{"id":17716,"date":"2023-03-21T12:48:24","date_gmt":"2023-03-21T07:18:24","guid":{"rendered":"https:\/\/gstguntur.com\/?p=17716"},"modified":"2023-03-21T12:49:06","modified_gmt":"2023-03-21T07:19:06","slug":"consolidated-and-separate-financial-statements-of-group-entities-ca-final-fr-study-material","status":"publish","type":"post","link":"https:\/\/gstguntur.com\/consolidated-and-separate-financial-statements-of-group-entities-ca-final-fr-study-material\/","title":{"rendered":"Consolidated and Separate Financial Statements of Group Entities \u2013 CA Final FR Study Material"},"content":{"rendered":"

Consolidated and Separate Financial Statements of Group Entities \u2013 CA Final FR Study Material<\/a>\u00a0is designed strictly as per the latest syllabus and exam pattern.<\/p>\n

Consolidated and Separate Financial Statements of Group Entities \u2013 CA Final FR Study Material<\/h2>\n

IND AS 27: Preparation of Separate Financial Statements (Based on Para Nos. 9 To 11a)<\/strong><\/p>\n

Question 1.
\nWhether the investment entity is required to measure its investment in subsidiaries at fair value through profit or loss in its separate financial statements?
\nAnswer:
\nThe answer is to be based on Paragraph 11A of Ind AS 27; Paragraphs 31, 32 and 4B of Ind AS 110.<\/p>\n

The parent that is an investment entity is required to measure its investments in its subsidiaries (except for entities covered under paragraph 32 of Ind AS I 110) at fair value through profit or loss in its consolidated financial statements as per the requirement of Ind AS 109.<\/p>\n

Further, such investment entity is required to account for these investments in the similar way in its separate financial statements as they have been accounted for in consolidated financial statements.<\/p>\n

\"Consolidated<\/p>\n

Question 2.
\nA company, A Ltd. holds investments in subsidiaries and associates. In its separate financial statements, A Ltd. wants to elect to account its investments in subsidiaries at cost and the investments in associates as financial assets at fair value through profit or loss (FVTPL) in accordance with Ind AS 109, Financial Instruments.<\/p>\n

Whether A Limited can carry investments in subsidiaries at cost and investments in associates in accordance with Ind AS 109 in its separate financial statements?
\nAnswer:
\nThe answer is to be given based on Paragraph 10 of Ind AS 27.<\/p>\n

Subsidiaries, associates and joint ventures would qualify as separate categories. Thus, the same accounting policies are applied for each category of investments – i.e. each of subsidiaries, associates and joint ventures.<\/p>\n

However, paragraph 10 of Ind AS 27 should not he read to mean that, in all circumstances, all investments in associates are one \u2018category \u2019of investment and all investments in joint ventures or an associate are one \u2018category\u2019 of investment.<\/p>\n

These categories can be further divided into sub-categories provided the subcategory can be defined clearly and objectively and results in information that is relevant and reliable.<\/p>\n

Example:
\nAn investment entity parent can have investment entity subsidiary (at fair value through profit or loss) and non-investment entity subsidiary (whose main purpose is to provide services that relate to the investment entity\u2019s investment activities) as separate categories in its separate financial statements.<\/p>\n

In the above case, investment in subsidiaries and associates are considered to be different categories of investments.<\/p>\n

Further, Ind AS 27 requires to account for the investment in subsidiaries, joint ventures and associates either at cost, or in accordance with Ind AS 109 for each category of Investment. Thus, A Limited can carry its investments in subsidiaries at cost and its investments in associates as financial assets in accordance with Ind AS 109 in its separate financial statements.<\/p>\n

\"Consolidated<\/p>\n

Question 3.
\nA Limited has an existing investment of INR 700 crores in its subsidiary, P Limited. The net assets of P Limited are only INR 400 crores as at March 31, 2018. The value in use as well as fair value less costs to sell of P Limited is INR 600 crores.<\/p>\n

A Limited has accounted its subsidiary at cost in its financial statements.<\/p>\n

What will be the impairment loss which A Limited, needs to recognize in the separate financial statements?
\nAnswer:
\nThe answer is based on Paragraphs 59 and 61 of Ind AS 36.<\/p>\n

Thus, in the above case, impairment loss of \u20b9 100 crores shall be recognized in the statement of profit and loss. However, it is also important to consider the underlying cash flows that support the investment while considering the investment for impairment.<\/p>\n

Question 4.
\nA parent entity A Ltd. has elected to account for its investments in its subsidiary at FVTPL in accordance with Ind AS 109, Financial Instruments. As a result, it measures its investments at fair value at each reporting date. However, A Ltd. is unable to reliably measure the fair value of one of its subsidiaries, Subsidiary B, which was set up a year ago and is not quoted on an active market.<\/p>\n

Does the fact that the fair value of one subsidiary cannot be measured reliably preclude A Ltd. from carrying its other subsidiaries at fair value in its separate financial statements?
\nAnswer:
\nThe answer is based on Paragraph 10 of Ind AS 27 and in the light of Paragraphs B5.2.3-B5.2.6 of Ind AS 109.<\/p>\n

On the basis of above, if an entity has elected to account for its investments in its subsidiary at FVTPL in accordance with Ind AS 109, then all such investments should be measured at fair value in accordance with Ind AS 109.<\/p>\n

However, in very limited circumstances, cost may be an appropriate estimate of fair value (for example, where insufficient recent information is available to determine fair value, or where there is a wide range of possible fair value measurements and cost represents the best estimate of fair value within that range). It may be noted that such circumstances would never apply to equity investments held by particular entities such as financial institutions and investment funds.<\/p>\n

\"Consolidated<\/p>\n

Under Ind AS 109, investments in equity instruments can be carried at cost only if either of the conditions stated above is met. Further while Ind AS 109 provides an exemption, it is expected to be available only in limited circumstances. It is acknowledged that current observable prices would usually not be available for unlisted companies. However, in such cases, instead of considering cost as a default measurement basis, fair value should be determined using unobservable inputs.<\/p>\n

It is important to note that use of cost as per B5.2.3 does not refer to use of cost method; instead it only recognizes that cost is an approximate of fair value in limited circumstances. For assessing whether or not cost is representative of fair value, in addition to considering the factors in B5.2.4 (stated above), an investor considers the existence of factors such as whether the environment in which the investee operates is dynamic, whether there have been changes in market conditions and the passage of time. Such factors might undermine the appropriateness of using cost as a means of measuring the fair value of unquoted equity instruments at the measurement date.<\/p>\n

For assessing whether cost is an approximation of fair value, all facts and cir-cumstances need to be considered carefully. As stated above, usually, current observable prices for shares in private companies are not available. In such case, the measurement of fair value is based on valuation techniques that use unobservable inputs (generally classified as Level 3 in the fair value hierarchy).<\/p>\n

There is no exemption from use of fair value in case fair value cannot be measured reliably. This seems to be on the basis that given the extensive and comprehensive guidance in Ind AS 113, Fair Value Measurement, fair value can be determined reliably for unlisted entities.<\/p>\n

In the given case, the entity should determine the fair value as per guidance provided in Ind AS 109. Only if, after following the guidance of Ind AS 109, A Ltd. concludes that cost is an approximate of fair value of its investment in subsidiary B, the Company can use the cost as its deemed fair value.<\/p>\n

Disclosure (Based on Para Nos. 15 To 17)<\/strong><\/p>\n

Question 5.
\nWhether a company is required to disclose the fact that the financial statements prepared by them are separate financial statements?
\nAnswer:
\n(i) When the separate financial statements are prepared by a parent company that elects not to present consolidated financial statements, then in accordance with paragraph 16(a) of Ind AS 27, it is required to disclose in those separate financial statements, the fact that the financial statements are separate financial statements.<\/p>\n

(ii) When separate financial statements are prepared by an investment entity as its only financial statements in accordance with paragraph 16A of Ind AS 27, then it is required to disclose that fact in the financial statements.<\/p>\n

(iii) When the separate financial statements are prepared by a parent (other than (i) and (it) above) or by an investor with joint control of, or significant influence over, an investee, the parent or investor shall identify the financial statements prepared in accordance with Ind AS 110, Ind AS 111 or Ind AS 28 to which they relate. In accordance with paragraph 17(a) of Ind AS 27, it is also required to disclose in those separate financial statements, the fact that the financial statements are separate financial statements.<\/p>\n

Therefore, in all the above cases, the companies are required to disclose in its separate financial statements the fact that the financial statements prepared by them are separate financial statements.<\/p>\n

\"Consolidated<\/p>\n

IND AS 110: Scope (Based on Para No. 4)<\/strong><\/p>\n

Question 6.
\nInd AS 110, Consolidated Financial Statements as well as the Companies Act, 2013 require companies to present consolidated financial statements. However, under both the regulations criteria for determining relationship with other entities (i.e., subsidiary, joint venture and associate companies) are different.<\/p>\n

Whether a company should follow the requirements of Ind AS 110 or the Companies Act, 2013 for the purpose of preparation of financial statements?
\nAnswer:
\nRule 4A of the Companies (Accounts) Rules, 2014 issued by the Ministry of Corporate Affairs states as follows:<\/p>\n

\u201c4A. Forms and items contained in financial statements<\/p>\n

The financial statements shall be in the form specified in Schedule HI to the Act and comply with Accounting Standards or Indian Accounting Standards as applicable:<\/p>\n

Provided that the items contained in the financial statements shall be prepared in accordance with the definitions and other requirements specified in the Accounting Standards or the Indian Accounting Standards, as the case may be.\u201d<\/p>\n

Thus, it is evident from the above that for the purposes of preparation of financial statements, the definitions and other requirements given under Ind AS should be considered and applied by the entity.<\/p>\n

Accordingly, a company should follow the requirements prescribed under Ind AS 110 for the purpose of preparation of financial statements.<\/p>\n

\"Consolidated<\/p>\n

Question 7.
\nA Limited holds majority voting shares in several companies. All of these investee companies qualify as subsidiaries of A Limited within the meaning of the Companies Act, 2013. All of these investee companies also qualify as subsidiaries of A Limited within the meaning of Ind AS 110, Consolidated Financial Statements, since all decisions are taken by these companies on the basis of simple majority of votes.<\/p>\n

A Limited hold 48 per cent of the voting shares in Z Limited. As A Limited neither controls the composition of the Board of Directors of Z limited nor it exercises or controls more than one-half of the total voting power of Z Limited therefore Z Limited does not qualify as a subsidiary of A Limited within the meaning of the Companies Act, 2013.<\/p>\n

The voting rights in Z Limited other than those held by A Limited are held by thousands of shareholders, none individually holding more than 1 per cent of the voting rights. None of the shareholders has any arrangements to consult any of the others or make collective decisions. On the basis of the relative ( size of the other shareholdings, A Limited has determined that a 48 per cent interest is sufficient to give it \u2018de facto control\u2019 over Z Limited within the meaning of this term under Ind AS 110. Consequently, Z Limited qualifies as its subsidiary under Ind AS 110.<\/p>\n

In preparing its consolidated financial statements as per Ind AS, should A Limited also consolidate Z Limited?
\nAnswer:
\nThe answer is based on Rule 4A of the Companies (Accounts) Rules, 2014 issued by the Ministry of Corporate Affairs.<\/p>\n

Thus, it is clear from the above that for the purposes of preparation of financial statements, the definitions and other requirements specified under Ind AS should be applied. As Z Limited qualifies as a subsidiary of A Limited under Ind AS 110, it should also be consolidated by A Limited in preparing its consolidated financial statements.<\/p>\n

\"Consolidated<\/p>\n

Question 8.
\nWhether a company H Limited is required to consolidate its subsidiary which is a Limited Liability Partnership (LLP) or a partnership firm?
\nWould the answer be different if LLP is an associate or joint venture of H Limited?
\nAnswer:
\nAs per Ind AS 110, any entity that is controlled by an investor is its \u2018subsidiary\u2019, irrespective of whether such an entity is a company or another type of entity such as a limited liability partnership firm, a partnership firm (other than LLP). Accordingly, in the given case, H Limited is required to consolidate its subsidiary which is an LLP or a partnership firm.<\/p>\n

Even if the LLP or partnership firm is an associate or joint venture of H Limited, then also the LLP and partnership firm is required to be consolidated. Method of consolidation as prescribed under Ind AS 28, Investments in Associates and Joint Ventures and Ind AS 111, Joint Arrangements, for associates and joint ventures shall be followed.<\/p>\n

Question 9.
\nWhether a parent is required to consolidate a subsidiary which has been acquired with intent to dispose it of in the near future?
\nAnswer:
\nThere is no exception in Ind AS 110 for excluding from consolidated financial statements a subsidiary(ies) that has been acquired with an intent to dispose it of in the near future. Accordingly, such a subsidiary is required to be consolidated by the parent.<\/p>\n

Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations, lays down, inter alia, requirements relating to classification, measurement, presentation and disclosure of non-current assets and disposal groups that meet the criteria to be classified as \u2018held for sale\u2019 (or \u2018held for distribution to owners\u2019).<\/p>\n

Accordingly, if on acquisition, a subsidiary acquired with intention of its disposal in near future meets the criteria of classification laid down in Ind AS 105 for classification as held for sale, the said standard (Le., Ind AS 105) shall apply in consolidating the subsidiary, i.e., the disposal group (comprising the assets that are to be disposed of and directly related liabilities) shall be measured in accordance with the requirements of Ind AS 105 and presented in the consolidated financial statements as held for sale.<\/p>\n

\"Consolidated<\/p>\n

Question 10.
\nWhether trusts or similar entities established for the purpose pension or gratuity plans etc. are covered under the scope exception under paragraph 4A of Ind AS 110?
\nAnswer:
\nParagraph 4A of Ind AS 110 provides an exemption to post-employment benefit plans or other long-term employment benefit plans to which Ind AS 19, Employee Benefits, applies. Thus, a parent entity, does not consolidate such plans. However, the entity should evaluate the accounting for trust in its standalone financial statements.<\/p>\n

Assessment of Control – Power (Based on Para Nos. 10 To 14 And Para Nos. B9 To B54 of Appendix B)<\/strong><\/p>\n

Question 11.
\nEntity H holds 40 per cent, and six other investors each hold ten per cent, of the voting rights of Entity S. An agreement among all the shareholders grants Entity H the right to appoint, remove and set the remuneration of management responsible for directing the relevant activities of Entity S. To change the agreement, tw o-third majority vote of the shareholders is required. Thus, Entity H cannot be divested of its contractual right since the combined voting power of all the other shareholders falls short of the three-fourths majority required for this purpose.<\/p>\n

Does Entity H have power over Entity S?
\nAnswer:
\nThe answer is based on paragraphs B41, B42 and B43 of Ind AS 110.<\/p>\n

In the present case, the absolute size of Entity H’s holding and the relative size of the other shareholdings alone are not conclusive in determining whether Entity H has rights sufficient to give it power. However, Entity H has contractual right to appoint, remove and set the remuneration of management responsible for directing the relevant activities of Entity S. The contractual right of H to appoint, remove and set the remuneration of management of Entity S gives it power over Entity S.<\/p>\n

The fact that Entity H might not have exercised this right or the likelihood of Entity H exercising its right to select, appoint or remove management shall not be considered when assessing whether Entity H has power.<\/p>\n

\"Consolidated<\/p>\n

Question 12.
\nA Limited owns 50% voting shares in X Limited. The board of directors of X Limited consists of six members of which three directors are nominated by A Limited and three other investors nominate one director each pursuant to a Shareholders\u2019 Agreement among them. All decisions concerning \u2018relevant activities\u2019 of X Limited are taken at its board meeting by a simple majority. As per the articles of association, one of the directors nominated by A Limited chair the board meetings and has a casting vote in the event that the directors cannot reach a majority decision. Whether A Limited has control over X Limited?
\nAnswer:
\nThe answer is based on Paragraphs 11 and B40 of Ind AS 110.<\/p>\n

In the instant case, A Limited has (though its nominee director who chairs board meetings) a casting vote at the board meetings which along with its 50% (three out of six) of the normal voting rights gives it power to take decisions concerning relevant activities, even if the nominee directors of other investors do not concur with it on any matter. Thus, A Limited has the current ability to direct the relevant activities of X Limited through control over board decisions and hence it controls X Limited.<\/p>\n

Question 13.
\nA Limited holds 90% equity shares, having an aggregate face value of \u20b9 90,000, in BC Limited out of its (BC Limited\u2019s) total issued and (fully) paid up equity capital of \u20b9 1,00,000. The relevant activities of BC Limited are decided upon by a simple majority vote and thus A Limited exercises control over BC Limited.<\/p>\n

C Limited holds 85% preference shares, having an aggregate face value of \u20b9 1,70,000, in BC Limited out of its (BC Limited\u2019s) total issued and (fully) paid-up preference share capital of \u20b9 2,00,000. In the facts of the case, the voting rights of C Limited as a preference shareholder are governed exclusively by the provisions of the Companies Act, 2013.<\/p>\n

The second proviso to section 47(2) of the Companies Act, 2013 provides that where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.<\/p>\n

As per, the first proviso to section 47(2), the proportion of the voting rights of equity shareholders to the voting rights of the preference shareholders shall be in the same proportion as the paid-up capital in respect of the equity shares bears to the paid-up capital in respect of the preference shares.<\/p>\n

BC Limited has not made the payment of dividend on its preference shares for the last two years. Whether the resulting voting rights available to C Limited require reassessment of A Limited’s control?
\nAnswer:
\nThe answer is based on paragraphs 6, 7 and 8 of Ind AS 110.<\/p>\n

In the present case, upon non-payment by BC Limited of dividend on preference shares for two years, C Limited becomes entitled to 56% of total voting rights over BC Limited (1,70,000\/3,00,000) and voting rights of A Limited in BC Limited stand reduced from 90% to 30% (90,000\/3,00,000).<\/p>\n

Hence in the given case, in view of the change in the percentage holding of voting rights and considering other factors of control as enunciated under Ind AS 110, A Limited and C Limited should reassess control over BC Limited.<\/p>\n

\"Consolidated<\/p>\n

Question 14.
\nCan an investor have power if it can make decisions concerning the relevant activities of the investee only upon the occurrence of a contingent event and cannot make such decisions currently?
\nAnswer:
\nThe answer is based on Paragraphs B13, B26 and B53 of Ind AS 110.<\/p>\n

As per the above, there can be situations where an investor has power even though it can make decisions about the investee’s activities only when particular circumstances or events occur.<\/p>\n

For instance, an investee\u2019s only business activity, is to purchase receivables and service them on a day-to-day basis for its investors. The servicing on a day-to-day basis includes the collection and passing on of principal and in-terest payments as they fall due. Upon default of a receivable the investee automatically puts the receivable to an investor A as agreed separately in an agreement between the investor and the investee.<\/p>\n

In the given case, A can exercise its power only in case of a contingent event, i.e. in case of default. In this case, the only relevant activity is managing the receivables upon default because it is the only activity that can significantly affect the investee\u2019s returns. Managing the receivables before default is not a relevant activity because it does not require substantive decisions to be made that could significantly affect the investee’s returns.<\/p>\n

Hence, default is the only time when decisions are required and X has the decision-making authority at the time when such decisions are required and therefore it has power even though it may not be able to make decisions currently.<\/p>\n

Question 15.
\nA Limited manufacture a single product P. It supplies almost 85% of quantity of product P manufactured by it to B Limited. Remaining 15% is supplied to other retail customers. B Limited neither has any decision-making powers regarding the manufacturing operations of A Limited nor any other involvement in A Limited except placing purchase orders with it. The contract period is three years and can be renewed by mutual consent. If the contract is not renewed, then either of the entity is able to seek other customers and suppliers respectively. However, in case of early termination, penalties are levied on the terminating entity.<\/p>\n

The board of A Limited operates and makes key decisions about its business independently. Further, A Limited is actively looking for new customers.<\/p>\n

Whether B Limited has power over A Limited?
\nAnswer:
\nThe answer is based on Paragraph B19 of Ind AS 110.<\/p>\n

In the present case, it seems that A Limited is economically dependent on B Limited for its sales. However, other factors need to be evaluated to assess B Limited\u2019s control over the A Limited, e.g. power to direct the day to day operations making the key decisions, seeking customers and suppliers etc. the given case, A Limited has unilateral decision-making powers over how to manufacture the product and is actively engaged in seeking new customers. Further, the key decisions about the business of A Limited are also made by the Board of a Limited without any involvement of B Limited. Thus, upon assessment of these factors it is evident that B Limited does not have power over A Limited.<\/p>\n

\"Consolidated<\/p>\n

Question 16.
\nX Limited, Y Limited, Z Limited hold 33.33% each of the voting rights in PQR Limited and each of them has the right to appoint two directors to the board of PQR Limited. Apart from its equity shareholding in PQR Limited, X Limited also holds call options that are exercisable at a fixed price at anytime and if exercised would give it all of the voting rights in PQR Limited. The call options are in the money. However, X Limited\u2019s management does not intend to exercise the call options even if Y Limited and Z Limited do not vote in the same manner as X Limited.<\/p>\n

Whether the call option (potential voting rights) held by X Limited constitute substantive rights for the purpose of assessing power over PQR Limited, considering the management\u2019s intention of not exercising the call options?
\nAnswer:
\nInd AS 110 is silent on whether the option holder’s intention to exercise or not exercise the option is to be considered in the assessment of potential voting rights.<\/p>\n

However, paragraph B14 of the Standard states that \u201cpower arises from rights\u201d. The intention of the management of X Limited with regard to not exercising the call options does not affect the assessment of whether the options are substantive unless such intention is caused by barriers (economic or otherwise) or other practical difficulties, as identified in the abovementioned paragraph B23 of Appendix B to Ind AS 110 which may prevent (or deter) X Limited from exercising the options.<\/p>\n

Since the options are in the money, in the absence of any barriers, the potential voting rights held by X Limited appear to be substantive rights.<\/p>\n

\"Consolidated<\/p>\n

Question 17.
\nA Limited owns 45% of the equity shares of B Limited. It also has an agreement with some other shareholders holding 20% equity shares of B Limited that they will always vote in the same manner as A Limited. The relevant activities of B Limited\u2019s are controlled through voting rights and a simple majority vote is required on all decisions about the relevant activities.<\/p>\n

Whether the voting rights owned by A Limited together with its contractual arrangement with the other shareholders referred to above give control of B Limited to A Limited?
\nAnswer:
\nThe answer is based on Paragraph B39 of Ind AS 110.<\/p>\n

In the present case, the contractual arrangement of A Limited with other shareholders holding 20% voting rights and its own holding of 45% voting power entitles it to majority voting rights, i.e., 65%. Thus, it has power to direct the relevant activities of B Limited. Hence, A Limited control B Limited.<\/p>\n

Question 18.
\nEntity A holds 49 per cent of the equity shares of Entity B. The remaining 51 per cent of the equity shares of Entity B are owned by three entities, P, Q and R, each owning 17 per cent respectively. None of the entities A, B, C or D is related to any of the other entities.<\/p>\n

Entity A has entered into a forward contract with Entity P to acquire an additional five per cent of the equity shares of Entity B held by Entity P. The forward contract will be settled in two years’ time. The terms of the forward contract give Entity A the right to receive dividends, if any, relating to the five per cent shares during the two-year intervening period. Entity P is also obliged to vote in accordance with the instructions of Entity A on the five per cent of equity shares subject to the forward contract during the two-year intervening period.<\/p>\n

Whether Entity A exercises control over Entity B? If yes, whether potential voting rights would be taken into account by it while consolidating Entity B?
\nAnswer:
\nThe answer is based on Paragraphs B22, B47, B90 and B91 of Ind AS 110.<\/p>\n

In the given case, right to dividends on the five percent shares gives Entity A, in-substance current access to the returns associated with the five percent shareholding. Accordingly, the rights available under forward contract are substantive rights and those rights together with its 49 percent holding gives ownership interest in Entity B. Thus, it can be concluded that Entity A controls Entity B (i.e. Entity A is the parent of Entity B). The proportion of profit or loss and other comprehensive income allocated between Entity A i.e., owner and the non-controlling interests of Entity B are 54 percent and 46 percent respectively. Thus, potential voting rights should be taken into account while consolidating Entity B.<\/p>\n

As stated above, the forward contract entered into by Entity A in the given case, gives it access to dividends on the five percent shares, i.e., it has in- substance current access to the returns associated with the five percent shareholding. Accordingly, the forward contract shall not be subject to the requirements of Ind AS 109.<\/p>\n

\"Consolidated<\/p>\n

Assessment of Control – Linkage Between Power And Returns (Based on Para Nos. 17 To 18 And B58 To B72 of Appendix B)<\/strong><\/p>\n

Question 19.
\nInvestors A Ltd., B Ltd. and C Ltd. have invested 15%, 30% and 55% respectively in a fund that is being managed by an external fund manager. The fund manager has wide powers to make investment decisions and the investors cannot direct or veto those decisions. The fund manager can be removed only by a unanimous vote of all the three investors and has been assessed to be an agent under Ind AS 110.
\nShould investors A Ltd., B Ltd. and C Ltd. attribute the fund manager\u2019s decision-making powers to themselves when they each consider whether they have power over the fund?
\nAnswer:
\nThe answer is based on Paragraphs B58, B59 and B65 of Ind AS 110.<\/p>\n

Where there are multiple principals, each principal should assess whether it has power over the investee by considering all the three elements of control, i.e., power, exposure to variable returns and the ability to use power to affect returns.<\/p>\n

Therefore, in the given case, the investors should not attribute the fund manager\u2019s decision powers to themselves. The fund manager is an agent for all three investors. As the agent acts for multiple principals, each of the principals must assess whether it has power. None of the investors has the unilateral power to direct or remove the fund manager. Therefore, none of them on their own have the ability to direct the relevant activities of the fund.<\/p>\n

Further, A Ltd., B Ltd. and C Ltd. should evaluate the applicability of Ind AS 111, Joint Arrangements and Ind AS 28, Investments in Associates and Joint Ventures.<\/p>\n

\"Consolidated<\/p>\n

Comprehensive Question on Control Assessment Investment Entities (Based on Para Nos. 31 To 33 and Para Nos. B85n and B85w of Appendix B)<\/strong><\/p>\n

Question 20.
\nAngel. Ltd. has adopted Ind AS with a transition date of 1st April, 2017. Prior to Ind AS adoption, it followed Accounting Standards notified under Companies (Accounting Standards) Rules, 2006 (hereinafter referred to as \u201cIGAAP\u201d).<\/p>\n

It has made investments in equity shares of Pharma Ltd., a listed company engaged in the business of pharmaceuticals. The shareholding pattern of Pharma Ltd. is given below:<\/p>\n\n\n\n\n\n\n\n
Shareholders (refer Note 1)<\/td>\nPercentage shareholding as on 1st April, 2017<\/td>\n<\/tr>\n
Angel Ltd.<\/td>\n21%<\/td>\n<\/tr>\n
Little Angel Ltd. (refer Note 2)<\/td>\n24%<\/td>\n<\/tr>\n
Wealth Master Mutual Fund (refer Note 3)<\/td>\n3%<\/td>\n<\/tr>\n
Individual public shareholders (refer Note 4)<\/td>\n52%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Notes:<\/p>\n

    \n
  1. None of the shareholders have entered into any shareholders\u2019 agreement.<\/li>\n
  2. Little Angel Ltd. is a subsidiary of Angel Ltd. (under Ind AS) in which Angel Ltd. holds 51% voting power.<\/li>\n
  3. Wealth Master Mutual Fund is not related party of either Little Angel Ltd. or Pharma Ltd.<\/li>\n
  4. Individual public shareholders represent 17,455 individuals. None of the individual shareholders hold more than 1% of voting power in Pharma Ltd.<\/li>\n<\/ol>\n

    All commercial decisions of Pharma Ltd. are taken by its directors who are appointed by a simple majority vote of the shareholders in the annual general meetings (\u201cAGM\u201d). The following table shows the voting pattern of past AGMs of Pharma Ltd.:<\/p>\n\n\n\n\n\n\n\n\n
    Share\u00ad-holders<\/td>\nAGM for the financial year:<\/td>\n<\/tr>\n
    <\/td>\n2013-14<\/td>\n2014-15<\/td>\n2015-16<\/td>\n<\/tr>\n
    Angel Ltd.<\/td>\nAttended and voted in favour of all the reso\u00adlutions<\/td>\nAttended and voted in favour of all the reso\u00adlutions<\/td>\nAttended and voted in favour of all the reso\u00adlutions<\/td>\n<\/tr>\n
    Little Angel Ltd.<\/td>\nAttended and voted as per directions of Angel Ltd.<\/td>\nAttended and voted as per directions of Angel Ltd.<\/td>\nAttended and voted as per directions of Angel Ltd.<\/td>\n<\/tr>\n
    Wealth Master Mutual Fund<\/td>\nAttended and voted in’ favour of all the reso\u00adlutions except for the reappointment of the retiring directors<\/td>\nAttended and voted in favour of all the reso\u00adlutions except for the reappointment of the retiring directors<\/td>\nAttended and voted in favour of all the reso\u00adlutions except for the reappointment of the retiring directors<\/td>\n<\/tr>\n
    Individ\u00aduals<\/td>\n7% of the individual shareholders attended the AGM. All the in\u00addividual shareholders voted in favour of all \u00a0the resolutions, except that 50% of the indivi\u00addual Shareholders voted against the resolution to appoint the retiring directors.<\/td>\n8% of the individual shareholders attended the AGM. All the in\u00addividual shareholders voted in favour of all the resolutions, except that 50% of the indivi\u00addual Shareholders voted against the resolution to appoint the retiring directors.<\/td>\n6% of the individual shareholders attended the AGM. All the in\u00addividual shareholders voted in favour of all the resolutions, except that 50% of the indivi\u00addual Shareholders voted against the resolution to appoint the retiring directors.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    \"Consolidated<\/p>\n

    Pharma Ltd. has obtained substantial long term borrowings from a bank. The loan is payable in 20 years from 1st April, 2017. As per the terms of the borrowing, following actions by Pharma Ltd. will require prior approval of the bank:<\/p>\n

      \n
    • Payment of dividends to the shareholders in cash or kind;<\/li>\n
    • Buyback of its own equity shares;<\/li>\n
    • Issue of bonus equity shares;<\/li>\n
    • Amalgamation of Pharma Ltd. with any other entity; and<\/li>\n
    • Obtaining additional loans from any entity.<\/li>\n<\/ul>\n

      Recently, the Board of Directors of Pharma Ltd. proposed a dividend of \u20b9 5 per share. However, when the CFO of Pharma Ltd. approached the bank for obtaining their approval, the bank rejected the proposal citing concerns over the short-term cash liquidity of Pharma Ltd.<\/p>\n

      Having learned about the developments, the Directors of Angel Ltd. along with the Directors of Little Angel Ltd. approached the bank with a request to re-consider its decision. The Directors of Angel Ltd. and Little Angel Ltd. urged the bank to approve a reduced dividend of at least \u20b9 2 per share. However, the bank categorically refused to approve any payout of dividend.<\/p>\n

      Under IGAAP, Angel Ltd. has classified Pharma Ltd. as its associate. As the CFO of Angel Ltd., you are required to comment on the correct classification of Pharma Ltd. on transition to Ind AS.
      \nAnswer:
      \nTo determine whether Pharma Limited can be continued to be classihed as an associate on transition to Ind AS, we will have to determine whether Angel Limited controls Pharma Limited as defined under Ind AS 110.<\/p>\n

      An investor controls an investee if and only if the investor has all the following:
      \n(a) Power over investee
      \n(b) Exposure, or rights, to variable returns from its involvement with the investee
      \n(c) Ability to use power over the investee to affect the amount of the investor\u2019s returns.<\/p>\n

      Since Angel Ltd. does not have majority voting rights in Pharma Ltd. we will have to determine whether the existing voting rights of Angel Ltd. are sufficient to provide it power over Pharma Ltd.<\/p>\n

      Analysis of each of the three elements of the definition of control:
      \nElements\/conditions : Power over investee<\/p>\n

      Analysis :
      \nAngel Limited along with its subsidiary Little Angel Limited (hereinafter referred to as \u201cthe Angel group\u201d) does not have majority voting rights in Pharma Limited.<\/p>\n

      \"Consolidated<\/p>\n

      Therefore, in order to determine whether Angel group have power over Pharma Limited. We will need to analyse whether Angel group, by virtue of its non-majority voting power, have practical ability to unilaterally direct the relevant activities<\/u> of Pharma Limited. In other words, we will need to analyse whether Angel group has de facto power over Pharma Limited. Following is the analysis of de facto power of Angel over Pharma Limited:<\/p>\n

        \n
      • The public shareholding of Pharma Limited (that is, 52% represents thousands of shareholders none individually holding material shareholding,<\/li>\n
      • The actual participation of Individual public shareholders in the general meetings is minimal (that is, in the range of 6% to 8%).<\/li>\n
      • Even the public shareholders who attend the meeting do not consult with each other to vote.<\/li>\n
      • Therefore, as per guidance of Ind AS 110, the public shareholders will not be able to outvote Angel group (who is the largest shareholder group) in any general meeting.<\/li>\n<\/ul>\n

        Based on the above mentioned analysis, we can conclude that Angel group has de facto power over Pharma Limited.<\/p>\n

        Elements\/conditions : Exposure, or rights, to variable returns from its involvement with the investee
        \nAnalysis :
        \nAngel group has exposure to variable returns from its involvement with Pharma Limited by virtue of its equity stake.<\/p>\n

        Elements\/conditions : Ability to use power over the investee to affect the amount of the investor\u2019s returns<\/p>\n

        Analysis :
        \nAngel group has ability to use its power (in the capacity of a principal and not an agent) to affect the amount of returns from Pharma Limited because it is in the position to appoint directors of Pharma Limited who would take all the decisions regarding relevant activities of Pharma Limited.<\/p>\n

        Here, it is worthwhile to evaluate whether certain rights held by the bank would prevent Angel Limited\u2019s ability to use the power over’Pharma Limited to affect its returns. It is to be noted that, all the rights held by the bank in relation to Pharma Limited are protective in nature as they do not relate to the relevant activities (that is, activities that significantly affect he Pharma Limited\u2019s returns) of Pharma Limited.<\/p>\n

        As per Ind AS 110, protective rights are the rights designed to protect the interest of the party holding those rights without giving that party power over the entity to which those rights relate<\/u>.<\/p>\n

        Therefore, the protective rights held by the bank should not be considered while evaluating whether or not Angel Group has control over Pharma Limited.<\/p>\n

        Conclusion:
        \nSince all the three elements of definition of control is present, it can be concluded that Angel Limited has control over Pharma Limited.<\/p>\n

        Consolidation Procedures – Uniform Accounting Policies (Based on Para Nos. 19 To 21 and Para Nos. B86 and B93 of Appendix B)<\/p>\n

        \"Consolidated<\/p>\n

        Question 21.
        \nH Limited has a subsidiary, S Limited and an associate\/ A Limited. The three companies are engaged in different lines of business.
        \nThese companies are using the following cost formulas for their valuation in accordance with Ind AS 2, Inventories:<\/p>\n

        Name of the Company
        \nCost formula used
        \nH Limited
        \nFIFO
        \nS Limited, A Limited
        \nWeighted average cost
        \nWhether H Limited is required to value inventories of S Limited and A Limited also using FIFO formula in preparing its consolidated financial statements?
        \nAnswer:
        \nAs per Ind AS 2, different cost formulas may be justified for inventories of a different nature or use. Thus, if inventories of S Limited and A Limited differ in nature or use from inventories of H Limited, then use of cost formula (weighted average cost) different from that applied in respect of inventories of H Limited (FIFO) in consolidated financial statements may be justified.<\/p>\n

        In simple words, in such a case, no adjustment needs to be made to align the cost formula applied by S Limited and A Limited to cost formula applied by H Limited.<\/p>\n

        Question 22.
        \nHow should a parent make the intragroup elimination in its consolidated financial statements when parent and its subsidiary do not have the same reporting period end?
        \nAnswer:
        \nThe answer is based on Paragraphs B86(c), B92 and B93 of Appendix B to Ind AS 110.<\/p>\n

        If it is impracticable for the entity to provide information, then it shall use the most recent financial statements of the subsidiary which should be adjusted for the effects of significant intragroup transactions that have occurred between the periods, for the purpose of elimination as required under paragraph B86(c).<\/p>\n

        \"Consolidated<\/p>\n

        Consolidation Procedures – Different Reporting Dates (Based on Para Nos. B92 And B93 of Appendix B)<\/strong><\/p>\n

        Question 23.
        \nHow should assets and liabilities be classified into current or non-cur-rent in consolidated financial statements when parent and subsidiary have different reporting dates?
        \nAnswer:
        \nThe answer is based on Paragraphs B92 and B93 of Ind AS 110.<\/p>\n

        The appropriate classification of the assets and liabilities as current or non-current in the consolidated financial statements has to be determined by reference to the reporting period end of the group. Accordingly, when a subsidiary\u2019s financial statements are for a different reporting period end, it is necessary to review the subsidiary\u2019s balance sheet to ensure that items are correctly classified as current or non-current as at the end of the group\u2019s reporting period.<\/p>\n

        For example, a subsidiary with the financial year end of December 31, 2018 has a payable outstanding that is due for payment on January 01, 2020, and has accordingly classified it as non-current in its balance sheet.<\/p>\n

        The financial year end of the parent’s consolidated financial statements is March 31, 2019. Due to the time lag, the subsidiary\u2019s payable falls due within 12 months from the end of the parent’s reporting period.<\/p>\n

        Accordingly, in this case, the payable should be classified as a current liability in the consolidated financial statements of the parent because the amount is repayable within nine months of the end of the parent\u2019s reporting period.<\/p>\n

        Consolidation Procedures -Treatment of Para No. 74 of IND AS 1<\/strong><\/p>\n

        Question 24.
        \nA Limited, an Indian Company has a foreign subsidiary, B Inc. Subsidiary B Inc. has taken a long-term loan from a foreign bank, which is repayable after in the year 2025. However, during the year, it breached one of the conditions of the loan, as a consequence of which the loan became repayable on demand on the reporting date. Subsequent to year end but before the approval of the financial statements, B Inc. rectified the breach and the bank agreed not to demand repayment and to let the loan run for its remaining period to maturity as per the original loan terms. While preparing its standalone financial statements as per IFRS, B Inc. has classified this loan as a current liability in accordance with IAS 1, Presentation of Financial Statements.<\/p>\n

        Whether A Limited is required to classify such loan as current while preparing its consolidated financial statement under Ind AS?
        \nAnswer:
        \nThe answer is based on paragraph 74 of Ind AS 1.<\/p>\n

        However, the position under Ind AS 1 differs from the corresponding position under IAS 1.<\/p>\n

        As per paragraph 74 of IAS 1, when an entity breaches a 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, it classifies the liability as current, even if the lender agreed, after the reporting period and before the authorization of the financial statements for issue, not to demand payment as a consequence of the breach. An entity classifies the liability as current because, at the end of the reporting period, it does not have an unconditional right to defer its settlement for at least twelve months after that date.<\/p>\n

        Accordingly, the loan liability recognized as current liability by B Inc. in its standalone financial statements prepared as per IFRS, should be aligned as per Ind AS in the consolidated financial statements of A Limited and should be classified as non-current in the consolidated financial statements of A Limited in accordance with Ind AS 1.<\/p>\n

        \"Consolidated<\/strong><\/p>\n

        Elimination of Intra Group Transactions (Based on Para Nos. 19 To 21 and Para Nos. B86 And B93 of Appendix B)<\/strong><\/p>\n

        Question 25.
        \nHow should deferred taxes on temporary differences arising from intra group transfers be accounted for in consolidated financial statements in the below-mentioned scenarios?
        \nScenario A:
        \nTax rate applicable to the transferor is higher than tax rate applicable to the transferee<\/p>\n

        A parent, an entity taxed at 30%, has a subsidiary that is taxed at 34%. Towards the end of its financial year (say Year 5), the subsidiary sells inventory with a cost of \u20b9 1,00,000 to the parent for \u20b9 1,20,000, giving rise to a taxable profit of \u20b9 20,000 and tax at 34% of \u20b9 6,800.<\/p>\n

        The inventory remains unsold with the parent at the end of the financial year. In the subsequent financial year (say year 6), the parent sells the inventory to a third party for \u20b9 1,50,000, giving rise to a taxable profit (at the parent entity level) of \u20b9 30,000 and tax of \u20b9 9,000. In the consolidated financial statements of the parent for Year 5, the profit made by the subsidiary on sale to the parent is eliminated.<\/p>\n

        Scenario B:
        \nTax rale applicable to the transferor is lower than tax rate applicable to the transferee<\/p>\n

        The facts are the same as in Scenario A, except that the tax rate applicable to the parent is 34% and the tax rate applicable to the subsidiary is 30%. [RTP-Nov. 19]
        \nAnswer:
        \nIn both of the above scenarios, in the consolidated financial statements, the gain of \u20b9 20,000 on the intra-group transfer is eliminated and consequently, the carrying amount of the inventory in consolidated financial statements is \u20b9 1,00,000. The tax base of the inventory held by the parent, on the other hand, changes to \u20b9 1,20,000, due to the intra-group transfer.<\/p>\n

        \"Consolidated<\/p>\n

        Scenario A:
        \nTax rate applicable to the transferor is higher than tax rate applicable to the transferee<\/p>\n

        A current tax expense\/liability of \u20b9 6,800 (being 3496 of subsidiary profit of \u20b9 20,000) is recognized in consolidated financial statements. The consolidated financial statements also recognize a deferred tax income \/ asset on the temporary difference of \u20b9 20,000 (carrying amount of \u20b9 1,00,000 – tax base of \u20b9 1,20,000) provided it is probable that taxable profit will be available against which the temporary difference can be utilized.<\/p>\n

        As the new tax base of \u20b9 1,20,000 is deductible in the hands of the parent (transferee) when the inventory is sold the tax rate applicable to the parent is used to calculate the deferred tax asset of \u20b9 6,000 (being 3096 of \u20b9 20,000). The assessment as to whether it is probable that taxable profit will be available against which the temporary difference of \u20b9 20,000 can be utilized is made by considering the expected taxable profits of the parent considering the tax laws of the jurisdiction of the parent.<\/p>\n

        In short, the net additional tax of \u20b9 800 payables by the subsidiary is recognized as income tax expense in the consolidated profit and loss for Year 5. This reflects the fact that, by transferring the inventory from one tax jurisdiction to another with a lower tax rate, the group has effectively exposed itself to additional tax of \u20b9 800 (i.e., \u20b9 20,000 at the tax rate differential of 496). The transferor pays a tax of 3496 on its profit of \u20b9 20,000 whereas the transferee would get a deduction of 3096 of \u20b9 20,000 when it sells the inventory.<\/p>\n

        Scenario B:
        \nTax rate applicable to the transferor is lower than tax rate applicable to the transferee<\/p>\n

        A current tax expense\/liability of \u20b9 6,000 (being 3096 of the subsidiary\u2019s profit of \u20b9 20,000) is recognized in consolidated financial statements. The consolidated financial statement also recognizes a deferred tax income \/asseton the temporary difference of \u20b9 20,000 (carrying amount of \u20b9 1,00,000 – tax base of \u20b9 1,20,000), provided it is probable that taxable profit will be available against which the temporary difference can be utilized.<\/p>\n

        Because the new tax base of \u20b9 1,20,000 is deductible in the hands of the parent (transferee) when the inventory is sold to an unrelated party, then the parent\u2019s tax rate is used to calculate the deferred tax asset of \u20b9 6,800 (being 3496 of \u20b9 20,000). The assessment as to whether it is probable that taxable profit will be available against which the temporary difference of \u20b9 20,000 can be utilized is made by considering the expected taxable profits of the parent considering the tax laws of the jurisdiction of the parent.<\/p>\n

        In short, a net tax income of \u20b9 800 is recognized in consolidated profit and loss for Year 5. This reflects the fact that, by transferring the inventory from one tax jurisdiction to another with a higher tax rate, the group has effectively increased the amount of the future tax deduction associated with the asset by \u20b9 800 (i.e. \u20b9 20,000 at the tax rate differential of 4%). The transferor pays a tax of 30% on its profit of \u20b9 20,000 whereas the transferee would get a deduction of 34% of \u20b9 20,000 when it sells the inventory.<\/p>\n

        \"Consolidated<\/p>\n

        Period of Consolidation (Based on Para No. 20)<\/strong><\/p>\n

        Question 26.
        \nEntity X had two subsidiaries at the end of its previous reporting period which it consolidated in its consolidated financial statements prepared in accordance with Ind AS.<\/p>\n

        During its current reporting period, Entity X disposes of its investment in both the subsidiaries and consequently does not have any subsidiary at the end of the reporting period. Is Entity X exempt from the requirement to present consolidated financial statements in view of not having any subsidiary at the end of the reporting period?
        \nAnswer:
        \nParagraph 20 of Ind AS 110 states:<\/p>\n

        \u201cConsolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee\u201d.<\/p>\n

        As per the above, where a parent disposes of the investment in subsidiary(ies) during the reporting period, it is required to consolidate such subsidiary(ies) until the date it loses the control of such subsidiary(ies) during the reporting period. This requirement applies in all cases of loss of control or disposal of subsidiaries, including cases where the disposal results in the parent not having any subsidiary at the end of the reporting period.<\/p>\n

        The requirement of presenting consolidated financial statements would apply in those cases also where an entity does not have any subsidiary either at the beginning or at the end of the reporting period but has acquired and disposed of a subsidiary (that is required to be consolidated as per Ind AS 110) during the reporting period.<\/p>\n

        \"Consolidated<\/p>\n

        Disposal of Shares – No Loss of Control (Based on Para Nos. 22 To 24 And Para Nos. B94 And B96 of Appendix B)<\/strong><\/p>\n

        Question 27.
        \nEntity A sells a 30% interest in its wholly-owned subsidiary to outside investors in an arm\u2019s length transaction for \u20b9 500 crores in cash and retains a 70% controlling interest in the subsidiary. At the time of the sale, the carrying value of the subsidiary\u2019s net assets in the consolidated financial statements of Entity A is \u20b9 1,300 crores, additionally, there is a goodwill of \u20b9 200 crore that arose on the subsidiary\u2019s acquisition. Entity A initially accounted for NCI representing present ownership interests in the subsidiary at fair value and it recognizes subsequent changes in NCI in the subsidiary at NCI\u2019s proportionate share in aggregate of net identifiable assets and associated goodwill. How should Entity A account for the transaction?
        \nAnswer:
        \nThe answer is based on paragraphs 23 and B96 of Ind AS 110.<\/p>\n

        At the time of sale of 30% of its equity interest, consolidated financial statements include an amount of \u20b9 1500 crore in respect of the subsidiary. Accordingly, the accounting entry on the date of sale of the 30% interest would be as follows:
        \nCash : Dr. : 500
        \nTo NCI (30% of 1,500 crore) : Cr. : 450
        \nTo Equity : Cr. : 50<\/p>\n

        Question 28.
        \nH Limited holds 80% share in its subsidiary S Limited at the beginning of the financial year, i.e., 1 April 2017. On 31 December 2017, H Limited sold its 5% stake in S Limited reducing its share from 80% to 75%, and as a result non-controlling interest (NCI) increased from 20% to 25%.<\/p>\n

        Assume that the net assets of S Limited and goodwill associated with acquisition of S Limited have a carrying amount of \u20b9 20,000 on 1 April 2017. Assume further that the profit earned by S Limited during the 9-months ended 31 December 2017 is \u20b9 1,000 and the profit earned during the next 3 months ended 31 March 2018 is \u20b9 300. The consideration received by H Limited for sale of the 5% interest is \u20b9 1,400. There is no item of other comprehensive income.<\/p>\n

        In view of the above change, how would the profit or loss and other comprehensive income be apportioned between the parent and non-controlling interest in the consolidated financial statements of H Limited for the financial year 2017-18?
        \nAnswer:
        \nThe answer is based on paragraphs 23 and B96 of Ind AS 110.<\/p>\n

        As at the date of sale of 5% interest, the carrying amount of net assets of S Limited (and goodwill associated with acquisition of S Limited) in the consolidated financial statements is \u20b9 21,000, i.e., opening balance of \u20b9 20,000 and profit of \u20b9 1,000 earned during the first 9-months of financial year 2017-18. The 5% increase in non-controlling interests thus means an increase of \u20b9 1,050 in NCI. As against this, the consideration received by H Limited for sale of the 5% interest is \u20b9 1,400. Thus, H Limited has made a gain of \u20b9 350 (\u20b9 1,400 minus \u20b9 1,050) which would be recognized directly in equity and attributed to owners of the parent in the consolidated financial statements<\/p>\n

        The profits or losses or other comprehensive income arising after the date of sale of the 5% interest would be apportioned between the owners of the parent and the NCI in the proportion of 75:25.<\/p>\n

        \"Consolidated<\/p>\n

        Disposal of Shares – Loss of Control (Based on Para No. 25 And Para Nos. B97 And B99 of Appendix B)<\/strong><\/p>\n

        Question 29.
        \nP Ltd. has a number of wholly-owned subsidiaries including S Ltd. at 3lst March, 2018. P Ltd.\u2019s consolidated balance sheet and the carrying amount of assets and liabilities of S Ltd., included in the respective amount of respective grouped assets and liabilities of the consolidated balance sheet as at 31st March, 2018 are as follows:
        \n\"Consolidated
        \nPrepare Consolidated Balance Sheet after disposal as on 31st March, 2018 when P Ltd. group sold 100% shares of S Ltd. to independent party for \u20b9 3,000 millions.
        \nAnswer:
        \n(a) When 100% shares sold to independent party
        \nConsolidated Balance Sheet of P Ltd. and its remaining subsidiaries as on 31st March, 2018
        \n\"Consolidated<\/p>\n

        Notes to Financial Statements:
        \n\"Consolidated<\/p>\n

        Statement of Changes in Equity:
        \n6. Equity Share Capital<\/p>\n\n\n\n\n
        Balance at the beginning of the reporting period<\/td>\nChanges in Equity share capital during the year<\/td>\nBalance at the end of the reporting period<\/td>\n<\/tr>\n
        1600<\/td>\n0<\/td>\n1600<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

        7. Other Equity
        \n\"Consolidated<\/p>\n

        \"Consolidated<\/p>\n

        Working Notes:
        \n1. When sold, the carrying amount of all assets and liabilities attributable to S Ltd. were eliminated from the consolidated statement of financial position.
        \n2. Cash in hand (\u20b9 in million)
        \n\"Consolidated
        \n3. Gain\/Loss on disposal of entity (\u20b9 in million)
        \n\"Consolidated
        \n4.Retained Earnings (\u20b9 in million)
        \n\"Consolidated<\/p>\n

        Question 30.
        \nT Ltd. has a number of wholly-owned subsidiaries including TL Ltd. at 31st March 2018.<\/p>\n

        T Ltd. consolidated statement of financial position and the group carrying amount of TL Ltd. assets and liabilities (i.e. the amount included in that consolidated statement of financial position in respect of TL Ltd. assets and liabilities) at 31st March 2018 are as follows:
        \n\"Consolidated
        \nPrepare Consolidated Balance Sheet after disposal as on 31st March, 2018 when Trust Ltd. group sold 90% shares of TL Ltd. to independent party for \u20b9 1000 (‘000).
        \nAnswer:
        \nWhen 90% shares sold to independent party
        \nConsolidated Balance Sheet of T Ltd. and its remaining subsidiaries as on 31st March, 2018
        \n\"Consolidated<\/p>\n

        Notes to accounts:
        \n\"Consolidated<\/p>\n

        Statement of changes in Equity:
        \n6. Equity share Capital<\/p>\n\n\n\n\n
        Balance at the beginning of the reporting period<\/td>\nChanges in Equity share capital during the year<\/td>\nBalance at the end of the reporting period<\/td>\n<\/tr>\n
        800<\/td>\n0<\/td>\n800<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

        7. Other Equity
        \n\"Consolidated<\/p>\n

        Working Notes
        \n1. When 90% being sold, the carrying amount of all assets and liabilities attributable to TL Ltd. were eliminated from the consolidated statement of financial position and further financial asset is recognized for remaining 10%.
        \n2. Fair value of remaining investment (\u20b9 in \u2019000):
        \n\"Consolidated<\/p>\n

        3. Cash on hand (\u20b9 in \u2019000):
        \n\"Consolidated<\/p>\n

        4. Gain\/Loss on disposal of entity (\u20b9 in \u2019000):
        \n\"Consolidated<\/p>\n

        5. Retained Earnings (\u20b9 in \u2019000):
        \n\"Consolidated<\/p>\n

        \"Consolidated<\/p>\n

        Question 31.
        \nA parent purchased an 80% interest in a subsidiary for \u20b9 1,60,000 on 1 April 20X1 when the fair value of the subsidiary\u2019s net assets was \u20b9 1,75,000. Goodwill of \u20b9 20,000 arose on consolidation under the partial goodwill method. An impairment of goodwill of \u20b9 8,000 was charged in the consolidated financial statements to 31 March 20X3. No other impairment charges have been recorded. The parent sold its investment in the subsidiary on 31 March 20X4 for \u20b9 2,00,000. The book value of the subsidiary\u2019s net assets in the consolidated financial statements on the date of the sale was \u20b9 2,25,000 (not including goodwill of \u20b9 12,000). When the subsidiary met the criteria to be classified as held for sale under Ind AS 105, no write down was required because the expected fair value less cost to sell (of 100% of the subsidiary) was greater than the carrying value.<\/p>\n

        The parent carried the investment in the subsidiary at cost, as permitted by Ind AS 27.<\/p>\n

        Calculate gain or loss on disposal of subsidiary in parent\u2019s separate and consolidated financial statements as on 31st March 20X4.
        \nAnswer:
        \nThe parent\u2019s separate statement of profit and loss for 20X3-20X4 would show a gain on the sale of investment of \u20b9 40,000 calculated as follows:
        \n\"Consolidated
        \nHowever, the group\u2019s statement of profit & loss for 20X3-20X4 would show a gain on the sale of subsidiary of \u20b9 8,000 calculated as follows:
        \n\"Consolidated<\/p>\n

        Working Note
        \nThe goodwill on consolidation (assuming partial goodwill method) is calculated as follows: \u20b9 \u2019000
        \nFair value of consideration at the date of acquisition – 160
        \nNon- controlling interest measured at proportionate share of the acquiree\u2019s identifiable net assets (1,75,000 \u00d7 20%) – 35
        \n\"Consolidated<\/p>\n

        Investment Entity (Based on Para Nos. 27 To 33)<\/strong><\/p>\n

        Question 32.
        \nA Limited holds investment in both equity instruments and debt instruments (having fixed maturity date). The business purpose of A Limited is to provide investment management services to its investors, and invest funds received from investors solely for returns from capital appreciation and\/or investment Income. A Limited has a documented exit strategy for substantially all of its equity investments; but it has no documented exit strategy for its debt instruments.<\/p>\n

        Assuming that A Limited has all other characteristics of an Investment entity as per Ind AS 110, does it meet the definition of an investment entity under the said Standard?
        \nAnswer:
        \nThe answer is based on Paragraphs 27 and 28 of Ind AS 110.<\/p>\n

        The absence of any of these typical characteristics does not necessarily dis-qualify an entity from being classified as an investment entity. An investment entity that does not have all of these typical characteristics provides additional disclosure required by paragraph 9A of Ind AS 112, Disclosure of Interests in Other Entities.<\/p>\n

        Further, as per paragraph B85F of Ind AS 110, one feature that differentiates an investment entity from other entities is that an investment entity does not plan to hold its investments indefinitely; it holds them for a limited period. Because equity investments and non-financial asset investments have the potential to be held indefinitely, an investment entity should have an exit strategy documenting how the entity plans to realize capital appreciation from substantially all of its equity investments and non-financial asset investments. An investment entity should also have an exit strategy for any debt instruments that have the potential to be held indefinitely, for example perpetual debt investments.<\/p>\n

        In the given case, A Limited has a documented exit strategy for substantially all of its equity investments. While’it has no documented exit strategy for its debt investments as they have a fixed maturity date and therefore do not have the potential to be held indefinitely. Consequently, the absence of a documented exit strategy for these debt investments does not per se disqualify A Limited from being an investment entity.<\/p>\n

        Assuming that A Limited has all the other characteristics of an investment entity as enunciated in Ind AS 110, A Limited is an investment entity as per Ind AS 110.<\/p>\n

        \"Consolidated<\/p>\n

        Question 33.
        \nAn entity, X Limited, is formed by Z Limited to invest in start-up technology companies for capital appreciation. Z Limited holds a 75% interest in X Limited and controls it; the other 25% ownership interest is held by 10 unrelated investors. Z Limited holds options to acquire investments held by X Limited, at their fair value, which would be exercised if the technology developed by the investees would benefit the operations of Z Limited.<\/p>\n

        Whether X Limited meet the definition of an investment entity as per Ind AS 110?
        \nAnswer:
        \nThe absence of an exit strategy for investments in subsidiaries also sug-gests that the investments are made not only for investment returns (capital appreciation, investment income or both) but also other benefits (such as those arising from synergies).<\/p>\n

        In the given case, although X\u2019s business purpose is investing for capital appreciation and it provides investment management services to its investors, X Limited is not an investment entity since:<\/p>\n

          \n
        • Z Limited, the parent of X Limited, has an option to acquire investments in investees held by X Limited, if assets developed by the investees would benefit the operations of Z Limited. This provides other benefits in addition to capital appreciation and investment income; and<\/li>\n
        • The investment plans of X Limited do not include exit strategies for its investments, which are equity instruments. The options held by Z Limited are not controlled by X Limited and do not constitute an exit strategy.<\/li>\n<\/ul>\n

          Since X Limited is not an investment entity, it will be required to consolidate its subsidiaries.<\/p>\n

          \"Consolidated<\/p>\n

          Comprehensive Questions on Cfs [Normal + Chain Holding]<\/strong><\/p>\n

          Question 34.
          \n(a) Summarised Balance Sheets of PN Ltd. and SR Ltd. as on 31st March, 2018 were given as below: (15 Marks)
          \n(Amount in \u20b9)
          \n\"Consolidated<\/p>\n

            \n
          1. PN Ltd. acquired 70% equity shares of \u20b9 100 each of SR Ltd. on 1st October, 2017.<\/li>\n
          2. The Retained Earnings of SR Ltd. showed a credit balance of \u20b9 93,600 on 1st April, 2017 out of which a dividend of 12% was paid on 15th December, 2017.<\/li>\n
          3. PN Ltd. has credited the dividend received to its Retained Earnings.<\/li>\n
          4. Fair value of Plant & Machinery of SR Ltd. as on 1st October, 2017 was \u20b9 6,24,000. The rate of depreciation on Plant & Machinery was 10% p.a.<\/li>\n
          5. Following are the increases on comparison of Fair Value as per respective Ind AS with book value as on 1st October, 2017 of SR Ltd. which are to be considered while consolidating the Balance Sheets:
            \n(a) Land & Buildings : \u20b9 3,12,000
            \n(b) Inventories : \u20b9 46,800
            \n(c) Trade Payables : \u20b9 31,200.<\/li>\n
          6. The inventory is still unsold on Balance Sheet date and the Trade Payables are not yet settled.<\/li>\n
          7. Other Reserves as on 31st March, 2018 are the same as was onlst April, 2017.<\/li>\n
          8. The business activities of both the company are not seasonal in nature and therefore, it can be assumed that profits are earned evenly throughout the year.<\/li>\n<\/ol>\n

            Prepare the Consolidated Balance Sheet as on 31st March, 2018 of the group of entities PN Ltd. and SR Ltd. as per Ind AS. [May 2019 -15 Marks]
            \nAnswer:
            \nConsolidated Balance Sheet of PN Ltd. and its subsidiary,
            \nSR Ltd. as on 31st March, 2018
            \n\"Consolidated<\/p>\n

            Notes to accounts
            \n\"Consolidated<\/p>\n

            Statement of Changes in Equity:
            \n6. Equity Share Capital<\/p>\n\n\n\n\n
            Balance at the beginning of the reporting period<\/td>\nChanges in Equity share capital during the year<\/td>\nBalance at the end of the reporting period<\/td>\n<\/tr>\n
            15,60,000<\/td>\n0<\/td>\n15,60,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

            7. Other Equity
            \n\"Consolidated<\/p>\n

            Working Notes:
            \n1. Adjustments of Fair Value
            \nThe Plant & Machinery of SR Ltd. would stand in the books at \u20b9 4,44,600 on 1st October, 2017, considering only six months\u2019 depreciation on \u20b9 4,21,200 total depreciation being \u20b9 46,800. The value put on the assets being \u20b9 6,24,000 there is an appreciation to the extent of \u20b9 1,79,400.<\/p>\n

            2. Acquisition date profits of SR Ltd.
            \n\"Consolidated<\/p>\n

            3. Post-acquisition profits of SR Ltd.
            \n\"Consolidated<\/p>\n

            4. Non-controlling Interest
            \n\"Consolidated<\/p>\n

            5. Goodwill
            \n\"Consolidated<\/p>\n

            6. Value of Plant and Machinery
            \n\"Consolidated<\/p>\n

            7. Profit & Loss account consolidated
            \n\"Consolidated<\/p>\n

            \"Consolidated<\/p>\n

            Question 35.
            \nEntity A has 4 wholly-owned subsidiaries that hold 25% equity shares each in Entity B. Entity A has no direct shareholding in Entity B. How should Entity B be consolidated by Entity A. i.e., whether by applying equity accounting by the intermediary subsidiaries and then consolidation by Entity A, or direct consolidation by Entity A?
            \nAnswer:
            \nEntity A shall directly consolidate Entity B as it exercises control over 100% of the voting rights in Entity B indirectly through its wholly-owned subsidiaries.<\/p>\n

            However, if each wholly-owned subsidiary applies equity accounting for the respective shares in Entity B and thereafter consolidating each intermediate wholly owned subsidiary on line by line basis in the consolidated financial statements (CFS) of Entity A would result in 100% of its indirect investment in Entity B in the consolidated financial statements.<\/p>\n

            The above approach will not reflect all the assets and liabilities of entity B in the consolidated financial statements of Entity A and hence the indirect approach of consolidating the same may not be appropriate.<\/p>\n

            Question 36.
            \nPrepare the Consolidated Balance Sheet as on 31st March, 2018 of a group of companies comprising Usha Limited, Nisha Limited and Sandhya Limited. Their summarized balance sheets on that date are given below:
            \nAmount \u20b9 in lakh
            \n\"Consolidated
            \nThe following additional information is available:
            \n(i) Usha Ltd. holds 80% shares in Nisha Ltd. and Nisha Ltd. holds 75% shares in Sandhya Ltd. Their holdings were acquired on 30th September, 2017.<\/p>\n

            (ii) The business activities of all the companies are not seasonal in nature and therefore, it can be assumed that profits are earned evenly through-out the year.<\/p>\n

            (iii) On 1st April, 2017, the following balances stood in the books of Nisha Limited and Sandhya Limited.<\/p>\n\n\n\n\n\n
            <\/td>\nNisha Limited<\/td>\nSandhya Limited<\/td>\n<\/tr>\n
            Reserves<\/td>\n40<\/td>\n30<\/td>\n<\/tr>\n
            Retained earnings<\/td>\n10<\/td>\n15<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

            (iv) \u20b9 5 Lakh included in the inventory figure of Nisha Limited, is inventory which has been purchased from Sandhya Limited at cost plus 25%.<\/p>\n

            (v) The parent company has adopted an accounting policy to measure Non-controlling interest at fair value (quoted market price) applying Ind AS 103. Assume market prices of Nisha Limited and Sandhya Limited are the same as respective face values.<\/p>\n

            (vi) The capital profit preferably is to be adjusted against cost of control. Note: Analysis of profits and notes to accounts must be a part of your answer.
            \nAnswer:
            \n(a) Consolidated Balance Sheet of the Group as on 31st March, 2018
            \n\"Consolidated<\/p>\n

            Notes to Accounts
            \n(\u20b9 in lakh)
            \n\"Consolidated<\/p>\n

            Working Notes:
            \n1. Analysis of Reserves and Surplus
            \n\"Consolidated<\/p>\n

            2. Calculation of Effective Interest of Parent company i.e. Usha Ltd. in Sandhya Ltd.
            \nAcquisition by Usha Ltd. in Nisha Ltd. = 80%
            \nAcquisition by Nisha Ltd. in Sandhya Ltd. = 75%
            \nAcquisition by Group in Sandhya Ltd. (80% \u00d7 75%) = 60%
            \nNon-controlling Interest = 40%<\/p>\n

            3. Calculation of Goodwill\/Capital Reserve on the acquisition date
            \n\"Consolidated<\/p>\n

            4. Calculation of Non-Controlling Interest
            \n\"Consolidated<\/p>\n

            5. Calculation of Consolidated Other Equity
            \n\"Consolidated<\/p>\n

            \"Consolidated<\/p>\n

            Assessment of Joint Control (Based On Para Nos. 7 To 13 and Para Nos. B5 To B11 of Appendix B)<\/strong><\/p>\n

            Question 37.
            \nX Company has a wholly-owned subsidiary (Entity A) which principally owns a portfolio of buildings. X Company wishes to reduce its exposure to this market. It sells 50% of its investment in Entity A to an Investment Bank. X Company and Investment Bank enter into a contract whereby decisions regarding Entity A\u2019s relevant activities require unanimous consent of the two parties. X Company continues to manage the portfolio of buildings in accordance with approved budgets and business plan and is paid a specified fee for the asset management services.<\/p>\n

            Whether the contract entered into between X Company and Investment Bank establishes their joint control over Entity A?
            \nAnswer:
            \nThe answer is based on Paragraphs 4, 5 and 7 of Ind AS 111.<\/p>\n

            In the given case, Entity A is jointly controlled by X Company and Investment Bank since a contractual arrangement between the two requires their unanimous consent for decisions about the relevant activities of Entity A. In acting as asset manager for the portfolio of buildings, X Company is required to follow the budgets and business plan approved unanimously by the two parties.<\/p>\n

            \"Consolidated<\/p>\n

            Question 38.
            \nA Limited and B Limited from P Limited to develop and market a specialized medicinal product. A Limited is responsible for and has the unilateral ability to make all decisions relating to developing the medicinal product and obtaining regulatory approvals. Once the approvals are in place, B Limited will manufacture and market the medicinal product and will have the unilateral ability to make all decisions about the manufacturing and marketing.<\/p>\n

            It is determined that all the activities \u2014 developing the medicine and obtaining regulatory approval as well as manufacturing and marketing the medicinal product \u2014 are relevant activities.
            \nWhether A Limited and B Limited have joint control over P Limited?
            \nAnswer:
            \nThe answer is based on Paragraphs 7-9 of Ind AS 111:<\/p>\n

            In the given case, it has been determined that all the activities – developing the medicinal product and obtaining regulatory approvals as well as manufacturing and marketing the medicinal product are relevant activities and each party can unilaterally take decisions concerning some of the relevant activities. Thus, there is no joint control because A Limited and B Limited do not collectively direct the relevant activities of the arrangement.<\/p>\n

            Further assessment is required to determine whether either party has \u2018control\u2019 of P Limited within the meaning of this term under Ind AS 110.<\/p>\n

            \"Consolidated<\/p>\n

            Question 39.
            \nA Limited and B Limited from P Limited to develop and market a medicinal product which will be developed, manufactured and marketed in two phases. The first phase is developing the medicinal product and obtaining regulatory approvals. The second phase is the manufacturing and marketing of the medicinal product. All of these activities are considered to be the relevant activities.<\/p>\n

            The decisions concerning the relevant activities require unanimous consent of the two parties in both the phases.<\/p>\n

            Whether there is joint control?
            \nAnswer:
            \nThe answer is based on Paragraphs 7-9 of Ind AS 111.<\/p>\n

            In the present case, unanimous consent of A Limited and B Limited is required for all decisions about the relevant activities throughout the term of the arrangement. Thus, the two parties have joint control over P Limited.<\/p>\n

            Question 40.
            \nA Limited, B Limited and C Limited establish P Limited to carry out manufacturing activities. A contractual arrangement between A Limited and B Limited provides that both would vote in tandem on all decisions concerning the relevant activities of P Limited. The consent of C Limited is not required for the above decisions except that C Limited has a right to veto any decision relating to the issuance of debt or equity instruments by P Limited. Manu-facturing activities are determined to be the relevant activities of P Limited.<\/p>\n

            Whether A Limited and B Limited have joint control over P Limited?
            \nAnswer:
            \nThe answer is based on Paragraphs 4, 5, 7 and B9 of Ind AS 111.<\/p>\n

            In the above case, A Limited and B Limited collectively have the ability to direct the activities of P Limited and a contractual arrangement requires them to mutually agree on all decisions in respect of these activities. Thus, A Limited and B Limited have joint control over P Limited.<\/p>\n

            The consent of C Limited is not needed for decisions concerning the relevant activities of P Limited. The ability of C Limited to veto the issuance of equity and debt instruments is in the nature of a protective right only because it is designed to protect its interests and does not give it the ability to direct the activities that significantly affect P Limited\u2019s returns.<\/p>\n

            Thus, although C Limited is a party to the joint arrangement, C Limited does not have joint control over P Limited.<\/p>\n

            \"Consolidated<\/p>\n

            Question 41.
            \nEntities A and B set up a separate entity under the name of \u2018AB Joint Venture Limited\u2019 pursuant to a joint operating agreement between them. Both investors nominate three directors each to AB\u2019s board of directors. All decisions concerning relevant activities are made at meetings of board of directors by simple majority. In the event of a deadlock, the chairman (a director nominated by Entity B) has the casting vote.<\/p>\n

            Whether there is joint control?
            \nAnswer:
            \nThe answer is based on Paragraphs 7-9 of Ind AS 111.<\/p>\n

            In the given case, Entity B has the ability to take all decisions about relevant activities of AB unilaterally due to the casting vote of its nominee. Consequently, Entity B controls AB. This means, inter alia, that Entity A does not have joint control over AB.<\/p>\n

            Entity A needs to evaluate whether it has ‘significant influence\u2019 over AB within the meaning of Ind AS 28.<\/p>\n

            Question 42.
            \nA Limited and B Limited together establish P Limited to carry out manufacturing activities using materials and technical know-how supplied by A Limited and B Limited. Both the parties own 50% each of the voting rights in P Limited. Consequently, each party is entitled to 50% of any dividends and 50% of the net assets upon liquidation. The annual business plan of P Limited requires the unanimous approval of the shareholders as per its articles of association. A Limited and B Limited have three directors each on the board of P Limited. The chairman of the board rotates between A Limited and B Limited and does not have any casting vote.<\/p>\n

            A Limited has an option to buy B Limited\u2019s shareholding in P Limited. Such option may be exercised by A Limited at any time in the event that both the parties do not agree on any decision relating to relevant activities of P Limited. The option is evaluated to be substantive.<\/p>\n

            Whether there is joint control?
            \nAnswer:
            \nThe answer is based on Paragraphs 4, 5 and 7 of Ind AS 111.<\/p>\n

            In the given case, A Limited already holds 50% shares in P Limited. Besides, it has the right to purchase the remaining 50% shares held by B Limited and this right has been evaluated to be substantive. Considering its existing shareholding in P Limited and its right to acquire the remaining shares in P Limited from B Limited, A Limited control P Limited. Consequently, B Limited does not have joint control of P Limited.<\/p>\n

            Entity B Limited needs to evaluate whether it has \u2018significant influence\u2019 over P Limited within the meaning of Ind AS 28.<\/p>\n

            \"Consolidated<\/p>\n

            Question 43.
            \nEntity X and Entity Y operate in the telecommunications industry and enter into a contractual arrangement in order to combine their 4G access networks. The purpose of the arrangement is to reduce operating costs for both parties, make capital infrastructure savings and obtain economies of scale from jointly managing and maintaining a consolidated network. All decisions about relevant activities, including strategic investing and financing decisions are taken by a simple majority of voting rights. Entity X and Entity Y have one vote each in the decision-making process.<\/p>\n

            Whether there is joint control?
            \nAnswer:
            \nThe answer is based on Paragraphs 4, 5 and 7 of Ind AS 111.<\/p>\n

            In the given case, all decisions about the relevant activities require consent of both parties – each party is entitled to one vote and even a simple majority requires both the parties to vote the same way. Thus, while the contractual arrangement does not explicitly require unanimous consent of the two parties, the need for their unanimous consent is implicit in the terms of the contractual arrangement. The arrangement is therefore a joint arrangement.<\/p>\n

            Question 44.
            \nEntities A and B jointly set up a company, (X Limited) pursuant to a joint operating agreement. Both investors nominate one director each to J\u2019s board of directors. Both directors have to agree unanimously for the approval of the annual budget. The joint operating agreement also sets up an operating committee and specifies irrevocable powers of the committee.<\/p>\n

            On an evaluation of the respective powers of the board of directors and the operating committee, it is determined that it is the operating committee that has the authority to take decisions concerning the relevant activities of X Limited.<\/p>\n

            Only Entity A can appoint members to the operating committee. Whether there is joint control?
            \nAnswer:
            \nThe answer is based on Paragraphs 7 and 8 of Ind AS 111.<\/p>\n

            In the given case, decisions about relevant activities are made not by the board of directors but by the operating committee.<\/p>\n

            Entity A alone can appoint members to the operating committee. Thus, X Limited is controlled by Entity A (and not jointly controlled by Entities A and B).<\/p>\n

            \"Consolidated<\/p>\n

            Assessment of Joint Arrangement (Based on Para Nos. 7 To 13 And Para Nos. B5 To B11 of Appendix B)<\/strong><\/p>\n

            Question 45.
            \nFour parties jointly buy an aircraft as part of a contractual arrangement. Each party has right to use the aircraft for a certain number of days each year. The parties are required to share the maintenance costs in proportions specified in the contractual arrangement. Unanimous consent of all the parties is required to take decisions that are considered as the relevant activities of the arrangement. The contractual arrangement spans over the entire expected life of the aircraft and cannot be terminated or modified without the unanimous consent of all the parties.<\/p>\n

            Whether the arrangement is a joint arrangement as per Ind AS 111?
            \nAnswer:
            \nThe answer is based on Paragraphs 4, 5, 7 and 9 of Ind AS 111.<\/p>\n

            In the given case, as per the contractual arrangement, decisions concerning the relevant activities require unanimous consent of all the four parties. Thus, all the four parties have joint control over the aircraft and the arrangement among the parties is a joint arrangement.<\/p>\n

            Question 46.
            \nEntity A has two shareholders, X and Y. Entity A\u2019s articles of association include a clause requiring unanimous consent of the shareholders for all decisions relating to the entity\u2019s relevant activities. The shareholders have not entered into any other agreements to manage the activities of Entity A.<\/p>\n

            Whether Entity A is a joint arrangement?
            \nAnswer:
            \nThe answer is based on Paragraphs 4,5,7 and B3 of Ind AS 111.<\/p>\n

            In the given case, Entity A meets the definition of a joint arrangement as its articles of association require unanimous consent of all shareholders for decisions about its relevant activities.<\/p>\n

            \"Consolidated<\/p>\n

            Types of Joint Arrangement – Joint Operation (Based on Para Nos. 14 To 19 And Para Nos. B12 To B33 of Appendix B)<\/strong><\/p>\n

            Question 47.
            \nA Limited and B Limited jointly form an entity P over which they have joint control. The contractual arrangement between the parties provides that A Limited and B Limited have equal rights to the assets of P and are obligated for the liabilities of P in the ratio of 70:30.<\/p>\n

            Whether this arrangement is a joint operation or a joint venture?
            \nAnswer:
            \nThe answer is based on Paragraphs 15, 16 and 17 of Ind AS 111.<\/p>\n

            In the present case, A Limited and B Limited have rights to the assets of P (in ratio of 50:50) and obligations for its liabilities (in ratio of 70:30) rather than having rights to the net assets of P. Accordingly, the arrangement (i.e. P) is a joint operation.<\/p>\n

            Question 48.
            \nA Limited, B Limited and C Limited join hands to manufacture, market and distribute a product. While the decisions concerning manufacturing, marketing and distribution activities are required to be taken unanimously, each entity is responsible for actually carrying out specified activities as per the arrangement. Some specified costs are shared among the parties in pre-defined proportions. Besides, parties also incur their own separate costs such as labour costs and manufacturing costs. Each party is entitled to the assets, and is liable for the obligations, relating to the activities carried out by it. The revenue arising from the sale of the product is shared among the parties in a pre-defined proportion.<\/p>\n

            Whether this arrangement is a joint operation or a joint venture?
            \nAnswer:
            \nThe answer is based on Paragraphs 15-17 of Ind AS 111.<\/p>\n

            In the given case, as per the arrangement among A Limited, B Limited and C Limited, all the three entities have joint control over the manufacturing, mar-keting and distribution activities. They share revenue and common costs and also incur their own separate costs. Each party is entitled to the assets, and is liable for the obligations, relating to its respective area of activities carried out by it. Accordingly, the arrangement is a joint operation.<\/p>\n

            \"Consolidated<\/p>\n

            Types of Joint Arrangement – Joint Venture (Based on Para Nos. 14 To 19 And Para Nos. B12 To B33 of Appendix B)<\/strong><\/p>\n

            Question 49.
            \nA Limited and B Limited enter into a contractual arrangement to buy a building that has 12 floors, which they will lease to other parties. A Limited and B Limited are authorized to lease five floors each. A Limited and B Limited can unilaterally make all decisions related to their respective floors and are entitled to all of the income from those floors. The remaining two floors will be jointly managed – all decisions concerning these two floors must be unanimously agreed to between A Limited and B Limited who will share net profits or net losses in respect of these two floors equally, i.e. they both have the rights to the net assets of the arrangement. The leasing of property is determined to be the relevant activity.<\/p>\n

            Whether this arrangement is a joint operation or a joint venture?
            \nAnswer:
            \nThe answer is based on Paragraphs 15-17 of Ind AS 111.<\/p>\n

            In the given case, accounting by A Limited and B Limited would be as follows:<\/p>\n

              \n
            1. Five floors that A Limited control
              \nFive floors that are controlled by A Limited shall be accounted for by A as investment property under Ind AS 40, Investment Property.<\/li>\n
            2. Five floors that B Limited controls
              \nFive floors that are controlled by B Limited shall be accounted for by B Limited as investment property under Ind AS 40.<\/li>\n
            3. Two floors that A Limited and B Limited jointly control.<\/li>\n<\/ol>\n

              For the two floors that are jointly controlled by A Limited and B Limited, as per the contractual arrangement, both A Limited and B Limited will share net profits or net losses equally i.e. they both have the rights to the net assets of the arrangement. Thus, the arrangement in respect of these two floors is a joint venture and shall be accounted for accordingly by A Limited and B Limited.<\/p>\n

              \"Consolidated<\/p>\n

              Question 50.
              \nA large telecommunications company (T) is seeking to establish operations in Country A which has a relatively undeveloped telecommunications infrastructure. The law’s of country A do not allow a local entity with a telecom license to be controlled by a foreign entity, though joint control along with a foreign entity is permitted. The T Co establishes a separate company with a local investor to allow T Co. to enter this market. The company\u2019s legal form confers the rights to the assets and obligations for liabilities to the company itself. T Co and the local investor enter into a shareholders\u2019 agreement which requires all decisions to be made jointly.<\/p>\n

              The agreement also confirms the following:
              \n(a) The arrangement\u2019s assets are owned by the company. Neither party will be able to sell, pledge, transfer or mortgage the assets.
              \n(b) The parties’liability is limited to any unpaid capital.
              \n(c) The company\u2019s profits will be shared between T Co and the investor in ratio of 60:40, i.e. the parties have the rights only to the net assets of the arrangement.
              \nWhether the arrangement is a joint operation or a joint venture?
              \nAnswer:
              \nThe answer is based on Paragraphs 15-17 of Ind AS 111.<\/p>\n

              In the given case, the arrangement is structured through a separate legal entity. The arrangement’s legal form provides a separation between the owners (the parties to the arrangement) and the entity itself under the country\u2019s local law. The parties are liable for obligations or claims against the company only to the extent of any unpaid capital. Further, the right of T Co and the investor is to share the profits (in ratio of 60:40), i.e. the parties have the rights only to the net assets of the arrangement.<\/p>\n

              In view of the above, the arrangement is a joint venture and not a joint operation.<\/p>\n

              \"Consolidated<\/p>\n

              Accounting For Joint Operation And Joint Venture (Based on Para Nos. 20 To 27)<\/strong><\/p>\n

              Question 51.
              \nA Limited and B Limited establish a joint arrangement through a separate vehicle P, but the legal form of the separate vehicle does not confer separation between the parties and the separate vehicle itself. Thus, both the parties have rights to the assets and obligations for the liabilities of P. As neither the contractual terms nor the other facts and circumstances indicate otherwise, it is concluded that the arrangement is a joint operation and not a joint venture.<\/p>\n

              Both the parties own 50% each of the equity interest in P. However, the contractual terms of the joint arrangement state that A Limited has the rights to all of Building No. 1 owned by P and the obligation to pay all of the debt owed by P to a lender XYZ. A Limited and B Limited have rights to all other assets in P, and obligations for all other liabilities of P in proportion of their equity interests (i.e. 50% each).<\/p>\n

              P\u2019s balance sheet is as follows (all amounts in INR):
              \n\"Consolidated
              \nHow would A Limited present its interest in P in its financial statements?
              \nAnswer:
              \nThe answer is based on Paragraph 20 of Ind AS 111.<\/p>\n

              The rights and obligations, as specified in the contractual arrangement, that an entity has with respect to the assets, liabilities, revenue and expenses relating to a joint operation might differ from its ownership interest in the joint operation. Thus, a joint operator needs to recognize its interest in the assets, liabilities, revenue and expenses of the joint operation on the basis (bases) specified in the contractual arrangement, rather than in proportion of its ownership interest in the joint operation.<\/p>\n

              Thus, A Limited would record the following in its financial statements, to account for its rights to the assets of P and its obligations for the liabilities of P.<\/p>\n\n\n\n\n\n\n\n\n\n
              Assets<\/td>\nAmount<\/td>\n<\/tr>\n
              Cash<\/td>\n20<\/td>\n<\/tr>\n
              Building 1 @<\/td>\n240<\/td>\n<\/tr>\n
              Building 2<\/td>\n100<\/td>\n<\/tr>\n
              Liabilities<\/td>\n<\/td>\n<\/tr>\n
              Debt (third party) #<\/td>\n240<\/td>\n<\/tr>\n
              Employees benefit plan obligation<\/td>\n50<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

              # A Limited has obligation for the debt owed by P to XYZ in its entirety.
              \n@ Since A Limited has the rights to all of Building No. 1, it records the amount in its entirety.<\/p>\n

              \"Consolidated<\/p>\n

              Question 52.
              \nEntity X is owned by three institutional investors – A Limited, B Limited and C Limited – holding 40%, 40% and 20% equity interest respectively. A contractual arrangement between A Limited and B Limited gives them joint control over the relevant activities of Entity X. It is determined that Entity X is a joint operation (and not a joint venture). C Limited is not a party to the arrangement between A Limited and B Limited. However, like A Limited and B Limited, C Limited also has rights to the assets, and obligations for the liabilities, relating to the joint operation in proportion of its equity interest in Entity X.<\/p>\n

              Would the manner of accounting to be followed by A Limited and B Limited on the one hand and C Limited on the other in respect of their respective interests in Entity X be the same or different?
              \nAnswer:
              \nThe answer is based on Paragraphs 21, 23, 26 and 27 of Ind AS 111.<\/p>\n

              In the given case, all three investors (A Limited, B Limited and C Limited) share in the assets and liabilities of the joint operation in proportion of their respective equity interest. Accordingly, both A Limited and B Limited (which have joint control) and C Limited (which does not have joint control) shall apply paragraphs 20-22 in accounting for their respective interests in Entity X in their respective separate financial statements as well as consolidated financial statements.<\/p>\n

              Question 53.
              \nEntities A and B establish a 50:50 joint operation in the form of a separate legal entity, Entity AB, whereby each operator has a 50% ownership interest and takes 50% of the output.<\/p>\n

              On formation of the joint operation, Entity A contributes a property with fair value of INR 110 and intangible asset with fair value of INR 10 whereas Entity B contributes equipment with a fair value of INR 120.<\/p>\n

              The carrying amounts of the assets contributed by Entities A and B are INR 100 and INR 80, respectively.<\/p>\n

              What will be the amount of any gain or loss to be recognized by Entity A in its separate financial statements as well as consolidated financial statements?
              \nAnswer:
              \nThe answer is based on Paragraph B34 of Ind AS 111.<\/p>\n

              The amount of gain or loss to be recognized by Entity A in its separate financial statements as well as consolidated financial statements is computed as below (all amounts are in INR): –
              \nA\u2019s share of fair value of asset contributed by Entity B (50% \u00d7 120)
              \nLess: Asset contributed by entity A to the joint operation-carrying amount of proportion ceded to
              \nEntity B (50% \u00d7 100)
              \n60 (50)
              \nGain to be recognized by Entity A 10<\/p>\n

              \"Consolidated<\/p>\n

              IND AS 28: Assessment of Significant Influence (Based on Para Nos. 5 To 9)<\/strong><\/p>\n

              Question 54.
              \nWhether voting rights on shares held by nominee or in a fiduciary capacity are considered while evaluating the significant influence of beneficiary shareholder over the investee?
              \nAnswer:
              \nVoting rights on shares held by nominee should be considered while evaluating the significant influence of beneficiary shareholder over the investee but not for the evaluation of significant influence by the nominee shareholder over the investee as such voting rights are exercised by the nominee as per the directions and in interest of the beneficiary.<\/p>\n

              Note:
              \nMinistry of Corporate Affairs vide general circular No. 24\/2014, dated 25.06.2014 clarified that the shares held by a company in another company in a ‘fiduciary capacity\u2019 shall not be counted for the purpose of determining the relationship of \u2018associate company\u2019 under section 2(6) of the Companies Act, 2013.<\/p>\n

              Therefore, beneficiary shareholder shall consider the voting rights on shares held by its nominee or in a fiduciary capacity while evaluating the significant influence over the investee.<\/p>\n

              Question 55.
              \nWhether restrictions on transfer of funds from the investee to the entity preclude the existence of significant influence of entity over the investee?
              \nAnswer:
              \nIn the above situation, an investor with an interest in such an associate should evaluate the facts and circumstances to assess whether it is still able to exercise significant influence over the financial and operating policies of the investee.<\/p>\n

              However, such restrictions do not, in isolation, preclude the exercise of significant influence. Long-term restrictions on a stand-alone basis ordinarily may not result in the impairment of significant influence but this combined with other factors as mentioned in Ind AS 28 may hamper the ability of the entity to demonstrate significant influence.<\/p>\n

              Accordingly, when assessing its ability to exercise significant influence over an entity, an investor should consider severe long-term restrictions on the transfer of funds from the associate to the investor, along with other factors as mentioned under Ind AS 28.<\/p>\n

              \"Consolidated<\/p>\n

              Question 56.
              \nX Ltd. owns 20% of the voting rights in Y Ltd. and is entitled to appoint one director to the board, which consist of five members. The remaining 80% of the voting rights are held by two entities, each of which is entitled to appoint two directors.<\/p>\n

              A quorum of four directors and a majority of those present are required to make decisions. The other shareholders frequently call board meeting at the short notice and make decisions in the absence of X Ltd\u2019s representative. X Ltd has requested financial information from Y Ltd, but this information has not been provided. X Ltd\u2019s representative has attended board meetings, but suggestions for items to be included on the agenda have been ignored and the other directors oppose any suggestions made by X Ltd. Is Y Ltd an associate of X Ltd.?
              \nAnswer:
              \nDespite the fact that the X Ltd owns 2096 of the voting rights and has representations on the board, the existence of other shareholders holding a significant proportion of the voting rights prevent X Ltd. from exerting significant influence. Whilst it appears the X Ltd should have the power to participate in the financial and operating policy decision, the other shareholders prevent X Ltd’s efforts and stop X Ltd from actually having any influence.<\/p>\n

              In this situation, Y Ltd would not be an associate of X Ltd.<\/p>\n

              \"Consolidated<\/p>\n

              Equity Method (Based on Para Nos. 3, 10, 26, 28 And 32)<\/strong><\/p>\n

              Question 57.
              \nHow should goodwill\/capital reserve be computed on step increase in an existing associate\/joint venture? Is there a need for re-measurement of existing ownership interest at the time of the increase?
              \nAnswer:
              \nHence, the purchase price paid for the additional interest should be added to the existing- carrying amount of the associate or the joint venture and the existing interest in the associate or joint venture should not be remeasured. The additional interest acquired should be notionally split between goodwill and the additional interest in the fair value of the net assets of the associate or joint venture. This split is based on the fair value of the net assets at the date of the increase in the associate or joint venture. However, no remeasurement should be made for previously unrecognized changes in the fair values of identifiable net assets.<\/p>\n

              Therefore, goodwill\/capital reserve will be computed based on fair value of identified assets and liabilities on the date of further acquisition.<\/p>\n

              Example:
              \nAn entity X obtains significant influence over entity Y by acquiring an investment of 20% at a cost of \u20b9 2,00,000. At the date of the acquisition of the investment, the fair value of the associate\u2019s net identifiable assets is \u20b9 9,50,000. The investment is accounted for under the equity method in the consolidated financial statements of entity X.<\/p>\n

              Subsequently, entity X acquires an additional investment of 15% in entity Y at a cost of \u20b9 1,80,000, increasing its total investment in entity Y to 35%. There is no change in the status of investee, the investment is however, still an associate and accounted for using the equity method of accounting and the current fair value of the associate\u2019s net identifiable assets has increased to \u20b9 10,00,000.<\/p>\n

              Assuming no directly attributable cost has been incurred and no profit\/loss arose during the period since the acquisition of first 20%.
              \nIn this case, the carrying amount of the investment immediately prior to the additional investment is \u20b9 2,00,000.<\/p>\n

              Upon acquisition of additional 15% the equity-accounted amount for the associate increases by \u20b9 1,80,000. The notional goodwill applicable to the second tranche of the acquisition is \u20b9 30,000 [\u20b9 1,80,000 – (15% \u00d7 \u20b9 10,00,000)].<\/p>\n

              The impact of the additional investment on Entity A\u2019s equity-accounted amount for Entity B is summarized as follows:<\/p>\n\n\n\n\n\n\n
              Particulars<\/td>\n% held<\/td>\nCarrying Amount<\/td>\nShare in Net Assets<\/td>\nGoodwill included in Investment<\/td>\n<\/tr>\n
              Existing Investment<\/td>\n20%<\/td>\n2,00,000<\/td>\n1,90,000<\/td>\n10,000<\/td>\n<\/tr>\n
              Additional Investment<\/td>\n15%<\/td>\n1,80,000<\/td>\n1,50,000<\/td>\n30,000<\/td>\n<\/tr>\n
              Total Investment<\/td>\n35%<\/td>\n3,80,000<\/td>\n3,40,000<\/td>\n40,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

              Note: For the purpose of simplicity, we have assumed that the difference pertains to goodwill only. However, in certain cases, it may also pertain to other intangible assets as well. Accordingly, an entity is required to evaluate and identify whether there is any other intangible asset. It has also been assumed that the company has not earned or incurred any profit or loss.<\/p>\n

              \"Consolidated<\/p>\n

              Question 58.
              \nWhether appropriation to mandatory reserves be excluded from the results of operations of the associate that would be used for the purpose of computing the investor’s share?
              \nAnswer:
              \nThe creation of such a reserve is merely appropriation of profits and doesn’t result in reduction of the proRt as well as net assets of the associate. Therefore, an entity should not exclude the appropriation made to mandatory reserves from the result of operations of the associate that would be used for the purpose of computing the investor\u2019s share.<\/p>\n

              For example, as per the terms of an agreement entered into with its debenture holders, an associate is required to appropriate adequate portion of its profits to a specified reserve over the period of maturity of the debentures such that, at the redemption date, the reserve constitutes at least half the value of such debentures. Although, such debenture appropriations are not available for distribution to the equity shareholders, however, entity should not exclude this from the computation of its share in the results of operations of the associateA<\/p>\n

              Question 59.
              \nEntity XYZ acquired a 10% interest in entity ABC for \u20b9 1,00,000 at 1 June 2017. The investment in entity ABC was accounted for equity investment (not held for trading) for which irrevocable option has been availed of routing the changes in fair value through other comprehensive income and related FVOCI reserve.<\/p>\n

              Entity XYZ recognized an increase in fair value of \u20b9 60,000 in other comprehensive income for the year ended 31 March 2018.<\/p>\n

              Entity XYZ acquired an additional 25% interest in entity ABC for \u20b9 4,00,000 at 1 April 2018 and achieved significant influence. The fair value of entity ABC\u2019s net assets was \u20b9 5,00,000 at June 2017 and had increased to \u20b9 8,00,000 at 1 April 2018.<\/p>\n

              Entity ABC recorded profits after dividends of \u20b9 2,00,000 between 1 June 2017 and 1 April 2018.<\/p>\n

              How should an entity account for an investment in an investee on account of piecemeal acquisition when such investment provides it significant influence over the investee?
              \nAnswer:
              \nIn the given case, an entity may account for the step acquisition of an associate or a joint venture by applying analogy to Ind AS 103, i.e. considering fair value as deemed cost. Accordingly, the cost of an associate acquired in stages is measured as the sum of the fair value of the interest previously held plus the fair value of any additional consideration transferred as of the date when the investment became an associate.<\/p>\n

              Further, as per paragraph 42 of Ind AS 103, if an entity has previously recognized changes in the value of its equity interest in the acquire in other comprehensive income, the amount that was recognized in other comprehensive income shall be recognized on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest i.e. reclassified within equity.<\/p>\n

              The following shall be the accounting treatment:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n
              Particulars<\/td>\nAmount<\/td>\n<\/tr>\n
              Fair value of previous 10% interest held (determined by reference to the fair value of consideration given to acquire the additional 25%)<\/td>\n1,60,000<\/td>\n<\/tr>\n
              [400,000\/25% \u00d7 10%]<\/td>\n<\/td>\n<\/tr>\n
              Fair value of additional 25% (amount paid)<\/td>\n4,00,000<\/span><\/td>\n<\/tr>\n
              <\/td>\n5,.60,000<\/span><\/td>\n<\/tr>\n
              Goodwill is calculated as follows:<\/td>\n<\/td>\n<\/tr>\n
              Cost of investment in associate<\/td>\n5,60,000<\/td>\n<\/tr>\n
              Fair value of identifiable net assets acquired (8,00,000 \u00d7 35%)<\/td>\n2,80,000<\/span><\/td>\n<\/tr>\n
              Goodwill<\/td>\n2,80,000<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

              Journal entry: (\u20b9)<\/p>\n\n\n\n\n\n\n\n\n
              Particulars<\/td>\nDr\/Cr<\/td>\nAmount<\/td>\n<\/tr>\n
              Investment A\/c (including goodwill \u20b9 2,80,000)<\/td>\nDr<\/td>\n5,60,000<\/td>\n<\/tr>\n
              OCI (Equity)<\/td>\nDr<\/td>\n60,000<\/td>\n<\/tr>\n
              To Cash<\/td>\n<\/td>\n4,00,000<\/td>\n<\/tr>\n
              To Investment (FVTOCI)<\/td>\n<\/td>\n1,60,000<\/td>\n<\/tr>\n
              To Retained Earnings (Equity)<\/td>\n<\/td>\n60,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

              \"Consolidated<\/p>\n

              [Based on Para Nos. 10 And 32]<\/strong><\/p>\n

              Question 60.
              \nOn 1st April 2019, Investor Ltd. acquires 35% interest in another entity, XYZ Ltd. Investor Ltd. determines that it is able to exercise significant influence over XYZ Ltd. Investor Ltd. has paid total consideration of \u20b9 47,50,000 for acquisition of its interest in XYZ Ltd. At the date of acquisition, the book value of XYZ Ltd.\u2019s net assets was \u20b9 90,00,000 and their fair value was \u20b9 1,10,00,000. Investor Ltd. has determined that the difference of \u20b9 20,00,000 pertains to an item of property, plant and equipment (PPE) which has remaining useful life of 10 years.<\/p>\n

              During the year, XYZ Ltd. made a profit of \u20b9 8,00,000. XYZ Ltd. paid a dividend of \u20b9 12,00,000 on 31st March, 2020. XYZ Ltd. also holds a longterm investment in equity securities. Under Ind AS, investment is classified as at FVTOCI in accordance with Ind AS 109 and XYZ Ltd. recognized an increase in value of investment by \u20b9 2,00,000 in OCI during the year. Ignore deferred tax implications, if any.<\/p>\n

              Calculate the closing balance of Investor Ltd.\u2019s investment in XYZ Ltd. as at 31st March, 2020 as per the relevant Ind AS. [RTP – November 2020]
              \nAnswer:
              \nComputation of Investment in XYZ Ltd.:
              \n(under Equity method)
              \n\"Consolidated<\/p>\n

              Equity Method (Based on Para Nos. 27 And 28)<\/strong><\/p>\n

              Question 61.
              \nHow should transactions between the reporting entity and its associates or joint ventures be eliminated at the time of applying equity method of consolidation?
              \nAnswer:
              \nThe following approach might be used to apply equity method:<\/p>\n

              In the statement of profit or loss:
              \nThe adjustment should be taken against either the investor\u2019s profit or the share of the associate\u2019s or joint venture’s profit, according to whether the investor or the associate or joint venture recorded the profit on the transaction, respectively.<\/p>\n

              In the balance sheet:
              \nThe adjustment should be made against the asset which was the subject of the transaction if it is held by the investor or against the carrying amount for the associate or joint venture if the asset is held by the associate or joint venture.<\/p>\n

              \"Consolidated<\/p>\n

              Question 62.
              \nHow should goodwill\/capital reserve be computed on step increase in an existing associate\/joint venture? Is there a need for re-measurement of existing ownership interest at the time of the increase?
              \nAnswer:
              \nHence, the purchase price paid for the additional interest should be added to the existing carrying amount of the associate or the joint venture and the existing interest in the associate or joint venture should not be remeasured. The additional interest acquired should be notionally split between goodwill and the additional interest in the fair value of the net assets of the associate or joint venture. This split is based on the fair value of the net assets at the date of the increase in the associate or joint venture. However, no remeasurement should be made for previously unrecognized changes in the fair values of identifiable net assets.<\/p>\n

              Therefore, goodwill\/capital reserve will be computed based on fair value of identified assets and liabilities on the date of further acquisition.<\/p>\n

              Example:
              \nAn entity X obtains significant influence over entity Y by acquiring an in-vestment of 20% at a cost of \u20b9 2,00,000. At the date of the acquisition of the investment, the fair value of the associate\u2019s net identifiable assets is \u20b9 9,50,000. The investment is accounted for under the equity method in the consolidated financial statements of entity X.<\/p>\n

              Subsequently, entity X acquires an additional investment of 15% in entity Y at a cost of \u20b9 1,80,000, increasing its total investment in entity Y to 35%. There is no change in the status of investee, the investment is however, still an associate and accounted for using the equity method of accounting and the current fair value of the associate’s net identifiable assets has increased to \u20b9 10,00,000.<\/p>\n

              Assuming no directly attributable cost has been incurred and no profit\/loss arose during the period since the acquisition of first 20%.<\/p>\n

              In this case, the carrying amount of the investment immediately prior to the additional investment is \u20b9 2,00,000.<\/p>\n

              Upon acquisition of additional 15% the equity-accounted amount for the associate increases by \u20b9 1,80,000. The notional goodwill applicable to the second tranche of the acquisition is \u20b9 30,000 [\u20b9 1,80,000 – (15% \u00d7 \u20b9 10,00,000)].<\/p>\n

              The impact of the additional investment on Entity A\u2019s equity-accounted amount for Entity B is summarized as follows:<\/p>\n\n\n\n\n\n\n
              Particulars<\/td>\n% held<\/td>\nCarrying Amount<\/td>\nShare in Net Assets<\/td>\nGoodwill included in Investment<\/td>\n<\/tr>\n
              Existing Investment<\/td>\n20%<\/td>\n2,00,000<\/td>\n1,90,000<\/td>\n10,000<\/td>\n<\/tr>\n
              Additional Investment<\/td>\n15%<\/td>\n1,80,000<\/td>\n1,50,000<\/td>\n30,000<\/td>\n<\/tr>\n
              Total Investment<\/td>\n35%<\/td>\n3,80,000<\/td>\n3,40,000<\/td>\n40,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

              Note: For the purpose of simplicity, we have assumed that the difference pertains to goodwill only. However, in certain cases, it may also pertain to other intangible assets as well. Accordingly, an entity is required to evaluate and identify whether there is any other intangible asset. It has also been assumed that the company has not earned or incurred any profit or loss.<\/p>\n

              \"Consolidated<\/p>\n

              Question 63.
              \nAn associate X holds 20% shares of another associate Y and associate Y holds 20% shares of associate X. The share capital of each of the associate is 1,00,000 shares at \u20b9 10 each. X\u2019s profit excluding its share in Y = \u20b9 1,00,000; Y\u2019s profit excluding its share in X = \u20b9 1,00,000.<\/p>\n

              Considering the above facts, how would entity X and Y account for reciprocal holdings? Also, whether adjustment for the cross holdings is required to be made in the earnings per share calculation?<\/p>\n

              Note:
              \nX and Y are not venture capital organizations.
              \nAnswer:
              \nIn the case of reciprocal holdings this approach would result in a portion of entity\u2019s profits being double-counted as explained below:
              \nIn the instant case, X\u2019s profit (x) is dependent on Y\u2019s profit (y) and vice versa.
              \nX\u2019s profit = \u20b9 1,00,000 + 20% of Y’s profit.
              \nSimilarly,
              \nY\u2019s profit = \u20b9 1,00,000 + 20% of X\u2019s profit.
              \nHowever, the same shall result in X\u2019s profit being \u20b9 1,25,000 and Y’s profit being \u20b9 1,25,000, which is apparently leading to double counting of profit.<\/p>\n

              Therefore, it is considered appropriate in case of reciprocal holdings to adopt an approach of simply accounting for interest in associate i.e. 20% in the instant case (ignoring the reciprocal interest held by the associate i.e. before adding the reciprocal profit).<\/p>\n

              This approach results in entity X and Y both recognizing profit of \u20b9 1,20,000. The difference of \u20b9 5,000 (\u20b9 1,25,000 – 1,20,000) represents the equity effect of the reciprocal holdings and therefore, the same is not recognized in the statement of profit & loss.<\/p>\n

              For the purpose of calculating the earnings per share the profits related to the reciprocal interests have been ignored. Therefore, it is necessary to adjust the number of shares to eliminate the reciprocal holdings while calculating the earnings per share.<\/p>\n

              For the purpose of earnings per share calculation, associate Y\u2019s ordinary shares are reduced to its effective holding i.e. 96,000. Entity Y indirectly owns 20% of X\u2019s 20% interest, Le. entity Y indirectly owns 4% (= 20% \u00d7 20%) of its own shares. Those shares should therefore be treated as being equivalent to treasury shares and be ignored for the purposes of the EPS calculation.<\/p>\n

              \"Consolidated<\/p>\n

              This can be shown as below:<\/p>\n\n\n\n\n\n\n\n\n
              Particulars<\/td>\nAmount<\/td>\n<\/tr>\n
              Y\u2019s total share capital (A)<\/td>\n1,00,000<\/td>\n<\/tr>\n
              Share capital held by X in Y<\/td>\n20,000<\/td>\n<\/tr>\n
              Y\u2019s share in X (%)<\/td>\n20%<\/td>\n<\/tr>\n
              Y\u2019s share in X (B)<\/td>\n4,000<\/td>\n<\/tr>\n
              Y\u2019s share capital after excluding his interest (A – B)<\/td>\n96,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

              On the similar basis, X’s share capital after excluding his interest shall be \u20b9 96,000.<\/p>\n

              Equity Method (Based On Para Nos. 33 And 34)<\/strong><\/p>\n

              Question 64.
              \nWhether the financial statements of an associate which is prepared as on a date subsequent to the reporting date of an entity, can be used for the purpose of applying the equity method of accounting under Ind AS 28?
              \nAnswer:
              \nInd AS 28 provides that when it is impracticable to prepare the financial statements of the associate as at the same date as the financial statements of the entity (investor), financial statements of the associate prepared for different reporting date may be used provided that length of the reporting periods and any difference between the ends of the reporting periods shall be the same from period to period i.e. consistently applied from period to period. Therefore, financial statements of an associate prepared as at a date subsequent to the reporting enterprise date can be used for the purpose of applying the equity method, provided the above consistency principle is not violated.<\/p>\n

              When financial statements with a different reporting date are used, adjustments are made for the effects of any significant events or transactions between the investor (or its consolidated subsidiaries) and the associate that occur between the date of the associate\u2019s financial statements and the date of the investor\u2019s consolidated financial statements.<\/p>\n

              Note:
              \nGenerally, in India the above situation of different reporting dates will not arise be-cause of regulatory requirements such as timelines as prescribed by SEBI and other regulatory restrictions etc.<\/p>\n

              \"Consolidated<\/p>\n

              Changes In Ownership Interest (Based On Para No. 25)<\/strong><\/p>\n

              Question 65.
              \nAn entity A owns 100% shares of the investee company X which were originally purchased for \u20b9 700 crores and had incurred directly attributable cost of \u20b9 50 crores.<\/p>\n

              Entity A sells 60% of the shares in the company X to Entity B for \u20b9 1,500 crores. As a result of the sale, Entity B obtains control over company X. Entity A retains 40% interest and determines that it has significant influence over company X.<\/p>\n

              At the date of disposal, the fair value of the identifiable assets and liabilities of company X including intangible assets is \u20b9 1,800 crores and the fair value of Entity A\u2019s retained interest of 40% of the shares of Company X is \u20b9 800 crores, which includes goodwill.<\/p>\n

              How’ entity A should measure the initial carrying amount of the investment in company X following disposal of its 60% interest?
              \nAnswer:
              \nIn the given case, upon loss of control, entity A should deconsolidate the Company X and account for its remaining interest in Company X, as an associate or joint venture using the equity method of accounting. Entity A’s initial carrying amount of the associate should be based on the fair value of the retained interest, i.e. \u20b9 800 crores.<\/p>\n

              The analysis of investment in Company X is as follows:
              \n(\u20b9 in crores)
              \nGoodwill Identifiable net assets Total Investment in Company X
              \n80 (See Note 1) 720 (See Note 2) 800
              \nNote 1:
              \nCalculation of Goodwill: 800 – 720 = 80
              \nNote 2:
              \nCalculation of identifiable net assets: 720= 40% of \u20b9 1,800, i.e., fair value of the identifiable assets and liabilities of the Company X.<\/p>\n

              \"Consolidated<\/p>\n

              Question 66.
              \nXYZ Ltd. has a 40% stake in its associate ABC Ltd. During the period, XYZ Ltd. sells 10% of its stake in ABC Ltd. for consideration of \u20b9 80,000. From the date of the partial disposal, XYZ Ltd. will continue to recognize its remaining 30% interest in ABC Ltd. as an associate.<\/p>\n

              At the date of the partial disposal, the net asset carrying value of ABC Ltd. is \u20b9 3,00,000. Goodwill was calculated at \u20b9 30,000 at the date of acquiring the associate and there has been no impairment. Cumulative share of associate\u2019s other comprehensive income \u20b9 20,000 represents actuarial gain or loss.<\/p>\n

              How to account for partial disposals of interests in associate or joint venture where the equity method continues to be applied?
              \nAnswer:
              \nOn such partial disposal, Ind AS 28 does not expressly deals with derecognition of proportionate investment in associate.<\/p>\n

              However, it is noted that the above reclassification of amounts from other comprehensive income to profit or loss is required as part of determining the gain or loss on disposal. Therefore, once ownership is reduced in cases of partial disposal, entity shall derecognize the carrying value of the associate proportionate to the percentage reduced and recognize the resulting gain or loss in profit and loss.<\/p>\n

              Further, it shall reclassify the gain or losses previously recognized in other comprehensive income to the statement of profit and loss on proportionate basis.<\/p>\n

              In the above case, the associate\u2019s carrying values in entity XYZ’s consolidated financial statements is \u20b9 1,50,000 [40% of 3,00,000 + 30,000], Carrying value of associate proportionate to the percentage is reduced by \u20b9 37,500 (1,50,000 \u00d7 10\/40).<\/p>\n

              The proportion of gain or loss previously recognized in OCI to be reclassified to profit or loss is \u20b9 5,000 (20,000\/40% \u00d7 10%)<\/p>\n

              \"Consolidated<\/p>\n

              Thus, the accounting entry shall be as follows:
              \n(i) On partial disposal of 10% stake<\/p>\n\n\n\n\n\n\n
              Particulars<\/td>\nDr\/Cr<\/td>\nAmount<\/td>\n<\/tr>\n
              Cash<\/td>\nDr<\/td>\n80,000<\/td>\n<\/tr>\n
              To Investment in Associate<\/td>\nCr<\/td>\n37,500<\/td>\n<\/tr>\n
              To Gain on partial disposal<\/td>\nCr<\/td>\n42,500<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

              (ii) Reclassifying from Other comprehensive to the statement of profit and loss on partial disposal<\/p>\n\n\n\n\n\n
              Particulars<\/td>\nDr\/Cr<\/td>\nAmount<\/td>\n<\/tr>\n
              OCI (Equity)<\/td>\nDr<\/td>\n5,000<\/td>\n<\/tr>\n
              To Profit and loss (reclassified as part of gain on partial disposal) (20,000\/40% \u00d7 10%)<\/td>\nCr<\/td>\n5,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

              Discontinuing The Use of Equity Method (Based On Para Nos. 22 And 23)<\/strong><\/p>\n

              Question 67.
              \nA Limited holds 25% interest in B Limited which is accounted for as investment in associate as per the equity method in the consolidated financial statements of A Limited. During the financial year ended March 2018, A Limited sold its 15% interest in B Limited to a third-party X Limited for \u20b9 80,000 and continues to hold 10% interest in B Limited as its financial asset. Carrying value of 25% investment in consolidated financial statements on the date of sale is \u20b9 1,20,000 and fair value of retained interest is \u20b9 65,000. Cumulative share of associate\u2019s other comprehensive income \u20b9 20,000 represents exchange difference relating to a foreign.operation.<\/p>\n

              How should this sale transaction and financial asset be accounted for in the financial statements of A Limited?
              \nAnswer:
              \nIn the given case, the equity method earlier followed by the entity needs to be discontinued from the date of transfer of 15% interest in B Limited (that is, the date on which B Limited ceases to be an associate of A Limited) and the retained interest will be accounted for as a financial asset. The retained financial interest will be classified and measured as per the principles of Ind AS 109. At inception (date of transfer of 15% interest in B Limited), the retained interest will be measured at fair value, i.e. \u20b9 65,000.<\/p>\n

              Any difference in fair value of any retained interest plus proceeds from disposal of 15% interest and the carrying amount of the investment at the date the equity method was discontinued will be recognized in profit and loss i.e. \u20b9 25,000 (\u20b9 65,000 + \u20b9 80,000 – \u20b9 1,20,000).<\/p>\n

              Furthermore, the entire share of associate’s other comprehensive income of \u20b9 20,000 representing exchange difference relating to a foreign operation will be reclassified to profit or loss.<\/p>\n

              \"Consolidated<\/p>\n

              The accounting entry shall be as follows:
              \n(i) Derecognition of investment in associate and recognition of retained interest at fair value<\/p>\n\n\n\n\n\n\n\n
              Particulars<\/td>\nDr\/Cr<\/td>\nAmount<\/td>\n<\/tr>\n
              Investment in FA (10%)<\/td>\nDr<\/td>\n65,000<\/td>\n<\/tr>\n
              Cash<\/td>\nDr<\/td>\n80,000<\/td>\n<\/tr>\n
              To Investment in Associate (book value)<\/td>\nCr<\/td>\n1,20,000<\/td>\n<\/tr>\n
              ToP&L<\/td>\nCr<\/td>\n25,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

              (ii) Reclassifying from other comprehensive income to the statement of profit and loss<\/p>\n\n\n\n\n\n
              Particulars<\/td>\nDr\/Cr<\/td>\nAmount<\/td>\n<\/tr>\n
              OCI (equity)<\/td>\nDr<\/td>\n20,000<\/td>\n<\/tr>\n
              To P&L
              \n(Reclassified as part of gain or loss on disposal)<\/td>\n              		Cr<\/td>\n20,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n","protected":false},"excerpt":{"rendered":"

              Consolidated and Separate Financial Statements of Group Entities \u2013 CA Final FR Study Material\u00a0is designed strictly as per the latest syllabus and exam pattern. Consolidated and Separate Financial Statements of Group Entities \u2013 CA Final FR Study Material IND AS 27: Preparation of Separate Financial Statements (Based on Para Nos. 9 To 11a) Question 1. …<\/p>\n

              Consolidated and Separate Financial Statements of Group Entities \u2013 CA Final FR Study Material<\/span> Read More »<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"spay_email":"","footnotes":""},"categories":[169],"tags":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/17716"}],"collection":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/comments?post=17716"}],"version-history":[{"count":3,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/17716\/revisions"}],"predecessor-version":[{"id":18009,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/17716\/revisions\/18009"}],"wp:attachment":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/media?parent=17716"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/categories?post=17716"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/tags?post=17716"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}