparatives) for the
immediately preceding
reporting period for all
items shown in the
Financial Statements
including notes shall also
be given.’
For all the numbers
disclosed in the financial
statements including those
in the notes, disclose the
corresponding previous
period numbers as well.
3. Rounding off • In some cases, it was The specific rule for
observed that the financial rounding off as per
statements did not include any Schedule III based on
reference regarding ‘rounding off’ ‘turnover’ is:
adopted by the company (For • Less than `100 crore:
example, ` in ‘00s, ‘000s, etc.) to the nearest
• Further, in some cases, it hundreds, thousands,
was observed that different lakhs or millions, or
rounding off was adopted in decimals thereof
different places (For example, the • `100 crore or more: to
figures were rounded off to the nearest lakhs,
millions in balance sheet and millions or crores, or
statement of profit and loss, but decimals thereof.
there was no rounding off at all in • Mention the rounding
the notes) off convention adopted
– at the beginning or on
each page of the
balance sheet,
statement of profit and
loss, cash flow
statement and other
notes (For example, `


in hundreds, `’000s,
etc.). It could be
placed at the top right
hand corner of the
page.
• Ensure consistency
across the financial
statements
• Where the numbers to
be disclosed are
smaller than the
rounding off adopted
by the company, the
best practice may be to
lower the level of
rounding off to that of
material items.
4. Reference to AS / • Appropriate references to the • The ‘basis of
GN Accounting Standards were preparation’ given at
missing in the financial the beginning in the
statements. notes to accounts
• In some cases, it has even normally include a
been observed that there is reference to the
no reference to the framework Accounting Standards
being used (i.e., no reference used by the entity in
to the Accounting Standards) preparation of the
financial statements.
• In case of companies,
reference should be
made to Accounting
Standards as notified
under Section 133 of
the Companies Act,
2013, read with Rule 7
of the Companies
(Accounts) Rules,
2014 and not to
Standards issued by
the ICAI.


• Further, ICAI ‘issues’
Accounting Standards
and does not ‘notify’
them. AS issued by
the ICAI are applicable
to non-corporate
entities only.
5. Tallying of At many places the totals of the Be cautious and avoid
balances/totals of notes carried in the balances casting errors.
the notes with the sheets or Statement of profit and
balance in the loss are not same
balance sheet or
statement of profit
or loss.
6. Disclosure of • At some places it has been • Avoid retention of
accounting observed that the accounting accounting policies
policies policies have been given but while the transactions
the relevant/related item is to which they relate are
missing. no longer entered into
• The accounting policy should by the company for a
be drafted considering the considerable number
relevance of the terminology of years.
used in the accounting • Compliance of the
standard standards and other
statutes shall be made
without any
misinterpretation.
7. Consistent In many financial statements, it Ensuring that negative
Disclosure of has been observed that negative numbers are consistently
negative figure figures at some places are shown disclosed either within
with minus signs and at some brackets or with a minus
places, in the same financial (‘-‘) sign preceding the
statements, they are shown in the number.
bracket.
Quantitative It is observed from some of the Schedule III (Part II)
disclosures financial statements, that the requirement: “In the case
company had earned revenue of trading companies,
from trading activities apart purchases in respect of
goods traded in by the


from the manufacturing company under broad
activities, but there were no heads”.
quantitative disclosures Further, Schedule III
regarding trading activities also requires: “In the
case of a company,
which falls under more
than one of the
categories mentioned in
(a), (b) and (c) above, it
shall be sufficient
compliance with the
requirements herein if
purchases, sales and
consumption of raw
material and the gross
income from services
rendered is shown under
broad heads.”
5.2 Observations on Disclosure of Balance Sheet Items

1. Shareholders’ Fund
a Share application Schedule III now has a
It was observed that share
money received specific requirement for
application money received
pending allotment disclosure of share
pending allotment was included in
/ calls received in application money pending
paid up capital disclosed on the
advance allotment on the face of the
face of the balance sheet.
balance sheet. It also
The note on share capital additionally provides that
disclosed the share application application money received
money separately as being added for allotment of securities
to the share capital and due for refund should
be disclosed under ‘other
current liabilities’.


b Options In a few cases, where the The requirement of the
outstanding company had outstanding Schedule III is to disclose:
employee stock options, no ‘shares reserved for issue
disclosure was made regarding under options and
outstanding in the note on share contracts / commitments
capital. for sale of shares /
disinvestment, including
the terms and amounts’
Where a company has

options such as employee
stock options or options
under a shareholders
agreement, disclose such
options in the note relating
to share capital.
2. Reserves and Surplus
a Movement in It was observed, in some cases, The requirement of
reserves that the balances for current and Schedule III is:
previous year were different for ‘Additions and deductions
certain reserves, however since last balance sheet to
movement of the reserves was not be shown under each of the
given specified heads’
Adjustments in securities
premium / other reserves
When there has been a

change in the balance of
any reserve as compared
to the last year, disclose
the movement in reserve
b Adjustment in Where certain amounts were In an announcement, titled
Securities adjusted directly in securities ‘Tax effect of
premium or other premium or other reserves, it was expenses/income adjusted
reserves observed that there was no directly against the
reference to the treatment of tax reserves and/or Securities
impact on account of the same Premium Account’, the ICAI
has recommended that ‘any
expense charged directly to
reserves and/or -Securities


Premium Account should
be net of tax benefits
expected to arise from the
admissibility of such
expenses for tax purposes’.
Similarly, any income
credited directly to a
reserve account or a similar
account should be net of its
tax effect.
3. Long-term Borrowings
Debentures: It has been observed in a few The requirement of
Terms of cases that the disclosures are Schedule III is
redemption / incomplete – either terms of ‘Bonds/Debentures (along
conversion redemption/ conversion or the with the rate of interest and
dates of redemption / conversion particulars of redemption or
were not disclosed in descending conversion, as the case
order may be) shall be stated in
descending order of
maturity or conversion,
starting from farthest
redemption or conversion
date, as the case may be’
Nature of security In some cases, it was noted that Schedule III requires
the nature of security was not specific disclosure of the
disclosed for all loans, particularly nature of security
where there were a large number separately in each case
of loans from various sources or
were disclosed as an aggregated
disclosure
Interest accrued It was observed in some cases, With respect to interest,
and due that no distinction was made Schedule III requires to
between interest accrued and due disclose two sub heads
and interest accrued but not due, under ‘other current
which is necessary in order to liabilities’ viz:
ensure appropriate disclosure
i. Interest accrued
under current liabilities
and due on borrowings and


ii. Interest accrued
but not due on borrowings.
Also the nature of security
should be disclosed in case
of each loan from every
source
4. Tax related Assets / Liabilities: Presentation

Presenting In many cases, it was observed AS 22 has a specific requirement
advance for tax that advance taxes were with respect to offsetting. As per
and provision for presented under the head ‘loans para 27, an enterprise should
tax and advances’ and provision for offset assets and liabilities
representing current tax if the
tax under the head ‘provisions’ enterprise:
without offsetting the two amounts
(a) has a legally enforceable right
to set off the recognised amounts;
and
(b) intends to settle the asset and
the liability on a net basis.
• Where the enterprise can
infact fulfill the criteria set
out in paragraph 27 of AS
22, disclose the advance tax
/ provision for tax on a net
basis.
• Do remember to mention the
adjusted amount as well. For
example (without the
corresponding previous
period figures):
Where advance tax is greater

than provision for tax:
Loans and Advances (in `)
Advance tax (net of
provision for tax: ` XX) XXX
OR
Where provision for tax is greater
than for advance tax:
Provisions (in `)


Provision for taxes (net
of advance tax: ` XX) XXX
Presentation of • In some cases, it was AS 22 has a specific

deferred tax observed that deferred tax requirement with respect to
liability / asset in liability and deferred tax asset offsetting. As per paragraph
the balance sheet were shown separately in the 29 of AS 22, an enterprise
standalone financial should offset deferred tax
statements of a company assets and deferred tax
located in India with no liabilities if:
branches outside India. (a) the enterprise has
• In certain other cases, it was a legally enforceable right
observed that deferred tax to set off assets against
liability and deferred tax asset liabilities representing
were presented on a net current tax; and
basis, despite the company (b) the deferred tax
being subject to taxes under assets and the deferred tax
various jurisdictions. liabilities relate to taxes on
income levied by the same
governing taxation laws.
Where the conditions of

paragraph 29 of AS 22 are
fulfilled, deferred tax asset
and deferred tax liability
should be offset and
disclosed net in the
financial statements to the
extent they are in the same
jurisdiction.
5. Tax related Assets / Liabilities: Other Disclosures
Break-up of It was noticed in some cases that Paragraph 31 of AS 22
components although the total deferred tax states ‘The break-up of
asset / liability was disclosed, the deferred tax assets and
break-up into the various deferred tax liabilities into
components was not disclosed major components of the
and the amount involved was respective balances should
material. be disclosed in the notes to
accounts.’
Ensure that the components
of deferred tax asset /


liability are disclosed
separately
Convincing In certain cases, it was observed Paragraph 32 of AS 22 has
evidence that the notes to accounts a specific disclosure
included a note that deferred tax requirement relating to
assets have been recognized on convincing evidence which
unabsorbed depreciation / carried reads as follows:
forward business losses using the ‘The nature of the evidence
principle of virtual certainty. supporting the recognition
However, no disclosures were of deferred tax assets
made as to what is the convincing should be disclosed, if an
evidence supporting the virtual enterprise has unabsorbed
certainty test as required by AS 22 depreciation or carry
forward of losses under tax
laws’
6. Fixed Assets
Note on fixed The note on fixed assets, in The requirement of both -
assets certain cases, did not include Schedule III and the
all the columns required to Accounting Standards is
present the information to disclose the gross and
specified by both Schedule III net book values of fixed
and AS 10. For example, the assets at the beginning
column for opening balance and end of an accounting
accumulated depreciation was period showing additions,
not disclosed disposals, acquisitions
and other movements.
Tangible and In certain cases, it was observed The requirement of
intangible assets that there was no distinction Schedule III is to disclose
made between tangible and tangible assets and
intangible assets in the note on intangible asset
fixed assets. separately. Also
paragraph 90 of AS 26
states:


Further, there was no “The financial statements
bifurcation of intangible assets should disclose the
into acquired intangible assets following for each class of
and internally generated intangible assets,
intangible assets. distinguishing between
internally generated
intangible assets and other
intangible assets:
(a) the useful lives or the
amortisation rates used;
(b) the amortization
methods used…….”
Impairment In certain instances, it was AS 28 requires disclosures

noticed, that the column of of information as required
depreciation was presented as under paragraph 117 to be
‘depreciation / impairment’ made for each ‘class of
implying that the figures assets’. Impairment loss
disclosed in that column are an should be presented
aggregation of both separately in Fixed Assets
depreciation and impairment Schedule as per
loss. requirement of AS 28.
Revaluation In some cases, where In case of revaluation, the

revaluation was done, it was method used for
observed, that the disclosure of revaluation, for example,
the manner in which valuation external valuers used,
was done was not mentioned. should be specified as
required as per para 39 of
AS 10.
7. Fixed Assets: Accounting Policies
Leasehold assets In certain cases, it was observed An asset acquired on
that there was no amortization lease indicates a finite
recognized with respect to useful life of the asset.
leasehold assets Accordingly, there should
be an amortization
charge pertaining to such
leased asset over the


period of the lease.
The amortization policy
used for leasehold assets
should be disclosed.
Expenditure during In certain cases, the accounting Reference in this regard is
construction policy stated that certain made to the requirements
period expenses such as indirect costs/ of AS 10, which states:
other incidental expenses / “The cost of a fixed
advertising and publicity asset should comprise
expenses which were incurred its purchase price and
during construction period, were
any attributable cost of
included in the amounts
bringing the asset to its
capitalized
working condition for
its intended use.”
Consequently, it needs to
be elaborated in the
accounting policy as to
whether the indirect costs
/ indirect expenses were
infact directly attributable
to construction of the
asset. Expenses incurred
towards advertising /
publicity, should not be
considered in the cost of
the fixed assets.
Capitalisation of In certain cases, it was In this case, reference is
assets not observed that enabling assets made to paragraphs 49
controlled by the or assets which were not and 88 of the ‘Framework
company
controlled by the company were for the Preparation and
recognized as fixed assets. For Presentation of Financial
example: Statements’, issued by
• Expenditure incurred the ICAI.
towards development of According to it,
road on land not owned by expenditure incurred
the company towards developing
• Expenditure towards sub- assets which are not


stations and power lines controlled by the
which are owned by the company should be
state electricity boards recognised in the
loss of the period in which
these are incurred.
Non-charging of In case of a company engaged in Usually where the life of an
depreciation port activities, it was observed asset is limited on account
that depreciation was being of legal or contractual
provided on ‘dredging’ assets terms, the same needs to
beyond the concession period. be factored in, while
estimating the useful life of
the asset.
Intangible assets – In certain cases, it was If an intangible asset is
Useful life beyond observed, that there was no amortised over more than
ten years explanation regarding the ten years, the reasons
rationale behind amortising a why it is presumed that
specific intangible asset beyond the useful life of an
the rebuttable assumption of ten intangible asset will
years as required by AS 26. exceed ten years from
the date when the asset
is available for use shall
be disclosed.
In giving these reasons,
the enterprise should
describe the factor(s) that
played a significant role
in determining the useful
life of the asset”
Intangible assets – In certain cases, it was noticed, Accordingly, AS 26

Assets with that the entities disclosed certain provides that amortisation
indefinite life intangible assets – particularly, is to be provided based on
right of use, as perpetual assets ‘best estimate of useful
with no amortisation being life’. The Standard also
provided on the same. prescribes a rebuttable
presumption that useful
life of an intangible asset


will not exceed ten years.
Amortization of In certain companies, it was The policy of charging
intangible assets noted that the accounting policy software purchased to
stated that software purchased statement of profit and
is charged to the statement of loss does not appear to be
profit and loss as and when in accordance with the
incurred. ‘best estimate of useful
life’ as given in paragraph
63 of AS 26, unless the
amount involved is not
material.
Borrowing costs In certain cases, it was observed The requirement of AS 16
that the accounting policy with is to ensure that borrowing
respect to borrowing costs, costs are capitalized only
specified that borrowing costs till the time substantially all
attributable to qualifying fixed the activities necessary to
assets were capitalized up to the prepare the qualifying
date of ‘commissioning’ of the asset for its intended use
assets or sale are complete.
Consequently, the
reference to
‘commissioning’ of assets
may not be an appropriate.
Research and It was also noticed that no Paragraph 41 of AS 26
Development distinction was made between very clearly states:
Expenses
“research” and “development” ‘No intangible asset
phases in drafting the related arising from research (or
accounting policies leading to from the research phase of
inappropriate accounting an internal project) should
be recognised.
policies: For example, policies
Expenditure on research
read as under: (or on the research phase
• “Capital expenditure on of an internal project)
research and development should be recognised as
is shown as an addition to an expense when it is
fixed assets and incurred.’
depreciated accordingly.” The words / phrases used
• “Capital expenditure in describing the


relating to Research and accounting policy should
Development amounting to be as per the respective
` XX (previous year ` XX) accounting standards
has been included in fixed
assets”
Such accounting policies convey
an impression that expenses
pertaining to the ‘research
phase’ are also considered for
capitalization.
8. Fixed Assets: Disclosures
Borrowing costs In most cases, it was observed Paragraph 23 of AS 16
that borrowing costs on requires the disclosure of
qualifying assets were ‘the amount of
capitalized and an accounting borrowing costs
policy for the same was also capitalized during the
disclosed. period’
However, the amount of
borrowing costs during the year
was not disclosed.
Discount rate used In a few cases, where the AS 28 requires the
in computing value company had recognized disclosure of discount rate
in use impairment loss and had used for computing value
computed value in use, the in use.
disclosure made with regard to
discount rate was “….based on
an appropriate discounting
factor” rather than specifically
stating the discount rate used.
9. Capital Work in Progress
Components of In some cases, the entity had not As a best practice, the
Capital Work in disclosed the components of components of capital work
Progress capital work in progress. in progress should be
disclosed especially in case
of significant capitalisation
projects.


Presentation of In few cases, capital advances Schedule III requires capital
Capital Advances were disclosed as part of capital advances to be disclosed
work-in- progress. under ‘Long-term loans and
advances’
Ensure that capital

advances are disclosed
under Long – term loans
and advances separately
presented at values
specified per above
paragraph.
10. Investments: Presentation
Categorization of In certain cases, it was observed As per AS 13, an enterprise

investments that in the note on investments: should disclose current
investments and long-term
In case of few non-corporate
investments distinctly in its
entities, the investments were not
classified as current or long term.
Further classification of
Also segregation between quoted
current and long term
and unquoted investments was
investments should be as
not made.
specified in the statute
governing the enterprise.
AS 13 requires to disclose,
‘the aggregate amount of
quoted and unquoted
investments, giving the
aggregate market value of
quoted investments’.
Additionally, the disclosure
requirement of
quoted/unquoted
investments as per
Schedule III is as given
below:


• Aggregate amount of
quoted investments and
market value thereof
• Aggregate amount of
unquoted investments
• Aggregate provision for
diminution in value of
investments
Also, Schedule III requires
classification of
investments as ‘trade’ and
‘other investments’.
Investment In certain cases, where the AS 13 states that an

property company had investment enterprise holding
property, the accounting policy investment properties
stated that the investment should account for them as
property was stated at fair value long term investments.
Diminution in the In some cases, it was observed As per AS 13, when there is
value of that the provision for diminution in a decline, other than
investments the value of investments was temporary, in the value of a
disclosed under the sub-head long term investment, the
‘provisions’ rather than reducing carrying amount is reduced
the same from the carrying value to recognise the decline.
of investments.
11. Current Assets - Inventories
Provision for slow It was observed, that in some AS 2 requires inventories to

moving inventory cases, companies were be valued at lower of cost
recognizing provisions for slow and net realizable value.
moving inventory. Further, the There are various factors
same was being disclosed as a considered for arriving at
reduction from the value of net realizable value, such
inventory. as physical damage, partial
or full obsolescence or
decrease in selling price.


Consequently, where
certain inventory is
determined to be slow
moving, this factor needs to
be adjusted in arriving at
the net realizable value
rather than just disclosing
the provision as a deduction
from the value of the
inventory raising a doubt in
the mind of the reader that
other factors have not been
considered at arriving the
net realizable value.
Valuation of It has been observed, in some With regard to

inventories cases, that the accounting policy measurement, AS 2
relating to valuation of inventories requires that Inventories
specified that certain categories should be valued at the
of inventories, usually raw lower of cost and net
materials stores and spares or realisable value.
work in progress, were valued
only at cost with no reference to
net realizable value.
In certain other cases, it was Inventories refer to all

observed that the accounting categories of inventories
policy refers to lower of cost or and requirements apply to
market value rather than net all categories of inventories
realizable value. including raw materials,
stores and spares, etc.
Cost formula It was observed that most AS 2 specifically requires

companies did not disclose the disclosure of the accounting
cost formula as required by AS 2 policies adopted in
measuring inventories,
including the cost formula
used.
The cost formula used
should be included in the


accounting policy of
inventories (For example,
FIFO, weighted average
method, specific
identification, etc.)
12. Cash and Bank Balances
Overdrafts It was observed in some cases An overdraft is not
that the bank overdrafts were ordinarily offset with the
disclosed as a reduction from bank balance, unless there
fixed deposits or from balances is a legal right with the
with banks rather than disclosing company to do so.
them separately under current
liabilities.
13. Loans and Advances
Distinction In some cases, it was noticed that Schedule III requires the
between short term loans and advances following disclosures
considered good were not bifurcated based on relating to short term loans
and considered whether they are considered good and advances as:
doubtful or considered doubtful • Secured,
considered good
• Unsecured,
considered good
• Doubtful
Allowance for bad and
doubtful loans and
advances shall be
disclosed under the
relevant heads separately.

5.3 Observations on Disclosure of Statement of Profit and Loss Items

S. Title Observation on the basis of Points to remember
No. the review of some published
1. Revenue Recognition: Presentation
Captive It was observed in some cases, Captive consumption of
consumption / that captive consumption of any product by a company
Inter unit sale internally generated product was does not fall under the
added to sales definition of revenue as
envisaged by AS 9 which
states that revenue is the
gross inflow of cash,
receivables or other
consideration arising in the
course of the ordinary
activities of an enterprise
from the sale of goods,
from the rendering of
services, and from the use
by others of enterprise
resources yielding interest,
royalties and dividends.
Revenue is measured by
the charges made to
customers or clients for
goods supplied and
services rendered to them
and by the charges and
rewards arising from the
use of resources by them.
In an agency relationship,
the revenue is the amount
of commission and not the
gross inflow of cash,
consideration.
The above position has
also been clarified in an
Announcement of the
Council on ‘Treatment of
Inter- Divisional Transfers’.


Income disclosed It was noticed in some cases that The definition of ‘revenue’
net of expenses the revenue from sale of goods as per AS 9 as stated
was disclosed net of the related above refers to ‘gross
expenses. For example, in one inflows’
case, sale of goods was
disclosed after reducing
expenses relating to ocean Revenue should be
freight. disclosed as the gross
inflows rather than
reducing related
expenses such as ocean
freight, etc from such
gross inflows
Gain/loss from It was noticed in some cases Schedule III specifically
foreign currency that the revenue included requires net gain or loss
transactions gain/loss from foreign currency on foreign currency
transactions transaction and
translation to be disclosed
as additional information
(other than that disclosed
as finance cost) and not
under revenue.
2. Revenue Recognition: Accounting Policies
Extent of risks and It has been observed that the Paragraph 11 of AS 9 inter
rewards transfer terminology used in the alia states all significant
accounting policy for revenue risks and rewards of
recognition with respect to ownership have been
transfer of risks and rewards is transferred to the buyer
not in line with that of AS 9. and the seller retains no
For example - the accounting effective control of the
policies state that the revenue is goods transferred to a
recognized on transfer of degree usually associated
‘sufficient’ or ‘substantial’ risks with ownership.
and rewards.
Extent of It has been observed that the As required by AS 9, the
crystallizing the accounting policy with respect to requirement is to make an
timing of revenue timing of revenue recognition is assessment of whether


recognition and inadequate as it does not ‘significant’ risks and
transfer of risks mention either the manner in rewards have been
and rewards which the transfer of significant transferred. The
risks and rewards occurs or it accounting policy of the
mentions a particular event but company needs to
does not mention whether the elaborate on this
occurrence of that event assessment and specify
indicates a transfer of the that the occurrence of the
significant risks and rewards. A specific event indicates
few examples include: that significant risks and
• Revenue is recognized on rewards have been
transfer of goods to transferred and hence
customers revenue is recognized on
• Revenue is recognized on occurrence of such event.
dispatch of goods
• Revenue from resale of Few examples could be:
software is recognized on • Revenue is recognised
delivery of products at the time of transfer
of significant risks and
• Sale is recognized on rewards which occurs
completion of sale of goods at the time of dispatch
of goods in the instant
case.
• Revenue from resale of
software is recognised
at the time of transfer
of significant risks and
rewards which in the
instant case occurs at
the time of delivery of
products.
Service revenue – The accounting policy in case of AS 9 provides for
Method of service revenue, in some cases, accounting for Service
accounting did not specify the method used revenue either by the
for recognizing revenue – either proportionate completion
proportionate completion method or by the
method or completed service completed service
contract method contract method.


In order to get an
understanding of how
revenue has been
recognized, it would be
appropriate to specify the
method of revenue
recognition used by the
company.
Example: Revenue from

fixed price contracts is
recognized as per the
proportionate completion
method with contract cost
determining the degree of
completion.
3. Government Grants
Presentation of It was observed in a few cases, Reference is made to the

subsidy that subsidy received from definition of revenue in
Government of India was AS 9, which inter alia
disclosed as ‘revenue’ instead of states “Revenue is the
‘other income’ gross inflow of cash,
consideration arising in
the course of the ordinary
activities of an enterprise
from the sale of goods,
from the rendering of
services, and from the use
by others of enterprise
resources yielding
interest, royalties and
dividends.
Since grants received
from the government are
not consideration towards
sale of goods, rendering
of services or use of the


resources of the
company, it would not be
appropriate to classify the
same as revenue. Rather
such grants should be
classified as ‘other
income’.
Nature of In certain cases, it was noticed The requirement of AS 12 is
Government Grant that the accounting policy for to account for grants based
government grants was generic on their nature, viz., grants
without specifying the nature of related to assets, grants
the grants leading to ambiguity in related to revenue or grants
terms of appropriateness of the in the nature of promoter’s
accounting treatment. contribution. Accordingly,
For example, a policy read as both the nature of grant as
under: well as the consequent
“Government grants are accounting treatment will
recognized in the profit and loss need to be provided in the
account in accordance with the accounting policy in order
related scheme and in the period to give a complete
in which these are accrued.” understanding.
Specific assets Where grants were received for Paragraph 23(ii) of AS 12
specific assets, it was observed, requires the disclosure of
that no disclosures were made “the nature and extent of
regarding the amount of grant government grants
received, the manner of recognized in the financial
adjustments, etc. statements, including
grants of non-monetary
assets given at a
concessional rate or free of
cost”.
4. Employee Benefits
Actuarial gains In many cases, it was observed Paragraph 120 (a) of AS 15

and losses that there was no accounting requires disclosure of
policy disclosed regarding accounting policy for
treatment of actuarial gains and recognizing actuarial gains
losses. and losses.


Defined benefit In some cases, it was observed Appropriate recognition
plans – that the classification of and measurement of
inappropriate employment benefits was not in employee benefits is
classification accordance with the dependent on the
requirements of AS 15. accurate classification of
For example, in some cases, the employee benefit in
employee benefit in the nature accordance with the
of gratuity (which is in the guidance in AS 15.
nature of defined benefit plan) Inappropriate
was classified as a ‘short term classification of
employee benefits’ with no employee benefits could
explanation as to the reason for potentially lead to
such classification. inappropriate recognition
of expenses, related
provision as well as
incorrect disclosures.
Reference should be
made to the definitions
of the various
categories of employee
benefits and each
employee benefit needs
to be carefully analyzed
to identify appropriate
classification.
Details of In a few cases, it was observed Reference is made to
provisions for that the details of provisions paragraph 5 of AS 29,
employee benefits recognized towards employee which inter alia states:
benefits such as liability “Where another
towards earned leave, medical Accounting Standard
leave, post-retirement benefit deals with a specific type
plans, etc., were disclosed as a of provision, contingent
liability or contingent
part of disclosures made for
asset, an enterprise
compliance with the
applies that Standard
requirements of AS 29. instead of this Standard.
Distinction In some cases, the disclosures Paragraph 120 (a) of AS
between wholly stated that the plans for certain 15 requires an analysis


unfunded plans groups of employees were of the defined benefit
and wholly or funded and other groups were obligation into amounts
partly funded unfunded. However, the arising from plans that
plans analysis of defined benefit are wholly unfunded and
obligation was presented on an amounts arising from
aggregate basis. plans that are wholly or
partly funded.
Where the entity has

multiple plans with some
being funded and others
unfunded, the
disclosures should be
made separately based
on the funding status of
the plan.
5. Foreign Currency Transactions
Monetary assets It was observed that the The requirement of

and liabilities accounting policy in relation to translation by AS 11 is
foreign currency transactions with regard to monetary
stated that “current assets and assets and liabilities and
current liabilities” denominated not with respect to
in foreign currencies as at the current assets and
balance sheet date are current liabilities.
translated at the rate of
exchange prevailing at the
year-end” rather than referring
to “monetary assets and
monetary liabilities”.
6. Prior Period Expenses and Change in Accounting Policy
Prior period In certain cases, where the In case of prior period
expenses profit and loss account included expenses, as per para 15
a prior period expense, it was of AS 5, "the nature and
observed that, there was no amount of prior period
disclosure regarding the nature items should be


of expense either in the profit separately disclosed in the
and loss account or in the notes statement of profit and
to accounts. loss in a manner that their
impact on the current
profit or loss can be
perceived."
Change in In certain cases, it was observed In case of change in
accounting policy that notes to the financial accounting policy, as per
statements mentioned that a para 32 of AS 5, "Any
change in accounting policy e.g. change in an accounting
change in valuation of plan
policy which has a
assets from book value to fair
value was made. material effect should be
disclosed. The impact of,
However, there were no further
and the adjustments
disclosures regarding the
resulting from, such
impact of change.
change, if material, should
be shown in the financial
statements of the period in
which such change is
made, to reflect the effect
of such change.
Where the effect of such

change is not
ascertainable, wholly or in
part, the fact should be
indicated. If a change is
made in the accounting
policies which has no
material effect on the
financial statements for
the current period but
which is reasonably
expected to have a
material effect in later


periods, the fact of such
change should be
appropriately disclosed in
the period in which the
change is adopted."
5.4 Observations on Other Components of Financial Statements

1. Cash Flow Statement
Components of Cash and cash equivalents, in a In explaining the definition

cash and cash few cases, included deposits of cash equivalents,
equivalents with maturity over twelve paragraph 6 of AS 3 states:
months. In other cases, it “Cash equivalents are
additionally included earmarked held for the purpose of
balances. meeting short-term cash
commitments rather than
for investment or other
purposes. For an
investment to qualify as a
cash equivalent, it must
be readily convertible to a
known amount of cash
and be subject to an
insignificant risk of
changes in value.
Therefore, an investment
normally qualifies as a
cash equivalent only
when it has a short
maturity of, say, three
months or less from the
date of acquisition.”
Consequently, where


deposits with maturity over
12 months are included in
cash equivalents, it would
be appropriate to explain
why these were considered
as cash equivalents.
Non-cash In certain cases, it was noted The requirement of AS 3
adjustments that export incentives accrued with regard to non-cash
were disclosed as a non-cash adjustments is prescribed
adjustment in arriving at the in para 20, which states:
operating profit before working “Under the indirect method,
capital changes. In another the net cash flow from
case, it was observed that operating activities is
foreign currency translation determined by adjusting
reserve, which is clearly a non- net profit or loss for the
cash transaction, was disclosed effects of:
under investing activities. (a) changes during the
period in inventories and
operating receivables and
payables;
(b) non-cash items
such as depreciation,
provisions, deferred
taxes, and unrealised
foreign exchange gains
and losses; and
(c) all other items for
which the cash effects are
investing or financing
cash flows”.
Export incentives are cash
transactions, as cash will
be received in future and
accordingly, it would have
to be disclosed as a change
in operating receivable
rather than as a non-cash
transaction.


Also non cash transactions
should not be disclosed
under investing and
financing activities in Cash
Flow Statement.
Dividend In certain cases, it was observed Dividends paid are to be
distribution tax that, there was no specific disclosed as cash flows
mention of dividend distribution from financing activities. It
tax although the cash flows from follows that tax on dividend
financing activities included should also be disclosed
dividend paid. along with the dividends
paid.
Reporting cash It was observed that in several AS 3 has specific
flows on a net cases, proceeds and repayment conditions to be fulfilled in
basis of term loans, etc. were order to report cash flows
disclosed on a net basis in the on a net basis which have
cash flow statement. been specified in
Similarly, in certain cases, paragraph 22 as: “Cash
purchase / sale of investments in flows arising from the
subsidiaries were disclosed on a following operating,
net basis. investing or financing
activities may be reported
on a net basis:
(a) cash receipts and
payments on behalf of
customers when the cash
flows reflect the activities
of the customer rather
than those of the
enterprise; and
(b) cash receipts and
payments for items in
which the turnover is
quick, the amounts are
large, and the maturities
are short”.
Unless the above
conditions are fulfilled,
ensure that disclosures


are made on a gross basis
rather than net basis.
2. Segment Reporting
Segment Where companies opted to While para 4 of AS 17,

disclosures made present segment disclosures allows enterprises to
in consolidated only in the consolidated financial present segment
financial statements, it was observed that disclosures only in
statements no reference to this fact was consolidated financial
made in the standalone financial statements, it would be
statements. appropriate to disclose
the fact in the standalone
financial statements that
the disclosures are being
made, in the consolidated
where both, stand alone
and consolidated financial
statements are part of a
single financial report.
5.5 Observations on Disclosure of Other Items of Financial Statements

1. Related Party Disclosures
Disclosures It was observed in a few cases, Reference is drawn to the

relating to key that the volume of transaction requirement of para 23 of
managerial (either as amount or as a AS 18 (iii) and (iv) which
personnel proportion) was not made. This requires disclosure of the
was particularly in case of key following:
managerial personnel, where “(iii) a description of the
the disclosure of remuneration / nature of transactions;
dividend paid to them was (iv) volume of the
either not made in entirety or transactions either as an
where made, it was done as a amount or as an
single aggregate amount of


remuneration / dividend. appropriate proportion”
Further, where disclosure is
made on the basis of
aggregation of similar
transactions, cognizance
needs to be given to the
requirements of para 27
including the explanation
thereto.
Disclosure of non- It was observed in a few cases, Owing to the explanation to
executive that non-executive directors para 14 of AS 18, non-
directors as key were being considered as key executive directors are not
managerial managerial personnel and generally considered as key
personnel disclosed accordingly. managerial personnel.
“A non-executive director of
a company is not
considered as a key
management person under
this Standard by virtue of
merely his being a director
unless he has the authority
and responsibility for
planning, directing and
controlling the activities of
the reporting enterprise.
The requirements of this
Standard are not applied in
respect of a non-executive
director even enterprise,
unless he falls in any of the
categories in para 3 of this
Standard.”
Accordingly, in cases where
non-executive directors are
considered as key
management personnel and
disclosed as such, the fact
that they have the authority
and responsibility for
planning, directing and


controlling the activities of
the reporting enterprise
should be disclosed.
2. Leases
Amortization of In a few cases, it was observed The accounting treatment

operating leases that the accounting policy with specified in case of operating
respect to operating leases leases in the books of the
stated that the operating lease lessee in para 23 of AS 19 is
obligations were ‘amortised as as follows:
per the terms of the lease’. “Lease payments under an
operating lease should be
recognised as an expense
in the statement of profit
and loss on a straight line
basis over the lease term
unless another systematic
basis is more
representative of the time
pattern of the user’s
benefit.”
Consequently, the
accounting policy needs to
refer to ‘straight line basis’,
else if some other basis is
being used by the company,
such basis and the reason for
using such basis needs to be
elaborated in the accounting
policy.
Operating leases: In a few cases, it was observed Compliance with the
Disclosures that the company had operating following disclosure
leases, as disclosed in the requirements of AS 19
accounting policies and needs to be ensured in case
statement of profit and loss. of operating leases:
However, there were no
“25. The lessee should
disclosures made in
accordance with AS 19 with make the following
respect to the future minimum disclosures for operating
leases:


lease payments. (a) the total of future
minimum lease payments
under non- cancellable
operating leases for each
of the following periods:
(i) not later than one
year;
(ii) later than one year
and not later than five
years;
(iii) later than five
years;…….”
Cancelable In some cases, where the While certain disclosure
operating leases company had specifically requirements under para
in the books of the mentioned that the operating 25 of AS 19 are specifically
lessee leases were cancelable leases, mandated for non-
it was observed that, there were cancelable leases, certain
no further disclosures as disclosures are mandated
required by AS 19.
without any distinction
between cancelable or
non-cancelable leases,
which include:
‘……(c) lease
payments recognised in
the statement of profit
and loss for the period,
with separate amounts
for minimum lease
payments and
contingent rents;
(d) sub-lease payments
received (or receivable)
recognised in the
loss for the period;
(e) a general description


of the lessee’s
significant leasing
arrangements including,
but not limited to, the
following: ……’
Accordingly, for cancelable
operating leases also,
disclosure of the amounts
recognized in the profit and
loss account and a general
description of the leasing
arrangements is required as
per AS 19.
3. Earnings per Share
Nominal Value of • In several instances, it The requirement of para 48

shares was observed that the of AS 20 is to disclose the
nominal value of the nominal value of shares
shares was not disclosed along with the earnings per
along with the basic and share figures.
diluted earnings per share As per para 8 of AS 20, an
on the face of the enterprise should present
statement of profit and basic and diluted earnings
loss, although the same per share on the face of the
was mentioned in the statement of profit and loss
relevant note on earnings for each class of equity
per share in the notes to shares that has a different
the financial statements. right to share in the net
• In certain cases, it was profit for the period.
observed that, the In order to appreciate the
nominal value of shares earnings per share figure,
was not disclosed either it is also essential to know
on the face of the what the nominal value of
statement of profit and the shares are, and hence
loss or in the relevant it is necessary to disclose
note. the nominal value of the
share along with the basic
and diluted earnings per


share disclosures on the
face of the profit and loss
account.
Weighted average In certain cases, it was The specific requirement of
number of shares observed that the disclosure of para 48(ii)(b) of AS 20 is to
reconciliation of number of state that the weighted
weighted average number of average number of equity
equity shares used as shares used as the
denominator in calculating the denominator in calculating
basic and diluted earnings per basic and diluted earnings
share was not made. per share, and a
reconciliation of these
denominators to each other.
Dividend on In certain cases, it was Para 13 of AS 20
cumulative observed that the dividend on specifically requires that
preference shares cumulative preference shares the full amount of the
was not adjusted while required preference
determining earnings for the dividends for cumulative
period. preference shares should
be deducted from the net
profit for the period,
whether or not the
dividends have been
provided for.
Where the company has
cumulative preference
shares, adjustment of
dividend on such
preference shares should
be ensured while
determining earnings for
the period.

5.6 Observations on Consolidated Financial Statements

No. the review of some
published financial
statements
1. General
Disclosures made In some cases, it was Compliance with the
in standalone observed that for certain requirements of Accounting
financial items there were no Standards (including
statements, but disclosures made in the disclosure requirements)
no corresponding
consolidated financial should be ensured for all
disclosures in
statements while the items in the consolidated
consolidated
financial disclosures were made in the financial statements.
statements standalone financial
statements.
For example, while the

disclosures relating to
employee benefits were made
as per AS 15 in the
standalone financial
statements, there were no
corresponding disclosures in
the consolidated financial
statements.
Similarly, in some cases,
there were no accounting
policies specified in the
consolidated financial
statements, with only a
reference to the accounting
policies included in the
standalone financial
statements.
Presentation of In certain cases, it was Companies should not net
goodwill observed that goodwill and off the goodwill and capital
capital reserve arising on reserve arising on separate
separate acquisitions were acquisitions but disclose
disclosed net. goodwill and capital


published financial
statements
reserve arising on all
acquisitions separately as
a note in the financial
statements.
Presentation of In some cases, it was AS 22 has a specific
deferred tax observed that deferred tax requirement with respect to
liability / asset in liability/deferred tax asset offsetting.
the balance sheet were presented net in the As per para 29 of AS 22,
consolidated financial ‘An enterprise should
statements of a company. offset deferred tax assets
and deferred tax
liabilities if:
(a) the enterprise has a
legally enforceable
right to set off assets
against liabilities
representing current
tax; and
(b) the deferred tax
assets and the
deferred tax liabilities
relate to taxes on
income levied by the
same governing
taxation laws.’
Consequently, in case of
statements, it would be
appropriate to offset the
deferred tax assets and
deferred tax liabilities of
the parent and the
subsidiaries, only in cases
where the abovementioned
conditions are satisfied.


published financial
statements
Different In certain cases, it was Reference is drawn to para 3
accounting observed that the actuarial of AS 21, which states:
policies gains/ losses in respect of “In the preparation of
employee benefits relating to consolidated financial
the subsidiary/(ies) of the statements, other
parent, were recognised Accounting Standards also
directly in the reserves and apply in the same manner as
were not recognised in the they apply to the separate
statement of profit and loss in statements.”
line with the requirements of Consequently, the
AS 15. accounting policy pertaining
to recognition of actuarial
gain/loss should be aligned
across the group and
recognised in the statement
of profit and loss as
mandated under AS 15.
Intragroup In certain infrastructure Reference is drawn to para 16
transactions entities, it was observed that of AS 21 which states:
Build-Operate- Transfer “Intragroup balances and
(BOT) contracts were entered intragroup transactions and
into by one of the group resulting unrealized profits
companies (holding company should be eliminated in full.
Unrealised losses
or fellow subsidiary) and the
resulting from intragroup
contract was further
transactions should also be
subcontracted to other eliminated unless cost
entities within the group. The cannot be recovered.”
profits / losses on such Consequently, it needs to be
subcontracted work within the ensured that the accounting
group were considered as policies and disclosures made
‘realised’ and were not by companies are in
eliminated in accordance with accordance with the
AS 21. consolidation procedures
specified in AS 21.
Consolidation In some cases, where Para 9 of AS 21 requires a
disclosure subsidiaries had not been parent which presents


published financial
statements
consolidated, the reason for consolidated financial
the same was stated as “on statements should
account of impairment of the consolidate all
investment”. subsidiaries, domestic as
well as foreign, other
than those referred to in
para 11. Further para 11
provides that a subsidiary
should be excluded from
consolidation when
(a) control is intended
to be temporary
because the
subsidiary is
acquired and held
exclusively with a
view to its
subsequent disposal
in the near future; or
(b) it operates under
severe long- term
restrictions which
significantly impair
its ability to transfer
funds to the parent.
Accordingly, ensure that all
the subsidiaries are
consolidated in accordance
with the above
requirements of AS 21.
Goodwill / Capital While the accounting policy Para 12 of AS 23 states, that
reserve had disclosed that the “Goodwill / capital reserve
goodwill /capital reserve arising on the acquisition
arising on acquisition of an of an associate by an
associate is adjusted in the investor should be
included in the carrying
carrying amount of the


published financial
statements
investment, there was no amount of investment in
separate disclosure of the the associate but should
amount of goodwill / capital be disclosed separately”
reserve Non-disclosure of goodwill /
capital reserve separately
does not convey the status
of the investment
appropriately
2. Joint Ventures
Jointly Controlled In most cases, it was observed It needs to be noted that as

Entities: that while detailed disclosures per para 49 of AS 27, a
Disclosures in were given in the consolidated venture should disclose the
separate financial financial statements with information required by paras
statements regard to jointly controlled 50, 51 and 52 in both the
entities, such disclosure were standalone and consolidated
not made in the standalone financial statements
In disclosing the information as Para 52 states “A venture
per para 52 of AS 27, in a should disclose a list of all
number of cases, it was joint ventures and
observed that, the country of description of interests in
incorporation or residence was significant joint ventures.
not disclosed In respect of jointly
controlled entities, the
venture should also
disclose the proportion of
ownership interest, name
and country of
incorporation or
residence”.
Jointly Controlled Separate financial statements Para 28 of AS 27 requires a
Entities: included disclosure of venturer to report its
Proportionate investments in joint venture interest in jointly controlled
Consolidation in entities. However, in the entity using proportionate
consolidated
consolidated financial consolidation with only two
statements, there was no specific exemptions.


published financial
statements
financial reference either in the Consequently, where the
statements accounting policy relating to investment in the jointly
consolidation procedures or controlled entity does not
disclosures as share of joint satisfy the two conditions, it
ventures in the respective should be accounted for on
account heads in the balance proportionate consolidation
sheet and statement of profit basis
and loss.
In a few instances, it was Para 32 of AS 27,
noted that while the fact that a specifically requires the
jointly controlled entity share in joint venture to be
existed was disclosed, there disclosed separately with
was no separate disclosure each line item:
regarding the share of assets, ‘Under proportionate
liabilities, expenses and consolidation, the
income of the joint venture as venturer includes
required to be done by AS 27 separate line items for its
share of the assets,
liabilities, income and
expenses of the jointly
controlled entity in its
statements. For example,
it shows its share of the
inventory of the jointly
controlled entity
separately as part of the
inventory of the
consolidated group; it
shows its share of the
fixed assets of the jointly
controlled entity
separately as part of the
same items of the
consolidated group.’

From the above illustrative common defects, one can infer that many of the defects in the financial
statements are either on account of non-compliance of Schedule III or Standards. In preparation
of a good financial statements it is very important that it should reflect true and fair view of the
company’s business, which is possible only when the preparer complies with the relevant
applicable provisions given in the Statute or in the Standard in true sense. Correctness of the
financial statements is utmost important. Let us examine some of the concepts of the standards
which affect the presentation of financial statements.
6. ILLUSTRATIONS BASED ON ACCOUNTING STANDARDS

Illustration 1
C Ltd. is a group engaged in manufacture and sale of industrial and FMCG products. One of their
division also deals in Leasing of properties - Mobile Towers. The accountant showed the rent
arising from the leasing of such properties as other income in the Statement of Profit and Loss.
Required:
Comment whether the classification of the rent income made by the accountant is correct or not
in the light of Schedule III to the Companies Act, 2013.
Solution
As per the “General Instructions for preparation of Statement of Profit and Loss” given in Schedule
III to the Companies Act, 2013, “Other Income” does not include operating income. The term
“Revenue from operations” has not been defined under Schedule III to the Companies Act, 2013.
However, as per the Guidance Note on Schedule III to the Companies Act, 2013 this would include
revenue arising from a company’s operating activities, i.e., either its principal or ancillary revenue-
generating activities. Whether a particular income constitutes “Revenue from operations” or “Other
income” is to be decided based on the facts of each case and detailed understanding of the
company’s activities. The classification of income would also depend on the purpose for which
the particular asset is acquired or held.
As per the information given in the question, C Ltd. is a group engaged in manufacture and sale
of industrial and FMCG products and its one of the division deals in leasing of properties - Mobile
Towers. Since its one division is continuously engaged in leasing of properties, it shall be
considered as its principal or ancillary revenue-generating activities. Therefore, the rent arising
from such leasing shall be shown under the head “Revenue from operations” and not as “other
income”.
Hence, the presentation of rent arising from the leasing of such properties as “other income” in
the Statement of Profit and Loss is not correct. It should be shown under the head “Revenue from
operations”.

Illustration 2
A private limited company manufacturing fancy terry towels had valued its closing inventory of
inventories of finished goods at the realisable value, inclusive of profit and the export cash
incentives. Firm contracts had been received and goods were packed for export, but the
ownership in these goods had not been transferred to the foreign buyers.
Required:
Comment on the valuation of the inventories by the company.
Solution
Accounting Standard 2 “Valuation of Inventories” states that inventories should be valued at lower
of historical cost and net realizable value. AS 9 on “Revenue Recognition” states, “at certain
stages in specific industries, such as when agricultural crops have been harvested or mineral ores
have been extracted, performance may be substantially complete prior to the execution of the
transaction generating revenue. In such cases, when sale is assured under forward contract or a
government guarantee or when market exists and there is a negligible risk of failure to sell, the
goods invoiced are often valued at net realisable value.”
Terry Towels do not fall in the category of agricultural crops or mineral ores. Accordingly, taking
into account the facts stated, the closing inventory of finished goods (Fancy terry towel) should
have been valued at lower of cost and net realisable value and not at net realisable value. Further,
export incentives are recorded only in the year the export sale takes place. Therefore, the policy
adopted by the company for valuing its closing inventory or inventories of finished goods is not
correct.
Illustration 3
Night Ltd. sells beer to customers. Some of the customers consume the beer in the bars run by
Night Limited. While leaving the bars, the consumers leave the empty bottles in the bars and the
company takes possession of these empty bottles. The company has laid down a detailed internal
record procedure for accounting for these empty bottles which are sold by the company by calling
for tenders. The accountant of the company is of the view that these empty bottles are not an
asset to the company and are scrap for the company.
Required:
Analyse the contention of the accountant of the company.
Solution
(i) Tangible objects or intangible rights carrying probable future benefits, owned by an
enterprise are called assets. Night Ltd. sells these empty bottles by calling tenders. It means
further benefits are accrued on its sale. Therefore, empty bottles are assets for the company.
(ii) As per AS 2 “Valuation of Inventories”, inventories are assets held for sale in the ordinary
course of business. Inventory of empty bottles existing on the Balance Sheet date is the
inventory and Night Ltd. has detailed controlled recording and accounting procedure which

duly signify its materiality. Hence inventory of empty bottles cannot be considered as scrap
and should be valued as inventory in accordance with AS 2.
Illustration 4
Omega Ltd. has to pay delayed cotton clearing charges over and above the negotiated price for
taking delayed delivery of cotton from the Suppliers' godown. Up to 20X1-20X2, the company has
regularly included such charges in the valuation of closing inventory. This being in the nature of
interest the company has decided to exclude it from closing inventory valuation for the year 20X2-
20X3. This would result into decrease in profit by ` 7.60 lakhs.
Required:
Treatment to be done in the annual accounts of a company for the year ended 31st March, 20X3
and appropriate disclosures to be made in this regards.
Solution
Para 29 of AS 5 (Revised) ‘Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies” states that a change in an accounting policy should be made only if
a. It is required by statute, or
b. for compliance with an accounting standard, or
c. if it is considered that the change would result in a more appropriate presentation of the
financial statements of an enterprise.
Therefore, the change in the method of inventory valuation is justified in view of the fact that the
change is in line with the recommendations of AS 2 (Revised) ‘Valuation of Inventories’ and would
result in more appropriate preparation of the financial statements.
Disclosure:
As per AS 2, this accounting policy adopted for valuation of inventories including the cost formulae
used should be disclosed in the financial statements in Notes to Accounts.
Also, appropriate disclosure of the change and the amount by which any item in the financial
statements is affected by such change is necessary as per AS 1, AS 2 and AS 5. Therefore, the
under mentioned note should be given in the annual accounts.
"In compliance with the Accounting Standards, delayed cotton clearing charges which are in the
nature of interest have been excluded from the valuation of closing inventory unlike preceding
years. Had the company continued the accounting practice followed earlier, the value of closing
inventory as well as profit before tax for the year would have been higher by ` 7.60 lakhs."
Illustration 5
During the course of the last three years, a company owning and operating Helicopters lost four
Helicopters. The company Accountant felt that after the crash, the maintenance provision created
in respect of the respective helicopters was no longer required, and proposed to write back to the
Profit and Loss account as a prior period item.

Required:
Analyse the company’s proposed accounting treatment.
Solution
The balance amount of maintenance provision written back to profit and loss account, no longer
required due to crash of the helicopters, is not a prior period item because there was no error in
the preparation of previous periods’ financial statements. The term ‘prior period items’, as defined
in AS 5 (revised) “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies”, refer only to income or expenses which arise in the current period as a result of errors
or omissions in the preparation of the financial statements of one or more prior periods. As per
paragraph 8 of AS 5, extraordinary items should be disclosed in the statement of profit and loss
as a part of net profit or loss for the period. The nature and the amount of each extraordinary item
should be separately disclosed in the statement of profit and loss in a manner that its impact on
current profit or loss can be perceived. The amount so written-back (If material) should be
disclosed as an extraordinary item as per AS 5.
Illustration 6
Sagar Limited belongs to the engineering industry. The Chief Accountant has prepared the draft
accounts for the year ended 31.03.20X1. The company undertook a contract for building a crane
for ` 10 lakhs. As on 31.03.20X1 it incurred a cost of ` 1.5 lakhs and expects that there will be
` 9 lakhs more for completing the crane. It has received so far ` 1 lakh as progress payment.
Required:
Advise the company on the above from the viewpoint of finalization of accounts, taking note of the
mandatory accounting standards.
Solution
Para 21 of AS 7 (Revised) ‘Construction Contracts’ provides that when the outcome of a
construction contract can be estimated reliably, contract revenue and contract costs associated
with the construction contract should be recognized as revenue and expenses respectively with
reference to the stage of completion of the contract activity at the reporting date.
Para 35 of AS 7 states that when it is probable that total contract cost will exceed total contract
revenue, the expected losses should be recognized as an expense irrespective of:
a. Whether or not work has commenced
b. Stage of completion of contract
c. The amount of profit on other contracts which are not treated as a single contract
Thus, when Estimated Contract Costs > Total Contract Revenue
Expected Loss = Work Certified + Work uncertified + Estimated cost to complete the
project - Total value of contract

Thus, in the given case, the foreseeable loss of ` 50,000 (expected cost ` 10.5 lakhs less contract
revenue ` 10 lakhs) should be recognized as an expense in the year ended
31st March, 20X1.
The following disclosures should also be given in the financial statements:
(a) the amount of contract revenue recognized as revenue in the period;
(b) the aggregate amount of costs incurred and loss recognized upto the reporting date;
(c) amount of advances received;
(d) amount of retentions; and
(e) gross amount due from/due to customers’ amount ∗
Illustration 7
Mr. ‘X’ as a contractor has just entered into a contract with a local municipal body for building a
flyover. As per the contract terms, ‘X’ will receive an additional ` 2 crore if the construction of the
flyover were to be finished within a period of two years of the commencement of the contract.
Mr. X wants to recognize this revenue since in the past he has been able to meet similar targets
very easily.
Required:
Discuss the correctness of the above proposal of Mr. X.
Solution
According to para 14 of AS 7 (Revised) ‘Construction Contracts’, incentive payments are additional
amounts payable to the contractor if specified performance standards are met or exceeded.
For example, a contract may allow for an incentive payment to the contractor for early completion
of the contract. Incentive payments are included in contract revenue when:
(i) the contract is sufficiently advanced that it is probable that the specified performance
standards will be met or exceeded; and
(ii) the amount of the incentive payment can be measured reliably. In the given problem, the
contract has not even begun and hence the contractor (Mr. X) should not recognize any
revenue of this contract.
∗
Amount due from/to customers = contract costs + Recognised profits – Recognised losses – Progress billings
= ` 1.5 + Nil – ` 0.5 – ` 1.0 = Nil.

Illustration 8
Victory Ltd. purchased goods on credit from Lucky Ltd. for ` 250 crores for export. The export
order was cancelled. Victory Ltd. decided to sell the same goods in the local market with a price
discount. Lucky Ltd. was requested to offer a price discount of 15%. The Chief Accountant of
Lucky Ltd. adjusted the sales figure to the extent of the discount requested by Victory Ltd.
Required:
Discuss whether this treatment is justified.
Solution
Lucky Ltd. had sold goods to Victory Ltd on credit worth for ` 250 crores and the sale was
completed in all respects. Victory Ltd.’s decision to sell the same in the domestic market at a
discount does not affect the amount recorded as sales by Lucky Ltd. The price discount of 15%
offered by Lucky Ltd. after request of Victory Ltd. was not in the nature of a discount given during
the ordinary course of trade because otherwise the same would have been given at the time of
sale itself. Now, as far Lucky Ltd is concerned, there appears to be an uncertainty relating to the
collectability of the debt, which has arisen subsequent to the time of sale therefore, it would be
appropriate to make a separate provision to reflect the uncertainty relating to collectability rather
than to adjust the amount of revenue originally recorded. Therefore, such discount should be
written off to the profit and loss account and not shown as deduction from the sales figure.
Illustration 9
Golden Eagle Ltd., has been successful jewellers for the past 100 years and sales are against
cash only. The company diversified into apparels. A young senior executive was put in charge
of Apparels business and sales increased 5 times. One of the conditions for sales is that dealers
can return the unsold stocks within one month of the end of season. Sales return for the year was
25% of sales.
Required:
Suggest a suitable Revenue Recognition Policy, with reference to AS 9.
Solution
As per AS 9 “Revenue recognition”, revenue recognition is mainly concerned with the timing of
recognition of revenue in statement of profit and loss of an enterprise. The amount of revenue
arising on a transaction is usually determined by the agreement between the parties involved in
the transaction. When uncertainties exist regarding the determination of the amount, or its
associated costs, these uncertainties may influence the timing of revenue recognition.
Effect of Uncertainty- In the case of the jewellery business the company is selling for cash and
returns are negligible. Hence, revenue can be recognized on sales. On the other hand, in Apparels
Industry, the dealers have a right to return the unsold goods within one month of the end of the
season. In this case, the company is bearing the risk of sales return and therefore, the company
should not recognize the revenue to the extent of 25% of its sales. The company may disclose

suitable revenue recognition policy in its financial statements separately for both Jewellery and
Apparels business.
Illustration 10
A company had imported raw materials worth US Dollars 6,00,000 on 5 th January, 20X1, when the
exchange rate was ` 43 per US Dollar. The company had recorded the transaction in the books
at the above mentioned rate. The payment for the import transaction was made on
5 th April, 20X1 when the exchange rate was ` 47 per US Dollar. However, on 31 st March, 20X1,
the rate of exchange was ` 48 per US Dollar. The company passed an entry on
31st March, 20X1 adjusting the cost of raw materials consumed for the difference between
` 47 and ` 43 per US Dollar.
Required:
In the background of the relevant accounting standard, discuss whether the correctness of the
company’s accounting treatment.
Solution
As per AS 11 (revised 2003), ‘The Effects of Changes in Foreign Exchange Rates’, monetary
items denominated in a foreign currency should be reported using the closing rate at each balance
sheet date. The effect of exchange difference should be taken into profit and loss account. Trade
payables is a monetary item, hence should be valued at the closing rate i.e, ` 48 at
31st March, 20X1 irrespective of the payment for the same subsequently at lower rate in the next
financial year. The difference of ` 5 (` 48-` 43) per US dollar should be shown as an exchange
loss in the profit and loss account for the year ended 31st March, 20X1 and is not to be adjusted
against the cost of raw- materials. In the subsequent year, the company would record an
exchange gain of ` 1 per US dollar, i.e., the difference between ` 48 and ` 47 per US dollar.
Hence, the accounting treatment adopted by the company is incorrect.
Illustration 11
A company has a scheme for payment of settlement allowance to retiring employees. Under the
scheme, retiring employees are entitled to reimbursement of certain travel expenses for class they
are entitled to as per company rule and to a lump-sum payment to cover expenses on food and
stay during the travel. Alternatively, employees can claim a lump sum amount equal to one month
pay last drawn.
The company’s contentions in this matter are:
(i) Settlement allowance does not depend upon the length of service of employee. It is restricted
to employee’s eligibility under the travel rule of the company or where option for lump-sum
payment is exercised, equal to the last pay drawn.
(ii) Since it is not related to the length of service of the employees, it is accounted for on claim
basis.

Required:
State whether the contentions of the company are correct as per relevant Accounting Standard.
Give reasons in support of your answer.
Solution
The present case falls under the category of defined benefit scheme under Para 49 of AS 15
(Revised) “Employee Benefits”. The said para encompasses cases where payment promised to
be made to an employee at or near retirement presents significant difficulties in the determination
of periodic charge to the statement of profit and loss. The contention of the Company that the
settlement allowance will be accounted for on claim basis is not correct even if company’s
obligation under the scheme is uncertain and requires estimation. In estimating the obligation,
assumptions may need to be made regarding future conditions and events, which are largely
outside the company’s control. Thus,
(1) Settlement allowance payable by the company is a defined retirement benefit, covered by
AS 15 (Revised).
(2) A provision should be made every year in the accounts for the accruing liability on account
of settlement allowance. The amount of provision should be calculated according to actuarial
valuation.
(3) Where, however, the amount of provision so determined is not material, the company can
follow some other method of accounting for settlement allowances.
Illustration 12
The Chief Accountant of Sports Ltd. gives the following data regarding its six segments:
` in lakhs
Particulars M N O P Q R Total
Segment Assets 40 80 30 20 20 10 200
Segment Results 50 (190) 10 10 (10) 30 (100)
Segment Revenue 300 620 80 60 80 60 1,200
The chief accountant is of the opinion that segments “M” and “N” alone should be reported.
Required:
Is the Chief Accountant justified in his view? Discuss.

Solution
As per para 27 of AS 17 ‘Segment Reporting’, a business segment or geographical segment
should be identified as a reportable segment if:
(i) Its revenue from sales to external customers and from other transactions with other segments
is 10% or more of the total revenue- external and internal of all segments; or
(ii) Its segment result whether profit or loss is 10% or more of:
(1) The combined result of all segments in profit; or
(2) The combined result of all segments in loss,
whichever is greater in absolute amount; or
(iii) Its segment assets are 10% or more of the total assets of all segments.
If the total external revenue attributable to reportable segments constitutes less than 75% of total
enterprise revenue, additional segments should be identified as reportable segments even if they
do not meet the 10% thresholds until atleast 75% of total enterprise revenue is included in
reportable segments.
(a) On the basis of turnover criteria segments M and N are reportable segments.
(b) On the basis of the result criteria, segments M, N and R are reportable segments (since their
results in absolute amount is 10% or more of ` 200 lakhs).
(c) On the basis of asset criteria, all segments except R are reportable segments.
Since all the segments are covered in atleast one of the above criteria all segments have to be
reported upon in accordance with Accounting Standard (AS) 17. Hence, the opinion of chief
accountant is wrong.
Illustration 13
A company has an inter-segment transfer pricing policy of charging at cost less 10%. The market
prices are generally 25% above cost.
Required:
Examine the correctness of the policy adopted by the company.
Solution
AS 17 ‘Segment Reporting’ requires that inter-segment transfers should be measured on the basis
that the enterprise actually used to price these transfers. The basis of pricing inter-segment
transfers and any change therein should be disclosed in the financial statements. Hence, the
enterprise can have its own policy for pricing inter-segment transfers and hence, inter-segment
transfers may be based on cost, below cost or market price. However, whichever policy is followed,

the same should be disclosed and applied consistently. Therefore, in the given case inter-segment
transfer pricing policy adopted by the company is correct if, followed consistently.
Illustration 14
XYZ Ltd. has three segments namely X, Y, Z. The total Assets of the Company are
` 10.00 crores. Segment X has ` 2.00 crores, segment Y has ` 3.00 crores and segment Z has
` 5.00 crores. Deferred tax assets included in the assets of each segments are X-
` 0.50 crores, Y— ` 0.40 crores and Z— ` 0.30 crores. The accountant contends that all the
three segments are reportable segments.
Required:
Evaluate the contention of the Accountant.
Solution
According to AS 17 “Segment Reporting”, segment assets do not include income tax assets.
Therefore, the revised total assets are ` 8.8 crores [ ` 10 crores – (` 0.5 + ` 0.4 + ` 0.3)].
Segment X holds total assets of ` 1.5 crores (` 2 crores – ` 0.5 crores); Segment Y holds
` 2.6 crores (` 3 crores – ` 0.4 crores); and Segment Z holds ` 4.7 crores (` 5 crores –
` 0.3 crores). Thus all the three segments hold more than 10% of the total assets, all segments
are reportable segments.
Illustration 15
On 30.6.20X1, Asmitha Ltd. incurred ` 2,00,000, net loss from disposal of a business segment.
Also, on 30.7.20X1, the company paid ` 60,000 for property taxes assessed for the calendar year
20X1.
Required:
How the above transactions should be included in determination of net income of Asmitha Ltd. for
the six months interim period ended on 30.9.20X1.
Solution
According to Para 10 of AS 25 “Interim Financial Reporting”, if an enterprise prepares and
presents a complete set of financial statements in its interim financial report, the form and content
of those statements should conform to the requirements as applicable to annual complete set of
As on 30.9.20X1, Asmitha Ltd., would report the entire ` 2,00,000 loss on the disposal of its
business segment since the loss was incurred during interim period. A cost charged as an
expense in an annual period should be allocated to Interim periods on accrual basis. Since
` 60,000 Property Tax payment relates to entire calendar year 20X1, ` 30,000 would be reported
as an expense for six months ended on 30th September, 20X1 while out of the remaining ` 30,000,
` 15,000 for January, 20X1 to March, 20X1 should be shown as payment of the outstanding
amount of previous year and another ` 15,000 related to quarter October, 20X1 to December,
20X1 would be reported as prepaid expenses.

7. CASE STUDIES BASED ON ACCOUTING STANDARDS

Case Study 1
The following is the excerpt of Note on Fixed Assets from the Balance Sheet of a public company.
(All figures are INR in millions)
Gross Block Accumulated Depreciation Net

Block
As of Additions Deletions As at As of Additions Deletions As at As at

1 st Apr 31st 1 st 31st 31st Mar
20X1 Mar Apr Mar 20X2
20X2 20X1 20X2
Buildings 5,000 100 - 5,100 1000 3 - 1003 4,097
Building on 2,000 - 2,000 500 - 500 1,500

long lease out
Intangibles 500 50 - 550 200 10 - 210 340
Machineries 500 100 - 600 400 20 - 420 180
Land under - -
Development 1,000 100 1,100 - - 1,100
9,000 350 - 9,350 2,100 33 - 2,133 7,217
Additional information:
a) Intangibles include purchased goodwill (related to acquisition of CGU), for INR 5 Million,
which has not been amortized till date. However, an entity feels it should be amortised.
b) Intangibles also include internally generated software of INR 2 Million. The management
believes that the useful life of the software shall atleast be for ten years.
Required:
Draw the corrected Note after substantiating your views.
Solution
The Excerpt of the Note given in the question has been examined with respect to
A. Presentation as per Schedule III; and
B. Compliance as per Accounting Standards

A. As per Schedule III to the Companies Act, 2013

1. ‘Land under development’ should be disclosed under the heading ‘Capital Work in
progress’.
2. Fixed Asset should further be classified into tangible asset, intangible assets and other
categories as per the requirement.
B. Compliance as per Accounting Standards
1. Para 3.4 of AS 13 “Accounting from Investments” defines Investment property as an
investment in land or buildings that are not intended to be occupied substantially for use
by, or in the operations of, the investing enterprise. Since no depreciation is charged on
such building, it may be inferred that it is not a tangible asset used in the operations of
the business. Infact, opening balance of depreciation appears to be the diminution in the
value of the building other than temporary. Accordingly, the ‘buildings on long lease out’
should be shown as an ‘Investment Property’ as a line item of Fixed Asset.
2. Para 78 of AS 28 “Impairment of Assets” states that in testing a cash-generating unit
(CGU) for impairment, an enterprise should identify whether goodwill that relates to this
CGU is recognized in the financial statements. Where the goodwill cannot be allocated
to the CGU, the bottom-up and top-down approaches to impairment testing should be
applied. Hence the goodwill of INR 5 Million should be tested for impairment as per above.
Note on Fixed Assets (All figures are INR in millions)
FIXED Gross Block Accumulated Depreciation Net

ASSETS Block
As of Additions Deletions As at As of Additions Deletions As at As at

1 st Apr 31st 1 st Apr 31st 31st
20X1 Mar 20X1 Mar Mar
20X2 20X2 20X2
Tangibles:
Buildings 5,000 100 - 5,100 1,000 3 - 1,003 4,097
Machineries 500 100 - 600 400 20 - 420 180
TOTAL 5,500 200 5,700 1,400 35 1,423 4,277
Intangible 500 50 550 200 10 210 340
TOTAL 6,000 250 6,250 1,600 33 1,633 4,617
Note: Intangibles pertaining to goodwill should be shown as a separate line item in above excerpt.
However due to lack of information on accumulated depreciation; they have been presented at
consolidated level.

Excerpts of Balance Sheet (Asset side)
Fixed Assets
Tangible Assets 4,277
Intangible Assets 340
Capital WIP 1,100
Non-current Investment
Investment Property (after decline other than temporary) 1,500
Note: Note for Investment property to be made separately.

Case Study 2
H Industries is a cash rich company and has got substantial investments. The following is the
extract of its Note on Investment from its draft financial statements for year ending
31st March 20X1
Investment in: INR in Lakhs

Mutual Funds - Liquid Funds 500
Mutual Funds - ETFs 20
X Ltd. a wholly owned subsidiary 100
H Foundation – 100% 20
Time Deposit 20
Total 660
Additional information:
1. Mutual funds are valued at MTM basis as of yearend. These were initially invested for
300 Lacs for liquid funds and 25 Lacs for ETFs respectively.
2. The Foundation has a clause in its deed that in the event of liquidation, the net assets of
the trust shall be transferred to another trust with similar objects.
Required:
Prepare the correct Note to Accounts on Investment.

Solution
Notes to Accounts on Investment
Note Ref In Lakhs
Non-current Investment (at cost)
X Ltd., a wholly owned subsidiary 100
H Foundation 1 20
Total Non-current Investment 120
Current Investment 2 325
Total Current Investment 325
Total 445
In accordance with Para 35 (d) of AS 13, a note should be given that there exists a significant
restriction on the realisability of investments or the remittance of income and proceeds of disposal.
Accordingly, the note is prepared as follows:
Note 1: The Company has a 100% stake holding in H Foundation. There exists a significant
restriction on the realisability of investments due to the clause in the constitution deed of the
Foundation that in the event of liquidation, the net assets of the trust shall be transferred to another
trust with similar objects. (Refer Para 35 (d) of AS 13).
Note 2: Para 31 of AS 13 states – ‘Investment classified as current investment should be carried
in the financial statements at the lower of cost and fair value determined either on an individual
investment basis or by category of investment, but not on an overall (or global) basis’. Assuming
that the MTM values provided represent the fair value, accordingly investments in mutual funds
are treated as follows:
Investment in Mutual Funds INR in Lakhs
Mutual Funds - Liquid Funds 300
Mutual Funds - ETFs 25
Total 325
Note 3: Time deposit will be a part of cash and cash equivalents.

Case Study 3
XMCC Ltd has provided its segmental report for its secondary geographical segments as follows:
All figures are INR in crores
Geography Segment Assets Segment Revenue
US 1,962 2522
UK 1,691 1241
India 2,030 1255
Others 1,082 1022
Total 6,765 6040
Segment Assets in ‘Others’ category comprises of INR 744 crores held for a new project yet to
commence operations in Bulgaria.
Additionally, it has provided its primary segment reporting as follows:
Segment 1 Segment 2 Segment 3 Total
Segment Revenue 2,655 2,121 1,264 6,040
Segment Results 504 1,111 114 1,729
Unallocable Costs
Interest Income 403
Finance Costs (120)
Others (50)
Net Profit Before Tax 1,962
Note: Tax expenses are not considered in above reporting as the management is of the opinion
that taxes are not a part of operating cost.
Required:
Identify and report the errors and misstatements in the above extract, if any.

Solution
1. Geographical segment reporting: The ‘others’ category represents 16% of the total segment
assets. In this context, Para 48 of AS 17 states to disclose, inter alia
‘the total carrying amount of segment assets by geographic allocation of assets, for each
geographical segment whose segment assets are 10 per cent or more of the total assets of all
geographical segments’.
Hence to comply with AS 17 disclosures, the management has to breakdown the ‘others’
category further and identify reportable geographies. In this case, the reportable geographical
segment will be Bulgaria.
The revised Note on secondary segmental reporting will be as follows:
All figures are INR in crores
Geography Segment Assets Segment Revenue

US 1,962 2,522
UK 1,691 1,241
India 2,030 1,255
Bulgaria 744 0
Others 338 1,022
TOTAL 6,765 6,040
Besides, the same Para mandates to disclose ‘the total cost incurred during the period to
acquire segment assets that are expected to be used during more than one period (tangible
and intangible fixed assets) by geographical location of assets, for each geographical segment
whose segment assets are 10 per cent or more of the total assets of all segments’. Hence, the
management has to show the addition to segment assets in a separate table; and if there are
no additions during the year, the same has to be stated as nil for the year.
2. Primary Business segment reporting: The management’s interpretation of presenting ‘Net
profit before taxes’ is incorrect. It is clear that the standard requires allocating expenses to
each segment to the possible extent, and unallocated costs to be shown separately as such.
In this case, tax expense will be added as an unallocable cost.
Case Study 4
The following disclosures are noticed under the section ‘Contingencies and Provisions’ in the
notes to accounts of Umble Co. Ltd as of 31st March 20X5.
Note 1: The Company has achieved a major breakthrough in its consultancy services in Middle
East following which it has entered into a contract of rendering services with Offlae Inc for INR 6
billion during the year. The termination clause of the contract is equivalent to INR 7 Million and is

payable in case transition time schedule is missed from 15 th December 20X5. The management
however is of the view that the liability cannot be treated as onerous.
Note 2: The Company is not able to assess the final liability for a particular tax assessment
pertaining to assessment year 20X1-20X2 wherein it has received a demand notice of INR 6
Million. However, the company is contesting the same with CIT (Appeals) as on the reporting date.
Required:
Review the disclosures and state
1. Whether you agree with the current treatment;
2. If you don’t agree, prepare the revised notes to accounts.
In both cases, you are required to substantiate with suitable explanations.
Solution
1. It is common to have a termination clause in service contracts and having a termination clause
per se will not create a liability on the company. Para 14 to AS 29 states ‘a provision will be
recognized when:
(a) An enterprise has a present obligation as a result of a past event;
(b) It is probable that an outflow of resources embodying economic benefits will be required
to settle the obligation; and
(c) A reliable estimate can be made of the amount of the obligation. If these conditions are
not met, no provision should be recognized.
In the above case, there is nothing to show that there is a present obligation, and hence there
is no provision to be made.
As per para 27 of AS 29, a contingent liability is recognized only where the possibility of an
outflow of resources embodying economic benefits is not remote. In the present note, the
management is of the view that there is no onerous liability as of date. Hence, the possibility
of an outflow being remote, no contingent liability arises. In fact, the management has wrongly
worded ‘onerous liability’ in its notes to accounts. Onerous liability arises only if the unavoidable
costs of meeting the obligation under the contract should exceed the economic benefits
expected to be received under it, which doesn’t seem to be the case as far as Umble Co. Ltd
is concerned. Hence, this note can be eliminated to avoid confusion to the readers of the
2. The demand notice from the tax department that is under litigation is a clear instance of a
‘contingent liability’. Accordingly, the note should be revised as –
‘Contingent Liability- Demand notice from income tax department pertaining to INR 6 Million,
under contest with CIT (Appeals) as on the reporting date.

Case Study 5
Following are the financial statements of SL Parvati Industries Ltd:
Balance Sheet
Particulars Note As at March 31, 20X1 (INR in million)
EQUITY AND LIABILITIES
Shareholders’ funds
Share capital 1,000
Reserves and surplus 1 2,000
Non-current liabilities
Long-term borrowings 2 5,555
Deferred tax liabilities a 200
Current liabilities
Trade payables 3 300
Short-term provisions 250
Other current liabilities 4 150
TOTAL 9,455
ASSETS
Non - current assets
Fixed Assets 5,655
Deferred Tax Assets a 500
Current assets
Inventories 1,000
Trade receivables 6 1,100
Cash and bank balances 7 1,200
TOTAL 9,455

Statement of Profit & Loss
Particulars Note Year ended March 31, 20X1

Revenue from operations 5,500
Expenses
Employee Benefit Expense 1,200
Operating Costs 2,200
Depreciation 999
Total Expenses 4,399
Profit before tax 1,101
Tax Expense (150 )
Profit after tax 951
Notes to Accounts:
Note 1: Reserves and surplus (INR in millions)
Capital Reserve 500

Surplus from P & L
Opening Balance 49
Additions 951 1,000
Reserve for foreseeable loss 500
Total 2,000
Note 2: Long Term Borrowings
Term Loan from Bank 5,555

Total 5,555
Note a: Deferred Tax
Deferred Tax Asset 500

Deferred Tax Liability (200)
Total 300

Note 3: Trade payables
MSME vendors 5
Other vendors 295
Total 300
Note 4: Other Current Liabilities
Unclaimed dividends 3
Billing in Advance 147
Total 150
Note 5: Trade Receivables
Considered good (outstanding within 6 months) 1,065
Considered doubtful (due from past 1 year) 40
Provision for doubtful debts (5)
Total 1,100
Note 6: Cash and Cash Equivalents
Balance with Banks 1,065
Cash on hand 5
Earmarked balances with banks 130
Total 1,200
Additional Information:
a. Share capital comprises of 100 million shares of INR 10 each
b. Term Loan from bank for INR 5555 million also includes interest accrued and due of INR 555
million as on the reporting date.
c. Reserve for forseeable loss is created against a service contract due within 6 months.
Required:
1. Identify and report the errors and misstatements in the above extract, if any: and,
2. Prepare the corrected Balance Sheet & Statement of Profit and Loss

Solution
Analysis:
1. Reserve for foreseeable loss for INR 500 million, due within 6 months, should be a part of
provisions. Hence it needs to be regrouped, and if it was a part of previous year’s comparatives,
a Note should be added in the notes to account on the regrouping done this year.
2. Interest accrued and due of INR 555 million on term loan will be a part of current liabilities.
Hence, it should be shown under the heading “Other Current Liabilities”
3. It can be inferred from the Note a, that the deferred tax liabilities and assets relate to taxes on
income levied by the same governing taxation laws, hence these shall be set off, in accordance
with AS 22. The net DTA of INR 300 million will be shown in the balance sheet.
4. Dues to vendors falling under the MSMED Act 2006 should also be presented on the face of
the balance sheet with certain mandatory disclosures to be made as regards to principal and
interest outstanding.
5. The notes to trade receivables is incorrectly presented. The recommended notes would be as
below:
Trade receivables (Unsecured) consist of the following:

a) Over six months from the date they were due for payment
i. Considered good 0
ii. Considered doubtful 40
Less: Provision for doubtful receivables (5)
(A) 35
b) Others
i. Considered good 1,065
ii. Considered doubtful 0
Less: Provision for doubtful receivables 0
(B) 1,065
Total 1,100
6. The title of the note should be ‘Cash & Cash Equivalent’. It should clearly state the bifurcation
of balances with bank held in current accounts and as deposits.

7. The statement to Profit and Loss needs to represent earnings per share, to be compliant with
AS 20.
Revised extracts of the financial statements:
Balance Sheet (INR in Million)
Note No. As at March 31, 20X1
EQUITY AND LIABILITIES
Shareholders’ funds
Share capital 1,000
Reserves and surplus 1 1,500
Non-current liabilities
Long-term borrowings 2 5,000
Current liabilities
Trade payables
(a) MSME 5
(b) Others 3 295
Short-term provisions 750
Other current liabilities 4 705
TOTAL 9,255
ASSETS
Non - current assets
Fixed Assets 5,655
Deferred Tax Assets a 300
Current assets
Inventories 1,000
Trade receivables 5 1,100
Cash and Cash Equivalents 6 1,200
TOTAL 9,255

Statement of Profit and Loss (INR in Million)
Notes No. Year ended March

31, 20X1
Revenue from operations 5,500
Expenses
Employee Benefit Expense 1,200
Operating Costs 2,200
Depreciation 999
Total Expenses 4,399
PBT 1,101
Tax Expense 150
PAT 951
Earnings Per Equity Share
Basic 9.51
Diluted 9.51
Number of equity shares (face value of ` 10 each) 100 million
Revised Notes (wherever applicable):

Note on Reserves and Surplus (INR in Million)
Capital Reserve 500
Surplus from P & L
Opening Bal 49
Additions 951 1,000
Total 1,500

Note on Long Term Borrowings
Term Loan from Bank 5,000
Total 5,000
Note on Other Current Liabilities
Unclaimed dividends 3
Interest on Term Loan 555
Billing in Advance 147
Total 705
8. CASE STUDIES BASED ON IND AS

Case Study 1
On April 1, 20X1, Pluto Ltd. has advance a loan for ` 10 lakhs to one of its employees for an interest
rate at 4% per annum (market rate 10%) which is repayable in 5 equal annual installments along
with interest at each year end. Employee is not required to give any specific performance against
this benefit.
The accountant of the company has recognised the staff loan in the balance sheet equivalent to the
amount disbursed i.e. ` 10 lakhs. The interest income for the period is recognised at the contracted
rate in the Statement of Profit and Loss by the company i.e. ` 40,000 (` 10 lakhs x 4%).
Required:
Analyse whether the above accounting treatment made by the accountant is in compliance with
the Ind AS. If not, advise the correct treatment alongwith working for the same.
Solution
The above treatment needs to be examined in the light of the provisions given in Ind AS 32 and
Ind AS 109 on Financial Instruments’ and Ind AS 19 ‘Employee Benefits’.
Para 11 (c) (i) of Ind AS 32 ‘Financial Instruments : Presentation’ states that:
“A financial asset is any asset that is:
(c) a contractual right:
(i) to receive cash or…..”
Further, paragraph 5.1.1 of Ind AS 109 states that:
“at initial recognition, an entity shall measure a financial asset or financial liability at its fair value”.

Further, paragraph 5.1.1 of Appendix B to Ind AS 109 states that:

“The fair value of a financial instrument at initial recognition is normally the transaction price (i.e.
the fair value of the consideration given or received. However, if part of the consideration given
or received is for something other than the financial instrument, an entity shall measure the fair
value of the financial instrument. For example, the fair value of a long term loan or receivable that
carries no interest can be measured as the present value of all future cash receipts discounted
using the prevailing market(s) of interest rate of similar instrument with a similar credit rating. Any
additional amount lent is an expense or reduction of income unless it qualifies for recognition as
some other type of asset”.
“After initial recognition, an entity shall measure a financial asset at:
(a) amortised cost;
(b) fair value through other comprehensive income; or
(c) fair value through profit or loss.
“Interest revenue shall be calculated by using the effective interest method. This shall be
calculated by applying the effective interest rate to the gross carrying amount of a financial asset”
Paragraph 8 of Ind AS 19 states that:
“Employee Benefits are all forms of consideration given by an entity in exchange for service
rendered by employees or for the termination of employment”.
The Accountant of Pluto Ltd. has recognised the staff loan in the balance sheet at ` 10 lakhs
being the amount disbursed and ` 40,000 as interest income for the period is recognised at the
contracted rate in the statement of profit and loss which is not correct and not in accordance with
Ind AS 19, Ind AS 32 and Ind AS 109.
Accordingly, the staff advance being a financial asset shall be initially measured at the fair value
and subsequently at the amortised cost. The interest income is calculated by using the effective
interest method. The difference between the amount lent and fair value is charged as Employee
benefit expense in statement of profit and loss.
a) Calculation of Fair Value of the Loan
Year Cash Inflow Discounting Factor (10%) Present Value
1 2,40,000 0.909 2,18,160

2 2,32,000 0.826 1,91,632

3 2,24,000 0.751 1,68,224

4 2,16,000 0.683 1,47,528
5 2,08,000 0.621 1,29,168
Total 8,54,712
Staff loan should be initially recorded at ` 8,54,712.

b) Employee Benefit Expense
Loan Amount – Fair Value of the loan = ` 10,00,000 – ` 8,54,712 = ` 1,45,288
` 1,45,288 shall be charged as Employee Benefit expense in Statement of Profit and Loss for
the year ended 31.03.20X2.
Amortisation table:
Year Opening balance of Interest (10%) Repayment Closing

Staff Advance balance of
Staff Advance
(a) (b)= (a x 10%) (c) (d) = a + b -c
1 8,54,712 85,471 2,40,000 7,00,183
2 7,00,183 70,018 2,32,000 5,38,201
3 5,38,201 53,820 2,24,000 3,68,021
4 3,68,021 36,802 2,16,000 1,88,823
5 1,88,823 19,177 (b.f.) 2,08,000 Nil
Balance Sheet extracts showing the presentation of staff loan as at 31 st March 20X2
Ind AS compliant Division II of Sch III needs to be referred for presentation requirement in Balance
Sheet on Ind AS.
Assets
Non-Current Assets
Financial Assets
(i) Loan 5,38,201

Current Assets
Financial Assets
(i) Loans (7,00,183 - 5,38,201) 1,61,982
Case Study 2
Moon Ltd. has received a grant from government for ` 2 lakh towards purchase of an equipment
costing ` 10 lakhs having useful life of 4 years. The grant is conditional upon certain employment
targets.
The accountant is of the view that the Asset should be recorded net of amount received from the
Government Grant and accordingly reduced grant received from the cost of asset and present the
net amount in the Balance Sheet as at March 31, 20X2.
The working of the same for presenting in the balance sheet is given as below: INR
Cost of Equipment 10,00,000
Less: Grant received (2,00,000)
Net Value 8,00,000
Less: Accumulated depreciation (8,00,000/ 4 years) (2,00,000)
Net block of Equipment 6,00,000

Required:
Analyse whether the above accounting treatment made by the accountant is in compliance of the
Ind AS. If not, advise the correct treatment alongwith working for the same.
Solution
The above treatment needs to be examined in the light of the provisions given in Ind AS 20:
Accounting for Government Grant and Disclosure of Government Assistance.
Para 24 of Ind AS 20 ‘Accounting for government grants and disclosure of government assistance’
states “Government grants related to assets, including non-monetary grants at fair value shall be
presented in the balance sheet by setting up the grant as deferred income”
Accountant of Moon Ltd. has deducted the amount of grant in arriving at the carrying amount of
the asset to be presented in the Balance Sheet which is not correct and not in accordance with
Ind AS 20.

Accordingly, the government grant shall be presented in the balance sheet by setting up the grant
as deferred income, which is recognised in profit or loss on a systematic basis over the useful life
of the asset.
The presentation under the method permitted as per Ind AS 20 for the reporting period ending on
31.03.20X2 is as follows: INR
Credit to deferred income – Grant Received 2,00,000
Less: Recognised in profit or loss (` 2,00,000/4 years) (50,000)
Deferred income balance at year end 1,50,000
Cost of equipment 10,00,000
Less: Depreciation expense (` 10,00,000/4 years) (2,50,000)
Carrying amount of equipment at year end 7,50,000
Case Study 3
Pluto Ltd. has purchased a manufacturing plant for ` 6 lakhs on 1 April 20X1. The useful life of
the plant is 10 years. On 30th September 20X3, Pluto temporarily stops using the manufacturing
plant because demand has declined. However, the plant is maintained in a workable condition
and it will be used in future when demand picks up.
The accountant of Pluto ltd. decided to treat the plant as held for sale until the demands picks up
and accordingly measures the plant at lower of carrying amount and fair value less cost to sell.
Also, the accountant has also stopped charging the depreciation for the rest of period considering
the plant as held for sale. The fair value less cost to sell on 30 th September 20X3 and 31 March
20X4 was ` 4 lakhs and ` 3.5 lakhs respectively.
The accountant has performed the following working: INR
Carrying amount on initial classification as held for sale
Purchase Price of Plant 6,00,000
Less: Accumulated dep (6,00,000/ 10 Years)* 2.5 years (1,50,000) 4,50,000
Fair Value less cost to sell as on 31 March 20X3 4,00,000
The value will be lower of the above two 4,00,000

Balance Sheet extracts as on 31 March 20X4
Assets
Current Assets
Other Current Assets
Assets classified as held for sale 3,50,000
Required:
Analyse whether the above accounting treatment made by the accountant is in compliance with
the Ind AS. If not, advise the correct treatment alongwith working for the same.
Solution
The above treatment needs to be examined in the light of the provisions given in Ind AS 16
‘Property, Plant and Equipment’ and Ind AS 105 ‘Non-current Assets Held for Sale and
Discontinued Operations’.
Para 6 of Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued Operations’ states that:
“An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying
amount will be recovered principally through a sale transaction rather than through continuing
use”.
“For this to be the case, the asset (or disposal group) must be available for immediate sale in its
present condition subject only to terms that are usual and customary for sales of such assets (or
disposal groups) and its sale must be highly probable. Thus, an asset (or disposal group) cannot
be classified as a non-current asset (or disposal group) held for sale, if the entity intends to sell it
in a distant future”.
Further, paragraph 8 of Ind AS 105 states that:
“For the sale to be highly probable, the appropriate level of management must be committed to a
plan to sell the asset (or disposal group), and an active programme to locate a buyer and complete
the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed
for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should
be expected to qualify for recognition as a completed sale within one year from the date of
classification and actions required to complete the plan should indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be withdrawn.”


“An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be
abandoned. This is because its carrying amount will be recovered principally through continuing
use.”
“Depreciation does not cease when the asset becomes idle or is retired from active use unless
the asset is fully depreciated.”
Going by the guidance given above,
The Accountant of Pluto Ltd. has treated the plant as held for sale and measured it at the fair
value less cost to sell. Also, the depreciation has not been charged thereon since the date of
classification as held for sale which is not correct and not in accordance with Ind AS 105 and Ind
AS 16.
Accordingly, the manufacturing plant should be treated as abandoned asset rather as held for sale
because its carrying amount will be principally recovered through continuous use. Pluto Ltd. shall
not stop charging depreciation or treat the plant as held for sale because its carrying amount will
be recovered principally through continuing use to the end of their economic life.
The working of the same for presenting in the balance sheet is given as below:
Calculation of carrying amount as on 31 March 20X4
Purchase Price of Plant 6,00,000
Less: Accumulated depreciation (6,00,000/ 10 Years)* 3 Years (1,80,000)
4,20,000
Balance Sheet extracts as on 31 March 20X4
Assets
Non-Current Assets
Property, Plant and Equipment 4,20,000
Case Study 4
On 5th April, 20X2, fire damaged a consignment of inventory at one of the Jupiter’s Ltd.’s
warehouse. This inventory had been manufactured prior to 31 st March 20X2 costing ` 8 lakhs.
The net realisable value of the inventory prior to the damage was estimated at ` 9.60 lakhs.
Because of the damage caused to the consignment of inventory, the company was required to

spend an additional amount of ` 2 lakhs on repairing and re-packaging of the inventory. The
inventory was sold on 15 th May, 20X2 for proceeds of ` 9 lakhs.
The accountant of Jupiter Ltd treats this event as an adjusting event and adjusted this event of
causing the damage to the inventory in its financial statement and accordingly re-measures the
inventories as follows: INR lakhs
Cost 8.00
Net realisable value (9.6 -2) 7.60
Inventories (lower of cost and net realisable value) 7.60
Required:
Analyse whether the above accounting treatment made by the accountant in regard to financial
year ending on 31.0.20X2 is in compliance of the Ind AS. If not, advise the correct treatment
alongwith working for the same.
Solution
The above treatment needs to be examined in the light of the provisions given in Ind AS 10 ‘Events
after the Reporting Period’ and Ind AS 2 ‘Inventories’.
Para 3 of Ind AS 10 ‘Events after the Reporting Period’ defines “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 approved by the Board of Directors in case of a
company, and, by the corresponding approving authority in case of any other entity for issue. Two
types of events can be identified:
(a) those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period).
“An entity shall not adjust the amounts recognised in its financial statements to reflect non-
adjusting events after the reporting period”.
Further, paragraph 6 of Ind AS 2 defines:
“Net realisable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale”.
“Inventories shall be measured at the lower of cost and net realisable value”.

Accountant of Jupiter Ltd. has re-measured the inventories after adjusting the event in its financial
statement which is not correct and nor in accordance with provision of Ind AS 2 and Ind AS 10.
Accordingly, the event causing the damage to the inventory occurred after the reporting date and
as per the principles laid down under Ind AS 10 ‘Events After the Reporting Date’ is a non-
adjusting event as it does not affect conditions at the reporting date. Non-adjusting events are not
recognised in the financial statements, but are disclosed where their effect is material.
Therefore, as per the provisions of Ind AS 2 and Ind AS 10, the consignment of inventories shall
be recorded in the Balance Sheet at a value of ` 8 Lakhs calculated below:
INR’ lakhs
Cost 8.00
Net realisable value 9.60
Inventories (lower of cost and net realisable value) 8.00
Case Study 5
On April 1, 20X1, Sun Ltd. has acquired 100% shares of Earth Ltd. for ` 30 lakhs. Sun Ltd. has
3 cash-generating units A, B and C with fair value of Rs 12 lakhs, 8 lakhs and 4 lakhs respectively.
The company recognizes goodwill of Rs 6 lakhs that relates to CGU ‘C’ only.
During the financial year 20X2-20X3, the CFO of the company has a view that there is no
requirement of any impairment testing for any CGU since their recoverable amount is
comparatively higher than the carrying amount and believes there is no indicator of impairment.
Required:
Analyse whether the view adopted by the CFO of Sun Ltd is in compliance of the Ind AS. If not,
advise the correct treatment in accordance with relevant Ind AS
Solution
The above treatment needs to be examined in the light of the provisions given in Ind AS 36:
Impairment of Assets.
Para 9 of Ind AS 36 ‘Impairment of Assets’ states that “An entity shall assess at the end of each
reporting period whether there is any indication that an asset may be impaired. If any such
indication exists, the entity shall estimate the recoverable amount of the asset.”
Further, paragraph 10(b) of Ind AS 36 states that:
“Irrespective of whether there is any indication of impairment, an entity shall also test goodwill
acquired in a business combination for impairment annually.”

Sun Ltd has not tested any CGU on account of not having any indication of impairment is partially
correct i.e. in respect of CGU A and B but not for CGU C. Hence the treatment made by the
Company is not in accordance with Ind AS 36.
Accordingly, impairment testing in respect of CGU A and B are not required since there are no
indications of impairment. However, Sun Ltd shall test CGU C irrespective of any indication of
impairment annually as the goodwill acquired on business combination is fully allocated to CGU
‘C’.
Case Study 6
Neptune Ltd. issued 15,000, 12% convertible debentures for ` 15 lakhs of ` 100 each at face
value on 1 st April 20X1 which will be converted into equity instruments on 31 st March 20X6. Similar
debentures without conversion right carry interest rate of 15%.
The CFO of the company has advised to recognise the 12% debentures in the balance sheet
equivalent to the amount of face value of debentures issued i.e. Rs 15 lakhs. The interest expense
for the period is recognised at the contracted rate in the Statement of Profit and Loss by the
company i.e. ` 1,80,000 (Rs 15 lakhs x 12%).
Required:
Analyse whether the above accounting treatment advised by CFO is in compliance with the
Ind AS. If not, advise the correct treatment alongwith working for the same.
Solution
The above treatment needs to be analysed from the purview of provisions given in Ind AS 32, Ind
AS 107 and Ind AS 109 on ‘Financial Instruments’.
The terms of a financial instrument may be structured such that it contains both equity and liability
components (i.e. by substance, the instrument is neither a liability nor an equity instrument in
entirety).
Para 11 of Ind AS 32 ‘Financial Instruments : Presentation’ states that:
“A financial liability is any liability that is:
(a) a contractual obligation:
(i) to deliver cash or …..
An equity instrument is any contract that evidences a residual interest in the assets of an entity
after deducting all of its liabilities”.
“The issuer of a non-derivative financial instrument shall evaluate the terms of the financial
instrument to determine whether it contains both a liability and an equity component. Such

components shall be classified separately as financial liabilities, financial assets or equity

instruments in accordance with paragraph 15.”
Further, paragraph 32 of Ind AS 32 which deals with separating the liability and equity
components, states that:
“The issuer of a bond convertible into ordinary shares first determines the carrying amount of the
liability component by measuring the fair value of a similar liability (including any embedded non-
equity derivative features) that does not have an associated equity component. The carrying
amount of the equity instrument represented by the option to convert the instrument into ordinary
shares is then determined by deducting the fair value of the financial liability from the fair value of
the compound financial instrument as a whole.”
“at initial recognition, an entity shall measure a financial asset or financial liability at its fair value”.
Further, paragraph 5.1.1 of Appendix B to Ind AS 109 provides the guidance to determine the fair
value of liability:
The fair value of the liability component on initial recognition is the present value of the contractual
stream of future cash flows discounted at the market rate of interest that would have been applied
to an instrument of comparable credit quality with substantially the same cash flows, on the same
terms, but without the conversion option.
Further, paragraph 4.2.1 of Ind AS 109 provides that:
The financial liability component will be subsequently measured depending on its classification
either as a financial liability at FVTPL, or as a Financial liability measured at amortised cost (using
the effective interest rate method).
As per the facts of the case study given in the question, the liability component is measured at
amortised cost using the effective interest rate method.
The equity component will not be required to remeasured.
The CFO of the Neptune Ltd. has advised to recognise 12% debenture in the balance sheet
equivalent to the amount of face value of debentures issued i.e. Rs 15 lakhs without separating
into the liability and equity component and ` 1,80,000 as interest expense for the period is
recognised at the contracted rate in the Statement of Profit and Loss which is not correct and not
in accordance with Ind AS 32, 107 and 109.
Accordingly, the 12% debentures initially need to be separated between the liability and equity
component using the guidance given under Ind AS 32. The liability component shall be initially
measured at the fair value and subsequently at the amortised cost. The interest expense is
calculated by using the effective interest method. It may be noted that equity component will not
be remeasured.

a) Calculation of Financial liability INR
Year Cash outflow Discounting Factor (15%) Present Value
1 1,80,000 0.870 1,56,600
2 1,80,000 0.756 1,36,080
3 1,80,000 0.658 1,18,440
4 1,80,000 0.572 1,02,960
5 1,80,000 0.497 89,460
Total 6,03,540
b) Separating the liability and equity components

Equity component = Fair value of the instrument as whole – Financial liability
= ` 15,00,000 – ` 6,03,540
= ` 8,96,460
The following journal entry is required to pass on the initial recognition of the instrument:
` `
Bank Account Dr. 15,00,000
To Financial Liability 6,03,540
To Equity 8,96,460
c) Amortisation table INR
Year Opening balance Interest (15%) Repayment Closing balance of

of liability liability
(a) (b)=(a) x 15% (c) (d) = (a +b -c)
1 6,03,540 90,531 1,80,000 5,14,071
2 5,14,071 77,111 1,80,000 4,11,182

3 4,11,182 61,677 1,80,000 2,92,859
4 2,92,859 43,929 1,80,000 1,56,788
5 1,56,788 23,212 (b.f.) 1,80,000 Nil
Balance Sheet extracts showing the presentation of compounded financial instrument as

at 31 st March 20X2
Ind AS compliant Division II of Schedule III needs to be referred for presentation requirement in
Balance Sheet on Ind AS. INR
Equity and Liabilities
Equity
Other Equity
Equity component of compound financial instrument 8,96,460
Liabilities
Non-Current liabilities
Financial Liabilities
(i) Borrowings (5,14,071 – 1,02,889) 4,11,182
Current liabilities
Financial Liabilities
(i) Borrowings (5,14,071 – 4,11,182) 1,02,889
The Equity component of compound financial instrument needs to be shown as a separate column
in Statement of Changes in Equity as per Ind AS compliant Schedule III.

TEST YOUR KNOWLEDGE

Questions based on AS
1. The company had spent ` 45 lakhs for publicity and research expenses on one of its new
consumer product, which was marketed in the accounting year 20X1-20X2, but proved to be a
failure.
Required:
Analyse, how you will deal with this amount in the accounts of the company for the year ended
31stMarch, 20X2 with reference to Accounting Standards:
2. A company with a turnover of ` 250 crores and an annual advertising budget of ` 2 crores had
taken up the marketing of a new product. It was estimated that the company would have a
turnover of ` 25 crores from the new product. The company had debited to its Profit and Loss
account the total expenditure of ` 2 crore incurred on extensive special initial advertisement
campaign for the new product.
Required:
Evaluate the correctness of the procedure adopted by the company?
3. Good Drugs and Pharmaceuticals Ltd. acquired a sachet filling machine on 1st April, 20X1 for
` 60 lakhs. The machine was expected to have a productive life of 6 years. At the end of
financial year 20X1-20X2 the carrying amount was ` 41 lakhs. A short circuit occurred in this
financial year but luckily the machine did not get badly damaged and was still in working order
at the close of the financial year. The machine was expected to fetch ` 36 lakhs, if sold in the
market. The machine by itself is not capable of generating cash flows. However, the smallest
group of assets comprising of this machine also, is capable of generating cash flows of ` 54
crore per annum and has a carrying amount of ` 3.46 crore. All such machines put together
could fetch a sum of ` 4.44 crore if disposed.
Required:
Discuss the applicability of Impairment loss.
4. Mini Ltd. took a factory premises on lease on 1.4.20X1 for ` 2,00,000 per month. The lease is
operating lease. During March, 20X3, Mini Ltd. relocates its operation to a new factory building.
The lease on the old factory premises continues to be live upto 31.12.20X5. The lease cannot
be cancelled and cannot be sub-let to another user. The auditor insists that lease rent of
balance 33 months upto 31.12.20X5 should be provided in the accounts for the year ending
31.3.20X3.
Required:
Advise Mini Ltd. in the above situation.

5. An oil company has been contaminating land for several years. It does not clean up because
there is no legislation requiring cleaning up. At 31st March 20X1, it is virtually certain that a law
requiring a clean-up of land already contaminated will be enacted shortly after the year end. Is
provisioning presently necessary?
Questions based on Ind AS
1. Venus Ltd. is a multinational entity that owns three properties. All three properties were
purchased on April 1, 20X1. The details of purchase price and market values of the properties
are given as follows:
Particulars Property 1 Property 2 Property 3
Factory Factory Let-Out
Purchase price 15,000 10,000 12,000
Market value 16,000 11,000 13,500

31.03.20X2
Life 10 Years 10 Years 10 Years
Subsequent Cost Model Revaluation Model Revaluation Model

Measurement
Property 1 and 2 are used by Venus Ltd. as factory building whilst property 3 is let-out to a non-
related party at a market rent. The management presents all three properties in balance sheet
as ‘property, plant and equipment’.
The Company does not depreciate any of the properties on the basis that the fair values are
exceeding their carrying amount and recognise the difference between purchase price and fair
value in Statement of Profit and Loss.
Required:
Analyse whether the accounting policies adopted by the Venus Ltd. in relation to these
properties is in accordance of Indian Accounting Standards (Ind AS). If not, advise the correct
treatment alongwith working for the same.
2. On 1st January 20X2, Sun Ltd. was notified that a customer was taking legal action against the
company in respect of a financial losses incurred by the customer. Customer alleged that the
financial losses were caused due to supply of faulty products on 30th September 20X1 by the
Company. Sun Ltd. defended the case but considered, based on the progress of the case up
to 31st March 20X2, that there was a 75% probability they would have to pay damages of ` 10
lakhs to the customer.

However, the accountant of Sun Ltd. has not recorded this transaction in its financial statement
as the case is not yet finally settled. The case was ultimately settled against the company
resulting in to payment of damages of ` 12 lakhs to the customer on 15th May 20X2. The
financials have been authorized by the Board of Directors in its meeting held on 18 th May 20X2.
Required:
Analyse whether the above accounting treatment made by the accountant is in compliance of
the Ind AS. If not, advise the correct treatment along with working for the same.
3. Mercury Ltd. is an entity engaged in plantation and farming on a large scale diversified across
India. On 1st April 20X1, the company has received a government grant for ` 10 lakhs subject
to a condition that it will continue to engage in plantation of eucalyptus tree for a coming period
of five years.
The management has a reasonable assurance that the entity will comply with condition of
engaging in the plantation of eucalyptus tree for specified period of five years and accordingly
it recognises proportionate grant for ` 2 lakhs in Statement of Profit and Loss as income
following the principles laid down under Ind AS 20 Accounting for Government Grants and
Disclosure of Government Assistance.
Required:
Analyse whether the above accounting treatment made by the management is in compliance
of the Ind AS. If not, advise the correct treatment alongwith working for the same.
4. Mercury Ltd. has sold goods to Mars Ltd. at a consideration of ` 10 lakhs, the receipt of which
receivable in three equal installments of ` 3,33,333 over a two year period (receipts on 1 st April
20X1, 31st March 20X2 and 31st March 20X3).
The company is offering a discount of 5 % (i.e. ` 50,000) if payment is made in full at the time
of sale. The sale agreement reflects an implicit interest rate of 5.36% p.a.
The total consideration to be received from such sale is at ` 10 Lakhs and hence, the
management has recognised the revenue from sale of goods for ` 10 lakhs. Further, the
management is of the view that there is no difference in this aspect between Indian GAAP and
Ind AS.
Required:
Analyse whether the above accounting treatment made by the accountant is in compliance of
the Ind AS. If not, advise the correct treatment along with working for the same.

ANSWERS TO TEST YOUR KNOWLEDGE

Answers to AS based Questions
1. In the given case, the company spent ` 45 lakhs for publicity and research of a new product
which was marketed but proved to be a failure. It is clear that in future there will be no related
further revenue/benefit because of the failure of the product. Thus according to paras 41 to 43
of AS 26 ‘Intangible Assets’, the company should charge the total amount of ` 45 lakhs as an
expense in the profit and loss account.
2. According to paras 55 and 56 of AS 26 ‘Intangible Assets’, expenditure on an intangible item
should be recognised as an expense when it is incurred unless it forms part of the cost of an
intangible asset.
In the given case, advertisement expenditure of ` 2 crores had been taken up for the marketing
of a new product which may provide future economic benefits to an enterprise by having a
turnover of ` 25 crores. Here, no intangible asset or other asset is acquired or created that
can be recognised. Therefore, the accounting treatment by the company of debiting the entire
advertising expenditure of ` 2 crores to the Profit and Loss account of the year is correct.
3. As per provisions of Para 91(b) of AS 28 “Impairment of Assets”, impairment loss is not to be
recognized for a given asset if its cash generating unit (CGU) is not impaired. In the given
question, the related cash generating unit which is group of asset to which the damaged
machine belongs is not impaired; and the recoverable amount is more than the carrying amount
of group of assets. Hence there is no need to provide for impairment loss on the damaged
sachet filling machine.
4. In accordance with explanation to para 1(b) of AS 29 ‘Provisions, Contingent Liabilities and
Contingent Assets’, if an enterprise has a contract that is onerous, the present obligation under
the contract should be recognized and measured as a provision. In the given case, the
operating lease contract has become onerous ∗ as the economic benefit of lease contract for
next 33 months up to 31.12.20X5 will be nil. However, the lessee, Mini Ltd., has to pay lease
rent of ` 66,00,000 (i.e.2,00,000 p.m. for next 33 months).
Therefore, provision on account of ` 66,00,000 is to be provided in the accounts for the year
ending 31.03.X3. Hence auditor is right.
5. As per para 29 of AS 29 ‘Provisions, Contingent Liabilities and Contingent Assets’, a past event
will lead to present obligation when the enterprise has no realistic alternative to settle the
obligation created by the past event.
∗
For a contract to qualify as an onerous contract, the unavoidable costs of meeting the obligation
under the contract should exceed the economic benefits expected to be received under it.

However, when environmental damage is caused there may be no obligation to remedy the
consequences. The causing of the damage will become an obligating event when a new law
requires the existing damage to be rectified. Where details of a proposed new law have yet to
be finalised, an obligation arises only when the legislation is virtually certain to be enacted.
In the given case it is virtually certain that law will be enacted requiring clean-up of a land
already contaminated. Therefore, an oil company has to provide for such clean-up cost in the
year in which the law is virtually certain to be enacted.
Answers to Ind AS based Questions
1. The above issue needs to be examined in the umbrella of the provisions given in Ind AS 1
‘Presentation of Financial Statements’, Ind AS 16 ‘Property, Plant and Equipment’ in relation
to property ‘1’ and ‘2’ and Ind AS 40 ‘Investment Property’ in relation to property ‘3’.
Property ‘1’ and ‘2’
Para 6 of Ind AS 16 ‘Property, Plant and Equipment’ defines:
“Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and
(b) are expected to be used during more than one period.”
“An entity shall choose either the cost model or the revaluation model as its accounting policy
and shall apply that policy to an entire class of property, plant and equipment”.
“If an item of property, plant and equipment is revalued, the entire class of property, plant
and equipment to which that asset belongs shall be revalued”.
“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”.
“Depreciation is recognised even if the fair value of the asset exceeds its carrying amount,
as long as the asset’s residual value does not exceed its carrying amount”.

Property ‘3’
Para 6 of Ind AS 40 ‘Investment property’ defines:
“Investment property is property (land or a building—or part of a building—or both) held (by
the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation
or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business”.
“An entity shall adopt as its accounting policy the cost model to all of its investment property”.
Further, paragraph 79 (e) of Ind AS 40 requires that:
“An entity shall disclose the fair value of investment property”.
Further, paragraph 54 (2) of Ind AS 1 ‘Presentation of Financial Statements’ requires that:
“As a minimum, the balance sheet shall include line items that present the following amounts:
(a) property, plant and equipment;
(b) investment property;
As per the facts given in the question, Venus Ltd. has
(a) presented all three properties in balance sheet as ‘property, plant and equipment’;
(b) applied different accounting policies to Property ‘1’ and ‘2’;
(c) revaluation is charged in statement of profit and loss as profit; and
(d) applied revaluation model to Property ‘3’ being classified as Investment Property.
These accounting treatment is neither correct nor in accordance with provision of Ind AS 1,
Ind AS 16 and Ind AS 40.
Accordingly, Venus Ltd. shall apply the same accounting policy (i.e. either revaluation or cost
model) to entire class of property being property ‘1’ and ‘2”. It also required to depreciate
these properties irrespective of that, their fair value exceeds the carrying amount. The
revaluation gain shall be recognised in other comprehensive income and accumulated in
equity under the heading of revaluation surplus.
There is no alternative of revaluation model in respect to property ‘3’ being classified as
Investment Property and only cost model is permitted for subsequent measurement. However,
Venus ltd. is required to disclose the fair value of the property in the Notes to Accounts. Also the
property ‘3’ shall be presented as separate line item as Investment Property.
Therefore, as per the provisions of Ind AS 1, Ind AS 16 and Ind AS 40, the presentation of
these three properties in the balance sheet is as follows:

Case 1: Venus Ltd. has applied the Cost Model to an entire class of property, plant and
equipment.
Balance Sheet extracts as at 31 st March 20X2 INR
Assets
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 13,500
Property ‘2’ 9,000 22,500
Investment Properties

Case 2: Venus Ltd. has applied the Revaluation Model to an entire class of property,
plant and equipment.
Balance Sheet extracts as at 31 st March 20X2
INR
Assets
Non-Current Assets
Property, Plant and Equipment
Property ‘2’ 11,000 27,000
Investment Properties
Equity and Liabilities
Other Equity
Revaluation Reserve
Property ‘2’ 2,000 4,500

The revaluation reserve should be routed through Other Comprehensive Income

(subsequently not reclassified to Profit and Loss) in Statement of Profit and Loss and Shown
as a separate column in Statement of Changes in Equity.
2. The above treatment needs to be examined in the light of the provisions given in Ind AS 37
‘Provisions, Contingent Liabilities and Contingent Assets’ and Ind AS 10 ‘Events After the
Reporting Period’.
Para 10 of Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ defines:
“Provision is a liability of uncertain timing or amount.
Liability is a present obligation of the entity arising from past events, the settlement of which
is expected to result in an outflow from the entity of resources embodying economic benefits”.
Further, paragraph 14 of Ind AS 37, states:
“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”.
“The amount recognised as a provision shall be the best estimate of the expenditure required
to settle the present obligation at the end of the reporting period”.
Further, paragraph 3 of Ind AS 10 ‘Events after the Reporting Period’ defines:
“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
approved by the Board of Directors in case of a company, and, by the corresponding
approving authority in case of any other entity for issue. Two types of events can be
identified:
(a) those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-
adjusting events after the reporting period).
“An entity shall adjust the amounts recognised in its financial statements to reflect adjusting
events after the reporting period.”

The Accountant of Sun Ltd. has not recognised the provision and accordingly not adjusted
the amounts recognised in its financial statements to reflect adjusting events after the
reporting period is not correct and nor in accordance with provision of Ind AS 37 and Ind
AS 10.
As per given facts, the potential payment of damages to the customer is an obligation arising
out of a past event which can be reliably estimated. Therefore, following the provision of Ind
AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ – a provision is required.
The provision should be for the best estimate of the expenditure required to settle the
obligation at 31 March 20X2 which comes to ` 7.5 lakhs (` 10 lakhs * 75%).
Further, following the principles of Ind AS 10 ‘Events After the Reporting Period’ evidence of
the settlement amount is an adjusting event. Therefore, the amount of provision created shall
be increased to ` 12 lakhs and accordingly be recognised as a current liability.
3. As per given facts, the company is engaged in plantation and farming. Hence Ind AS 41
Agriculture shall be applicable to this company.
The above facts need to be examined in the light of the provisions given in Ind AS 20
‘Accounting for Government Grants and Disclosure of Government Assistance’ and Ind AS
41 ‘Agriculture’.
Para 2(d) of Ind AS 20 ‘Accounting for Government Grants and Disclosure of Government
Assistance’ states:
“This Standard does not deal with government grants covered by Ind AS 41, Agriculture”.
Further, paragraph 1 (c) of Ind AS 41 ‘Agriculture’, states:
“This Standard shall be applied to account for the government grants covered by
paragraphs 34 and 35 when they relate to agricultural activity”.
Further, paragraph 1 (c) of Ind AS 41 ‘Agriculture’, states:
“If a government grant related to a biological asset measured at its fair value less costs to
sell is conditional, including when a government grant requires an entity not to engage in
specified agricultural activity, an entity shall recognise the government grant in profit or loss
when, and only when, the conditions attaching to the government grant are met”.
Understanding of the given facts, The Company has recognised the proportionate grant for Rs 2
lakhs in Statement of Profit and Loss before the conditions attaching to government grant are met
which is not correct and nor in accordance with provision of Ind AS 41 ‘Agriculture’.
Accordingly, the accounting treatment of government grant received by the Mercury Ltd. is
governed by the provision of Ind AS 41 ‘Agriculture’ rather Ind AS 20 ‘Accounting for
Government Grants and Disclosure of Government Assistance’.

Government grant for ` 10 lakhs shall be recognised in profit or loss when, and only when,
the conditions attaching to the government grant are met i.e. after the expiry of specified
period of five years of continuing engagement in the plantation of eucalyptus tree.
Balance Sheet extracts showing the presentation of Government Grant
as on 31 st March 20X2 INR
Liabilities
Non-Current liabilities
Other Non-Current Liabilities
Government Grants 10,00,000
4. The above treatment needs to be examined in the light of the provisions given in Ind AS 18:
Revenue.
Para 9 of Ind AS 18 ‘Revenue’ states that:
“Revenue shall be measured at the fair value of the consideration received or receivable.”
“When the arrangement effectively constitutes a financing transaction, the fair value of the
consideration is determined by discounting all future receipts using an imputed rate of interest.
The difference between the fair value and the nominal amount of the consideration is
recognised as interest revenue in accordance with Ind AS 109.”
The accountant has recognised the nominal amount of consideration as revenue from the sale
of goods which is not correct and not in accordance with Ind AS 18.
Accordingly, the revenue from sale of goods shall be recognised at the fair value of the
consideration received or receivable. The fair value of the consideration is determined by
discounting all future receipts using an imputed rate of interest where the receipt is deferred
beyond normal credit terms. The difference between the fair value and the nominal amount of
the consideration is recognised as interest revenue.
The fair value of consideration (cash price equivalent) of the sale of goods is calculated as
follows: INR
Year Consideration Present value Present value of

(Installment) factor consideration
Time of sale 3,33,333 - 3,33,333

End of 1 st year 3,33,333 0.949 3,16,333
End of 2 nd year 3,33,334 0.901 3,00,334
10,00,000 9,50,000
The Company that agrees for deferring the cash inflow from sale of goods will recognise the
revenue from sale of goods and finance income as follows:
Initial recognition of sale of goods INR
Cash Dr. 3,33,333
Trade Receivable Dr. 6,16,667
To Sale 9,50,000
Recognition of interest expense and receipt of second

installment
Cash Dr. 3,33,333
To Interest Income 32,999
To Trade Receivable 3,00,334
Recognition of interest expense and payment of final

installment
Cash Dr. 3,33,334
To Interest Income (Balancing figure) 17,000
To Trade Receivable 3,16,333
Balance Sheet and Profit and Loss extracts showing the presentation
for the year ended as at for the year ending 31 st March 20X2 and 31 st March 20X3
Ind AS compliant Division II of Sch III needs to be referred for presentation requirement in
Balance Sheet and Profit and Loss on Ind AS.

Balance Sheet (extracts) as at 31 st March 20X2 and 31 st March 20X3

INR
As at Mar 31, As at Mar 31,

20X2 20X3
Income
Sale of Goods 9,50,000 -
Other Income (Finance income) 32,999 17,000
Statement of Profit and Loss (extracts)

for the year ended 31 st March 20X2 and 31 st March 20X3
INR
As at Mar 31, As at Mar 31,

20X2 20X3
Assets
Current Assets
Financial Assets
Trade Receivable 3,16,333 XXX

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After studying this chapter, you would be able to:

 Analyse the common mistakes incurred by the preparers of the financial

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