{"id":18054,"date":"2023-03-23T12:15:18","date_gmt":"2023-03-23T06:45:18","guid":{"rendered":"https:\/\/gstguntur.com\/?p=18054"},"modified":"2023-03-23T12:16:06","modified_gmt":"2023-03-23T06:46:06","slug":"accounting-and-reporting-of-financial-instruments-ca-final-fr-study-material","status":"publish","type":"post","link":"https:\/\/gstguntur.com\/accounting-and-reporting-of-financial-instruments-ca-final-fr-study-material\/","title":{"rendered":"Accounting and Reporting of Financial Instruments \u2013 CA Final FR Study Material"},"content":{"rendered":"

Accounting and Reporting of Financial Instruments \u2013 CA Final FR Study Material<\/a>\u00a0is designed strictly as per the latest syllabus and exam pattern.<\/p>\n

Accounting and Reporting of Financial Instruments \u2013 CA Final FR Study Material<\/h2>\n

Compound Financial Instruments (Based On Para Nos. Ag30 To Ag35 of Appendix A)<\/strong><\/p>\n

Question 1.
\nVedika Ltd. issued 80,000 8% convertible debentures @ \u20b9 100 each on 1st April, 2015. The debentures are due for redemption on 31st March, 2019 at a premium of 20%, convertible into equity shares to the extent of 50% and balance to be settled in cash to the debenture holders. The interest rate on equivalent debenture without conversion right was 12%. The conversion to equity qualifies as fixed for fixed. You are required to separate the debt and equity components at the time of issue and show the accounting entries in Vedika Ltd.\u2019s books at initial recognition only. The following present values of Rupee 1 at 8% and 12% are provided for a period of 5 years. [Nov. 2020-10 Marks]<\/p>\n\n\n\n\n\n
Interest rate<\/td>\nYear 1<\/td>\nYear 2<\/td>\nYear 3<\/td>\nYear 4<\/td>\nYear 5<\/td>\n<\/tr>\n
8%<\/td>\n0.923<\/td>\n0.853<\/td>\n0.789<\/td>\n0.731<\/td>\n0.677<\/td>\n<\/tr>\n
12%<\/td>\n0.887<\/td>\n0.788<\/td>\n0.701<\/td>\n0.625<\/td>\n0.557<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Answer:
\nComputation of Debt and Equity component:<\/p>\n\n\n\n\n\n\n\n\n\n
Particulars<\/td>\nWorkings<\/td>\nAmount<\/td>\n<\/tr>\n
Proceeds<\/td>\n80,000 \u00d7 100<\/td>\n80,00,000<\/td>\n<\/tr>\n
Less:<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Liability Component Interest (80,000 \u00d7 100 \u00d7 8%)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 ‘<\/td>\n6,40,000 \u00d7 3.001 [PVIFA i.e. @ 12% for 1-4 years]<\/td>\n(19,20,640)<\/td>\n<\/tr>\n
Principal (80,000 \u00d7 100 \u00d7 50% \u00d7 120%)<\/td>\n48,00,000 \u00d7 0.625 [PVIF @ 12% for 4th Year end]<\/td>\n(30,00,000)<\/td>\n<\/tr>\n
<\/td>\n<\/td>\n(49,20,640)<\/td>\n<\/tr>\n
Equity Component<\/td>\nBalancing figure<\/td>\n30,79,360<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Journal entry on initial recognition:<\/p>\n\n\n\n\n
Bank\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Dr<\/td>\n80,00,000<\/td>\n<\/td>\n<\/tr>\n
To 8% Debentures – Debt component<\/p>\n

To 8% Debentures – Equity component<\/td>\n

<\/td>\n49,20,640<\/p>\n

30,79,360<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\"Accounting<\/p>\n

Question 2.
\nOn 1st April, 20X4, S Ltd. issued 5,000, 8% convertible debentures with a face value of \u20b9 100 each maturing on 31st March, 20X9. The debentures are convertible into equity shares of S Ltd. at a conversion price of \u20b9 105 per share. Interest is payable annually in cash. At the date of issue, S Ltd. could have issued non-convertible debt with a 5 year term bearing a coupon interest rate of 12%. On 1st April, 20X7, the convertible debentures have a fair value of \u20b9 5,25,000. S Ltd. makes a tender offer to debenture holders to repurchase the debentures for \u20b9 5,25,000, which the holders accepted. At the date of repurchase, S Ltd. could have issued non-convertible debt with a 2 year term bearing a coupon interest rate of 9%.<\/p>\n

Show accounting entries in the books of S Ltd. for recording of equity and liability component:<\/p>\n

    \n
  1. At the time of initial recognition and<\/li>\n
  2. At the time of repurchase of the convertible debentures.<\/li>\n<\/ol>\n

    The following present values of \u20b9 1 at 8%, 9% & 12% are supplied to you:<\/p>\n\n\n\n\n\n\n
    Interest Rate<\/td>\nYear 1<\/td>\nYear 2<\/td>\nYear 3<\/td>\nYear 4<\/td>\nYear 5<\/td>\n<\/tr>\n
    8%<\/td>\n. \u00a00.926<\/td>\n0.857<\/td>\n0.794<\/td>\n0.735<\/td>\n0.681<\/td>\n<\/tr>\n
    9%<\/td>\n0.917<\/td>\n0.842<\/td>\n0.772<\/td>\n0.708<\/td>\n0.650<\/td>\n<\/tr>\n
    12%<\/td>\n0.893<\/td>\n0.797<\/td>\n0.712<\/td>\n0.636<\/td>\n0.567<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    Answer:
    \n(i) At the time of initial recognition
    \n\"Accounting
    \nNote: Since \u20b9 105 is the conversion price of debentures into equity shares and not the redemption price, the liability component is calculated @ \u20b9 100 each only.<\/p>\n

    \"Accounting<\/p>\n

    Journal Entry
    \n\"Accounting<\/p>\n

    (ii) At the time of repurchase of convertible debentures
    \nThe repurchase price is allocated as follows:
    \n\"Accounting
    \n*(5,25,000 – 4,91,360) = 33,640<\/p>\n

    Journal Entries
    \n\"Accounting<\/p>\n

    \"Accounting<\/p>\n

    Question 3.
    \nV Limited issues convertible bonds of \u20b9 75,00,000 on 1st April, 2018. The bonds have a life of five years and a face value of \u20b9 20 each, and they offer interest payable at the end of each financial year at a rate of 4.5 percent annum. The bonds are issued at their face value and each bond can be converted into one ordinary share in Veer Ltd. at any time in the next five years.<\/p>\n

    Companies of a similar risk profile have recently issued debt at 6 percent per annum with similar terms but without the option for conversion.<\/p>\n

    You are required to:
    \n(i) Provide the appropriate accounting entries for initial recognition as per the relevant Ind AS in the books of the company.
    \n(ii) Calculate the stream of interest expenses across the five years of the life of the bonds.
    \n(iii) Provide the accounting entries if the holders of the bonds elect to convert the bonds to ordinary shares at the end of the fourth year.
    \nAnswer:
    \nPresent value of bonds at the market rate of debt
    \nPresent value of principal to be received in 5 years discounted at 6%
    \n\"Accounting<\/p>\n

    (i) Journal Entries
    \n\"Accounting<\/p>\n

    (ii) The stream of interest expense is summarised below, where interest for a given year is calculated by multiplying the present value of the liability at the beginning of the period by the market rate of interest, this is being 6 percent.<\/p>\n\n\n\n\n\n\n\n\n\n\n
    Date<\/td>\nPayment<\/td>\nInterest expense at 6% (e of previ\u00adous year \u00d7 6%)<\/td>\nIncrease in bond liability (c – b)<\/td>\nTotal bond liability (e of previous year +d)<\/td>\n<\/tr>\n
    (a)<\/td>\n(b)<\/td>\n(c)<\/td>\n(d)<\/td>\n(e)<\/td>\n<\/tr>\n
    1st April, 2018<\/td>\n<\/td>\n<\/td>\n<\/td>\n70,24,050<\/td>\n<\/tr>\n
    31st March, 2019<\/td>\n3,37,500<\/td>\n4,21,443<\/td>\n83,943<\/td>\n71,07,993<\/td>\n<\/tr>\n
    31st March, 2020<\/td>\n3,37,500<\/td>\n4,26,480<\/td>\n88,980<\/td>\n71,96,973<\/td>\n<\/tr>\n
    31st March, 2021<\/td>\n3,37,500<\/td>\n4,31,818<\/td>\n94,318<\/td>\n72,91,291<\/td>\n<\/tr>\n
    31st March, 2022<\/td>\n3,37,500<\/td>\n4,37,477<\/td>\n99,977<\/td>\n73,91,268<\/td>\n<\/tr>\n
    31st March, 2023<\/td>\n3,37,500<\/td>\n4,46,232*<\/td>\n1,08,732<\/td>\n75,00,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    \"Accounting<\/p>\n

    * Difference is due to rounding off.<\/p>\n

    (iii) If the holders of the bond elect to convert the bonds to ordinary shares at the end of the fourth year (after receiving their interest payments), the entries in the fourth year would be:
    \n\"Accounting<\/p>\n

    Question 4.
    \n(i) On 1st April, 2014, S Ltd. issued 5,000, 8% convertible debentures with a face value of \u20b9 100 each maturing on 31 st March, 2019. The debentures are convertible into equity shares of S Ltd. at a conversion price of \u20b9 105 per share. Interest is payable annually in cash. At the date of issue, S Ltd. could have issued non-convertible debentures with a 5 year term bearing a coupon interest rate of 12%. On 1st April, 2017, the convertible debentures have a fair value of \u20b9 5,25,000. S Ltd. makes a tender offer to debenture holders to repurchase the debentures for \u20b9 5,25,000, which the holders accepted. At the date of repurchase, S Ltd. could have issued non-convertible debt with a 2 year term bearing a coupon interest rate of 9%.<\/p>\n

    Examine the accounting treatment in the books of S Ltd., by passing appro-priate journal entries, for recording t>f equity and liability component:<\/p>\n

      \n
    1. At the time of initial recognition and<\/li>\n
    2. At the time of repurchase of the convertible debentures.<\/li>\n<\/ol>\n

      The following present values of Re. 1 at 8%, 9% & 12% are supplied to you:<\/p>\n\n\n\n\n\n\n
      Interest Rate<\/td>\nYear 1<\/td>\nYear 2<\/td>\nYear 3<\/td>\nYear 4<\/td>\nYear 5<\/td>\n<\/tr>\n
      8%<\/td>\n0.926<\/td>\n0.857<\/td>\n0.794<\/td>\n0.735<\/td>\n0.681<\/td>\n<\/tr>\n
      9%<\/td>\n0.917<\/td>\n0.842<\/td>\n0.772<\/td>\n0.708<\/td>\n0.650<\/td>\n<\/tr>\n
      12%<\/td>\n0.893<\/td>\n0.797<\/td>\n0.712<\/td>\n0.636<\/td>\n0.567<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      (ii) On 1 January, 2018, Entity X writes a put option for 1,00,000 of its own equity shares for which it receives a premium of \u20b9 5,00,000.<\/p>\n

      Under the terms of the option, Entity X may be obliged to take delivery of 1,00,000 of its own shares in one year\u2019s time and to pay the option exercise price of \u20b9 22,000,000. The option can only be settled through physical delivery of the shares (gross physical settlement). Examine the nature of the financial instrument and how it will be accounted assuming that the present value of option exercise price is \u20b9 2,00,000?
      \nAnswer:
      \n(i) (1) At the time of initial recognition
      \n\"Accounting
      \nNote: Since \u20b9 105 is the conversion price of debentures into equity shares and not the redemption price, the liability component is calculated @ \u20b9 100 each only.<\/p>\n

      \"Accounting<\/p>\n

      Journal Entry
      \n\"Accounting<\/p>\n

      (2) At the time of repurchase of convertible debentures
      \nThe repurchase price is allocated as follows:<\/p>\n\n\n\n\n\n\n\n\n\n\n
      <\/td>\nCarrying Value @ 12%<\/td>\nFair Value<\/td>\nDiffer\u00adence<\/td>\n<\/tr>\n
      <\/td>\n\u20b9<\/td>\n\u20b9<\/td>\n\u20b9<\/td>\n<\/tr>\n
      Liability component<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
      Present value of 2 remaining yearly inter\u00adest payments of \u20b9 40,000, discounted at 12% and 9%, respectively<\/td>\n67,600<\/td>\n70,360<\/td>\n<\/td>\n<\/tr>\n
      Present value of \u20b9 5,00,000 due in 2 years, discounted at 12% and 9%, compounded yearly, respectively<\/td>\n3,98,500<\/td>\n4,21,000<\/td>\n<\/td>\n<\/tr>\n
      Liability component<\/td>\n4,66,100<\/td>\n4,91,360<\/td>\n(25,260)<\/td>\n<\/tr>\n
      Equity component (5,25,000 – 4,91,360)<\/td>\n72,300<\/td>\n33,640*<\/td>\n38,660<\/td>\n<\/tr>\n
      Total<\/td>\n5,38,400<\/td>\n5,25,000<\/td>\n13,400<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      *(5,25,000 – 4,91,360) = 33,640<\/p>\n

      \"Accounting<\/p>\n

      Journal Entries
      \n\"Accounting<\/p>\n

      (ii) This derivative involves Entity X taking delivery of a fixed number of equity shares for a fixed amount of cash. Even though the obligation for Entity X to purchase its own equity shares for \u20b9 22,000,000 is conditional on the holder of the option exercising the option, Entity X has an obligation to deliver cash which it cannot avoid.<\/p>\n

      As per para 23 of Ind AS 32 ‘Financial Instruments: Presentation\u2019, the accounting for financial instrument will be as below:
      \nThe financial liability is recognised initially at the present value of the redemption amount, and is reclassified from equity. This would imply that a financial liability for an amount of present value of \u20b9 22,000,000, say \u20b9 20,000,000 will be recognised through a debit to equity. The initial premium received (\u20b9 5,00,000) is credited to equity.<\/p>\n

      Subsequently, the financial liability is measured in accordance with Ind AS 109. While a subsequent paragraph will deal with measurement of financial liabilities. The financial liability of \u20b9 20,000,000 will be measured at amortised cost as per Ind AS 109 and finance cost of \u20b9 2,000,000 will be recognised over the exercise period.<\/p>\n

      If the contract expires without delivery, the carrying amount of the financial liability is reclassified to equity i.e. an amount of \u20b9 22,000,000 will be reclassified from financial liability to equity.<\/p>\n

      \"Accounting<\/p>\n

      Question 5.
      \n(1) Q Ltd. issued 10,00,000 of 8% Long-Term bond-A Series of \u20b9 1 each on 1st April, 2016. The bond tenure is 3 years. Interest is payable annually on 1st April each year. The investors expect an effective interest rate on the loan at 10%. 0 Ltd. wants you to suggest the suitable accounting entries for the issue of these bonds as per applicable Ind AS. Consider the discounting factor 3 years, 10% discounting factor is 0.751315 and 3 years cumulative discounting factor is 2.48685.
      \n(i) What is the principal value of the bond at the initial recognition at the time of issue of bond as per applicable Ind AS?
      \n(ii) What is the present value of the interest payment to be recognised as part of the sale price of the bond as per applicable Ind AS?
      \n(iii) What are the proceeds of the sale of the bond to be recognized at the time of initial recognition as per applicable Ind AS?
      \n(iv) What is the accounting entry to be passed at the time of accounting for payment of interest for the first year?<\/p>\n

      (2) Q Ltd. has also issued 10,00,000 of 8% Long Term Bond-B Series of \u20b9 1 each on 1st April, 2016. The bond tenure is 3 years. Interest is payable annually on 1st April each year. However, the bond holders of this series are entitled to convert the bonds to shares of Re. 1 each on the date of maturity, instead of receiving the principal repayment. Interest rate on the similar bond without conversion option is 10%. Q Ltd. has requested you to suggest the following for this type of instrument:
      \n(a) What is entry to be passed at the date of issuance of the bond as per applicable Ind AS?
      \n(b) What is entry to be passed at the date of conversion of the bond as per applicable Ind AS?
      \nAnswer:
      \n(1) (i) Option (C) : \u20b9 7,51,315
      \n(ii) Option (C) : \u20b9 1,98,948
      \n(iii) Option (B) : \u20b9 9,50,263
      \n(iv) Option (B) :
      \nBond Interest Expenses A\/c Dr. \u20b9 95,026
      \nTo Discount on Bond A\/s \u20b9 15,026
      \nTo Cash\/Bank A\/c\u2003 \u20b9 80,000<\/p>\n

      Workings:
      \nSince the Effective interest rate on the loan is 10% while the Bond has been issued at 8%, the financial liability will be recognized affair value determined as follows:<\/p>\n

      \"Accounting<\/p>\n

      Calculation of initial recognition amount of 8% Long-term Loan Bond A Series<\/p>\n\n\n\n\n\n\n
      Particulars<\/td>\n\u20b9<\/td>\n<\/tr>\n
      Present value of the principal repayable after 3 years (10,00,000 \u00d7 751315)<\/td>\n7,51,315<\/td>\n<\/tr>\n
      Present value of Interest [(10,00,000 \u00d7 8%) \u00d7 2.48685]<\/td>\n9,50,263<\/td>\n<\/tr>\n
      Total Present Value of Long-term Loan Bond<\/td>\n1,98,948<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      Interest for the first year recognized in the books as per effective interest rate method
      \n= \u20b9 9,50,263 \u00d7 10% = \u20b9 95,026
      \nHowever, interest paid is @ 8% i.e, \u20b9 10,00,000 \u00d7 8% = \u20b9 80,000<\/p>\n

      (2) (a) Option (B): Cash\/Bank A\/c – \u20b9 10,00,000
      \nTo 8% LT Bond Series B A\/c – \u20b9 9,50,263
      \nTo Share Option A\/c – \u20b9 49,737<\/p>\n

      Workings:
      \nIt is a compound instrument.<\/p>\n

      Calculation of initial recognition amount of 8% Long-term Loan Bond B Series liability and equity component
      \n\"Accounting<\/p>\n

      (b) 8% LT Bond Series B A\/c – \u20b9 10,00,000
      \nShare Option A\/c – \u20b9 49,737
      \nTo Share Capital A\/c – \u20b9 10,00,000
      \nTo Share Premium A\/c – \u20b9 49,737<\/p>\n

      \"Accounting<\/p>\n

      Question 6.
      \nOn 1 April, 2018, an 8% convertible loan with a nominal value of \u20b9 6,00,000 was issued at par. It is redeemable on 31 March, 2022 also at par. Alternatively, it may be converted into equity shares on the basis of 100 new shares for each \u20b9 200 worth of loan.<\/p>\n

      An equivalent loan without the conversion option would have carried interest at 10%. Interest of \u20b9 48,000 has already been paid and included as a finance cost.
      \nPresent value rates are as follows:<\/p>\n\n\n\n\n
      Year End<\/td>\n@8%<\/td>\n@ 10%<\/td>\n<\/tr>\n
      1<\/p>\n

      2<\/p>\n

      3<\/p>\n

      4<\/td>\n

      		0.93<\/p>\n

      0.86<\/p>\n

      0.79<\/p>\n

      0.73<\/td>\n

      		0.91<\/p>\n

      0.83<\/p>\n

      0.75<\/p>\n

      0.68<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      How will the Company present the above loan notes in the financial statements for the year ended 31 March, 2019?
      \nAnswer:
      \nStep 1 : There is an \u2018option\u2019 to convert the loans into equity i.e. the loa!n note holders do not have to accept equity shares; they could demand repayment in the form of cash.<\/p>\n

      Ind AS 32 states that where there is an obligation to transfer economic benefits there should be a liability recognised. On the other hand, where there is not an obligation to transfer economic benefits, a financial instrument should be recognised as equity.<\/p>\n

      In the above illustration we have both – \u2018equity and’ debt features in the instrument. There is an obligation to pay cash – i.e. interest at 8% per annum and a redemption amount – this is \u2018financial liability or\u2019 debt component. The equity part of the transaction is the option to convert. So it is a compound financial instrument.<\/p>\n

      \"Accounting<\/p>\n

      Step 2 : Debt element of the financial instrument so as to recognise the liability is the present value of interest and principal.<\/p>\n

      The rate at which the same is to be discounted, is the rate of equivalent loan note without the conversion option would have carried interest at 10%, therefore this is the rate to be used for discounting.<\/p>\n

      Step 3 : Calculation of the debt element of the loan note as follows:
      \n8% Interest discounted at a rate of 10% Present Value (6,00,000 \u00d7 8%)<\/p>\n\n\n\n\n\n\n\n\n\n
      S. No.<\/td>\nYear<\/td>\nInterest amount<\/td>\nPVF<\/td>\nAmount<\/td>\n<\/tr>\n
      Year 1<\/td>\n2019<\/td>\n48,000<\/td>\n0.91<\/td>\n43,680<\/td>\n<\/tr>\n
      Year 2<\/td>\n2020<\/td>\n48,000<\/td>\n0.83<\/td>\n39,840<\/td>\n<\/tr>\n
      Year 3<\/td>\n2021<\/td>\n48,000<\/td>\n0.75<\/td>\n36,063<\/td>\n<\/tr>\n
      <\/td>\n<\/td>\n<\/td>\n<\/td>\n1,19,583<\/td>\n<\/tr>\n
      Year 4<\/td>\n2022<\/td>\n648,000<\/td>\n0.68<\/td>\n4,40,640<\/td>\n<\/tr>\n
      Amount to be recognised as a liability<\/td>\n5,60,223<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      Initial proceeds – (6,00,000)
      \nAmount to be recognised as equity – 39,777
      \n* In year 4, the loan note is redeemed therefore \u20b9 6,00,000 + \u20b9 48,000 = \u20b9 6,48,000.<\/p>\n

      Step 4 : The next step is to recognise the interest component equivalent to the loan that would carry if there was no option to cover. Therefore, the interest should be recognised at 10%. As on date \u20b9 48,000 has been recognised in the statement of profit and loss i.e. 6,00,000 \u00d7 8% but we have discounted the present value of future interest payments and redemption amount using discount factors of 10%, so the finance charge in the statement of profit and loss must also be recognised at the same rate i.e. for the purpose of consistency.<\/p>\n

      \"Accounting<\/p>\n

      The additional charge to be recognised in the income statement is calculated as:
      \nDebt component of the financial instrument \u20b9 5,60,000<\/p>\n\n\n\n\n\n
      Interest charge (5,60,000 \u00d7 10%)<\/td>\n\u20b9 56,000<\/td>\n<\/tr>\n
      Already charged to the income statement<\/td>\n(\u20b9 48,000)<\/td>\n<\/tr>\n
      Additional charge required<\/td>\n\u20b9 8,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      Journal Entries for recording additional finance cost for year ended 31 March, 2019
      \n\"Accounting<\/p>\n

      Question 7.
      \nBlueberry Ltd entered into the following transactions during the year ended 31st March, 20X2:
      \n(a) Entered into a speculative interest rate option costing \u20b9 10,000 on 1st April, 20X0 to borrow \u20b9 60,00,000 from Exon Bank commencing 30th June, 20X2 for 6 months at 4%.
      \nThe value of the option at 31st March, 20X2 was \u20b9 15,250.
      \n(b) Purchased 6% debentures in Fox Ltd on 1st April, 20X1 (their issue date) for \u20b9 150,000 as an investment. Blueberry Ltd. intends to hold the debentures, until their redemption at a premium, in 5 years\u2019 time. The effective rate of interest of the bond is 8%.
      \n(c) Purchased 50,000 shares in Cox Ltd on 1st October, 20X2 for \u20b9 3.50 each as an investment. The share price on 31st March, 20X2 was \u20b9 3.75.<\/p>\n

      Show the accounting treatment and relevant extracts from the financial statements for the year ended 31st March, 20X2 of transactions related to financial instruments.<\/p>\n

      Blueberry Ltd designates financial assets at fair value through profit or loss only when this is unavoidable. [MTP-May 2020]
      \nAnswer:
      \nBalance Sheet as at 31st March, 20X2
      \n[Extract]<\/p>\n\n\n\n\n\n\n
      Financial Assets:<\/td>\n\u20b9<\/td>\n<\/tr>\n
      Interest rate option (Working Note -1)<\/td>\n15,250<\/td>\n<\/tr>\n
      6% Debentures in Fox Ltd. (Working Note – II)<\/td>\n1,53,000<\/td>\n<\/tr>\n
      Shares in Cox Ltd. (Working Note – III)<\/td>\n1,87,500<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      Statement of Profit and Loss [Extract]
      \n\"Accounting<\/p>\n

      Working Notes:<\/p>\n

      Working Note -1:
      \nInterest Rate option:
      \nSubsequent Measurement:
      \nIt is a derivative and therefore it must be accounted using FVTPL.
      \n\"Accounting
      \nThus,
      \nFinancial Assets (\u20b9 10,000 + \u20b9 5,250) = \u20b9 15,250 (For Balance Sheet)
      \nGain on interest option = \u20b9 5,250 (For Statement of Profit and Loss)<\/p>\n

      \"Accounting<\/p>\n

      Working Note – II:
      \nDebentures:<\/p>\n

      Subsequent Measurement:
      \nOn the basis of information provided, it can be treated as a held-to-maturity investment (Business model of holding investment for collecting Contractual cash flows); which implies to be measured at amortized cost.
      \n\"Accounting
      \nThus,
      \nAmortized cost at 31st March, 20X2:
      \n(\u20b9 150,000 + \u20b9 12,000 – \u20b9 9,000) = \u20b9 153,000 (For Balance Sheet)
      \nEffective interest on 6% debenture = \u20b9 12,000 (For Statement of Profit and Loss)<\/p>\n

      Working Note – III:
      \nShares in Cox Ltd.:<\/p>\n

      Subsequent Measurement:
      \nEquity shares are measured at FVTPL unless it is not held for trading in which case it is measured at FVTOCI (Non- recycling) or FVTPL whichever option the company chooses.<\/p>\n

      These are assumed to be measured at FVTOCI (Non-Recycling).
      \n\"Accounting
      \nThus,
      \nShares in Cox Ltd. (\u20b9 1,75,000 + \u20b9 12,500) = \u20b9 1,87,500 (For Balance Sheet)
      \nGain on Equity Shares = \u20b9 12,500 (For Statement of Profit and Loss)<\/p>\n

      \"Accounting<\/p>\n

      Special Issues On Initial Measurement of Financial Assets-Processing Fee; Transaction Value Vs Fair Value; Prepayment (Modification) [Based On Para No. 5.4.3 Of Ind As 109]<\/strong><\/p>\n

      Question 8.
      \nK Ltd. has granted an interest free loan of \u20b9 10,00,000 to its wholly owned Indian Subsidiary Y Ltd. There is no transaction cost attached to the said loan. The Company has not finalised any terms and conditions including the applicable interest rates on such loans. The Board of Directors of the Company are evaluating various options and has requested your firm to provide your views under Ind AS in following situations:<\/p>\n

      (i) The Loan given by K Ltd. to its wholly owned subsidiary Y Ltd. is interest free and such loan is repayable on demand.
      \n(ii) The said Loan is interest free and will be repayable after 3 years from the date of granting such loan. The current market rate of interest for similar loan is 10%. Considering the same, the fair value of the loan at initial recognition is \u20b9 8,10,150.
      \n(iii) The said loan is interest free and will be repaid as and when the YK Ltd. has funds to repay the Loan amount.<\/p>\n

      Based on the same, K Ltd. has requested you to suggest the accounting treatment of the above loan in the standalone financial statements of K Ltd. and Y Ltd. and also in the consolidated financial statements of the group. Consider interest for only one year for the above loan.<\/p>\n

      Further the Company is also planning to grant interest free loan from Y Ltd. to K Ltd. in the subsequent period. What will be the accounting treatment of the same under applicable Ind AS?
      \nAnswer:
      \nScenario (i)
      \nSince the loan is repayable on demand, it has fair value equal to cash consideration given. K Ltd. and Y Ltd. should recognize financial asset and liability, respectively, at the amount of loan given (assuming that loan is repayable within a year). Upon, repayment, both the entities should reverse the entries that were made at the origination.<\/p>\n

      Journal entries in the books of K Ltd.
      \n\"Accounting<\/p>\n

      Journal entries in the books of Y Ltd.
      \n\"Accounting
      \nIn the consolidated financial statements, there will be no entry in this regard since loan receivable and loan payable will get set off.<\/p>\n

      \"Accounting<\/p>\n

      Scenario (ii)
      \nApplying the guidance in Ind AS 109, a \u2018financial asset’ shall be recorded at its fair value upon initial recognition. Fair value is normally the transaction price. However, sometimes certain type of instruments may be exchanged at off market terms (i.e., different from market terms for a similar instrument if exchanged between market participants).<\/p>\n

      If a long-term loan or receivable that carries no interest while similar instruments if exchanged between market participants carry interest, then fair value for such loan receivable will be lower from its transaction price owing to the loss of interest that the holder bears. In such cases where part of the consideration given or received is for something other than the financial instrument, an entity shall measure the fair value of the financial instrument. The difference in fair value and transaction cost will treated as investment in Subsidiary Y Ltd.<\/p>\n

      Both K Ltd. and Y Ltd. should recognise financial asset and liability, respectively, at fair value on initial recognition, i.e., the present value of \u20b9 10,00,000 payable at the end of 3 years using discounting factor of 10%. Since the question mentions fair value of the loan at initial recognition as \u20b9 8,10,150, the same has been considered. The difference between the loan amount and its fair value is treated as an equity contribution to the subsidiary. This represents a further investment by the parent in the subsidiary.<\/p>\n

      Journal entries in the books of K Ltd. (for one year)
      \n\"Accounting
      \nNote- Interest needs to be recognised in statement of profit and loss. The same cannot be adjusted against capital contribution recognised at origination.<\/p>\n

      \"Accounting<\/p>\n

      Journal entries in the books of YLtd. (for one year)
      \n\"Accounting
      \nIn the consolidated financial statements, there will be no entry in this regard since loan and interest income\/expense will get set off.<\/p>\n

      Scenario (iii)
      \nGenerally, a loan which is repayable when funds are available, cannot be stated as loan repayable on demand. Rather the entity needs to estimate the repayment date and determine its measurement accordingly by applying the concept prescribed in Scenario (ii).<\/p>\n

      In the consolidated financial statements, there will be no entry in this regard since loan and interest income\/expense will get set off.<\/p>\n

      In case the subsidiary Y Ltd. is planning to grant interest free loan to K Ltd., then the difference between the fair value of the loan on initial recognition and its nominal value should be treated as dividend distribution by Y Ltd. and dividend income by the parent K Ltd.<\/p>\n

      \"Accounting<\/p>\n

      Question 9.
      \nS Limited issued redeemable preference shares to its Holding Company H Limited. The terms of the instrument have been summarized below. Analyse the given situation, applying the guidance in Ind AS 109 \u2018Financial Instruments\u2019, and account for this in the books of H Limited.<\/p>\n\n\n\n\n\n\n\n\n\n\n\n
      Nature<\/td>\nNon-cumulative redeemable preference shares<\/td>\n<\/tr>\n
      Repayment<\/td>\nRedeemable after 3 years<\/td>\n<\/tr>\n
      Date of Allotment<\/td>\n1st April, 2015<\/td>\n<\/tr>\n
      Date of Repayment<\/td>\n31st March, 2018<\/td>\n<\/tr>\n
      Total Period<\/td>\n3 Years<\/td>\n<\/tr>\n
      Value of Preference Shares issued<\/td>\n5,00,00,000<\/td>\n<\/tr>\n
      Dividend Rate<\/td>\n0.0001% Per Annum<\/td>\n<\/tr>\n
      Market rate of interest<\/td>\n12% Per Annum<\/td>\n<\/tr>\n
      Present value factor<\/td>\n0.1118<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      Answer:
      \n1. Analysis of the financial instrument issued by S Ltd. to its holding company H Ltd.<\/p>\n

      Applying the guidance in Ind AS 109, a \u2018financial asset’ shall be recorded at its fair value upon initial recognition. Fair value is normally the transaction price. However, sometimes certain type of instruments may be exchanged at off market terms (ie., different from market terms for a similar instrument if exchanged between market participants).<\/p>\n

      For example, a long-term loan or receivable that carries no interest while similar instruments if exchanged between market participants carry interest, then fair value for such loan receivable will be lower from its transaction price owing to the loss of interest that the holder bears. In such cases where part of the consideration given or received is for something other than the financial instrument, an entity shall measure the fair value of the financial instrument.<\/p>\n

      In the above case, since S Ltd. has issued preference shares to its Holding Company- H Ltd., the relationship between the parties indicates that the difference in transaction price and fair value is akin to investment made by H Ltd. in its subsidiary. This can further be substantiated by the nominal rate of dividend i.e. 0.0001% mentioned in the terms of the instrument issued.<\/p>\n

      \"Accounting<\/p>\n

      Computations on initial recognition:<\/p>\n\n\n\n\n\n\n
      <\/td>\n\u20b9<\/td>\n<\/tr>\n
      Transaction value of the Redeemable preference shares<\/td>\n5,00,00,000<\/td>\n<\/tr>\n
      Less: Present value of loan component @ 12% (5,00,00,000 \u00d7 .7118)<\/td>\n(3,55,90,000)<\/td>\n<\/tr>\n
      Investment in subsidiary<\/td>\n1,44,10,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      Subsequently, such preference shares shall be carried at amortised cost at each reporting date as follows:<\/p>\n\n\n\n\n\n\n\n
      Year<\/td>\nDate<\/td>\nOpening Balance<\/td>\nInterest @ 12%<\/td>\nClosing balance<\/td>\n<\/tr>\n
      <\/td>\n1st April, 2015<\/td>\n3,55,90,000<\/td>\n–<\/td>\n3,55,90,000<\/td>\n<\/tr>\n
      1<\/td>\n31st March, 2016<\/td>\n3,55,90,000<\/td>\n42,70,800<\/td>\n3,98,60,800<\/td>\n<\/tr>\n
      2<\/td>\n31st March, 2017<\/td>\n3,98,60,800<\/td>\n47,83,296<\/td>\n4,46,44,096<\/td>\n<\/tr>\n
      3<\/td>\n31st March, 2018<\/td>\n4,46,44,096<\/td>\n53,55,904*<\/td>\n5,00,00,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      * \u20b9 4,46,44,096 \u00d7 12% = \u20b9 53,57,292. The difference of \u20b9 1,388 53,57,292 – \u20b9 53,55,904) is due to approximation in present value factor.<\/p>\n

      2. In the books of HLtd.
      \nJournal Entries to be done at every reporting date
      \n\"Accounting<\/p>\n

      \"Accounting<\/p>\n

      Question 10.
      \nPerfect Ltd. issued 50,000 Compulsory Cumulative Convertible Preference Shares (CCCPS) as on 1st April, 2017 @ \u20b9 180 each. The rate of dividend is 10% payable at the end of every year. The preference shares are convertible into 12,500 equity shares (Face value \u20b9 10 each) of the company at the end of 5th year from the date of allotment. When the CCCPS are issued, the prevailing market interest rate for similar debt without conversion option is 15% per annum. Transaction cost on the date of issuance is 2% of the value of the proceeds. Effective Interest Rate is 15.86%. (Round off the figures to the nearest multiple of Rupee)<\/p>\n

      Discounting Factor @ 15%<\/p>\n\n\n\n\n
      Year<\/td>\n1<\/td>\n2<\/td>\n3<\/td>\n4<\/td>\n5<\/td>\n<\/tr>\n
      Discount Factor<\/td>\n0.8696<\/td>\n0.7561<\/td>\n0.6575<\/td>\n0.5718<\/td>\n0.4971<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      You are required to compute Liability and Equity Component and Pass Journal Entries for entire term of arrangement i.e. from the issue of Preference Shares till their conversion into Equity Shares. Keeping in view the provisions of relevant Ind AS. [May 2019 – 12 Marks]
      \nAnswer:
      \nThis is a compound financial instrument with two components – liability representing present value of future cash outflows and balance represents equity component.<\/p>\n

      (a) Computation of Liability & Equity Component:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n
      Date<\/td>\nParticulars<\/td>\nCash Flow<\/td>\nDiscount Factor<\/td>\nPresent Value<\/td>\n<\/tr>\n
      01-Apr-2017<\/td>\n<\/td>\n0<\/td>\n1<\/td>\n0<\/td>\n<\/tr>\n
      31-Mar-2018<\/td>\nDividend<\/td>\n9,00,000<\/td>\n0.8696<\/td>\n7,82,640<\/td>\n<\/tr>\n
      31-Mar-2019<\/td>\nDividend<\/td>\n9,00,000<\/td>\n0.7561<\/td>\n6,80,490<\/td>\n<\/tr>\n
      31-Mar-2020<\/td>\nDividend<\/td>\n9,00,000<\/td>\n0.6575<\/td>\n5,91,750<\/td>\n<\/tr>\n
      31-Mar-2021<\/td>\nDividend<\/td>\n9,00,000<\/td>\n0.5718<\/td>\n5,14,620<\/td>\n<\/tr>\n
      31-Mar-2022<\/td>\nDividend<\/td>\n9,00,000<\/td>\n0.4971<\/td>\n4,47,390<\/td>\n<\/tr>\n
      Total Liability Component<\/td>\n<\/td>\n<\/td>\n<\/td>\n30,16,890<\/td>\n<\/tr>\n
      Total Proceeds<\/td>\n<\/td>\n<\/td>\n<\/td>\n9,00,00,000<\/td>\n<\/tr>\n
      Total Equity Component (Bal. fig.)<\/td>\n<\/td>\n<\/td>\n<\/td>\n59,83,110<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      \"Accounting<\/p>\n

      (b) Allocation of transaction costs<\/p>\n\n\n\n\n\n
      Particulars<\/td>\nAmount<\/td>\nAllocation<\/td>\nNet Amount<\/td>\n<\/tr>\n
      Liability Component Equity Component<\/td>\n30,16,890 59,83,1 10<\/td>\n60,338
      \n1,19,662<\/td>\n      		29,56,552
      \n58,63,448<\/td>\n<\/tr>\n
      Total Proceeds<\/td>\n90,00,000<\/td>\n1,80,000<\/td>\n88,20,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      (c) Accounting for liability at amortised cost: –
      \n– Initial accounting = Present value of cash outflows less transaction costs
      \n– Subsequent accounting = At amortised cost, Le., initial fair value adjusted for interest and repayments of the liability.
      \nEffective interest rate is given at 15.86%<\/p>\n\n\n\n\n\n\n\n\n\n
      Opening Financial Liability A<\/td>\nInterest B<\/td>\nCash Flow C<\/td>\nClosing Financial Liability A+B-C<\/td>\n<\/tr>\n
      29,56,552<\/td>\n–<\/td>\n–<\/td>\n29,56,552<\/td>\n<\/tr>\n
      29,56,552<\/td>\n4,68,909<\/td>\n9,00,000<\/td>\n25,25,461<\/td>\n<\/tr>\n
      25,25,461<\/td>\n4,00,538<\/td>\n9,00,000<\/td>\n20,25,999<\/td>\n<\/tr>\n
      20,25,999<\/td>\n3,21,323<\/td>\n9,00,000<\/td>\n14,47,322<\/td>\n<\/tr>\n
      14,47,322<\/td>\n2,29,545<\/td>\n9,00,000<\/td>\n7,76,867<\/td>\n<\/tr>\n
      7,76,867<\/td>\n1,23,133 (b\/f)<\/td>\n9,00,000<\/td>\n–<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      \"Accounting<\/p>\n

      (d) Journal Entries to be recorded for entire term of arrangement are as follows:
      \n\"Accounting
      \n\"Accounting
      \n\"Accounting<\/p>\n

      \"Accounting<\/p>\n

      Question 11.
      \nN Limited granted a loan of \u20b9 120 lakh to O Limited for 5 years @ 10% p.a. which is Treasury bond yield of equivalent maturity. But the incremental borrowing rate of O Limited is 12%. In this case, the loan is granted to O Limited at below market rate of interest. Ind AS 109 requires that a financial asset or financial liability is to be measured at fair value at the initial recognition. Should the transaction price be treated as fair value? If not, find out the fair value. What is the accounting treatment of the difference between the transaction price and the fair value on initial recognition in the book of N Ltd.?<\/p>\n

      Present value factors at 12%:<\/p>\n\n\n\n\n
      Year<\/td>\n1<\/td>\n2<\/td>\n3<\/td>\n4<\/td>\n5<\/td>\n<\/tr>\n
      PVF<\/td>\n0.892<\/td>\n0.797<\/td>\n0.712<\/td>\n0.636<\/td>\n0.567<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      Answer:
      \nSince the loan is granted to 0 Ltd. at 10% Le. below market rate of 12%. It will be considered as loan given at off market terms. Hence the Fair value of the transaction will be lower from its transaction price & not the transaction price.<\/p>\n

      Calculation of fair value
      \n\"Accounting
      \nThe fair value of the transaction be \u20b9 111.288 lakh.<\/p>\n

      Since fair value is based on level 1 input or valuation technique that uses only data from observable markets, difference between fair value and transaction price will be recognized in Profit and Loss as fair value loss i.e. \u20b9 120 lakh – \u20b9 111.288 lakh = \u20b9 8.712 lakh.<\/p>\n

      \"Accounting<\/p>\n

      Question 12.
      \nMake necessary journal entries for accounting of the security deposit made by Admire Ltd., whose details are described below. Assume market interest rate for a deposit for similar period to be 12% per annum. [Nov. 2019 – 4 Marks]<\/p>\n\n\n\n\n\n\n\n\n\n\n
      Particulars<\/td>\nDetails<\/td>\n<\/tr>\n
      Date of Security Deposit (Starting Date)<\/td>\n1-Apr-2014<\/td>\n<\/tr>\n
      Date of Security Deposit (Finishing Date)<\/td>\n31-Mar-2019<\/td>\n<\/tr>\n
      Description<\/td>\nLease<\/td>\n<\/tr>\n
      Total Lease Period<\/td>\n5 years<\/td>\n<\/tr>\n
      Discount rate<\/td>\n12.00%<\/td>\n<\/tr>\n
      Security deposit (A)<\/td>\n20,00,000<\/td>\n<\/tr>\n
      Present value factor at the 5th year<\/td>\n0.567427<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      Answer:
      \nFair Value of security deposit = 20,00,000 \u00d7 0.567427 = 11,13,854 (Assuming no interest is paid during 5 years)
      \nJournal Entry:<\/p>\n\n\n\n\n\n
      Security Deposit<\/td>\nDr<\/td>\n11,13,854<\/td>\n<\/td>\n<\/tr>\n
      ROV Asset<\/td>\nDr<\/td>\n8,86,146<\/td>\n<\/td>\n<\/tr>\n
      To Bank<\/td>\n<\/td>\n20,00,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      \"Accounting<\/p>\n

      Question 13.
      \nAn Indian entity, whose functional currency is rupees, purchases USD dominated bond at its fair value of USD 1,000. The bond carries stated interest @ 4.7% p.a. on its face value. The said interest is received at the year end. The bond has maturity period of 5 years and is redeemable at its face value of USD 1,250.<\/p>\n

      The fair value of the bond at the end of year 1 is USD 1,060. The exchange rate on the date of transaction and at the end of year 1 are USD 1 = \u20b9 40 and USD 1 = \u20b9 45, respectively. The weighted average exchange rate for the year is 1 USD = \u20b9 42.<\/p>\n

      The entity has determined that it is holding the bond as part of an investment portfolio whose objective is met both by holding the asset to collect contractual cash flows and selling the asset. The purchased USD bond is to be classified under the FVTOCI category.<\/p>\n

      The bond results in effective interest rate (EIR) of 10% p.a.<\/p>\n

      Calculate gain or loss to be recognized in Profit & Loss and Other Comprehensive Income for year 1.
      \nAlso pass journal entry. [RTP November 2020]
      \nAnswer:
      \nComputation of amounts to be recognized in the P&L and OCI:
      \n\"Accounting<\/p>\n

      Journal Entry to recognize gain\/loss:
      \n[Figures have been rounded off to the nearest rupees]
      \n\"Accounting<\/p>\n

      \"Accounting<\/p>\n

      Impairment (Based On Chapter 5.5 of Ind As 109)<\/strong><\/p>\n

      Question 14.
      \nOn 1st April, 2017, A Ltd. lent \u20b9 2 crores to a supplier in order to assist them with their expansion plans. The arrangement of the loan cost the company \u20b9 10 lakhs. The company has agreed not to charge interest on this loan to help the supplier\u2019s short-term cash flow but expected the supplier to repay \u20b9 2.40 crores on 31st March, 2019. As calculated by the finance team of the company, the effective annual rate of interest on this loan is 6.9% On 28th February, 2018, the company received the information that poor economic climate has caused the supplier significant problems and in order to help them, the company agreed to reduce the amount repayable by them on 31st March, 2019 to \u20b9 2.20 crores. Suggest the accounting entries as per applicable Ind AS.
      \nAnswer:
      \nThe loan to the supplier would be regarded as a financial asset. The relevant accounting standard Ind AS 109 provides that financial assets are normally measured at fair value.<\/p>\n

      If the financial asset in which the only expected future cash inflows are the receipts of principal and interest and the investor intends to collect these inflows rather than dispose of the asset to a third party, then Ind AS 109 allows the asset to be measured at amortised cost using the effective interest method.<\/p>\n

      If this method is adopted, the costs of issuing the loan are included in its initial carrying value rather than being taken to profit or loss as an immediate expense. This makes the initial carrying value \u20b9 2,10,00,000.<\/p>\n

      Under the effective interest method, part of the finance income is recognised in the current period rather than all in the following period when repayment is due. The income recognised in the current period is \u20b9 14,49,000 (\u20b9 2,10,00,000 \u00d7 6.9%)<\/p>\n

      In the absence of information regarding the financial difficulties of the sup-plier the financial asset at 31st March, 2018 would have been measured at \u20b9 2,24,49,000 (\u20b9 2,10,00,000 + 14,49,000). The information regarding financial difficulty of the supplier is objective evidence that the financial asset suffered impairment at 31st March, 2018.<\/p>\n

      The asset is re-measured at the present value of the revised estimated future cash inflows, using the original effective interest rate. Under the revised estimates the closing carrying amount of the asset would be \u20b9 2,05,79,981 (\u20b9 2,20,00,000\/1.069). The reduction in carrying value of \u20b9 18,69,019 (\u20b9 2,24,49,000 – 2,05,79,981) would be charged to profit or loss in the current period as an impairment of a financial asset.<\/p>\n

      Therefore, the net charge to profit or loss in respect of the current period would be \u20b9 4,20,019 (18,69,019 – 14,49,000).<\/p>\n

      \"Accounting<\/p>\n

      Derecognition Of Financial Liabilities (Based On Chapter 3.3 Of Ind As 109 And Including Appendix D Of Ind As 109)<\/strong><\/p>\n

      Question 15.
      \nOn 1 January 20X0, P Ltd. issues 10 year bonds for \u20b9 10,00,000, bearing interest at 10% (payable annually on 31st December each year). The bonds are redeemable on 31 December 20X9 for \u20b9 10,00,000. No costs or fees are incurred. The effective interest rate is 10%. On 1 January 20X5 (i.e. after 5 years) Preet Ltd. and the bondholders agree to a modification in accordance with which:<\/p>\n

        \n
      • the term is extended to 31 December 20Y1;<\/li>\n
      • interest payments are reduced to 5% p.a.;<\/li>\n
      • the bonds are redeemable on 31 December 20Y1 for \u20b9 15,00,000; and<\/li>\n
      • legal and other fees of \u20b9 1,00,000 are incurred.<\/li>\n<\/ul>\n

        P Ltd. determines that the market interest rate on 1 January 20X5 for borrowings on similar terms is 11%.<\/p>\n

        Analyse whether the extinguishment accounting will apply or not as per Ind AS. If yes, determine the fair value of the modified liability and compute the gain or loss on modification.
        \nAnswer:
        \nThe repayment schedule for the original debt till the date of renegotiation is as below:<\/p>\n\n\n\n\n\n\n\n\n\n
        Date\/year ended<\/td>\nOpening balance<\/td>\nInterest ac\u00adcrual<\/td>\nCash flows<\/td>\nClosing balance<\/td>\n<\/tr>\n
        1 January 20X0<\/td>\n10,00,000<\/td>\n<\/td>\n<\/td>\n10,00,000<\/td>\n<\/tr>\n
        31 December 20X0<\/td>\n10,00,000<\/td>\n1,00,000<\/td>\n(1,00,000)<\/td>\n10,00,000<\/td>\n<\/tr>\n
        31 December 20X1<\/td>\n10,00,000<\/td>\n1,00,000<\/td>\n(1,00,000)<\/td>\n10,00,000<\/td>\n<\/tr>\n
        31 December 20X2<\/td>\n10,00,000<\/td>\n1,00,000<\/td>\n(1,00,000)<\/td>\n10,00,000<\/td>\n<\/tr>\n
        31 December 20X3<\/td>\n10,00,000<\/td>\n1,00,000<\/td>\n(1,00,000)<\/td>\n10,00,000<\/td>\n<\/tr>\n
        31 December 20X4<\/td>\n10,00,000<\/td>\n1,00,000<\/td>\n(1,00,000)<\/td>\n10,00,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

        On 1 January 20X5, the discounted present value of the remaining cash flows of the original financial liability is \u20b9 10,00,000.
        \nOn this date, Preet Ltd. will compute the present value of:<\/p>\n

          \n
        • cash flows under the new terms -i.e. \u20b9 15,00,000 payable on 31 December 20Y1 and \u20b9 50,000 payable for each of the 7 years ending 31 December 20Y1.<\/li>\n
        • any fee paid (net of any fee received) – i.e. \u20b9 1,00,000 using the original effective interest rate of 10%.<\/li>\n<\/ul>\n

          \"Accounting<\/p>\n

          The total of these amounts to \u20b9 11,13,158 (Refer Working Note). This differs from the discounted present value of the remaining cash flows of the original financial liability by 11.32% ie. by more than 10%. Hence, extinguishment accounting applies.<\/p>\n

          The next step is to estimate the fair value of the modified liability. This is determined as the present value of the future cash flows (interest and principal), using an interest rate of 11% (the market rate at which Preet Ltd. could issue new bonds with similar terms). The estimated fair value on this basis is \u20b9 958,097 (Refer Working Note). A gain or loss on modification is then determined as:<\/p>\n

          Gain (loss) = carrying value of existing liability – fair value of modified liability – fees and costs incurred i.e. \u20b9 10,00,000 – \u20b9 9,58,097 – \u20b9 1,00,000 = Loss of t 58,097
          \nWorking Note:
          \n\"Accounting
          \n\"Accounting<\/p>\n

          \"Accounting<\/p>\n

          Question 16.
          \nH Limited borrowed \u20b9 500,000,000 from a bank on 1 January, 2017. The original terms of the loan were as follows:<\/p>\n

            \n
          • Interest rate: 11%<\/li>\n
          • Repayment of principal in 5 equal instalments<\/li>\n
          • Payment of interest annually on accrual basis<\/li>\n
          • Upfront processing fee: \u20b9 5,870,096 Effective interest rate on loan: 11.50%<\/li>\n<\/ul>\n

            On 31 December, 20X2, H Limited approached the bank citing liquidity issues in meeting the cash flows required for immediate instalments and re-negotiated the terms of the loan with banks as follows:<\/p>\n

              \n
            • Interest rate 15%<\/li>\n
            • Repayment of outstanding principal in 10 equal instalments starting 31st December, 2018.<\/li>\n
            • Payment of interest on an annual basis<\/li>\n<\/ul>\n

              Record journal entries in the books of H Limited till 31 st December, 2018, after giving effect of the changes in the terms of the loan on 31st December, 2017.
              \nAnswer:
              \nOn the date of initial recognition, the effective interest rate of the loan shall be computed keeping in view the contractual cash flows and upfront processing fee paid. The following table shows the amortisation of loan based on effective interest rate:
              \n\"Accounting<\/p>\n

              (a) 1 January, 2016
              \n\"Accounting<\/p>\n

              (b) 31 December, 2016
              \n\"Accounting<\/p>\n

              (c) 31 December, 2017 – Before H Limited approached the bank –
              \n\"Accounting
              \nUpon receiving the new terms of the loan, H Limited, re-computed the carrying value of the loan by discounting the new cash flows with the original effective interest rate and comparing the same with the current carrying value of the loan. As per requirements of Ind AS 109, any change of more than 10% shall be considered a substantial modification, resulting in fresh accounting for the new loan:
              \n\"Accounting
              \nConsidering a more than 10% change in PV of cash flows compared to the carrying value of the loan, the existing loan shall be considered to have been extinguished and the new loan shall be accounted for as a separate financial liability. The accounting entries for the same are included below:<\/p>\n

              \"Accounting<\/p>\n

              (d) 31 December, 2017 – accounting for extinguishment
              \n\"Accounting<\/p>\n

              (e) 31 December, 2018
              \n\"Accounting<\/p>\n

              Embedded Derivatives (Based On Chapter 4.3 of Ind As 109)<\/strong><\/p>\n

              Question 17.
              \nOn 1st January, 2017, E Limited agreed to purchase USD (S) 40,000 from E Bank in future on 31st December, 2017 for a rate equal to \u20b9 65 per USD. E Limited did not pay any amount upon entering into the contract. E Limited is a listed company in India and prepares its financial statements on a quarterly basis.<\/p>\n

              Using the definition of derivative included in Ind AS 109 and following the principles of recognition and measurement as laid down in Ind AS 109, you are required to record the entries for each quarter ended tilt the date of actual purchases of USD.<\/p>\n

              For the purpose of accounting, use the following information representing marked to market fair value of forward contracts at each reporting date:<\/p>\n\n\n\n\n\n\n
              As at 31st March, 2017<\/td>\n\u20b9 (50,000)<\/td>\n<\/tr>\n
              As at 30th June, 2017<\/td>\n\u20b9 (30,000)<\/td>\n<\/tr>\n
              As at 30th September, 2017<\/td>\n\u20b9 24,000<\/td>\n<\/tr>\n
              Spot rate of USD on 31st December, 2017<\/td>\n\u20b9 62 per USD<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

              Answer:
              \nAssessment of the arrangement using the definition of derivative included under Ind AS 109.<\/p>\n

              Derivative is a financial instrument or other contract within the scope of this Standard with all three of the following characteristics:
              \n(a) its value changes in response to the change in foreign exchange rate (emphasis laid)
              \n(b) it requires no initial net investment or an initial net investment is smaller than would be required for other types of contracts with similar response to changes in market factors.
              \n(c) it is settled at a future date.<\/p>\n

              \"Accounting<\/p>\n

              Upon evaluation of contract in question, on the basis of the definition of derivative, it is noted that the contract meets the definition of a derivative as follows:
              \n(a) the value of the contract to purchase USD at a fixed price changes in response to changes in foreign exchange rate.
              \n(b) the initial amount paid to enter into the contract is zero. A contract which would give the holder a similar response to foreign exchange rate changes would have required an investment of USD 40,000 on inception.
              \n(c) the contract is settled in future<\/p>\n

              The derivative is a forward exchange contract.
              \nAs per Ind AS 109, derivatives are measured at fair value upon initial recognition and are subsequently measured at fair value through profit and loss.<\/p>\n

              Accounting in each Quarter
              \n(i) Accounting on 1st January, 2017
              \nAs there was no consideration paid and without evidence to the contrary the fair value of the contract on the date of inception is considered to be zero. Accordingly, no accounting entries shall be recorded on the date of entering into the contract.<\/p>\n

              (ii) Accounting on 31st March, 2017
              \n\"Accounting<\/p>\n

              (iii) Accounting on 30th June, 2017
              \n\"Accounting<\/p>\n

              (iv) Accounting on 30th September, 2017
              \n\"Accounting<\/p>\n

              (v) Accounting on 31st December, 2017
              \nThe settlement of the derivative forward contract by actual purchase of USD 40,000
              \n\"Accounting<\/p>\n

              \"Accounting<\/p>\n

              Question 18.
              \nOn 1st April, 2017, X Ltd., a company incorporated in India enters into a contract to buy solar panels from Good Associates, a firm domiciled in UAE, for which delivery is due after 6 months i.e. on 30th September, 2017. The purchase price for solar panels is US$ 50 million.<\/p>\n

              The functional currency of XYZ is Indian Rupees (INR) and of Good Asso-ciates is Dirhams.<\/p>\n

              The obligation to settle the contract in US Dollars has been evaluated to be an embedded derivative which is not closely related to the host purchase contract.
              \nExchange rates:
              \n1. Spot rate on 1st April, 2017: USD 1 = \u20b9 60
              \n2. Six-month forward rate on 1st April, 2017: USD 1 = \u20b9 65
              \n3. Spot rate on 30th September, 2017: USD 1 = \u20b9 66
              \nAnalyse the contract and pass the necessary journal entries.
              \nAnswer:
              \nHost contract:
              \nHost contract to purchase solar panels.
              \nEmbedded derivative:
              \nForward contract to pay US Dollars.<\/p>\n

              For accounting of embedded derivative, we need to split the transaction as under:
              \n\"Accounting
              \n# A notional payment in INR at 6-month forward rate – \u20b9 32,500 lacs. (USD 500 lacs X INR 65 per USD)
              \n## A notional receipt in INR; i.e. a forward contract to sell US Dollars at INR 65 per US Dollar.<\/p>\n

              Note:
              \nA notional INR payment in respect of host contract and the notional INR receipt in respect of embedded derivative would create an offsetting position.<\/p>\n

              The host contract is not accounted for until delivery. The embedded derivative is recorded at FVTPL.
              \nOn delivery A Ltd. will record the solar panels at the amount of the host contract(\u20b9 32,500 lacs). The derivative asset or liability (i.e. the cumulative gain or loss) is settled by becoming part of the financial liability that arises on delivery.
              \n\"Accounting
              \n# The effect is that the financial liability at the date of delivery is \u20b9 33,000 lacs (32,500 + 500) which is equal to USD 500 lacs \u00d7 66 (i.e. spot rate on 30th September, 2017.)<\/p>\n

              Subsequently, the financial liability (creditors) is a financial instrument de-nominated in USD. It will be retranslated at the dollar spot rate in the normal way, until it is settled.<\/p>\n

              \"Accounting<\/p>\n

              Impairment of Ind As 109 (Based On Chapter 5.5)<\/strong><\/p>\n

              Question 19.
              \nAn entity purchases a debt instrument with a fair value of \u20b9 1,000 on 15th March, 20X1 and measures the debt instrument at fair value through other comprehensive income. The instrument has an interest rate of 5% over the contractual term of 10 years, and has a 5% effective interest rate. At initial recognition, the entity determines that the asset is not a purchased or original credit-impaired asset.<\/p>\n

              On 31st March 20X1 (the reporting date), the fair value of the debt instrument has decreased to ? 950 as a result of changes in market interest rates. The entity determines that there has not been a significant increase in credit risk since initial recognition and that ECL should be measured at an amount equal to 12 month ECL, which amounts to \u20b9 30.<\/p>\n

              On 1st April 20X1, the entity decides to sell the debt instrument for \u20b9 950, which is its fair value at that date.<\/p>\n

              Pass journal entries for recognition, impairment and sale of debt instruments as per Ind AS 109. Entries relating to Interest income are not to be provided. [RTP-November 2019]
              \nAnswer:
              \nOn Initial recognition:
              \n\"Accounting
              \nThe cumulative loss in other comprehensive income at the reporting date was \u20b9 20. That amount consists of the total fair value change of \u20b9 50 (that is, \u20b9 1,000 – \u20b9 950) offset by the change in the accumulated impairment amount representing 12 month ECL, that was recognized (\u20b9 30).<\/p>\n

              On Sale of debt instrument:
              \n\"Accounting<\/p>\n

              \"Accounting<\/p>\n

              Hedge Accounting (Based On Chapter 6 Of Ind As 109)<\/strong><\/p>\n

              Question 20.
              \nDiscuss the heed of hedge accounting and types of various hedges?
              \nAnswer:
              \nHedge accounting may be required due to accounting mismatches in:
              \nMeasurement – some financial instruments (non-derivative) are not measured at fair value with changes being recognised in the statement of profit and loss whereas all derivatives, which commonly are used as hedging instruments, are measured at fair value<\/p>\n

              Recognition – unsettled or forecast transactions that may be hedged are not recognised on the balance sheet or are included in the statement of profit and loss only in a future accounting period, whereas all derivatives are recognised at inception.<\/p>\n

              Recognition mismatches include the hedge of a contracted or expected but not yet recognised sale, purchase or financing transaction in a foreign currency and future committed variable interest payments.<\/p>\n

              \"Accounting<\/p>\n

              Types of hedge accounting
              \n1. Fair value hedge accounting model
              \nA fair value hedge seeks to offset the risk of changes in the fair value of an existing asset or liability or an unrecognised firm commitment that may give rise to a gain or loss being recognised in the statement of profit and loss.<\/p>\n

              A fair value hedge is a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect the statement of profit and loss.<\/p>\n

              2. Cash flow hedge accounting model
              \nA cash flow hedge seeks to offset certain risks of the variability . of cash flows in respect of an existing asset or liability or a highly
              \nprobable forecast transaction that may be reflected in the state-ment of profit and loss in a future period.<\/p>\n

              A cash flow hedge is a hedge of the exposure to variability in cash flows that (i) is attributable to a particular risk associated with a recognised asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction or a firm commitment in respect of foreign currency and (ii) could affect the statement of profit and loss.<\/p>\n

              \"Accounting<\/p>\n

              3. Net investment hedging
              \nAn investor in a non-integral operation is exposed to changes in the carrying amount of the net assets of the foreign operation (the net investment) arising from the translation of those assets into the reporting currency of the investor.<\/p>\n","protected":false},"excerpt":{"rendered":"

              Accounting and Reporting of Financial Instruments \u2013 CA Final FR Study Material\u00a0is designed strictly as per the latest syllabus and exam pattern. Accounting and Reporting of Financial Instruments \u2013 CA Final FR Study Material Compound Financial Instruments (Based On Para Nos. Ag30 To Ag35 of Appendix A) Question 1. Vedika Ltd. issued 80,000 8% convertible …<\/p>\n

              Accounting and Reporting of Financial Instruments \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\/18054"}],"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=18054"}],"version-history":[{"count":2,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/18054\/revisions"}],"predecessor-version":[{"id":18163,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/18054\/revisions\/18163"}],"wp:attachment":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/media?parent=18054"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/categories?post=18054"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/tags?post=18054"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}