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IND AS 1 PRESENTATION OF
FINANCIAL STATEMENT
Topics Pg. Topics Pg.
I. Objective 1 Sources of estimation uncertainty 9
II. Scope 1 Other Disclosures 9
III. Financial Statement 1 Identification of FS 10
Complete set of Financial Statement 2 IV. Practical Questions 11
Balance Sheet 2
Statement of Profit & Loss 2
Statement of Changes in Equity 3
Statement of Cash Flow 3
Notes 3
General Features 4
True & Fair View 4
Departure from IND AS 4
Going Concern 5
Accrual basis of accounting 6
Materiality & Aggregation 6
Offsetting 7
Frequency of Reporting 7
Comparative Information 7
Change in Accounting Policy 8
Reclassification 8
Consistency of Presentation 9
Disclosure of Accounting Policy 9
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I.
This Standard prescribes the basis for presentation of general purpose financial
statements to ensure comparability both with the entity’s financial statements of
previous periods & with financial statements of other entities. It sets out overall
requirements for Presentation of financial statements, Guidelines for their
structure and Minimum requirements for their content.
II.
An entity shall apply this Standard in preparing and presenting general purpose
financial statements in accordance with Indian Accounting Standards (Jnd ASs).
This Standard applies equally to all entities, including those that present consolidated
financial statements in accordance with Ind AS 110, Consolidated Financial
Statements, and those that present separate financial statements in accordance with Ind
AS 27, Separate Financial Statements. This standard does not apply to structure and
content of condensed interim financial statements prepared in accordance with Ind AS
34. Entities that do not have equity as defined in IAS 32 Financial Instruments:
Presentation e.g. some mutual funds and entities whose share capital is not equity e.g.
some co‑operative entities may need to adapt the financial statement presentation of
members’ or unitholders’ interests
III.
1. General purpose financial statements (referred to as ‘financial statements’) are
those intended to meet the needs of users who are not in a position to require an
entity to prepare reports tailored to their particular information needs.
2. The objective of financial statements is to provide information about the financial
position, financial performance and cash flows of an entity that is useful to a
wide range of users in making economic decisions. To meet this objective, financial
statements provide information about an entity’s assets, liabilities; equity; income and
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expenses, including gains and losses; contributions by and distributions to owners in
their capacity as owners and cash flows.
3. A complete set of financial statements comprises:
a. a balance sheet as at the end of the period;
b. a statement of profit and loss for the period;
c. statement of changes in equity for the period;
d. a statement of cash flows for the period;
e. notes, comprising a summary of significant accounting policies & other explanatory
information; and
f. comparative information in respect of the preceding period and
g. a balance sheet as at the beginning of the preceding period when an entity applies an
accounting policy retrospectively or makes a retrospective restatement of items in its
financial statements, or when it reclassifies items in its financial statements.
Many entities present reports and statements such as financial reviews by
management, environmental reports, and value added statements that are outside the
financial statements. Such reports & statements that are outside the financial
statements are outside the scope of Ind AS.
4. Balance Sheet
a. Schedule III of companies act 2013 provides a format of the balance sheet and sets
out the minimum requirements of disclosure on face of balance sheet
b. Items presented in the balance sheet are to be classified as current and non-current.
c. Schedule III does not permit companies to avail of the option of presenting assets
and liabilities in the order of liquidity, as provided by Ind AS 1.
5. Statement of Profit and Loss
a. An entity shall present a single statement of profit and loss, with profit or loss
(P/L) and other comprehensive income (OCI) presented in two sections. The
sections shall be presented together, with the profit or loss section presented first
followed directly followed by the other comprehensive income section.
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b. Schedule III provides a format of the statement of profit and loss and sets out the
minimum requirements of disclosure on the face of statement of profit and loss.
c. Statement of profit & loss is to be presented in accordance with nature of
expenses and would include profit/loss for period & OCI for period.
6. Statement of changes in Equity
a. The Statement of changes in equity would reconcile opening to closing amounts
for each component of equity including reserves & surplus and items of OCI.
b. The format also includes disclosure of the equity component of compound financial
instruments in ‘other equity’, which is in accordance with Ind AS 32.
7. Statement of Cash Flows: The Statement of cash flows would be presented when
required in accordance with Ind AS 7, Statement of Cash Flows.
8. Notes
a. Notes containing information in addition to that which is presented in the financial
statements would be provided, including, where required, narrative descriptions or
disaggregation of items recognised in the financial statements and information about
items that do not qualify for such recognition.
b. Disclosure under Ind AS shall be made in the Notes or by way of additional
statement(s) unless required to be disclosed on face of the Financial Statements.
c. In situations where compliance with the requirements of the companies Act
including Ind AS requires any change in treatment or disclosure in the formats given
in Schedule III, then Schedule III permits such changes to be made and the
requirements of Schedule III would stand modified accordingly.
d. Situations where an accounting treatment /disclosure in an Ind AS is in conflict with
requirements of Schedule III, entity should comply with the relevant Jnd AS.
e. Many entities present reports & statements such as financial reviews by
management, environmental reports, & value added statements that are outside the
financial statements. Such reports and statements that are outside FS & outside
scope of Ind AS.
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9. General Features
a. True & Fair View:
i. Financial statements shall present a true & fair view of financial position, financial
performance and cash flows of an entity. The application of Ind AS, with additional
disclosure when necessary, is presumed to result in financial statements that
present a true and fair view.
ii. An entity whose financial statements comply with Ind AS shall make an explicit
and unreserved statement of such compliance in the notes.
iii. Presentation of a true and fair view also requires an entity:
• to select and apply accounting policies in accordance with Ind AS 8 which sets out
hierarchy of authoritative guidance that management considers in the absence of an
Ind AS that specifically applies to an item.
• to present information, including accounting policies, in a manner that provides
relevant, reliable, comparable and understandable information.
• to provide additional disclosures when compliance with specific requirements in Ind
AS is insufficient to enable users to understand the impact of particular transactions,
other events & conditions on entity’s financial position and financial performance.
b. An entity cannot rectify inappropriate accounting policies either by disclosure of
the accounting policies used or by notes or explanatory material.
c. Departure from IND AS
i. In the extremely rare circumstances in which management concludes that
compliance with a requirement in an Jnd AS would be so misleading, the
entity shall depart from that requirement if relevant regulatory framework requires,
or otherwise does not prohibit, such a departure and it shall disclose:
• that management has concluded that the financial statements present a true & fair
view of the entity’s financial position, financial performance and cash flows.
• that it has complied with applicable Ind AS, except that it has departed from a
particular requirement to present a true and fair view;
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ii. the title of Ind AS from which the entity has departed, the nature of the departure,
including treatment that the Ind AS would require, the reason why that treatment
would be so misleading in the circumstances that it would conflict with objective
of financial statements set out in Framework, & treatment adopted and
iii. for each period presented, the financial effect of departure on each item in financial
statements that would have been reported in complying with the requirement.
iv. When an entity has departed from a requirement of an Ind AS in a prior period, and
that departure affects the amounts recognised in the financial statements for the
current period, it shall make the disclosures given above.
d. In the extremely rare circumstances in which management concludes that
compliance with a requirement in an Ind AS would be so misleading that it would
conflict with the objective of financial statements set out in the Framework, but the
relevant regulatory framework prohibits departure from the requirement, the
entity shall, to the maximum extent possible, reduce the perceived misleading
aspects of compliance by disclosing:
i. Title of Ind AS in question, the nature of requirement & reason why management has
concluded that complying with that requirement is so misleading in circumstances
that it conflicts with objective of financial statements set out in Framework &
ii. For each period presented, the adjustments to each item in the financial statements
that management has concluded would be necessary to present a true and fair view.
4. Going Concern
a. Financial statements prepared under Ind AS should be prepared on a going concern
basis unless management either intends to liquidate the entity or to cease trading, or
has no realistic alternative but to do so.
b. If management has significant doubt of the entity’s ability to continue as a going
concern, the uncertainties should be disclosed.
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c. In case the financial statements are not prepared on a going concern basis, the entity
should disclose the basis of preparation of financial statements and also the
reason why the entity is not regarded as a going concern.
d. Events that occur after reporting period might indicate that entity is no longer
a going concern in such a case entity does not prepare its financial statements on a
going concern basis. This is consistent with Ind AS10, which requires a fundamental
change to basis of accounting when going concern assumption is not appropriate.
5. Accrual basis of accounting
a. An entity shall prepare its financial statements, except for cash flow information,
using the accrual basis of accounting.
b. When accrual basis of accounting is used, an entity recognises items as assets,
liabilities, equity, income and expenses (elements of financial statements) when they
satisfy the definitions & recognition criteria for those elements in framework.
4. Materiality & Aggregation
a. An entity shall present separately each material class of similar items. An entity
shall present separately items of a dissimilar nature or function unless they are
immaterial except when required by law.
b. Financial statements result from
i. processing large numbers of transactions or other events that are aggregated into
classes according to their nature or function.
ii. Final stage in that is the presentation of condensed and classified data, which form
line items in the financial statements. If a line item is not individually material, it is
aggregated with other items either in those statements or in notes. An item that is
not sufficiently material to warrant separate presentation in those statements may
warrant separate presentation in notes.
5. Offsetting
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a. An entity shall not offset assets & liabilities or income & expenses, unless
required or permitted by an Ind AS.
b. An entity reports separately both assets and liabilities, and income and expenses.
Measuring assets net of valuation allowances for e.g., doubtful debts allowances
on receivables is not offsetting.
c. An entity undertakes, in the course of its ordinary activities, other transactions that do
not generate revenue but are incidental to the main revenue-generating activities and
presents them by netting any income with related expenses arising on same
transaction only if it reflects the substance of the transaction or other event.
d. An entity presents on a net basis the gains & losses arising from a group of similar
transactions, for e.g., foreign exchange gains & losses or gains & losses arising on
financial instruments held for trading. However, an entity presents such gains &
losses separately if material.
6. Frequency of reporting
a. An entity shall present a complete set of financial statements (including comparative
information) at least annually.
b. When an entity changes the end of its reporting period and presents financial
statements for a period longer / shorter than one year, an entity shall disclose, in
addition to period covered by the financial statements, reason for using a longer /
shorter period, and the fact that amounts presented are not completely comparable.
7. Comparative information
a. Minimum comparative information
i. An entity should present comparative information in respect of the preceding period
for all amounts reported in the current period’s financial statements except when Ind
AS permit or require otherwise.
ii. Comparative information for narrative and descriptive information should be
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included if it is relevant to understand the current period’s financial statements.
iii. An entity shall present, as a minimum: 2 Balance Sheets, 2 Statement of P&L, 2
Statement of Cash Flows, 2 Statement of Changes in Equity & Related Notes.
b. Additional comparative information:
An entity may present comparative information in addition to minimum comparative
financial statements required by Ind ASs, as long as that information is prepared in
accordance with Ind ASs.
c. Change in accounting policy, retrospective restatement or reclassification
When an entity applies an accounting policy retrospectively or makes a retrospective
restatement of items in its financial statements or when it reclassifies items in its
financial statements, it shall present, as a minimum, 3 balance sheets, 2 of
each of other statements, and related notes. An entity presents balance sheets as at:
i. the end of the current period,
ii. the end of the previous period (which is same as beginning of current period), and
iii. the beginning of the earliest comparative period.
d. Reclassification:
When entity changes the presentation/classification of items in its financial
statements, entity shall reclassify comparative amounts unless reclassification is
impracticable. When entity reclassifies comparative amounts, entity shall:
When Practical disclose When impracticable disclose
a. the nature of the reclassification a. reason for not reclassifying amounts &
b. the amount of each item or class
of items that is reclassified &
b. nature of adjustments that would have
been made if amounts were reclassified.
c. reason for the reclassification.
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8. Consistency of presentation
Presentation & classification of items in FS is retained from one period to next unless
a. it is apparent another presentation or classification would be more appropriate or
b. an Ind AS requires a change in presentation.
When making presentation changes, entity reclassifies its comparative information.
9. Disclosure of accounting policies
An entity shall disclose its significant accounting policies comprising:
a. measurement basis (or bases) used in preparing the financial statements, &
b. other accounting policies used that are relevant to an understanding of FS.
An entity must disclose along with its significant accounting policies or other notes,
the judgments, apart from those involving estimations, that management has made in
the process of applying the entity’s accounting policies that have the most significant
effect on the amounts recognised in the financial statements.
10. Sources of estimation uncertainty
An entity must disclose, in notes, information about assumptions made concerning
future, and other important sources of estimation uncertainty at the end of the
reporting period, that have a significant risk of resulting in a material
adjustment to the carrying amounts of assets & liabilities within the next financial
year. Disclosures about nature of such assets and their carrying amount as at the end
of the reporting period should also be made.
11. Other disclosures
a. An entity must disclose the amounts of dividends proposed or declared before the
financial statements were approved for issue but not recognised as a distribution to
owners during the period, and the related amount per share and amount of any
cumulative preference dividends not recognised.
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b. Ind AS 1 requires certain other disclosures, if not disclosed elsewhere in
information published with financial statements, such as, the domicile & legal
form of entity, its country of incorporation and the address of its registered
office, a description of nature of entity’s operations & its principal activities, the
name of the parent and the ultimate parent of group, if it is a limited life entity
information regarding the length of its life.
12. Identification of Financial Statements
a. An entity shall clearly identify the financial statements and distinguish them from
other information in the same published document because Ind AS apply only to
financial statements, and not necessarily to other information presented in an annual
report, a regulatory filing, or another document though they may be useful to users.
b. An entity shall display the following information prominently:
• name of reporting entity or other means of identification, and any change in that
information from the end of the preceding reporting period
• whether the financial statements are of an individual entity or a group of entities;
• reporting date or the reporting period
• the presentation currency
• the level of rounding used in presenting amounts in the financial statements.
An entity meets above requirements by presenting appropriate headings for pages,
statements, notes, columns and the like. Judgement is required in determining the
best way of presenting such information. For example, when an entity presents the
financial statements electronically separate pages are not always used; an entity
then presents the above items to ensure that the information included in the
financial statements can be understood.
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Q1. An entity prepares its financial statements that contain an explicit and unreserved
statement of compliance with Ind AS. However, the auditor’s report on those
financial statements contains a qualification because of disagreement on application
of one Accounting Standard. In such case, is it acceptable for the entity to make an
explicit and unreserved statement of compliance with Ind AS?
Q2. Entity XYZ is a large manufacturer of plastic products for local market. On 1st
April, 20X6 the newly elected government unexpectedly abolished all import tariffs,
including the 40% tariff on all imported plastic products. Many other economic
reforms implemented by the new government contributed to the value of the
country’s currency ` appreciating significantly against most other currencies. The
currency appreciation severely reduced the competitiveness of the entity’s products.
Before 20X6 entity XYZ was profitable. However, because it was unable to compete
with low priced imports, entity XYZ went into losses. As at 31st March, 20X7,
entity XYZ’s equity was ` 1,000. During the second quarter of financial year ended
31 March 20X7, the management restructured entity’s operations. That restructuring
helped reduce losses for the third and fourth quarters to `400 and `380, respectively.
During the year ended 31st March, 20X7, entity XYZ reported a loss of ` 4,000. In
January 20X7, the local plastic industry and labour union lobbied government to
reinstate tariffs on plastic. On 15th March, 20X7, the government announced that it
would reintroduce limited plastic import tariffs at 10 percent in 20X8. However, it
emphasised that those tariffs would not be as protective as the tariffs enacted by the
previous government. In its latest economic forecast, the government predicts a
stable currency exchange rate in the short term with a gradual weakening of the
jurisdiction’s currency in the longer term.
Management of the entity XYZ undertook a going concern assessment at 31st
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March, 20X7. Management projects/forecasts that imposition of a 10 per cent tariff
on the import of plastic products would, at current exchange rates, result in entity
XYZ returning to profitability. How should the management of entity XYZ disclose
the information about the going concern assessment in entity XYZ’s 31st March,
20X7 annual financial statements?
Q3. Is offsetting of revenue against expenses, permissible in case of a company acting as
an agent and having sub-agents, where commission is paid to sub-agents from the
commission received as an agent?
Q4. A retail chain acquired a competitor in March, 20X1 and accounted for the business
combination under Ind AS 103 on a provisional basis in its 31st March, 20X1 annual
financial statements. The business combination accounting was finalised in 20X1-
20X2 and the provisional fair values were updated. As a result, the 20X0-20X1
comparatives were adjusted in the 20X1-X2 annual financial statements. Does the
restatement require an opening statement of financial position (that is, an additional
statement of financial position) as of 1st April, 20X0?
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I N D A S 7 C A S H F L O W S T A T E M E N T
Topics Pg.
I. Objective 1
II. Scope 1
III. Cash & Cash Equivalents 1
IV. Presentation 2
Operating activities 2
Investing activities 2
Financing activities 3
V. Reporting 3
Operating activities 3
Investing & Financing activities 3
Cash to be presented on net basis 3
Foreign Currency transaction 4
Interest & Dividends 4
Taxes on Income 5
Investments in associates & Joint Venture 5
Non Cash Transaction 6
Components of CCE 6
Other Disclosures 6
VI. Practical Question 8
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I.
The objective of this Standard is to require the providing of information about
historical changes in CCE of an entity by means of a statement of cash flows which
classifies cash flows during period in operating, investing & financing activities.
II.
An entity shall prepare a statement of cash flows in accordance with the requirements of
this Standard and shall present it as an integral part of its financial statements for each
period for which financial statements are presented.
III.
1. Cash comprises cash on hand and demand deposits & Cash equivalents are short-
term, highly liquid investments that are readily convertible to known amounts of
cash & which are subject to insignificant risk of changes in value.
2. Cash equivalents are held for the purpose of meeting short-term cash commitments rather
than for investment or other purposes. An investment normally qualifies as a cash
equivalent only when it has a short maturity of, say, 3 months or less from the
date of acquisition. Equity investments are excluded from cash equivalents unless
they are, in substance, cash equivalents, for e.g. in the case of preference shares acquired
within a short period of their maturity and with a specified redemption date.
3. Bank overdrafts which are repayable on demand form an integral part of entity's cash
management & hence are included as component of CCE. Characteristic of such banking
arrangements is that bank balance often fluctuates from being positive to overdrawn.
4. Cash flows are inflows and outflows of cash & cash equivalents. It excludes
movements between items that constitute CCE because these components are part of
cash management of an entity rather than part of its operating, investing or financing
activities. Cash management includes investment of excess CCE.
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IV.
The statement of cash flows shall report cash flows during the period classified by
operating, investing and financing activities.
1. Operating Activities:
a. Operating activities are the principal revenue-producing activities of entity & other
activities that are not investing or financing activities. Therefore, they generally result
from the transactions and other events that enter into determination of Profit or loss.
b. The amount of cash flows arising from operating activities is a key indicator of the
extent to which the operations of the entity have generated sufficient cash flows or not.
If the cash flow from operations is positive, it will be treated as positive indicator whereas
negative cash flow from operations will denote that company’s ability to generate the
revenue from its main operations is very weak.
c. They are used to maintain the operating capability of the entity, pay dividends & make
new investments without recourse to external sources of financing.
d. Cash payments for getting asset manufactured / directly acquire assets for rental to
others & subsequently held for sale as well as are receipts from rents & sales of
such assets are also cash flows from operating activities.
e. Entity may hold securities and loans for dealing / trading purposes, in which case
they are similar to inventory acquired specifically for resale. .’. cash flows arising
from purchase & sale of dealing / trading securities are classified as operating activities.
2. Investing Activities:
a. Investing activities are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents. Investment means sacrifice of current
resource in a view to get more returns in future.
b. Separate disclosure of cash flows arising from investing activities is important because
cash flows represent the extent to which expenditures have been made for resources
intended to generate future income & cash flows. Only expenditures that result in
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recognising asset are eligible for classification as investing activities.
c. When a contract is accounted for as a hedge of an identifiable position cash flows of the
contract are classified in same manner as the cash flows of the position being hedged.
d. Example of investment activities are cash payments / receipt to acquire / sale equity or
debt instruments of other entities and interests in joint ventures, cash payments / receipt
for futures contracts, forward contracts, option contracts and swap contracts except when
the contracts are held for dealing or trading purposes, or the payments /receipts are
classified as financing activities
3. Financing Activities:
a. Financing activities are activities that result in changes in the size and composition of
the contributed equity and borrowings of the entity.
b. Separate disclosure of cash flows from financing activities is important because it is
useful in predicting claims on future cash flows by providers of capital.
V.
1. Operating Activities: Entity shall report operating activities cash flows using either:
a. Direct method, in which major classes of gross cash receipts and gross cash
payments are disclose. This is also the preferred method by standard; or
b. Indirect method, whereby profit/loss is adjusted for effects of transactions of a non-
cash nature, any deferrals or accruals of past / future operating cash receipts or payments,
& items of income / expense associated with investing/ financing cash flows.
2. Investing & Financing activities: Entity shall report separately major classes of
gross cash receipts & gross cash payments arising from investing & financing activities.
3. Exception to above point are the cash flows arising from the following operating,
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 entity; and
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b. cash receipts & payments for items in which turnover is quick, amounts are large, and
the maturities are short. e.g. principal amounts relating to credit card customers
Cash flows arising from each of following activities of a financial institution may
be reported on a net basis:
a. cash receipts&payments for acceptance&repayment of deposits with fixed maturity date
b. placement of deposits with & withdrawal of deposits from other financial institutions &
c. cash advances & loans made to customers and repayment of those advances and loans
4. Foreign Currency Transactions:
a. Cash flows arising from transactions in foreign currency shall be recorded in an entity’s
functional currency by applying the exchange rate at date of cash flow. Cash
flows of a foreign subsidiary shall be translated at exchange rates on dates of cash
flows.
b. Unrealised gains & losses arising from changes in foreign currency exchange rates are
not cash flows. However, the effect of exchange rate changes on CCE held or due in a
foreign currency is reported in statement of cash flows in order to reconcile CCE at the
beginning and end of the period. This amount is presented separately from cash
flows from operating, investing and financing activities and includes the differences, if
any, had those cash flows been reported at end of period exchange rates.
5. Interest & Dividends:
a. Cash flows from interest & dividends received / paid shall each be disclosed
separately. Cash flows from interest & dividends paid should be classified as from
financing activities & if received should be classified as from investing activities.
b. The total amount of interest paid during a period is disclosed in statement of cash
flows whether it has been recognised as an expense in profit or loss or capitalised
in accordance with Ind AS 23 Borrowing Costs.
c. There is no consensus on classification of Interest paid and interest & dividends received
for non-financing entities. Some argue that interest paid and interest & dividends
received may be classified as operating cash flows because they enter into determination
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of P/L. However, it is more appropriate that interest paid and interest & dividends
received are classified as financing cash flows & investing cash flows respectively,
because they are costs of obtaining financial resources/returns on investments.
d. Dividends paid may be classified as a component of operating activities in order to
assist users to determine the ability of entity to pay dividends from operating cash flows.
However, it is more appropriate that dividends paid should be classified as financing
activities because they are cost of obtaining financial resources.
6. Taxes on Income: Cash flows arising from taxes on income shall be separately
disclosed and shall be classified as cash flows from operating activities unless they can
be specifically identified with financing and investing activities.
7. Investments in associates & Joint Venture:
a. When accounting for an investment in an associate / joint venture for by use of the
equity method, an investor restricts its reporting in the statement of cash flows to the cash
flows between itself and investee, e.g. dividends & advances. An entity which reports its
interest in a jointly controlled entity (JCE) using proportionate consolidation includes
in its consolidated statement of cash flows its proportionate share of JEC cash flows.
An entity which reports such an interest using equity method includes in its statement of
cash flows, the cash flows in respect of its investments in the jointly controlled entity,
and distributions and other payments or receipts between them.
b. The aggregate cash flows arising from obtaining / losing control of subsidiaries or
other businesses shall be presented separately and classified as investing activities. An
entity shall disclose, in aggregate, during the period each of the following:
1. Total consideration paid or received;
2. Portion of the consideration consisting of CCE;
3. Amount of CCE in subsidiaries/other businesses over which control is obtained/lost &
4. Amount of assets & liabilities other than CCE in subsidiaries / other businesses over
which control is obtained or lost, summarised by each major category.
c. Cash flow effects of losing control are not deducted from those of obtaining control.
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d. Cash flows from changes in ownership interests in a subsidiary that do not result in a
loss of control shall be classified as from financing activities.
e. Changes in ownership interests in a subsidiary that do not result in a loss of control, are
accounted for as equity transactions as per IND AS 110. Accordingly, the resulting cash
flows are classified in same way as other transactions with owners i.e. such transactions
are treated as cash flows of Financing activities.
8. Non cash transaction: Investing & financing transactions that do not require the use
of cash or cash equivalents shall be excluded from a statement of cash flows.
9. Components of CCE: An entity shall disclose components of CCE & shall present
a reconciliation of amounts in its statement of cash flows with the equivalent items
reported in the balance sheet and discloses the policy which it adopts in determining
the composition of cash and cash equivalents.
10. Other Disclosures:
a. An entity shall disclose, the amount of significant cash and cash equivalent balances
held by the entity that are not available for use by the group.
b. An entity shall provide disclosures that enable users of financial statements to evaluate
changes in liabilities arising from financing activities, including both changes arising
from cash flows and non-cash changes. Viz. Changes from financing cash flows, changes
arising from obtaining or losing control of subsidiaries or other businesses, effect of
changes in foreign exchange rates, changes in fair values & other changes.
c. Liabilities arising from financing activities are liabilities for which cash flows were /
future cash flows will be, classified in cash flow statement as financing activities.
d. In addition, disclosure requirement also applies to changes in financial assets for e.g.,
assets that hedge liabilities arising from financing activities if cash flows from those
financial assets were, or will be, included in cash flows from financing activities.
e. One way to fulfil the disclosure requirement is by providing a reconciliation between
the opening and closing balances in the balance sheet for liabilities arising from
financing activities, including the changes identified.
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f. If an entity provides the disclosure required in combination with disclosures of changes
in other assets and liabilities, it shall disclose the changes in liabilities arising from
financing activities separately from changes in those other assets and liabilities.
g. Bank overdraft, in the balance sheet, will be included within financial
liabilities. Just because the bank overdraft is included in cash and cash equivalents
for the purpose of Ind AS 7, does not mean that the same should be netted off
against the CCE balance in the balance sheet. Instead Ind AS 7 requires a disclosure of
the components of cash and cash equivalent and a reconciliation of amounts presented
in the cash flow statements.
h. Additional information may be relevant to users in understanding the financial position
and liquidity of an entity. Disclosure of this information, together with a commentary
by management, is encouraged and may include:
1. amount of undrawn borrowing facilities that may be available for future
2. aggregate amounts of cash flows from each activities related to interests in joint
ventures reported using proportionate consolidation;
3. the aggregate amount of cash flows that represent increases in operating capacity
separately from those cash flows that are required to maintain operating capacity; and
4. the amount of the cash flows arising from the operating, investing and financing
activities of each reportable segment.
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VI.
Components of CCE
Q1. Company has provided following information regarding various assets held by
company on 31/03/2020. Find out, which items will be part of cash and cash
equivalents for the purpose of preparation of cash flow statement as per Ind AS 7:
Sr.
No.
Name of the Security Additional Information
1. Government Bonds 5%, open ended, main purpose was to park
the excess funds for temporary period
2. Fixed deposit with SBI 12%, 3 years maturity on 1st Jan 2022
3. Fixed deposit with HDFC 10%, original term was for 2 years, but due
for maturity on 30.06.2019
4. Redeemable Preference shares in C Redemption is due on 30th April 2019
5. Cash balances at various banks All branches of all banks in India
6. Cash balances at various banks All international branches of Indian banks
7. Cash balances at various banks Branches of foreign banks outside India
8. Treasury Bills 90 days maturity
Presentation of Cash Flows
Q2. From following transactions of private sector bank, identify which transactions will
be classified operating and which as Investing activity.
Interest received on loans
Interest paid on Deposits
Deposits accepted
Loans given to customers
Loans repaid by the customers
Deposits repaid
Commission received
Lease rentals paid for various
branches
Service tax paid
Furniture purchased for new branches
Implementation of upgraded banking
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software
Purchase of shares in 100%
subsidiary for opening a branch in
Abu Dhabi
New cars purchased from Honda
dealer, in exchange of old cars
Provident fund paid for the
employees
Issued employee stock options
Q3. From following transactions taken from a parent company having multiple
businesses & multiple segments, identify which transactions will be classified as
operating, Investing and Financing:
Issued preference shares
Purchased shares of 100% subsidiary
company
Dividend received from subsidiaries
Dividend received from other
companies
Bonus shares issued
Purchased license for manufacturing
of special drugs
Royalty received from goods patented
by company
Rent received from let out building
(letting out is not main business)
Interest received from advances given
Dividend paid
Interest paid on security deposits
Purchased goodwill
Acquired the assets of a company by
issue of equity shares (not parting any
cash)
Interim dividends paid
Dissolved the 100% subsidiary and
received the amount in final
settlement
Reporting: Foreign currency transactions
Q4. Entity has bank balance in foreign currency aggregating to USD 100 (equivalent to `
4,500) at beginning of the year. Presuming no other transaction taking place, entity
reported a profit before tax of ` 100 on account of exchange gain on the bank balance
in foreign currency at the end of the year. What is closing CCE as per balance sheet?
Q5. Z Ltd. has no foreign currency cash flow for the year 2017. It holds some deposit in a
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bank in the USA. The balances as on 31.12.2018 and 31.12.2019 were US $ 100,000
and US $ 102,000 respectively. The exchange rate on December 31, 2018 was US $ 1
= ` 45. The same on 31.12.2019 was US $ 1 = ` 50. The increase in the balance was
on account of interest credited on 31.12.2019. Thus, the deposit was reported at `
45,00,000 in the balance sheet as on December 31, 2018. It was reported at ̀ 51,00,000
in the balance sheet as on 31.12.2019. How these transactions should be presented in
cash flow for the year ended 31.12.2019 as per Ind AS 7?
Interest & dividends
Q6. A firm invests in a 5 year bond of another company with a face value of ` 10,00,000 by
paying ` 5,00,000. The effective rate is 15%. Firm recognises proportionate interest
income in its income statement throughout the period of bond. Based on above
a. How interest income will be treated in cash flow during the period of bond?
On maturity, whether the receipt of ` 10,00,000 should be split between interest
income and receipts from investment activity.
Tax on Income
Q7. X Ltd. as paid an advance tax amounting to ` 5,30,000 during the current year. Out of
the above paid tax, ` 30,000 is paid for tax on long term capital gains. Under which
activity the above said tax be classified in the cash flow statements of X Ltd.?
Non-Cash Transaction
Q8. X Limited acquires fixed asset of ` 10,00,000 from Y Limited by accepting the liabilities
of ` 8,00,000 of Y Limited and balance amount it paid in cash. How X Limited will treat
all those items in its cash flow statements?
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Cash Flow Statement
Q9. From following summary cash account of XYZ Ltd, prepare cash flow statement
for y.e. March 31, 2019 in accordance with Ind AS 7 using direct method.
Summary of Bank Account for the year ended March 31, 2019
` 000 ` 000
Balance on 1.4.2018 50 Payment to creditors 2,000
Issue of Equity Shares 300 Purchase of Fixed Assets 200
Receipts from customers 2,800 Overhead Expenses 200
Sale of Fixed Assets 100 Payroll 100
Tax Payment 250
Dividend 50
Repayment of Bank loan 300
Balance on 31.3. 2019 150
3,250 3,250
Q10. Construct a statement of cash flows for ABC Ltd. using direct & indirect methods:
2019 2018
Cash 4,000 14,000
Accounts Receivable 25,000 32,500
Prepaid Insurance 5,000 7,000
Inventory 37,000 34,000
Fixed Assets 3,16,000 2,70,000
Accumulated Depreciation (45,000) (30,000)
Total Assets 3,42,000 3,27,500
Accounts Payable 18,000 16,000
Wages Payable 4,000 7,000
Debentures 1,73,000 1,60,000
Equity Shares 88,000 84,000
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Retained Earnings 59,000 60,500
Total Liabilities & Equity 3,42,000 3,27,500
Sales 2,00,000
Cost of Goods Sold (1,23,000)
Depreciation (15,000)
Insurance Expense (11,000)
Wages (50,000)
Net Profit 1,000
During financial year 2019 company ABC Ltd. declared and paid dividends of ` 2,500.
During 2019, ABC Ltd. paid ` 46,000 in cash to acquire new fixed assets. The accounts
payable was used only for inventory. No debt was retired during 2019.
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IND AS 21 The Effects of
Foreign Exchange Rates
Topics Pg.
I. Objective 1
II. Scope 1
III. Definition 2
IV. Explanation 3
Functional Currency 3
Net Investment in Foreign Operation 3
Monetary Items 4
V. Foreign Exchange Transactions 5
Initial & Subsequent recognitions 5
Change in Functional currency 6
Translation to presentation currency 7
VI. Translation of Foreign Operation 7
VII. Disposal 8
VIII. Inter Group Transaction 9
IX. Business Combination 10
X. Advance Consideration 10
XI. Disclosures 11
XII. Practical Questions 12
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I.
The objective of this Standard is to prescribe how to include foreign currency
transactions and foreign operations in the financial statements of an entity and
how to translate financial statements into a presentation currency. The principal
issues are which exchange rate(s) to use and how to report the effects of changes in
exchange rates in the financial statements.
II.
1. This Standard shall be applied:
a. in accounting for transactions and balances in foreign currencies, except for those
derivative transactions and balances that are within the scope of Ind AS 109,
Financial Instruments
b. in translating results & financial position of foreign operations that are included
in the financial statements of the entity by consolidation or the equity method; and
c. in translating an entity’s results and financial position into presentation currency.
2. This IND AS is not applicable.
a. Ind AS 109 applies to many foreign currency derivatives and, accordingly, these are
excluded from the scope of this Standard. However, those foreign currency derivatives
that are not within the scope of Ind AS 109 are within the scope of this Standard.
In addition, this Standard applies when an entity translates amounts relating to
derivatives from its functional currency to its presentation currency.
b. This Standard does not apply to hedge accounting for foreign currency items,
including hedging of a net investment in foreign operation. Ind AS 109 applies to it.
c. This Standard applies to the presentation of an entity’s financial statements in a
foreign currency and sets out requirements for the resulting financial statements to be
described as complying with Indian Accounting Standards (Ind ASs). For
translations of financial information into a foreign currency that do not meet these
requirements, this Standard specifies information to be disclosed.
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d. This Standard does not apply to presentation in a statement of cash flows of the
cash flows arising from transactions in a foreign currency, or to the translation of
cash flows of a foreign operation (see Ind AS 7, Statement of Cash Flows).
III.
1. Closing rate is the spot exchange rate at the end of the reporting period.
2. Exchange difference is the difference resulting from translating a given number of
units of one currency into another currency at different exchange rates.
3. Exchange rate is the ratio of exchange for two currencies.
4. Spot exchange rate is the exchange rate for immediate delivery.
5. Fair value is price that would be received to sell asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.
6. Net investment in a foreign operation is the amount of the reporting entity’s interest
in the net assets of that operation.
7. Functional currency is currency of the primary economic environment in which
the entity operates. In this regard, the primary economic environment will normally
be the one in which it primarily generates & expends cash i.e. it operates.
8. Foreign operation has been defined as an entity that is a subsidiary, associate, joint
venture or branch of a reporting entity, the activities of which are based or
conducted in a country or currency other than those of the reporting entity.
9. Presentation currency is currency in which financial statements are presented,
presentation currency may be different from the entity’s functional currency.
10. Foreign Currency is the currency other than functional currency.
11. Monetary items: Units of currency held and assets and liabilities to be received or
paid are in a fixed or determinable number of units of currency.
12. Non monetary items are items other than monetary items.
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IV.
A. Functional Currency
1. Entity measures its assets, liabilities, equity, income and expenses in its functional
currency. All transactions in currencies other than functional currency are foreign
currency transactions. In determining functional currency, an entity emphasises
the currency that determines pricing of transactions that it undertakes, rather than
focusing on currency in which those transactions are denominated.
2. Factors that may be considered in determining an appropriate functional currency:
a. the currency that mainly influences sales prices for goods & services, this often
will be the currency in which sales prices are denominated and settled.
b. the currency of country whose competitive forces and regulations mainly
determine the sales prices of its goods and services; and
c. the currency that mainly influences labour, material and other costs of providing
goods and services, often this will be currency in which these costs are denominated
and settled.
3. Other factors that may provide supporting evidence are:
a. the currency in which funds from financing activities i.e., issuing debt and equity
instruments) are generated;
b. the currency in which receipts from operating activities are usually retained.
4. In practice, the functional currency of a foreign operation that is integral to the group
will usually be the same as that of the parent.
B. Net investment in a foreign operation
1. Entity may have a monetary item that is receivable from / payable to a foreign
operation. Item for which settlement is neither planned nor likely to occur in
foreseeable future is, in substance, a part of entity’s net investment in that foreign
operation.
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2. Such monetary items may include long-term receivables or loans. They do not
include trade receivables or trade payables. The entity that has a monetary item
receivable from or payable to a foreign operation may be any subsidiary of the group.
For example, an entity has two subsidiaries, A and B. Subsidiary B is a foreign
operation. Subsidiary A grants a loan to Subsidiary B. Subsidiary A’s loan receivable
from Subsidiary B would be part of the entity’s net investment in Subsidiary B if
settlement of the loan is neither planned nor likely to occur in the foreseeable
future. This would also be true if Subsidiary A were itself a foreign operation.
3. On the other hand, a long-term loan with a fixed maturity period (say, 10 to 15 years)
does not automatically qualify to be treated as being part of the net investment
simply because of a long duration, unless management has expressed its intention to
renew the loan at maturity & accordingly, period of repayment is not foreseeable.
C. Monetary items
1. The essential feature of a monetary item is a right to receive (or an obligation to
deliver) a fixed or determinable number of units of currency. E.g. include: pensions
and other employee benefits to be paid in cash; provisions that are to be settled in
cash; and cash dividends that are recognised as a liability. Similarly, a contract to
receive (or deliver) a variable number of the entity’s own equity instruments or a
variable amount of assets in which the fair value to be received (or delivered) equals
a fixed or determinable number of units of currency is a monetary item.
2. Conversely, the essential feature of a non-monetary item is the absence of right
to receive (or an obligation to deliver) a fixed or determinable number of units of
currency. E.g. amounts prepaid for goods & services; goodwill; intangible assets;
inventories; property, plant and equipment; and provisions that are to be settled by
the delivery of a non-monetary asset.
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V.
1. Initial Recognition at Transaction Date
A foreign currency transaction is a transaction that is denominated or requires
settlement in a foreign currency. A foreign currency transaction is initially
recorded by translation in the entity’s functional currency at the exchange rate on
the transaction date. An average exchange rate for a specific period may be
used as an approximate rate if the exchange rate does not fluctuate significantly.
2. Subsequent Recognition at the end of each Reporting Period
a. At the reporting date, assets and liabilities denominated in a foreign currency are
translated as follows:
i. monetary items are translated at exchange rate at reporting date i.e. closing rate
ii. non-monetary items measured at historical cost are not retranslated and instead
remain at the exchange rate at the date of the transaction; and
iii. non-monetary items measured at fair value in a foreign currency are translated
at the exchange rate on date the fair value was determined.
b. Exchange differences arising on the settlement of monetary items or on translating
monetary items are recognised in P&L, except:
i. for accounting for exchange difference as required by application of hedge
accounting under Ind AS 109.
ii. for monetary items that in substance form part of the reporting entity’s net
investment in a foreign operation.
iii. for long-term foreign currency monetary items in case the entity has exercised
option for recognising exchange differences on such items in equity.
3. Non-Monetary Items
a. Ind AS requires certain gains & losses to be recognised in other
comprehensive income. When such an asset is measured in a foreign currency
and its revalued amount is translated at date the value is determined, the resulting
exchange gain or loss is also recognised in other comprehensive income.
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b. If the gain or loss on a non-monetary item is recognised in profit or loss, any
exchange component of that gain or loss is also recognized in profit or loss.
c. Exchange differences arising on a monetary item that forms part of a reporting
entity’s net investment in a foreign operation shall be recognised in P&L in
separate financial statements of the reporting entity or individual financial statements
of the foreign operation, as appropriate.
d. In the financial statements that include the foreign operation and the reporting entity
(e.g. consolidated financial statements when the foreign operation is a subsidiary),
such exchange differences shall be recognised initially in OCJ & reclassified from
equity to profit or loss on disposal of the net investment.
4. Change in Functional Currency
a. Once an entity has determined its functional currency, it is not changed unless there
is a change in the relevant underlying transactions, events and conditions.
b. If circumstances change and a change in functional currency is appropriate, then the
change is accounted for prospectively from the date of the change.
c. For accounting the effect of a change in functional currency prospectively:
i. All items are translated into new functional currency using exchange rate at date of
change. Resulting figures of non-monetary items are treated as historical cost.
ii. Exchange differences arising from the translation of a foreign operation previously
recognised in other comprehensive income are not reclassified from equity to
profit or loss until the disposal of the operation.
d. Since entities prefer to present financial statements in their functional currency, a
change in currency functional currency may be accompanied by a change in
presentation currency. A change in presentation currency is accounted for as
a change in accounting policy.
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5. Translation to the Presentation Currency
a. An entity measures items in its FS in its functional currency, but it may decide to
present its FS in a currency or currencies other than its functional currency.
b. There can be situations wherein a group comprises operations with a number of
functional currencies. Under Ind AS 21, there is no concept of a “group” functional
currency. Rather the group has a presentation currency only. Each entity in
group prepares its FS in its functional currency and translates them into group
presentation currency (if different) for consolidation purposes.
c. The results & financial position of an entity are translated into a different
presentation currency as follows:
i. assets & liabilities for each balance sheet presented are translated at the
closing rate at the date of that balance sheet;
ii. income & expenses for each statement of profit and loss presented are translated
at exchange rates at the dates of relevant transactions. Weighted average rates
may be used if they are reasonable approximation;
iii. all resulting exchange differences should be recognised in OCI as they have little
or no direct effect on the present and future cash flows from operations and are
presented in a separate component of equity until disposal of foreign operation.
VI.
1. Effectively, the translation procedures those for translating foreign operations are
the same as those followed when an entity presents its financial statements in a
presentation currency that is different from its functional currency:
i. Assets & liabilities are translated at the closing rate at the reporting date;
ii. Jncome & expense are translated at exchange rates at the dates of relevant
transactions, although appropriate average rates may be used;
iii. the resulting exchange differences are recognised in OCI and are presented in a
separate component of equity (generally referred to as the foreign currency
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translation reserve or currency translation adjustment) until disposal of the foreign
operation; and
iv. Cash flows are translated at exchange rates at the dates of the relevant
transactions, although an appropriate average rate may be used.
2. In the CFS of reporting entity, the exchange difference arising on such intra
group transactions is recognised in P&L account unless it arises from on a
monetary item that forms part of a reporting entity’s net investment in a foreign
operation in which case it is taken to OCI and accumulated in separate
component of equity & reclassified to P&L only on disposal of foreign operation;
VII.
1. Full Disposal of investment in foreign operation
a. A disposal may arise, for example, through sale, liquidation or repayment of share
capital. On disposal of foreign operation, the cumulative exchange differences
relating to that foreign operation recognised in OCI and accumulated separately in
equity are reclassified to profit or loss when the gain or loss on disposal is
recognised.
b. In addition to the disposal of an entity’s entire interest in a foreign operation, the
following are accounted for as disposals even if the entity retains an interest in the
former subsidiary, associate or jointly controlled entity:
i. loss of control of a subsidiary that includes a foreign operation;
ii. loss of significant influence over an associate that includes a foreign operation; and
iii. loss of joint arrangement over a jointly controlled entity that includes a FO.
2. Partial Disposal of net investment in foreign operation
a. A partial disposal of an entity’s interest in a foreign operation is any reduction in an
entity’s ownership interest in a foreign operation, except for those reductions
that are accounted for as disposals.
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b. In any other partial disposal of a foreign operation, the entity reclassifies to profit
or loss only the proportionate share of the cumulative amount of the exchange
differences recognised in other comprehensive income.
3. On disposal of a subsidiary that includes a foreign operation, the cumulative
amount of the exchange differences relating to that foreign operation that have
been attributed to the non-controlling interests shall be derecognised,
but shall not be reclassified to profit or loss.
4. On partial disposal of a subsidiary that includes a foreign operation, the entity
shall re-attribute the proportionate share of cumulative amount of the exchange
differences recognised in OCI to non-controlling interests in that FO.
VIII.
a. Although intra-group balances are eliminated on consolidation, any related foreign
exchange gains / losses will not be eliminated because the group has a real exposure
to a foreign currency since one of the entities will need to obtain or sell foreign
currency in order to settle the obligation or realise the proceeds received.
b. Accordingly, in the CFS of reporting entity, the exchange difference arising on such
intra group transactions is recognised in the statement of P&L, unless it arises from a
monetary item that forms part of a reporting entity’s net investment in a foreign
operation in which case it is taken to OCI.
c. The elimination of intra-group profits / losses arising from transactions, like sales
between entities that are consolidated, should be based on the spot rate i.e. the
exchange rate of the date of sale.
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IX.
Any goodwill and any fair value adjustments to carrying amounts of assets and
liabilities arising on a foreign operation’s acquisition are treated as assets and
liabilities of the foreign operation. Hence, they are expressed in functional currency of
foreign operation and should be translated at closing exchange rate as is the case for
other assets and liabilities.
X.
1. When an entity pays or receives consideration in advance in a foreign currency, it
generally recognises a non-monetary asset or non-monetary liability before the
recognition of the related asset, expense or income. The related asset, expense or
income (or part of it) is the amount recognised applying relevant Standards, which
results in the derecognition of the non-monetary asset or non-monetary liability
arising from the advance consideration.
2. Thus question arises as how to determine the date of transaction for the purpose of
determining exchange rate to use on initial recognition of related asset, expense
or income (or part of it) on the derecognition of a non-monetary asset/ liability
arising from payment or receipt of advance consideration in a foreign currency.
3. The date of transaction for the purpose of determining the exchange rate to use on
initial recognition of the related asset, expense or income (or part of it) is the date on
which an entity initially recognises the non-monetary asset or liability arising from
the payment or receipt of advance consideration. If there are multiple payments or
receipts in advance, the entity shall determine a date of the transaction for each
payment or receipt of advance consideration.
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XI.
Ind AS 21 requires the following disclosures:
1. Amount of exchange differences recognised in P&L except for those arising on
financial instruments measured at FVTPL in accordance with Ind AS 109;.
2. Net exchange differences recognised in OCI & accumulated in a separate component
of equity, along with reconciliation of amount at beginning & end of period.
3. If the presentation currency is different from the functional currency - that fact shall
be stated, together with disclosure of the functional currency and the reason for
using a different presentation currency;
4. In case of change in functional currency of reporting entity or significant FO:
a. fact of such change;
b. reason for the change and;
c. date of change in functional currency;
5. If presentation currency is different from functional currency, FS can be described as
complying with Ind AS only if all Ind AS including the translation method of this
Standard is complied with. However, if an entity presents its FS/ supplementary
information in currency other than its functional/presentation currency
a. Information should be clearly identified as supplementary information to
distinguish it from the information that complies with Ind AS;
b. Currency in which supplementary information is displayed should be disclosed &
c. Entity’s functional currency and the method of translation used to determine the
supplementary information should be disclosed.
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XII.
Identifying Functional Currency
Q1. Future Ltd. sells a revitalizing energy drink that is sold throughout the world. Sales
of the energy drink comprise over 90% of the revenue of Future Ltd. For
convenience and consistency in pricing, sales of the energy drink are denominated
in USD. All financing activities of Future Ltd. are in its local currency (L$),
although company holds some USD cash reserves. Almost all the costs incurred by
Future Ltd. are denominated in L$. What is the functional currency of Future Ltd.?
Q2. Small India Private Limited, a subsidiary of Big Inc., takes orders from Indian
customers for Big’s merchandise and then bills and collects for the sale of the
merchandise. Small also has a local warehouse in India to facilitate timely delivery
and ensures that it remits to its parent all cash flows that it generates as the operations
of Small are primarily financed by Big Inc. What is Small’s functional currency?
Q3. A is an Oman based company having a foreign operation, B, in India. The foreign
operation was primarily set up to execute a construction project in India. The
functional currency of A is OMR. 78% of entity B ’s finances have been raised in
USD by way of contribution from A. B’s bank accounts are maintained in USD as
well as INR. Cash flows generated by B are transferred to A on a monthly basis in
USD in respect of repayment of finance received from A. Revenues of B are in USD.
Its competitors are globally based. Tendering for the construction project happened in
USD. B incurs 70% of the cost in INR and remaining 30% costs in USD. Since B is
located in India can it can presume its functional currency to be INR?
Q4. S Ltd is a company based out of India which got listed on Bombay Stock Exchange in
the financial year ended 31st March, 20X1. Since then the company’s operations have
increased considerably. The company was engaged in the business of trading of
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motor cycles. The company only deals in imported Motor cycles. These motor cycles
are imported from US.
After importing the motor cycles, these are sold across India through its various
distribution channels. The company had only private customers earlier but the
company also started corporate tie-up and increased its customer base to corporates
also. The purchase of the motor cycles are in USD because the vendor(s) from whom
these motor cycles are purchased those are all located in US.
All other operating expenses of the company are incurred in India only because of its
location and they generally happen to be in INR
Currently, its customers are both corporate and private in the ratio of 70:30
approximately. The USD denominated prices of motor cycles in India are different
from those in other countries.
The company is also expecting that in the coming years, its customers base will
increase significantly in India and the current proportion may also change.
Currently, the invoices are raised to the corporate customers in USD for the purpose of
hedging. However, private customers don’t accept the same arrangement and hence
invoices are raised to them in INR.
What would be the functional currency of this company?
Foreign Operations
Q5. Functional currency of parent P is EURO while the functional currency of its
subsidiary S is USD. P sells inventory to S for EURO 300. At the reporting date,
though the amount is yet to be received from S, the payment is expected to be made
in the foreseeable future. In addition to the trading balances between P and S, P has
lent an amount of EURO 500 to S that is not expected to be repaid in the foreseeable
future. Should the exchange difference be recognised in the profit and loss account?
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Q6. Parent P acquired 90 percent of subsidiary S some years ago. P now sells its entire
investment in S for ` 1,500 lakhs. The net assets of S are 1,000 and the NCI in S is `
100 lakhs. The cumulative exchange differences that have arisen during P’s
ownership are gains of ` 200 lakhs, resulting in P’s foreign currency translation
reserve in respect of S having a credit balance of `180 lakhs, while the cumulative
amount of exchange differences that have been attributed to the NCI is ` 20 lakhs
Calculate P’s gain on disposal.
Q7. The functional and presentation currency of parent P is USD while the functional
currency of its subsidiary S is EURO. P sold goods having a value of USD 100 to S
when the exchange rate was USD 1 = Euro 2. At year-end, the amount is still due and
the exchange rate is USD 1 = Euro 2.2. How should the exchange difference, if any,
be accounted for in the consolidated financial statements?
Q8. Parent P acquired 90 percent of subsidiary S some years ago. P now sells its entire
investment in S for ` 1,500 lakhs. The net assets of S are 1,000 and the NCI in S is `
100 lakhs. The cumulative exchange differences that have arisen during P’s ownership
are gains of ` 200 lakhs, resulting in P’s foreign currency translation reserve in respect
of S having a credit balance of `180 lakhs, while the cumulative amount of exchange
differences that have been attributed to the NCI is ` 20 lakhs. Calculate P’s gain on
disposal in its consolidated financial statements.
Q9. Entity A, whose functional currency is `, has a foreign operation, Entity B, with a
Euro functional currency. Entity B issues to A perpetual debt (i.e. it has no maturity)
denominated in euros with an annual interest rate of 6 per cent. The perpetual debt has
no issuer call option or holder put option. Thus, contractually it is just an infinite
stream of interest payments in Euros. In A's consolidated financial statements, can the
perpetual debt be considered, in accordance with Ind AS 21.15, a monetary item "for
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which settlement is neither planned nor likely to occur in the foreseeable future" (i.e.
part of A's net investment in B), with the exchange gains and losses on the perpetual
debt therefore being recorded in equity?
Q10. Infotech Global Ltd. has a functional currency of USD and needs to translate its
financial statements into the functional and presentation currency of Infotech Inc.
(L$). The following is the statement of financial position of Infotech Global Ltd. prior
to translation:
Particulars USD L$
Property, plant and equipment 50,000
Receivables 9,35,000
Total assets 9,85,000
Issued capital 50,000 30,055
Opening retained earnings 28,000 15,274
Profit for the year 20,000
Accounts payable 8,40,000
Accrued liabilities 47,000
Total equity and liabilities 9,85,000
Required: Translate the statement of financial position of Infotech Global Ltd. into L$
ready for consolidation by Infotech Inc. (Share capital and opening retained earnings
have been pre- populated). Prepare a working of the cumulative balance of the foreign
currency translation reserve. Additional information:
Relevant exchange rates are:
Rate at beginning of the year L$ 1 = USD 1.22
Average rate for the year L$ 1 = USD 1.175
Rate at end of the year L$ 1 = USD 1.13
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Q11. M Ltd is engaged in the business of manufacturing of bottles for pharmaceutical
companies and non-pharmaceutical companies. It has a wholly owned subsidiary, G
Ltd, which is engaged in the business of pharmaceuticals. G Ltd purchases the
pharmaceutical bottles from its parent company. The demand of G Ltd is very high
and the operations of M Ltd are very large and hence to cater to its shortfall, G Ltd
also purchases the bottles from other companies. Purchases are made at the
competitive prices. M Ltd sold pharmaceuticals bottles to G Ltd for Euro 12 lacs on
1st February, 20X1. The cost of these bottles was ` 830 lacs in the books of M Ltd
at the time of sale. At the year-end i.e. 31st March, 20X1, all these bottles were
lying as closing stock with G Ltd. What should be accounting treatment for the above?
Following additional information is available:
Exchange rate on 1st February, 20X1 1 Euro = ` 83
Exchange rate on 31st March, 20X1 1 Euro = ` 85
Translation from foreign currency from to functional currency for Foreign
currency transactions
Particulars Translation rate
At Initial Recognition Rate on date of transaction
At the reporting date
Monetary Items Closing rate
Non-Monetary Items
At Historical cost No retranslation
At Revalued Amount Rate at the date of revaluation
Exchange difference Profit & Loss
Net investment in Foreign Operation
In SFS of entity or FO Profit & Loss
In CFS OCI till disposal of Net investment in FO
AJ Education NeXt
Translation from Functional currency to Presentation currency
Particulars Translation rate
Asset & Liability Closing Rate
Income & Expenses Average Rate
Net Investment in Foreign Operation OCI till disposal of Net investment in FO
Exchange Difference Other comprehensive Operation
Translation of Foreign Operations
Particulars Translation rate
Asset & Liability Closing Rate
Income & Expenses Average Rate
Net Investment in Foreign Operation OCI till disposal of Net investment in FO
Exchange Difference Other comprehensive Operation
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.1
IND AS 103 BUSINESS COMBINATION
1. Business combination is a transaction in which the acquirer obtains control of another business
(the acquiree). Under Ind AS 103, Business combination occurs when an entity obtains control of a
business by acquiring net assets or acquiring its significant equity interest. As such, two elements
are required for a transaction to be business combination under Ind AS 103:
a. the acquirer obtains control of an acquiree (“control” as defined in Ind AS 110) and
b. the acquiree is a business
2. 'Business' is defined as an integrated set of activities and assets that is capable of being conducted
and managed for the purpose of providing a return in the form of dividends, lower costs or other
economic benefits directly to investors or other owners, members or participants.
a. Input: Any economic resource that creates, or has the ability to create, outputs when one or more
processes are applied to it. Examples include non-current assets (including intangible assets or
rights to use non-current assets), intellectual property, the ability to obtain access to
necessary materials or rights and employees.
b. Process: Any system, standard, protocol, convention or rule that when applied to an input or inputs,
creates or has the ability to create output Examples include strategic management processes,
operational processes and resource management processes.. These processes typically are
documented, but an organised workforce having the necessary skills and experience following rules
and conventions may provide the necessary processes that are capable of being applied to inputs to
create outputs. (Accounting, billing, payroll and other administrative systems typically are not
processes used to create outputs.)
c. Output: The result of inputs and processes applied to those inputs that provide or have the ability
to provide a return in the form of dividends, lower costs or other economic benefits directly to
investors or other owners, members or participants.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.2
3. Acquisition Date: The date on which the acquirer obtains control of acquiree is acquisition date.
Generally, the date on which the acquirer legally transfers the consideration, acquires the assets and
assumes the liabilities of the acquiree is the acquisition date i.e. the closing date. However, the
acquirer might obtain control on a date that is either earlier or later than the closing date.
4. Identifying the acquirer
All business combination within the scope of Ind AS 103 are accounted under the acquisition
method (also known as purchase method). In order to apply the purchase method, the parties
involved has to identify the acquirer i.e. the entity that obtains the control of another entity.
The acquiring enterprise is the enterprise which obtains control and the determination of control is
as per the guidance given in Ind AS 110. It may so happen that guidance in Ind AS 110 does not
clearly indicate which of the combining entity is the acquirer. In such a case, Ind AS 103 provides
additional guidance on identifying the acquirer. As per Ind AS 110 ‘Consolidated Financial
Statements’, an investor controls an investee if and only if the investor has all the following:
a. power over the investee;
b. exposure, or rights, to variable returns from its involvement with the investee; and
c. ability to use its power over investee to affect the amount of the investor’s returns.
The above definition is very wide and control assessment does not depend only on voting rights
instead it depends on the following as well:
a. Potential voting rights;
b. Rights of non-controlling shareholders; and
c. Other contractual right of the investor if those are substantive in nature.
Other pertinent facts & circumstances shall also be considered in identifying acquirer in a business
combination effected by exchanging equity interests, including:
d. The relative voting rights in the combined entity after the business combination: The acquirer
is usually the combining entities whose owners as a group retain or receive the largest portion of
the voting rights in the combined entity. In determining which group of owners retains or receives
the largest portion of the voting rights, an entity shall consider the existence of any unusual or
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.3
special voting arrangements and options, warrants or convertible securities.
e. The existence of a large minority voting interest in the combined entity if no other owner or
organized group of owners has a significant voting interest—The acquirer is usually the combining
entity whose single owner or organized group of owners holds the largest minority voting interest
in the combined entity.
f. The composition of the governing body of the combined entity —The acquirer is usually the
combining entity whose owners have the ability to elect or appoint or to remove a majority of the
members of the governing body of the combined entity.
g. The composition of the senior management of the combined entity —The acquirer is usually the
combining entity whose (former) management dominates the management of the combined entity.
h. The acquirer is usually the combining entity whose relative size (measured in, for example, assets,
revenues or profit) is significantly greater than that of the other combining entity or entities.
i. In a business combination involving more than two entities, determining the acquirer shall include a
consideration of, among other things, which of the combining entities initiated the combination, as
well as the relative size of the combining entities.
5. Recognition of Assets & Liabilities
a. To qualify for recognition as part of applying the acquisition method, the identifiable assets
acquired & liabilities assumed must meet definitions of assets & liabilities in the Framework for the
Preparation and Presentation of Financial Statements in accordance with Indian Accounting
Standards issued by the ICAI at acquisition date.
b. Acquirer should only record assets & liabilities recorded as a part of business combination which
means only those assets and liabilities which have been assumed as a part of business combination
deal should only be recorded & not any other assets
c. When acquirer applies recognition principle, it may record certain assets & liabilities which the
acquiree had not recorded earlier in their financial statements.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.4
6. Measurement Principle
The assets and liabilities recognised are measured on the following principles:
a. The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their
acquisition-date fair values.
b. Measure non-controlling interest (NCI) in acquiree either at fair value or present ownership
instruments’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets.
Sometimes an acquirer will be able to measure acquisition-date fair value of NCI on the basis of a
quoted price in an active market for the equity shares. In other situations, where a quoted price in an
active market is not be available, fair value of NCI would be using other valuation techniques.
c. Fair values of acquirer’s interest in the acquiree and the non-controlling interest on a per-share basis
might differ. The main difference is likely to be the inclusion of a control premium in the per-share
fair value of the acquirer’s interest in the acquiree or, conversely, the inclusion of a discount for
lack of control (also referred to as a non-controlling interest discount) in the per-share fair value of
the non-controlling interest if market participants would take into account such a premium or
discount when pricing the non-controlling interest.
7. EXCEPTIONS TO MEASUREMENT AND RECOGNITION PRINCIPLE
Income taxes: The acquirer shall recognise and measure a deferred tax asset or liability arising
from the assets acquired and liabilities assumed in a business combination in accordance with Ind
AS 12, Income Taxes. The acquirer shall account for the potential tax effects of temporary
differences and carry forwards of an acquiree that exist at the acquisition date or arise as a result of
the acquisition in accordance with Ind AS 12.
Employee benefits: The acquirer shall recognise and measure a liability (or asset, if any) related to
the acquiree’s employee benefit arrangements in accordance with Ind AS 19, Employee Benefits.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.5
Operating Lease
1. Acquiree is a lessee: The acquirer shall recognise right-of-use assets and lease liabilities for leases
identified in accordance with Ind AS 116.
The acquirer is not required to recognise right-of-use assets and lease liabilities for:
(a) leases for which the lease term ends within 12 months of the acquisition date; or
(b) leases for which the underlying asset is of low value.
2. The acquirer shall measure the lease liability at the present value of the remaining lease payments
as if the acquired lease were a new lease at the acquisition date.
3. The acquirer shall measure right-of-use asset at the same amount as the lease liability, adjusted to
reflect favourable or unfavourable terms of the lease when compared with market terms.
Acquiree is a lessor: In measuring the acquisition-date fair value of an asset, the acquirer shall take
into account the terms of lease. The acquirer does not recognise a separate asset or liability if terms
of an operating lease are either favourable or unfavourable when compared with market terms.
Indemnification Assets
The seller in a business combination may contractually indemnify the acquirer for the outcome of a
contingency or uncertainty related to all or part of a specific asset or liability. For e.g., seller may
indemnify acquirer against losses above a specified amount on a liability arising from a particular
contingency; in other words, seller will guarantee that the acquirer’s liability will not exceed a
specified amount.
Initial Recognition: The acquirer shall recognize an indemnification asset at the same time that it
recognizes the indemnified item measured on the same basis as the indemnified item, subject to the
need for a valuation allowance for uncollectible amounts i.e. if the indemnification item is
recognised at the acquisition date at fair value then the indemnification asset is also recognised at
acquisition date at its fair value. If indemnification asset is recognised at fair value then its
uncertainty in collection is already considered in fair value hence a separate allowance for
uncollectible not required.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.6
Subsequent Recognition: At the end of each subsequent reporting period, the acquirer shall
measure an indemnification asset that was recognized at the acquisition date on the same basis as
the indemnified liability or asset, subject to any contractual limitations on its amount and, for an
indemnification asset that is not subsequently measured at its fair value, management’s assessment
of the collectability of the indemnification asset. The acquirer shall derecognize the indemnification
asset only when it collects the asset, sells it or otherwise loses the right to it.
EXCEPTIONS TO RECOGNITION PRINCIPLE
Contingent Liability
Initial Recognition: AS per Ind AS – 103, the acquirer shall recognise as of the acquisition date a
contingent liability assumed in a business combination if-
• it is a present obligation that arises from past events and
• its fair value can be measured reliably.
Therefore, contrary to Ind AS 37, the acquirer recognises a contingent liability assumed in a
business combination at the acquisition date even if it is not probable that an outflow resources
embodying economic benefits will be required to settle the obligation.
Subsequent recognition: After initial recognition and until settlement / cancellation / expiry, the
acquirer shall measure a contingent liability recognized in a business combination at the higher of:
• the amount that would be recognized in accordance with Ind AS 37; and
• amount initially recognized
Contingent Assets
Contingent asset of acquiree should not be recognised even of it is virtually certain it will become
unconditional or non-contingent. Only if the acquirer determines that the asset exist at the
acquisition date i.e. it has unconditional rights at the acquisition date, then asset should be
recognised with appropriate IND AS.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.7
EXCEPTION TO MEASUREMENT PRINCIPLE
Reacquired Rights: These are the rights which the acquirer before acquisition may have granted
to the acquiree to use certain assets which belongs to the acquirer. For e.g., license to use the brand
name, Franchisee rights etc. It does not matter whether the asset was recorded in the financial
statement of the acquirer or not.
Initial Recognition:
a. If an acquirer acquires an acquiree which had certain rights granted to it by the acquirer then the
business combination results in settlement of the rights and accordingly any settlement gain or loss
should be considered as a separate transaction form business combination and will be recorded in
financial statement of the acquirer.
b. If the terms of contract giving rise to a reacquired right are favourable or unfavorable in comparison
to current market terms then acquirer shall recognise a settlement gain or loss.
c. The acquirer shall measure the value of a reacquired right recognized as an intangible asset on the
basis of the only remaining contractual term of the related contract without considering the effect of
potential renewals.
Subsequent Recognition: A reacquired right recognized as an intangible asset shall be amortized
over the remaining contractual period of the contract in which the right was granted. An acquirer
that subsequently sells a reacquired right to a third party shall include the carrying amount of the
intangible asset in determining the gain or loss on the sale.
Share-based payment transactions
Acquirer shall measure a liability or an equity instrument related to share-based payment
transactions of the acquiree or the replacement of an acquiree’s share-based payment transactions
with share-based payment transactions of the acquirer in accordance with method in Ind AS 102,
Share-based Payment, at the acquisition date.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.8
Assets held for sale
The acquirer shall measure an acquired non-current asset (or disposal group) that is classified as
held for sale at the acquisition date in accordance with Ind AS 105, Non-current Assets Held for
Sale and Discontinued Operations, at fair value less costs to sell as per that Ind AS (IND AS 105).
Purchase Consideration
The consideration transferred in a business combination shall be measured as sum of the
acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the
acquirer to former owners of the acquiree and the equity interests issued by the acquirer. If assets or
liabilities of acquirer transferred have carrying amounts different from their fair values at the
acquisition date then:
1. acquirer shall remeasure the assets or liabilities to their fair values as of the acquisition date and
2. recognise the resulting gains or losses in profit or loss.
Contingent consideration: An obligation of acquirer to transfer additional assets or equity interest
of selling company as part exchange for control of acquiree if specified future events occur or
condition are met or a right with acquirer to receive the previously transferred consideration is
specified terms conditions are met.
Initial Recognition: The acquirer shall recognize the acquisition date fair value of contingent
consideration as part of the consideration transferred in exchange for acquiree. The acquirer shall
classify an obligation to pay contingent consideration as a liability or as equity as per Ind AS 32
Financial Instruments: Presentation, or other applicable Indian Accounting Standards. The acquirer
shall classify as an asset a right to return of previously transferred consideration if specified
conditions are met.
Subsequent Recognition: Any change in the fair value of the consideration after the initial
recognition due to additional information that the acquirer obtained after initial recognition and is
related to the facts and circumstances that existed at the acquisition date should be accounted
through goodwill or capital Reserve. The changes that result from events after the acquisition date
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.9
like meeting the specified targets etc are not remeasurement. Such changes in fair value are
accounted as follows:
1. If treated as equity then they are not remeasured and its settlement is accounted within equity
2. Else it is remeasured at every year end at fair value through fair value.
Business combination achieved in stages or Step Acquisition
An acquirer sometimes obtains control of an acquiree in which it held an equity interest
immediately before the acquisition date. In a business combination achieved in stages, the acquirer
shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value
and recognise the resulting gain or loss, if any, in profit or loss or other comprehensive income, as
appropriate. If in prior reporting periods, the acquirer accounts its equity interest in the acquiree as
FVTOCI then the amount that was recognised in other comprehensive income shall be recognised
on the same basis as if acquirer had disposed directly of the previously held equity interest.
A business combination achieved without the transfer of consideration
An acquirer sometimes obtains control of an acquiree without transferring consideration. The
acquisition method of accounting for a business combination applies to those combinations. Such
circumstances include:
a. The acquiree repurchases (Buy Back) a sufficient number of its own shares for an existing investor
(the acquirer) to obtain control.
b. Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which
the acquirer held the majority voting rights.
c. The acquirer and acquiree agree to combine their businesses by contract alone. The acquirer
transfers no consideration in exchange for control of an acquiree and holds no equity interests in the
acquiree, either on the acquisition date or previously. Examples of business combinations achieved
by contract alone include bringing two businesses together in a stapling arrangement or forming a
dual listed corporation.
In a business combination achieved by contract alone, the acquirer shall attribute to the owners of
the acquiree the amount of the acquiree’s net assets recognised in accordance with this Ind AS. In
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.10
other words, the equity interests in the acquiree held by parties other than the acquirer are a non-
controlling interest in the acquirer’s post-combination financial statements even if the result is that
all of the equity interests in the acquiree are attributed to the non-controlling interest.
Bargain purchases
In extremely rare circumstances, an acquirer will make a bargain purchase in a business
combination in which the acquirer shall recognise the resulting gain in other comprehensive income
on the acquisition date and accumulate the same in equity as capital reserve. The gain shall be
attributed to the acquirer. A bargain purchase might happen, for example, in a business combination
that is a forced sale in which the seller is acting under compulsion.
Before recognising a gain on a bargain purchase, acquirer shall determine whether there exists clear
evidence of the underlying reasons for classifying the business combination as a bargain purchase.
If such evidence exists, the acquirer shall reassess whether it has correctly identified all of the assets
acquired and all of the liabilities assumed and shall recognise any additional assets or liabilities that
are identified in that review.
The acquirer shall then review the procedures used to measure the amounts this Ind AS requires to
be recognised at the acquisition date for all of the following:
(a) the identifiable assets acquired and liabilities assumed;
(b) the non-controlling interest in the acquiree, if any;
(c) for a business combination achieved in stages, acquirer’s previously held equity interest in acquiree
(d) the consideration transferred.
The objective of the review is to ensure that the measurements appropriately reflect consideration of
all available information as of the acquisition date.
If there does not exist any such clear evidence, then the gain on bargain purchase shall be
recognised directly in equity as capital reserve (not through OCI).
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.11
MEASUREMENT PERIOD
a. Ind AS 103 provides a measurement period window wherein if all the required information is not
available on the acquisition date then the equity will be requiring to do the purchase price allocation
on a provision basis.
b. Subsequently, if new information is obtained about facts and circumstances that existed at the
acquisition date during the measurement period, the acquirer shall retrospectively adjust the
provisional amounts recognized at the acquisition date through goodwill.
c. The acquirer shall also recognize additional assets or liabilities if new information is obtained about
facts and circumstances that existed as of the acquisition date.
d. After the measurement period ends, any change in the value of assets and liabilities due to an
information which existed on the valuation date will be accounted as an error as per Ind AS 8,
“Accounting policies, Changes in Accounting Estimates & Errors”.
e. The measurement period shall not exceed one year from the acquisition date.
DETERMINING WHAT IS PART OF THE BUSINESS COMBINATION TRANSACTION
A transaction entered into by or on behalf of the acquirer or primarily for the benefit of the acquirer
or the combined entity, rather than primarily for the benefit of the acquire (or its former owners)
before the combination, is likely to be a separate transaction. The following are e.g. of separate
transactions that are not to be included in applying the acquisition method: Transaction that
• In effect settles pre-existing relationships between the acquirer and acquiree;
• Remunerates employees or former owners of the acquiree for future services;
• Reimburses acquiree/its former owners for paying acquirer’s costs of acquisition.
ACQUIRER SHARE BASED PAYMENT AWARDS EXCHNAGED FOR AWARDS HELD
BY THE ACQUIREE’S EMPLOYEES
An acquirer may exchange its share-based payment awards (replacement awards) for awards held
by employees of the acquiree. Exchanges of share options or other share-based payment awards
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.12
in conjunction with a business combination are accounted for as modifications of share-based
payment awards in accordance with Ind AS 102, Share-based Payment.
However, in situations in which acquiree awards would expire as a consequence of a business
combination and if the acquirer replaces those awards when it is not obliged to do so, all of the
market-based measure of the replacement awards shall be recognised as remuneration cost in the
post-combination financial statements in accordance with Ind AS 102.
To determine the portion of a replacement award that is part of the consideration transferred for
the acquiree and the portion that is remuneration for post-combination service, the acquirer shall
measure both the replacement awards granted by the acquirer and the acquiree awards as of the
acquisition date in accordance with Ind AS 102.
Pre-Combination Award / Obligation (Treated as part of PC) =
Market price of original award * Vesting period completed
Greater of Total or Original vesting period
Post Combination Award / Obligation: Treated as Post acquisition Employee cost
Market price of New Replacement Award – pre combination Award
The portion of a non-vested replacement award attributable to pre- combination service, as well
as the portion attributable to post- combination service, shall reflect the best available estimate of
the number of replacement awards expected to vest. The same requirements for determining
portions of a replacement award attributable to pre combination and post- combination service
apply regardless of whether a replacement award is classified as a liability or as an equity
instrument in accordance with provisions of Ind AS 102.
Common Control Transactions
CCT means a business combination involving entities or businesses in which all combining entities
or businesses are ultimately controlled by same party or parties both before and after the business
combination, and that control is not transitory. Common control business combinations will include
transactions, such as transfer of subsidiaries/businesses, between entities within a group.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.13
Accounting: CCT shall be accounted for using the pooling of interest method. The pooling of
interest method is considered to involve the following:
1. The assets and liabilities of combining entities are reflected at their carrying amounts.
2. No adjustments are made to reflect fair values, or recognise any new assets or liabilities. The only
adjustments that are made are to harmonise accounting policies.
3. The consideration for the business combination may consist of securities, cash or other assets.
Securities shall be recorded at nominal value.
4. In determining consideration, assets other than cash shall be considered at fair values.
5. The balance of the retained earnings appearing in the financial statements of the transferor is
aggregated with the corresponding balance appearing in the financial statements of the transferee.
alternatively, it is transferred to General Reserve, if any.
6. The identity of the reserves shall be preserved.
7. Difference, if any, between the amount recorded as share capital issued plus any additional
consideration in form of cash / other assets and the amount of share capital of transferor shall be
transferred to capital reserve and should be presented separately from other capital reserves with
disclosure of its nature & purpose in notes.
Practical Questions
Identification of Business
Q1. Company X is a liquor manufacturer and has traded for a number of years. It produces a wide
variety of liquor and employs a workforce of machine operators, testers, and other operational,
marketing and administrative staff. It owns & operates a factory, warehouse and machinery and
holds raw material inventory and finished products. On 1st January 20X1, Company Y pays USD
80 million to acquire 100% of the ordinary voting shares of Company X. No other type of shares
has been issued by Company X. On the same day, the four main executive directors of Company Y
take on the same roles in Company X. Can company X be referred as business.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.14
Q2. Company D is a development stage entity that has not started revenue- generating operations. The
workforce consists mainly of research engineers who are developing a new technology that has a
pending patent application. Negotiations to license this technology to a number of customers are at
an advanced stage. Company D requires additional funding to complete development work &
commence planned commercial production. Value of the identifiable net assets in Company D is
INR 750 million. Company A pays INR 600 million in exchange for 60% of the equity of Company
D (a controlling interest). Does company D qualify to be known as business?
Q3. A acquires 100% of equity & voting rights of P, a subsidiary of a property investment group. P
owns three investment properties. The properties are single-tenant industrial warehouses subject to
long-term leases. Leases oblige P to provide basic maintenance and security services, which have
been outsourced to third party contractors. The administration of P’s leases was carried out by an
employee of its former parent company on a part-time basis but this individual does not transfer to
the new owner. Can Company P be referred to as business.
Q4. Company A acquires 100% of the equity and voting rights of Company Q, which owns three
investment properties. The properties are multi-tenant residential condominiums subject to short-
term rental agreements that oblige Company Q to provide substantial maintenance and security
services, which are outsourced with specialist providers. Company Q has five employees who deal
directly with the tenants and with the outsourced contractors to resolve any non-routine security or
maintenance requirements. These employees are involved in a variety of lease management tasks
e.g. identification and selection of tenants; lease negotiation and rent reviews & marketing activities
to maximise quality of tenants and rental income.
Q5. Company S is a manufacturer of a wide range of products. The company’s payroll and accounting
system is managed as a separate cost centre, supporting all the operating segments and the head
office functions. Company A agrees to acquire the trade, assets, liabilities and workforce of the
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.15
operating segments of Company S but does not acquire the payroll and accounting cost centre or
any head office functions. Company A is a competitor of Company S.
Q6. Company A is a property development company with a number of subsidiary companies, each of
which holds a single development. After completion of development, Company A sells its equity
investment because the applicable tax rate is lower than that applicable to the sale of underlying
property. Company A is planning to start development of a large new retail complex. Rather than
incorporating a new company, Company A acquires entire share capital of a ‘shell’ company.
Discuss.
Q7. Company A is a pharmaceutical company. Since inception, the Company had been conducting in-
house research and development activities through its skilled workforce and recently obtained an
intellectual property right (IPR) in the form of patents over certain drugs. The Company’s has a
production plant that has recently obtained regulatory approvals. However, the Company has not
earned any revenue so far and does not have any customer contracts for sale of goods. Company B
acquires Company A. Does Company A constitute a business in accordance with Ind AS 103?
Q8. Modifying the above illustration, if Company A had revenue contracts and a sales force, such that
Company B acquires all the inputs and processes other than the sales force, then whether, the
definition of business is met in accordance with Ind AS 103?
Identification of Control
Q9. Company P, a Manufacturer of Textile Products, acquires 40,000 of the Equity Shares of Company
X (a Manufacturer of complementary products) out of 1,00,000 Shares in issue. As part of the same
agreement, Company P purchases an option to acquire an additional 25,000 Shares. The option is
exercisable at any time in the next 12 months. The Exercise Price includes a small premium to the
market price at the transaction date. After the above transaction, the Shareholdings of Company X's
two other original Shareholders are 35,000 and 25,000 Each of these Shareholders also has
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.16
currently exercisable options to acquire 2,000 Additional Shares. Has Company P acquired control
of Company X in this case?
Q10. Can an acquiring entity account for a Business Combination based on a signed Non-Binding Letter
of Intent where exchange of consideration & other conditions are expected to be completed in 2m?
Identification of Business Combination
Q11. ABC Ltd. incorporated a company Super Ltd. to acquire 100% shares of another entity Focus Ltd.
(and therefore to obtain control of the Focus Ltd.). To fund the purchase, Super Ltd. acquired a
loan from XYZ Bank at commercial interest rates. The loan funds are used by Super Ltd. to
acquire entire voting shares of Focus Ltd. at fair value in an orderly transaction. Post the
acquisition, Super Ltd. has the ability to elect or appoint or to remove a majority of the members
of the governing body of the Focus Ltd. and also Super Ltd’s management is in a power where it
will be able to dominate the management of the Focus Ltd. Can Super Ltd. be identified as the
acquirer in this business combination?
Q12. Company B was in business of operating restaurants. It has closed these Restaurants. Some of the
Assets pertaining to these restaurants, such as, Land, Buildings, Leased Assets and Leasehold
Improvements are acquired by Company A. Company A does not acquire employees, rights to trade
name, or the processes from Company B. Is this a "Business Combination" under Ind AS-103?
Q13. RM Ltd purchased from Nisha Ltd a group of assets comprising of plant and machinery, furniture,
equipment and software at combined price of ` 400 lakhs. Assets do not constitute business as per
Ind AS 103. How would RM Ltd. Measure these assets for the purpose of initial reorganization?
The fair value of these assets determined applying Ind AS – 113 fair value measurement is:
Assets Amount (`) Assets Amount (`)
Plant and Machinery 200 lakhs Furniture 30 lakhs
Equipment 50 lakhs Licenses 70 lakhs
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.17
Identification of Acquisition Date
Q14. Company A acquired 80% Equity Interest in Company B for cash consideration. The relevant dates
are as under –
Date of Shareholder Agreement 1st January
Appointed Date as per Shareholder Agreement 1st April
Date of obtaining control over the Board Representation 1st July
Date of Payment of Consideration: 15th
July
Date of Transfer of Shares to Company A: 1st August
Determine the "Acquisition Date" for Ind AS-103 purposes.
Q15. On April 1, Company X agrees to acquire the Shares of Company B in an all equity deal. As per the
binding agreement Company X will get the effective control on 1st April. However, the
consideration will be paid only when the Shareholders' approval is received. The Shareholders'
Meeting is scheduled to happen on 30th April. If shareholder approval is not received for issue of
new shares, then the consideration will be settled in cash. What is the Acquisition Date in this case?
Q16. ABC Ltd. acquired all the shares of XYZ Ltd. The negotiations had commenced on
1stJanuary,20X1 and the agreement was finalised on 1
stMarch, 20X1. While ABC Ltd. obtains the
power to control XYZ Ltd.'s operations on 1stMarch,20X1, the agreement states that the acquisition
is effective from 1stJanuary, 20X1 and that ABC Ltd. is entitled to all profits after that date. In
addition, the purchase price is based on XYZ Ltd's net asset position as at 1stJanuary, 20X1. What
is date of acquisition?
Q17. ABC Ltd. and XYZ Ltd. are manufacturers of rubber components for a particular type of
equipment. ABC Ltd. makes a bid for XYZ Ltd.'s business and the Competition Commission of
India (CCI) announces that the proposed transaction is to be scrutinized to ensure that competition
laws are not breached. Even though the contracts are made subject to the approval of the CCI, ABC
Ltd. and XYZ Ltd. mutually agree the terms of the acquisition and the purchase price before
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.18
competition authority clearance is obtained. Can the acquisition date in this situation be the date on
which ABC Ltd. and XYZ Ltd. agree the terms even though the approval of CCI is awaited.
(Assume that the approval of CCI is substantive)?
Step Acquisition
Q18. On 1stApril, 20X1, PQR Ltd. acquired 30% of the voting ordinary shares of XYZ Ltd. for ` 8,000
crore. PQR Ltd. accounts its investment in XYZ Ltd. using equity method as prescribed under. Ind
AS 28. At 31stMarch, 20X2, PQR Ltd. recognised its share of the net asset changes of XYZ Ltd.
using equity accounting as follows: (` in crore)
Share of profit or loss 700
Share of exchange difference in OCI 100
Share of revaluation reserve of PPE in OCI 50
The carrying amount of the investment in the associate on 31stMarch, 20X2 was therefore ` 8,850
crore (8,000 + 700 + 100 + 50).
On 1stApril, 20X2, PQR Ltd. acquired the remaining 70% of XYZ Ltd. for cash ` 25,000 crore. The
following additional information is relevant at that date: (`̀̀̀ in crore)
Fair value of the 30% interest already owned 9,000
Fair value of XYZ's identifiable net assets 30,000
How should such business combination be accounted for?
Q19. On 9th
April 20X2, Shyam Ltd, a Listed Company started to negotiate with Ram Ltd, which is an
Unlisted Company, about the possibility of merger. On 10 May 20X2 the Board of Directors of
Shyam authorized their Management to pursue the merger with Ram Ltd. On 15 May 20X2, the
Management of Shyam Ltd offered the Management of Ram Ltd 12,000 Shares of Shyam Ltd
against their total share outstanding. On 31 May 20X2, the Board of Directors of Ram Ltd accepted
the offer subject to Shareholder Vote. On 2 June 20X2, both the Companies jointly made a press
release about the proposed merger. On 10 June 20X2, the Shareholders of Ram Ltd approved the
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.19
terms of the merger. On 15 June, the Shares were allotted to the Shareholders of Ram Ltd. The
Market Price of the Shares of Shyam Ltd was as follows –
Date April 9 May 10 May 15 31 May 2 June 10 June 15 June
Price 70 75 60 70 80 85 90
What is Acquisition Date and Purchase Consideration in the above scenario?
Q20. Select the Acquisition date for the below cases
1. X Ltd acquires 15% of Y Ltd. on 1/4/2017 & further acquires 40% stake on 1/4/2018.
2. X Ltd acquires 55% of Y Ltd. on 1/4/2017 & further acquires 15% stake on1/4/2018.
Direct Cost of Acquisition
Q21. Should stamp duty paid on acquisition of land pursuant to a business combination be capitalised to
cost of asset or should it be treated as an acquisition related cost and accordingly be expensed off?
Q22. ABC Ltd. acquires PQR Ltd. on 30th
June, 20X1. The assets acquired from PQR Ltd. include an
intangible asset that comprises wireless spectrum license. For this intangible asset, ABC Ltd. is
required to make an additional one-time payment to the regulator in PQR’s jurisdiction in order for
the rights to be transferred for its use. Whether such additional payment to the regulator is an
acquisition-related cost?
Contingent Liability & Indemnification Asset
Q23. ABC Ltd. acquired a beverage company PQR Ltd. from XYZ Ltd. At the time of the acquisition,
PQR Ltd. is the defendant in a court case whereby certain customers of PQR Ltd. have alleged that
its products contain pesticides in excess of the permissible levels that have caused them health
damage. PQR Ltd. is being sued for damages of ` 2 crore. XYZ Ltd. has indemnified ABC Ltd. for
the losses, if any, due to the case for amount up to ` 1 crore. The fair value of the contingent
liability for the court case is ` 70 lakh. How should ABC Ltd. account for the contingent liability
and the indemnification asset? What if the fair value of liability is ` 1.2 crore instead of ` 70 lakh.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.20
Q24. ABC Ltd. pays ` 50 crore to acquire PQR Ltd. from XYZ Ltd. PQR Ltd. manufactured products
containing fiber glass and has been named in 10 class actions concerning the effects of these fiber
glass. XYZ Ltd. agrees to indemnify ABC Ltd. for the adverse results of any court cases up to an
amount of ` 10 crore. The class actions have not specified amounts of damages and past
experience suggests that claims may be up to ` 1 crore each, but that they are often settled for
small amounts. ABC Ltd. makes an assessment of the court cases and decides that due to potential
variance in outcomes, contingent liability cannot be measured reliably and accordingly no amount
is recognised in respect of the court cases. How should indemnification asset be accounted for?
Q25. Company A acquires Company B in a business combination. B is being sued by one of its
customers for breach of contract. The Sellers of B provide an indemnification to A for
reimbursement of any losses greater than? 100 Lakhs. There are no collectability issues around this
indemnification. At acquisition date, Company A determined that there is a present obligation and
the Fair Value of the Obligation would be? 250 Lakhs. What will be accounting for these items?
Q26. A suit for damages worth `10 Million was filed on Company B for alleged breach of certain
contract provisions. Company B had disclosed the same as a contingent liability in its financial
statements, as it considered that it is a present obligation for which it was not probable that the
amount would be payable. Company A acquire Company B and determines the fair value of the
contingent liability to be `2 million. How would you deal with above case as per Ind AS – 103.
Contingent Consideration
Q27. A acquires B in April 20X1 for cash. The acquisition agreement states that an additional ` 20
million of cash will be paid to B’s former shareholders if B succeeds in achieving certain specified
performance targets. A determines the fair value of the contingent consideration liability to be 15
million at the acquisition date. How this shall be accounted for keeping Ind AS 103 in mind.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.21
Recognition of Intangible Asset
Q28. ABC Ltd. a pharmaceutical group acquires XYZ Ltd. another pharmaceutical business. XYZ Ltd.
has incurred significant research costs in connection with two new drugs that have been undergoing
clinical trials. Out of the two drugs, one drug has not been granted necessary regulatory approvals.
However, ABC Ltd. expects that approval will be given within two years. The other drug has
recently received regulatory approval. The drugs’ revenue-earning potential was one of the
principal reasons why entity ABC Ltd. decided to acquire entity XYZ Ltd. Whether the research
and development on either of the drugs be recognised as an intangible asset in books of ABC Ltd.?
Q29. Company A, FMCG company acquires an online e-commerce company E, with the intention to
start doing retailing. The e-commerce company has over the period have 10 million registered
users. However, the e-commerce company E does not have any intention to sale the customer list.
Should this customer list be recorded as an intangible in a business combination?
Reacquired Rights
Q30. Vadapav Ltd. is a successful company has number of own stores across India and also offers
franchisee to other companies. Efficient Ltd. is one of the franchisee of Vadapav Ltd. and is and
operates number of store in south India. Vadapav Ltd. decided to acquire Efficient Ltd due to its
huge distribution network and accordingly purchased the outstanding shares on 1stApril, 20X2. On
the acquisition date, Vadapav Ltd. determines that license agreement reflects current market terms.
Q31. ABC Ltd. acquires PQR Ltd. for a consideration of ` 1 crore. 4 years ago, ABC Ltd. had granted a
ten-year license allowing PQR Ltd. to operate in Europe. The cost of the license was ` 2,50,000.
The contract allows either party to terminate the franchise at a cost of the unexpired initial fee plus
20%. At the date of acquisition, the settlement amount is ` 1,80,000 [(` 2,50,000 x6/10) + 20%].
ABC Ltd. has acquired PQR Ltd., because it sees high potential in the European market & wishes
to exploit it. ABC Ltd. calculates that under current economic conditions and at current prices it
could grant a 6 year franchise for a price of `4,50,000. How is the license accounted for ?
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.22
Comprehensive
Q32. Company A and Company B are in power business. Company A holds 25% of equity shares of
Company B. On 1stNovember, Company A obtains control of Company B when it acquires a
further 65% of Company B’s shares, thereby resulting in a total holding of 90%. The acquisition
had the following features:
• Consideration: Company A transfers cash of ` 59,00,000 and issues 1,00,000 shares on
1stNovember. The market price of Company A’s shares on the date of issue is ` 10 per share. The
equity shares issued as per this transaction will comprise 5% of the post-acquisition equity capital
of Company A.
• Contingent consideration: Company A agrees to pay additional consideration of
` 7,00,000 if the cumulative profits of Company B exceed ` 70,00,000 over the next two years. At
the acquisition date, it is not considered probable that the extra consideration will be paid. The fair
value of the contingent consideration is determined to be ` 3,00,000 at the acquisition date.
• Transaction costs: Company A pays acquisition-related costs of `1,00,000.
• Non-controlling interests (NCI): The fair value of the NCI is determined to be ` 7,50,000 at the
acquisition date based on market prices. Company A elects to measure non-controlling interest at
fair value for this transaction.
• Previously held non-controlling equity interest: Company A has owned 25% of the shares in
Company B for several years. At 1stNovember, the investment is included in Company A’s
consolidated balance sheets at ` 6,00,000, accounted for using the equity method; the fair value is
`20,00,000.
The fair value of Company B’s net identifiable assets at 1stNovember is ` 60,00,000, determined in
accordance with Ind AS 103. Determine the accounting under acquisition method for the business
combination by Company A.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.23
Bargain Purchase
Q33. On 1stJanuary, 20X1, A Ltd. acquires 80 per cent of the equity interests of B Ltd. in exchange for
cash of `15 crore. The former owners of B Ltd. were required to dispose off their investments in B
Ltd. by a specified date, and accordingly they did not have sufficient time to find potential buyers.
A qualified valuation professional hired by the management of A Ltd. measures the identifiable net
assets acquired, in accordance with the requirements of Ind AS 103, at ` 20 crore and the fair value
of the 20 per cent non-controlling interest in B Ltd. at ` 4.2 crore. How should A Ltd. recognise the
above bargain purchase?
Measurement Period
Q34. Entity X acquired 100% shareholding of Entity Y on 1stApril, 20X1 and had complete the
preliminary purchase price allocation and accordingly recorded net assets of ` 100 million against
the purchase consideration of 150 million. Entity Y had significant carry forward losses on which
deferred tax asset was not recorded due to lack of convincing evidence on the acquisition date.
However, on 31stMarch, 20X2, Entity Y won a significant contract which is expected to generate
enough taxable income to recoup the losses. Accordingly, deferred tax asset was recorded on the
carry forward losses on 31stMarch, 20X2. Whether, aforesaid losses can be adjusted with Goodwill
recorded based on preliminary purchase price allocation?
Q35. ABC Ltd. acquires XYZ Ltd. in a business combination on 15th
January, 20X1. Few days before the
date of acquisition, one of XYZ Ltd's customers had claimed that certain amounts were due by
XYZ Ltd. under penalty clauses for completion delays included in the contract. ABC Ltd. evaluates
the dispute based on the information available at the date of acquisition and concludes that XYZ
Ltd. was responsible for at least some of the delays in completing the contract. Based on the
evaluation, ABC Ltd. recognises ` 1 crore towards this liability which is its best estimate of fair
value of liability to the customer based on the information available at date of acquisition.
In October, 20X1 (within the measurement period), the customer presents additional information as
per which ABC Ltd. concludes the fair value of liability on the date of acquisition to be ` 2 crore.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.24
ABC Ltd. continues to receive and evaluate information related to the claim after October, 20X1.
Its evaluation doesn’t change till February, 20X2 (i.e. after the measurement period), when it
concludes that the fair value of the liability for the claim at the date of acquisition is ` 1.9 crore.
ABC Ltd. determines that the amount that would be recognised with respect to the claim under Ind
AS 37, Provisions, Contingent Liabilities and Contingent Assets as at February, 20X2 is ` 2.2
crore. How should the adjustment to the provisional amounts be made in the financial statements
during and after the measurement period?
Part of Business Combination
Q36. Progressive Ltd is being sued by Regressive Ltd for an infringement of its Patent. At 31stMarch,
20X2, Progressive Ltd recognised a ` 10 million liability related to this litigation. On 30th
July,
20X2, Progressive Ltd acquired the entire equity of Regressive Ltd for ` 500 million. On that date,
the estimated fair value of the expected settlement of the litigation is ` 20 million.
Contingent Payments to Employee
Q37. KKV Ltd acquires a 100% interest in VIVA Ltd, a company owned by a single shareholder who is
also the KMP in the Company, for a cash payment of USD 20 million and a contingent payment of
USD 2 million. The terms of the agreement provide for payment 2 years after the acquisition if
following conditions are met:
• the EBIDTA margins of the Company after 2 years after the acquisition is 21%.
• the former shareholder continues to be employed with VIVA Ltd for at least 2 years after the
acquisition. No part of the contingent payment will be paid if the former shareholder does not
complete the 2 year employment period.
Q38. ABC Ltd. acquires all of the outstanding shares of XYZ Ltd. in a business combination. XYZ Ltd.
had three shareholders with equal shareholdings, two of whom were also senior-level employees of
XYZ Ltd. and would continue as employee post acquisition of shares by ABC Ltd.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.25
• The employee shareholders each will receive ` 60,00,000 plus an additional payment of `
1,50,00,000 to 2,00,00,000 based on a multiple of earnings over next two years.
• The non-employee shareholders each receive `1,00,00,000.
The additional payment of each of these employee shareholders will be forfeited if they leave the
employment of XYZ Ltd. at any time during the two years following its acquisition by ABC Ltd.
The salary received by them is considered reasonable remuneration for their services. How much
amount is attributable to post combination services?
Acquirer Share Based Payment Awards Exchanged for Awards held by the Acquiree’s Employees
Q39. Green Ltd. acquired pollution Ltd. as a part of the arrangement Green Ltd. had to replace the
Pollution Ltd’s existing equity-settled award. The original awards specify a vesting period of 5
years. At the acquisition date, Pollution Ltd employees have already rendered two years of service.
As required, Green Ltd replaced the original awards with its own share-based payment awards
(replacement award). Under the replacement awards, the vesting period is reduced to 2 year (from
the acquisition date). The value (market-based measure) of the awards at the acquisition date are,
Original awards: INR 500 & Replacement awards: INR 600. As of acquisition date, all awards are
expected to vest.
Q40. Acquirer A Ltd. issues a replacement award under a business combination transaction, the market
based measurement of which under Ind AS 102 is `10 million. The employees are required to
render 2 years’ service after business combination to be entitled to the awards. The original award
of acquiree has a market based measure of `9 million on the date of acquisition, and a vesting
period of 5 years which all the employees have completed. Should the additional obligation be
treated as liability assumed in business combination? If not allocate the obligation into pre-
combination obligation and post-combination remuneration.
Q41. Acquirer A Ltd. issues a replacement award under a business combination transaction, the market
based measurement of which under Ind AS 102 is `10 million. The employees are required to
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.26
render 2 years’ service after business combination to be entitled to the awards. The original award
of acquiree has a market based measure of `9 million on the date of acquisition, and a vesting
period of 5 years of which the employees have completed 2 years only. Should the additional
obligation be treated as liability assumed in a business combination?
Q42. Acquirer A Ltd. issues a replacement award under a business combination transaction, the market
based measurement of which under Ind AS 102 is `10 million. The employees are not required to
render any service after business combination. The original award of acquiree has a market based
measure of `9 million on the date of acquisition, and a vesting period of 5 years of which the
employees have completed 2 years only. Should the additional obligation be treated as liability
assumed in a business combination?
Q43. P a real estate company acquires Q another construction company which has an existing equity
settled share based payment scheme. The awards vest after 5 years of employee service. At the
acquisition date, Company Q’s employees have rendered 2 years of service. None of the awards are
vested at the acquisition date. P did not replace the existing share based payment scheme but
reduced the remaining vesting period from 3 years to 2 years. Company P determines that the
market based measure of the award at the acquisition date is INR 500 (based on measurement
principles and conditions at the acquisition date as per Ind AS 102)
Q44. Acquirer A Ltd. issues a replacement award under a business combination transaction market based
measurement of which under Ind AS 102 is `10 million. Original award of acquiree has a market
based measure of `9 million. Under replacement awards, employees are not required to provide any
further service after acquisition date, and vesting period has been completed under acquiree’s
award. Should additional obligation be treated as liability assumed in business combination?
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.27
Acquisition Method
Q45. A Ltd. & B Ltd. was amalgamated on & from 1/04/2015. A new company C Ltd. was formed to
take over the business of the existing companies. Additional Information:
a) 10% Debentures holders of A Ltd. & B Ltd. are discharged by C Ltd. issuing its 15% Debentures of
` 100 each so as to maintain the same amount of interest.
b) Preference shareholders of the two companies are issued equivalent number of 15% preference
shares of C Ltd. at a price of ` 150 per share (face value ` 100)
c) C Ltd will issue 5 equity shares for each equity shares of A Ltd. & 4 equity shares for each equity
share of B Ltd. The shares are to be issued @ ` 30 each, having a face value of ` 10/share.
d) Investment allowances reserve is to be maintained for 4 more years.
Prepare the balance sheet of C Ltd. as on 1st April 2015 after the amalgamation has been carried out
on the basis of Amalgamation in the nature of purchase. Balance sheets of A Ltd. and B Ltd. in `
Lakhs as on 31st March 2015 are given below:
` In Lakhs
Particulars A Ltd. B Ltd.
I EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share Capital
Issued, subscribed and paid up capital:
Equity shares of ` 100 each 800 750
12% preference shares of ` 100 each 300 200
(b) Reserves & Surplus
Revaluation reserve 150 100
General Reserve 170 150
Investment allowance reserve 50 50
Surplus (Profit & loss account) 50 30
2 Non-current liabilities
(a) Long Term borrowings
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.28
10% debentures of ` 100 each 60 30
3 Current liabilities
(a) Trade Payables 270 120
Bills Payable 150 170
TOTAL 2,000 1,600
II ASSETS
1 Non-current assets
(a) Fixed Assets
(i) Tangible assets
Land & build 550 400
Plant & Mach 350 250
2 Current assets
(a) Inventories 350 250
(b) Trade receivables 250 300
Bills Receivable 50 50
(c) Cash and cash equivalents 300 200
(d) Other current assets 150 150
TOTAL 2,000 1,600
Q46. Following are the balance sheets of P Ltd. and S Ltd. as at 31st December 2015:
Particulars P Ltd. S Ltd.
I EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share Capital 900,000 300,000
(b) Reserves & Surplus 280,000 70,000
2 Current liabilities
(a) Trade Payables 105,000 80,000
Bills Payable 35,000 10,000
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.29
TOTAL 1,320,000 460,000
II ASSETS
1 Non-current assets
(a) Fixed Assets
(i) Tangible assets
Plant & Mach 650,000 -
Furniture 75,000 30,000
2 Current assets
(a) Inventories 305,000 270,000
(b) Trade receivables 156,000 55,000
Bills Receivable 20,000 30,000
(c) Cash and cash equivalents 114,000 75,000
(d) Other current assets - -
TOTAL 1,320,000 460,000
P Ltd. takes over business of S Ltd for ` 4,00,000 payable in equity shares allotted at par. Included
in the bills payable of P Ltd are bills amounting to ` 25,000 accepted in favor of S Ltd. for goods
purchased; S Ltd charging profit @ 25% in cost. On date of absorption, goods purchased from S
Ltd. of the invoice price of ` 12500 still remain unsold in the stock of P Ltd. and of the above
mentioned bills of ` 25000 bills only ` 5000 bills still remain in S Ltd’s hands, the rest having been
endorsed in favor of creditors or got discounted with bank. Expenses of liquidation of S Ltd ` 6000
were met by P Ltd. Prepare necessary accounts in the books of S Ltd. and draw balance sheet of P
Ltd. after absorption.
Q47. Balance sheet of Big Ltd & Small Ltd as on 31st March 2015 (` crores)
Particulars Big Ltd. Small Ltd.
I EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share Capital
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.30
Issued, subscribed and paid up capital:
Equity shares of ` 10 each 50 40
10% preference share capital - 60
(b) Reserves & Surplus 200 150
2 Non-Current liabilities
(a) Long Term borrowings (secured loans) 100 100
TOTAL 350 350
II ASSETS
1 Non-current assets
(a) Fixed Assets (net of depreciation 150 150
2 Current assets (net of current liability) 200 200
TOTAL 350 350
The present worth of the fixed assets of Big Ltd is ` 200 crores and that of Small Ltd is ` 429
crores. Goodwill of Big Ltd is ` 40 crores and of Small Ltd is ` 75 crores. Small Ltd absorbs Big
Ltd. by issuing equity shares at par in such a way that intrinsic net worth is maintained.
Goodwill account is not to appear in books. Fixed assets are to appear at old figures.
Show the balance sheet after absorption & draft a statement of valuation of shares on intrinsic value
basis to prove the accuracy of your workings.
Q48. Balance sheets of R Ltd. and P Ltd. for the year ending on 31.03.2015 are as under:
Particulars R Ltd. P Ltd.
I EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share Capital
Equity shares of ` 10 each fully 2,400,000 1,200,000
8% Preference shares of ` 10 each 800,000 -
10% preference share of ` 10 each 400,000
(b) Reserves & Surplus 3,000,000 2,400,000
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.31
2 Current liabilities 1,800,000 1,000,000
TOTAL 8,000,000 5,000,000
II ASSETS
1 Non-current assets
(a) Fixed Assets 5,500,000 2,700,000
2 Current assets 2,500,000 2,300,000
TOTAL 8,000,000 5,000,000
The following information is provided:
b) Equity shares of both companies are quoted in the market. Both companies are carrying on similar
manufacturing operations. R Ltd proposes to absorb P Ltd. as on 31.03.2015 on following terms:
i. Preference shareholders of P Ltd will receive 8% preference shares of R Ltd. sufficient to increase
the income of the preference shareholders of P Ltd. by 10%.
ii. Equity shares of P Ltd. will receive equity shares of R Ltd. on the following basis:
a. The equity shares of P Ltd. will be valued by applying to the earnings per share of P Ltd. 75% of
price-earning ratio of R Ltd. based on the results of 2014-2015 of both companies provided above.
b. The market price of the equity shares of R Ltd. is ` 40 per share
c. Number of shares to be issued to equity shareholders of P Ltd. will be based on above market value.
d. In addition to equity shares, 8% preference shares of R Ltd. will be issued to the equity
shareholders of P Ltd. to make up for the loss in income arising from the above exchange of shares
based on the dividends for the year 2014-2015.
e. The assets and liabilities of P Ltd as on 31.03.2015 are revalued by a professional value as under:
Fixed assets Increase by ` 100,000
Current Assets Decreased by ` 200,000
R Ltd. P Ltd.
Profit before tax 10,64,000 4,80,000
Taxation 4,00,000 2,00,000
Preference dividend 64,000 40,000
Equity dividend 2,88,000 1,92,000
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.32
Current Liabilities Decreased by ` 40,000
Required: a. Set out the purchase consideration in detail &
b. Draw up the balance sheet after absorption.
Q49. The abridged balance sheet of Vidur Ltd. as at 31st December 2015 was as follows:
Particulars `
I EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share Capital
Equity shares of ` 10 each 2,000,000
(b) Reserves & Surplus (70,000)
2 Current liabilities
(a) Other Current liabilities 350,000
TOTAL 2,280,000
II ASSETS
1 Non-current assets
(a) Fixed Assets 1,310,000
2 Current assets 970,000
TOTAL 2,280,000
On above-mentioned date, Panchal Limited absorbed the business of Vidur Ltd. at balance sheet
values. Winding up costs of ` 9000 were also borne by Panchal Ltd.
The summarized balance sheet of Panchal Limited at that date stood as follows:
Particulars `
I EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share Capital
Equity shares of ` 10 each fully paid up 3,000,000
(b) Reserves & Surplus
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.33
General reserve 1,000,000
2 Current liabilities
(a) Other Current liabilities 1,945,000
TOTAL 5,945,000
II ASSETS
1 Non-current assets
(a) Fixed Assets 3,210,000
(b) Non-current investments
Investments in equity instruments
(50000 equity shares of Vidhur Ltd.) 475,000
2 Current assets 2,260,000
TOTAL 5,945,000
Panchal Limited discharged the purchase consideration by allotment to Vidur Limited 1,00,000
fully paid equity shares of ` 10 each at an agreed value of ` 12 each and by payment of cash for the
balance. Panchal Ltd. has sufficient cash for the payment to Liquidator of Vidur Limited. Prepare
necessary accounts in the books of Vidur and balance sheet of Panchal Ltd.
Q50. Given below is the balance sheet of H Ltd as on 31st March 2015:
Particulars ` In lacs
I EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share Capital
Equity share capital (` 10 each) 4.00
10% Preference share capital 3.00
(b) Reserves & Surplus
General Reserve 1.00
Profit & loss account 1.00
2 Current liabilities
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.34
(a) Trade Payables 3.00
TOTAL 12.00
II ASSETS
1 Non-current assets
(a) Fixed Assets less depreciation 6.00
2 Current assets
(a) Inventories & Trade receivables 5.30
(b) Cash and cash equivalents 0.70
TOTAL 12.00
M Ltd. another existing company holds 25% of the equity share capital of H Ltd. purchased at ` 10
per share. It was agreed that M Ltd. should take over the entire undertaking of H Ltd. as on 30th
September 2015 on which date the position of current assets (except cash and bank) and creditors
was as follows:
Stock and Debtors 4 Lakhs
Creditors 2 Lakhs
Profits earned for half year ended 30th
September 2015 by H Ltd was ` 70,500 after charging
depreciation of ` 32,500 on fixed assets. H Ltd. declared 10% dividend for 2014-2015 on 30th
August 2015 and the same was paid within a week. Goodwill of H Ltd. was valued at ` 80,000 and
fixed assets were valued at 10% over book value as on 31st March 2015 for purpose of take over.
Preference shareholders of H Ltd. will be allotted 10% preference shares of ` 10 each by M Ltd.
Equity shareholders of H Ltd. will received requisite number of equity shares of ` 10 each from M
Ltd. valued at ` 10 per share. Required:
a) Compute the purchase consideration.
b) How capital reserve/goodwill will appear in balance sheet of M Ltd. after absorption.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.35
Q51. Balance sheets of M/s Hari Ltd. and Haran Ltd. as on 31st March 2015.
Particulars Hari Ltd.
`̀̀̀
Haran Ltd.
`̀̀̀
I EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share Capital
Issued, subscribed and paid up
Equity shares capital of ` 100 each 1,000,000 500,000
(b) Reserves & Surplus
General reserve 200,000 300,000
Development rebate reserve - 200,000
2 Current liabilities 300,000 500,000
TOTAL 1,500,000 1,500,000
II ASSETS
1 Non-current assets
(a) Fixed Assets
(i) Tangible assets 500,000 1,000,000
(ii) Intangible assets (Goodwill) 200,000 100,000
2 Non-current investments (at cost) 200,000 200,000
3 Current Assets 600,000 200,000
TOTAL 1,500,000 1,500,000
It was agreed that M/s Hari Ltd was to take over the business of Haran Ltd. on the basis of their
respective share values after adjusting, wherever necessary, the book values of the assets and
liabilities in the light of further information provided below:
a) Investments of Haran Ltd. include 1000 shares of ` 100 each in Hari Ltd. acquired at a cost of `
150/- per share. Other investments are trade investments in other companies having a market value
of ` 77000.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.36
b) The development Rebate Reserve was created in 2000. Admissible rate was 20% on the new assets
acquired at a cost of ` 10,00,000. The Company obtained the relief from the Income Tax
Department to retain a reserve of ` 1,50,000 for the next 2 year, to be carried on by any successor
of the business, if applicable.
c) Goodwill of Hari Ltd. is considered worth ` 3,00,000 & of Haran Ltd. `1,50,000.
d) The market value of the investments of Hari Ltd. was ` 2,50,000.
e) The current assets of Hari Ltd. were worth ` 2,80,000.
Required: Prepare necessary accounts in the books of both companies and the balance sheet of Hari
Ltd. after the absorption.
Q52. Company P should take over N Ltd. The debenture holders in N Ltd. agreed to convert the
debentures into 14% Redeemable Preference shares of ` 100 each. Prior to absorption, P Ltd.
declared a dividend of 20%; the dividend had not yet been paid. Shareholders in N Ltd. were to
receive shares in P Ltd. on the basis of intrinsic value of shares. The fixed assets of N Ltd. had to be
written up by ` 40,000 and those of P Ltd. reduced by ` 15,000 for the purpose of absorption. The
following are summarized balance sheet of two companies P Ltd. and N Ltd. as on 31/03/2015.
Particulars P Ltd.
`
N Ltd.
`
I EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share Capital
Equity shares of ` 10 each 500,000 180,000
(b) Reserves & Surplus
General reserve 145,000 -
Profit & loss account - (20,000)
2 Non-Current liabilities
(a) Long Term borrowings
Debentures - 200,000
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.37
Current Liabilities: Creditors 300,000 200,000
TOTAL 945,000 560,000
II ASSETS
1 Non-current assets
(a) Fixed Assets 815,000 460,000
(b) Non current investments
(i) Investments in Equity Instruments
Shares in P Ltd. (10000) - 100,000
Shares in N Ltd. (4500) 30,000 -
(iii) Investments in debentures or bonds
Debentures in N Ltd 100,000 -
TOTAL 945,000 560,000
Q53. AX Ltd. and BX Ltd. amalgamated on and from 1stJanuary, 20X2. A new Company ABX Ltd.
with shares of `10 each was formed to take over the businesses of the existing companies.
Summarized Balance Sheet as on 31-12-20X2
ASSETS Note No. AX Ltd BX Ltd
Non-current assets
Property, Plant and Equipment 8,500 7,500
Financial assets
Investment 1,050 550
Current assets
Inventory 1,250 2,750
Trade receivables 1,800 4,000
Cash and Cash equivalent 450 400
13,050 15,200
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.38
EQUITY AND LIABILITIES
Equity
Equity share capital (of face value of ` 10 each) 6,000 7,000
Other equity 1 3,050 2,700
Liabilities
Non-current liabilities
Financial liabilities
Borrowings (12% Debentures) 3,000 4,000
Current liabilities
Trade payables 1,000 1,500
13,050 15,200
1. Other equity AX Ltd BX Ltd
General Reserve 1,500 2,000
Profit & Loss 1,000 500
Investment Allowance Reserve 500 100
Export Profit Reserve 50 100
3,050 2,700
ABX Ltd. issued requisite number of shares to discharge the claims of the equity shareholders of
the transferor companies. Also the new debentures were issued in exchange of the old series of both
the companies. Prepare a note showing purchase consideration and discharge thereof and draft the
Balance Sheet of ABX Ltd:
a. Assuming that both the entities are under common control
b. Assuming BX Ltd is a larger entity and their management will take the control of the entity ABX Ltd.
The fair value of net assets of AX and BX limited are as follows:
Assets AX Ltd. (‘000) BX Ltd. (‘000)
Property, Plant and Equipment 9,500 1,000
Inventory 1,300 2,900
Fair value of the business 11,000 14,000
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.39
Q54. Balance Sheets of Professional Ltd & Dynamic Ltd as of 31/03/20X2 (` Lakhs)
Assets Professional Ltd. Dynamic Ltd.
Non Current
Assets:
- Property, Plant & Equipment 300 500
- Investments 400 100
Current Assets: - Inventories 250 150
- Financial Assets 400 230
- Trade Receivables 450 300
- Cash and Cash Equivalents 200 100
Total 2000 1,380
Equity - Equity Capital of 100 each 500 400
-Reserves and Surplus 730 180
- Other Comprehensive
Income (OCI)
80 45
Non-Current
Liabilities
-Long Term Borrowings 250 200
- Long Term Provisions 50 70
- Deferred Tax 40 35
Current
Liabilities:
- Short Term Borrowings 100 150
BP - Trade Payables 250 300
Total 2000 1,380
Other Information:
1. Professional acquired 70% of Dynamic Ltd on 1 April 20X2 for by issuing its own Shares in the
ratio of 1 Share of Professional Ltd for every 2 Shares of Dynamic Ltd. The Fair Value of the
shares of Professional Ltd was `40
2. The Fair Value exercise resulted in the following: (all figures in ` Lakhs)
(a) PPE Fair Value on 1 April 20X2 was `350.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.40
(b) Professional Ltd also agreed to pay an additional payment that is higher of `35 Lakhs and 25% of
any excess of Dynamic Ltd in the first year after acquisition over its profits in the preceding 12
months. This additional amount will be due after 2 years. Dynamic Ltd has earned `10 Lakhs Profit
in the preceding year and expects to earn another `20 Lakhs.
(c) In addition to above, Professional Ltd also had agreed to pay one of the Founder Shareholders, a
payment of `20 Lakhs provided he stays with the Company for two year after the acquisition.
(d) Dynamic Ltd had certain Equity-settled Share Based Payment Award (Original Award) which got
replaced by the new awards issued by Professional Ltd. As per the original term, the vesting period
was 4 years and as of the acquisition date the employees of Dynamic Ltd have already served 2
years of service. As per the replaced awards, the vesting period has been reduced to one year (1
year from the acquisition date). The Fair Value of the award on the acquisition date was - Original
award – `5 & Replacement A ward- `8.
(e) Dynamic Ltd had a lawsuit pending with a customer who had made a claim of `50 Lakhs.
Management estimated the Fair Value of the Liability to be `5 Lakhs.
(f) The applicable tax rate for both Entities is 30%.
Prepare Opening Consolidated Balance Sheet of Professional Ltd as on 1 April 20X2
Q55. On 30thSeptember, 20X1 Entity A issues 2.5 shares in exchange for each ordinary share of Entity
B. All of Entity B’s shareholders exchange their shares in Entity B. Therefore, Entity A issues
150 ordinary shares in exchange for all 60 ordinary shares of Entity B. The fair value of each
ordinary share of Entity B at 30thSeptember, 20X1 is ` 40. The quoted market price of Entity A’s
ordinary shares at that date is ` 16. The fair values of Entity A’s identifiable assets and liabilities at
30thSeptember, 20X1 are the same as their carrying amounts, except that the fair value of Entity
A’s non- current assets at 30thSeptember, 20X1 is1,500.The statements of financial position of
Entity A and Entity B immediately before the business combination are:
Entity A Entity B
(legal parent) (legal subsidiary)
(accounting acquiree) (accounting acquirer)
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.41
Current assets 500 700
Non-current assets 1,300 3,000
Total assets 1,800 3,700
Current liabilities 300 600
Non-current liabilities 400 1,100
Total liabilities 700 1,700
Shareholders’ equity
Retained earnings 800 1,400
Issued equity
100 ordinary shares 300
60 ordinary shares 600
Total shareholders’ equity 1,100 2,000
Total liabilities and shareholders’ equity 1,800 3,700
Assume that Entity B’s earnings for the annual period ended 31stDecember, 20X0 were 600 and
that the consolidated earnings for the annual period ended 31st
December, 20X1 were 800. Assume
also that there was no change in the number of ordinary shares issued by Entity B during the
annual period ended 31stDecember, 20X0 and during the period from 1
stJanuary,20X1 to the
date of the reverse acquisition on 30th
September,20X1.
Calculate the fair value of the consideration transferred measure goodwill & prepare consolidated
balance sheet as on September 30, 20X1. Also compute EPS as on December 31, 20X1.
Common Control Transactions - Demerger
Q56. Enterprise Ltd. has 2 divisions A and B. Division A has been making constant profits while
division B has been invariably marking losses. On 31st March 2015, the following division wise
balance sheet was available: (` Crores)
Particulars Div A Div B Total
I EQUITY AND LIABILITIES
1 Shareholders’ funds
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.42
(a) Share Capital
Equity shares of ` 10 each - - 25
(b) Reserves & Surplus -
Profit & loss account - - 75
2 Non-Current liabilities
(a) Long Term borrowings (loan funds) - 300 300
3 Current liabilities 25 400 425
TOTAL 25 700 825
II ASSETS
1 Non-current assets
(a) Fixed Assets (cost) 250 500 750
Less: depreciation -225 -400 -625
2 Current assets 200 500 700
TOTAL 225 600 825
Division B along with its assets and liabilities were sold for ` 25 crores to Turnaround Ltd, a new
company who allotted 1 crore equity shares of ` 10 each at a premium of ` 15 per share to the
members of Enterprise Ltd. in full settlement of the consideration, in proportion to their
shareholding in the company. Assuming that there are no other transactions, you are asked to: Pass
journal entries in the books of enterprise Ltd. & Prepare the balance sheet of Enterprise Ltd. &
Turnaround Ltd.
Q57. Maxi, Mini Ltd. has 2 divisions – Maxi and Mini.
Balance sheet as at 31st October 2015 (` crores)
Particulars Maxi Mini Total
I EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share Capital
Equity shares of ` 10 each 50
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.43
(b) Reserves & Surplus
Profit & loss account 650
2 Non-Current liabilities
Long Term borrowings (loan funds) - 100 100
3 Current liabilities 100 100 200
TOTAL 100 200 1,000
II ASSETS
1 Non-current assets
Fixed Assets (cost) 600 300 900
Less: Depreciation -500 -100 -600
2 Current assets 400 300 700
TOTAL 500 500 1,000
It was decided to form a new company Mini Ltd. to take over the assets and liabilities of Mini
Division. Accordingly, Mini Ltd. was incorporated to take over at balance sheet values the assets
and liabilities of that division. Mini Ltd. is to allot 5 crores equity shares of ` 10 each in the
company to the members of Maxi Mini Ltd, in full settlement of the consideration. Members of
Maxi Mini Ltd. are therefore to become the members of Mini Ltd., as well without having to make
any further investment. Required:
a) Pass journal entries in books of Maxi Mini Ltd.
b) Draw up the balance sheet of Maxi Mini Ltd. and Mini Ltd. after demerger.
c) Find out the Net assets value of equity shares pre and post demerger.
d) Comment on the impact of demerger on the shareholders wealth.
Q58. Following are balance sheet as on 31/ 03/2015 of Ksha Ltd. and Yaa Ltd. (` crore)
Particulars Ksha Ltd Yaa Ltd
I EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share Capital: Equity shares of `10 each fully paid 300 200
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.44
(b) Reserves & Surplus
Capital reserves 40 20
Surplus 710 430
2 Non-Current liabilities
(a) Long Term borrowings (loan funds) 250 350
3 Current liabilities 1,300 900
TOTAL 2,600 1,900
II ASSETS
1 Non-current assets
(a) Fixed Assets (cost) 1,000 700
Less: depreciation -400 -300
2 Current assets 2,000 1,500
TOTAL 2,600 1,900
Ksha Ltd. has 2 divisions – very profitable Division A and loss making Division B. Yaa Ltd.
similarly has very profitable division B and loss making division A. The two companies decided to
reorganize. Necessary approvals from creditors and members and sanction by High court have been
obtained to the following scheme:
a) Division B of Ksha Ltd. which has fixed assets costing ` 400 crores (written down value ` 160
crores), Current assets ` 900 crores. Current Liabilities ` 750 crores and loan funds of ` 200 crores
is to be transferred at ` 125 crores to Yaa Ltd.
b) Division A of Yaa Ltd. which has fixed assets costing ` 500 crores (Depreciation ` 200 crores),
Current assets ` 800 crores, current liabilities ` 700 crores, and loan fund ` 250 crores is to be
transferred at ` 140 crores to Ksha Ltd.
c) Difference in two considerations is to be treated as a 15 % loan.
d) Directors of each of the companies revalued the fixed assets taken over as follows:
• Division A of Yaa Ltd. taken over ` 325 crores
• Division B of Ksha Ltd. taken over ` 200 crores
All the other assets and liabilities are recorded at the balance sheet values. Required:
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.45
i. Prepare balance sheet of both companies after reconstruction
ii. Ritchie Rich, who owns 50,000 equity shares of Ksha Ltd. & 30,000 that of Yaa Ltd., wants to
know whether he has gained / lost in net asset terms after reorganization.
Q59. Company X, the ultimate parent of a large number of subsidiaries, reorganises retail segment of its
business to consolidate all of its retail businesses in a single entity. Under the reorganisation,
Company Z (a subsidiary and the biggest retail company in the group) acquires Company X’s
shareholdings in its one operating subsidiary, Company Y by issuing its own shares to Company X.
After transaction, Company X will directly control the operating and financial policies of Y.
Q60. ABC Ltd. and XYZ Ltd. are owned by four shareholders B, C, D and E, each of whom holds 25%
of the shares in each company. Shareholders B, C and D have entered into a shareholders'
agreement in terms of governance of ABC Ltd. and XYZ Ltd. due to which they exercise joint
control. Whether ABC Ltd. and XYZ Ltd. are under common control?
Q61. ABC Ltd. and XYZ Ltd. are owned by four shareholders B, C, D and E, each of whom holds 25%
of the shares in each company. However, there are no agreements between any of the shareholders
that they will exercise their voting power jointly. Whether ABC Ltd. and XYZ Ltd. are under
common control?
Q62. ABC Ltd. had a subsidiary, namely, X Ltd. which was acquired on 1st April, 2010. ABC Ltd.
acquires all of the shares of Y Ltd. on 1stApril, 2017. ABC Ltd. transfers the shares in Y Ltd. to X
Ltd. on 2nd April, 2017. How should the above transfer of Y Ltd. into X Ltd. be accounted for in
the CFS of X Ltd.?
Q63. Bank F acquires Bank E in a business combination in October, 20X1. The loan by Bank E to
Borrower B is recognised at its provisionally determined fair value. In December 20X1, F receives
Borrower B’s financial statements for the year ended 30th September, 20X1, which indicate
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.46
significant decrease in Borrower B’s income from operations. Basis this, the fair value of the loan
to B at the acquisition date is determined to be less than the amount recognised earlier on a
provisional basis.
Q64. Bank F acquires Bank E in a business combination in October, 20X1. The loan by Bank E to
Borrower B is recognised at its provisionally determined fair value. In December 20X1, F receives
information that Borrower B has lost its major customer earlier that month and this is expected to
have a significant negative effect on B’s operations. Comment on the treatment done by Bank F.
Theory Answers
A1. Company X has input in form of suppliers, factory, machineries etc. Process in form of work force,
testers etc. which when applied on inputs will generate output in form of revenue or profits. As all
the elements of business are present company X will be classified as business as per IND AS 103.
A2. Although Company D is not yet earning revenues (an example of ‘outputs’) there are a number of
indicators that it has a sufficiently integrated set of activities and assets that are capable of being
managed to produce a return for investors. In particular, D:
• employs specialist engineers developing knowhow & design specifications of technology.
• is pursuing a viable plan to complete development work and commence production.
• has identified and will be able to access customers willing to buy the outputs.
In addition, Company A has paid a premium (or goodwill) for its 60% interest. In the absence of
evidence to the contrary, Company D is presumed to be a business.
A3. In most cases, an asset or group of assets and liabilities that are capable of generating revenues,
combined with all or many of the activities necessary to earn those revenues, would constitute a
business. However, investment property is a specific case in which earning a return for investors is
a defining characteristic of the asset. Accordingly, revenue generation and activities that are
specific and ancillary to an investment property and its tenancy agreements should therefore be
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.47
given a lower ‘weighting’ in assessing whether the acquiree is a business. Hence purchase of
investment property with tenants and services that are purely ancillary to the property and its
tenancy agreements should generally be accounted for as an asset purchase.
A4. In this case, Company Q consists of a group of revenue-generating assets, together with employees
and activities that clearly go beyond activities ancillary to the properties and their tenancy
agreements. The assets and activities are clearly integrated so Company Q is considered a business.
A5. In this case, the activities and assets within the operating segments are capable of being managed as
a business and so Company A accounts for the acquisition as a business combination. The payroll
and accounting cost centre and administrative head office functions are typically not used
A6. The shell company does not contain an integrated set of activities and assets and so does not
constitute a business. Consequently, Company A should account for the purchase of the shell
company in the same way as the incorporation of a new subsidiary. In the CFS, any costs incurred
will be accounted for in accordance with their nature and applicable Ind AS. No goodwill is
recognised.
A7. The definition of business requires existence of inputs and processes. In this case, the skilled
workforce, manufacturing plant and IPR, along with strategic and operational processes constitutes
the inputs and processes in line with the requirements of Ind AS 103. When the said inputs and
processes are applied as an integrated set, the Company A will be capable of producing outputs; the
fact that the Company A currently does not have revenue is not relevant to the analysis of the
definition of business under Ind AS 103. Basis this and presuming that Company A would have
been able to obtain access to customers that will purchase the outputs, the present case can be said
to constitute a business as per Ind AS 103.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.48
A8. Though the sales force has not been taken over, however, if the missing inputs (i.e., sales force) can
be easily replicated or obtained by the market participant to generate output, it may be concluded
that Company A has acquired business. Further, if Company B is also into similar line of business,
then the existing sales force of Company B may also be relevant to mitigate the missing input. As
such, the definition of business is met in accordance with Ind AS 103.
A9. In assessing whether it has obtained control over Company X, Company P should consider not only
the 40,000 shares it owns but also its option to acquire another 25,000 shares (a so-called potential
voting right). In this assessment, the specific terms and conditions of the option agreement and
other factors are considered:
• the options are currently exercisable and there are no other required conditions before such options
can be exercised
• if exercised, these options would increase Company P’s ownership to a controlling interest of over
50% before considering other shareholders’ potential voting rights (65,000 shares out of a total of
1,25,000 shares)
• although other shareholders also have potential voting rights, if all options are exercised Company
P will still own a majority (65,000 shares out of 1,29,000 shares)
• the premium included in the exercise price makes the options out-of-the-money. However, the fact
that the premium is small and the options could confer majority ownership indicates that the
potential voting rights have economic substance. By considering all the above factors, Company P
concludes that with acquisition of 40,000 shares together with potential voting rights, it has
obtained control of X.
A10. No. as per the requirement of the standard a non- binding Letter of Intent (LOI) does not effectively
transfer control and hence this cannot be considered as the basis for determining the acquisition
date.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.49
A11. The key drivers of the accounting are identifying the party on whose behalf the new entity has
been formed and identifying the business acquired. In this scenario, as Super Ltd. has the ability to
elect or appoint or to remove a majority of the members of the governing body of the Focus Ltd.
and has the ability to dominate the management of the Focus Ltd. Accordingly, Super Ltd. will be
identified as the acquirer unless there are conditions to conclude to the contrary.
A12. In the given case, company B is out of operation i.e. there is no business and further there is no
process to take over. Hence the take over by company A cannot be considered to be business
combination. The transaction should be accounted as acquisition of group of assets.
A13. ` in lakhs
Assets Fair value Cost
Plant and Machinery 200 228.57
Furniture 30 34.29
Equipment 50 57.14
Licenses 70 80
Total 350 400
A14. As the control over the board, which is on the way in which the control is established, is obtained
on 1st July, that will be the acquisition date.
A15. The acquisition date in the above case is 1stApril. This is because, in the above scenario, even if
the shareholders don’t approve the shares, consideration will be settled through payment of cash.
A16. Therefore, in this case, notwithstanding that the price is based on the net assets at 1stJanuary, 20X1
and that XYZ Ltd's shareholders do not receive any dividends after that date, the date of acquisition
for accounting purposes will be 1stMarch, 20X1. It is only on 1
stMarch, 20X1 and not 1
stJanuary,
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.50
20X1, that ABC Ltd. has the power to direct the relevant activities of XYZ Ltd. so as to affect its
returns from its involvement with XYZ Ltd. Accordingly, the date of acquisition is 1stMarch,20X1.
A17. Since CCI approval is a substantive approval for ABC Ltd. to acquire control of XYZ Ltd’s
operations, the date of acquisition cannot be earlier than the date on which approval is obtained
from CCI. This is pertinent given that the approval from CCI is considered to be a substantive
process and accordingly, the acquisition is considered to be completed only on receipt of such
approval.
A19. Date of acquisition – 10th
June
Purchase consideration – 12000 shares * 85 per share = ` 10,20,000
A20. 1. Date of Acquisitions – 01/04/2018
2. Date of Acquisitions – 01/04/2017
A21. The stamp duty payable for transfer of assets in connection with the business combination is an
acquisition-related cost as described. Stamp duty is a cost incurred by the acquirer in order to effect
the business combination and it is not part of the fair value exchange between the buyer and seller
for the business. In such cases, the stamp duty is incurred to acquire the ownership rights in land in
order to complete the process of transfer of assets as part of the overall business combination
transaction but it does not represent consideration paid to gain control over business from the
sellers. Unlike Ind AS 16, the acquisition accounting as per Ind AS 103 requires assets and
liabilities acquired in a business combination to be measured at fair value and hence stamp duty
does not increase the future economic benefits so cannot be capitalised. In the given case, the
transfer of land and the related stamp duty is required to be accounted as part of the business
combination transaction as per requirements of Ind AS 103 and not as a separate transaction under
Ind AS. Accordingly, stamp duty incurred in relation to land acquired as part of a business
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.51
combination transaction are required to be recognised as an expense in the period in which
acquisition is completed and given effect to in financial statements of acquirer.
A22. The payment to the regulator represents a transaction cost and will be regarded as acquisition
related cost incurred to effect the business combination. Applying the requirements of Ind AS 103,
it should be expensed as it is incurred. Transfer of rights in the instant case cannot be construed to
be separate from the business combination because the transfer of the rights to ABC Ltd. is an
integral part of the business combination itself.
A23. In the current scenario, ABC Ltd. measures the identifiable liability of entity PQR Ltd. at ` 70 lakh
and also recognises a corresponding indemnification asset of ` 70 lakhs on its consolidated balance
sheet. The net impact on goodwill from the recognition of the contingent liability and associated
indemnification asset is nil. However, in the case where the liability’s fair value is more than ` 1
crore ie. ` 1.2 crore, the indemnification asset will be limited to ` 1 crore only.
A24. Since no liability is recognised in the given case, ABC Ltd. will also not recognise an
indemnification asset as part of the business combination accounting.
A25. At the acquisition date, Company A determined that there is a present obligation and therefore the
fair value of the contingent liability of ` 250 is recognised by A in the acquisition accounting. In
the acquisition accounting A also recognises an indemnification asset of ` 150 (` 250 - ` 100).
A26. Company A would recognise ` 2 million in its financial statements as part of acquisition
accounting, even if it is not probable that payment will be required to settle the obligation.
A27. As certain consideration is based on achieving certain performance parameters in future, the
consideration is contingent on achieving those parameters. As such, the transaction involves
contingent consideration. Further, since the consideration is to be settled for a variable amount in
cash, such consideration would be in the nature of financial liability rather than equity. As at the
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.52
acquisition date, the acquirer should consider the acquisition date fair value of contingent
consideration as part of business combination. Accordingly, such recognition would increase
goodwill (or reduce gain on bargain purchase, as the case may be).
In the above case, if the chance of meeting the performance criteria becomes less probable, then in
such a case, the contingent consideration in the nature of financial liability should be remeasured
and the impact for the change in the fair value should be recognised in statement of profit and loss.
A28. Acquirer recognises as an asset separately from goodwill an in-process research and development
project of the acquiree if the project meets the definition of an intangible asset. An acquiree’s in-
process research and development project meets the definition of an intangible asset when it:
(a) meets the definition of an asset; and
(b) is identifiable, i.e. is separable or arises from contractual or other legal rights.
In accordance with above,
(i) The fair value of the first drug reflects the probability and the timing of the regulatory approval
being obtained. As per the standard, the recognition criterion of probable future economic benefits
is considered to be satisfied in respect of the asset acquired accordingly an asset is recognised.
Subsequent expenditure on an in-process research or development project acquired separately is to
be dealt with in accordance with Ind AS 38.
(ii) The rights to the second drug also meet the recognition criteria in Ind AS 38 and are recognised.
The approval means it is probable that future economic benefits will flow to ABC Ltd. This will be
reflected in the fair value assigned to the intangible asset.
A29. In this situation the customer database does not give rise to legal or contractual right. Accordingly,
the assessment of its separability will be assessed. The database can be useful to other players and E
has the ability to transfer this to them. Accordingly, the intention not to transfer will not affect the
assessment whether to record this as an intangible or not.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.53
A30. Vadapav will record the franchisee right as an intangible asset (reacquired right) while doing
purchase price allocation and since it is at market terms no gain or loss will be recorded on
settlement.
A31. In the instant case, the license is recognised at ` 4,50,000, the fair value at market rates of a license
based on the remaining contractual life. The gain or loss on settlement of the contract is lower of:
• ` 3,00,000, which is the amount by which the right is unfavorable to ABC Ltd. compared to market
terms. This is the difference between the amount that ABC Ltd. could receive for granting a similar
right, `4,50,000, compared to the carrying value (or the unamortised value) that it was granted for,
` 1,50,000 (2,50,000 X6/10).
• ` 1,80,000, which is the amount that ABC Ltd. would have to pay to terminate the right at the date
of acquisition.
The loss on settlement of the contract is ` 1,80,000. Therefore, out of the ` 1 crore paid, ` 98.2 lakh
is accounted for as consideration for the business combination and ` 1,80,000 is accounted for
separately as a settlement loss on the re-acquired right.
A34. No, as per the requirement of Ind AS 103, changes to the net assets are allowed which results from
the discovery of a fact which existed on the acquisition date. However, change of facts resulting in
recognition and de-recognition of assets and liabilities after the acquisition date will be accounted
in accordance with other Ind AS. In the above scenario deferred tax asset was not eligible for
recognition on the acquisition date and accordingly new contract on 31stMarch, 20X2 will
tantamount to change of estimate and accordingly will not impact the Goodwill amount.
A35. The consolidated financial statements of ABC Ltd. for the year ended 31stMarch, 20X1 should
include ` 1 crore towards the contingent liability in relation to the customer claim.
When the customer presents additional information in support of its claim, the incremental
liability of ` 1 crore will be adjusted as a part of acquisition accounting as it is within the
measurement period.
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.54
In its financial statements for the year ending on 31stMarch, 20X2, ABC Ltd. will disclose the
amounts and explanations of the adjustments to the provisional values recognized during the
current reporting period. Therefore, it will disclose that the comparative information for the year
ending on 31stMarch, 20X1 is adjusted retrospectively to increase the fair value of the item of
liability at the acquisition date by ` 1 crore, resulting in a corresponding increase in goodwill.
The information resulting in the decrease in the estimated fair value of the liability for the claim in
February, 20X2 was obtained after the measurement period. Accordingly, the decrease is not
recognised as an adjustment to the acquisition accounting. If the amount determined in accordance
with Ind AS 37 subsequently exceeds the previous estimate of the fair value of the liability, then
ABC Ltd. recognises an increase in the liability. As the change has occurred after the end of the
measurement period, the increase in the liability amounting to ` 20 lakh (` 2.2 crore– ` 2 crore) is
recognised in profit or loss.
A36. In the above scenario the litigation is in substance settled with the business combination transaction
and accordingly the ` 20 million being the fair value of the litigation liability will be considered as
paid for settling the litigation claim and will be not included in the business combination.
Accordingly, the purchase price will reduce by 20 million and the difference between 20 and 10
will be recorded in income statement of the Progressive limited as loss on settlement of the
litigation.
A37. In the above scenario the former shareholder is required to continue in employment and the
contingent consideration will be forfeited if the employment is terminated or if he resigns.
Accordingly, only USD 20 million is considered as purchase consideration and the contingent
consideration is accounted as employee cost and will be accounted as per the other Ind AS.
A38. Ind AS 103 provides an indication that a contingent consideration arrangement in which the
payments are automatically forfeited if employment terminates is remuneration for post-
combination services. Arrangements in which the contingent payments are not affected by
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.55
employment termination may indicate that the contingent payments are additional consideration
rather than remuneration. In accordance with the above, in the instant case, the additional
consideration of `1,50,00,000 to ` 2,00,00,000 represents compensation for post-combination
services, as the same represents that part of the payment which is forfeited if the former shareholder
does not remain in the employment of XYZ Ltd. for two years following the acquisition - i.e., only
` 60,00,000 is attributed to consideration in exchange for the acquired business.
A59. In this situation, Company Z pays consideration to Company X to obtain control of Company Y.
The transaction meets the definition of a business combination. Prior to the reorganisation, each of
the parties are controlled by Company X. After the reorganisation, although Company Y are now
owned by Company Z, all two companies are still ultimately owned and controlled by Company X.
From the perspective of Company X, there has been no change as a result of the reorganisation.
This transaction therefore meets the definition of a common control combination and is within the
scope of Ind AS 103.
A60. In instant case, both ABC Ltd. and XYZ Ltd. are jointly controlled by group of individuals
(B, C and D) as a result of contractual arrangement. Therefore, in current scenario, ABC Ltd. and
XYZ Ltd. are considered to be under common control.
A61. In the present case, there is no contractual arrangement between the shareholders who exercise
control collectively over either company. Thus, ABC Ltd. and XYZ Ltd. are not considered to be
under common control even if there is an established pattern of voting together.
A62. Considering X Ltd. and Y Ltd. are under common control (with common parent), it might seem that
acquisition accounting is not required because of the specific requirement for common control
business combination. However, X Ltd. should be identified as acquirer & should account for its
combination with Y Ltd. using acquisition accounting. This is because X Ltd. would have applied
acquisition accounting for Y Ltd. if X Ltd. had acquired Y Ltd directly rather than through ABC
AJ Education NeXt IND AS 103
Lecture No: ____ Date: ___/___/_____ 27.56
Ltd. Acquisition accounting cannot be avoided in financial statements of X Ltd. simply by placing
X Ltd. & Y Ltd. under common control of P shortly before transaction.
A63. New information obtained by F subsequent to the acquisition relates to facts and circumstances
that existed at the acquisition date. Accordingly, an adjustment (i.e., decrease) to in the provisional
amount should be recognised for loan to B with a corresponding increase in goodwill.
A64. Basis this, the fair value of the loan to B will be less than the amount recognised earlier at the
acquisition date. The new information resulting in the change in the estimated fair value of the loan
to B does not relate to facts and circumstances that existed at the acquisition date, but rather is
due to a new event i.e., the loss of a major customer subsequent to the acquisition date. Therefore,
based on the new information, F should determine and recognise an allowance for loss on the loan
in accordance with Ind AS 109, Financial Instruments: Recognition and Measurement, with a
corresponding charge to profit or loss; goodwill is not adjusted.
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 1
SCHEDULE III DIVISION II
1. Where compliance with the requirements of the Act including Indian Accounting Standards
(except the option of presenting assets and liabilities in the order of liquidity as provided by the
relevant Ind AS) as applicable to the companies require any change in treatment or disclosure
including addition, amendment substitution or deletion in the head or sub-head or any changes inter
se, in the financial statements or statements forming part thereof, the same shall be made and the
requirements under this Schedule shall stand modified accordingly.
2. The disclosure requirements specified in this Schedule are in addition to and not in substitution of
the disclosure requirements specified in the Indian Accounting Standards. Additional disclosures
specified in the Indian Accounting Standards shall be made in the Notes or by way of additional
statement or statements unless required to be disclosed on the face of the Financial Statements.
Similarly, all other disclosures as required by the Companies Act, 2013 shall be made in the Notes
in addition to the requirements set out in this Schedule.
3. 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.
4. Financial Statements shall disclose all 'material' items, i,e, the items if they could. individually or
collectively, influence the economic decisions that users make on the basis of the financial
statements. Materiality depends on the size or nature of the item or a combination of both, to be
judged in the particular circumstances.
4.a All Assets & liabilities are classified as current and noncurrent as follows
Entity shall classify an asset as current when Entity shall classify a liability as current when
a. it expects to realise asset, or intends to sell or
consume it, in its normal operating cycle;
a. it expects to settle the liability in its normal
operating cycle;
b. it holds asset primarily for trading b. it holds liability primarily for trading
c. it expects to realise the asset within twelve
months after the reporting period; or
c. the liability is due to be settled within twelve
months after the reporting period; or
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 2
d. the asset is cash or a cash equivalent unless
the asset is restricted from being exchanged or
used to settle a liability for at least twelve
months after the reporting period.
d. it does not have an unconditional right to
defer settlement of the liability for atleast 12m
after the reporting period
An entity shall classify all other assets as
non-current.
An entity shall classify all other liabilities as
non-current.
Above classification is not applicable to Equity
b. The operating cycle of an entity is the time between the acquisition of assets for processing and
their realisation in cash or cash equivalents, When the entity's normal operating cycle is not clearly
identifiable, it is assumed to be twelve months. (It should be gross operating cycle i.e. without
deducting credit period given by creditors)
BALANCESHEET AS ON ________
Particulars Note No.`. CY `. LY
I. Assets
A Non Current Assets
1. Plant Property and Equipment
2. Capital Work in Progress
3. Investment Property
4. Goodwill
5. Other Intangible Assets
6. Intangible Asset under development
7. Biological Assets other than Bearer Plant
8. Financial Assets
a. Investment
b. Trade Receivable
c. Loans
9. Deferred Tax Assets (net)
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 3
10. Other Non Current Assets
B Current Assets
1. Inventories
2. Financial Assets
a. Investment
b. Trade Receivable
c. Cash & Cash Equivalent
d. Bank Balance Other than CCE
e. Loans
f. Others (to be specified)
3. Current Tax Assets (net)
4. Other Current Assets
Total Assets
II. Equity and Liabilities
A Equity
1. Equity Share capital
2. Other Equity
B Liabilities
1. Non Current Liabilities
a. Financial Liabilities
i. Borrowings
ii. Trade Payables
Total Outstanding dues of MESE
Total Outstanding dues of other than MESE
iii. Other Financial Liabilities
b. Provisions
c. Deferred Tax Liabilities (Net)
d. Other Non Current Liabilities
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 4
2. Current liabilities
a. Financial Liabilities
i. Borrowings
ii. Trade payables:
Total Outstanding dues of MESE
Total Outstanding dues of other than MESE
iii. Other financial liabilities(other than those specified in item (c)
b. Other current liabilities
c. Provisions
d. Current Tax Liabilities
Total Equity and Liabilities
Contingent Liabilities and Commitments
(i) Contingent liabilities shall be classified as:
(a) Claims against the company not acknowledged as debt;
(b) Guarantees;
(c) Other money for which the company is contingently liable
(ii) Commitments shall be classified as:
(a) Est. amount of contracts remaining to be executed on capital account & not provided for;
(b) Uncalled liability on shares and other investments partly paid
(c) Other commitments (specify nature).
Statement of Changes in Equity for the period _________
A. Equity Share Capital
At the Beginning of the Period Changes during the Year Balance at the end of the Period
XXXX XXXX XXXX
B. Other Equity
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 5
Statement of changes in Equity for the period ended……………
Particulars SA
MR
PA
Equity
component
in CFI
Reserves & Surplus Refer
Note
3
Total
Capital
Reserve
S
P
Other
Reserves
Retained
Earnings
Bal at period
beginning
Changes in
Accounting
Policies/prior period
errors
Restated balance at
beg. of year
Total Comprehensive
Income for year
Dividends
Transfer to reserve
Other changes
Balance at period end
Important Notes:
1. Re-measurement of defined benefit plans and fair value changes relating to own credit risk of
financial liabilities designated at FVTPL shall be recognised as a part of retained earning with
separate disclosure of such items along with the relevant amounts in the Notes.
2. A description of purposes of each reserve within equity shall be disclosed in the Notes.
3. Additional columns may be
(a) Debt instruments / Equity instruments through other comprehensive income
(b) Effective portion of effective hedge
(c) Revaluation surplus
(d) Exchange difference on translating the financial statement & (e) Other items of OCI
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 6
Disclosures
NON CURRENT ASSETS
1. PPE (i) Classification shall be given as:
(a) Land
(b) Buildings
(c) Plant and Equipment
(d) Furniture and Fixtures
(e) Vehicles
(f) Office equipment
(g) Bearer Plants
(h) Others (specify nature)
(ii)Assets under lease shall be separately specified under each class of assets
(iii) A reconciliation of gross & net carrying amounts of each class of assets at
beginning & end of reporting period showing additions, disposals, acquisitions
through business combinations & other adjustments and the related
depreciation and impairment losses or reversals shall be disclosed separately.
2. Investment
Property:
Same as point iii above of PPE
3. Goodwill Same as point iii above of PPE
4. Other
Intangible Assets
(i) Classification shall be given as:
(a) Brands or trademarks
(b) Computer software
(c) Mastheads and publishing titles
(d) Mining rights
(e) Copyright, patents, other intellectual property rights, services and
operating rights
(f) Recipes, formulae, models, designs and prototypes
(g) Licenses and franchises
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 7
(h) Others (specify nature)
(ii) A reconciliation of gross & net carrying amounts of each class of assets at
beginning & end of reporting period showing additions, disposals, acquisitions
through business combinations & other adjustments and the related
amortization and impairment losses or reversals shall be disclosed separately.
5. Biological
Assets other than
bearer plants
Same as point iii above of PPE
6. Investment (i) Investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investments in Preference Shares;
(c) Investments in Government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) Investments in partnership firms; or
(g) Other investments (specify nature)
Under each classification, details shall be given of names of bodies corporate
that are- subsidiaries, associates, joint ventures, or structured entities, in whom
investments have been made and nature and extent of investment so made in
each such body corporate (showing separately investments which are partly-
paid). Investment in partnership firms along with names of firms, their
partners, total capital and shares of each partner shall be disclosed separately.
(ii) The following shall also be disclosed:
(a) Aggregate amount of quoted investment and market value thereof:
(b) Aggregate amount of unquoted investment, and
(c) Aggregate amount of impairment in value of investment.
7. Trade
Receivables
(i) Trade receivables shall be sub-classified as;
(a) Trade Receivables considered good -Secured;
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 8
(b) Trade Receivables considered good -Unsecured;
(c) Trade Receivables which have significant increase in Credit Risk; and
(d) Trade Receivables – credit impaired
(ii) Allowance for bad and doubtful debts shall be disclosed under relevant
heads separately.
(iii) Debts due by directors or other officers of the company or any of them
either severally or jointly with any other person or debts due by firms or
private companies respectively in which any director is a partner or a director
or a member should be separately stated.
8. Loans (i) Loans shall be classified as-
(a) Security Deposits;
(b) Loans to related parties (giving details thereof);and
(c) Other loans (specify nature).
(ii) Loans Receivables shall be sub-classified as:
(a) Considered good -Secured;
(b) Considered good -Unsecured;
(c) Which have significant increase in Credit Risk; and
(d) Credit impaired;
The above shall also be separately sub-classified as-
(a) Secured, considered good;
(b) Unsecured, considered good; and
(c) Doubtful.
Allowance for bad and doubtful loans shall be disclosed under the relevant
heads separately.
(iv) Loans due by directors or other officers of company or any of them either
severally or jointly with any other persons or amounts due by firms or private
companies respectively in which any director is a partner or a director or a
member should be separately stated.
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 9
9. Bank deposits with more than 12 months maturity shall be disclosed under 'Other financial assets'
10. Other non-
current asset
Other non-current assets shall be classified as-
(i) Capital Advances; and
(ii) Advances other than capital advances shall be classified in same way as
loans above
(iii) Others (specify nature)
CURRENT ASSETS
1. Inventories (i) Inventories shall be classified as-
(a) Raw materials;
(b) Work in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods acquired for trading);
(e) stores and spares;
(f) Loose tools; and
(g) Others (specify nature).
(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories.
(iii) Mode of valuation shall be stated.
2. Investments Same as investment in Non Current Assets.
3. Trade
Receivables
(i) Trade receivables shall be sub-classified as:
(a) Trade Receivables considered good -Secured;
(b) Trade Receivables considered good -Unsecured;
(c) Trade Receivables which have significant increase in Credit Risk; and
(d) Trade Receivables – credit impaired.
(ii) Allowance for bad and doubtful debts shall be disclosed under the
relevant heads separately.
(iii) Debts due by directors or other officers of company or any of them
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 10
either severally or jointly with any other person or debts due by firms or
private companies respectively in which any director is a partner or a director
or a member should be separately stated.
4. Cash & Cash
equivalent
Cash and cash equivalents shall be classified as-
a. Balances with Banks (of the nature of cash and cash equivalents);
b. Cheques, drafts on hand;
c. Cash on hand; and
d. Others (specify nature).
5. Loans Same as Loans in Non Current Assets
6. Other Current
Assets
This is an all-inclusive heading, which incorporates current assets that do not
fit into any other asset categories. Other current assets shall be classified as-
(i) Advances other than capital advances
(1) Advances other than capital advances shall be classified as:
(a) Security Deposits;
(b) Advances to related parties (giving details thereof);
(c) Other advances (specify nature)
(2) Advances to directors or other officers of the company or any of them
either severally or jointly with any other persons or advances to firms or
private companies respectively in which any director is a partner or a director
or a member should be separately stated.
(a) Earmarked balances with banks (for example for unpaid dividend) shall be
separately stated.
(b) Balances with banks to the extent held as margin money or security against
the borrowings, guarantees, other commitments shall be disclosed separately.
(c) Repatriation restrictions, if any, in respect of cash and bank balances shall
be separately stated.
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 11
EQUITY
1. Equity Share
Capital
(a) the number and amount of shares authorised;
(b) the number of shares issued, subscribed and fully paid, and subscribed
but not fully paid;
(c) par value per Share;
(d) a reconciliation of the number of shares outstanding at the beginning
and at the end of the period;
(e) the rights, preferences and restrictions attaching to each class of shares
including restrictionsonthedistributionofdividendsandtherepaymentofcapital;
(f) shares in respect of each class in the company held by its holding
company or its ultimate holding company including shares held by subsidiaries
or associates of holding company or ultimate holding company in aggregate;
(g) shares in the company held by each shareholder holding more than five
per cent. shares specifying the number of shares held;
(h) shares reserved for issue under options and contracts or commitments
for the sale of shares or disinvestment, including the terms and amounts;
(i) for the period of 5 years immediately preceding Balance Sheet date aggregate of
• number & class of shares allotted as fully paid up for non cash consideration;
• number and class of shares allotted as bonus shares; and
• number and class of shares bought back;
(j) terms of any securities convertible into equity shares issued along with
earliest date of conversion in descending order starting from farthest such date
(k) calls unpaid
(l) forfeited shares (amount originally paidup).
2. Other Equity (i) Other Reserves' shall be classified in the notes as-
(a) Capital Redemption Reserve;
(b) Debenture Redemption Reserve;
(c) Share Options Outstanding Account; and
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 12
(d) others (specify nature & purpose of each reserve & amount in respect thereof);
(Additions and deductions since last balance sheet to be shown under each of
the specified heads)
(ii) Retained Earnings represents surplus i.e. balance of the relevant column in
the Statement of Changes in Equity;
(iii) A reserve specifically represented by earmarked investments shall
disclose the fact that it is so represented;
(iv) Debit balance of Statement of Profit and Loss shall be shown as a
negative figure under the head 'retained earnings'. Similarly, the balance of
'Other Equity', after adjusting negative balance of retained earnings, if any,
shall be shown under the head 'Other Equity' even if the resulting figure is in
the negative; and
(v) Under the sub-head 'Other Equity', disclosure shall be made for the
nature and amount of each item.
NON CURRENT LIABLITIES
1. Borrowings (i) borrowings shall be classified as-
(a) Bonds or debentures
(b) Term loans
• from banks
• from other Parties
(c) Deferred payment liabilities
(d) Deposits.
(e) Loans from related parties
(f) Long term maturities of finance lease obligations
(g) Liability component of compound financial instruments
(h) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured.
Nature of security shall be specified separately in each case.
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 13
(iii) where loans have been guaranteed by directors or others, the aggregate
amount of such loans under each head shall be disclosed;
(iv) bonds or debentures (along with the rate of interest, and particulars of
redemption or conversion, as the case may be) shall be stated in descending
order of maturity or conversion, starting from farthest redemption or
conversion date, as the case may be, where bonds/debentures are redeemable
by installments, the date of maturity for this purpose must be reckoned as the
date on which the first installment becomes due;
(v) particulars of any redeemed bonds or debentures which the company
has power to reissue shall be disclosed;
(vi) terms of repayment of term loans and other loans shall be stated; and
(vii) period and amount of default as on the balance sheet date in repayment
of borrowings and interest shall be specified separately in each case.
2. Provisions The amounts shall be classified as-
(a) Provision for employee benefits; and
(b) Others (specify nature).
3. Other Non
Current
Liabilities
(a) Advances; and
(b) Others (specify nature).
CURRENT LIABILITIES
1. Borrowings (i) Borrowings shall be classified as-
(a) Loans repayable on demand
• from banks
• from other parties
(b) Loans from related parties
(c) Deposits
(d) Other loans (specify nature);
Other Disclosures same as Borrowings in Non Current Liabilities
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 14
2.Other
Financial
Liabilities ('Long
term debt is a
borrowing having
a period of more
than 12 months at
the time of
origination)
Other Financial liabilities shall be classified as-
(a) Current maturities of long-term debt;
(b) Current maturities of finance lease obligations;
(c) Interest accrued;
(d) Unpaid dividends;
(e) Application money received for allotment of securities to the extent
refundable and interest accrued thereon;
(f) Unpaid matured deposits and interest accrued thereon;
(g) Unpaid matured debentures and interest accrued thereon; and
(h) Others (specify nature).
3. Other Current
Liabilities
The amounts shall be classified as-
(a) revenue received in advance;
(b) other advances (specify nature);and
(c) others (specify nature);
4. Provisions The amounts shall be classified as-
(i) provision for employee benefits; and
(ii) others (specify nature)
OTHER DISCLOSURES:
1. The presentation of liabilities associated with group of assets classified as held for sale and non-
current assets classified as held for sale shall be in accordance with the relevant Indian Accounting
Standards (Ind ASs)
2. The amount of dividends proposed to be distributed to equity and preference shareholders for the
period and title related amount per share shall be disclosed separately. Arrears of fixed cumulative
dividends on irredeemable preference shares shall also be disclosed separately.
3. Where in respect of an issue of securities made for a specific purpose the whole or part of amount
has not been used for the specific purpose at the Balance sheet date, there shall be indicated by way
of note how such unutilized amounts have been used or invested.
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 15
4. When a company applies an accounting policy retrospectively or makes a restatement of items in
the financial statements or when it reclassifies items in its financial statements, the company shall
attach to Balance Sheet, a "Balance Sheet" as at beginning of earliest comparative period presented.
5. Share application money to the extent not refundable shall be shown under the head Equity & to the
extent refundable shall be separately shown under 'Other financial liabilities'.
6. Preference shares including premium received on issue, shall be classified and presented as 'Equity'
or 'Liability' in accordance with the requirements of the relevant Indian Accounting Standards.
Accordingly, the disclosure and presentation requirements in that regard applicable to the relevant
class of equity or liability shall be applicable mutatis mutandis to the preference shares. For
instance, plain vanilla redeemable preference shares shall be classified and presented under 'non-
current liabilities' as 'borrowings' and the disclosure requirements in this regard applicable to such
borrowings shall be applicable mutatis mutandis to redeemable preference shares.
10. Compound financial instruments such as convertible debentures, where split into equity and
liability components, as per Indian Accounting Standards, shall be classified and presented under
the relevant heads in 'Equity' and 'Liabilities'.
Statement of Profit and Loss for the period ended................
Particulars Note No. CY PY
I. Income
Revenue from operations
Other Income
Total Income
II. EXPENSES
Cost of materials consumed
Purchases of Stock-in-Trade
Changes in inventories of finished goods, Stock-in -Trade and work-in-progress
Employee benefits expense
Finance costs
Depreciation expenses and amortization
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 16
Other expenses
Total expenses
Profit/(loss) before exceptional items and tax
(+/-) Exceptional Items
Profit/ (loss) before tax
Tax expense:
(1)Current tax
(2)Deferred tax
Profit (Loss) for the period from continuing operations
III. Profit/(loss) operations from discontinued operations
Tax expenses of discontinued operations
Profit/(loss) from Discontinued operations (after tax)
Profit/(loss) for the period
IV. Other Comprehensive Income
A. (i) Items that will not be reclassified to profit or loss
(ii)Income tax relating to items that will not be reclassified to profit or loss
B. (i) Items that will be reclassified to profit or loss
(ii) Income tax relating to items that will be reclassified to profit or loss
V. Total Comprehensive Income for the period
VI. EPS (for continuing operation):
Basic
Diluted
VII. EPS (for discontinued operation):
Basic
Diluted
VIII. EPS (for discontinued & continuing operation)
Basic
Diluted
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 17
Disclosures:
1. Revenue from
operations
Revenue from operations shall disclose separately in the notes
(a) sale of products
(b) sale of services; and
(c) other operating revenues.
2. Finance Cost Finance costs shall be classified as-
(a) interest;
(b) dividend on redeemable preference shares;
(c) exchange differences regarded as an adjustment to borrowing costs; and
(d)other borrowing costs (specify nature).
3. Other income other income shall be classified as-
(a) interest Income;
(b) dividend Income; and
(c) other non-operating income (net of expenses directly attributable to such income)
4. Other
Comprehensive
Income
OCI shall be classified into-
(A) Items that will not be reclassified to profit or loss
(i) Changes in revaluation surplus;
(ii) Re-measurements of the defined benefit plans
(iii) Equity Instruments through OCI;
(iv) Fair value changes relating to own credit risk of financial liabilities
designated at FVTPL;
(v) Share of OCI in Associates & Joint Ventures, to the extent not to be
classified into profit or loss; and
(B) Items that will be reclassified to profit or loss;
(i) Exchange differences in translating the FS of a foreign operation;
(ii) Debt instruments through Other Comprehensive Income;
(iii) The effective portion of gains and loss on hedging instruments in a
cash flow hedge;
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 18
(iv) Share of OCI in Associates and Joint Ventures, to the extent to be
classified into profit or loss; and
(v) Others (specify nature)
Additional information regarding aggregate expenditure/income.
(a) Employee Benefits expense (showing separately (i) salaries and wages, (ii) contribution to
provident and other funds, (iii) share based payments to employees, (iv) staff welfare expenses).
(b) Depreciation and amortisation expense;
(c) Any item of income or expenditure which exceeds 1% of the revenue from operations or
`.10,00,000, whichever is higher, in addition to the consideration of 'materiality.
(d) Interest Income; (e) Interest Expense (f) Dividend income; (g) Net gain/loss on sale of investments;
(h) Net gain/loss on foreign currency transaction & translation (other than considered as finance cost);
(i) Payments to the auditor as (a) auditor, (b) for taxation matters, (c) for company law matters, (d) for
other services, (e) for reimbursement of expenses;
(j) In case of companies covered under section 135, amount of expenditure incurred on corporate
social responsibility activities; &
(k) Details of items of exceptional nature;
Consolidated financial Statements
1. In addition to requirements of schedule III as above, CFS shall disclose the information as per the
requirements specified in the applicable IND AS notified under Companies (Indian Accounting
Standards) Rules 2015, including following, namely:
(i) Profit or loss and total comprehensive income attributable to 'non-controlling interest ‘and to
‘owners of the parent' in P&L. The aforesaid disclosures for 'total comprehensive income shall also
be made in the statement of changes in equity.
(ii) 'Non-controlling interests' in Balance Sheet & in Statement of Changes in Equity, within equity,
shall be presented separately from equity of the 'owners of the parent'.
(iii) Investments accounted for using the equity method.
AJ Education NeXt SCHEDULE III DIVISION II
Lecture No: ____ Date: ___/___/_____ 35. 19
2. In CFS, the following shall be disclosed by the way of additional information
Name of
Entity in
group
Net Assets Share in Net P&L Share in OCI Share in TCI
As % of
Consolidated
Net Assets
`. As % of
Consolidated
P&L
`. As % of
Consolidated
OCI
`. As % of
Consolidated
TCI
`.
A. Parent
1.Subsidiaries
2. NCI in Sub.
B. Associate
C. JV
Note:
1. In all of the above separate bifurcation of Indian & Foreign should be given
2. All subsidiaries, associates and joint venture (whether Indian or Foreign) will be covered under
consolidated financial statement.
3. An entity shall disclose the list of subsidiaries or associates or joint venture which have been
consolidated in the consolidated financial statement along with the reason of not consolidating.
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IND AS 19
A2. Accumulating paid absences are those that are carried forward and can be used in future periods if
current period’s entitlement is not used in full. Accumulating paid absences may be either
• Vesting: employees are entitled to a cash payment for unused entitlement or
• Non-vesting: employees are not entitled to a cash payment for unused entitlement hence the
obligation for such leaves are measured based on probability of leave that is expected to be availed
by the employee. The entity will recognise liability in the books equal to 150 (30 x 5) days of paid
casual leaves and 10 (10 x 1) days of sick pay.
A5. An entity shall recognise expected cost of profit-sharing & bonus payments when, and only when:
i. entity has a present legal/constructive obligation to make such payments as a result of past events &
ii. a reliable estimate of the obligation can be made.
Measurement of obligation reflects the possibility that some employees may leave without
receiving a bonus. The company shall recognize a liability and an expense of an amount of ` 9
crores for the financial year 20X1-20X2 (i.e. 4.5% of `200 crores).
A6. Accumulating paid absences are those that are carried forward and can be used in future periods if
current period’s entitlement is not used in full. Accumulating paid absences may be either
• Vesting: employees are entitled to a cash payment for unused entitlement or
• Non-vesting: employees are not entitled to a cash payment for unused entitlement hence the
obligation for such leaves are measured based on probability of leave that is expected to be availed
by the employee.
No of employees to utilised carried forward the leave 8
No of leave that will be utilised from carried forward leave (6.5 days -5 days) 1.5 days
No of days for which the Provisions is to be created (1.5 days * 8) 12 days
A7. No benefit is attributed to service before the age of 25 because service before that date does not
lead to benefits. A benefit of ` 140 is attributed to each subsequent year.
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Period of service Expense Per Year to be considered
Before Age of 25 0
Before Age of 25 140
A8. Employee benefits is Present Value of following
Period Amount of Benefit Years Annual expenses
Employees expected to leave after 20 years
First 20 years of service 50% of expected medical cost 20 2.5%
Any no of years after 20 Nil
Employees expected to leave after 10 year but less than 20 years
First 10 years of service 20% of expected medical cost 10 2%
Any no of years after 10 Nil
Employees expected to leave in less than 10 years
Any no of years less than 10 Nil
A9. Paras Pvt. Ltd. should recognise a liability for the contributions adjusted for the time value of
money and an equal expense in profit or loss. 30 million / 10 years = 3 million per year
A10.
PV of Obligation A/c. Plan Asset A/c.
By Bal b/d 1400 To Bal b/d 1140
By Interest 112 To Actual Return 24
1400 * 8%
By CSC 55 To Current Contri. 111
To Bal b/d 1580 By Actuarial Loss 13 By Bal b/d 1275
Calculation of Net Interest
Interest on obligation @ 8% (1400 * 8%) 112
Interest on Plan asset @ 8% (1140 * 8%) 91
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Net Interest 21
Calculation of Net Actuarial G/L
Actual Return on Plan Asset 24
Interest on opening balance (expected return) (1140 * 8%) 91
Actuarial Loss on plan Asset 67
Actuarial Loss on Obligation 13
Net Actuarial Loss 80
1. Interest A/c.…………….Dr. (Net interest P&L) 112
CSC…………………………Dr. (P&L) 55
Actuarial Loss………………Dr. (OCI) 13
To Provision of Obligation 180
2. Plan Asset…………………..Dr. (Current Contri.) 111
To Cash Bank 111
3. Actuarial Loss……………….Dr. (OCI) 67
Plan Asset…………………..Dr. (Actual Return) 24
To Expected Returns (@ 8%) (Net Interest P&L) 91
Profit & Loss Extract for the year ended ………….
Current service Cost 55
Net Interest 21
Other Comprehensive Income
Remeasurement – Net Actuarial Loss 80
Balance Sheet Extract as on …………………
PV of provision for obligation 1580
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Less: FV of Plan Asset (1275)
Net defined benefit liability 305
A14. Past service cost, which is the change in the present value of the defined benefit obligation for
employee service in prior periods, resulting from a plan amendment (introduction or withdrawal of,
or changes to, a defined benefit plan) or a curtailment (a significant reduction by the entity in the
number of employees covered by a plan); and Accordingly OPQ Ltd increased the pension to 3% of
the final salary for each year of service starting from 1stApril, 20X1 to 1
stApril,20X8. The company
would recognize the total amount of ` 4,96,000 (i.e. ` 2,75,000 + ` 2,21,000) immediately as
expenses (past service cost) & provision for obligation, as for the purpose of recognition it does not
make any difference as to whether the benefits are already vested or not.
A15. Please cancel the question
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IND AS 33
A2. Solution
The calculation of basic EPS is as follows:
` `
Profit 100,000
Less Dividends payable for the period:
Preference (5,000 × ` 5) 25,000
Ordinary (10,000 × ` 2) 20,000 (45,000)
Undistributed earnings 55,000
Allocation of undistributed earnings:
Allocation per ordinary share = X
.’. Allocation per preference share = 0.5X
(X × 10,000) + (0.5X × 5,000) = ` 55,000
.’. X = 4.4 & 0.5 X = 2.2
Dividend per share are: Preference/ share Ordinary/ Share
Distributed earnings 5.00 2.00
Undistributed earnings 2.20 4.40
Totals 7.20 6.40
A3. Adjustments for the purpose of calculating EPS are made as follows:
Particulars Amount (`̀̀̀) Amount (`̀̀̀)
Profit after tax 150,000
Amortisation of discount on issue of increasing-rate
preference shares (Refer Note 1) (18,000)
Discount on repurchase of 8% preference shares (Refer Note 2) 1,000 (17,000)
Profit attributable to ordinary equity holders
for BEPS (Refer Note 3-5) 1,33,000
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Notes:
1. The original discount on issue of the increasing-rate preference shares is treated as amortised to
retained earnings, and treated as preference dividends for EPS purposes and adjusted against profit
attributable to the ordinary equity holders. There is no adjustment in respect of dividend, because
these do not commence until 20X5. Instead, the finance cost is represented by the amortisation of
the discount in the dividend-free period. In future years, the accrual for the dividend of `20,000 will
be deducted from profits.
2. The discount on repurchase of the 8% preference shares has been credited to equity so should be
added to profit.
3. The dividend on the 5% preference shares has been charged to the income statement, because the
preference shares are treated as liabilities, so no adjustment is required for it from the profit.
4. No accrual for the dividend on the 8% preference shares is required, because they are non-
cumulative. If a dividend had been declared for the year, it would have been deducted from profit
for the purpose of calculating basic EPS, because the shares are treated as equity and the dividend
would have been charged to equity in the financial statements.
5. The 7% preference shares were converted at the beginning of the year, so there is no adjustment in
respect of the 7% preference shares, because no dividend accrued in respect of the year. The
payment of the previous year’s cumulative dividend is ignored for EPS purposes, because it will
have been adjusted for in the prior year. Similarly, the excess of the fair value of additional
ordinary shares issued on conversion of the convertible preference shares over the fair value of the
ordinary shares to which the shareholders would have been entitled under the original conversion
terms would already have been deducted from profit attributable to the ordinary shareholders, and
no further adjustment is required.
A4. In the given situation, ` 1 per share is the excess payment made by the company amounting to `
1,00,000 in all. The amount of ` 1,00,000 will be deducted from the earnings of the year 20X3-
20X4 while calculating the basic EPS of year 20X3-20X4.
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A7. The number of ordinary share equivalents that would be included in the basic EPS calculation on a
weighted basis is as follows: (100,000 × ` 1.75) / ` 2.50 = 70,000 shares.
A8. 20X2-20X3 20X1-20X2
Calculation of earnings `’000 `’000
Profit for the year 550 450
Less: Preference shares dividend (50) (50)
Earnings (A) 500 400
Number of ordinary shares No. of shares No. of shares
‘000 ‘000
Shares in issue for full year 4,000 4,000
Capitalization issue at 1stOctober20X2 1,000
Number of shares (B) 5,000 4,000
BEPS (A/B) 10Paise 10Paise
Basic EPS Restated for comparative (400 / 4000 + 1000) 8 Paise
A12. Calculation of earnings for DEPS / NAPESH for DEPS
Profit after tax 64,000
Add: saving of interest (25000 * 4%) 1000
Less: Additional Bonus@1% 10
Net Increase in Profit 990
Less: Tax @20% 198 792
NAPESH 64,972
A13. BEPS = `̀̀̀500,000 = 0.5
10,00,000
DEPS = `̀̀̀500,000 + ( `̀̀̀ 100,000 * 10%) * 0.79 = 0.498
10,00,000 + (1000 Bonds * 20 Shares)
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Incremental EPS = `̀̀̀ 100,000 * 10% * 0.79 = 0.395
1000 Bonds * 20 Shares
It is Assume all bonds are converted to shares, even though this converts ` 100 worth of bonds into
20 shares worth only ` 90 and is therefore not economically rational.
A16. Particulars NAPESH WANES EPS (`̀̀̀)
BEPS: 20X7 500,000 40,00,000 0.13
20X8 600,000 40,00,000 0.15
DEPS: 20X7 500,000 42,62,500 0.12
(40,00,000 + [630,000*(120-70)/120])
20X8 600,000 354,375 0.14
(40,00,000 + [630,000*(160-70)/160])
A18. Particulars BEPS DEPS
NAPESH 200,000 200,000
Converted Shares 219
(`25000*5%*3/12*0.7 )
Unconverted shares 2,625
(`75000*5%*0.7)
Total (A) 200,000 202,844
WANES:
Outstanding 10,00,000 10,22,500
Converted shares 22,500 7,500
((`25,000/`100*120shares)*9m/12m) ((`25,000/`100*120shares)*3m/12m)
Unconverted shares 90,000
(`75,000/`100*120shares)
Total (B) 10,22,500 11,20,000
EPS (A/B) 0.196 or 0.20 0.181 or 0.18
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A19. 20X3 20X2
Trading results ` `
A. Profit before interest, fair value movements and tax 895,000 825,000
B. Interest on 8% convertible loan stock (100,000) (75,000)
(1250000 * 8%) (1250000 * 8%*9/12)
795,000 750,000
Taxation @ 33% on (A-B) (262,350) (247,500)
532,650 502,500
C. Change in fair value of embedded option (2,650) (2,500)
Net Profit after Tax 530,000 500,000
Number of equity shares outstanding 1,500,000 1,500,000
Basic EPS 35 paise 33 paise
Diluted EPS 20X3 20X2
NAPESH: Profit after tax as per BEPS 530,000 500,000
Add Interest 67,000 50,250
(1250000*8%*0.67) (1250000*8%*9/12*0.67)
Add: Fair value change loss 1,775 1,675
(2650*0.67) (2500*0.67)
Net Profit After tax A 5,98,775 5,51,925
WANES: Number of equity shares for BEPS 1,500,000 15,00,000
Add: Shares on Conversion 16,87,500 12,65,625
(12500*135) (12500*135*9/12)
Total B 31,87,500 27,65,625
DEPS A/B 0.187 0.199
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A22. BEPS Quarters
First Second Third Fourth Full year
Numerator (`) 1,100,000 1,200,000 (400,000) 1,000,000 2,900,000
Denominator:
Ordinary shares outstanding 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Retail site contingency – 3,3331 6,667
2 10,000 5,000
3
Earnings contingency4 – – – – –
Total shares 1,000,000 1,003,333 1,006,667 1,010,000 1,005,000
Basic earnings per share (`) 1.10 1.20 (0.40) 0.99 2.89
1 5,000 shares ×2/3
2 5,000 shares + (5,000 shares ×1/3)
3 (5,000shares×8/12) + (5,000shares×4/12)
4 The earnings contingency has no effect on basic earnings per share because it is not certain
that the condition is satisfied until the end of the contingency period. The effect is negligible for the
fourth- quarter and full-year calculations because it is not certain that the condition is met until the
last day of the period.
First Second Third Fourth Full year
Numerator (`) 1,100,000 1,200,000 (400,000) 1,000,000 2,900,000
Denominator:
Ordinary shares outstanding 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Retail site contingency – 5,000 10,000 10,000 10,000
Earnings contingency –5 300,000
6 –
7 900,000
8 900,000
Total shares 1,000,000 1,305,000 1,010,000 1,910,000 1,910,000
Diluted earnings per share (`) 1.10 0.92 (0.40)9 0.52 1.52
5 Company A does not have year-to-date profit exceeding `2,000,000 at 31March 20X1. Standard
does not permit projecting future earnings levels & including the related contingent shares.
6 [(` 2,300,000 – ` 2,000,000) ÷ 1,000] × 1,000 shares = 300,000 shares.
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7 Year-to-date profit is less than ` 2,000,000.
8 [(` 2,900,000 – ` 2,000,000) ÷ 1,000] × 1,000 shares = 900,000 shares.
9 Because the loss during the third quarter is attributable to a loss from a discontinued operation,
the anti-dilution rules do not apply. The control number (i.e. profit or loss from, continuing
operations attributable to the equity holders of the parent entity) is positive. Accordingly, the effect
of potential ordinary shares is included in the calculation of diluted earnings per share.
A26. Subsidiary’s earnings per share
Basic EPS ` 5,400 (a) – `400 (b) = ` 5.00
1,000 (c)
Diluted EPS ` 5,400 (d) = ` 3.66
(1,000 + 75 (e) + 400(f))
Notes:
(a) Subsidiary's profit attributable to ordinary equity holders.
(b) Dividends paid by subsidiary on convertible preference shares.
(c) Subsidiary's ordinary shares outstanding.
(d) Subsidiary's profit attributable to ordinary equity holders (` 5,000) increased by ` 400 preference
dividends for the purpose of calculating diluted earnings per share.
(e) Incremental shares from warrants, calculated: [(` 20 – ` 10) ÷ `20] × 150.
(f) Subsidiary's ordinary shares assumed outstanding from conversion of convertible preference shares,
calculated: 400 convertible preference shares × conversion factor of 1.
Consolidated earnings per share
Basic EPS ` 12,000(a) + ` 4,300(b) = ` 1.63
10,000(c)
Diluted EPS ` 12,000 + ` 2,928(d) + ` 55(e) + ` 1,098(f) = ` 1.61
10,000
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(a) Parent's profit attributable to ordinary equity holders of the parent entity.
(b) Portion of subsidiary's profit to be included in consolidated basic earnings per share, calculated:
(800 × ` 5.00) + (300 ×Re 1.00).
(c) Parent's ordinary shares outstanding.
(d) Parent's proportionate interest in subsidiary's earnings attributable to ordinary shares, calculated:
(800 ÷ 1,000) × (1,000 shares × `3.66 per share).
(e) Parent's proportionate interest in subsidiary's earnings attributable to warrants, calculated:
(30 ÷ 150) × (75 incremental shares × `3.66 per share).
(f) Parent's proportionate interest in subsidiary's earnings attributable to convertible preference shares,
calculated: (300 ÷ 400) × (400 shares from conversion × ` 3.66 per share).
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IND AS 37
A3. As per Ind AS 37 states “A past event that leads to a present obligation is called an obligating
event. For an event to be an obligating event, it is necessary that the entity has no realistic
alternative to settling the obligation created by the event. This is the case only:
(a) where the settlement of the obligation can been forced by law ;or
(b) in the case of a constructive obligation, where the event (which may be an action of the entity)
creates valid expectations in other parties that the entity will discharge the obligation.”
On the basis of the above, provision should be recognised as soon as the obligating event takes
place because the entity is under legal obligation to restore the sea bed, provided the other
recognition criteria are met. Moreover, the amount of the provision would depend on the extent of
the obligation arising from the obligating event. In the instant case, an obligating event is the laying
of cables under the sea. To the extent the cables have been laid down under the sea, a legal
obligation has arisen and to that extent provision for restoration of sea bed should be recognised.
A5. As per the standard, where an inflow of economic benefits is probable, an entity should disclose a
brief description of the nature of the contingent assets at the end of the reporting period, and, where
practicable, an estimate of their financial effect, measured using the principles set out in Ind AS 37.
Amount of contingent asset to be disclosed (2,50,00,000 * 85%) 2,12,50,000
Amount of provision to be created for 30,00,000
A6. A provision is to be recognized only if there probability of making payment to settle the obligation
is more compare to the probability of not making the payment to settle the obligation. Where there
are a number of similar obligation, the probability of outflow to settle an obligation, is determined
for the class of obligation as a whole, although the likelihood of outflow for any one item may be
very small, it may be probable that outflow of resources will be require to settle the class of
obligation as a whole e.g. warranty provisions. The expected value of the cost of repairs is: (75% of
nil) + (20% of 1m) + (5% of 4m) = ` 4,00,000
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A7. Measurement: Reliable estimation of obligation
i. The amount recognised as provision, shall be the best estimate of expenditure require to settle the
present obligation at the reporting date.
ii. When the effect of time value of money is material, the amount of provision shall be present value
of expenditure expected to be required to settle the obligation.
Future events that may affect the amount require to settle the obligations shall be considered in
amount of provision, where there is sufficient objective evidence that they will occur. However, an
entity does not anticipate the development of a completely new event unless it is supported by
sufficient objective evidence.
Calculation of obligation
Present Value of obligation ` 30,00,000
Add: Expected Increase in obligation @ 5% `1,50,000
Total 31,50,000
A9. Reimbursement: Where some or all of the expenditure require to settle provision is expected to be
reimbursed by another party, the reimbursement shall be recognised when and only when it is
virtually certain that the reimbursement will be received if the entity settles the obligation.
Since the understanding results in an enforceable agreement,
Balance sheet: Reimbursement Right (` 30,00,000 x 30%) ` 9,00,000
Provision will be recognised for `30,00,000
P&L: Net Expenses (net of reimbursement) `21,00,000
Reimbursement right shall be treated as a separate asset and shall not be offset with the provision.
A10. Ind AS 37 provides that in rare cases it not clear whether there is a present obligation, for example,
in a lawsuit, it may be disputed either whether certain events have occurred or whether those events
result in a present obligation. In such a case, an entity should determine whether a present
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obligation exits at the end of the reporting period by taking account of all available evidence, for
example, the opinion of experts.
In the present case, the company is not confident that whether it would win the appeal. By taking
into account the opinion of the legal counsel, it is not sure that whether the company would win the
appeal. On the basis of such evidence, it is more likely than not that a present obligation exists at
the end of the reporting period. Therefore, the entity should recognise a provision. The company
should provide for a liability of ` 1,00,00,000.
A13. Onerous contract are one in which unavoidable cost of meeting the obligation under the contract
exceeds the economic benefit expected to be received under the contract. The unavoidable cost
under the contract reflects the least net cost of existing the contract, which is lower of:-
i. Cost of fulfilling contract &
ii. Any compensation or penalties arising from failure to fulfill it.
It’s a case of onerous contact. Hence provisions will be created for least of the following
Cost of existing the contract 60,000
Loss on executing the contract (500,000 – 4,50,000) 50,000
.’. Provision 50,000
A14. Financial statements deal with financial position as on the reporting date and not financial position
in future, therefore no provision is recognised of any cost to be incurred for operating in future. i.e.
provisions are created only for those liabilities, which are existing at the reporting date.
Provisions shall not be for future operating losses. As the future operating loss does not meet the
definition of liability and recognition criteria of provision, no provision is recognized for it. Since
Ind AS 37 prohibits the recognition of future operating losses, so X Packaging Ltd. should not
include these future operating losses in a provision for restructuring even though these losses relate
to the disposal group.
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A15. Constructive obligation is an obligation that is derived from entities action e.g. by established
pattern of past practices, published policies or sufficient specific current statement through which
entity has indicate to other parties, that it will accept certain responsibility and as a result entity has
created valid expectation on part of those other parties that it will discharge those responsibilities.
As per Ind AS 37, the conditions prescribed are:
(a) there should be detailed formal plan of restructuring;
(b) which should have raised valid expectations in the minds of those affected that the entity would
carry out the restructuring by announcing the main features of its plans to restructure.
The board of directors did discuss and formalise a formal plan of winding up the operation in the
above said state. This plan was communicated to the parties affected and created a valid
expectation in their minds that X Cements Ltd. would go ahead with its plans to close down
operations in that state. Thus, there is a constructive obligation that needs to be provided at year-
end.
A17. A provision is made for a present obligation arising out of a past event (obligating event).
Overhauling does not arise out of past event. Even a legal requirement to overhaul does not make
the cost of overhaul a liability, because no obligation exists to overhaul the ships independently of
the company’s future actions - the company could avoid the future expenditure by its future actions
for example by selling the ships. So there is no present obligation.
As per the standard, financial statements deal with the financial position of an entity at the end of
its reporting period and not its possible position in the future. Therefore, no provision is recognised
for costs that need to be incurred to operate in the future. The only liabilities recognised in an
entity’s balance sheet are those that exist at the end of the reporting period.
Therefore, the accounting policy of X Shipping Ltd. is not correct. The company should adopt the
component approach in Ind AS 16, Property, Plant and Equipment, for accounting for the
refurbishment cost.
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A19. A provision of ` 60,000 has been recognised for expected warranty claims on products sold during
the last three financial years. It is expected that the majority of this expenditure will be incurred in
the next financial year, and all will be incurred within two years after the reporting period.
A20. A provision of ` 300 million has been recognised for decommissioning costs. These costs are
expected to be incurred between 2077 and 2087; however, there is a possibility that
decommissioning will not take place until 2117–2127. If the costs were measured based upon the
expectation that they would not be incurred until 2117–2127 the provision would be reduced to `
136 million. The provision has been estimated using existing technology, at current prices, and
discounted using a real discount rate of 2%.
A21. Cancelled
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IND AS 38
A1. An entity may have a portfolio of customer or a market share and expects that because of its efforts
in building the customer relationship and loyalty, customer would continue to trade with the entity.
However, in absence of any legal rights to protect or other ways to control the relationship with
customer or loyalty of customer, the entity usually has insufficient control over the expected
benefits hence such relationship are not considered as assets. Market share does not meet the
definition of intangible assets as is not identifiable i.e. It is neither separable and nor arised from
contractual or legal rights.
A3. In this situation, the entity has no legal rights to the customer relationship, but exchange
transactions have taken place that evidence separability of the asset and the control that the entity is
able to exercise over the asset. Therefore, the list is an intangible asset. An intangible asset are
recognised only if following conditions are met.
a. It is probable that expected future economic benefit attributable to asset, will flow to the entity and
b. Cost of asset can be measurable reliably.
Accordingly, the entity may not recognise the asset because the cost of generating the customer list
internally cannot be distinguished from the cost of developing the business as a whole.
A4. If asset is acquired separately the cost would include the expenses directly attributed to preparing
the asset for its intended use accordingly
Calculation of purchase price of software
List price (30,00,000 - 5%) 28,50,000
Non refundable purchase Tax 50,000
Customisation cost 7,00,000
Total Cost 36,00,000
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A6. If asset is acquired separately the cost would include the expenses directly attributed to preparing
the asset for its intended use accordingly
Particulars Amount
Cash paid 600,000
Deferred consideration Present value of ` 400,000 3,63,636
Purchase Tax 1,00,000
Legal fees 87,000
Consultancy fees for implementation 1,20,000
Total cost 12,70,636
If asset is purchased on deferred credit terms, than the asset should be recognised at its cash price
and the difference between the cash price and the total amount payable is recognised as interest
expense over the term of credit.
A7. Acquired in exchange of Non monetary asset: In this case, the intangible asset is recognised at its
fair value. However, if the fair value of asset acquired is not clearly evident, than the fair value of
asset given up should be considered to be the cost of asset acquired. If the fair value of asset
acquired as well as asset given up is not evident then the acquired asset is recognised cost of asset
given up. Transaction at fair value of asset received adjusted for any cash received / paid.
.’.(a) patent is measured at ` 18,00,000, & (b) it is measured at ` 20,00,000 (18,00,000 + 2,00,000).
A10. An Asset is a resource of enterprise which is controlled by enterprise and from which future
economic benefits are expected to be received by the enterprise.
An asset is considered to be in control of entity when both the following conditions are satisfied.
1. Entity has a power to obtain economic benefit from that asset &
2. It can restrict others from deriving the those benefits from the assets.
Although, without doubt the skill sets of the employees make them extremely valuable to the
company, however it does not have control over them. Merely having good HR policies would not
make them eligible to be recognised as an intangible asset.
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A12. X should recognise intangible asset in respect of consideration paid towards ‘Non- Compete Fee’.
However, amount paid for obtaining skilled staff amounting to ` 30,00,000 does not meet the
definition of intangible asset since X Ltd. has not established any right over the resource and should
be expensed. The entity has insufficient control over the expected future economic benefits arising
from a team of skilled staff.
Therefore, ` 50,00,000 will be separately recognised as an intangible asset, whereas amount paid
for obtaining skilled staff does not meet the recognition criteria. However, since it is acquired in a
business combination, it forms part of the goodwill recognised at the acquisition date.
The value of goodwill is ` 1,00,00,000 (` 1,50,00,000 – ` 50,00,000).
A13. If acquired in business combination: If the intangible assets are identifiable and their fair value is
available than they are recognised as separate intangible asset at their fair values. However, if they
are not identifiable, they are subsumed in the value of goodwill. Further No intangible assets are
generated from the expenses incurred in research phase hence these expenses should be expensed
out in the year of incurrence. The intangible assets arising from development phase shall be
recognised if and only if following criteria are met.
X Ltd. should initially recognise the acquired “in house research project’’ at its fair value i.e., `
10,00,000. Research cost of ` 5,00,000 and cost of ` 2,00,000 for establishing technical feasibility
should be charged to profit & loss. Costs incurred from the point of technological feasibility/asset
recognition criteria until the time when development costs are incurred are capitalised. So the
intangible asset should be recognised at ` 17,00,000 (` 10,00,000 + ` 7,00,000).
A17. X Pharmaceutical Ltd. is advised as under:
1. It should recognise the drug license as an intangible asset, because it is a separate external purchase,
separately identifiable asset and considered successful in respect of feasibility and probable future
cash inflows. The drug license should be recorded at ` 1,00,00,000.
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2. It should recognise the brand as an intangible asset because it is purchased as part of acquisition
and it is separately identifiable. The brand should be amortised over a period of 15 years. The
brand will be recorded at ` 3,00,00,000.
3. The advertisement expenses of ` 1,00,00,000 should be expensed off.
4. The development cost incurred during the financial year 20X1-20X2 should be capitalised. Cost of
intangible asset (Drug A) as on 31stMarch,20X2
Opening cost `5,00,00,000
Development cost `5,00,00,000
Total cost `10,00,00,000
5. Research expenses of ` 50,00,000 incurred for developing ‘Drug B’ should be expensed off since
technological feasibility has not yet established.
A18. Expenditure of ` 1,00,00,000 though increased future economic benefits, but it does not result in
creation of an intangible asset. Such promotional cost should be expensed off.
A19. Value as on 31stMarch, 20X2
Original cost `3,00,000
Less:amortisation (`60,000)
NetValue `2,40,000
Value as on 31stMarch, 20X3
Carrying Amount 01/04/20X2 2,40,000
Impairment loss (90,000)
Revised Carrying Amount 1,50,000
Depreciation for 20X2 – 20X3 (150000 / 2) 75,000
Closing Carrying Amount 75,000
Value as on 31stMarch, 20X4
Carrying Amount 01/04/20X3 75,000
Revised Carrying Amount 300,000
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.’. Reversal of impairment loss 225,000
Allocation of reversal of impairment loss
Credited to P&L 90,000
Credited to Revaluation Reserve 135,000
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IND AS 113
Q3. Determination of Enterprise Value of XYZ Ltd.
Particulars `̀̀̀ in crore
EBITDA as on the measurement date 40
EV/EBITDA multiple as on the date of valuation 8
Enterprise value of XYZ Ltd. 320
Determination of subsequent measurement of XYZ Ltd.
Particulars `̀̀̀ in crore
Enterprise Value of XYZ Ltd. 320
ABC Ltd.’s share based on percentage of holding (5% of 320) 16
Less: Liquidity discount & Non-controlling stake discount (5%+5%=10%) (1.6)
Fair value of ABC Ltd.’s investment in XYZ Ltd. 14.4
A4. Determination of equity value of PT Ltd.
(`̀̀̀ in crore)
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Cash flows 187.1 187.6 121.8 269 278.8
Terminal Value 3,965
Discount rate 0.9009 0.8116 0.7312 0.6587 0.5935
Free Cash Flow
available to the firm 168.56 152.26 89.06 177.19 2,518.69
Total of all years 3,105.76
Less: Debt (1,465)
Add: Cash & Cash equivalent 106.14
Equity Value of PT Ltd. 1,746.90
No. of Shares 85,284,223
Per Share Value 204.83
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A5. Equity Valuation of KK Ltd.
Particulars Weights (`̀̀̀ in crore)
As per Market Approach 50 5268.2
As per Income Approach 50 3235.2
Enterprise Valuation based on weights (5268.2 x 50%) + (3235.2 x 50%) 4,251.7
Less: Debt obligation as on measurement date (1465.9)
Add: Surplus cash & cash equivalent 106.14
Add: Fair value of surplus assets and liabilities 312.40
Enterprise value of KK Ltd. 3204.33
No. of shares 85,284,223
Value per share 375.72
