Ind AS on Presentation of Items in the Financial Statements – CA Final FR Study Material

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

Ind AS on Presentation of Items in the Financial Statements – CA Final FR Study Material

Ind AS 1 : Presentation of Financial Statements

Scope (Based On Para Nos. 2 To 6)

Question 1.
Does Ind AS 1 prescribe any Format for the presentation of the general-purpose financial statements?
Answer:
Ind AS 1 does not prescribe any format for presentation of general purpose financial statement.

Note:
However, it may be noted that Ind AS 1 prescribes the information required to be presented.

Financial Statements (Based On Para Nos. 9 To 17)

Question 2.
Is it acceptable to disclose information required by Ind AS 1 in management/directors’ report forming part of annual report without making such disclosures in the financial statements?
Answer:
No.
Paragraph 14 of Ind AS 1:
“Reports and statements presented outside the financial statements are outside the scope of Ind AS”. Information appearing in reports presented outside the financial statements may repeat information given in the financial statements or draw reference to the same.

It may be noted that financial statements cannot omit any disclosures required by Ind ASs because it is included in other reports outside the financial statements.

Also, drawing reference to the information given in the reports outside the financial statements would not be sufficient unless permitted by an Ind AS.

Question 3.
Can an entity claim compliance with Ind ASs if it has not complied with one or more Ind ASs and its financial statements state the fact that the entity complies with Ind ASs, except for compliance with one or more Standards?
Answer:
Paragraph 16 of Ind AS 1:
“An entity whose financial statements comply with Ind ASs shall make an explicit and unreserved statement of such compliance in the notes.”

An entity shall not describe financial statements as complying with Ind ASs unless they comply with all the requirements of Ind ASs.

Therefore, unless all the requirements of Ind ASs are complied with, the entity cannot claim compliance with the Ind ASs.

Question 4.
An entity prepares its financial statements that contain an explicit and unreserved statement of compliance with Ind ASs.
However, the auditor’s report on those financial statements contains a qualification because of disagreement on application of one Ind AS.
In such case, is it acceptable for the entity to make an explicit and unreserved statement of compliance with Ind ASs?
Answer:
The preparation of financial statements is the prerogative of the management. Thus, it is possible for an entity to make an unreserved and explicit statement of compliance with Ind ASs, even though the auditor’s report contains a qualification because of disagreement on application of one Ind AS.

Offsetting (Based On Para Nos. 32 To 35)

Question 5.
Is offsetting of revenue against expenses, permissible in case of a company acting as an agent and having sub-agents, where commission is paid to sub-agents from the commission received as an agent?
Answer:
The answer needs to be read in the light of Paras 32,33 and 35 of Ind AS.

Net presentation in the given case would not be appropriate, as it would not reflect substance of the transaction and would undermine the ability of users to understand the transaction.

Therefore, commission paid to sub-agent should not be offset against commis-sion earned by the company.

Question 6.
Is offsetting permitted under the following circumstances?
(a) Expenses incurred by a holding company on behalf of subsidiary, which is reimbursed by the subsidiary – whether in the separate books of the holding company, the expenditure and related reimbursement of expenses can be offset?
(b) Whether profit on sale of an asset against loss on sale of another asset can be offset?
(c) When services are rendered in a transaction with an entity and services are received from the same entity in two different arrangements, can the receivable and payable be off-set?
Answer:

Point	Para No. of Ind AS	Details of Para No.	Remarks
{a)	33 of Ind AS 1	Offsetting is permitted only when the offsetting reflects the substance of the transaction.	In this case, the agreement/ar­rangement, if any, between the holding and subsidiary company needs to be considered. Only if the arrangement is to re­imburse the cost incurred by the holding company on behalf of the subsidiary company, the same may be presented net. It should be ensured that the sub­stance of the arrangement is that the payments are actually in the nature of reimbursement.
(b)	35 of Ind AS 1	An entity to present on a net basis gains and losses arising from a group of similar transactions.	Gains or losses arising on disposal of various items of property, plant and equipment shall be presented on net basis. However, gains or losses should be presented separately if they are material.
(c)	33 of Ind AS 1 and 42 of Ind AS 32	Ind AS 1: Offsetting is permitted only when the offsetting reflects the substance of the transaction.	The receivable and payable should be offset against each other and net amount is presented in the balance sheet if that the entity has a legal right to set off and the entity intends to do so.
		Ind AS 32: A financial asset and a financial liability should be offset if the entity has legally enforceable right to set off and the entity intends either to settle on net basis or to realize the asset and settle the liability simultaneously.	Otherwise, the receivable and pay­able should be reported separately.

Changes In Accounting Policy (Based On Para Nos. 40a To 44)

Question 7.
Is it appropriate to conclude that restatement of comparative amounts is impracticable on the basis that it would involve undue cost?
Answer:
The answer needs to be read in the light of Para 7 of Ind AS 1.
It is not appropriate to conclude that restatement is impracticable merely because of the cost involved.

Structure And Content (Based On Para Nos. 47 To 59)

Question 8.
Paragraph 53 of Ind AS 1 states “An entity often makes financial statements more understandable by presenting information in thousands, lakhs, millions or crores of units of the presentation currency”.
Can an entity adopt different levels of rounding for different disclosures that are made in the financial statements?
Answer:
Paragraph 53 of Ind AS 1 permits the use of rounding off provided an entity discloses the level of rounding and does not omit material information.

It may be noted that to maintain consistency within the financial statements, the same unit of measurement should be used throughout the financial statements.

Also, Schedule IH to the Companies Act, 2013, contains an explicit requirement to use the same unit of measurement consistently for presentation of financial statements. Therefore, an entity should use a uniform unit of measurement.

Question 9.
Does cash and cash equivalent under Ind AS 1 have the same meaning as cash and cash equivalent as per Ind AS 7?
Answer:
Logically, there should not be a difference in the amount of cash and cash equivalent as per Ind AS 1 and as per Ind AS 7.

Paragraph 8 of Ind AS 7:
Where bank overdrafts are repayable on demand form an integral part of an entity’s cash management, bank overdrafts are included as a component of cash and cash equivalents.

Although Ind AS 7 permits bank overdrafts to be included as cash and cash equivalent, for the purpose of presentation in the balance sheet, it would not be appropriate to include bank overdraft in the line item cash and cash equivalents unless the netting off conditions as given in paragraph 42 of Ind AS 32, are complied with.

Bank overdraft, in the balance sheet, will be included within financial liabilities.
Simply, because the bank overdraft is included in cash and cash equivalents for the purpose of Ind AS 7, does not mean that the same should be netted off against the cash and cash equivalent balance in the balance sheet.

Paragraph 45 of Ind AS 7:
An entity is required to make disclosure of the components of cash and cash equivalent and a reconciliation of amounts presented in the cash flow state-ments with the equivalent items reported in the balance sheet.

Another element on account of which there could be difference between the cash and cash equivalents presented in the balance sheet and the statement of cash flows is unrealized gains or losses arising from changes in foreign currency exchange rates, which are not considered to be cash flows.

Operating Cycle & Current And Non-Current Assets And Liabilities (Based On Para Nos. 60 To 64 + 66 To 71)

Question 10.
Is it mandatory for an entity to present current and non-current assets, and current and non-current liabilities, as separate classification in its balance sheet even if such classification is difficult?
Answer:
It is mandatory for entities to present the current/non-current classifi-cation of assets and liabilities as required by paragraph 60 of Ind AS 1, except when a presentation based on liquidity provides information that is relevant and reliable.

Note:
Non-classification of assets and liabilities as current/non-current on grounds of difficulty is not permissible.

Question 11.
What is the basis for classification of assets as current or non-current?
Answer:
The answer is to be read in the light of Paragraph 66 of Ind AS 1.

Thus, for the purpose of classification, each asset as at the reporting date has to be assessed as current or non-current on the basis of the relevant criteria in Para 66:

Example:
Balance Sheet Item Basis for Classification of an asset as current or non-current

Balance Sheet Item	Basis for Classification of an asset as current or non-current
Inventory, Receiv­ables	Normal operating cycle (Assuming these will be realized in the normal operating cycle)
Loans recoverable on demand	Expectation of the entity to realize the same within twelve months after the reporting period.
Securities	Intention of the entity as to whether held for trading or not. If not, the expectation of the entity to realize the same within twelve months after the reporting period.

Question 12.
An entity manufactures passenger vehicles. The time between purchasing of underlying raw materials to manufacture the passenger vehicles and the date the entity completes the production and delivers to its customers is 11 months. Customers settle the dues after a period of 8 months from the date of sale:
(a) Will the inventory and the trade receivables be current in nature?
(b) Assuming that the production time was say 15 months and the time lag between the date of sale and collection from customers is 13 months, will the answer be different?
Answer:
Note:
Inventory and debtors need to be classified in accordance with the requirement of paragraph 66(a) of Ind AS 1:

(a) The time lag between the purchase of inventory and its realization into cash is 19 months.
[11 months + 8 months].
Both inventory and the debtors would be classified as current if the entity expects to realize these assets in its normal operating cycle.

(b) The answer will be the same
In this case, time lag between the purchase of inventory and its realiza-tion into cash is 28 months.
[15 months +13 months].

It may be noted that additional information as required by paragraph 61 of Ind AS 1 will be required to be made by the entity.

Question 13.
An entity is in the real estate business. As per the industry under which it operates, the entity constructs residential apartments for customers and the construction normally takes three to four years.
How should the entity classify its construction work-in-progress – Current/ non-current?
Answer:
Paragraph 68 of Ind AS 1:

Where an entity’s normal operating cycle is such that its assets, such as, in-ventory/trade receivables are not realized in cash within a period of twelve months, these assets would still be current in nature.

Since the entity expects to realize the construction work-in-progress through sale to its customers, in its normal operating cycle, the construction work- in-progress will be current in nature.

It may be noted that additional information as required by paragraph 61 of Ind AS 1 will be required to be made by the entity.

Question 14.
Entity B has two different businesses, real estate and manufacture of passenger vehicles. With respect to the real estate business, the entity constructs residential apartments for customers and the normal operating cycle is three to four years.

With respect to the business of manufacture of passenger vehicles, normal operating cycle is 19 months.
Under such circumstance where an entity has different operating cycles for different types of businesses, how classification into current and non-current be made?

Answer:

The answer is to be read in light of Paras 66(a) and 69(a) of Ind AS 1.
In the given case, where businesses have different operating cycles, classification of asset/liability as current/non-current would be in relation to the normal operating cycle that is relevant to that particular asset/liability.

Note:
It would be appropriate that the entity discloses the normal operating cycles relevant to different types of businesses for better understanding.

Question 15.
As per paragraph 68 of Ind AS 1, where an entity’s normal operating cycle is such that its assets, such as, inventory/trade receivables are not realized in cash within a period of twelve months, these assets would still be current in nature.

An entity has in its balance sheet line item of trade receivables, combination of assets that are expected to be realized before twelve months and after twelve months from the end of the reporting period.
Under such situation, what are the disclosure requirements?
Answer:
On the assumption, that the trade receivables are expected to be realized in the normal operating cycle, the entire trade receivables will be disclosed as current in the balance sheet.

However, in the notes, the entity will be required to give additional disclosure of amounts expected to be recovered no more than twelve months after the reporting period and in more than twelve months after the reporting period. [This is in accordance with paragraph 61 of Ind AS 1]

Question 16.
A holding company gives a loan/inter corporate deposit to a subsidiary that is recoverable on demand, at a rate of interest at 10%.
(a) Should such loan be disclosed as a current/non-current asset in the books of the holding company?
How relevant would the commercial reality of the transaction be in comparison to the legal terms of the transaction?
(b) How this loan/inter-corporate deposit that is repayable on demand would be classified in the books of the subsidiary?
Answer:
(a) The answer is to be read in the light of Paragraph 66(c) of Ind AS 1.
To determine the expectation of the entity, the commercial reality of the transaction should also be considered.
If the loans have been given with an understanding that these loans would not be called for repayment even though a clause may have been added that these are recoverable on demand, it should be classified as a non-current asset.

(b) The answer is to be read in the light of Paragraph 69(c) of Ind AS 1.
Since the loan/inter-corporate deposit would become due immediately as and when demanded and presuming that the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period, it should be classified as current liability.

Question 17.
How the following deposits should be classified, i.e., current or non-current?
(a) Electricity Deposit.
(b) Tender Deposit/Earnest Money Deposit.
(c) GST paid under dispute.
Answer:

Point	Analysis	Remarks	Conclusion
(a)	An entity pays electricity deposit for the purposes of receiving an electrici­ty connection. At all points of time, such deposit is recoverable on demand, when the con­nection is not required. However, practically, such electric connection is required as long as the entity exists.	Hence from a commer­cial reality perspective, an entity does not expect to realize the asset within twelve months from the end of the reporting period.	Hence, electricity depos­it should be classified as a non-current asset.
(b)	Tender deposit is gener­ally paid for participa­tion in various bids. They normally become recoverable if the entity does not win the bid.	Bid dates are known at the time of tendering the deposit. But until the date of the actual bid, one is not in a position to know if the entity is winning the bid or oth­erwise.	Thus, depending on the terms of the deposit if en­tity expects to realize the deposit within a period of twelve months, it should be classified as current otherwise non-current.
(c)	GST paid to the Gov­ernment authorities in the event of any legal dispute, which is under protest would depend on the facts of the case and the expectation of the entity to realize the same within a period of twelve months.		Depends.

Question 18.
An entity has the following trial balance line items. How should these items be classified, i.e., current or non-current?
(a) Receivables (viz., receivable under a contract of sale goods in which an entity deals).
(b) Advance to suppliers.
(c) Income tax receivables [other than deferred tax]
(d) Insurance spares.
Answer:

Point	Para No. of Ind AS	Analysis	Conclusion
(a)	66(a) + 68 + 61 of.’Ind AS 1	Based on Para Nos. 66(a) and 68.	Receivables that are consid­ered a part of the normal op­erating cycle will be classified as current asset. If the operating cycle exceeds twelve months, then additional disclosure as required by para­graph 61 of Ind AS 1 is required to be given in the notes.
(b)	66(a) + 68 + 61 ofInd AS 1	Based on Para Nos. 66(a) and 68. Advances to suppliers for goods and services would be classified in accordance with normal operating cycle if it is given in relation to the goods or services in which the entity normally deals.	If the advances are considered a part the normal operating cycle, it would be classified as a current asset. If the operating cycle exceeds twelve months, then additional disclosure as required by para­graph 61 of Ind AS 1 is required to be given in the notes.
(c)	66(c) of Ind AS 1	Classification will be based on the expectation of the entity to realize the asset.	If the receivable is expected to be realized within twelve months after the reporting period, then it will be classified as current else non-current.
(d)	8 of Ind AS 16	If insurance spares meet the definition’ of property, plant and equipment, these should be treated as an item of property, plant and equipment, other­wise inventory.	Accordingly, the insurance spares that are treated as an item of property, plant and equipment would normally be classified as non-current asset whereas insurance spares that are treated as inventory will be classified as current asset if the entity expects to consume it in its normal operating cycle.

Question 19.
How should an entity classify derivative assets/liabilities?
Answer:
Derivative assets/liabilities should be presented as current or non-current based on the contractual maturity/date of settlement of related derivatives and in accordance with guidance given in Para 66 of Ind AS 1.

Question 20.
A Gas Agency requires an amount to be deposited as security deposit, which is refundable when the gas connection is surrendered. How should the Gas Agency classify such deposits received, i.e., current or non-current?
Answer:
Although it is expected that most of the customers will not surrender their connection and the deposit will need not to be refunded, but surrendering of gas connection by the customer is a condition that is not within the control of the entity.

Therefore, the Gas Agency does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.
Accordingly, the deposit will have to be classified as current liability.

Question 21.
An entity develops tools for customers and this normally takes a period of around 2 years for completion. The material is supplied by the customer and hence the entity only renders a service. For this, the entity receives payments upfront and credits the amount so received to “Income Received in Advance”.
How should this “Income Received in Advance” be classified, i.e. current or non-current?
Answer:
The answer is to be read in the light of Paragraph 70 of Ind AS 1.
Thus, income received in advance would be classified as current liability since it is a part of the working capital, which the entity expects to earn in its normal operating cycle.

Question 22.
An entity manufactures batteries for the automobile industry. Based on terms of warranty, a provision is made by the entity. How should the warranty provision be presented in the balance sheet, i.e., current or non-current?
Answer:
Terms of the warranty will determine its classification i.e., current or non-current. Warranties that are due for more than twelve months from the reporting date, should be classified as non-current.

It may be noted that in accordance with paragraph 61 of Ind AS 1, the entity shall disclose separately the warranty provision expected to be settled/expired no more than twelve months, and more than twelve months after the reporting period.

Question 23.
Company A has taken a long-term loan arrangement from Company B. In the month of December 20X1, there has been a breach of material provision of the arrangement. As a consequence of which the loan becomes payable on demand on March 31, 20X2. In the month of May 20X2, the Company started negotiation with the Company B for not to demand payment as a consequence of the breach.

The financial statements were approved for the issue in the month of June 20X2. In the month of July 20X2, both company agreed that the payment will not be demanded immediately as a consequence of breach of material provision.
Advise on the classification of the liability as current/non-current.
Answer:
As per para 74 of Ind AS 1 “Presentation of Financial Statements” where there is a breach of a material provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand on the reporting date, the entity does not classify the liability as current, if the lender agreed, after the reporting period and before the approval of the financial statements for issue, not to demand payment as a consequence of the breach.

In the given case, Company B (the lender) agreed for not to demand payment but only after the financial statements were approved for issuance. The finan-cial statements were approved for issuance in the month of June 20X2 and both companies agreed for not to demand payment in the month of July 20X2 although negotiation started in the month of May 20X2 but could not agree before June 20X2 when financial statements were approved for issuance.

Hence, the liability should be classified as current in the financial statement for the year ended March 31,20X2. The reason for current classification is as below:

Special Issues On Financial Liability (Based On Para Nos. 72 To 75)

Question 24.
An entity has taken a loan facility from a bank that is to be repaid within a period of 9 months from the end of the reporting period. Prior to the end of the reporting period, the entity and the bank enter into an arrangement, whereby the existing outstanding loan will, unconditionally, roll into the new facility which expires after a period of 5 years.

(a) How should such loan be classified in the balance sheet of the entity?
(b) Will the answer be different if the new facility is agreed upon after the end of the reporting period?
(c) Will the answer to (a) be different if the existing facility is from one bank and the new facility is from another bank?
(d) Will the answer to (a) be different if the new facility is not yet tied up with the existing bank, but the entity has the potential to refinance the obligation? [RTP-Nov. 19]

Answer:

Point	Analysis	Conclusion
(a)	The loan is not due for payment at the end of the reporting period. The entity and the bank have agreed for the said roll over prior to the end of the reporting period for a period of 5 years.	As the entity has an unconditional right to defer the settlement of the liability for at least twelve months after the reporting period, the loan should be classified as non-current.
(b)	Based on Para 72 of Ind AS 1: As at the end of the reporting period, the entity does not have an uncondi­tional right to defer settlement of the liability for at least twelve months after the reporting period.	The answer will be different if the arrangement for roll over is agreed upon after the end of the reporting period. Therefore, the loan is to be classified as current.
(c)	Loan facility arranged with new bank cannot be treated as refinancing, as the loan with the earlier bank would have to be settled which may coin­cide with loan facility arranged with a new bank.	Since, the loan has to be repaid within a period of 9 months from the end of the reporting period, therefore, it will be classified as current liability.
(d)	Based on Para 73 of Ind AS 1: When refinancing or rolling over the obligation is not at the discretion of the entity (for example, there is no arrangement for refinancing), the en­tity does not consider the potential to refinance the obligation and classifies the obligation as current.	The answer will be different and the loan should be classified as current.

Question 25.
An entity enters into a loan arrangement with a banker and is subject to compliance with various covenants — some are financial and some are non-financial covenants. The entity commits a breach of covenant prior to the end of the reporting period. As a result of such breach, as per terms of the arrangement, the loan becomes payable on demand. Assuming that as per the original terms, the loan is payable after a period of 24 months from the reporting date-

(a) How should the liability be classified in the balance sheet—current/ non-current, if subsequent to the end of the reporting period but before the approval of financial statements, the banker has agreed not to demand payment?
(b) Will the answer be different, if the banker has condoned the breach prior to the reporting period and provided a time period of more than twelve months after the reporting period to rectify the breach?
(c) What will be the classification, if the banker has condoned the breach prior to the reporting period but provided a time period of only less than twelve months after the reporting period to rectify the breach?
Answer:

Point	Analysis	Conclusion
(a)	Based on Para 74 of Ind AS 1: It is worth mentioning that paragraph 74 is a mandatory carve out from IFRS Le. IAS 1.	The loan should be classified as non-current.
(b)	Based on Para 75 of Ind AS 1:	The loan can retain its classification as non-current.
(c)	Based on Para 75 of Ind AS I:	The loan will require a reclassifi­cation to current since the period of grace is less than twelve months after the reporting period.

Question 26.
An entity has a long-term loan facility with a bank. As per the loan facility, certain financial ratios are required to be maintained on a quarterly basis failing which the loan becomes repayable on demand. Information regarding such compliance is required to be submitted to the bankers after a period of 1 month from the end of every quarter. Determination of such ratios requires the drawing up of the financial statements of the entity.

The entity did not have any breach until the 3rd quarter. With respect to the 4th quarter, the entity realized that there was a breach, only after the financials were drawn up after the end of the reporting period and the bank has not condoned the breach before the financial statements are approved for issue. Reporting of the compliance is required to be made after a period of 1 month from the end of the 4th quarter:

(a) How should the loan be classified, current or non-current, consequent to the breach of the loan covenant?
(b) If there is a cross default clause, whereby breach emanating from one loan gets linked to other borrowings, how should the underlying loans be presented?
(c) If there is a cross default clause by a group company which impacts the reporting entity’s loan and there has been a default, how should the same be classified, current or non-current?
(d) How should the loan be classified assuming that the financial covenants have not been temporarily met with [since the testing date did not fall due during such temporary period], but the same have been met on the testing date? For example, on quarterly basis the Company does not meet the required ratios but the bank requires it to meet the same on annual basis. In such a scenario, how the loan should be classified in the interim financial statements.
Answer:

Point	Analysis	Conclusion
(a)	Circumstances will always arise when a loan covenant can be assessed only after the end of the reporting period, which are based on financial infor­mation as at the end of the reporting period.	The loan should be classified as current. In this case, even though the breach has been identified after the reporting period, the loan should be classified as current since the conditions resulting into breach existed at the reporting date.
(b)	There can be cross default clause attached to some borrowings. Under such circumstances, compli­ance with the loan covenants of the other borrowings is also considered for assessment. Breach of a loan covenant would immediately have an effect on those borrowings that have a cross default clause attached to it.	Thus, all the borrowings that are linked through the said clause will be repayable immediately and hence require a current classification.
(c)	Same as point (b)	Same as point (b)
(d)	Trigger for breach of covenant arises only on a breach that occurs on the testing date. The entity can perform its test for purposes of monitoring complianc­es, which will be purely an internal matter. If on the testing date, there is no breach of covenant, then there is no requirement for reclassification to current.	In the given case, the bank requires financial ratios to be maintained on annual basis. If the financial ratios are met on annu­al basis but do not meet on quarterly basis, the liability should be classified as non-current in the annual as well as quarterly financial Statements as on the testing date ie., at the end of the year, there is no breach.

Question 27.
In December 2014 an entity entered into a loan agreement with a bank. The loan is repayable in three equal annual instalments starting from December 2019. One of the loan covenants is that an amount equivalent to the loan amount should be contributed by promoters by March 24, 2015, failing which the loan becomes payable on demand. As on March 24, 2015, the entity has not been able to get the promoter’s contribution. On March 25, 2015, the entity approached the bank and obtained a grace period upto June 30, 2015 to get the promoter’s contribution.

The bank cannot demand immediate repayment during the grace period. The annual reporting period of the entity ends on March 31, 2015.

(a) As on March 31, 2015, how should the entity classify the loan?
(b) Assume that in anticipation that it may not be able to get the promoter’s contribution by due date, in February 2015, the entity approached the bank and got the compliance date extended upto June 30, 2015 for getting promoter’s contribution. In this case will the loan classification as on March 31, 2015 be different from (a) above?
Answer:

Point	Analysis	Conclusion
(a)	Based on Paragraph 75 of Ind AS 1: In the given case, following the de­fault, grace period within which an entity can rectify the breach is less than twelve months after the report­ing period.	Thus, as on March 31, 2015, the loan will be classified as current.
(b)	Ind AS 1 is dealing with classification of liability as current or non-current in case of breach of a loan covenant and does not deal with the classification in case of expectation of breach. In this case, whether actual breach has taken place or not is to be as­sessed on June 30,2015, ie., after the reporting date.	Therefore, in the absence of actual breach of the loan covenant as on March 31, 2015, the loan will retain its classification as non-current.

Question 28.
An entity has taken a long-term loan which has numerous covenants associated for compliance. Although as at the end of reporting period, there has been no default, the entity does not expect to meet the financial covenants in next twelve months after reporting period.
Should the loan be classified as current on reporting date?
Answer:
Ind AS 1 is dealing with classification of liability as current or non-current in case of breach of a loan covenant and does not deal with the classification in case of expectation of breach.

In the above case, actual breach has not taken place at the end of the reporting period. Therefore, in the absence of actual breach-of the loan covenant as at the end of the reporting period, the loan will retain its classification as non-current.

Note:
If there is a breach that occurs between the end of the reporting period and the date of approval of the financial statements, it will be a non-adjusting post balance sheet event requiring disclosure in accordance with Para No. 21 of Ind AS 10, Events After the Reporting Period.

Question 29.
M Ltd. has acquired a heavy machinery at a cost of ₹ 1,00,00,000 (with no breakdown of the component parts). The estimated useful life is 10 years. At the end of the sixth year, one of the major components, the turbine requires replacement, as further maintenance is uneconomical. The remainder of the machine is perfect and is expected to last for the next four years. The cost of a new turbine is ₹ 45,00,000.

Advise a per Ind AS whether the cost of the new turbine be recognised as an asset, and, if so, what treatment should be used. Also calculate the revised carrying amount of the machinery? Consider the discount rate of 5% per annum. [MTP May 2018]
Answer:
The new turbine will produce economic benefits to M Ltd., and the cost is measurable. Hence, the item should be recognised as an asset. The original invoice for the machine did not specify the cost of the turbine; however, the cost of the replacement 45,00,000) can be used as an indication (usually by discounting) of the likely cost, six years previously.

If an appropriate discount rate is 5% per annum, ₹ 45,00,000 discounted back six years amounts to ₹ 33,57,900 [ ₹ 45,00,000/(1.05)⁶], ie., the approximate cost of turbine before 6 years.

The current carrying amount of the turbine which is required to be replaced of ₹ 13,43,160 would be derecognised from the books of account, (ie., Original cost ₹ 33,57,900 as reduced by accumulated depreciation for past 6 years ₹ 20,14,740, assuming depreciation is charged on straight-line basis.)

The cost of the new turbine, ₹ 45,00,000 would be added to the cost of ma-chine, resulting in a revision of carrying amount of machine to ₹ 71,56,840 (i.e., ₹ 40,00,000 – ₹ 13,43,160 + ₹ 45,00,000).
* Original cost of machine ₹ 1,00,00,000 reduced by accumulated depreciation (till the end of 6 years) ₹ 60,00,000.

Statement Of P&L (Based On Para Nos. 7 + 82 To 96)

Question 30.
Is it required to disclose the share of the profit or loss of associates and joint ventures accounted for using the equity method above the tax expense in the Consolidated Statement of Profit and Loss?
Answer:
Considering the nature of the item, it should be disclosed before tax expense in the Consolidated Statement of Profit and Loss.

Question 31.
How investment income should be presented in the Statement of Profit and Loss in case of entities whose principal activity is not investment?
Answer:
In case of entities, whose principal activity is not investment, income from investments can be shown as a separate line item to describe the entity’s financial performance.

Question 32.
As per the statutory requirements, exceptional items are required to be disclosed whereas Ind AS 1 requires separate disclosures of material items and how these are to be presented in the financial statements. Does that imply that ‘exceptional’ means ‘material’? Give examples. How should these be presented in the financial statements?
Answer:
Exceptional items have not been defined Ind AS.
However, paragraph 97 of Ind AS 1 requires that when items of income or ex-pense are material, an entity shall disclose their nature and amount separately.

As per Ind AS 1, materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor.

Exceptional items are those items which meet the test of ‘materiality’ (size and nature) and the test of ‘incidence’.
Following are some examples which may give rise to a separate disclosure of items as an ‘exceptional item’ in financial statements if they meet the test of ‘materiality’ and ‘incidence’:

(a) write-downs of inventories to net realizable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs;
(b) restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring;
(c) disposals of items of property, plant and equipment;
(d) disposals of investments;
(e) discontinued operations;
(f) litigation settlements; and
(g) other reversals of provisions.

Note:
These are all examples which were given in AS-5.

Question 33.
Entity A has undertaken various transactions in the financial year ended March 31, 20X1. Identify and present the transactions in the financial statements as per Ind AS 1.

	₹
Re-measurement of defined benefit plans	2,57,000
Current service cost	1,75,000
Changes in revaluation surplus	1,25,000
Gains and losses arising from translating the monetary assets in foreign currency	75,000
Gains and losses arising from translating the financial statements or a foreign operation	65,000
Gains and losses from investments in equity instruments designated at fair value through other comprehensive income	1,00,000
Income tax expense	35,000
Share based payments cost	3,35,000

Answer:
Items impacting the Statement of Profit and Loss for the year ended 31st March, 20X1

	(₹)
Current service cost	1,75,000
Gains and losses arising from translating the monetary assets in foreign currency	75,000
Income tax expense	35,000
Share based payments cost	3,35,000

Items impacting the other comprehensive income for the year ended 31st March, 20X1

	(₹)
Re-measurement of defined benefit plans	2,57,000
Changes in revaluation surplus	1,25,000
Gains and losses arising from translating the financial statements of a foreign operation	65,000
Gains and losses from investments in equity instruments designated at fair value through other comprehensive income	1,00,000

ABC Ltd. works out translation gain/loss over the years on its investment in foreign subsidiary 2014-15: ₹ 2 lakhs, 2015-16: ₹ 4 lakhs, 2016-17: ₹ 3 lakhs. The foreign subsidiary is sold on 30th June, 2017. The translation gain on sale of such investment as on that date is ₹ 2 lakhs. Assuming that deferred tax effect is computed @ 30%. How should the company present the translation gain/ loss, deferred taxation and reclassification adjustment in the Profit and loss, other comprehensive income, equity and liabilities?

Question 34.
Mike Ltd. has undertaken following various transactions in the fi-nancial year ended 31.03.2018:
(a) Remeasurement of defined benefit plans : ₹ 1,54,200
(b) Current service cost : 1,05,000
(c) Changes in revaluation surplus : ₹ 75,000
(d) Gains and losses arising from translating the monetary assets in foreign currency ₹ 45,000
(e) Gains and losses arising from translating the financial statements of a foreign operation ₹ 39,000
(f) Gains and losses arising from investments in equity instruments designated at fair value through other comprehensive income ₹ 60,000
(g) Income tax expenses ₹ 21,000
(h) Share based payments cost 2,01,000
Identify and present the transactions in the financial statements as per Ind AS 1. [May 2019 – 4 Marks]
Answer:
Items impacting the Statement of Profit and Loss for the year ended 31st March, 2018

	(₹)
Current service cost	1,05,000
Gains and losses arising from translating the monetary assets in for­eign currency	45,000
Income tax expense	21,000
Share based payments cost	2,01,000

Items impacting the other comprehensive income for the year ended 31st March, 2018

	(₹)
Remeasurement of defined benefit plans	1,54,200
Changes in revaluation surplus	75,000
Gains and losses arising from translating the financial statements of a foreign operation	39,000
Gains and losses from investments in equity instruments designated at fair value through other comprehensive income	60,000

Ind AS 34: Interim Financial Reporting

Computation Of Tax Interim Financial Reporting (Based On Para Nos. 28 To 41)

Question 1.
N Limited manufacturer of ceramic tiles has shown a net profit of ₹ 15,00,000 for the first quarter of 2018-2019. Following adjustments were made while computing the net profit:

(i) Bad debts of ₹ 1,64,000 incurred during the quarter. 75% of the bad debts have been deferred for the next three quarters (25% for each quarter).
(ii) Sales promotion expenses of ₹ 5,00,000 incurred in the first quarter and 90% expenses deferred to the next three quarters (30% for each quarter) on the basis that the sales in these quarters will be high in comparison to first quarter.
(iii) Additional depreciation of ₹ 3,50,000 resulting from the change in the method of depreciation has been taken into consideration.
(iv) Extra-ordinary loss of ₹ 1,36,000 incurred during the quarter has been fully recognized in this quarter.
Discuss the treatment required under Ind AS 34 and ascertain the correct net profit to be shown in the Interim Financial report of first quarter to be presented to the Board of Directors.

Answer:

As per Ind AS 34, Interim Financial Reporting, the quarterly net profit should be adjusted and restated as follows:

(i) Bad debts of ₹ 1,64,000 have been incurred during current quarter. Out of this, the company has deferred 75% i.e. ₹ 1,23,000 to the next 3 quarters. This treatment is not correct as the expenses incurred during an interim reporting period should be recognised in the same period unless conditions mentioned in Ind AS 34 are fulfilled. Accordingly, ₹ 1,23,000 should be deducted from the net profit of the current quarter ₹ 15,00,000.
(ii) Deferment of sales promotion expenses of ₹ 4,50,000 is not correct. It should be charged in the quarter in which the expenses have been in-curred. Hence, it should be charged in the first quarter only.
(iii) Recognising additional depreciation of ₹ 3,50,000 in the same quarter is correct and is in tune with Ind AS 34.
(iv) The treatment of extraordinary loss of ₹ 1,36,000 being recognised in the same quarter is correct.
Thus considering the above, the correct net profits to be shown in Interim Fi-nancial Report of the third quarter shall be ₹ 15,00,000 – ₹ 1,23,000 – ₹ 4,50,000 = ₹ 9,27,000.

Question 2.
An entity reports quarterly, earns ₹ 1,50,000 pre-tax profit in the first quarter but expects to incur losses of ₹ 50,000 in each of the three remaining quarters. The entity operates in a jurisdiction in which its estimated average annual income tax rate is 30%.

The management believes that since the entity has zero income for the year, its income-tax expense for the year will be zero.

State whether the management’s views are correct. If not, then calculate the tax expense for each quarter as well as for the year as per Ind AS 34. [RTP-November 2019]

Answer:

Para 30(c) of Ind AS 34:
Income tax expense is recognized in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year.

Analysis:
Accordingly, the management’s contention that since the net income for the year will be zero no income tax expense shall be charged quarterly in the in-terim financial report, is not correct.

Computation of correct income tax expense to be reported each quarter:

Period	Pre-tax earnings (in ₹)	Effective tax rate	Tax expense (in ₹)
First Quarter	1,50,000	30%	45,000
Second Quarter	(50,000)	30%	(15,000)
Third Quarter	(50,000)	30%	(15,000)
Fourth Quarter	(50,000)	30%	(15,000)
Annual	0		0

Question 3.
An entity’s accounting year ends is 31st December, but its tax year end is 31st March. The entity publishes an interim financial report for each quarter of the year ended 31st December, 2019. The entity’s profit before tax is steady at ₹ 10,000 each quarter, and the estimated effective tax rate is 25% for the year ended 31st March, 2019 and 30% for the year ended 31st March, 2020.
How the related tax charge would be calculated for the year 2019 and its quarters. [RTP-November 2020]
Answer:
Analysis and Conclusion:
As per Ind AS 34, since an entity’s accounting year is not same as the tax year, more than one tax rate might apply during the accounting year.
Accordingly, the entity should apply the effective tax rate for each interim period to the pre-tax result for that period.

Computation of Tax Expense for each Quarter:

Particulars	Quarter ending 31st March, 2019	Quarter ending 30th June, 2019	Quarter ending 30th September, 2019	Quarter ending 31st December, 2019	Year ending 31st Decem­ber, 2019
	₹	₹	₹	₹	₹
Profit before tax Tax charge	10,000 (2,500)	10,000 (3,000)	10,000 (3,000)	10,000 (3,000)	40,000 (11,500)
	7,500	7,000	7,000	7,000	28,500

Ind AS 7: Statement of Cash Flows

Scope (Based On Para Nos. 1 To 3)

Question 1.
Does Ind AS 7 provide any exemption with regard to its applicability like AS 3, which provides that AS 3 is not mandatory for Small and Medium Sized Companies and non-corporate entities falling in Level II and Level III?
Answer:
Ind AS 7 does not provide any exemption with regard to its applicability as provided in AS 3. Like other Indian Accounting Standards (Ind ASS), this Standard will be applicable to specified class of companies as per the road map for implementation of Ind AS issued under Companies (Indian Accounting Standards) Rules, 2015, notified by the Ministry of Corporate Affairs (MCA) in this regard.

Also, Ind AS 7 provides that statement of cash flows forms an integral part of financial statements for each period for which financial statements are presented.

Accordingly, the class of companies which will be required to prepare financial statements as per Ind AS will be required to prepare statement of cash flows as per Ind AS 7.

Question 2.
Whether statement of cash flows should be prepared only for annual reporting period?
Answer:
Paragraph 1 of Ind AS 7:
Statement of cash flows forms an integral part of financial statements for each period for which financial statements are presented.

Ind AS 1, Presentation of Financial Statements:
Complete set of financial statements include among other statements, a state-ment of cash flows for the period.
Thus, it is clear that statement of cash flows is an integral part of financial statements and the same should be prepared for each period for which financial statements are presented ie., annual period as well as interim reporting period.

Note:
It may also be noted that Ind AS 34, Interim Financial Reporting, states that interim financial report shall comply with all of the requirements of Indian Accounting Standards.

Ind AS 34 provides that interim financial report means a financial report containing either a complete set of financial statements or a set of condensed financial statements for an interim period. Accordingly, statement of cash flows can be presented in complete or condensed form.

Cash & Cash Equivalents (Based On Para No. 6)

Question 3.
When an item qualifies to be a cash equivalent?
Answer:
Paragraph 6 of Ind AS 7:
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.

Cash equivalents are held for the purpose of meeting short-term cash require-ments rather than for investment or other purposes.

An investment normally qualifies to be a cash equivalent only when it has a short maturity (say not more than three months) from the date of acquisition, readily convertible to a known amount of cash and is subject to an insignificant risk of changes in value.

Therefore, readily convertible investments for which the amount of cash that will be received is known at the time of initial investment will be treated as cash equivalents for the purpose of statement of cash flows.

Examples of cash equivalents:

• Balances with bank in short-term deposits say not more than three months.
• Short-term money market instruments, such as, 91 days’ treasury bills, certificate of deposit, etc.

An overriding test is that cash equivalents are held to meet short-term cash requirements of the entity rather than for investment or other purposes.

Example:
A three-month loan or deposit given to a party to help in managing party’s short-term liquidity position is not a cash equivalent because it is given for a purpose other than to manage its own short-term cash requirements.

Note:
In view of variety of cash management practices and banking arrangements, an entity is required to disclose the policy which it adopts in determining the composition of cash and cash equivalents.

Question 4.
Cash is defined as cash on hand and demand deposits. What is the meaning of the term ‘demand deposit’? State the treatment of demand deposits?
Answer:
Ind AS 7 does not define the term ‘demand deposit’.
In commercial parlance, demand deposit refers to a deposit in an account held at a bank/financial institution where the amount deposited can be withdrawn at any time by the depositor without any penalty.

Examples:

• Current accounts.
• Savings accounts etc.

The purpose of making a demand deposit is to meet the short-term fund requirements. Such deposits have same level of liquidity as cash. Accordingly, demand deposits are included in cash.

Question 5.
What is meant by ‘term deposit’? State the treatment of term deposits?
Answer:
Term deposit is a deposit held at a bank/financial institution at an agreed rate of interest for fixed period of time. The money so deposited along with the interest at agreed rate can be withdrawn at the end of such period, or amount deposited can be withdrawn earlier along with interest at lower rate for the period for which the deposit was held.

Term deposit can be for short-term or long-term.

For the purpose of presentation of term deposits in the statement of cash flows, short-term deposits (say, not more than three months) are those deposits which are held with an intention to meet the short-term fund requirements. Since short-term deposits are highly liquid investments that are readily convertible into known amounts of cash and are subject to insignificant risk of changes in value, the same qualify to be a cash equivalent.

Note:
The three months maturity period is to be determined from the date of deposit and not from the end of the reporting period, ie., for a term deposit to qualify to be a cash equivalent, it should have original maturity of period less than three months.

However, term deposits placed for a specified long period (say, more than three months) with an intention to meet the long-term fund requirements will not satisfy the definition of cash equivalents. Further, there could be restrictions on withdrawal or early redemption.
Accordingly, cash flows from these deposits are classified under investing activities.

Question 6.
What do you mean by ‘cash flows’? Is it necessary that there should be actual cash inflow/outflow from entity’s cash/bank balances?
Answer:
The dictionary meaning of the word ‘flow’ means movement.
There are two types of cash flows viz., cash inflow and cash outflow.
A cash flow transaction must increase or decrease cash and cash equivalents.

Examples:
Receipt from debtors, sale of fixed assets for cash, repayment of term loan etc.
Any transaction which does not have any effect on cash and cash equivalents is outside the purview of statement of cash flows.

Examples:
Conversion of term loan or debt into equity, redemption of preference shares by conversion into equity, purchase of goods on credit etc.

Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of the cash management of an entity rather than part of operating, investing or financing activities.

Examples:
Cheques/demand drafts deposited in bank, withdrawal or deposit of cash from/in bank, cash invested in short-term deposit classified as cash equivalent etc.

Question 7.
What is the difference between ‘bank overdraft’ and ‘cash credit’?
Answer:
Bank Overdraft:
An overdraft is a loan arrangement between the borrower and the bank whereby the bank extends the credit to a maximum amount up to which the customer can write cheques or make withdrawals. It refers to the amount of money borrowed that exceeds the deposits.

Bank overdraft facility is granted by bank usually for a short period to accommodate short-term fund requirement. It may be secured by tangible assets or may be a clean overdraft. Overdraft facilities are linked with the operations in current account.

Cash Credit:
Cash credit is a fund-based facility granted by a bank to its customer to finance working capital requirements on a continuing basis. Cash credit is usually secured by hypothecation of inventory and debtors or pledge of goods. It may also be secured by a charge on fixed assets.

Presentation in the statement of cash flows:
Based on paragraph 8 of Ind AS 7:
Cash credit from bank, a facility on a continuing basis (though contractually payable on demand on violation of terms and conditions of sanction) is considered as a part of financing activities and bank overdraft forming the part of cash management is considered as cash equivalent while preparing the statement of cash flows.

Question 8.
What are the examples of cash and cash equivalent balances held by the entity that are not available for use?
Answer:
Ind AS 7 requires an entity to disclose together with management com-mentary, the amount of significant cash and cash equivalent balances held by the entity that are not available for use.

The examples are as follows:
(a) balance in unpaid dividend account;
(b) balance in bank account for share application money, pending allotment of shares;
(c) earmarked bank balances for specific purposes. Examples: bank account for debenture redemption, dividend payment etc.
(d) balance in bank account subject to legal restrictions.

Operating Activities (Based On Para Nos. 13 To 15)

Question 9.
What is the preferred method to report cash flows from operating activities?
Answer:
An entity shall report cash flows from operating activities using either the ‘direct method’ or the ‘indirect method’.

According to Ind AS 7, the entities are encouraged to report cash flows from operating activities using the ‘direct method’ as it provides information which may be useful in estimating future cash flows and which is not available under the ‘indirect method’.

Due to voluminous operating transactions of commercial entities, it is difficult to prepare statement of cash flows under direct method as both cash as well as non-cash transactions are recorded in the books of account under accrual system of accounting.

Note:
Clarifications based on AS-3: .
Insurance Regulatory and Development Authority (IRDA):
In its master circular on preparation of financial statements of general and life insurance business has specified that all insurers are required to present the statement of cash flows as per the direct method.

Clause 32 of the listing agreement specified by SEBI:
All listed companies are required to present the statement of cash flows as per the indirect method principles of AS 3.

Financing Activrnes (Based On Para No 17)

Question 10.
What is the meaning of ‘contributed equity’ used in the definition of financing activities?
Answer:
Contributed equity is paid up capital contributed by shareholders of the company. Cash flows arising from changes in contributed equity on account of issue of additional capital, buy back of shares etc. are classified as financing activities.

Net Basis (Based On Para Nos. 22 To 24)

Question 11.
What are the examples of cash flows which can be reported on a net basis?
Answer:
Generally, all cash flows are reported gross. Cash flows are offset and reported net only in limited circumstances.
Cash flows arising from the following operating, investing and financing ac-tivities may be reported on a net basis:

• cash receipts and payments on behalf of customers when the cash flow reflect the activities of the customer rather than those of the entity; and
• cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short.

Examples:

(a) receipt of insurance premium from policy holders and refund of premium on cancellation of general insurance policy to policy holders (under direct method of presenting cash flows from operating activities);
(b) investment and sale of securities by wealth management companies on behalf of customers (under direct method of presenting cash flows from operating activities);
(c) receipts and payments by an agent on behalf of a principal;
(d) acceptance and repayment of deposits with short maturities;
(e) withdrawal and deposits from/in cash credit account with bank.

Cash flows arising from the following activities of a financial institution may be reported on a net basis:

• cash receipts and payments for the acceptance and repayment of deposits with fixed maturity date;
• the placement of deposits with and withdrawal of deposits from other financial institutions;
  cash advances and loans made to customers and repayment of those advances and loans.

Special Issues – Interest And Dividends (Based On Para Nos. 31 To 34)

Question 12.
What is the classification for interest and dividend paid and received in the statement of cash flows? How are lease payments under finance lease and payment towards acquiring a fixed asset on deferred payment basis presented in the statement of cash flows?
Answer:
An entity presents cash flows from operating, investing and financing activities in a manner which is most appropriate to its business. The classifi-cation by activity provides information that allows users to assess the impact of those activities on the financial position of the entity and the amount of its cash and cash equivalents.
Examples of classification of various activities:

Interest and dividend received on invest­ments in subsidiaries, associates and in other entitiesInvesting activitiesInvesting activities

Particulars	Classification for reporting cash flows
	Banks and financial institutions	Other entities
Interest received on loans and advances given	Operating activities	Investing activities
Interest paid on deposits and other borrowings	Operating activities	Financing activities
Interest and dividend received on investments in subsidiaries. associates and in other entities	Investing activities	Investing activities
Dividend paid on preference and equity shares, including tax on dividend paid on preference and equity shares by other entities	Financing activities	Financing activities
Finance charges paid by lessee under finance lease	Financing activities	Financing activities
Payment towards reduction of outstand­ing finance lease liability	Financing activities	Financing activities
Interest paid to vendor for acquiring fixed asset under deferred payment basis	Financing activities	Financing activities
Principal sum payment under deferred payment basis for acquisition of fixed assets	Investing activities	Investing activities
Penal interest received from customers for late payments	Operating activities	Operating activities
Penal interest paid to suppliers for late payments	Operating activities	Operating activities
Interest paid on delayed tax payments	Operating activities	Operating activities
Interest received on tax refunds	Operating activities	Operating activities

Question 13.
[Based on Para No. 36]
During the financial year 2019-2020, Akola Limited have paid various taxes & reproduced the below mentioned records for your perusal:

• Capital gain tax of ₹ 20 crores on sale of office premises at a sale con-sideration of ₹ 100 crores.
• Income Tax of ₹ 3 crores on Business profits amounting ₹ 30 crores (assume entire business profit as cash profit).
• Dividend Distribution Tax of ₹ 2 crores on payment of dividend amounting ₹ 20 crores to its shareholders.
• Income tax Refund of ₹ 1.5 crore (Refund on taxes paid in earlier pe-riods for business profits).

You need to determine the net cashflow from operating activities, investing activities and financing activities of Akola Limited as per relevant Ind AS. [RTP-November 2020]
Answer:
Analysis Transaction wise:

Particulars	Amount (in crores)	Activity
Sale Consideration	100	Investing Activity
Capital Gain Tax	(20)	Investing Activity
Business profits	30	Operating Activity
Tax on Business profits	(3)	Operating Activity
Dividend Payment	(20)	Financing Activity
Dividend Distribution Tax	(2)	Financing Activity
Income Tax Refund	1.5	Operating Activity
Total Cash flow	86.5

Analysis Activity wise:

Activity wise                                                                          –	Amount (in crores)
Operating Activity	28.5
Investing Activity	80
Financing Activity	(22)
Total	86.5

Special Issues – Taxes On Income (Based On Para Nos. 35 And 36)

Question 14.
What are the examples of cash flows arising from taxes on income to be separately disclosed under cash flows from investing or financing activities?
Answer:
Cash flows arising from taxes on income shall be separately disclosed and classified as cash flow from operating activities, unless they can be specifically identified with financing and investing activities. Taxes on income arise on transactions that give rise to cash flows that are classified as operating, investing or financing activities in the statement of cash flows.

While tax expense may be identified with investing or financing activities, the related tax cash flows are often impracticable to identify and may arise in a different period from the cash flows of underlying transaction. Therefore, taxes paid are usually classified as cash flows from operating activities.

Example:
Classification of taxes should be in accordance with the nature of the related transaction, tax impact of short-term capital gain should be classified as investing activity.
Suppose, the entity is incurring business losses, the same gets adjusted against shortterm capital gain for tax purposes.

Accordingly, showing tax impact of short-term capital gain and business losses separately is impracticable.
Therefore, tax paid is usually classified as cash flows from operating activity.

However, where it is practicable to identify the tax cash flow with an individ-ual transaction that gives rise to cash flows, tax cash flows are classified as investing or financing activities.

Examples:
Tax payment by way of long-term capital gain on sale of land which was used as property, plant and equipment (PPE), tax payment on dividend received from a foreign company shall be classified as investing activity.

Similarly, dividend distribution tax under section 115-0 of Income-tax Act, 1961 viz., preference and equity dividend distribution tax are considered as an integral part of financing activities.

Special Issues – Changes In Ownership Interests In Subsid-Iaries And Other Businesses (Based On Para Nos. 39 To 42b)

Question 15.
Company A acquires 70% of the equity stake in Company B on, July 20, 20X1. The consideration paid for this transaction is as below:
(a) Cash consideration of ₹ 15,00,000
(b) 2,00,000 equity shares having face of ₹ 10 and fair value of ₹ 15 per share.
On the date of acquisition, Company B has cash and cash equivalent balance of ₹ 2,50,000 in its books of account.
On October 10, 20X2, Company A further acquires 10% stake in Company B for cash consideration of ₹ 8,00,000.
Advise how the above transactions will be disclosed/presented in the statement of cash flows as per Ind AS 7.
Answer:
The answer is based on paras 39, 42 and 42A of Ind AS 7.
For the financial year ended March 31, 20X2 total consideration of ₹ 15,00,000 less ₹ 2,50,000 will be shown under investing activities as “Acquisition of the subsidiary (net of cash acquired)”.

There will not be any impact of issuance of equity shares as consideration in the cash flow statement however a proper disclosure shall be given elsewhere in the financial statements in a way that provides all the relevant information about the issuance of equity shares for non-cash consideration.

Further, in the statement of cash flows for the year ended March 31, 20X3, cash consideration paid for the acquisition of additional 10% stake in Company B will be shown under financing activities.

Special Issues – Non-Cash Transactions (Based On Para Nos. 43 And 44)

Question 16.
Ind AS 7 requires disclosure of non-cash transactions in the financial statements. Give examples of non-cash transactions?
Answer:
Investing and financing transactions that do not require the use of cash and cash equivalents are excluded from the statement of cash flows. Such transactions are however required to be disclosed elsewhere in the financial statements in a way that provides all the relevant information. The disclosure of these significant non-cash transactions is made by way of notes to the fi-nancial statements.

Examples of non-cash transactions:

(a) acquisition of an enterprise by means of issue of equity shares;
(b) conversion of debentures or preference shares into equity shares;
(c) conversion of term loan into equity shares;
(d) issue of bonus shares;
(e) reduction of capital under restructuring or reduction of capital;
(f) exchange of assets.

Special Issues – Foreign Currency Cash Flows (Based On Para Nos. 25 To 28)

Question 17.
Which rate should be used in translating the cash flows denominated in a foreign currency? What is the treatment of unrealized gains and losses arising from changes in foreign currency exchange rates?
Answer:
Cash flows arising from the transactions in a foreign currency shall be recorded in an entity’s functional currency by applying to the foreign currency amount the exchange rate between the functional currency and the foreign currency at the date of cash flow.
Cash flows denominated in a foreign currency are reported in a manner con-sistent with Ind AS 21.

Note:
Unrealized gains and losses arising from changes in foreign exchange rates do not give rise to actual inflow or outflow of cash or cash equivalents. However, the effect of such exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported separately from cash flows from operating, investing and financing activities in the statement of cash flows in order to reconcile cash and cash equivalents as per the statement of cash flows with cash and cash equivalents as per the balance sheet.

Question 18.
Z Ltd. has no foreign currency cash flow for the year 2017. It holds some deposit in a bank in the USA. The balances as on 31.12.2017 and 31.12.2018 were US$ 100,000 and US$ 102,000 respectively. The exchange rate on December 31, 2017 was US$1 = ₹ 45. The same on 31.12.2018 was US$1 = ₹ 50. The increase in the balance was on account of interest credited on 31.12.2018. Thus, the deposit was reported at ₹ 45,00,000 in the balance sheet as on December 31, 2017. It was reported at ₹ 51,00,000 in the balance sheet as on 31.12.2018. How these transactions should be presented in cash flow for the year ended 31.12.2018 as per Ind AS 7?
Answer:
The profit and loss account was credited by ₹ 1,00,000 (US$ 2000 × ₹ 50) towards interest income. It was credited by the exchange difference of US$ 100,000 × (₹ 50 – ₹ 45) that is, ₹ 500,000. In preparing the cash flow statement, ₹ 500,000, the exchange difference, should be deducted from the ‘net profit before taxes, and extraordinary item’.

However, in order to reconcile the opening balance of the cash and cash equivalents with its closing balance, the exchange difference ₹ 500,000, should be added to the opening balance in note to cash flow statement.

Cash flows arising from transactions in a foreign currency shall be recorded in Z Ltd.’s functional currency by applying to the foreign currency amount the exchange rate between the functional currency and the foreign currency at the date of the cash flow.

Cash Flow Statement

Question 19.
Provide examples where reconciliation statement is required to be disclosed between the amounts in the statement of cash flows with the equivalent items reported in the balance sheet.
Answer:
Reconciliation may be required for certain items, such as, bank over-drafts which are repayable on demand form an integral part of an entity’s cash management, are included as a component of cash and cash equivalents in the statement of cash flows.

However, bank overdrafts will be included in financial liabilities in balance sheet. Accordingly, such bank overdrafts could be one element of reconciliation.

Where the reporting entity holds foreign currency cash and cash equivalent balances, these are monetary items that will be restated at the reporting date in accordance with Ind AS 21. The Effects of Changes in Foreign Exchange Rates. Any exchange differences arising on translation will increase or decrease these balances but will not give rise to cash flows. Accordingly, such unrealized gains or losses arising from changes in foreign currency exchange rates could be another element of reconciliation.

Question 20.
How should the sale proceeds from a sale and leaseback transaction be reported in the statement of cash flows?
Answer:
A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. The accounting treatment of cash flows arising from the sale proceeds of a sale and leaseback transaction depends upon the type of lease involved. ‘

If the leaseback is a finance lease:
The transaction is a financial arrangement between the lessor and the lessee in substance, whereby the lessor provides finance to the lessee with the asset as security. Accordingly, in such a case sale proceeds of the asset should be classified as financing activities in the statement of cash flows.

Lease finance charges and repayment of lease principal in the future are also required to be reported in the statement of cash flows as financing activities.

If the leaseback is an operating lease:
Cash flows arising from sale proceeds of the fixed assets should be recorded as investing activities. The lease payments to be made in future would be classified as cash flows from operating activities.

Question 21.
How debt securities purchased at a discount/premium are classified in the statement of cash flows?
Answer:
Actual cash outflow irrespective of discount or premium will be pre-sented as investing activity.

Example:
Bonds of face value of ₹ 10,50,000 are purchased in the market at a discount for ₹ 10,43,000. In this case, cash outflow of ₹ 10,43,000 will be presented in the statement of cash flows under investing activities.

Question 22.
What is the presentation of cash flows arising out of payments for manufacture or acquisition of assets held for rental to others and subsequently held for sale in the ordinary course of business?
Answer:
The cash receipts from rent and subsequent sale of such assets are cash flows from operating activities.
Therefore, cash flows associated with such assets are classified as cash flows arising from operating activities.

Note:
This is in contradiction to the normal classification where cash payments made to acquire or manufacture property, plant and equipment and cash receipts from the sale of such assets are classified as investing activities.

Question 23.
Whether comparative figures are required to be presented in the statement of cash flows?
Answer:
An entity is required to present statement of cash flows for the current period classifying the cash flows from operating, investing and financing ac-tivities with corresponding figures of earlier reporting period for comparison and analysis.

Question 24.
How do you classify purchase and sale of securities in the statement of cash flows?
Answer:
An entity may hold securities for dealing or trading purposes as they relate to the main revenue generating activity of the entity.

In this scenario, cash flows arising from the purchase and sale of such securities are classified as operating activities.
Cash flows arising from the purchase and sale of securities held as investments are classified as investing activities.

Question 25.
How do you classify cash receipts and payments arising out of future contracts, forward contracts, option contracts and swap contracts?
Answer:
The answer is based on Paragraph 16 of Ind AS 7:
Classification of cash flows from future contracts, forward contracts, option contracts and swap contracts depends upon whether a contract is accounted for as a hedging instrument for hedged item or not.

When such a contract is accounted for as a hedge, cash flows arising from hedging instruments are classified as operating/investing or financing activities, on the basis of the classification of the cash flows arising from the hedged item.

Example:
When a forward contract is taken for repayment of a foreign currency loan and hedge accounting is followed, cash payments and receipts of the aforesaid forward contract is classified as financing activities.

When these contracts are not accounted for as hedge, the classification of cash flows depends on the nature of the contract itself, Le., if these contracts are held for dealing or trading purposes, cash flows arising from such transactions should be classified as cash flows from operating activities. Otherwise, the cash flows will be classified as investing activities except where cash flows are classified as financing activities.

Question 26.
An entity invests in a 10-year bond with a face value of ₹ 12,00,000 by paying ₹ 4,63,000. The effective rate of interest is 10%. An entity recognizes proportionate interest income in its statement of profit and loss over the period of bond.

How the interest income will be treated in the statement of cash flows during the period of bond?
How the maturity proceeds of ₹ 12,00,000 will be treated in the statement of cash flows?
Note:
The entity is not in the business of dealing in securities.
Answer:
₹ 4,63,000 invested in a bond will be classified as investing activities. There is no cash flow of interest during bond period, as there is no cash receipt. On maturity, proceeds of ₹ 12,00,000 will be classified as investing activity with a bifurcation of ₹ 7,37,000 as interest and ₹ 4,63,000 as proceeds towards redemption of bond.

Question 27.
An entity invests in a 10-year bond with a face value of ₹ 12,00,000 by paying ₹ 4,63,000. The effective rate of interest is 10%. An entity recognizes proportionate interest income in its statement of profit and loss over the period of bond.
How the interest income will be treated in the statement of cash flows during the period of bond?
How the maturity proceeds of ₹ 12,00,000 will be treated in the statement of cash flows?
Note:
The entity is not in the business of dealing in securities.
Answer:
₹ 4,63,000 invested in a bond will be classified as investing activities. There is no cash flow of interest during bond period, as there is no cash receipt.
On maturity, proceeds of ₹ 12,00,000 will be classified as investing activity with a bifurcation of ₹ 7,37,000 as interest and ₹ 4,63,000 as proceeds towards redemption of bond.

Question 28.
Explain how securitization of receivables is presented in the statement of cash flows in the books of originator?
Answer:
There is no guidance in Ind AS 7 with regard to presentation of cash flows from securitizations. In this regard, it mav be noted that derecognition of receivables in the books of the originator in accordance with the requirements laid down in Ind AS 109, Financial Instruments implies that, in substance it is similar to sale of receivables. Amount received from such securitizations can be considered as early collection of amounts due from customers.

Accordingly, cash flows arising from proceeds from securitization activities derecognized in accordance with the requirements of Ind AS 109 should be classified as part of operating activities even if the entity does not enter into such transactions regularly.

In other cases, where the receivables are not derecognized in the books of the originator in accordance with the requirements of Ind AS 109, the proceeds from securitization arrangement are recognized as a liability. Therefore, cash flows arising from such transactions should be classified as part of financing activities.

Question 29.
Following is the balance sheet of Kuber Limited for the year ended 31st March, 20X2

Additional Information:

(1) Profit after tax for the year ended 31st March, 20X2 – ₹ 4,450 lacs
(2) Interim Dividend paid during the year – ₹ 450 lacs
(3) Depreciation and amortisation charged in the statement of profit and loss during the current year are as under:
(a) Property, Plant and Equipment – ₹ 500 lacs
(b) Intangible Assets – ₹ 20 lacs
(4) During the year ended 31st March, 20X2 two machineries were sold for ₹ 10 lacs. The carrying amount of these machineries as on 31st March, 20X2 is ₹ 60 lacs.
(5) Income taxes paid during the year ₹ 105 lacs

Using the above information of Kuber Limited, construct a statement of cash flows under indirect method. Other non-current/current assets and liabilities are related to operations of Kuber Ltd. and do not contain any element of financing and investing activities. [RTP-November 2019]
Answer:

Case Study 1:

Foreign currency cash flows

Entity A, whose functional currency is Indian Rupee, had a balance of cash and cash equivalents of ₹ 2,00,000, but no trade receivables or trade payables on January 1, 2019. During 2019, the entity entered into the following foreign currency transactions:

• Entity A purchased goods for resale from Europe for €1,00,000 when the exchange rate was €1 = ₹ 50. This balance is still unpaid at Decem-ber 31, 2019 when the exchange rate is €1 = ₹ 45. An exchange gain on retranslation of the trade payable of ₹ 5,00,000 is recorded in profit or loss [€1,00,000 × (50 – 45) = ₹ 5,00,000],
• Entity A sold the goods to an American client for $ 1,50,000 when the exchange rate was $ 1 = ₹ 40. This amount was settled when the exchange rate was $1 = ₹ 42. A further exchange gain of ₹ 3,00,000 regarding the trade receivable is recorded in the statement of profit or loss [$ 1,50,000 × (42 – 40) = ₹ 3,00,000],
• Entity A also borrowed €1,00,000 under a long-term loan agreement when the exchange rate was €1 = ₹ 50 and immediately converted it to ₹ 50,00,000. The loan was retranslated at December 31, 2019 @ ₹ 45 = ₹ 45,00,000, with a further exchange gain of ₹ 5,00,000 recorded in the statement of profit or loss.
• Entity A therefore records a cumulative exchange gain of ₹ 13,00,000 (5,00,000 + 3,00,000 + 5,00,000) in arriving at its profit for the year.

In addition, Entity A records a gross profit of 10,00,000 (₹ 60,00,000 – ₹ 50,00,000) on the sale of the goods.
How cash flows arising from above transactions would be reported in the statement of cash flows under indirect method?
Answer:
Indirect method of statement of cash flows
Cash flows from operating activities

Particulars	Amount (₹)
Profit before taxation (10,00,000 + 13,00,000)	23,00,000
Adjustment for unrealized exchange gains/losses
Foreign exchange gain on long-term loan	(5,00,000)
Decrease in trade payables	(5,00,000)
Operating Cash flow before working capital changes Changes in working capital (Due to increase in trade payables)	13,00,000 50,00,000
Net cash inflow from operating activities	63,00,000
Cash inflow from financing activity	50,00,000
Net increase in cash and cash equivalents	1,13,00,000
Cash and cash equivalents at the beginning of the period	2,00,000
Cash and cash equivalents at the end of the period	1,15,00,000

Case Study 2:

Entity A acquired a subsidiary, entity B, during the year.
Summarized information from the consolidated statement of profit and loss and balance sheet is provided, together with some supplementary information, to demonstrate how the statement of cash flows under the indirect method is derived.

Consolidated statement of profit and loss		Amount (₹)
Revenue		3,80,000
Cost of sales		(‘2,20,000‘)
Gross profit		1,60,000
Depreciation		(30,000)
Other operating expenses		(56,000)
Interest cost		(4,000)
Profit before taxation		70,000
Taxation		(15,000)
Profit after taxation		55,000

Consolidated balance sheet	2019	2018
Assets	Amount (₹)	Amount (₹)
Cash and cash equivalents	8,000	5,000
Trade receivables	54,000	50,000
Consolidated balance sheet	2019	2018
Assets	Amount (₹)	Amount (₹)
Inventories	30,000	35,000
Property, plant and equipment	1,60,000	80,000
Goodwill	18,000	— —
Total assets	2,70,000	1,70,000
Liabilities
Trade payables	68,000	60,000
Income tax payable	12,000	11,000
Long-term debt	1,00,000	64,000
Total liabilities	1,80,000	1,35,000
Shareholders’ equity	90,000	35,000
Total liabilities and shareholders’	2,70,000	1,70,000

Other information:
All of the shares of entity B were acquired for ₹ 74,000 in cash. The fair values of assets acquired and liabilities assumed were:

Particulars	Amount (₹)
Inventories	4,000
Trade receivables	8,000
Cash	2,000
Property, plant and equipment	1,10,000
Trade payables	(32,000)
Long term debt                                                             ‘	(36,000)
Goodwill	18,000
Cash consideration paid	74,000
Prepare statement of cash flows.

Answer:
This information will be incorporated into the consolidated statement of cash flows as follows :

Statement of cash flows for 2019 (Extract) Cash flows from opening activities	Amount (₹)	Amount (₹)
Profit before taxation
Adjustments for non-cash items.	70,000
Depreciation	30,000
Decrease in inventories (Note 1)	9,000
Decrease in trade receivables (Note 2)	4,000
Decrease in trade payables (Note 3)	(24,000)
Interest paid to be included in financing activities	23,000
Taxation (11,000 + 15,000 – 12,000)	14,0000
Net cash inflow from operating activities		79,000
Cash flows from investing activities
Cash paid to acquire subsidiary (74,000 – 2,000)	72.000
Net cash outflow from investing activities		(72,000)
Cash flows from financing activities
Interest paid	(4,000)
Net cash outflow from financing activities		(4,000)
Increase in cash and cash equivalents		3,000
Cash and cash equivalents, beginning of year		5,000
Cash and cash equivalents, end of year		8,000

Working Note 1:

Total inventories of the Group at the end of the year	₹ 30,000
Inventories acquired during the year from subsidiary	₹ 4,000
	₹ 26,000
Opening inventory	₹ 35,000
Decrease in inventory	₹ 9,000

Working Note 2:

Total trade receivable of the Group at the end of the year	₹ 54,000
Trade receivables acquired during the year from subsidiary	₹ 8,000
	₹ 46,000
Opening trade receivable	₹ 50,000
Decrease in trade receivable	₹ 4,000

Working Note 3:

Trade payables at the end of the year	₹ 68,000
Trade payables of the subsidiary assumed during the year	₹ 32,0000
	₹ 36,000
Opening trade payable	₹ 60,000
Decrease in trade payables	₹ 24,000

Question 30.
A Ltd., whose functional currency is Indian Rupee, had a balance of cash and cash equivalents of ₹ 2,00,000, but there are no trade receivables or trade payables balances as on 1st April, 2017. During the year 2017-2018, the entity entered into the following foreign currency transactions:

• A Ltd. purchased goods for resale from Europe for € 2,00,000 when the exchange rate was €1 = ₹ 50. This balance is still unpaid at 31st March, 2018 when the exchange rate is €1 = ₹ 45. An exchange gain on retranslation of the trade payable of ₹ 5,00,000 is recorded in profit or loss.
• A Ltd. sold the goods to an American client for $ 1,50,000 when the exchange rate was $1 = ₹ 40. This amount was settled when the ex-change rate was $1 = ₹ 42. A further exchange gain regarding the trade receivable is recorded in the statement of profit or loss.
• A Ltd. also borrowed €1,00,000 under a long-term loan agreement when the exchange rate was € 1 = ₹ 50 and immediately converted it to ₹ 50,00,000. The loan was retranslated at 31st March, 2018 @ ₹ 45, with a further exchange gain recorded in the statement of profit or loss.
• A Ltd. therefore records a cumulative exchange gain of ₹ 18,00,000 (10,00,000 + 3,00,000 + 5,00,000) in arriving at its profit for the year.
• In addition, A Ltd. records a gross profit of ₹ 10,00,000 (₹ 60,00,000 – ₹ 50,00,000) on the sale of the goods.
• Ignore taxation.

How cash flows arising from the above transactions would be reported in the statement of cash flows of A Ltd. under indirect method?
Answer:
Statement of cash flows

Particulars		Amount (₹)
Cash flows from operating activities
Profit before taxation (10,00,000 + 18,00,000)	28,00,000
Adjustment for unrealized exchange gains/losses:
Foreign exchange gain on long-term loan [€ 2,00,000 × ₹ (50-45)]	(10,00,000)
Decrease in trade payables [1,00,000 × ₹ (50-45)]	5,00,000
Operating Cash flow before working capital changes	13,00,000
Changes in working capital (Due to increase in trade payables)	50,00,000
Net cash inflow from operating activities		63,00,000
Cash inflow from financing activity		50,00,000
Net increase in cash and cash equivalents		1,13,00,000
Cash and cash equivalents at the beginning of the period		2,00,000
Cash and cash equivalents at the end of the period		1,15,00,000