Ind AS on Assets of the Financial Statements – CA Final FR Study Material

Ind AS on Assets of the Financial Statements – CA Final FR Study Material is designed strictly as per the latest syllabus and exam pattern.

Ind AS on Assets of the Financial Statements – CA Final FR Study Material

Ind AS 2: Inventories
Scope (Based On Para Nos. 3 To 5)Scope (Based On Para Nos. 3 To 5)

Question 1.
Ind AS 2 does not apply to the measurement of inventories held by certain categories of persons. In this case, whether the other requirements of this Standard are applicable to these inventories?
Answer:
Measurement criteria is not applicable to the inventories held by pro-ducers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realizable value and inventories held by the commodity broker-traders who measure their inventories at fair value less cost to sell.

Note:
Paragraphs 4 and 5 of Ind AS 2 clearly state that these types of inventories are excluded from only the measurement requirements of this Standard.

Thus, the other requirements laid down in the Standard are applicable. For example, disclosure requirements of this Standard are applicable to these types of inventories.

Cost (Based On Para Nos. 10 To 17)

Question 2.
Inventories include ‘materials and supplies awaiting use in the production process’.
Whether packing material and publicity material are covered by the term ‘materials and supplies awaiting use in the production process’?
Answer:
While the primary packing material may be included within the scope of the term ‘materials and supplies awaiting use in the production process’ but the secondary packing material and publicity material cannot be so included, as these are selling costs which are required to be excluded as per Ind AS 2.
Where,

Primary packing material is one which is essential to bring an item of inventory to its saleable condition, for example, bottles, cans etc., in case of food and beverages industry.
Other packing material required for transporting and forwarding the material will normally be in the nature of secondary packing material.

Question 3.
As per Ind AS 2, selling costs are excluded from the cost of inventories and are required to be recognized as an expense in the period in which these are incurred, whereas, AS 2 excludes both selling and distribution costs.
Whether the distribution costs would now be included in the cost of inventories under Ind AS 2?
Answer:
Selling and distribution costs are generally used as single term because both are related, as selling costs are incurred to effect the sale and the distribution costs are incurred by the seller to complete a sale transaction by making the goods available to the buyer from the point of sale to the point at which the buyer takes possession. Since these costs are not related to bringing the goods to their present location and condition, the same are not included in the cost of inventories.

Accordingly, though the word ‘distribution costs’ is not specifically mentioned in Ind AS 2, these costs would continue to be excluded from the cost of inventories, as being done as per AS 2.

Question 4.
X Limited has a plant with the normal capacity to produce 10,00,000 units of a product per annum and the expected fixed overhead is ₹ 30,00,000, Fixed overhead, therefore based on normal capacity is ₹ 3 per unit.
Determine Fixed overhead as per Ind AS 2 ‘Inventories’ if
(i) Actual production is 7,50,000 units.
(ii) Actual production is 15,00,000 units.
Answer:
(i) Actual production is 7,50,000 units : Fixed overhead is not going to change with the change in output and will remain constant at ₹ 30,00,000, therefore, overheads on actual basis is ₹ 4 per unit (30,00,000/7,50,000).
Hence, by valuing inventory at ₹ 4 each for fixed overhead purpose, it will be overvalued and the losses of ₹ 7,50,000 will also be included in closing inventory leading to a higher gross profit then actually earned. Therefore, it is advisable to include fixed overhead per unit on normal capacity to actual production (7,50,000 × 3) ₹ 22,50,000 and balance ₹ 7,50,000 shall be transferred to Profit & Loss Account.

(ii) Actual production is 15,00,000 units: Fixed overhead is not going to change with the change in output and will remain constant at ₹ 30,00,000, therefore, overheads on actual basis is ₹ 2 (30,00,000/15,00,000).
Hence by valuing inventory at ₹ 3 each for fixed overhead purpose, we will be adding the element of cost to inventory which actually has not been incurred. At ₹ 3 per unit, total fixed overhead comes to ₹ 45,00,000 whereas, actual fixed overhead expense is only ₹ 30,00,000. Therefore, it is advisable to include fixed overhead on actual basis (15,00,000 × 2) – 30,00,000.

Joint And By-Products (Based On Para No. 14)

Question 5.
In a manufacturing process of S Ltd., one by-product BP emerges besides two main products MP1 and MP2 apart from scrap. Details of cost of production process are hereunder:

Average market price of MP1 and MP2 is ₹ 60 per unit and ₹ 50 per unit respectively, by-product is sold @ ₹ 20 per unit. There is a profit of ₹ 5,000 on sale of by-product after incurring separate processing charges of ₹ 8,000 and packing charges of ₹ 2,000, ₹ 5,000 was realised from sale of scrap.
Calculate the value of closing stock of MP1 and MP2 as on 3 1-03-2018. [MTP-October 2018]
Answer:
As per Ind AS 2 ‘Inventories’, most by-products as well as scrap or waste materials, by their nature, are immaterial. They are often measured at net realizable value and this value is deducted from the cost of the main product.
(1) Calculation of NRV of By-product BP

(2) Calculation of cost of conversion for allocation between joint products MP1 and MP2

(3) Determination of “basis for allocation” and allocation of joint cost to MP1 and MP2

(4) Determination of value of closing stock of MP1 and MP2

Cost Formula (Based On Para Nos. 23 To 27)

Question 6.
AS 2 specifically provides that the formula used in determining the cost of an item of inventory should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition whereas Ind AS 2 does not specifically state so.
Does this mean that Ind AS 2 allows free choice between FIFO and weighted average methods?
Answer:
Yes, any of the permitted methods, i.e., FIFO or weighted average method can be used when specific identification method is not possible.

Question 7.
Whether an entity can use different cost formulae for inventories held at different geographical locations having similar nature and use to it.
Answer:
The answer is based on Paragraph 25 of Ind AS 2.
An entity shall use the same cost formula for all inventories having similar nature and use to it.

In the given case, since the inventories held at different geographical location are of similar nature and use to the entity, different cost formula cannot be used for inventory valuation purposes.

Valuation Of Inventory (Including Raw Material) [Based On Para Nos. 9 And 32]

Question 8.
On 31 March 20X1, the inventory of A includes spare parts which it had been supplying to a number of different customers for some years. The cost of the spare parts was ₹ 10 million and based on retail prices at 31 March 20X1, the expected selling price of the spare parts is ₹ 12 million. On 15 April 20X1, due to market fluctuations, expected selling price of the spare parts in stock reduced to ₹ 8 million. The estimated selling expense required to make the sales would be ₹ 0.5 million. Financial statements were authorised by Board of Directors on 20th April 20X1.

As at 31st March 20X2, Directors noted that such inventory is still unsold and lying in the warehouse of the company. Directors believe that inventory is in a saleable condition and active marketing would result in an immediate sale. Since the market conditions have improved, estimated selling price of inventory is ₹ 11 million and estimated selling expenses are same ₹ 0.5 million.
What will be the value inventory at the following dates:
(a) 31st March 20X1
(b) 31st March 20X2 [RTP-May 2018]
Answer:
As per Ind AS 2 ‘Inventories’, inventory is measured at lower of ‘cost’ or ‘net realisable value’. Further, as per Ind AS 10: ‘Events after Balance Sheet Date’, decline in net realisable value below cost provides additional evidence of events occurring at the balance sheet date and hence shall be considered as ‘adjusting events’.

(a) In the given case, for valuation of inventory as on 31 March 20X1, cost of inventory would be ₹ 10 million and net realisable value would be ₹ 7.5 million (ie. Expected selling price ₹ 8 million-estimated selling expenses ₹ 0.5 million). Accordingly, inventory shall be measured at ₹ 7.5 million ie. lower of cost and net realisable value. Therefore, inventory write down of ₹ 2.5 million would be recorded in income statement of that year.

(b) As per para 33 of Ind AS 2, a new assessment is made of net realizable value in each subsequent period. It Inter alia states that if there is increase in net realizable value because of changed economic circumstances, the amount of write down is reversed so that new carrying amount is the lower of the cost and the revised net realizable value. Accordingly, as at 31 March 20X2, again inventory would be valued at cost or net realisable value whichever is lower. In the present case, cost is ₹ 1 million and net realisable value would be ₹ 10. 5 million (ie. expected selling price ₹ 11 million – estimated selling expense ₹ 0.5 million). Accordingly, inventory would be recorded at ₹ 10 million and inventory write down carried out in previous year for ₹ 2.5 million shall be reversed.

Net Realisable Value (Based On Para Nos. 28 To 33)

Question 9.
What is the difference between ‘Net Realizable Value’ and ‘Fair Value’? Explain with suitable example.
Answer:
Refer definitions of NRV and Fair Value in Ind AS 2.
Based on the definitions, net realizable value refers to the net amount that an entity expects to realize from the sale of inventory in the ordinary course of business. Whereas, fair value reflects the price at which an orderly transaction to sell the same inventory in the principal (or most advantageous) market for that inventory would take place between market participants at the measurement date.
The former is an entity-specific measurement; the latter is market-based measurement.

Note:
Net realizable value for inventories may not be equal to fair value less costs to sell.

Example:
An entity holds inventories of 10,000 units and it could sell the same in the market @ ₹ 10 each after selling expenses. The entity has an order in hand to sell the inventories @ ₹ 11. In this situation, fair value is ₹ 10 each, but net realizable value is ₹ 11 each.

Question 10.
How the recognition and disclosure of amount of reversal of any write-down of inventories as a reduction to inventories is to be made?
Answer:
The answer is based on Paragraphs 34 and 36(f) of Ind AS 2.
The reversal of any write-down needs to be recognized in the statement of profit and loss by way of reduction in the amount of inventories recognized as an expense.
Specimen disclosure:
Notes to account:

	2018-19	2017-18
	(₹ in thousands)	(₹ in thousands)
Raw Material	9,000	8,000
Product in progress	800	600
Finished products	28,000	26,000
Total	37,800	34,600

Cost of Inventories recognized as expense:

	2018-19	2017-18
	(₹ in thousands)	(₹ in thousands)
Cost of Inventories recognised as expenses including	1,00,000	90,000
— Write-down of inventories	2,000	800
— Reversal of earlier write-down	(100)	–

Question 11.
Whether the following costs should be considered while determining the Net Realizable Value (NRV) of the inventories?
(a) Costs of completion of work-in-progress;
(b) Trade discounts expected to be allowed on sale; and
(c) Cash discounts expected to be allowed for prompt payment.
Answer:
Point Remarks

Point	Remarks
(a)	Costs of completion of work-in-progress are incurred to convert the work- in-progress into finished goods. Thus, the same should be deducted from the estimated selling price to determine the NRV of work-in-progress.
(b)	Trade discount is allowed either expressly through an agreement or through prevalent commercial practices in the terms of the trade and the same is adjusted in arriving at the selling price. Thus, the trade discount expected to be allowed should be deducted to de­termine the estimated selling price.
(c)	These costs are not incurred to make the sale, therefore, the same should not be considered while determining NRV.

Disclosures (Based On Para Nos. 36 To 39)

Question 12.
Paragraph 36(h) of Ind AS 2 requires the disclosure with regard to the carrying amount of inventories pledged as security for liabilities. Whether the term pledge covers other kinds of charges/encumbrances?
Answer:
The term ‘pledge’ has not been defined in Ind AS 2.
In common parlance, ‘pledge’ is understood as bailment of personal property as a security for some debt or engagement, redeemable on certain terms, and with an implied power of sale on default.

The purpose of use of term ‘pledge’ for the purpose of disclosure of carrying amount of pledged inventory under this Ind AS seems to be broad, Le., to provide the information to the user about restrictions on an entity’s inventory whether physically in the possession of the entity or not.

Thus, for the purposes of disclosures required under Ind AS 2, pledge would include all charges/encumbrances where restriction has been put by the charge holder on the use of that asset.

Ind AS 16: Property, Plant and Equipment
Definition (Based On Para No. 6)

Question 1.
Company A has exhibited certain rare and expensive paintings and sculptures for aesthetic purposes at entrance hall, conference rooms. The entity does not trade in these items in the ordinary course of business. How such items should be recognized in the financial statements of Company A?
Answer:
The answer is based on paragraph 6 of Ind AS 16.

In the given case, Company A is not in the business of trading in paintings and sculptures but is holding them for aesthetic purpose which is considered to be administrative in nature.

Assuming these paintings and sculptures are expected to be used during more than one period, the same should be capitalized as an item of property, plant and equipment.

However, there may be situations wherein an entity holds rare piece of art or antique paintings that are protected by legal or contractual rights such as copyrights (e.g. signature of the painter).

Further, it may be possible that their value appreciates with time. An entity needs to evaluate that whether such artistic related items are tangible or in-tangible assets. It is probable that the future economic benefits are expected to be derived from the intangible element and hence such rare piece of art may therefore be artistic related intangible assets. Such items should be disclosed as a separate class of intangible asset.

Scope (Based On Para Nos. 2 To 5)

Question 2.
An entity has recognized some assets held under finance lease as property, plant and equipment in its balance sheet. The entity has also recognized items of property, plant and equipment owned by it, of similar nature and use. The entity uses the revaluation model prescribed under Ind AS 16 for the entire class of property, plant and equipment. Whether properly, plant and equipment held under finance lease are classified as a separate class of assets from the assets owned by the entity?
Answer:
The assets that are held under a finance lease and owned assets of similar nature and use should be classified as one class of assets and revaluation principles will apply to the entire class of assets.

Recognition [Based On Para Nos. 7 To 10 And 16(B)]

Question 3.
A manufacturing company has acquired agricultural land for setting up a factory building. For construction of the building, certain permissions are required from regulatory authorities. The company has to incur significant costs (non-refundable) for obtaining such permissions such as environmental clearance and change of land use, etc. Whether such cost can be capitalized? If yes, whether this can be capitalized as a cost of construction of the factory ‘ building?
Answer:
The answer is based on paragraphs 7, 10 and 16 of Ind AS 16.
For assessing whether costs incurred for obtaining permission should be capitalized, judgment is required, at the time when the expenditure is incurred, of whether it is probable that the relevant permission will be granted and as a result of which future economic benefits will flow to the entity.

In some cases, regulatory permission may be a formality.

Example:

1. the company regularly obtains such permission; or
2. has been told informally that the permission will be granted; or
3. as per the past experience of the company, it will be able to obtain such permission in a short span of time.

In such cases, there may be sufficient evidence that it is probable that future economic benefits will flow to the entity.

In other situations where consent from regulatory authority is not a formality.
Example:
If the company has been trying to get permission for some time and still has no indication of whether it will be granted, it seems unlikely that the company can demonstrate access to future economic benefit.

In the given case since these costs are directly attributable for bringing the factory building to the location and condition necessary for it to be capable of operating in the manner intended by management and if the company anticipates that the grant of permission is probable, then the expenditure incurred for obtaining permission should be capitalized in the cost of factory building.

If these costs do not meet the recognition criteria as envisaged in paragraph 7, then such costs should be charged as an expense in the Statement of profit and loss. Once expensed, if there is subsequently a change in circumstances, then these costs cannot be capitalized.

Question 4.
A Ltd. is setting up a new refinery outside the city limits. In order to facilitate the construction of the refinery and its operations, A Ltd. is required to incur expenditure on the construction/development of railway siding, road and bridge. Though A Ltd. incurs (or contributes to) the expenditure on the construction/development, it will not have ownership rights on these items and they are also available for use to other entities and public at large. Whether A Ltd. can capitalize expenditure incurred on these items as property, plant and equipment (PPE)? If yes, how should these items be depreciated and presented in the financial statements of A Ltd.?
Answer:
The answer is based on Paragraphs 7, 9 and 16 of Ind AS 16.

In the given case, railway siding, road and bridge are required to facilitate the construction of the refinery and for its operations. Expenditure on these items is required to be incurred in order to get future economic benefits from the project as a whole which can be considered as the unit of measure for the purpose of capitalization of the said expenditure even though the company cannot restrict the access of others for using the assets individually.

It is apparent that the aforesaid expenditure is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

In view of this, even though A Ltd. may not be able to recognize expenditure incurred on these assets as an individual item of property, plant and equipment in many cases (where it cannot restrict others from using the asset), expenditure incurred may be capitalized as a part of overall cost of the project. From this, it can be concluded that, in the above case the expenditure incurred on these assets, ie., railway siding, road and bridge, should be considered as the cost of constructing the refinery and accordingly, expenditure incurred on these items should be allocated and capitalized as part of the items of property, plant and equipment of the refinery.

Depreciation:

For this we need to answer based on Paragraphs 43 and 45 of Ind AS 16.
If these assets have a useful life which is different from the useful life of the item of property, plant and equipment to which they relate, it should be depreciated separately. However, if these assets have a useful life and the depreciation method that are the same as the useful life and the depreciation method of the item of property, plant and equipment to which they relate, these assets may be grouped in determining the depreciation charge.

Nevertheless, if it has been included in the cost of property, plant and equipment as a directly attributable cost, it will be depreciated over the useful lives of the said property, plant and equipment. The useful lives of these assets should not exceed that of the asset to which it relates.

Presentation:
These assets should be presented within the class of asset to which they relate.

Question 5.
Let’s consider in the above question, A Ltd. under an understanding with local authorities also construct a school, which will be subsequently handed over to be managed by an independent trust. Though A Ltd. incurs expenditure on the construction/development of the school, it will not have ownership rights and the assets will also be available for use to the general public (however, preference will be given to employees of the Company). Whether A Ltd., can capitalize expenditure incurred as its property, plant and equipment?
Answer:
In the given case, if there is no obligation to construct the school and if A Ltd. will be able to construct the refinery without constructing the school. It cannot be considered as directly attributable to bringing the refinery to its working condition for the intended use as the incurrence of this expenditure is not necessary for construction or operations of the refinery.
Therefore, the expenditure incurred on construction of school should not be capitalized.

Question 6.
M Ltd. is setting up a new factory outside the Delhi city limits. In order to facilitate the construction of the factory and its operations, M Ltd. is required to incur expenditure on the construction/development of electric-substation. Though M Ltd. incurs (or contributes to) the expenditure on the construction/development, it will not have ownership rights on these items and they are also available for use to other entities and public at large. Whether M Ltd. can capitalise expenditure incurred on these items as property, plant and equipment (PPE)? If yes, how should these items be depreciated and presented in the financial statements of M Ltd. as per Ind AS? /ATov. 2019 -8 MarksJ
Answer:
Paragraph 7 of Ind AS 16 states that “the cost of an item of property, plant and equipment shall be recognized as an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will flow to the entity; and
(b) the cost of the item can be measured reliably.”

Further paragraph 9 of Ind AS 16 provides that, “This Standard does not prescribe the unit of measure for recognition, Le., what constitutes an item of property, plant and equipment. Thus, judgment is required in applying the recognition criteria to an entity’s specific circumstances. It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies, and to apply the criteria to the aggregate value.”

Paragraph 16 of Ind AS 16, inter alia, states that the cost of an item of property, plant and equipment comprise any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

In the given case, construction/development of electric-sub-station are required to facilitate the construction of the factory and its operations. Expenditure on these items is required to be incurred in order to get future economic benefits from the project as a whole which can be considered as the unit of measure for the purpose of capitalization of the said expenditure even though the company cannot restrict the access of others for using the assets individually. It is apparent that the aforesaid expenditure is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

In view of this, even though M Ltd. may not be able to recognize expenditure incurred on these assets as an individual item of property, plant and equipment in many cases (where it cannot restrict others from using the asset), expenditure incurred may be capitalized as a part of overall cost of the project. From this, it can be concluded that, in the extant case the expenditure incurred on these assets, should be considered as the cost of constructing the factory and accordingly, expenditure incurred on these items should be allocated and capitalized as part of the items of property, plant and equipment.

Depreciation
As per paragraph 43 of Ind AS 16, each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately.

Further paragraph 45 provides that, a significant part of an item of property, plant and equipment may have a useful life and a depreciation method that are the same as the useful life and the depreciation method of another significant part of that same item. Such parts may be grouped in determining the depreciation charge.

In view of the above, if these assets have a useful life which is different from the useful life of the item of property, plant and equipment to which they relate, it should be depreciated separately. However, if these assets have a useful life and the depreciation method that are the same as the useful life and the depreciation method of the item of property, plant and equipment to which they relate, these assets may be grouped in determining the depreciation charge.

Nevertheless, if it has been included in the cost of property, plant and equipment as a directly attributable cost, it will be depreciated over the useful lives of the said property, plant and equipment. The useful lives of these assets should not exceed that of the asset to which it relates.

Presentation
These assets should be presented within the class of assets to which they relate.

Question 7.
A large manufacturing company expenses off items purchased below a certain threshold set by the management. Whether such a policy is permissible under Ind AS?
Answer:
In deciding that an individual item is insignificant and the same may not be recognized as property, plant and equipment is a matter of professional judgment which requires careful assessment of facts and circumstances including qualitative aspects.

Accordingly, individual insignificant assets below a threshold determined by management may not be recognized as property, plant and equipment.
These may be expensed if their cumulative aggregate cost for that category of asset is not material.

Question 8.
A Company produces fertilizers at various manufacturing units. The manufacturing units use various processes/technologies for manufacture of fertilizers. The Company has machinery spares (which are customized by the supplier as per the requirements of the company) and are expected to be used for more than one period. How’ should machinery spares be accounted for as per Ind AS?
Answer:
The answer is based on paragraphs 6 and 8 of Ind AS 16:
In the given case, the machinery spares are held for use in the production of goods and are expected to be used for more than one period. Hence, the same should be capitalized as property, plant and equipment in accordance with this Standard irrespective of whether procured at the time of purchase of the equipment or subsequently.

Question 9.
The management of a Company has set an internal limit for capitalization of spares to be ₹ 50,000 i.e., any item of spare having useful life of more than 1 year and value more than ₹ 50,000 would be capitalized by the Company.

Further, spares which are used collectively need to be capitalized, if the collective total of the same exceeds ₹ 50,000. Whether such spares should be capitalized from the date of its purchase or date of actual issu.e of that spare into use since such spares are procured in advance and kept in stores till the time they are issued for use?
How should ‘expected to be used during more than one period’ be interpreted.

Whether a spare that has a life of less than one year but is being used in two financial year periods as per the date of issue, can be capitalized?
Answer:
The answer is based on Paragraphs 8 and 9 of Ind AS 16:
The Standard does not distinguish between different types of spares.
In the given case, the spares are not individually significant compared to the overall asset. The nature and purpose of such spares need to be carefully eval-uated. If it is probable that future economic benefits associated with the item would flow to the company and cost of the item can be measured reliably then these items should be recognized as property, plant and equipment.

Depreciation:
Based on paragraph 55 of Ind AS 16:
Depreciation on the spares recognized as item of property, plant and equipment shall begin from the date of its purchase.

More than one period:
The term ‘more than one period’ is not defined in Ind AS. Ordinarily, the accounting policies are determined for preparing and presenting financial statements on annual basis. Accordingly, the term ‘period’, should ordinarily be construed to be the annual period.

In the given case, spares that are not expected to be used during more than one annual period should not be capitalized as item of property, plant and equipment.

Question 10.
A section of a mall is renovated by constructing a food court and gaming zone so as to increase the footfall in the mall. The food court and gaming zone are expected to result in a significant increase in sales for the shops and outlets of the mall. Whether this cost of construction of food court and gaming zone should be capitalized as property, plant and equipment or expensed off in the Statement of Profit and Loss?
Answer:
The answer is based on Paragraphs 7 and 10 of Ind AS 16.
Since it is probable that the construction of food court and gaming zone will result into flow of future economic benefits to the entity in the form of increase in sales and the cost of construction can be measured reliably, accordingly, the subsequent cost of construction of food court and gaming zone should be capitalized in the cost of mall as an item of property, plant and equipment.

Question 11.
An entity buys five machines for use in its manufacturing facility. Simultaneously it purchases a spare motor which can be used as a replacement in case the motor of any one of the five machines breaks down. The motor will be used in the production of goods and, once brought into service, will be operated during more than one period. How should the spare motor be accounted for?
Answer:
The spare motor is classified as property, plant and equipment.
Spare parts will have to be depreciated along with the corresponding main asset. The depreciation period for any spare part capitalized should not exceed its useful life. Spare parts are depreciated when they are available for use. Hence, the motor should be depreciated when available for use over the lesser of its useful life and the remaining useful life of the asset to which it relates.

Question 12.
X Limited was negotiating a deal to purchase large plant and machinery. During the negotiations, X Limited had asked for minimum 1 % additional discount. Since the vendor was also not agreeable to give this discount, the broker agreed to pass on 75% of its sales commission (that it received from the vendor) to X Limited so as to induce it to purchase the machinery. Based on this offer, the final deal was struck and X purchased the machine.

The management of X Limited is of the view that it has not received commission rebate from the vendor and therefore it cannot be reduced from the cost of machinery. Rather, it should be treated as other income in the period in which it purchased the machine. Is the management view tenable?
Answer:
It does not matter whether such discounts or rebates are received from the vendor directly or indirectly through the broker. Therefore, the commission passed on by the broker is in the nature of trade discounts and rebates received.

Moreover, X Ltd. has entered into only one transaction, ie., purchase of the machine and from the facts of the case, it is clear that X Ltd. asked for a minimum discount to buy the machine.

Accordingly, the cost of acquisition of the machine is net of the amount of commission passed on by the broker to the entity, therefore, the commission passed on by the broker should be deducted from the purchase price of the plant and machinery.

Subsequent Costs (Based On Para Nos. 12 To 14)

Question 13.
An entity is engaged in refining of petroleum products. It has a captive power plant with Gas Turbine Generators. Critical parts of generators are exposed all the time to very high temperatures leading to fracture of these parts. As a result, various components of generators need regular overhauling in line with scheduled cycle of number of hours of operations prescribed as per manufacturers’ manual.

At the time of such overhauling, these parts are required to be replaced. Certain servicing charges are also incurred at the time of overhaul. How should such costs incurred on replacement of critical parts be accounted for under Ind AS?
Answer:
The answer is based on Paragraphs 7 and 13 of Ind AS 16.
In the given case, since, the critical parts of the generator are required to be replaced at regular intervals to run the gas turbine generator to generate the power, accordingly, it implies that future economic benefits associated with the replaced item will flow to the entity.

Assuming the cost of these items can be measured reliably, the company should recognize the cost of replacing these parts in the carrying amount of generators. The carrying amount of the replaced part should be derecognized as per derecognition principles of Ind AS 16.

Further, the day to day servicing charges incurred are expensed to the state-ment of profit and loss. However, servicing charges which incurred at the time of replacing the part or in connection with replacing the part should be capitalized (Le., where these charges do not relate to ongoing day-to-day ser-vices, and which are directly attributable and meet the definition of property, plant and equipment).

Question 14.
A Company acquires a ship for ₹ 500 crores. The useful life of the ship is 20 years. The ship is mandatorily required to undergo major periodic inspection and repairs as per statute (dry-docking) at least once in every three years. Dry-docking costs are estimated to be ₹ 100 crores for similar ships based on current market price which comprises of inspection costs of ₹ 30 crores and replacement of parts amounting to ₹ 70 crores. How will the company treat these dry dock cost when incurred?
Answer:
Dry docking costs incurred on items which meet the recognition criteria are capitalized. Otherwise, the same may be charged to the profit and loss.

In the given case, the company should recognize the cost of replacing part of ₹ 70 crores in the carrying amount of the ship, if the recognition criteria laid down in the paragraph 7 of Ind AS 16 is met. The carrying amount of replaced parts should be derecognized. The company will depreciate the cost of parts to be replaced totalling to ₹ 70 crores over the period of three years in accordance with paragraph 13 of Ind AS 16.

Major inspection cost amounting to ₹ 30 crores should also be recognized in the carrying amount of the ship and the same will be depreciated over the period of three years till the next dry-docking.

Initial Measurement (Based On Para Nos. 15 To 27)

Question 15.
On 1 April 2018, X Limited began the construction of a new factory. Costs relating to the factory, incurred in the year ended 31 March 2019, are as follows:

Note 1: The factory was constructed in the eight months ended 30 November 2018. It was brought into use on 31 December 2018. The employment costs are for the nine months to 31 December 2018. The employees were engaged in construction and related activities.
Note 2: Other costs directly related to the construction include an abnormal cost of ₹ 200, in respect of repairing the damage which resulted from a gas leak.
What will be the initial carrying value of the factory building?
Answer:
The initial carrying value of the factory is computed as below:

Particulars	Amount (₹ 000)	Reason
Costs of dismantling existing structures on the site (demolition costs)	500	Directly attributable to the build­ing.
Material consumed to construct the factory	6,000	Directly attributable cost
Employment costs	1,600	Employment costs for the period of 8 months are directly attributable. Therefore, costs to be capitalized is ₹ 1600 (ie., 8/9 X 1,800)
Other costs directly related to the construction	1,000	Directly attributable cost exclud­ing abnormal cost
General administrative overheads	Nil	General overhead costs are not cost of an item of property, plant and equipment unless if it can be clearly demonstrated that they
		are directly attributable to con­struction
Architects’ and consultants’ fees direct­ly related to the construction	400	Directly attributable cost
Costs of relocating staff who are to work at the factory	Nil	This is not required for getting the asset ready for use
Costs relating to the formal opening of the factory	Nil	Specifically disallowed by Ind AS 16.
Total Cost	9,500

Question 16.
Fly wing Airways Ltd is a company which manufactures aircraft parts and engines and sells them to large multinational companies like Boeing and Airbus Industries.

On 1 April 20X1, the company began the construction of a new production line in its aircraft parts manufacturing shed.
Costs relating to the production line are as follows:

Additional Information:
The construction staff was engaged in the production line, which took two months to make ready for use and was brought into use on 31 May 20X1.

The other overheads were incurred in the two months period ended on 31 May 20X1. They included an abnormal cost of ₹ 3,00,000 caused by a major electrical fault.

The production line is expected to have a useful economic life of eight years. At the end of that time Flywing Airways Ltd is legally required to dismantle the plant in a specified manner and restore its location to an acceptable standard. The amount of ₹ 2 million mentioned above is the amount that is expected to be incurred at the end of the useful life of the production line. The appropriate rate to use in any discounting calculations is 5%. The present value of Re.1 payable in eight years at a discount rate of 5% is approximately Re.0-68.

Four years after being brought into use, the production line will require a major overhaul to ensure that it generates economic benefits for the second half of its useful life. The estimated cost of the overhaul, at current prices, is ₹ 3 million.

The Company computes its depreciation charge on a monthly basis. No im-pairment of the plant had occurred by 31 March 20X2.

Analyze the accounting implications of costs related to production line to be recognized in the balance sheet and profit and loss for the year ended 31 March, 20X2. [MTP-May 2020]
Answer:
Statement showing Computation of Cost of Production line:

Computation of Carrying value of Production line:
(as on 31st March, 20X2)

Working Note -1:
Computation of Depreciation charge:

Note:
In accordance with Ind AS 16 the asset is split into 2 depreciable components:

Statement of Profit & Loss
[Extract]

Balance Sheet
[Extract]

Working Note – II:
Computation of Provision for Dismantling cost:

Question 17.
A Ltd. is engaged in retail business and it has a chain of departmental stores across the country. It has acquired a new store at another location. In order to start the new store significant renovation expenditure are required at that location and the management expects that the renovations would continue for the period of six months.

Management has prepared the budget for this period including expenditure related to construction and re-modelling costs, salaries of staff participating in hiring (not related to construction), salary costs of staff on the bench, training, etc. Can A Ltd. capitalize all the costs incurred during the period of six months?
Answer:
The answer is based on paragraphs 15 and 19 of Ind AS 16:
Costs of construction and re-modelling the departmental store, are necessary to bring the store to the condition necessary for it to be capable of operating in the manner intended by management. The departmental store cannot be opened without incurring the re-modelling expenditure, and thus the expenditure should be considered as a part of the asset. Therefore, A Ltd. should capitalize the costs of construction and re-modelling the departmental store.

The cost of salaries of staff on the bench, staff participating in training, hiring, etc. are operating expenditures. These costs are not necessary to bring the store to the condition necessary for it to be capable of operating in the manner intended by management and should be expensed.
However, salary, if any, paid to workers for renovation of store should be capitalized.

Question 18.
An entity A Ltd. is setting up a new plant. It sets up a project team comprising existing employees who will be responsible for setting up the new plant. The employees will work on a full-time basis and installation is expected to take eight weeks. Whether the cost of the project team including all employee benefits which will be paid otherwise should be capitalized?
Answer:
The cost of the project team, including all employee benefits, during the period of installation is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, therefore the same should be included in the cost of the new plant. These costs are to be capitalized even if these costs would have been incurred otherwise also because for cost to be directly attributable it need not to be external.

Question 19.
Company X plans to construct a hotel on a site which is currently occupied by the residents of a small town. The Company XYZ agrees to pay the cost of relocating the residents to another site. Whether the cost of relocating should be capitalized as part of the cost of land for the hotel?
Answer:
The cost of relocating the existing residents should be capitalized to the cost of land because the relocation is a direct result of the decision to acquire the land and is in the nature of cost of site preparation. Hence, it is directly attributable cost to bring the land to the condition necessary for it to be capable of operating in the manner intended by management.

Question 20.
A manufacturing company enters into a contract with a supplier to procure equipments over a period of 3 years. The Company has to pay cancellation fees for terminating the contract. The cancellation fees would only be in respect of those equipments which are not procured by the Company as per the contract.

The Company decides to terminate the contract at the end of year 1 since it has identified another supplier which would result in a significant reduction in cost for the company. It pays the cancellation fees in respect of the remaining equipments not yet procured. Whether the cancellation fee paid by the Company should be capitalized as part of the cost of the equipments purchased?
Answer:
The cancellation fees incurred is not directly attributable costs as they are not directly related to the acquisition of the equipment and are not required to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management.

Hence, the cancellation fee should not be capitalized as part of the cost of the equipments purchased from another supplier, instead it should be expensed off as and when incurred.

Question 21.
An entity has employed a contractor for construction of chemical plant. The terms of the agreement clearly specify that the liquidated damages are paid as compensation for failure to meet performance conditions in terms of the desired quality and level of output subsequent to commissioning of the plant. The damages will be calculated based on the shortfall in the output as a percentage of the contract price. Whether such liquidated damages received be deducted from the cost of the related asset or recognized as income?
Answer:
The amount of liquidated damages received are not directly attributable to the construction of the chemical plant like trade discounts and rebates. Such damages are as a result of the inefficiencies on the part of the contractor. Further, the amount of liquidated damages is directly linked to performance parameters for the plant subsequent to commissioning of the plant.

Therefore, the liquidated damages should not be deducted from the cost of related asset and the same should be accounted as income.

Question 22.
An entity P Ltd. employed a contractor to build a power plant on turnkey project basis for a total consideration of? 100 crores. As per the terms of the contract, if there is more than one-month delay in the completion of construction, P Ltd. is entitled to recover liquidated damages at 0.25% of the contract value for every week of delay subject to the maximum of 5% of contract value.

The contractor delayed the completion of construction by 45 days and therefore, P Ltd. received liquidated damages from the contractor. The management believes that liquidated damages basically compensate it for its loss of revenue for the period of 45 days. What will be the treatment of these liquidated damages received on delays by the contractor?
Answer:
The treatment of liquidated damages received on delays by the contractor depends on the facts and circumstances. Hence, whether or not the liquidated damages should be adjusted against the project cost would depend upon the fact whether the liquidated damages are directly identifiable with the project and whether, in fact, they are received for mitigating extra project costs to be incurred by the entity which will be capitalized as part of the cost of the plant. Where and to the extent the liquidated damages meet the aforesaid stipulations in affirmative, the same should be adjusted in the cost of the project. Otherwise the same should be accounted for as income.

Question 23.
Company A is constructing a building for its business use. The construction of the building is interrupted because of protests by the farmers for additional compensation for land sold by them in that area for an indefinite period. Company A continues to incur certain fixed cost. Whether such fixed costs, including abnormal costs, incurred during the period of interruption will be capitalized to the cost of building?
Answer:
Based on the principles of Ind AS 23, the cost incurred during an inter-ruption should also be capitalized only if the interruption is temporary and is a necessary part of bringing the asset to the condition for it to be capable of operating in the manner intended by the management e.g. the cost of delays for obtaining permits for the eventual operation of the asset.

In the given case, interruption due to protest by farmers for additional com-pensations is not a necessary part of bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Moreover, the interruption is not a temporary delay or routine in nature. Accordingly, such interruption is abnormal in nature.

Therefore, fixed costs incurred during the period of interruption should not be capitalized to the cost of building.

Question 24.
Entity X has a warehouse which is closer to factory of Entity Y and vice versa. The factories are located in the same vicinity. Entity X and Entity Y agree to exchange their warehouses. The carrying value of warehouse of Entity X is ₹ 1,00,000 and its fair value of ₹ 1,25,000. It exchanges its warehouse with that of Entity Y, the fair value of which is ₹ 1,20,000. It also receives cash amounting to ₹ 5,000. How should Entity X account for the exchange of warehouses?
Answer:
In the given case, the transaction lacks commercial substance as the company’s cash flows are not expected to significantly change as a result of the exchange because the factories are located in the same vicinity le. it is in the same position as it was before the transaction. ,

Therefore, Entity X will have to recognize the assets received at the carrying amount of asset given up, i.e., ₹ 1,00,000 being carrying amount of existing warehouse of Entity X and ₹ 5,000 received will be deducted from the cost of property, plant and equipment. Therefore, the warehouse of Entity Y is recognized as property, plant and equipment with a carrying value of ₹ 95,000 in the books of Entity X.

Question 25.
Entity A acquired Entity B and measured the assets acquired at the acquisition date fair values in accordance with the requirement of Ind AS 103.
Ind AS 16 prescribes that where an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs should be revalued. In accordance with Ind AS 103 does this mean that Entity A is required to revalue its own existing tangible fixed assets that are classified in the same class of assets?
Answer:
As per paragraph 18 of Ind AS 103, Business Combinations, the acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. Accordingly, Entity A measured the fixed assets acquired at the acquisition date fair values.

The fair value measurement of assets acquired as per the requirements of Ind AS 103 does not mean that revaluation has taken place from a group’s perspective. The acquisition date fair value is just an initial recognition of the asset at cost (which is fair value in this case). It does not tantamount to adoption of revaluation model by the entity as per Ind AS 16. It is only an allocation of the purchase price (for initial recognition) as part of the cost model and does not relate to revaluation.

Therefore, the existing tangible fixed assets of the same class held by the group do not need to be revalued assuming that the group has a policy of measuring its assets at cost.

Question 26.
A Ltd. is setting up a new refinery outside the city limits. In order to facilitate the construction of the refinery and its operations, A Ltd. is required to incur expenditure on the construction/development of railway siding, road and bridge. Though A Ltd. incurs (or contributes to) the expenditure on the construction/development, it will not have ownership rights on these items and they are also available for use to other entities and public at large. Whether A Ltd. can capitalise expenditure incurred on these items as property, plant and equipment (PPE)? If yes, how should these items be depreciated and presented in the financial statements of A Ltd, as per Ind AS?
Answer:
The answer is based on Paragraphs 7, 9 and 16 of Ind AS 16.

Though A Ltd. may not be able to recognize expenditure incurred on these assets as an individual item of property, plant and equipment in many cases (where it cannot restrict others from using the asset), expenditure incurred may be capitalised as a part of overall cost of the project. From this, it can be concluded that, in the extant case the expenditure incurred on these assets, i.e., railway siding, road and bridge, should be considered as the cost of con-structing the refinery and accordingly, expenditure incurred on these items should be allocated and capitalised as part of the items of property, plant and equipment of the refinery.

Depreciation
As per paragraphs 43 and 47 of Ind AS 16, if these assets have a useful life which is different from the useful life of the item of property, plant and equipment to which they relate, it should be depreciated separately. However, if these assets have a useful life and the depreciation method that are the same as the useful life and the depreciation method of the item of property, plant and equipment to which they relate, these assets may be grouped in determining the depreciation charge. Nevertheless, if it has been included in the cost of property, plant and equipment as a directly attributable cost, it will be depreciated over the useful lives of the said property, plant and equipment.
The useful lives of these assets, should not exceed that of the asset to which it relates.

Presentation
These assets should be presented within the class of asset to which they relate.

Question 27.
On 1st April, 2017 G Limited purchased some land for ₹ 1.5 crore (including legal cost of ₹ 10 lakhs) for the purpose of constructing a new factory. Construction work commenced on 1st May, 2017. G Limited incurred the following costs in relation to its construction.

Income received during the temporary use of the factory premises as a store during the construction period.

The construction of the factory was completed on 31st December, 2017 and production began on 1st February, 2018. The overall useful life of the factory building was estimated at 40 years from the date of completion. However, it is estimated that the roof will need to be replaced 20 years after the date of completion and that the cost of replacing the roof at current prices would be 25% of the total cost of the building.

At the end of the 40 years period, Good Time Limited has a legally enforceable obligation to demolish the factory and restore the site to its original condition. The company estimates that the cost of demolition in 40 years’ time (based on price prevailing at that time) will be ₹ 3 crore. The annual risk adjusted discount rate which is appropriate to this project is 8%. The present value of ₹ 1 payable in 40 years time at an annual discount rate of 8% is 0.046.

The construction of the factory was partly financed by a loan of ₹ 1.4 crore taken out on 1st April, 2017. The loan was at an annual rate of interest of 9%. During the period 1st April, 2017 to 30th September, 2017 (when the loan proceeds had been fully utilized to finance the construction), G Limited received investment income of ₹ 1,25,000 on the temporary investment of the proceeds.
You are required to compute the cost of the factory and the carrying amount of the factory in the Balance Sheet of Good Time Limited as at 31st March, 2018.
Answer:
Computation of the cost of the factory

Computation of carrying amount of the factory as at 31st March, 2018 (₹)

Note:

1. Interest cost has been capitalised based on nine month period. This is because, purchase of land would trigger off capitalisation.
2. All of the net finance cost of ₹ 8,20,000 (₹ 9,45,000 – ₹ 1,25,000) has been allocated to the depreciable asset i.e. Factory. Alternatively, it can be allocated proportionately between land and factory.

Question 28.
On 1st April, 2017, A Ltd. assumes a decommissioning liability in a business combination.

The entity is legally required to dismantle and remove an offshore oil platform at the end of its useful life, which is estimated to be 10 years. A Ltd. uses the expected present value technique to measure the fair value of the decommissioning liability. If A Ltd. was contractually allowed to transfer its decommissioning liability to a market participant, it concludes that a market participant would use the following inputs, probability-weighted as appropriate, when estimating the price, it would expect to receive:

(i) Labour costs are developed on the basis of current market place wages, adjusted for expectations of future wage increases, required to hire con-tractors to dismantle and remove offshore oil platforms. A Ltd. assigns probability assessments (based on A Ltd.’s experience with fulfilling obligations of this type and its knowledge of the market) to a range of cash flow estimates as follows:

(ii) A Ltd. estimates allocated overhead and equipment operating costs to be 80% of expected labour costs in consistent with the cost structure of market participants.

(iii) A Ltd. estimates the compensation that a market participant would require for undertaking the activity and for assuming the risk associated with the obligation to dismantle and remove the asset as follows:

1. A third-party contractor typically adds 20% mark-up on labour and allocated internal costs to provide a profit margin on the job.
2. A Ltd. estimates 5% premium of the expected cash flows, includ-ing the effect of inflation for uncertainty inherent in locking in today’s price for a project that will not occur for 10 years.

(iv) Entity A assumes a rate of inflation of 4% over the 10-year period on the basis of available market data.

(v) The risk-free rate of interest for a 10-year maturity on 1st April, 2017 is 5 %. A Ltd. adjusts that rate by 3.5 per cent to reflect its risk of non-per-formance (i.e. the risk that it will not fulfil the obligation), including its credit risk.

A Ltd. concludes that its assumptions would be used by market participants.

In addition, A Ltd. does not adjust its fair value measurement for the existence of a restriction preventing it from transferring the liability. Measure the fair value of its decommissioning liability.
Discount factor:

Answer:
(a) Measurement of the fair value of its decommissioning liability

Working Note:

Subsequent Measurement (Based On Para Nos. 29 To 42)

Question 29.
If the revaluation model is adopted, Ind AS 16 specifies that all items within a class of assets are to be revalued simultaneously to prevent selective revaluations. What does ‘class of asset’ represent?
Answer:
Paragraph 37 of Ind AS 16 provides that, a class of property, plant and equipment is a grouping of assets of a similar nature and use in an entity’s operations.

Following are examples of separate classes:
(a) land;
(b) land and buildings;
(c) machinery;
(d) ships;
(e) aircraft;
(f) motor vehicles;
(g) furniture and fixtures;
(h) office equipment; and
(i) bearer plants.

The above-mentioned is a broad illustration of the classes of assets and it is possible that there may be other classes of assets based on their similar nature and use.

Example:
Buildings could be further classified as office buildings and factory buildings as separate classes of asset. Similarly, machinery may also be classified based on use for example, mining machinery, captive power plants, pollution control equipment etc.
Ultimately it is a matter of judgment in the context of the specific operations of an individual entity.

Question 30.
Company A has textile manufacturing facilities in two different geographical locations for similar products or products with similar markets. The company wants to classify both the manufacturing facilities as different class of property, plant and equipment, based on their different geographical location. Whether the company is permitted to do so?
Would the response be different if the company manufactured different products, say pharmaceuticals and textiles in the same geographical location?
Answer:
The Company A cannot classify both the manufacturing facilities as separate class of property, plant and equipment.

In the given case, the different geographical locations do not justify to classify the assets in different classes, as the manufacturing facilities in both regions are used for manufacturing similar products. Hence, the manufacturing facilities in both the locations should be classified as one class of property, plant and equipment.

However, if the entity manufactured pharmaceuticals and textiles, both in the same geographical location, then these could be classified as a separate class if it is sufficiently justified that the assets are of different nature and use as the nature and use of the assets should be assessed with respect to the business segment for which they are used, rather than their geographic location.

Question 31.
Company X performed a revaluation of all of Its plant and machinery at the beginning of 2018-19. The following information relates to one machinery:

The useful life of the machinery is 10 years and the company uses straight line method of depreciation. The revaluation was performed at the end of 4 years.
How should the Company account for revaluation of plant and machinery and depreciation subsequent to revaluation?
Answer:
Option I:
Gross carrying amount ₹ 250
[(200/120) × 150]
Net carrying amount ₹ 150
Accumulated depreciation ₹ 100
(250- 150)

Journal entry
Fixed Assets (Gross Block)……….Dr. 50
To Accumulated Depreciation 20
To Revaluation Surplus 30

Option II:

Gross carrying amount is restated to ₹ 150 to reflect the fair value and Accu-mulated depreciation is set at zero.
Journal entry
Accumulated Depreciation …….. Dr. 80
To Fixed Asset (Gross Block) 80
Fixed Asset (Gross Block) ……… Dr. 30
To Revaluation surplus 30

Depreciation
Option I:
Since the Gross Block has been restated, the depreciation charge will be ₹ 25 per annum (₹ 250/10 years).
Option II:
Since the Revalued amount is the revised Gross Block, the useful life to be considered is the remaining useful life of the asset which results in the same depreciation charge of ₹ 25 per annum as per Option A (150/6 years).

Question 32.
A Ltd. purchased some Property, Plant and Equipment on 1st April, 20X1, and estimated their useful lives for the purpose of financial statements prepared on the basis of md AS: Following were the original cost, and useful life of the various components of property, plant, and equipment assessed on 1st April, 20X1:

A Ltd. uses the straight-line method of depreciation. On 1st April, 20X4, the entity reviewed the following useful lives of the property, plant, and equipment through an external valuation expert:

There were no salvage values for the three components of the property, plant, and equipment either initially or at the time the useful lives were revised.
Compute the impact of revaluation of useful life on the Statement of Profit and Loss for the year ending 31st March, 20X4.
Answer:
The annual depreciation charges prior to the change in useful life were:

The revised annual depreciation for the year ending 31 st March, 20X4, would be:

The impact on Statement of Profit and Loss for the year ending 31 st March, 20X4 = ₹ 26,00,000 – ₹ 25,00,000 = ₹ 1,00,000
This is a change in accounting estimate which is adjusted prospectively in the period in which the estimate is amended and, if relevant, to future periods if they are also affected. Accordingly, from 20X4-20X5 onward, excess of ₹ 1,00,000 will be charged in the Statement of Profit and Loss every year till the time there is any further revision.

Question 33.
Company X performed a revaluation of all of its plant and machinery at the beginning of 2018-2019. The following information relates to one of the machinery:

The useful life of the machinery is 10 years and the company uses Straight line method of depreciation. The revaluation was performed at the end of the 4th year.
How should the Company account for revaluation of plant and machinery and depreciation subsequent to revaluation?
Answer:
According to paragraph 35 of Ind AS 16, when an item of property, plant and equipment is revalued, the carrying amount of that asset is adjusted to the revalued amount. At the date of the revaluation, the asset is treated in one of the following ways:

(a) The gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. For example, the gross carrying amount may be restated by reference to observable market data or it may be restated proportionately to the change in the carrying amount.

The accumulated depreciation at the date of the revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account accumulated impairment losses; or

(b) The accumulated depreciation is eliminated against the gross carrying amount of the asset.
The amount of the adjustment of accumulated depreciation forms part of the increase or decrease in carrying amount that is accounted for in accordance with the paragraphs 39 and 40 of Ind AS 16.
If the Company opts for the treatment as per option (a), then the revised carrying amount of the machinery will be:

Journal entry

If the balance of accumulated depreciation is eliminated as per option (b), then the revised carrying amount of the machinery will be as follows:

Gross carrying amount is restated to ₹ 150 to reflect the fair value and Accumulated depreciation is set at zero.
Journal entry

Depreciation

Option (a) – Since the Gross Block has been restated, the depreciation charge will be ₹ 25 per annum (₹ 250/10 years).
Option (b) – Since the Revalued amount is the revised Gross Block, the useful life to be considered is the remaining useful life of the asset which results in the same depreciation charge of ₹ 25 per annum as per Option A (₹ 150/6 years).

Depreciation (Based On Para Nos. 43 To 62a)

Question 34.
A company acquires a land with an existing building for a consideration of ₹ 200 lakhs. The company has no intention of using the existing building. The fair market value of the land is ₹ 160 lakhs and that of the building is ₹ 40 lakhs. The planned redevelopment necessitates the demolition of that building and its replacement with a new building as an owner-occupied property. How the acquisition of land with the existing building will be accounted for in the books of account of the real estate developer?
Answer:
Paragraph 58 of Ind AS 16, inter alia, states that, land and buildings are separable assets and are accounted for separately, even when they are acquired together.

In accordance with above paragraph, in ordinary course, on initial recognition, the building and land should be recognized as two separate items of property, plant and equipment under Ind AS 16.

However, in the given case, the entity has no intention of utilizing the existing building for its business activities and the acquisition does not relate to a group of assets being acquired. The existing building is unusable to the entity and the same is to be demolished after acquisition.

Thus, although the company has acquired both land as well as building and fair- values of the land and existing building are available, the purpose of acquiring the land is to construct a new building for self-occupation. The entity has no intention of utilizing the existing building for self-occupation.
Accordingly, the amount paid for building should be included in the cost of land, ie., the entire amount of ₹ 200 should be treated as cost of land.

Question 35.
In accordance with Schedule II of the Companies Act, 2013, if the company uses a different useful life than as specified in Schedule II or a residual value of more than 5%, it is required to disclose the same in the financial statements and provide justification duly supported by the technical advice. Whether such technical advice is to be necessarily obtained from external experts?
Answer:
The Company may obtain technical advice from external or internal experts.

Irrespective of whether the useful life is determined as per the Schedule II to the Companies Act, 2013 a company should evaluate the reasonableness of the useful life of assets. Schedule II to the Companies Act, 2013 is silent regarding – whether the technical advice is to be necessarily obtained from external experts.

Determination of useful life is a matter of judgment and may be decided on a case to case basis. If a company has adequate internal technical expertise, it may be appropriate for the companies to rely on the judgments of such internal experts regarding the useful lives and residual value of the property, plant and equipment.

It should be supported by adequate documentation to be able to demonstrate that the company has obtained advice from such internal technical experts and the criteria and assumptions involved in making such determination of useful lives and residual value.

Question 36.
A manufacturing company has recently acquired a new factory, which cost ₹ 15,00,000 for the freehold land and building. The land has a fair value of ₹ 5,00,000. The factory building has a residual value of ₹ 1,00,000 at the end of 30 years, Which is the expected useful life of the building. This factory has a flat roof, which needs replacement after every ten years. The current cost of replacement is ₹ 1,00,000. How should the Company depreciate the entire factory?
Answer:
The company may consider the roof as a significant part of the item and depreciate the cost of the roof of ₹ 1,00,000 over the period of 10 years, giving a depreciation charge of ₹ 10,000 per annum and to depreciate the remaining value of the factory of ₹ 9,00,000 to its residual value of ₹ 1,00,000 over 30 years, giving depreciation charge of ₹ 26,667.

At the end of year 10 when the roof will be replaced the carrying amount attributable to the replaced roof would be nil, with no profit or loss on disposal.

Question 37.
Company A has purchased a captive power plant for ₹ 150 crores. Plant consists of significant components like boiler, turbine blades and generator. Company applies component accounting and depreciate all the 3 components as per their respective useful life. Company does not have the breakup of cost component-w’ise in the invoice. How will the total cost be allocated to the components?
Answer:
In case, the separate cost of each significant component of an asset is not available in the books of account then for the purpose of determining the cost of such component, the following criteria can be used in the order given below:
(a) Break-up cost provided by the vendor;
(b) Cost break-up given by internal/external technical expert;
(c) Fair values of various components; or
(d) Current replacement cost of component of the related asset and applying the same basis on the historical cost of asset.

Question 38.
An automotive company A has various types of tools that are used in the car manufacturing process. These tools are specific to a particular variant of a car and cannot be used for any other purpose. The number of units that can be produced or serviced through the use of these tools is estimated based on their utilization and the company maintains a detailed five-year production plan. Can the Company apply the units of production (UOP) method of depreciation?
Answer:
Based on the above facts, the depreciation of the tools can be provided based on the number of units expected to be obtained from the use of the asset, generally known as the UOP method. The Company maintains a detailed five- year plan, production plan so that it is able to reliably estimate the number of units that can be used or serviced through the use of these tools. By relating depreciation to the proportion of productive capacity the depreciation method reflects the pattern in which the future economic benefits are expected to be consumed by the entity.

Company A should periodically review the number of units that can be produced or serviced from the asset in the future. Where such an asset is idle for a long period of time, the Company should assess whether the use of UOP method is still appropriate.

Compensation (Based On Para Nos. 64 And 66)

Question 39.
Entity A has five manufacturing units across India. On 1 April, 2018, a major fire broke at one of the manufacturing units. All the fixed assets are insured under a fire insurance policy. The carrying value of the fixed assets in the manufacturing unit was ₹ 8 crores. Entity A received the insurance claim amounting to ₹ 12 crores including ₹ 10 crores for reconstructing the unit and ₹ 2 crores for loss of profits. The actual cost of rebuilding the unit is ₹ 11 crores. How will the Entity A account for the same?
Answer:
The Company will recognize the following in accordance with paragraph 66 of Ind AS 16:
(a) Loss of ₹ 8 crores for writing off the carrying value of the manufacturing unit.
(b) Insurance claim receivable of ₹ 12 crores when it becomes receivable as compensation for loss of manufacturing unit (to be included in Other Income);
(c) Cost of reconstruction of manufacturing unit amounting to ₹ 11 crores will be considered as new item of property, plant and equipment.

Decommissioning Cost (Based On Appendix A Of Ind As 16)

Question 40.
Company A has received a land on lease for 99 years from the government to carry out its activities. As per the terms and conditions of the lease, the Company is supposed to return the land to (he government after 99 years on a “as it is where it is basis”. At the inception of the lease the land is utilized by the company and a building has been constructed.

As per Ind AS 16, the cost of an item of property, plant and equipment comprises the initial estimate of the cost of dismantling and removing the item and restoring the site on which it is located. Management is of the view that the scrap value derived at the end of the lease period from the demolition of the project will compensate for the cost of demolition of the project.
How should the Company account for such decommissioning and restoration costs?
Answer:
In the above case, the decommissioning liability would be the liability associated with the costs of demolishing the building and making good the land to be returned to the government as per the terms and conditions of the agreement without considering the scrap value which will be derived from the demolition of the project at the end of the lease period.

All site restoration costs and other environmental restoration and similar costs need to be estimated and capitalized at initial recognition, in order that such costs can be recovered over the life of the item of property, plant and equipment even if the expenditure will only be incurred at the end of the item’s life.

Where an obligation exists to dismantle or remove an asset or restore a site to its former condition at the end of its useful life, the present value of the related future payments is capitalized along with the cost of acquisition or construction upon completion and a corresponding liability is recognized.

The total decommissioning cost is estimated, discounted to its present value and it is this amount which forms the initial provision. This ‘initial estimate of the costs of dismantling and removing the item and restoring the site’ is added to the corresponding asset’s cost. Thereafter, the asset is depreciated over its useful life, while the discounted provision is progressively unwound, with the unwinding charge shown as a finance cost.

Question 41.
An entity has a nuclear power plant and a related decommissioning liability. The nuclear power plant started operating on April 1,2015. The plant has a useful life of 40 years. Its initial cost was ₹ 1,20,000. This included an amount for decommissioning costs of ₹ 10,000, w hich represented ₹ 70,400 in estimated cash flows payable in 40 years discounted at a risk-adjusted rale of 5 per cent. The entity’s financial year ends on March 31. Assume that a market-based discounted cash flow valuation of ₹ 1,15,000 is obtained at March 31, 2018.

It includes an allowance of ₹ 11,600 for decommissioning costs, w’hich represents no change to the original estimate, after the unwinding of three years’ discount. On March 31, 2019, the entity estimates that, as a result of technological advances, the present value of the decommissioning liability has decreased by ₹ 5,000. The entity decides that a full valuation of the asset is needed at March 31, 2019, in order to ensure that the carrying amount does not differ materially from fair value. The asset is now valued at ₹ 1,07,000, which is net of an allowance for the reduced decommissioning obligation.
How the entity will account for the above changes in decommissioning liability if it adopts revaluation model?
Answer:

Notes:

1. Valuation obtained of ₹ 1,15,000 plus decommissioning costs of ₹ 11,600, allowed for in the valuation but recognised as a separate liability = ₹ 1,26,600.
2. Three years’ depreciation on original cost ₹ 1,20,000 × 3/40 = ₹ 9,000 plus cumulative discount on ₹ 10,000 at 5 per cent compound = ₹ 1,600; total ₹ 10,600.
3. Revalued amount ₹ 1,26,600 less previous net book value of ₹ 1,11,000 (cost ₹ 1,20,000 less accumulated depreciation ₹ 9,000).

The depreciation expense for 2018-19 is therefore ₹ 3,420 (₹ 1,26,600 × 1/37) and the discount expense for 2019 is ₹ 600. On March 31, 2019, the decommissioning liability (before any adjustment) is ₹ 12,200. However, as per estimate of the entity, the present value of the decommissioning liability has decreased by ₹ 5,000. Accordingly, the entity adjusts the decommissioning liability from ₹ 12,200 to ₹ 7,200.

The whole of this adjustment is taken to revaluation surplus, because it does not exceed the carrying amount that would have been recognised had the asset been carried under the cost model. If it had done, the excess would have been taken to profit or loss. The entity makes the following journal entry to reflect the change:

As at March 31, 2019, the entity revalued its asset at ₹ 1,07,000, which is net of an allowance of ₹ 7,200 for the reduced decommissioning obligation that should be recognised as a separate liability. The valuation of the asset for financial reporting purposes, before deducting this allowance, is therefore ₹ 1,14,200. The following additional journal entry is needed:

Notes:

1. Eliminating accumulated depreciation of ₹ 3,420 in accordance with the entity’s accounting policy.
2. The debit is to revaluation surplus because the deficit arising on the revaluation does not exceed the credit balance existing in the revaluation surplus in respect of the asset.
3. Previous valuation (before allowance for decommissioning costs) ₹ 1,26,600, less cumulative depreciation ₹ 3,420, less new valuation (before allowance for decommissioning costs) ₹ 1,14,200.

Following this valuation, the amounts included in the balance sheet are:

Notes:

1. ₹ 10,600 at March 31, 2018, plus depreciation expense of ₹ 3,420 and discount expense of ₹ 600 = ₹ 14,620.
2. ₹ 15,600 at March 31, 2018, plus ₹ 5,000 arising on the decrease in the liability, less ₹ 8,980 deficit on revaluation = ₹ 11,620.

Ind AS 116: Leases

Question 1.
[Based on Para Nos. 13 and 14 + B33]
Entity X (lessee) entered into a lease agreement (‘lease agreement’) with Entity Y (lessor) to lease an entire floor of a shopping mall for a period of 9 years. The monthly lease rent is ₹ 70,000. To carry out its operations smoothly, Entity X simultaneously entered into another agreement (‘facilities agreement’) with Entity Y for using certain other facilities owned by Entity Y such as passenger lifts, DG sets, power supply infrastructure, parking space etc., which are specifically mentioned in the agreement, for monthly service charges amounting to ₹ 1,00,000. As per the agreement, the ownership of the facilities shall remain with Entity Y. Lessee’s incremental borrowing rate is 10%.

The facilities agreement clearly specifies that it shall be co-existent and coterminous w ith ‘lease agreement’. The facility agreement shall stand terminated automatically on termination or expiry of ‘lease agreement’.
Entity X has assessed that the stand-alone price of ‘lease agreement’ is ₹ 1,20,000 per month and stand-alone price of the ‘facilities agreement’ is ₹ 80,000 per month. Entity X has not elected to apply the practical expedient in paragraph 15 of Ind AS 116 of not to separate non-lease component(s) from lease component(s) and accordingly it separates non-lease components from lease components.

How will Entity X account for lease liability as at the commencement date? [RTP-November 2020]

Note:
This question involves a basic understanding of computation of least liability apart from the concept of separating lease and non-lease components.
Answer:
Analysis:
Entity X identifies that the contract contains lease of premises and non-lease component of facilities availed.

As Entity X has not elected to apply the practical expedient as provided in paragraph 15, it will separate the lease and non-lease components and allocate the total consideration of ₹ 1,70,000 to the lease and non-lease components in the ratio of their relative stand-alone selling prices.

Allocation of lease and non-lease components:
(in the ratio of their relative stand-alone selling prices)

Computation of Lease liability:
(at the commencement date)

Note:
₹ 68,000 allocated to the non-lease component of facility used will be recognized in profit or loss as and when incurred.

Ind AS 23: Borrowing Costs
Definition Of Borrowing Costs (Based On Para Nos. 5 To 6a)

Question 1.
A Lid. has taken a loan of USD 20,000 on April .1,20X1 for constructing a plant at an interest rale of 5% per annum payable on annual basis.
On April 1, 20X1, the exchange rate between the currencies i.c. USD v. Rupees was ₹ 45 per USD. The exchange rate on the reporting date i.c. March 31, 20X2 is ₹ 48 per USD.
The corresponding amount could have been borrowed by A Ltd. from State Bank of India in local currency at an interest rate of 11% per annum as on April 1,20X1.
Compute the borrowing cost to be capitalized for the construction of plant by A Ltd.
Answer:
In the above situation, the Borrowing cost needs to determine for interest cost on such foreign currency loan and eligible exchange loss difference if any.

(a) Interest on Foreign currency loan for the period:
USD 20,000 × 596 = USD 1,000
Converted in ₹ : USD 1,000 × ₹ 48/USD = ₹ 48,000
Increase in liability due to change in exchange difference:
USD 20,000 × (48 – 45) = ₹ 60,000

(b) Interest that would have resulted if the loan was taken in Indian Currency:
USD 20,000 × ₹ 45/USD × 1196 = ₹ 99,000

(c) Difference between Interest on Foreign Currency borrowing and local
Currency borrowing:
₹ 99,000 – 48,000 = ₹ 51,000
Hence, out of Exchange loss of ₹ 60,000 on principal amount of foreign currency loan, only exchange loss to the extent of ₹ 51,000 is considered as borrowing costs.

Total borrowing cost to be capitalized is as under:

The exchange difference of ₹ 51,000 has been capitalized as borrowing cost and the remaining ₹ 9,000 will be expensed off in the Statement of Profit and loss.

Capitalisation Of Borrowing Costs General Borrowings [Based On Para No. 14]

Question 2.
An entity constructs a new office building commencing on 1st September, 2018, which continues till 31st December, 2018 (and is expected to go beyond a year). Directly attributable expenditure at the beginning of the month on this asset are ₹ 2 Lakhs in September 2018 and ₹ 4 Lakhs in each of the months of October to December 2018.

The entity has not taken any specific borrowings to finance the construction of the building but has incurred finance costs on its general borrowings during the construction period. During the year, the entity had issued 9% debentures with a face value of ₹ 30 Lakhs and had an overdraft of ₹ 4 Lakhs, which increased to ₹ 8 Lakhs in December 2018. Interest was paid on (he overdraft at 12% until 1st October, 2018 and then the rate was increased to 15%.

Calculate the Capitalization rate for computation of borrowing cost in accordance with Ind AS ‘Borrowing Cost’. [Nov. 2019 – 8 Marks]
Answer:
Computation of Capitalization rate:

Question 3.
An entity constructs a new head office building commencing on 1st September 20X1, which continues till 31st December 20X1. Directly attributable expenditure at the beginning of the month on this asset are ₹ 1,00,000 in September 20X1 and ₹ 2,50,000 in each of the months of October to December 20X1.

The entity has not taken any specific borrowings to finance the construction of the asset, but has incurred finance costs on its general borrowings during the construction period. During the year, the entity had issued 10% debentures with a face value of ₹ 20 lacs and had an overdraft of ₹ 5,00,000, which increased to ₹ 7,50,000 in December 20X1. Interest was paid on the overdraft at 15% until 1 October 20X1, then the rate was increased to 16%.

Calculate the capitalization rate for computation of borrowing cost in accordance with Ind AS 23 ‘Borrowing Costs’.
Answer:
Since the entity has only general borrowing hence first step will be to compute the capitalisation rate. The capitalisation rate of the general borrowings of the entity during the period of construction is calculated as follows:

Weighted average borrowings during period
= \(\frac{(20,00,000 \times 4)+(5,00,000 \times 3)+(7,50,000 \times 1)}{4}\) = ₹ 25,62,500 4
Capitalisation rate = Total finance costs during the construction period/ Weighted average borrowings during the construction period
= 96,250/25,62,500 = 3.756%

Question 4.
Kaba Ltd. began construction of a new building at an Estimated cost of ₹ 7 lakh on 1st April, 2017. To finance construction of the building it obtained a specific loan of ₹ 2 lakh from a financial institution at an interest rate of 9% per annum.
The company’s other outstanding loans were:

The expenditure incurred on the construction was:

The construction of building was completed by 31st January, 2018.Follow-ing the provisions of Ind AS 23 ‘Borrowing Costs’, calculate the amount of interest to be capitalized and pass necessary journal entry for capitalizing the cost and borrowing cost in respect of the building as on 31st January, 2018.
Answer:
(i) Calculation of capitalization rate on borrowings other than specific borrowings

(ii) Computation of borrowing cost to be capitalized for specific borrowings and general borrowings based on weighted average accumulated expenses

Note: Since construction of building started on 1st April, 2017, it is presumed that all the later expenditures on construction of building had been incurred at the beginning of the respective month.

(iii) Total expenses to be capitalized for building

Question 5.
On 1st April, 20X1, entity A contracted for the construction of a building for ₹ 22,00,000. The land under the building is regarded as a separate asset and is not part of the qualifying assets. The building was completed at the end of March, 20X2, and during the period the following payments were made to the contractor:

Entity A’s borrowings at its year end of 31st March, 20X2 were as follows:
(a) 10%, 4 year note with simple interest payable annually, which relates specifically to the project; debt outstanding on 31st March, 20X2 amounted to ₹ 7,00,000. Interest of ₹ 65,000 was incurred on these borrowings during the year, and interest income of ₹ 20,000 was earned on these funds while they were held in anticipation of payments.
(b) 12.5% 10 year note with simple interest payable annually; debt outstanding at 1st April, 20X1 amounted to ₹ 10,00,000 and remained unchanged during the year; and
(c) 10% 10 year note with simple interest payable annually; debt outstanding at 1st April, 20X1 amounted to ₹ 15,00,000 and remained unchanged during the year.
What amount of the borrowing costs can be capitalized at year end as per relevant Ind AS? [RTP-November 2019]
Answer:
Analysis of expenditure:

# Specific borrowings of ₹ 7,00,000 fully utilized on 1st April & on 30th June to the extent of ₹ 5,00,000 hence remaining expenditure of ₹ 1,00,000 allocated to general borrowings.

Capitalisation rate = \(\frac{(10,00,000 \times 12.5 \%)+(15,00,000 \times 10 \%)}{10,00,000+15,00,000}\) = 11%

Ind AS 36: Impairment of Assets
Computation Of Impairment Loss – Basics [BASED ON PARA NOS. 6,18 TO 32 + 58 TO 64 + 104 TO 108]

Question 1.
E limited is a manufacturing company which deals into manufacturing of cold drinks and beverages. It is having various plants across India. There is a Machinery A in the Baroda plant which is used for the purpose of bottling. There is one more machinery which is Machinery B clubbed with Machinery A. Machinery A can individually have an output and also sold independently in the open market. Machinery B cannot be sold in isolation and without clubbing with Machine A it cannot produce output as well. The Company considers this group of assets as a Cash Generating Unit and an Inventory amounting to ₹ 2 Lakh and Goodwill amounting to ₹ 1.50 Lakhs is included in such CGU.

Machinery A was purchased on 1st April, 2013 for ₹ 10 Lakhs and residual value is ₹ 50 thousands. Machinery B was purchased on 1st April, 2015 for ₹ 5 Lakhs with no residual value. The useful life of both Machines A and B is 10 years. The Company expects following cash flows in the next 5 years pertaining to Machinery A. The incremental borrowing rate of the company is 10%.

On 31st March, 2018, the professional valuers have estimated that the current market value of Machinery A is ₹ 7 lakhs. The valuation fee was ₹ 1 lakh. There is a need to dismantle the machinery before delivering it to the buyer. Dismantling cost is ₹ 1.50 lakhs. Specialised packaging cost would be ₹ 25 thousand and legal fees would be ₹ 75 thousand.
The Inventory has been valued in accordance with Ind AS 2. The recoverable value of CGU is ₹ 10 Lakh as on 31st March, 2018. In the next year, the company has done the assessment of recoverability of the CGU and found
that the value of such CGU is ₹ 11 Lakhs i.e. on 31st March, 2019. The Recoverable value of Machine A is ₹ 4,50,000 and combined Machine A and B is ₹ 7,60,000 as on 31st March, 2019.

Required:
(a) Compute the impairment loss on CGU and carrying value of each asset after charging impairment loss for the year ending 31st March, 2018 by providing all the relevant working notes to arrive at such calculation.
(b) Compute the prospective depreciation for the year 2018-2019 on the above assets.
(c) Compute the carrying value of CGU as at 31st March, 2019.
Answer:
(a) Computation of impairment loss and carrying value of each of the asset in CGU after impairment loss

(i) Calculation of carrying value of Machinery A and B before impairment

(ii) Calculation of Value-in-use of Machinery A

In 20X3-X4, East expects to invest in new technology costing ₹ 1,00, 000. This technology will reduce the variable costs of manufacturing each steering wheel from ₹ 110 to v 100 and the share of fixed overheads from ₹ 30 to ₹ 15 (subject to the availability of technology, which is still under development).

East is depreciating the machine using the straight-line method over the machine’s 10 year estimated useful life. The current estimate (based on similar assets that have reached the end of their useful lives) of the disposal proceeds from selling the machine is ₹ 80,000 net of disposal costs. East expects to dispose of the machine at the end of March, 20X8.

East has determined a pre-tax discount rate of 8 per cent, which reflects the market’s assessment of the time value of money and the risks associated with this asset.
Assume a tax rate of 30%. What is the value in use of the machine in accor-dance with Ind AS 36? [RTP – November 2019]
Answer:
Calculation of the value in use of the machine owned by East Ltd. (East) includes the projected cash inflow (ie. sales income) from the continued use of the machine and projected cash outflows that are necessarily incurred to generate those cash inflows (i. e. cost of goods sold). Additionally, projected cash inflows include ₹ 80,000 from the disposal of the asset in March, 20X8. Cash outflows include routing capital expenditures of ₹ 50,000 in 20X5-X6

As per Ind AS 36, estimates of future cash flows shall not include:

• Cash inflows from receivables
• Cash outflows from payables
• Cash inflows or outflows expected to arise from future restructuring to which an entity is not yet committed
• Cash inflows or outflows expected to arise from improving or enhancing the asset’s performance
• Cash inflows or outflows from financing activities
• Income tax receipts or payments.

Hence in this case, cash flows do not include financing interest (ie. 10%), tax (ie. 30%) and capital expenditures to which East has not yet committed (ie. ₹ 1,00,000). They also do not include any savings in cash outflows from these capital expenditures, as required by Ind AS 36.

The cash flows (inflows and outflows) are presented below in nominal terms. They include an increase of 3% per annum to the forecast price per unit (B), in line with forecast inflation. The cash flows are discounted by applying a discount rate (8%) that is also adjusted for inflation.

Note: Figures are calculated on full scale and then rounded off to the nearest absolute value.

Question 3.
The UK entity with a sterling functional currency has a property located in US, which was acquired at a cost of US$ 1.8 million when the exchange rate was £ 1 = USS 1.60. The property is carried at cost. At the balance sheet date, the recoverable amount of the property (as a result of an impairment review) amounted to US$ 1.62 million, when the exchange rate £ 1 = US$ 1.80.
Compute the amount which is to be reported in Profit & Loss of UK entity as a result of impairment, if any.
Ignore depreciation.
Also analyze the total impairment loss on account of change in value due to impairment component and exchange component. [RTP-November 2020]
Answer:
Computation of Impairment Loss:
(to be charged in the Profit & Loss A/c)

Allocation Of Corporate Assets (Based On Para Nos. 100 To 102)

Question 4.
M Ltd. has three cash-generating units: A, B and C. Due to adverse changes in the technological environment, M Ltd. conducted impairment tests of each of its cash-generating units. On 31st March, 2018, the carrying amounts of A, B and C are ₹ 100 lakhs, ₹ 150 lakhs and ₹ 200 lakhs respectively.

The operations are conducted from a headquarter. The carrying amount of the headquarter assets is ₹ 200 lakhs: a headquarter building of ₹ 150 lakhs and a research centre of ₹ 50 lakhs. The relative carrying amounts of the cash-generating units are a reasonable indication of the proportion of the head-quarter building devoted to each cash-generating unit. The carrying amount of the research centre cannot be allocated on a reasonable basis to the individual cash-generating units.

Following is the remaining estimated useful life of:

The headquarter assets are depreciated on a straight-line basis.

The recoverable amount of each cash generating unit is based on its value in use since net selling price for each CGU cannot be calculated. Therefore, Value in use is equal to

*The research centre generates additional future cash flows for the enterprise as a whole. Therefore, the sum of the value in use of each individual CGU is less than the value in use of the business as a whole. The additional cash flows are not attributable to the headquarter building.
Calculate and show allocation of impairment loss as per AS 28. Ignore tax effects.
Answer:
1. Identification of Corporate Assets of M Ltd.
Here, the corporate assets are the headquarter building and the research centre.

For corporate building
Since, the carrying amount of the headquarter building can be allocated on a reasonable and consistent basis to the cash-generating units under review. Therefore, only a ‘bottom-up’ test is necessary.

For research centre
Since the carrying amount of the research centre cannot be allocated on a reasonable and consistent basis to the individual CGU under review. Therefore, a ‘top-down’ test will be applied in addition to the ‘bottom-up’ test.

2. Allocation of Corporate Assets
Since the estimated remaining useful life of A’s CGU is 10 years, whereas the estimated remaining useful lives of B and C’s CGU are 20 years, the carrying amount of the headquarter building is allocated to the carrying amount of each individual cash-generating unit on weight basis.

3. Calculation of a weighted allocation of the carrying amount of the headquarter building
(Amount in ₹ lakhs rounded off)

4. Calculation of Impairment Losses
(i) Application of‘bottom-up’test (Amount in ₹ lakhs)

(ii) Allocation of the impairment losses for cash-generating units B and C

Since the research centre could not be allocated on a reasonable and consistent basis to A, B and C’s CGU, M Ltd. compares the carrying amount of the smallest CGU to which the carrying amount of the research centre can be allocated (i.e., M as a whole) to its recoverable amount, in accordance with the ‘top-down’ test.

(iii) Application of the ‘top-down’ test

Since recoverable amount is more than the carrying amount of M Ltd., no additional impairment loss has been resulted from the application of the ‘top-down’ test. Only an impairment loss of ₹ 46 lakhs will be recognized as a result of the application of the ‘bottom-up’ test.

Question 5.
XYZ Limited has three cash-generating units – X, Y and Z, the carrying amounts of which as on 31st March, 2018 are as follows:

XYZ Limited also has corporate assets having a remaining useful life of 20 years as given below:

Recoverable amounts as on 31st March, 2018 are as follows:

Calculate the impairment loss if any of XYZ Ltd. Ignore decimals.
Answer:
(i) Allocation of corporate assets to CGU
The carrying amount of A is allocated to the carrying amount of each individual cash-generating unit. A weighted allocation basis is used because the estimated remaining useful life of Y’s cash-generating unit is 10 years, whereas the estimated remaining useful lives of X and Z’s cash-generating units are 20 years.

(ii) Calculation of impairment loss
Step 1: Impairment losses for individual cash-generating units and its allocation

(a) Impairment loss of each cash-generating units

Impairment Testing CGU With Goodwill And NCI (Based On Appendix C)

Question 6.
A Lid. prepares consolidated financial statements upto 31st March each year. On 1st July 2017, A Ltd. acquired 75% of the equity shares of J Ltd. and gained control of J Ltd. The issued shares of J Ltd. is X 1,20,00,000 equity shares. Details of the purchase consideration are as follows:

On 1st July, 2017, A Ltd. issued two shares for every three shares acquired in J Ltd. On 1st July, 2017, the market value of an equity share in A Ltd. was ₹ 6.50 and the market value of an equity share in J Ltd. was ₹ 6.

* On 30th June, 2018, A Ltd. will make a cash payment of ₹ 71,50,000 to the former shareholders of J Ltd. who sold their shares to A Ltd. on 1st July, 2017. On 1st July, 2017, A Ltd. would have to pay interest at an annual rate of 10% on borrowings.

* On 30th June, 2019, A Ltd. may make a cash payment of ₹ 3,00,00,000 to the former shareholders of J Ltd. who sold their shares to A Ltd. on 1st July, 2017. This payment is contingent upon the revenues of A Ltd. growing by 15% over the two-year period from 1st July, 2017 to 30th June, 2019. On 1st July, 2017, the fair value of this contingent consideration was ₹ 2,50,00,000. On 31sl March, 2018, the fair value of the contingent consideration was ₹ 2,20,00,000.

* On 1st July, 2017, the carrying values of the identifiable net assets of J Ltd. in the books of that company was X 6,00,00,000. On 1st July, 2017, the fair values of these net assets was ₹ 7,00,00,000. The rate of deferred tax to apply to temporary differences is 20%.

During the nine months ended on 31st March, 2018, J Ltd. had a poorer than expected operating performance. Therefore, on 31st March, 2018 it was necessary for A Ltd. to recognise an impairment of the goodwill arising on acquisition of J Ltd., amounting to 10% of its total computed value.

Compute the impairment of goodwill in the consolidated financial statements of A Ltd. under both the methods permitted by Ind AS 103 for the initial computation of the non-controlling interest in J Ltd. at the acquisition date.
Answer:
Computation of goodwill impairment

Working Note:

Question 7.
O Ltd. is an entity with various subsidiaries. The entity closes its books of account at every year ended on 31st March. On 1st July, 2014, O Ltd. acquired an 80% interest in P Ltd. Details of the acquisition were as follows:

* O Ltd. acquired 8,00,000 shares in P Ltd. by issuing two equitv shares for every five acquired. The fair value of O Ltd.’s share on 1st July 2014 was ₹ 4 per share and the fair value of a P’s share was ₹ 1-40 per share. The costs of issue were 5% per share.
* O Ltd. incurred further legal and professional costs of ₹ 1,00,000 that directly related to the acquisition.
* The fair values of the identifiable net assets of P Ltd. at 1st July 2014 were measured at ₹ 1-3 million. O Ltd. initially measured the non-controlling interest in P Ltd. at fair value. They used the market value of a P Ltd. share for this purpose. No impairment of goodwill arising on the acquisition of P Ltd. was required at 31st March 2015 or 2016.

P Ltd. comprises three cash generating units A, B and C. When P Ltd. was acquired the directors of O Ltd. estimated that the goodwill arising on acquisition could reasonably be allocated to units A:B:C on a 2:2:1 basis. The carrying values of the assets in these cash generating units and their recoverable amounts are as follows:

Required:
(i) Compute the carrying value of the goodwill arising on acquisition of P Ltd. in the consolidated Balance Sheet of O Ltd. at 31st March 20X4 following the impairment review as per Ind AS.
(ii) Compute the total impairment loss arising as a result of the impairment review, identifying how much of this loss would be allocated to the non-controlling interests in P Ltd.
Answer:
1. Computation of goodwill on acquisition

Acquisition costs are not included as part of the fair value of the con-sideration given under Ind AS 103, Business Combination.

2. Calculation of impairment loss

* After writing down assets in the individual CGU to recoverable amount.

3. Calculation of closing goodwill

4. Calculation of overall impairment loss

20% of total loss i.e. ₹ 21.20 thousand is allocated to the NCI with the balance allocated to the shareholders of O Ltd.

Ind AS 38: Intangible Assets
[BASED ON PARA NOS. 13 + 15]

Question 1.
ABC Pvt. Ltd., recruited a player. As per the terms of the contract, the player is prohibited from playing for any other entity for coming 5 years and have to in the employment with the company and cannot leave the entity without mutual agreement. The price the entity paid to acquire this right is derived from the skills and fame of the said player. The entity uses and de-velops the player through participation in matches.
State whether the cost incurred to obtain the right regarding the player can be recognized as an intangible asset as per Ind AS 38? [RTP-November 2020]
Answer:
Evaluation Chart:

Definition And Recognition Of Intangible Asset (Based On Para Nos. 8, 12, 21, 48, 63 And 69)

Question 2.
A Ltd. intends to open a new retail store in a new location in the next few weeks. It has spent a substantial sum on a series of television advertisements to promote this new store. It has paid for advertisements costing ₹ 8,00,000 before 31st March, 2018. ₹ 7,00,000 of this sum relates to advertisements shown before 31st March, 2018 and ₹ 1,00,000 to advertisements shown in April, 2018. Since 31 st March, 2018, A Ltd. has paid for further advertisements costing ₹ 4,00,000.

The accountant charged all these costs as expenses in the year to 31st March, 2018. However, CFO of A Ltd. does not want to charge ₹ 12,00,000 against 2017-2018 profits. He believes that these costs can be carried forward as intangible assets because the company’s market research indicates that this new store is likely to be highly successful.

Examine and justify the treatment of these costs of ₹ 12,00,000 in the financial statements for the year ended 31st March, 2018 as per Ind AS.
Answer:
Ind AS 38 specifically prohibits recognising advertising expenditure as an intangible asset. Irrespective of success probability in future, such expenses have to be recognized in profit or loss. Therefore, the treatment given by the accountant is correct since such costs should be recognised as expenses.

However, the costs should be recognised on an accruals basis.
Therefore, of the advertisements paid for before 31st March, 2018, ₹ 7,00,000 would be recognised as an expense and ₹ 1,00,000 as a pre-payment in the year ended 31st March, 2018.
₹ 4,00,000 cost of advertisements paid for since 31st March, 2018 would be charged as expenses in the year ended 31st March, 2019.

Question 3.
MNC Ltd. is in process of setting up a medicine manufacturing business which is at very initial stage. For this purpose, MNC Ltd. as part of its business expansion strategy acquired on 1st April, 2019, 100% shares of Akash Ltd., a company that manufactures pharmacy products. The purchase consideration for the same was by way of a share exchange valued at ₹ 38 crores. The fair value of Akash Ltd.’s assets and liabilities were ₹ 68 crores and ₹ 50 crores respectively, but the same does not include the following:

(i) A patent owned by Akash Ltd. for an established successful new drug that has a remaining life of 6 years. A consultant has estimated the value of this patent to be ₹ 8 crore. However, the outcome of clinical trials for the same are awaited. If the trails are successful, the value of the drug would fetch the estimated ₹ 12 crores.

(ii) Akash Ltd. has developed and patented another new drug which has been approved for clinical use. The cost of developing the drug was ₹ 13 crores. Based on early assessment of its sales success, a reputed valuer has estimated its market value at ₹ 19 crores. However, there is no active market for the patent.

(iii) Akash Ltd.’s manufacturing facilities have received a favourable inspection by a Government department. As a result of this, the company has been granted an exclusive five-year license on 1st April, 2018 to manufacture and distribute a new vaccine.
Although the license has no direct cost to the Company, its directors believe that obtaining the license is a valuable asset which assures guaranteed sales and the cost to acquire the license is estimated at ₹ 7 crores for remaining period of life. It is expected to generate at least equivalent revenue.

Suggest the accounting treatment of the above transactions with reasoning under applicable Ind AS in the books of MNC Ltd.
[Nov. 2020 – 8 Marks]
Answer:
The company can recognise following Intangible assets while determining Goodwill/Bargain Purchase for the transaction:

(i) Patent owned by Akash Ltd.:
The patent owned will be recognised at fair value by MNC Ltd. even though it was not recognised by A Ltd. in its financial statements. The patent will be amortised over the remaining useful life of the asset ie. 6 years. Since the company is awaiting the outcome of the trials, the value of the patent cannot be estimated at ₹ 12 crore and the extra ₹ 4 crore should only be disclosed as a Contingent Asset and not recognised.

(ii) Patent internally developed by Akash Ltd.:
Further as per para 75 of Ind AS 38 ‘Intangible Assets’, after initial recognition, an intangible asset shall be carried at revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, fair value shall be determined by reference to an active market.

From the information given in the question, it appears that there is no active market for patents since the fair value is based on early assess-ment of its sale success. Hence it is suggested to use the cost model and recognise the patent at the actual development cost of ₹ 13 crore.

(iii) Grant of Licence to Akash Ltd. by the Government:
As regards to the five-year license, para 44 of Ind AS 38 requires to recognize grant asset at fair value. MNC Ltd. can recognize both the assets (license) and the grant at ₹ 7 crore to be amortised over 5 years. Hence the revised working would be as follows:

Research And Development (Based On Para Nos. 54 To 67)

Question 4.
CARP Ltd. is engaged in developing computer software. The expenditures incurred by CARP Ltd; in pursuance of its development of software is given below;

1. Paid ₹ 1,50,000 towards salaries of the program designers.
2. Incurred ₹ 3,00,000 towards other cost of completion of program design.
3. Incurred ₹ 80,000 towards cost of coding and establishing technical feasibility.
4. Paid ₹ 3,00,000 for other direct cost after establishment of technical feasibility.
5. Incurred ₹ 90,000 towards other testing costs.
6. A focus group of other software developers was invited to a conference for the introduction of this new software. Cost of the conference aggregated to ₹ 60,000.
7. On March 15,2018, the development phase was completed and a cash flow budget was prepared.
   Net profit for the year 2017-18 was estimated to be equal ₹ 30,00,000.

How CARP Ltd. should account for the abovementioned cost as per relevant Ind AS? [May 2019 – 5 Marks]
Answer:
Costs incurred in creating computer software, should be charged to research & development expenses when incurred until technical feasibility/ asset recognition criteria have been established for the product. Here, technical feasibility is established after completion of detailed program design.

In this case, ₹ 5,30,000 (salary cost of ₹ 1,50,000; program design cost of ₹ 3,00,000 and coding and technical feasibility cost of t 80,000) would be recorded as expense.

Cost incurred from the point of technical feasibility are capitalised as software costs. But the conference cost of ₹ 60,000 would be expensed off.

In this situation, direct cost after establishment of technical feasibility of ₹ 3,00,000, testing cost of ₹ 90,000 will be capitalised.
The cost of software capitalised is = ₹ (3,00,000 + 90,000) = ₹ 3,90,000.

[Based On Initial And Subsequent Measurement – Comprehensive Question]

Question 5.
Shaurya Limited owns Budding A which is specifically used for the purpose of earning rentals. The Company has not been using the building A or any of its faculties for its own use for a long time. The company is also exploring the opportunities to sell the budding if it gets the reasonable amount in consideration.

Following information is relevant for Building A for the year ending 31st March, 2020:
Building A was purchased 5 years ago at the cost of ₹ 10 crore and building life is estimated to be 20 years. The company follows straight line method for depreciation.

During the year, the company has invested in another Building B with the purpose to hold it for capital appreciation. The property was purchased on 1st April, 2019 at the cost of ₹ 2 crores. Expected life of the building is 40 years. As usual, the company follows straight line method of depreciation.

Further, during the year 2019-2020, the company earned/incurred following direct operating expenditure relating to Building A and Building B:

The company does not have any restrictions and contractual obligations against buildings – A and B. For complying with the requirements of Ind AS, the management sought an independent report from the specialists so as to ascertain the fair value of buildings A and B. The independent valuer has valued the fair value of property as per the valuation model recommended by International valuation standards committee. Fair value has been computed by the method by streamlining present value of future cash flows namely, discounted cash flow method.

The other key inputs for valuation are as follows:

The estimated rent per month per square feet for the period is expected to be in the range of ₹ 50 – ₹ 60. It is further expected to grow at the rate of 10 per cent per annum for each of 3 years. The weighted discount rate used is 12% to 13%.

Assume that the fair value of properties based on discounted cash flow method is measured at ₹ 10.50 crore on 31st March, 2020. What would be the treatment of Building A and Building B in the balance sheet of Shaurya Limited? Provide detailed disclosures and computations in line with relevant Indian accounting standards.

Treat it as if you are preparing a separate note or schedule, of the given assets in the balance sheet. [RTP-November 2020]
Answer:
Measurement of Investment property: (as per Ind AS 40 in the Balance Sheet)

Amount to be recognized in Profit and Loss A/c:
(with respect to Investment Properties)

Disclosure Note on Investment Properties: (acquired by the entity)

The investment properties consist Property A and Property B. As at 31st March, 2020, the fair value of the properties is ₹ 10.50 crore. The valuation is performed by independent valuers, who are specialists in valuing investment properties. A valuation model as recommended by International Valuation Standards Committee has been applied. TheCompany considers factors like management intention, terms of rental agreements, area leased out, life of the assets etc. to determine classification of assets as investment properties.

The Company has no restrictions on the realisability of its investment properties and no contractual obligations to purchase, construct or develop investment properties or for repairs, maintenance and enhancements.

Description of valuation techniques used and key inputs to valuation on investment properties:

Ind AS 40: Investment Property
Transfer (Based On Para Nos. 57 To 59)

Question 1.
X Ltd. is engaged in the construction industry and prepares its financial statements upto 31st March each year. On 1st April, 2013, X Ltd. purchased a large property (consisting of land) for ₹ 2,00,00,000 and imme-diately began to lease the property to Y Ltd. on an operating lease. Annual rentals were ₹ 20,00,000. On 31st March, 2017, the fair value of the property was ₹ 2,60,00,000. Under the terms of the lease, Y Ltd. was able to cancel the lease by giving six months’ notice in writing to X Ltd. Y Ltd. gave this notice on 31st March, 2017 and vacated the property on 30th September, 2017. On 30th September, 2017, the fair value of the property was ₹ 2,90,00,000.

On 1st October, 2017, X Ltd. immediately began to convert the property into ten separate flats of equal size which X Ltd. intended to sell in the ordinary course of its business. X Ltd. spent a total of ₹ 60,00,000 on this conversion project between 30th September, 2017 to 31st March, 2018. The project was incomplete at 31st March, 2018 and the directors of X Ltd. estimate that they need to spend a further ₹ 40,00,000 to complete the project, after which each flat could be sold for ₹ 50,00,000.

Examine and show how the three events would be reported in the financial statements of X Ltd. for the year ended 31st March, 2018 as per Ind AS.
Answer:
From 1st April, 2013, the property would be regarded as an investment property since it is being held for its investment potential rather than being owner occupied or developed for sale.

The property would be measured under the cost model. This means it will be measured at ₹ 2,00,00,000 at each year end.

On 30th September, 2017, the property ceases to be an investment property. X Ltd. begins to develop it for sale as flats. The increase in the fair value of the property from 31st March, 2017 to 30th September, 2017 of ₹ 30,00,000 (₹ 2,90,00,000 – ₹ 2,60,00,000) would be recognised in P/L for the year ended 31st March, 2018.

Since the lease of the property is an operating lease, rental income of ₹ 10,00,000 (₹ 20,00,000 × 6/12) would be recognised in P/L for the year ended 31st March, 2018.

When the property ceases to be an investment property, it is transferred into inventory at its then fair value of ₹ 2,90,00,000. This becomes the initial ‘cost’ of the inventory.

The additional costs of ₹ 60,00,000 for developing the flats which were incurred up to and including 31st March, 2018 would be added to the ‘cost’ of inventory to give a closing cost of ₹ 3,50,00,000.

The total selling price of the flats is expected to be ₹ 5,00,00,000 (10 × ₹ 50,00,000). Since the further costs to develop the flats total ₹ 40,00,of borrowing, their net realisable value is ₹ 4,60,00,000 (₹ 5,00,00,000 – ₹ 40,00,000), so the flats will be measured at a cost of ₹ 3,50,00,000.
The flats will be shown in inventory as a current asset.

Ind AS 105: Non-current Assets Held for Sole and Discontinued Operations
Classification As Held For Sale (Based On Para Nos. 6 To 14)

Question 1.
A Ltd. is to sell a non-current asset, being a piece of land. The piece of land has been contaminated and will require the entity to carry out ₹ 1,00,000 of work in order to rectify the contamination. If the land was not contaminated, it could be sold for ₹ 3,00,000. With the contamination, it is worth only ₹ 2,00,000. The work that is needed to rectify the contamination will extend the period of sale by one year from the date the land is first marketed for sale.

Required:
In the following situations, examine with suitable reasons whether land can be classified as held for sale in accordance with Ind AS 105: Non-current assets held for sale and discontinued operations.

Situation 1. The land is marketed for ₹ 3,00,000 and A Ltd. was not aware of the contamination till the time a firm purchase commitment was signed with a purchaser. The purchaser found the contamination through a survey.
The purchaser signed the firm purchase commitment on condition that the contamination damage will be rectified.

Situation 2. A Ltd. marketed the land for ₹ 3,00,000, knowing about the con-tamination when the proposal to sale the land went in the market. However, A Ltd. marketed it with an agreement that it would carry out the rectification work within few months from signing the firm purchase commitment.

Situation 3. A Ltd. knew about the contamination prior to float the proposal to sell the land and markets it for ₹ 2,00,000 with no obligation on itself to rectify or fix the contamination.
Answer:
Situation 1
As fair as the entity was aware, the land was marketed and available for imme-diate sale in its present condition at a reasonable price. The event extending the one-year period was imposed by the buyer after the firm purchase commitment was received and the entity is taking steps to address it. The land qualifies as held for sale and continues to do so after it is required to carry out the rectification work.

Situation 2
The land is not available for immediate sale in its present condition when it is first marketed. It is being marketed at a price that involves further work to the land. It cannot be classified as held for sale when it is first marketed. It also cannot be classified as held for sale when a purchase commitment is received, because even then it is not for sale in its present condition and no conditions have been unexpectedly imposed. The land will not be classified as held for sale until the rectification work is actually carried out.

Situation 3
The land in this case is available for immediate sale in its present condition and it would qualify to be classified as held for sales since it is being marketed at reasonable price.

Measurement (Based On Para Nos. 15 To 25)

Question 2.
Following is the extract of the consolidated financial statements of A Ltd. for the year ended on:

On 15th September, 20X1, Entity A decided to sell the business. It noted that the business meets the condition of disposal group classified as held for sale on that date in accordance with Ind AS 105. However, it does not meet the conditions to be classified as discontinued operations in accordance with that standard.

The disposal group is stated at the following amounts immediately prior to reclassification as held for sale.

Entity A proposed to sell the disposal group at ₹ 19,00,000. It estimates that the costs to sell will be ₹ 70,000. This cost consists of professional fee to be paid to external lawyers and accountants.

As at 31st March 20X2, there has been no change to the plan to sell the disposal group and entity A still expects to sell it within one year of initial classification. Mr. X, an accountant of Entity A remeasured the following assets/liabilities in accordance with respective standards as on 31st March 20X2:

The disposal group has not been trading well and its fair value less costs to sell has fallen to ₹ 16,50,000.

Required:
What would be the value of all assets/Liabilities within the disposal group as on the following dates in accordance with Ind AS 105?
(a) 15 September, 20X1 and
(b) 31st March, 20X2
Answer:
(a) As at 15 September, 20X1
The disposal group should be measured at ₹ 18,30,000 (19,00,000 – 70,000). The impairment write down of ₹ 3,30,000(₹ 21,60,000 – ₹ 18,30,000) should be recorded within profit from continuing operations.
The impairment of ₹ 3,30,000 should be allocated to the carrying values of the appropriate non-current assets.

The impairment loss is allocated first to goodwill and then pro rata to the other assets of the disposal group within Ind AS 105 measurement scope. Following assets are not in the measurement scope of the standard- financial asset measured at other comprehensive income, the deferred tax asset or the current assets. In addition, the impairment allocation can only be made against assets and is not allocated to liabilities.

(b) As on 31 March, 20X2:
All of the assets and liabilities, outside the scope of measurement under IFRS 5, are remeasured in accordance with the relevant standards. The assets that are remeasured in this case under the relevant standards are the Financial asset measured at fair value through other comprehensive income (Ind AS 109), the deferred tax asset (Ind AS 12), the current assets and liabilities (various standards) and the non-current liabilities (Ind AS 37).

Question 3.
On June 1, 2018, entity D Limited plans to sell a group of assets and liabilities, which is classified as a disposal group. On July 31, 2018, the Board of Directors approved and committed to the plan to sell the manufacturing unit by entering into a firm purchase commitment with entity G Limited.

However, since the manufacturing unit is regulated, the approval from the regulator is needed for sale. The approval from the regulator is customary and highly probable to be received by November 30, 2018 and the sale is expected to be completed by March 31, 2019. Entity D Limited follows December year end. The assets and liabilities attributable to this manufacturing unit are as under:

The fair value of the manufacturing unit as on December 31, 2017 is ₹ 4,000 and as on July 31, 2018 is ₹ 3,700. The cost to sell is 200 on both these dates. The disposal group is not sold at the period end i.e., December 31, 2018. The fair value as on December 31, 2018 is lower than the carrying value of the disposal group as on that date.

Required:
(i) Assess whether the manufacturing unit can be classified as held for sale and reasons thereof. If yes, then at which date?
(ii) The measurement of the manufacturing unit as on the date of classifi-cation as held for sale.
(iii) The measurement of the manufacturing unit as at the end of the year. [Nov. 2019 – 10 Marks]
Answer:
i.

ii. Measurement is at the lower of:
Carrying amount = 5,200
FVLCTS = 3,500 (3,700 – 200)
Thus, measured at 3,500.

iii There has been a further reduction in FVLCTS which will be recognized in P&L.

Question 4.
C Ltd. prepares the financial statement under Ind AS for the quarter year ended 30th June, 2018. During the 3 months ended 30th June, 2018 following events occurred:

On 1st April, 2018, the Company has decided to sell one of its divisions as a going concern following a recent change in its geographical focus. The proposed sale would involve the buyer acquiring the non-monetary assets (including goodwill) of the division, with the Company collecting any outstanding trade receivables relating to the division and settling any current liabilities.

On 1st April, 2018, the carrying amount of the assets of the division were as follows:

• Purchased Goodwill – ₹ 60,000
• Property, Plant & Equipment (average remaining estimated useful life two years) – ₹ 20,00,000
• Inventories – ₹ 10,00,000

From 1st April, 2018, the Company has started to actively market the division and has received number of serious enquiries. On 1st April, 2018 the directors estimated that they would receive ₹ 32,00,000 from the sale of the division. Since 1st April, 2018, market condition has Improved and as on 1st August, 2018 the Company received and accepted a firm offer to purchase the division for ₹ 33,00,000.

The sale is expected to be completed on 30th September, 2018 and ₹ 33,00,000 can be assumed to be a reasonable estimate of the value of the division as on 30th June, 2018. During the period from 1st April to 30th June inventories of the division costing ₹ 8,00,000 were sold for ₹ 12,00,000. At 30th June, 2018, the total cost of the inventories of the division was ₹ 9,00,000. All of these inventories have an’estimated net realisable value that is in excess of their cost.

The Company has approached you to suggest how the proposed sale will be reported in the interim financial statements for the quarter ended 30th June, 2018 giving relevant explanations.
Answer:
The decision to offer the division for sale on 1st April, 2018 means that from that date the division has been classified as held for sale. The division available for immediate sale, is being actively marketed at a reasonable price and the sale is expected to be completed within one year.

The consequence of this classification is that the assets of the division will be measured at the lower of their existing carrying amounts and their fair value less cost to sell. Here the division shall be measured at their existing carrying amount i.e. ₹ 30,60,000 since it is less than the fair value less cost to sell ₹ 32,00,000.
The increase in expected selling price will not be accounted for since earlier there was no impairment to division held for sale.

The assets of the division need to be presented separately from other assets in the balance sheet. Their major classes should be separately disclosed either on the face of the balance sheet or in the notes.
The Property, Plant and Equipment shall not be depreciated after 1 st April, 2018 so its carrying value at 30th June, 2018 will be ₹ 20,00,000 only. The inventories of the division will be shown at ₹ 9,00,000.

The division will be regarded as discontinued operation for the quarter ended 30th June, 2018. It represents a separate line of business and is held for sale at the year end.
The Statement of Profit and Loss should disclose, as a single amount, the posttax profit or loss of the division on classification as held for sale.
Further, as per Ind AS 33, EPS will also be disclosed separately for the discontinued operation.

Question 5.
P Limited purchased a plastic bottle manufacturing plant for ₹ 24 lakh on 1st April, 2015. The useful life of the plant is 8 years. On 30th September, 2017, P Limited temporarily stops using the manufacturing plant because demand has declined. However, the plant is maintained in a workable condition and it will be used in future when demand picks up.

The accountant of P Limited decided to treat the plant as held for sale until the demand picks up and accordingly measures the plant at lower of carrying amount and fair value less cost to sell. The accountant has also stopped charging depreciation for rest of the period considering the plant as held for sale. The fair value less cost to sell on 30th September, 2017 and 31st March, 2018 was ₹ 13.5 lakh and ₹ 12 lakh respectively.
The accountant has made the following working:

Balance Sheet extracts as on 31st March, 2018

Required:
Analyze whether the above accounting treatment is in compliance with the Ind AS. If not, advise the correct treatment showing necessary workings.
Answer:
(a) As per Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued Operations’, an entity shall classify a non-current asset as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.

For asset to be classified as held for sale, it must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets and its sale must be highly probable. In such a situation, an asset cannot be classified as a non-current asset held for sale, if the entity intends to sell it in a distant future.

For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset, and an active programme to locate a buyer and complete the plan must have been initiated. Further, the asset must be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Further Ind AS 105 also states that an entity shall not classify as held for sale a non-current asset that is to be abandoned. This is because its carrying amount will be recovered principally through continuing use.

An entity shall not account for a non-current asset that has been temporarily taken out of use as if it had been abandoned.

In addition to Ind AS 105, Ind AS 16 states that depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. The Accountant of PB Ltd. has treated the plant as held for sale and measured it at the fair value less cost to sell. Also, the depreciation has not been charged thereon since the date of classification as held for sale which is not correct and not in accordance with Ind AS 105 and Ind AS 16.

Accordingly, the manufacturing plant should neither be treated as abandoned asset nor as held for sale because its carrying amount will be principally recovered through continuous use. PB Ltd. shall not stop charging depreciation or treat the plant as held for sale because its carrying amount will be recovered principally through continuing use to the end of their economic life.

The working of the same for presenting in the balance sheet will be as follows:

Balance Sheet extracts as on 31st March, 2018

Working Note:

Fair value less cost to sell of the plant = ₹ 12,00,000
Value in Use(not given) or = Nil (since plant has temporarily not been used for manufacturing due to decline in demand)
Recoverable amount = higher of above i.e. ₹ 12,00,000
Impairment loss = Carrying amount – Recoverable amount
Impairment loss = ₹ 15,00,000 – ₹ 12,00,000
= ₹ 3,00,000.