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25 Issues
&
Non-compliance
Examples
on
Ind AS Application
CA Manish C. Iyer
Copyright Page
Copyright © 2023 by Manish Chidambaram Iyar
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Accounting Standards notified under Companies (Indian Accounting Standards), Rules 2015 as
amended till 31 March 2023 or other uses permitted by the Copyright Act, 1957.
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This book is protected under the provisions of the Indian Copyright Act 1957.
Author: Manish Chidambaram Iyar

MANISH Digitally signed by
MANISH
Date of Publication: 11-10-2023
CHIDAMBARA CHIDAMBARAM IYER
ISBN: 978-93-6013-258-3 (E-Book) Date: 2023.10.15
Cover Design: CA Pramendra Kumar Jain
M IYER 15:28:44 +05'30'
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CA Manish C. Iyer | Director | GAAP Advisors Page | 1

Table of Contents
Connect with Author................................................................................................................................ 4
About GAAP Advisors Services .............................................................................................................. 5
About this book ........................................................................................................................................ 7
Acknowledgements .................................................................................................................................. 8
Ind AS wise listing of issues on Ind AS and examples of Non-compliance: ...................................... 10
Section I – 25 Issues on Ind AS - Table of Contents ............................................................................ 11
Issue Id: 1 – Offsetting of Interest Income and Interest Expense ...................................................... 12
Issue Id: 234 – Classification of Cash Flows ........................................................................................ 13
Issue Id: 251 – Classification of Convertible Loan by Holder ........................................................... 14
Issue Id: 252 – Classification of Convertible Loan by Issuer ............................................................. 15
Issue Id: 310 – Change in Depreciation Method ................................................................................. 17
Issue Id: 313 – Accounting for Weather Insurance ............................................................................. 18
Issue Id: 321 – Determination of Effective Interest Rate ................................................................... 20
Issue Id: 328 – Disclosure of Other Long-term Employee Benefits ................................................... 21
Issue Id: 529 – Current / Non-current Classification.......................................................................... 23
Issue Id: 1276 – Interest free Rental Deposit ....................................................................................... 25
Issue Id: 1277 – Accounting for Modification in terms of Preference Shares................................... 27
Issue Id: 1367 – Dividends on Investment in Subsidiary .................................................................... 31
Issue Id: 1446 – Expected Credit Losses on Trade Receivables ......................................................... 34
Issue Id: 1447 – Processing Fees on Floating Rate Loan .................................................................... 37
Issue Id: 1632 – Employee Benefits as Intangible Assets .................................................................... 40
Issue Id: 2104 – Treatment in Consolidated Financial Statements of Convertible Preference
Shares issued by Subsidiary .................................................................................................................. 41
Issue Id: 2240 – Related Party Disclosures .......................................................................................... 44
Issue Id: 2314 – Consultation for Optimisation of Factory Costs...................................................... 46
Issue Id: 2316 – Related Party Disclosures .......................................................................................... 48
Issue Id: 2317 – Accounting for Insurance Claim Receivable ............................................................ 49
Issue Id: 2337 – Non-cumulative Redeemable Preference Shares ..................................................... 53
Issue Id: 2349 – Classification of units issued by Alternative Investment Fund .............................. 54
Issue Id: 2351 – Equity Investments at Fair Value through Other Comprehensive Income ........... 56
Issue Id: 2411 – Receivable settled with Property, Plant and Equipment ........................................ 57
Issue Id: 2521 – Goodwill on Common Control Business Combination ........................................... 59
Section II – 25 Examples of Non-compliance with Ind AS ................................................................. 61
Example 1 – Non-compliance of Ind AS 1............................................................................................ 62

Example 2 – Non-compliance of Ind AS 1 and Schedule III to the Companies Act, 2013 ............... 64
Example 6 – Non-compliance of Ind AS 1 and Ind AS 20 .................................................................. 71
Example 8 – Non-compliance of Ind AS 109........................................................................................ 75
Example 9 – Non-compliance of Ind AS 1 and Schedule III to the Companies Act, 2013 ............... 76
Example 10 – Non-compliance of Ind AS 115 ...................................................................................... 77
Example 11 – Non-compliance of Ind AS 1 and Schedule III to the Companies Act, 2013 ............. 78
Example 13 – Non-compliance of Ind AS 1 and Ind AS 7 .................................................................. 80
Example 14 – Non-compliance of Ind AS 7.......................................................................................... 82
Example 16 – Non-compliance of Ind AS 7 and Ind AS 16 ................................................................ 85
Example 17 – Non-compliance of Ind AS 1 and Schedule III to the Companies Act, 2013 ............. 87
Example 25 – Non-compliance with Ind AS 1 and Ind AS 16 ............................................................ 96

Connect with Author
CA Manish C. Iyer is the Director of GAAP Advisors. The repositories on
https://gaapadvisors.com have been conceptualised by him. His mission is to spread knowledge
and awareness of financial reporting standards in India and help the small and medium audit
firms and companies avail expert services on Ind AS and Indian GAAP application at the cost of
a beginner. He has reviewed more than 100 financial statements of listed companies on suo moto
basis. The non-compliance examples are observations of the author on review of financial
statements of listed companies.
He is the author of GAAP Advisors TASK Newsletter on LinkedIn having 12000+ subscribers.
95 editions have been published till date.
He served as Deputy Director in the Technical Directorate Department of The Institute of

Chartered Accountants of India from 2013 to 2016. He was in-charge of the Accounting
Standards Board and the Technical Directorate of The Institute of Chartered Accountants of India
when he resigned on May 2016. He played an important role in development and notification of
Ind AS in 2015 and in 2016. He had been part of groups constituted by bodies like RBI, IRDA
etc. for framing regulations for financial statements on Ind AS for Banks and Insurance.
Till September 2013, he was practising under the banner Manish Iyer & Co., Chartered
Accountants. He qualified as Chartered Accountant in 2003 and Diploma in International
Financial Reporting in 2006.
He has delivered 4500+ man hours of presentations on IFRS, US GAAP, Indian GAAP at various
forums across India and abroad. He is B. Com, FCA, DISA(ICAI) and DipIFR (ACCA). He has
written articles and columns in professional journals like The Chartered Accountant of The
Institute of Chartered Accountants of India and Ahmedabad Chartered Accountants’ Association
Journal on the subject of IFRS and Indian GAAP. He has has extensive exposure in Ind AS, IFRS
and Indian GAAP compliance in almost all industries including BFSI Sector.
You can book 30-minute online meeting slot for one-on-one consultation on Ind AS, IFRS and
Indian GAAP from the link given below:
https://topmate.io/ca_manish_c_iyer10
He offers the following services on traditional mode:

• Issue based Consulting on IFRS, Ind AS and Indian GAAP
• Review of Financial Statements
• Training on Ind AS and Indian GAAP
• Guidance on First-time Adoption of Ind AS
• Hedge Documentation
The above services are available on either retainership basis or on needs basis. For any further
information on GAAP Advisors services, please mail to [email protected].

About GAAP Advisors Services
The website https://gaapadvisors.com has 6 repositories:
• Issue Repository – containing 4000+ issues and solution to those issues on application of
Ind AS and Indian GAAP.
• Accounting Policy Repository – containing 7000+ accounting policies disclosed by
companies listed on Bombay stock exchange and National stock exchange
• Key Audit Matters Repository – containing 2000+ key audit matters reported in
independent auditor’s report on financial statements of companies listed on Bombay
stock exchange and National stock exchange
• Notes Repository – 100+ Notes from financial statements of companies listed on Bombay
stock exchange and National stock exchange
• Active Referencer – All terms defined in Ind AS and Indian GAAP with ready
comparison between the two. Text of all notified standards along with amendments
• TASK Repository – TASK stands for Test Accounting Standards Knowledge. TASK is a
learning game on notified financial reporting standards in India. Any registrant can test
accounting standards knowledge on solo basis or group basis for free. All participants are
awarded certificate of participation the moment the participant answers consistent with
GAAP Advisors response.
Any human being can register on https://gaapadvisors.com for free. On registration, 48 hours of
subscription access is available to the registrant for free. A registrant is also offered 48 hours of
free subscription access on birthday and on being selected as winner in daily winner scheme.
Daily two registrants are randomly selected and offered 48 hours of free subscription access to
all repositories. Thus, a registrant is assured of at least 48 hours of free subscription access to all
repositories in a year.
A registrant can subscribe repositories on selective basis or all the repositories. A registrant can
opt for different plans from 48-hour plan to bi-annual plan. Subscription packages can be viewed
on https://gaapadvisors.com. Available offers can be accessed from Offers page.
Every issue submitted by a registrant is responded by a resource person. The response submitted
by the resource person is approved by an approver. On approval, the issue and the response is
mailed to the registered mail id of the issue submitter in password protected PDF. The issue and
response is also made available for viewing by other registrants in issue repository. There is no
limit on the number of issues on Ind AS and Indian GAAP that a subscribed registrant can submit.
An unsubscribed registrant can submit maximum of three issues for free.

The website is based on collaborative model as shown in the picture below:
Every registrant gets credit points based on the time spent on reading the contents of the
repository other than TASK, for giving consistent answers in TASK, on birthday and on
subscription. Registrants are also awarded credit points on referral and whenever the referred
user subscribes. Credit points are awarded to resources persons and approvers when they respond
to any issues or add any post to repositories. On 1st of every month, a designated amount of
subscriptions received in the immediately preceding month is distributed among the registrants,
resource persons and approvers based on their credit points vis-à-vis total credit points of all
registrants, resource persons and approvers in their discount wallets and cash wallets. Registrants
can avail discounts on subscription to repositories from discount wallet and can claim cashback
from amounts in cash wallets. Credit points do not expire. However, amounts in wallets expire
if not claimed in time. The discount that can be availed from discount wallet is in addition to any
discount made available as an offer.
The above model is applicable on payment for download of this book from
https://gaapadvisors.com. Therefore, the more you learn by accessing the contents on
https://gaapadvisors.com and the more you refer others to https://gaapadvisors.com, the more
you earn discounts and cashbacks.

About this book
This book contains two sections:
1. Compilation of 25 issues
2. Compilation of 25 Examples of Non-compliance with Ind AS based on suo moto reviews of
financial statements of listed companies.
Each issue has been identified with issue id in issue repository. The solutions to some of the
issues discussed herein are not the same as in the issue repository. The solution to the issues has
been updated based on standards amended till 31 March 2023. The issues have been submitted
by registrants on https://gaapadvisors.com . I have edited the issues submitted for grammatical
errors and unclear or vague language to the extent possible. However, there is an inherent
limitation in such compilation that the issues submitted may not provide complete facts of the
case and may not have professional level of drafting. Also, because of incomplete facts, the
solution to the issue may be based on assumptions. However, the advantage of such a compilation
is that it contains issues faced while applying Ind AS. The views expressed are my personal views
and the same are not binding on the reader. The reader is cautioned to seek the help of an expert
before acting or refraining from any action based on the solution to issues given in this
compilation.
The second section of the book includes compilation of 25 examples of non-compliance with Ind
AS observed on review of financial statements of listed companies on suo moto basis. A link to
the videos uploaded on GAAP Advisors Channel on YouTube discussing each non-compliance
has also been given. No correspondence is made either with the company or the auditor of those
companies while undertaking review. I have shared the review reports with few companies.
However, I did not receive any response from any of them on the review observations. A review
of financial statements will enable you –
1. to decide whether to issue modified audit report as an auditor;
2. to decide whether to hold on to your investment or to invest further or to exit at the earliest as
an investor;
3. to seek answers to observations in the review report from the company as a lender, employee,
supplier or customer; and
4. to enhance confidence of investors on corporate governance practices as a company.
Please note that an example of non-compliance specified herein may not be only possible view.
Therefore, a reader is recommended to connect with the author or take the help of another expert
before acting or refraining from action based on examples of non-compliance discussed herein.
If you would like to get financial statements reviewed, please mail them to
[email protected].

Acknowledgements
The acknowledgements section of the book is what I find the most difficult to write. It requires
great amount of skill in expressing gratitude. Also, this is a section wherein Ind AS application
is not involved. It requires literary and vocabulary skills where I consider myself an amatuer. No
number of words are ever enough to express gratitude for the help and support of others. I have
kept the tone of this section informal to let me express my feelings. I have taken this opportunity
to express my gratitude not only to those who helped me publish this book but also to others who
have helped me to craft my career.
When I pick up a book for the first time, I have a look at the acknowledgements section. I am
curious to know who works behind the curtain and silently without taking any credit letting the
author take it all. Please note that credit for the creation of this book is shared among the
wonderful human beings recognised here. It’s time for these many supporters to step out into the
footlights for a moment a take a well-deserved bow. If I have left anyone in the wings, I
apologize; any omissions are inadvertent. Also, please note that I have not specified in the order
of importance. All have played important role.
To begin with, I would like to thank the registrants and subscribers on https://gaapadvisors.com.
As stated in About this Book section, this book contains a compilation of 25 issues submitted by
the registrants and subscribers on https://gaapadvisors.com. Had they not registered or
subscribed to issue repository, the issues would not have been submitted on the portal of GAAP
Advisors and I would not have had the opportunity to learn and enhance my knowledge on Ind
AS application and compile the same in this book.
Once the issues are submitted, it is the resource persons who contribute their time and knowledge
in drafting the response. I am thankful to the following resource persons for contributing their
time and knowledge on Ind AS in support of my mission:
CA Harshil Patel, CA Utsav Hirani and CA Priyanka Vazirani
CA Harshil Patel has not only supported by drafting the response to the issues but has contributed
a lot of ideas for development and growth of https://gaapadvisors.com. CA Priyanka Vazirani has
supported by drafting the response to the issues and also helped in creating videos on GAAP
Advisors Channel on YouTube. Her videos are among the most watched videos on GAAP
Advisors Channel.
The contribution by other resource persons, CA Harsha Ramnani and CA Bhakti Sheth who work
on development of Accounting Policy repository and Key Audit Matters repository is very
important. Because of their contribution, GAAP Advisors is able to get more footfalls and
convert those into registrants and eventually subscribers. Thank you so much CA Harsha
Ramnani and CA Bhakti Sheth for contributing your time and knowledge in development of
accounting policy repository and key audit matters repository.
Here I would like to make special mention of CA Naresh Kataria for the support and guidance
on the development of the repositories and especially review reports. Without his guidance my

observations on review on financial statements would have been irrelevant. It is he who helped
me in identifying the issues in financial statements that need not be reported.
Thank you so much Akshay Sethia, Piyush Patel and all the Dezinebrainz Team for developing
https://gaapadvisors.com and provide me all the help on development of any function on the
website. You people have helped me execute my ideas and forward my mission.
I am immensely grateful to Dr. Avinash Chander for always being there to guide me and help me
in understanding Ind AS while approving the response drafted by resource persons and for
observations on review of financial statements. Whenever I find myself in need of help, he has
been there as a strong pillar that I can rely on completely. Without his guidance and support, the
response to the issues on https://gaapadvisors.com might not have been of the quality that it is
now. It is because of Dr. Avinash Chander that I have been able to retain the faith of the registrants
and subscribers on https://gaapadvisors.com.
I am deeply grateful to CA Pramendra Jain for motivating me to start a series of books of which
this is the first volume and help in designing the book cover and aligning the contents of the
book. Without him, the book would not have been in the format as it is now. He has designed the
cover pages and also helped in getting ISBN for this book. It is he and CA Pooja Gupta who had
motivated me to join Institute of Chartered Accountants of India and surrender my Certificate of
Practice. My stint at The Institute of Chartered Accountants of India provided me great exposure
to how standards are developed and be part of Ind AS development and notification process.
Also, it enabled me to fulfil one of my dreams to have online comments on exposure drafts of
all standards issued by the Accounting Standard Board of The Institute of Chartered Accountants
of India. Thank you so much CA Pooja Gupta for providing me the direction for my career. When
I think of the direction for my career, I cannot forget the contribution of CA Hiren D. Shah,
Partner of Dinesh R. Shah & Co., Chartered Accountants, where I did my training for CA
qualification. It is he who motivated me to continue my focus on Accounting Standards and IFRS
during my training and after my CA qualification when at that time, Accounting Standards were
not taken as seriously as is being taken now. Without his motivation and guidance, I am sure that
I would have lost focus to provide GST or Income Tax related services and thus would not have
been able to specialise on Accounting Standards.
And finally, thank you to my family. Rashmi and Hasit for your love and patience that you show
when I start talking about Ind AS and IFRS even at home. I am thankful to my brother for all the
love, care and support whenever I felt in need of. I am thankful to my mother and father who
showed me how to lead by example and to have a purpose in life. Some of the quotes that my
mother used to repeat when I was in childhood and I can recollect are Patience is the greatest
prayer, Practice before you preach, All that glitters is not gold, Rome was not built in a day and
Hope for the best but be prepared for the worst. It is these quotes which have helped me to hold
on to my principles and values till date.

Ind AS wise listing of issues on Ind AS and examples of Non-
compliance:
Ind AS Title of Ind AS Issue Id Non-compliance
No. Example
Schedule III to the Companies Act, 2, 9, 11, 17
2013
1 Presentation of Financial 1, 529, 1277, 1446. 1, 2, 5, 6, 7, 9, 11,
Statements 1447 13, 15, 17, 18, 20,
22, 25
2 Inventories 2317
7 Statement of Cash Flows 234 3, 4, 13, 14, 16
8 Accounting Policies, Changes in 310, 321, 1277,
Accounting Estimates and Errors 1447, 2317, 2349
10 Events after the Reporting Period 529
12 Income Taxes 1 12, 24,
16 Property, Plant and Equipment 310, 2317, 2411 16, 21, 23, 25
19 Employee Benefits 1, 328, 1632
20 Accounting for Government Grants 6
and Disclosure of Government
Assistance
24 Related Party Disclosures 2240
27 Separate Financial Statements 1367 19
28 Investments in Associates and Joint 1367
Ventures
32 Financial Instruments: Presentation 1, 252, 1277, 2337,
2349
37 Provisions, Contingent Liabilities 1
and Contingent Assets
101 First-time Adoption of Indian 1446, 1447
Accounting Standards
103 Business Combination 2521
104 Insurance Contracts 313
107 Financial Instruments: Disclosures 1446
109 Financial Instruments 251, 313, 321,1276, 8
1277, 1367, 1446,
1447. 2104, 2317,
2351
110 Consolidated Financial Statements 2104
115 Revenue from Contracts with 2314, 2317 10
Customers
116 Leases 1276

25 ISSUES AND NON-COMPLIANCE EXAMPLES ON IND AS APPLICATION
Section I – 25 Issues on Ind AS - Table of Contents

Sr. No. Issue Id Title of the Issue
1 1 Offsetting of Interest Income and Interest Expense
2 234 Classification of Cash Flows
3 251 Classification of Convertible Loan by Holder
4 252 Classification of Convertible Loan by Issuer
5 310 Change in Depreciation Method
6 313 Accounting for Weather Insurance
7 321 Determination of Effective Interest Rate
8 328 Disclosure of Other Long-term Employee Benefits
9 529 Current / Non-current Classification
10 1276 Interest free Rental Deposit
11 1277 Accounting for Modification in Terms of Preference Shares
12 1367 Dividends on Investment in Subsidiary
13 1446 Expected Credit Loss on Trade Receivables
14 1447 Processing Fees on Floating Rate Loan
15 1632 Employee Benefits as Intangible Assets
16 2104 Treatment in Consolidated Financial Statements of Convertible
Preference Shares issued by Subsidiary
17 2240 Related Party Disclosures
18 2314 Consultation for Optimisation of Factory Costs
19 2316 Related Party Disclosures
20 2317 Accounting for Insurance Claim Receivable
21 2337 Non-cumulative Redeemable Preference Shares
22 2349 Classification of Units issued by Alternative Investment Fund
23 2351 Equity Investments at Fair Value through Other Comprehensive
Income
24 2411 Receivables settled with Property, Plant and Equipment
25 2521 Goodwill on Common Control Business Combination

Issue Id: 1 – Offsetting of Interest Income and Interest Expense

Issue/Query:
Can an entity offset Interest Income and Interest expense under Finance Costs?
Response:
An entity other than NBFC entity cannot offset interest income and interest expense aggregated
with Finance Costs except when required or permitted by Ind AS such as in case of hedge
accounting under Ind AS 109, Financial Instruments.
Paragraph 99 of Ind AS 1, Presentation of Financial Statements, states as follows:

“An entity shall present an analysis of expenses recognised in profit or loss using a
classification based on the nature of expense method.”
Thus, paragraph 99 of Ind AS 1 mandates analysis of expenses based on nature of expense

method. Under nature of expense analysis, the expenses and incomes are presented as per their
natural heads and are not offset on the basis of functions such as finance function where
interest income and interest expense related to finance function is offset.
Attention of the querist is also drawn to the following requirements of paragraph 32 of Ind AS
1 which prohibits offsetting of assets and liabilities or income and expenses, unless required or
permitted by an Ind AS:
“An entity shall not offset assets and liabilities or income and expenses, unless required or
permitted by an Ind AS.”
Therefore, an entity shall not offset assets and liabilities or income and expenses, unless
required or permitted by an Ind AS. Given below are examples of requirements of Ind AS on
offsetting:
1. Paragraph 42 of Ind AS 32, Financial Instruments: Presentation, requires offsetting of
financial assets and financial liabilities if the conditions specified therein are met.
2. Paragraphs 71 and 74 of Ind AS 12, Income Taxes, require offsetting of current tax assets
and current tax liabilities and deferred tax assets and deferred tax liabilities respectively if the
conditions specified therein are met.
3. Paragraph 131 of Ind AS 19, Employee Benefits, specifies when an asset relating to one plan
shall be offset against a liability relating to another plan.
4. Paragraph 116 of Ind AS 19, Employee Benefits, prohibits offsetting of reimbursement right
asset with defined benefit obligation in balance sheet but permits offsetting of income from
reimbursement right asset and expense from defined benefit obligation in profit or loss.
5. Paragraph 53 of Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets,
prohibits offsetting of reimbursement right asset and provision in balance sheet similar to
paragraph 116 of Ind AS 19. However, paragraph 54 of Ind AS 37 permits offsetting of income
from reimbursement right asset to be offset against expense relating to provision in profit or
loss.

Issue Id: 234 – Classification of Cash Flows

Facts of the case:
A Ltd. acquires buildings for rental to others and subsequently for sale. A Ltd. has classified
the cash payment made to acquire the buildings and cash receipts from sale of those buildings
as cash flows from investing activities. Cash inflows from rentals have been presented as cash
flows from operating activities.
Issue/Query:
Whether the classification of cash flows by A Ltd. in statement of cash flows is proper?
Response:
Paragraph 14 of Ind AS 7, Statement of Cash Flows, states, inter alia, as follows:
“…However, cash payments to manufacture or acquire assets for rental to others and
subsequently held for sale as described in paragraph 68A of Ind AS 16, Property, Plant and
Equipment, are cash flows from operating activities. The cash receipts from rent and
subsequent sales of such assets are also cash flows from operating activities.”
Therefore, the classification of cash flows by A Ltd. relating to buildings held for rental to
others and subsequently for sale as cash flows from investing activities is not proper. All cash
receipts and payments relating either due to the rentals or due to acquisition or construction of
those buildings or due to sale of those buildings should be classified as cash flows from
operating activities.

Issue Id: 251 – Classification of Convertible Loan by Holder

Facts of the case:
1. Lender (Holding Co) grants optionally convertible loan up-to ₹10 Lakhs to the
company (Subsidiary Co.) in one or more tranche as requested by the company within 3
days from the date of request called “disbursement date”.
2. Loan shall be repayable 3 years from the Disbursement date. Company has option to
prepay loan with all interest. Lender may demand the prepayment of loan.
3. Lender, after completion of 1 year of the tenure of the loan, at its option, by giving a
notice to company, may convert this loan into equity shares of the company.
4. Interest to be calculated 11% per annum and shall be compounded annually. Interest
shall accrue every year and will be paid on completion of the loan.
Issue/Query:
How will the lender (Holding Company) classify the loan in its separate financial statements?
Response:
Paragraph 4.1.2 of Ind AS 109, Financial Instruments, states as follows:
“A financial asset shall be measured at amortised cost if both of the following conditions are
met:
(a) the financial asset is held within a business model whose objective is to hold financial
assets in order to collect contractual cash flows and
(b) the contractual terms of the financial asset give rise on specified dates to cash flows that
are solely payments of principal and interest on the principal amount outstanding.
Paragraphs B4.1.1 - B4.1.26 provide guidance on how to apply these conditions.”
In the given case, the lender has an option to convert the loan to equity. Therefore, the
contractual terms of the loan do not give rise on specified dates to cash flows that are solely
payment of principal and interest on the principal amount outstanding. Therefore, the loan
cannot be measured at amortised cost.
Paragraph 4.1.4 of Ind AS 109 states as follows:

“A financial asset shall be measured at fair value through profit or loss unless it is measured at
amortised cost in accordance with paragraph 4.1.2 or at fair value through other
comprehensive income in accordance with paragraph 4.1.2A. However an entity may make an
irrevocable election at initial recognition for particular investments in equity instruments that
would otherwise be measured at fair value through profit or loss to present subsequent changes
in fair value in other comprehensive income (see paragraphs 5.7.5–5.7.6).”
As the loan is convertible into equity, the loan contract does not give rise to cash flows on
specified dates that are solely payments of principal and interest on the principal amount
outstanding. Therefore, neither paragraph 4.1.2 of Ind AS 109 nor paragraph 4.1.2A of Ind AS
109 are applicable to the loan contract. Accordingly, the loan will be classified and measured at
fair value through profit or loss in accordance with paragraph 4.1.4 of Ind AS 109.

Issue Id: 252 – Classification of Convertible Loan by Issuer

Facts of the case:
1. Lender (Holding Co) grants optionally convertible loan up-to ₹10 Lakhs to the
company (Subsidiary Co.) in one or more tranche as requested by the company within 3
days from the date of request called “disbursement date”.
2. Loan shall be repayable 3 years from the Disbursement date. Company has option to
prepay loan with all interest. Lender may demand the prepayment of loan.
3. Lender, after completion of 1 year of the tenure of the loan, at its option, by giving a
notice to company, may convert this loan into equity shares of the company.
4. Interest to be calculated 11% per annum and shall be compounded annually. Interest
shall accrue every year and will be paid on completion of the loan.
Issue/Query:
Is there a need to separate equity and liability component because lender has the option to
demand prepayment?
Response:
Paragraph 16 of Ind AS 32, Financial Instruments: Presentation, specifies the following
conditions for a financial instrument to be classified by the issuer as equity:
“When an issuer applies the definitions in paragraph 11 to determine whether a financial
instrument is an equity instrument rather than a financial liability, the instrument is an equity
instrument if, and only if, both conditions (a) and (b) below are met.
(a) The instrument includes no contractual obligation:
(i) to deliver cash or another financial asset to another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under conditions
that are potentially unfavourable to the issuer.
(b) If the instrument will or may be settled in the issuer’s own equity instruments, it is:
(i) a non-derivative that includes no contractual obligation for the issuer to deliver a variable
number of its own equity instruments; or
(ii) a derivative that will be settled only by the issuer exchanging a fixed amount of cash or
another financial asset for a fixed number of its own equity instruments. For this purpose,
rights, options or warrants to acquire a fixed number of the entity’s own equity instruments for
a fixed amount of any currency are equity instruments if the entity offers the rights, options or
warrants pro rata to all of its existing owners of the same class of its own non- derivative
equity instruments. Apart from the aforesaid, the equity conversion option embedded in a
convertible bond denominated in foreign currency to acquire a fixed number of the entity’s own
equity instruments is an equity instrument if the exercise price is fixed in any currency. Also, for
these purposes the issuer’s own equity instruments do not include instruments that have all the
features and meet the conditions described in paragraphs 16A and 16B or paragraphs 16C and
16D, or instruments that are contracts for the future receipt or delivery of the issuer’s own
equity instruments.
A contractual obligation, including one arising from a derivative financial instrument, that will
or may result in the future receipt or delivery of the issuer’s own equity instruments, but does
not meet conditions (a) and (b) above, is not an equity instrument. As an exception, an
instrument that meets the definition of a financial liability is classified as an equity instrument

if it has all the features and meets the conditions in paragraphs 16A and 16B or paragraphs
16C and 16D.”
In the given case, basis the limited facts submitted by the querist, the loan contract is silent on
the number of shares up to which the loan will be converted. Therefore, the equity conversion
feature in the convertible loan contract does not meet the condition mentioned in paragraph
16(b) of Ind AS 32, Financial Instruments: Presentation. Therefore, the conversion feature in
the loan contract is not an equity component.
Paragraph 28 of Ind AS 32 states as follows:

“The issuer of a non-derivative financial instrument shall evaluate the terms of the financial
instrument to determine whether it contains both a liability and an equity component. Such
components shall be classified separately as financial liabilities, financial assets or equity
instruments in accordance with paragraph 15.”
As the conversion feature does not meet the definition of equity, the convertible loan borrowed
by the subsidiary does not meet the conditions specified in paragraph 28 of Ind AS 32 for
classifying the same as compound financial instrument. Therefore, the entire convertible loan
shall be classified as financial liability.

Issue Id: 310 – Change in Depreciation Method

Facts of the case:
A Ltd. was following Written Down Value (WDV) Depreciation method since the inception of
Company and now to align as per Group Policy, Company is changing the Depreciation policy
to Straight Line Method (SLM).
Issue/Query:
Can depreciation method be changed to align with Group Policy?
Response:
Attention is drawn to the following requirements of paragraph 61 of Ind AS 16 Property, Plant
and Equipment:
“The depreciation method applied to an asset shall be reviewed at least at each financial year-
end and, if there has been a significant change in the expected pattern of consumption of the
future economic benefits embodied in the asset, the method shall be changed to reflect the
changed pattern. Such a change shall be accounted for as a change in accounting estimate in
accordance with Ind AS 8.”
It may be noted that a change from WDV to SLM method of depreciation is not a change in
accounting policy but a change in estimate under Ind AS. In this regard, attention is drawn to
the following requirements of paragraph 34 of Ind AS 8, Accounting Policies, Changes in
Accounting Estimates and Errors:
“An entity may need to change an accounting estimate if changes occur in the circumstances
on which the accounting estimate was based or as a result of new information, new
developments or more experience. By its nature, a change in an accounting estimate does not
relate to prior periods and is not the correction of an error.”
Thus, the need to change from WDV method of depreciation to SLM must be because of
change in pattern of consumption of the item of the property, plant and equipment or due to
new information or new developments or more experience on the pattern of consumption. In
the given case, the change in depreciation method is not attributable to any of the facts stated in
paragraph 34 of Ind AS 8.
Therefore, alignment of method of depreciation on group basis cannot be a justification for

changing the method of depreciation. Method of depreciation can be changed only when:
1. There has been a significant change in the expected pattern of consumption; or
2. If the previous method of depreciation was in error.

Issue Id: 313 – Accounting for Weather Insurance

Facts of the case:
A Insurance Ltd. has issued weather insurance policies. The policy requires farmers
organisation to be compensated if the rainfall in that particular village is below the long-term
average rainfall.
Issue/Query:
How to account for weather insurance policy?
Response:
To understand the accounting for the weather insurance policy as given in the case, one need to
understand the following definitions contained in Appendix A of Ind AS 104, Insurance
Contracts:
“Insurance contract
A contract under which one party (the insurer) accepts significant insurance risk from another
party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain
future event (the insured event) adversely affects the policyholder (See Appendix B for
guidance on this definition)
Insurer
The party that has an obligation under an insurance contract to compensate a policyholder if
an insured event happens
Insurance risk
Risk, other than financial risk, transferred from the holder of a contract to the issuer
Policyholder
A party that has a right to compensation under an insurance contract if an insured event
occurs
Insured event
An uncertain future event that is covered by an insurance contract and creates insurance risk
Financial risk
The risk of a possible future change in one or more of specified interest rate, financial
instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating
or credit index or other variable, provided in the case of a non-financial variable that the
variable is not specific to a party to the contract.”
In the given case, the weather insurance does not meet the definition of insurance contact. This
is because the compensation is not dependent on whether the insured event adversely affects
the farmer. The rainfall in the Village may be lower than the long-term average rainfall in the
Village. However, the farmer organisation may or may not be adversely affected by such lower
rainfall. The farmer organisation could have benefitted too. Still the farmer organisation has a
right to compensation from A Insurance Ltd. and A Insurance Ltd. cannot deny compensation
even though the organisation is not adversely affected by the insured event. Therefore, weather
insurance policies issued by A Insurance Ltd. is not an insurance contract.

Appendix A of Ind AS 109 defines a derivative as under:

“Derivative Contract
A financial instrument or other contract within the scope of this Standard with all three of the
following characteristics:
1. Its value changes in response to the change in a specified interest rate, financial
instrument price, commodity price, foreign exchange rate, index of prices or rates,
credit rating or credit index, or other variable, provided in the case of a non-financial
variable that the variable in not specific to a party to the contract (sometimes called the
‘underlying’).
2. It requires no initial net investment or an initial net investment that is smaller than
would be required for other types of contracts that would be expected to have a similar
response to changes in market factors.
3. It is settled at a future date.”
The weather insurance contract meets the definition of a derivative because the amount of
compensation, that is, value of the contract depends on rainfall index which is a non-financial
variable but is not specific to a party to the contract. Had it been specific to a party to the
contract, it could have become insurance contract. Further, the initial net investment by the
farmer is a premium which is very small as compared to the compensation to be paid. Lastly,
the settlement of the contract happens at a future date.
Therefore, the weather insurance contract would be accounted for as a derivative in accordance
with Ind AS 109, Financial Instruments, at fair value through profit or loss.

Issue Id: 321 – Determination of Effective Interest Rate

Facts of the case:
A Ltd. borrowed from B Bank a term loan of ₹10 crores with interest @8%. For the purpose, B
Bank charged processing fees of ₹100000/- and there are no other transaction costs. For A Ltd.,
the amount of ₹100000/- is immaterial. In view of the immateriality of the amount involved, A
Ltd. concludes that the effective interest rate of the term loan is 8%.
Issue/Query:
Whether the conclusion of A Ltd. that the effective interest rate is equal to the coupon interest
@8% is proper?
Response:
Paragraph 5.1.1 of Ind AS 109, Financial Instruments, states the following principles with
regard to initial measurement of financial liability:
“At initial recognition, as entity shall measure a financial asset or financial liability at its fair
values plus or minus, in the case of a financial asset or a financial liability not at fair value
through profit or loss, transaction costs that are directly attributable to the acquisition or issue
of the financial asset or financial liability.”
Appendix A of Ind AS 109 Financial Instruments defines transaction costs as under:

“Incremental costs that are directly attributable to the acquisition, issue or disposal of a
financial asset or financial liability (see paragraph B5.4.8). An incremental cost is one that
would not have been incurred if the entity had not acquired, issued or disposed of the financial
instrument.”
Therefore, the processing charges of ₹100000/- is a transaction cost. As per paragraph 5.1.1 of
Ind AS 109, the initial measurement of the loan will include the transaction cost of ₹100000/-.
Therefore, the initial measurement of the loan will be at Rs.9,99,00,000 /- and effective interest
rate will be calculated on that basis. However, the difference between the coupon rate and the
effective interest rate would be immaterial for A Ltd basis the limited facts submitted by the
querist. In this regard, attention is drawn to the following requirements of paragraphs 7 and 8
of Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors, which state as
under:
“7 When an Ind AS specifically applies to a transaction, other event or condition, the
accounting policy or policies applied to that item shall be determined by applying the Ind AS.
8 Ind ASs set out accounting policies that result in financial statements containing
relevant and reliable information about the transactions, other events or conditions to which
they apply. Those policies need not be applied when the effect of applying them is immaterial.
However, it is inappropriate to make, or leave uncorrected, immaterial departures from Ind ASs
to achieve a particular presentation of an entity’s financial position, financial performance or
cash flows.”
Therefore, the conclusion of A Ltd. that the effective interest rate is equal to the coupon interest
@8% is proper as the effect of the calculation of effective interest rate is immaterial.

Issue Id: 328 – Disclosure of Other Long-term Employee Benefits

Facts of the case:
A Ltd. provides leave encashment benefit to its employees. A Ltd. has accounted for leave
encashment as other long-term employee benefits. A Ltd. has not disclosed any information on
other long-term employee benefits claiming that Ind AS 19 does not require disclosures for
other long-term employee benefits.
Issue/Query:
Whether the claim of A Ltd. is proper?
Response:
Paragraph 158 of Ind AS 19 Employee Benefits states as under:
“158 Although this Standard does not require specific disclosures about other long-term
employee benefits, other Ind ASs may require disclosures. For example, Ind AS 24 requires
disclosures about employee benefits for key management personnel. Ind AS 1 requires
disclosure of employee benefit expense.”
Therefore, the claim of A Ltd. that Ind AS 19 does not require disclosure for other long-term
employee benefits is proper. However, it might have to peep into the disclosures required by
other standards especially Ind AS 24 Related Party Disclosures and Ind AS 1 Presentation of
Financial Statements.
Paragraph 17 of Ind AS 24 requires the following disclosure:

“An entity shall disclose key management personnel compensation in total and for each of the
following categories:
1. Short-term employee benefits;
2. Post-employment benefits;
3. Other long-term employee benefits;
4. Termination benefits; and
5. Share-based payment.”
Paragraph 112 of Ind AS 1 states as under:

“The notes shall:
1. Present information about the basis of preparation of financial statements and the
specific accounting policies used in accordance with paragraphs 117-124;
2. Disclose the information required by Ind ASs that is not presented elsewhere in the
financial statements; and
3. Provide information that is not presented elsewhere in the financial statements, but is
relevant to an understanding of any of them.”
Therefore, apart from disclosing other long-term employee benefits included in key
management personnel compensation, A Ltd. should evaluate whether not providing
disclosures of other long-term employee benefits similar to post-employment benefits impairs
understandability of financial statements. If not providing disclosures of other long-term
employee benefits similar to post-employment benefits impairs understandability of financial
statements, it should disclose the information on other long-term employee benefits to make
the financial statements understandable. It is recommended that the company discloses details

of other long-term employee benefits similar to defined benefit plans to the extent practicable
as the liability in both the cases is determined on actuarial valuation.

Issue Id: 529 – Current / Non-current Classification

Facts of the case:
A Ltd. had taken loan from B Bank. The loan as per sanction letter is payable on demand. A
Ltd. has applied to B Bank to reschedule the payments under the loan such that no amount is
payable before 30 June 2018. A Ltd. is very confident that B Bank will accept the request for
reschedulement. As on 30 April 2017, B Bank agreed to the request of A Ltd. to reschedule the
payments under the loan such that no amount is payable before 30 June 2018. A Ltd. had
classified the loan as non-current in its financial statements for the year ended on 31 March
2017 considering the request and the subsequent event of agreement by the bank not to demand
payment before 30 June 2018. A Ltd.’s board approved the financial statements on 20 May
2017.
Issue/Query:
Whether the classification by A Ltd. is proper?
Response:
Paragraph 73 of Ind AS 1 Presentation of Financial Statements clarifies that if an entity
expects, and has the discretion, to refinance or roll over an obligation for at least twelve months
after the reporting period under an existing loan facility, it classifies the obligation as non-
current, even if it would otherwise be due within a shorter period. However, when refinancing
or rolling over the obligation is not at the discretion of the entity (for example, there is no
arrangement for refinancing), the entity does not consider the potential to refinance the
obligation and classifies the obligation as current. In the given case, A Ltd. does not have the
discretion to roll over the obligation such that no amount is payable before 12 months of the
end of the reporting period. Therefore, the conditions existing on 31 March 2017 were that the
loan was payable on demand and therefore, current.
Paragraph 3 of Ind AS 10, Events after the Reporting Period, defines ‘Events after the
Reporting Period’ as follows:
“Events after the reporting period are those events, favourable and unfavourable, that occur
between the end of the reporting period and the date when the financial statements are
approved by the Board of Directors in case of a company, and, by the corresponding approving
authority in case of any other entity for issue. Two types of events can be identified:
(a) those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period).
Notwithstanding anything contained above, where there is a breach of a material provision of a

long-term loan arrangement on or before the end of the reporting period with the effect that the
liability becomes payable on demand on the reporting date, the agreement by lender before the
approval of the financial statements for issue, to not demand payment as a consequence of the
breach, shall be considered as an adjusting event.”
The event of agreement by B Bank to not to demand payment before 30 June 2018 is an event
after the reporting period because the event occurred after 31 March 2017 and before 20 May
2017. As stated above, the conditions that existed at the end of the reporting period were that

the loan was payable on demand. Therefore, the event of agreement by B Bank to not to
demand repayment before 30 June 2018 is indicative of conditions that arose after the reporting
period, that is, non-adjusting event. Further, the agreement by B Bank to not to demand
repayment before 30 June 2018 is not a relief for any breach of material provision of the loan
contract. Therefore, the non-adjusting event does not become an adjusting event.

“An entity shall not adjust the amounts recognised in its financial statements to reflect non-
adjusting events after the reporting period.”
Therefore, A Ltd. shall classify the loan as current in its financial statements for the year ended
on 31 March 2017.

Issue Id: 1276 – Interest free Rental Deposit

Facts of the case:
Company A has given Interest free deposit as security for property (building) taken on rent, in
consideration of the same discounting of such deposit is done at the prevailing market interest
rate and PV of such deposit is identified. PV of deposit will be accounted as receivable and
interest will be accrued over the period on the same.
Issue/Query:
What will be the treatment of difference between Deposit amount provided and Present value
of the Deposit given and how same will be derecognised over the period of lease.
Response:
The rental deposit provides contractual right to receive cash and therefore, meets the definition
of financial asset. Paragraph 5.1.1 of Ind AS 109, Financial Instruments, states as follows:
“Except for trade receivables within the scope of paragraph 5.1.3, at initial recognition, an
entity shall measure a financial asset or financial liability at its fair value plus or minus, in the
case of a financial asset or financial liability not at fair value through profit or loss,
transaction costs that are directly attributable to the acquisition or issue of the financial asset
or financial liability.”
Therefore, Company A has measured the security deposit at present value and accordingly, a
difference arises between the amount of deposit given and the initial measure of security
deposit at present value. Paragraph B5.1.1 of Ind AS 109 provides guidance on accounting for
the difference as follows:
“The fair value of a financial instrument at initial recognition is normally the transaction price
(ie the fair value of the consideration given or received, see also paragraph B5.1.2A and Ind
AS 113). However, if 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. For
example, the fair value of a long-term loan or receivable that carries no interest can be
measured as the present value of all future cash receipts discounted using the prevailing market
rate(s) of interest for a similar instrument (similar as to currency, term, type of interest rate
and other factors) with a similar credit rating. Any additional amount lent is an expense or a
reduction of income unless it qualifies for recognition as some other type of asset.”
Paragraph B5.1.1 of Ind AS 109 states that any additional amount lent is either an expense or a
reduction in income unless it qualifies for recognition as some other type of asset. The
difference between the deposit amount and present value of the deposit given is prepaid lease
rental. Paragraph 24 of Ind AS 116, Leases, states what the cost of the right-of-use assets shall
comprise of at the time of its initial measurement as follows:
“The cost of the right-of-use asset shall comprise:
(a) the amount of the initial measurement of the lease liability, as described in paragraph 26;
(b) any lease payments made at or before the commencement date, less any lease incentives
received;
(c) any initial direct costs incurred by the lessee; and
(d) an estimate of costs to be incurred by the lessee in dismantling and removing the underlying
asset, restoring the site on which it is located or restoring the underlying asset to the condition
required by the terms and conditions of the lease, unless those costs are incurred to produce

inventories. The lessee incurs the obligation for those costs either at the commencement date or
as a consequence of having used the underlying asset during a particular period.”
Therefore, the difference between the deposit amount and the present value of the deposit
regarded as prepaid lease rental shall be added to the cost of right-of-use asset in accordance
with paragraph 24(b) of Ind AS 116. The same shall be derecognised when the right-of-use
asset is derecognised.

Issue Id: 1277 – Accounting for Modification in terms of Preference

Shares
Facts of the case:
Company A has changed the terms to Fixed number of shares for Fixed amount per share in
2017-18 for the preference shares issued by the Company in 2014. Company is in Phase-I of
the applicability of Ind AS, that is the company transitioned to Ind AS in FY 2016-17. On date
of transition, the company has split the preference shares into debt and equity. Now in current
year due to fixed-for-fixed criteria being met, same will be converted into equity.
Issue/Query:
On change in terms of preference shares, what should be accounting treatment of debt
recognised till date on preference share and whether conversion should be of full amount to the
equity or PV of debt recognised for preference shares till date.
Response:
The querist has submitted the issue of accounting for change in terms of preference shares that
have been split into debt component and equity component, that is, accounted as compound
financial instrument. Therefore, before addressing the issue of accounting for change in terms,
we must analyse whether the split accounting by the company based on the limited facts
submitted by the querist is appropriate.
Paragraph 28 of Ind AS 32, Financial Instruments: Presentation, states as follows:

“The issuer of a non-derivative financial instrument shall evaluate the terms of the financial
instrument to determine whether it contains both a liability and an equity component. Such
components shall be classified separately as financial liabilities, financial assets or equity
instruments in accordance with paragraph 15.”
Therefore, for the preference shares to be regarded as compound financial instrument, the
preference share must have both a liability and an equity component. Paragraph 16 of Ind AS
32 explains when the instrument could be said to be equity as follows:
“When an issuer applies the definitions in paragraph 11 to determine whether a financial
instrument is an equity instrument rather than a financial liability, the instrument is an equity
instrument if, and only if, both conditions (a) and (b) below are met.
(a) The instrument includes no contractual obligation:
that are potentially unfavourable to the issuer.
(b) If the instrument will or may be settled in the issuer’s own equity instruments, it is:
(i) a non-derivative that includes no contractual obligation for the issuer to deliver a variable
number of its own equity instruments; or
(ii) a derivative that will be settled only by the issuer exchanging a fixed amount of cash or
another financial asset for a fixed number of its own equity instruments. For this purpose,
rights, options or warrants to acquire a fixed number of the entity’s own equity instruments for
a fixed amount of any currency are equity instruments if the entity offers the rights, options or
warrants pro rata to all of its existing owners of the same class of its own non-derivative equity
instruments. Apart from the aforesaid, the equity conversion option embedded in a convertible
bond denominated in foreign currency to acquire a fixed number of the entity’s own equity

instruments is an equity instrument if the exercise price is fixed in any currency. Also, for these
purposes the issuer’s own equity instruments do not include instruments that have all the
features and meet the conditions described in paragraphs 16A and 16B or paragraphs 16C and
16D, or instruments that are contracts for the future receipt or delivery of the issuer’s own
equity instruments.
A contractual obligation, including one arising from a derivative financial instrument, that will
or may result in the future receipt or delivery of the issuer’s own equity instruments, but does
not meet conditions (a) and (b) above, is not an equity instrument. As an exception, an
instrument that meets the definition of a financial liability is classified as an equity instrument
if it has all the features and meets the conditions in paragraphs 16A and 16B or paragraphs
16C and 16D.”
According to paragraph 16 of Ind AS 32, an instrument is said to be having equity component

when the instrument is convertible into fixed number of equity shares at a fixed price per share.
The querist has submitted that the terms of preference shares have been changed in 2017-18 to
fixed number of equity shares for fixed amount per share. Therefore, the preference shares did
not have that feature on transition date to Ind AS. Accordingly, basis the limited facts submitted
by the querist, the company should have classified the preference shares as financial liability
and not as compound financial instrument. By treating the preference shares as compound
financial instrument, the company has made a prior period error.
Paragraph 42 of Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors,

states as follows:
“Subject to paragraph 43, an entity shall correct material prior period errors retrospectively in
the first set of financial statements approved for issue after their discovery by:
(a) restating the comparative amounts for the prior period(s) presented in which the error
occurred; or
(b) if the error occurred before the earliest prior period presented, restating the opening
balances of assets, liabilities and equity for the earliest prior period presented.”
Therefore, the company shall rectify the error first before accounting for the extinguishment of
financial liability into equity. The company must restate the opening balance of liabilities and
equity as at the beginning of FY 2016-17. The company shall also restate the statement of
profit and loss for FY 2016-17 for the change in the financial liability on its subsequent
measurement at the end of the reporting period. The company shall disclose the details of the
error as required by paragraph 49 of Ind AS 8.
Attention of the querist is drawn to the following requirements of paragraph 40A of Ind AS 1,
Presentation of Financial Statements:
“An entity shall present a third balance sheet as at the beginning of the preceding period in
addition to the minimum comparative financial statements required in paragraph 38A if:
(a) it applies an accounting policy retrospectively, makes a retrospective restatement of items in
its financial statements or reclassifies items in its financial statements; and
(b) the retrospective application, retrospective restatement or the reclassification has a
material effect on the information in the balance sheet at the beginning of the preceding
period.”

Therefore, the company shall present three balance sheets in its financial statements for FY
2017-18 if the retrospective restatements has a material effect on the information in the balance
sheet as on 1 April 2016. The third balance sheet shall be as on 1 April 2016.
Company A has changed the terms of preference share to meet fixed for fixed condition in
paragraph 16 of Ind AS 32, Financial Instruments: Presentation. Therefore, there is a
substantial modification to the terms of preference shares.

“An exchange between an existing borrower and lender of debt instruments with substantially
different terms shall be accounted for as an extinguishment of the original financial liability
and the recognition of a new financial liability. Similarly, a substantial modification of the
terms of an existing financial liability or a part of it (whether or not attributable to the
financial difficulty of the debtor) shall be accounted for as an extinguishment of the original
financial liability and the recognition of a new financial liability.”
Therefore, Company A shall account for extinguishment of preference share liability. However,
paragraph 3.3.2 states recognition of new financial liability. It is not clear whether the
paragraph is applicable when there is no new financial liability but equity.

“The difference between the carrying amount of a financial liability (or part of a financial
liability) extinguished or transferred to another party and the consideration paid, including
any non-cash assets transferred or liabilities assumed, shall be recognised in profit or loss.”
The question is whether equity instruments that would be issued could be consideration paid
for the preference shares. Paragraph 5 of Appendix D of Ind AS 109 confirms that the issue of
equity instruments to extinguish all or part of a financial liability is consideration paid in
accordance with paragraph 3.3.3 of Ind AS 109. Paragraph 6 of Appendix D of Ind AS 109
requires that Company A shall measure the equity instruments issued to extinguish preference
shares at their fair value. In accordance with paragraph 3.3.3 of Ind AS 109, Company A shall
recognise the difference between the carrying amount of preference share liability and fair
value of equity instruments issued in profit or loss.
Till now, I discussed based on limited facts submitted by the querist and therefore, the analysis
was that the preference shares should not have been accounted as compound financial
instrument. Now assume that the dividend on the preference share is at the discretion of the
issuer. In such a case, the initial accounting by the company of preference shares as compound
financial instrument would be proper.
Company A has changed the terms of preference share to meet fixed for fixed condition in
paragraph 16 of Ind AS 32, Financial Instruments: Presentation. Therefore, there is a
substantial modification to the terms of preference shares.

“An exchange between an existing borrower and lender of debt instruments with substantially
different terms shall be accounted for as an extinguishment of the original financial liability
and the recognition of a new financial liability. Similarly, a substantial modification of the
terms of an existing financial liability or a part of it (whether or not attributable to the

financial difficulty of the debtor) shall be accounted for as an extinguishment of the original
financial liability and the recognition of a new financial liability.”
Therefore, Company A shall account for extinguishment of preference share liability. However,
paragraph 3.3.2 states recognition of new financial liability. It is not clear whether the
paragraph is applicable when there is no new financial liability but equity. Paragraph 3.3.3 of
Ind AS 109 states as follows:
“The difference between the carrying amount of a financial liability (or part of a financial
liability) extinguished or transferred to another party and the consideration paid, including
any non-cash assets transferred or liabilities assumed, shall be recognised in profit or loss.”
The question is whether equity instruments that would be issued could be consideration paid
for the preference shares. Paragraph 5 of Appendix D of Ind AS 109 confirms that the issue of
equity instruments to extinguish all or part of a financial liability is consideration paid in
accordance with paragraph 3.3.3 of Ind AS 109. Paragraph 6 of Appendix D of Ind AS 109
requires that Company A shall measure the equity instruments issued to extinguish preference
shares at their fair value. Appendix D does not provide guidance on extinguishment of financial
liabilities that were originally accounted as compound financial instrument. It might not be
appropriate to recognise the entire difference between the fair value of equity shares and the
carrying amount of the liability component in profit or loss. This is because, the instrument was
not classified entirely as liability. Company A may account as per the guidance given in
paragraph AG 33 and AG 34 of Ind AS 32 by allocating the fair value of equity shares to the
liability and equity components and recognising the difference between the carrying amount of
the financial liability and the consideration allocated to the liability component in profit or loss.

Issue Id: 1367 – Dividends on Investment in Subsidiary

Facts of the case:
H Ltd. acquired 3,000 shares in S Ltd., at a cost of ₹4,80,000 on 1st November, 20X1. The
capital of S Ltd. consisted of 5,000 shares of ₹100 each fully paid. The Statement of Profit and
Loss of this company for year ended 31st March 20X2 showed an opening balance as on
1st April 20x1 of ₹2,00,000 and profit for the year ended 31st March 20X2 of ₹2,00,000. After
the end of the year in the ensuing annual general meeting, it declared a dividend of
40%. Discuss the treatment in the books of H Ltd., in respect of the dividend.
Issue/Query:
Will the following interpretation of the same be correct?
In case it is not clearly established from all the available facts and circumstances keeping in
view the principle of substance over form that dividend has been paid out of profits as on
1st April 20x1, then it could be concluded that the profit for 20X1-20X2 alone has been utilised
to pay the dividend, and no part of the profit brought forward has been utilised for the purpose.
However, the acquisition happened on 1st November 20x1. The dividend should ideally be
proportionately bifurcated as return of capital (₹120,000 x 7/12 = reduce from the cost of
investment as per para B5.7.1 of Ind AS 109) and return on capital (₹120,000 x 5/12 = credit in
statement of profit and loss in accordance with paragraph 12 of Ind AS 27).
Response:
The query is whether dividends declared by S Ltd. need to be apportioned between return on
investment and return of investment. The requirement as to recognition of dividends under Ind
AS is given in the following paragraphs:
Paragraph 5.7.1A of Ind AS 109 Financial Instruments:
“Dividends are recognised in profit or loss only when:
a. The entity’s right to receive payment of the dividend is established;
b. It is probable that the economic benefits associated with the dividend will flow to the
entity; and
c. The amount of the dividend can be measured reliably.”
Paragraph B5.7.1 of Ind AS 109:

“Paragraph 5.7.5 permits an entity to make an irrevocable election to present in other
comprehensive income changes in the fair value of an investment in an equity investment that is
not held for trading. This election is made on an instrument-by-instrument (ie share-by-share)
basis. Amounts presented in other comprehensive income shall not be subsequently transferred
to profit or loss. However, the entity may transfer the cumulative gain or loss within equity.
Dividends on such investments are recognised in profit or loss in accordance with paragraph
5.7.6 unless the dividend clearly represents a recovery of part of the cost of the investment.”
Paragraph 12 of Ind AS 27 Separate Financial Statements:

“An entity shall recognise a dividend from a subsidiary, a joint venture or an associate in profit
or loss in its separate financial statements when its right to receive the dividend is
established.”
Paragraph 10 of Ind AS 28 Investments in Associates and Joint Ventures:

“Under the equity method, on initial recognition the investment in an associate or a joint
venture is recognised at cost, and the carrying amount is increased or decreased to recognise
the investor’s share of the profit or loss of the investee after the date of acquisition. The
investor’s share of the investee’s profit or loss is recognised in the investor’s profit or loss.
Distributions received from an investee reduce the carrying amount of the investment.
Adjustments to the carrying amount may also be necessary for changes in the investor’s
proportionate interest in the investee arising from changes in the investee’s other
comprehensive income. Such changes include those arising from the revaluation of property,
plant and equipment and from foreign exchange translation differences. The investor’s share of
those changes is recognised in the investor’s other comprehensive income (see Ind AS 1,
Presentation of Financial Statements).”
The case under consideration is of dividend from investment in subsidiary. Therefore,

paragraph 10 of Ind AS 28 is not applicable in this case. The issue that now arises is whether
all the other paragraphs, paragraph 12 of Ind AS 27, paragraph 5.7.1A and B5.7.1 of Ind AS
109 are applicable to the given case. Paragraph B5.7.1 applies to dividends from equity
investments that are measured at fair value through other comprehensive income whereas
paragraph 5.7.1A applies to all dividends arising from investments that are within the scope of
financial instruments standard.
In this regard, attention is drawn to the following requirements of paragraph 2.1(a) of Ind AS
109:
“2.1 This Standard shall be applied by all entities to all types of financial instruments
except:
a. Those interests in subsidiaries, associates and joint ventures that are accounted for in
accordance with Ind AS 110 Consolidated Financial Statements, Ind AS 27 Separate
Financial Statements or Ind AS 28 Investments in Associates and Joint Ventures.
However, in some cases Ind AS 110, Ind AS 27 or Ind AS 28 require or permit an entity
to account for an interest in a subsidiary, associate or joint venture in accordance with
some or all of the requirements of this Standard. Entities shall also apply this Standard
to derivatives on an interest in a subsidiary, associate or joint venture unless the
derivative meets the definition of an equity instrument of the entity in Ind AS 32
Financial Instruments: Presentation.”
Therefore, whether paragraph 12 of Ind AS 27 will apply or whether paragraphs 5.7.1A and
B5.7.1 will apply in the given case depends on how the investment in subsidiary S Ltd. is
accounted for in the separate financial statements of H Ltd.
In this regard, attention is drawn to the following requirements of paragraph 10 of Ind AS 27:
“When an entity prepares separate financial statements, it shall account for investments in
subsidiaries, joint ventures and associates either:
a. At cost; or
b. In accordance with Ind AS 109.
The entity shall apply the same accounting for each category of investments. Investments
accounted at cost shall be accounted for in accordance with Ind AS 105, Non-Current Assets
Held for Sale and Discontinued Operations, when they are classified as held for sale (or
included in a disposal group that is classified as held for sale). The measurement of

investments accounted for in accordance with Ind AS 109 is not changed in such
circumstances.”
The querist has not specified how the investment in subsidiary S Ltd. is being accounted for in
the separate financial statements of H Ltd. Given below is an analysis in both the cases where
the investment in subsidiary S Ltd. is measured at cost and where the investment in subsidiary
S Ltd. is measured in accordance with Ind AS 109.
Investment in subsidiary S Ltd. is measured at cost:

In such a case, paragraph 12 of Ind AS 27 will apply which requires recognition of dividends in
profit or loss. Paragraphs 5.7.1A and B5.7.1 of Ind AS 109 are not applicable as the investment
is scoped out of Ind AS 109 requirements. Therefore, in such a case, dividends will not be
apportioned into return on investment and return of investment. Entire dividend shall be
recognised in profit or loss.
Investment in subsidiary S Ltd. is measured in accordance with Ind AS 109:

In this case, paragraph 5.7.1A will be applicable which requires dividends to be recognised in
profit or loss. Therefore, if H Ltd. measures the investment at fair value through profit or loss,
both the fair value changes and dividends will be recognised in profit or loss.
If H Ltd. measures the investment at fair value and elects to recognise all fair value gains and
loss in other comprehensive income, paragraph B5.7.1 will also be applicable. In this case,
dividends will be bifurcated into return on investment and return of investment where it is very
clear that part of the dividends represent recovery of the cost of the investment. In the given
case, it is very clear that dividends have been declared out of pre-acquisition profits. Therefore,
7 months’ profits will be considered as pre-acquisition to be reduced from cost of investment
and 5 months’ profit will be considered as post-acquisition to be recognised in profit or loss.

Issue Id: 1446 – Expected Credit Losses on Trade Receivables

Facts of the case:
Company has a subsidiary in Ethiopia in which Company has investment of 54%, Company
has entered into an agreement with subsidiary to receive 2% of sales as (Manufacturing
Technical know-how and corporate consultancy fees) and 2.5% of sales as (Trademark license
fees). As on 31 Mar 2017 Company has not received both fees (4.5%) for 5 years and it is
expected that they will be able to pay fees due before 2014 in the financial year ending 31
March 2018 and balance will be paid later. In consideration of same, amount expected to
receive in the financial year ending on 21 March 2018 is classified as current and balance as
non-current receivables under previous GAAP. Company must converge given Indian GAAP
financials to IND-AS financials. Company has not made any provision on amount receivables
classified as Non-Current in Indian GAAP.
Issue/Query:
Whether while conversion, Company has to make provision for Non-Current Receivables as
per expected credit loss method and how same need to be computed.
Response:
Paragraph B8G of Ind AS 101, First-time Adoption of Indian Accounting Standards, states as
follows:
“If, at the date of transition to Ind ASs, determining whether there has been a significant
increase in credit risk since the initial recognition of a financial instrument would require
undue cost or effort, an entity shall recognise a loss allowance at an amount equal to lifetime
expected credit losses at each reporting date until that financial instrument is derecognised
(unless that financial instrument is low credit risk at a reporting date, in which case paragraph
B8F(a) applies).”
Paragraph 5.5.15 of Ind AS 109 states as under:

“Despite paragraphs 5.5.3 and 5.5.5, an entity shall always measure the loss allowance at an
amount equal to lifetime expected credit losses for:
(a) trade receivables or contract asset that result from transactions that are within the scope
of Ind AS 115, and that:
(i) do not contain a significant financing component in accordance with Ind AS 115 (or when the
entity applies the practical expedient in accordance with paragraph 63 of Ind AS 115); or
(ii) contain a significant financing component in accordance with Ind AS 115, if the entity
chooses as its accounting policy to measure the loss allowance at an amount equal to lifetime
expected credit losses. That accounting policy shall be applied to all such trade receivables or
contract assets but may be applied separately to trade receivables and contract assets.
(b) lease receivables that result from transactions that are within the scope of Ind AS 116, if the
entity chooses as its accounting policy to measure the loss allowance at an amount equal to
lifetime expected credit losses. That accounting policy shall be applied to all lease receivables
but may be applied separately to finance and operating lease receivables.”
In absence of information, it is assumed that the fees receivable do not contain any significant
financing component. The financial asset is a trade receivable having no significant financing
component for which paragraph 5.5.15 of Ind AS 109 requires measurement of the loss
allowance at an amount equal to lifetime expected credit losses. Therefore, the exception in
paragraph B8G of Ind AS 101 specified above is not applicable to the company. Accordingly,

the company must recognise an allowance for lifetime expected credit losses on the outstanding
trade receivables on the transition date.
Paragraph B5.5.35 of Ind AS 109 states as follows:

“An entity may use practical expedients when measuring expected credit losses if they are
consistent with the principles in paragraph 5.5.17. An example of a practical expedient is the
calculation of the expected credit losses on trade receivables using a provision matrix. The
entity would use its historical credit loss experience (adjusted as appropriate in accordance
with paragraphs B5.5.51–B5.5.52) for trade receivables to estimate the 12-month expected
credit losses or the lifetime expected credit losses on the financial assets as relevant. A
provision matrix might, for example, specify fixed provision rates depending on the number of
days that a trade receivable is past due (for example, 1 per cent if not past due, 2 per cent if
less than 30 days past due, 3 per cent if more than 30 days but less than 90 days past due, 20
per cent if 90–180 days past due etc). Depending on the diversity of its customer base, the
entity would use appropriate groupings if its historical credit loss experience shows
significantly different loss patterns for different customer segments. Examples of criteria that
might be used to group assets include geographical region, product type, customer rating,
collateral or trade credit insurance and type of customer (such as wholesale or retail).”
Therefore, the company shall determine the lifetime expected credit losses on trade receivables
as per the guidance given in paragraph B5.5.35 of Ind AS 109 on transition date and reduce the
carrying amount of the trade receivable by the expected credit loss allowance so determined.
In the given case, the company has not received the amount receivable since last 5 years.
Paragraph B5.5.37 of Ind AS 109 states as follows:
“When defining default for the purposes of determining the risk of a default occurring, an
entity shall apply a default definition that is consistent with the definition used for internal
credit risk management purposes for the relevant financial instrument and consider qualitative
indicators (for example, financial covenants) when appropriate. However, there is a rebuttable
presumption that default does not occur later than when a financial asset is 90 days past due
unless an entity has reasonable and supportable information to demonstrate that a more
lagging default criterion is more appropriate. The definition of default used for these purposes
shall be applied consistently to all financial instruments unless information becomes available
that demonstrates that another default definition is more appropriate for a particular financial
instrument.”
If the company has not rebutted the presumption of 90 days past due as definition of default,
the fees receivable being 90 days past due shall be disclosed under the category of credit-
impaired trade receivables.
Paragraph 35F(b) of Ind AS 107, Financial Instruments: Disclosures, states as follows:

“An entity shall explain its credit risk management practices and how they relate to the
recognition and measurement of expected credit losses. To meet this objective an entity shall
disclose information that enables users of financial statements to understand and evaluate:
(b) an entity’s definitions of default, including the reasons for selecting those definitions;”

Therefore, where the company does not agree with the rebuttable presumption of 90 days past
due contained in paragraph B5.5.37 of Ind AS 109, the company shall disclose its definition of
default, including the reasons for the selection of such a definition.
Attention of the querist is drawn to the following requirements of paragraph 68 of Ind AS 1,

Presentation of Financial Statements:
“The operating cycle of an entity is the time between the acquisition of assets for processing
and their realisation in cash or cash equivalents. When the entity’s normal operating cycle is
not clearly identifiable, it is assumed to be twelve months. Current assets include assets (such
as inventories and trade receivables) that are sold, consumed or realised as part of the normal
operating cycle even when they are not expected to be realised within twelve months after the
reporting period. Current assets also include assets held primarily for the purpose of trading
(examples include some financial assets that meet the definition of held for trading in Ind AS
109) and the current portion of non-current financial assets.”
The trade receivables are already past due. Therefore, though the company expects to receive
twelve months after the reporting period, the trade receivable shall be classified as current.
Accordingly, no amount of the fees receivable shall be classified as non-current.

Issue Id: 1447 – Processing Fees on Floating Rate Loan

Facts of the case:
Company has taken term loans from bank and interest rates are linked with Base rate
determined by the bank. Company has incurred transaction cost (Processing charges) while
taking such loan and same is accounted as expense in Indian GAAP / Previous GAAP. As
Company has to move to IND-AS, it has to defer processing fees over the period of loan. Being
a floating interest loan, it is not possible to determine EIR.
Issue/Query:
How processing cost on such loan should be amortised.
Response:
The issue under consideration is how the processing fees on a floating rate liability is to be
amortised on transition to Ind AS. In this regard, attention is drawn to the following definition
of ‘material’ as contained in paragraph 7 of Ind AS 1, Presentation of Financial Statements:
“Information is material if omitting, misstating or obscuring it could reasonably be expected to
influence decisions that the primary users of general purpose financial statements make on the
basis of those financial statements, which provide financial information about a specific
reporting entity.
Materiality depends on the nature or magnitude of information, or both. An entity assesses

whether information, either individually or in combination with other information, is material
in the context of its financial statements taken as a whole.
Information is obscured if it is communicated in a way that would have a similar effect for
primary users of financial statements to omitting or misstating that information. The following
are examples of circumstances that may result in material information being obscured:-
a. information regarding a material item, transaction or other event is disclosed in the
financial statements but the language used is vague or unclear;
b. information regarding a material item, transaction or other event is scattered
throughout the financial statements;
c. dissimilar items, transactions or other events are inappropriately aggregated;
d. similar items, transactions or other events are inappropriately disaggregated; and
e. the understandability of the financial statements is reduced as a result of material
information being hidden by immaterial information to the extent that a primary user is
unable to determine what information is material.
Assessing whether information could reasonably be expected to influence decisions made by

the primary users of a specific reporting entity’s general purpose financial statements requires
an entity to consider the characteristics of those users while also considering the entity’s own
circumstances.
Many existing and potential investors, lenders and other creditors cannot require reporting
entities to provide information directly to them and must rely on general purpose financial
statements for much of the financial information they need. Consequently, they are the primary
users to whom general purpose financial statements are directed. Financial statements are
prepared for users who have a reasonable knowledge of business and economic activities and
who review and analyse the information diligently. At times, even well-informed and diligent

users may need to seek the aid of an adviser to understand information about complex
economic phenomena.”
Continuing the discussion on materiality, attention is drawn to the explanations given in

paragraph 8 of Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors, as
under:
“Ind ASs set out accounting policies that result in financial statements containing relevant and
reliable information about the transactions, other events and conditions to which they apply.
Those policies need not be applied when the effect of applying them is immaterial. However, it
is inappropriate to make, or leave uncorrected immaterial departures from Ind ASs to achieve a
particular presentation of an entity’s financial position, financial performance or cash flows.”
Paragraph B5.4.5 of Ind AS 109, Financial Instruments, states regarding determining effective
interest rate for a floating rate liability as under:
“B5.4.5 For floating-rate financial assets and floating-rate financial liabilities, periodic
re-estimation of cash flows to reflect the movements in the market rates of interest alters the
effective interest rate. If a floating-rate financial asset or a floating-rate financial liability is
recognised initially at an amount equal to the principal receivable or payable on maturity, re-
estimating the future interest payments normally has no significant effect on the carrying
amount of the asset or the liability.”
Therefore, the company is required to estimate the forward interest curve applicable for that
loan liability to calculate effective interest rate. There could be two scenarios:
1. The processing fees is not material, as is normally the case – Based on the definition of
material contained in Ind AS 1 and the explanation given in paragraph 8 of Ind AS 8,
processing fees need not to be adjusted to the initial fair value of the floating rate loan.
2. The processing fees is material – Based on the definition contained in Ind AS 1 and the
explanation given in paragraph 8 of Ind AS 8, processing fees are required to be
adjusted to the initial fair value of the floating rate loan liability.
Scenario 1:
Here there are two possibilities:
1. Not adjust the loan liability for the processing fees on the transition date. In this case,
no adjustment to retained earnings will be required.
2. Amortise the processing fees on a straight-line basis over the term of the loan liability.
In this case, the unamortised processing fees as on the transition date will be recognised
in retained earnings in accordance with paragraph 11 of Ind AS 101, First-time
Adoption of Indian Accounting Standards, which states as follows:
The accounting policies that an entity uses in its opening Ind AS Balance Sheet may
differ from those that it used for the same date using its previous GAAP. The resulting
adjustments arise from events and transactions before the date of transition to Ind ASs.
Therefore, an entity shall recognise those adjustments directly in retained earnings (or,
if appropriate, another category of equity) at the date of transition to Ind ASs.
Scenario 2:
The company must calculate amortised cost of the floating-rate liability based on forward
interest curves including the processing fees as a transaction cost and recognise the difference

between the amortised cost of the loan liability measured on effective interest method based on
forward interest curves and the carrying amount as per previous GAAP in retained earnings.
In this regard, attention is drawn to the following exception to retrospective application of

effective interest method in paragraph B8C of Ind AS 101:
“If it is impracticable (as defined in Ind AS 8) for an entity to apply retrospectively the effective
interest method in Ind AS 109, the fair value of the financial asset or the financial liability at
the date of transition to Ind ASs shall be the new gross carrying amount of that financial asset
or the new amortised cost of that financial liability at the date of transition to Ind ASs.”
Paragraph 5 of Ind AS 8 defines ‘Impracticable’ as follows:

“Applying a requirement is impracticable when the entity cannot apply it after making every
reasonable effort to do so. For a particular prior period, it is impracticable to apply a change
in an accounting policy retrospectively or to make a retrospective restatement to correct an
error if:
(a) the effects of the retrospective application or retrospective restatement are not
determinable;
(b) the retrospective application or retrospective restatement requires assumptions about what
management’s intent would have been in that period; or
(c) the retrospective application or retrospective restatement requires significant estimates of
amounts and it is impossible to distinguish objectively information about those estimates that:
(i) provides evidence of circumstances that existed on the date(s) as at which those amounts are
to be recognised, measured or disclosed; and
(ii) would have been available when the financial statements for that prior period were
approved for issue from other information.”
The company might not have gathered the information on forward interest curves at the
inception of the floating rate loan under previous GAAP and therefore retrospective application
of effective interest method on floating rate loan liability may be impracticable without use of
hindsight. In such a case, the company must fair value the floating rate loan liability at the date
of transition to Ind AS which shall be new amortised cost of that floating rate loan liability at
the date of transition. No separate accounting or amortisation of processing fees is required.
The difference between the new amortised cost of the floating rate loan liability and the
carrying amount as per previous GAAP shall be recognised in retained earnings in accordance
with paragraph 11 of Ind AS 101.

Issue Id: 1632 – Employee Benefits as Intangible Assets

Facts of the case:
An Indian Company having a subsidiary in Mexico. As per law in Mexico, some companies are
under the provisions of National Labour Union and have to compensate their workers as per
rate decided by the union, which is higher as compared to the normal market rate. Due to which
Company was incurring labour cost equal to 15%-16% of revenue. Whereas if company does
not pay according to the rate decided by the union labour, the cost would reduce by 50%. The
Company has taken a step to come out of the provisions of such National Labour Union with
the help of the Govt. Accordingly they have retired all the employees of the company on a
particular day and paid all the dues to the workers along with retirement benefit and
compensation.
Now, as per new dispensation agreement, the company has the sole prerogative to employ
work force at lower rate. The company is going to enjoy this benefit till perpetuity.
Now the total amount paid by the Company to the workers is treated as intangible assets as it is
going to realise benefits for the Mexico Company. The Auditor of the Company has also
accepted this view.
Issue/Query:
You are requested to please give your valuable input; whether the treatment being done by the
company is correct since this company will be consolidated in India as per Ind AS.
Response:
Paragraph 8 of Ind AS 19 Employee Benefits contains the definition of various terms used in
the Standard. The term ‘termination benefit’ is defined as under:
“Termination benefits are employee benefits provided in exchange for the termination of an
employee’s employment as a result of either:
(a) an entity’s decision to terminate an employee’s employment before the normal retirement
date; or
(b) an employee’s decision to accept an offer of benefits in exchange for the termination of
employment.”
Therefore, the amount paid by the subsidiary company in Mexico for termination of the
employment of employees is an employee benefit as defined in Ind AS 19.

“An entity shall recognise a liability and expense for termination benefits at the earlier of the
following dates:
(a) when the entity can no longer withdraw the offer of those benefits; and
(b) when the entity recognises costs for a restructuring that is within the scope of Ind AS 37 and
involves the payment of termination benefits.”
The company has no control over the saving in costs generated on termination of employees.
Therefore, the termination benefits must be recognised as an expense in profit or loss and cannot
be recognised as an intangible asset.

Issue Id: 2104 – Treatment in Consolidated Financial Statements of

Convertible Preference Shares issued by Subsidiary
Facts of the case:
A Ltd.is Subsidiary Company of B Ltd ( B Ltd holds 80% Stake in A ltd), A Ltd has issued
Preference Shares to B Ltd only excluding other minority shareholders. In Ind AS convergence,
Preference shares issued is split in debt and equity component, and similarly in holding
Company also investment is split in Debt and equity component.
Issue/Query:
Whether the Equity Component calculated on Preference Shares which are 100% issued to B
Ltd need to be allocated to NCI (Minority Interest) in consolidation and how the Elimination
entry need to be passed in Consolidated Financial Statements for the same.
Response:
In absence of details, the following example is being considered for the purpose:
A Ltd. issues 100 convertible preference share of Rs.100 each to its parent B Ltd. Of the
Rs.10000 consideration, Rs.8000 is the fair value of the liability component and Rs.2000 is the
equity component of the convertible preference shares. Therefore, the following will be the
extract of the individual financial statements of A Ltd.:
Assets 10000
Liabilities 8000
Equity 2000
The querist has stated that in holding company B Ltd.’s books too, the investment in preference
shares of subsidiary is split into debt and equity component. Attention is drawn to the
requirements of paragraph 4.1.4 of Ind AS 109:
“4.1.4 A financial asset shall be measured at fair value through profit or loss unless it is
measured at amortised cost in accordance with paragraph 4.1.2 or at fair value through other
comprehensive income in accordance with paragraph 4.1.2A. However, an entity may make an
irrevocable election at initial recognition for particular investments in equity instruments that
would otherwise be measured at fair value through profit or loss to present subsequent changes
in fair value in other comprehensive income (see paragraphs 5.7.5 – 5.7.6).”
An investment in convertible preference share does not have contractual terms that give rise on
specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding. Therefore, it will be measured at fair value through profit or loss in
accordance with paragraph 4.1.4. Accordingly, the measurement by B Ltd. of splitting the
investment in debt and equity is not proper. For the purpose of illustrating the consolidation
entries, let us assume that the fair value of the convertible preference share is Rs.9000 on
transition date. Therefore, following will be extract of B Ltd. separate financial statements:
Assets 9000
Liabilities 10000
Equity -1000

Paragraph B86 of Ind AS 110 Consolidated Financial Statements provide guidance on

preparation of consolidated financial statements as under:
“B86 Consolidated financial statements:
a. combine like items of assets, liabilities, equity, income, expenses and cash flows of the
parent with those of its subsidiaries;
b. offset (eliminate) the carrying amount of the parent’s investment in each subsidiary and
the parent’s portion of equity of each subsidiary (Ind AS 103 explains how to account
for any related goodwill);
c. eliminate in full intragroup assets and liabilities, equity, income, expenses and cash
flows relating to transactions between entries of the group (profits or losses resulting
from intragroup transactions that are recognised in assets, such as inventory and fixed
assets, are eliminated in full). Intragroup losses may indicate an impairment that
requires recognition in the consolidated financial statements. Ind AS 12 Income Taxes
applies to temporary differences that arise from the elimination of profits and losses
resulting from intragroup transactions.”
Given below is the extract of balance sheet after step (a) of paragraph B86 of Ind AS 110:
Assets 19000
Liabilities 18000
Equity 1000
In absence of details, it is assumed that step (b) of paragraph B86 of Ind AS 110 is already
done. Moving on to step (c) of paragraph B86 of Ind AS 110, the following elimination entries
will be passed:
Sr. No. Particulars Debit Credit
Investment in Preference Shares of Subsidiary A
1 1000
Ltd. account dr.
To Retained Earnings account 1000
(Being fair value loss recognised on investment
in preference shares of subsidiary recognised in
separate financial statements eliminated in
consolidated financial statements)
Equity component of preference shares issued
2 2000
to parent B Ltd. account dr.
To Preference Shares Liability account 2000
(Being the split of preference share liability and
equity component in individual financial
statement of subsidiary eliminated in
consolidated financial statement to the extent of
preference shares held by the parent A Ltd.)
3 Preference Shares Liability account dr. 10000
To Investment in Preference Shares 10000
(Being inter-company issue of preference shares
to parent A Ltd. recognised in individual
financial statements of subsidiary B Ltd. and
investment in preference shares of subsidiary B
Ltd. recognised in separate financial statements

Sr. No. Particulars Debit Credit

of B Ltd. eliminated in consolidated financial
statements)
An extract of the consolidated financial statements after the above elimination entries is given
below:
Assets (19000 + 1000 – 10000) 10000
Liabilities (18000 + 2000 – 10000) 10000
Equity (1000 – 2000 + 1000) 0

Issue Id: 2240 – Related Party Disclosures

Facts of the case:
Entity P Limited has a controlling interest in subsidiaries SA Limited and SB Limited
and SC Limited. SC Limited is a subsidiary of SB Limited. P Limited also has
significant influence over associates A1 Limited and A2 Limited. Subsidiary SC Limited has
significant influence over associate A3 Limited
Issue/Query:
Examine related party relationships of A1 A2 and A3.
Response:
Paragraph 9 of Ind AS 24 Related Party Disclosures defines the term “Related Party” as under:
“A related party is a person or entity that is related to the entity that is preparing its financial
statements (in this Standard referred to as the ‘reporting entity’)
a. A person or a close member of that person’s family is related to a reporting entity if that
person:
i. Has control or joint control of the reporting entity;
ii. Has significant influence over the reporting entity; or
iii. Is a member of the key management personnel of the reporting entity or of a
parent of the reporting entity.
b. An entity is related to a reporting entity if any of the following condition applies;
i. The entity and the reporting entity are members of the same group (which means
that each, parent, subsidiary and fellow subsidiary is related to the others.
ii. One entity is an associate of joint venture of the other entity (or an associate or
joint venture of a member of a group of which the other entity is a member)
iii. Both entities are joint ventures of the same third party.
iv. One entity is a joint venture of a third entity and the other entity is an associate
of the third entity.
v. The entity is a post-employment benefit plan for the benefit of employees of
either the reporting entity or an entity related to the reporting entity. If the
reporting entity is itself such a plan, the sponsoring employers are also related
to the reporting entity.
vi. The entity is controlled or jointly controlled by a person identified in (a).
vii. A person identified in (a)(i) has significant influence over the entity or is a
member of the key management personnel of the entity (or of a parent of the
entity).
viii. The entity or any member of a group of which it is a part, provides key
management personnel services to the reporting entity or to the parent of the
reporting entity.
Therefore, associates of an entity or of a member of the group are not related to one another.
Accordingly, no related party relationship exists between A1 Limited, A2 Limited and A3
Limited.
• In the individual financial statements of A1 Limited:
P Limited, SA Limited, SB Limited and SC Limited are related parties
• In the individual financial statement of A2 Limited:

• In the individual financial statements of A3 Limited:


Issue Id: 2314 – Consultation for Optimisation of Factory Costs

Facts of the case:
A company enters into an agreement with XYZ consultancy for optimizing the factory costs.
XYZ shall charge an amount of 10 crore and shall take it all as advance, then for 9 months the
consultancy shall review the companys structure etc. After completion of 9 months the next 12
months company shall seek viability of the consultancy on monthly basis and post completion
of 12 months it shall be able to take refund of any saving amount less than 10 crores, ie : if the
management comes to a conclusion that saving is just of 6 crores, company shall receive a
refund of 4cr from the consultancy and if the saving is more than the cost there is no liability of
the company.
My opinion.
Treating the consultancy payment as advance and amortize the same in 9 months of their
research. Later on, when we shall come to conclusion after 12 months of any receivable we
shall treat it as income.
Issue/Query:
Kindly comment.
Response:
The querist has inquired about the accounting for the service of factory costs optimization
received by the company from XYZ Consultancy. The contract is success based, that is, the
transaction price for the contract is limited to the extent of the costs optimised. However, a cap
to the transaction price has been kept of ₹10 crores. The querist has expressed a view that the
amount paid as advance may be amortised over the period XYZ Consultancy performs the
services, that is, over the period of 9 months. For such accounting, the company should be
receiving and consuming the benefits as XYZ Consultancy performs its services or XYZ
Consultancy should be transferring control to the company over time.
Paragraph 35 of Ind AS 115, Revenue from Contracts with Customers, states as follows:
“An entity transfers control of a good or service over time and, therefore, satisfies a
performance obligation and recognises revenue over time, if one of the following criteria is
met:
(a) the customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs (see paragraphs B3–B4);
(b) the entity’s performance creates or enhances an asset (for example, work in progress) that
the customer controls as the asset is created or enhanced (see paragraph B5); or
(c) the entity’s performance does not create an asset with an alternative use to the entity (see
paragraph 36) and the entity has an enforceable right to payment for performance completed
to date (see paragraph 37).”
Paragraph B3 and B4 of Ind AS 115 provide guidance on simultaneous receipt and

consumption of benefits of the entity’s performance obligation by its customer (Here entity is
XYZ consultancy and customer is company)
“B3 For some types of performance obligations, the assessment of whether a customer
receives the benefit of an entity’s performance as the entity performs and simultaneously
consumes those benefits as they are received will be straightforward. Examples include routine

or recurring services (such as a cleaning service) in which the receipt and simultaneous
consumption by the customer of the benefits of the entity’s performance can be readily
identified.
B4 For other types of performance obligation, an entity may not be able to readily identify
whether a customer simultaneously receives and consumes the benefits from the entity’s
performance as the entity performs. In those circumstances, a performance obligation is
satisfied over time if an entity determines that another entity would not need to substantially re-
perform the work that the entity has completed to date if that other entity were to fulfil the
remaining performance obligation to the customer. In determining whether another entity
would not need to substantially reperform the work the entity has completed to date, an entity
shall make both of the following assumptions:
a. Disregard potential contractual restrictions or practical limitations that otherwise
would prevent the entity from transferring the remaining performance obligations to
another entity; and
b. Presume that another entity fulfilling the remainder of the performance obligation
would not have the benefit of any asset that is presently controlled by the entity and that
would remain controlled by the entity if the performance obligation were to transfer to
another entity.”
In the given case, it is not readily identifiable as to whether the company simultaneously
receives and consumes the benefits from XYZ’s performance. Further, if another entity is
required to perform after partial performance by XYZ Consultancy, that another entity will
have to start the study from scratch. Therefore, the conditions in paragraph B4 of Ind AS 115
are not met. Further, in absence of sufficient facts, an informed judgement on other conditions
in paragraph 35 of Ind AS 115 cannot be made.

If a performance obligation is not satisfied over time in accordance with paragraphs 35–37, an
entity satisfies the performance obligation at a point in time…
Hence, XYZ Consultancy will recognise the revenue at a point in time. The point of time is the
moment when XYZ Consultancy finishes its study, that is, at the end of 9 months. The
company shall also start recognising the expense from that moment.
The company shall recognise the amount of Rs.10 crores as Advance for Services at inception
of the contract. From 10th month, the company shall recognise consultancy expense to the
extent of costs saved at the end of every month subject to a cap of Rs.10 crores in aggregate. At
the end of the twelfth month, the company would have recognised expenses to the extent of the
cost saved and the amount that is remaining in advance, if any, will be received as refund.
Therefore, the consultancy payment cannot be amortised as the company is not simultaneously
receiving and consuming the benefits as XYZ Consultancy performs its services.

Issue Id: 2316 – Related Party Disclosures

Facts of the case:
Mr. X has a 100% investment in A Limited. He is also a member of the key management
personnel (KMP) of B Limited. B Limited has a 100% investment in C Limited.
Issue/Query:
Examine related party relationships from the perspective of C Limited for A Limited
Response:
As per the facts of the case, Mr. X has 100% investment in A Ltd. Therefore, Mr. X has, in
absence of details on contractual arrangement, control over A Limited. Mr. X is a key
management personnel of B Ltd.
Paragraph 9 of Ind AS 24 Related Party Disclosure defines the term “key management
personnel” as under:
“Key management personnel are those persons having authority and responsibility for
planning, directing and controlling the activities of the entity directly or indirectly, including
any director (whether executive or not).”
Paragraph 3 of Ind AS 28 defines the term significant influence as under:

“Significant influence is the power to participate in the financial and operating policy
decisions of the investee but is not control or joint control of those policies.”
Therefore, a key management personnel has significant influence over the entity. Accordingly,
Mr. X has significant influence over B Limited.
Paragraph 9(vii) identifies the following relationship as related parties:

“A person identified in (a)(i) has significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the entity)”
From A Limited’s perspective, that is, if A Limited is a reporting entity, B Ltd. is related to A
Ltd. as Mr. X having control over A Limited has significant influence over B Ltd.
B Ltd. has, in absence of details of any contractual arrangements, control over C
Limited. Therefore, if A Ltd. is a reporting entity, C Ltd. is related to A Ltd. as a key
management personnel of parent of B Limited has control over A Limited. Accordingly, the
relationship of C ltd. and A Ltd. from the perspective of C Ltd. will be:
Entities controlled by key management personnel of the Parent.

Issue Id: 2317 – Accounting for Insurance Claim Receivable

Issue/Query:
Accounting of Insurance claim receivable under Ind AS, when goods are lost.
Response:
The querist has asked about the accounting for insurance claim receivable. An insurance claim
receivable is a contractual right to receive cash and therefore, is a financial asset. Below is
given accounting for insurance claim receivable from recognition to derecognition.
Ind AS 2, Inventories, does not contain requirements relating compensation for loss of
inventory. Paragraphs 10-12 of Ind AS 8, Accounting Policies, Changes in Accounting
Estimates and Errors, provides the guidance for accounting in the absence of an Ind AS that
specifically applies to a transaction, other event or condition as follows:
“10 In the absence of an Ind AS that specifically applies to a transaction, other event or
condition, management shall use its judgement in developing and applying an accounting
policy that results in information that is:
(a) relevant to the economic decision-making needs of users; and
(b) reliable, in that the financial statements:
(i) represent faithfully the financial position, financial performance and cash flows of the
entity;
(ii) reflect the economic substance of transactions, other events and conditions, and not merely
the legal form;
(iii) are neutral, ie free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
11 In making the judgement described in paragraph 10, management shall refer to, and
consider the applicability of, the following sources in descending order:
(a) the requirements in Ind ASs dealing with similar and related issues; and
(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income
and expenses in the Conceptual Framework for Financial Reporting under Indian Accounting
Standards (Conceptual Framework) issued by the Institute of Chartered Accountants of India.
12 In making the judgement described in paragraph 10, management may also first consider
the most recent pronouncements of International Accounting Standards Board and in absence
thereof those of the other standard-setting bodies that use a similar conceptual framework to
develop accounting standards, other accounting literature and accepted industry practices, to
the extent that these do not conflict with the sources in paragraph 11.”
Paragraph 65 and 66 of Ind AS 16, Property, Plant and Equipment provide the guidance on
accounting for compensation received from third parties for items of property, plant and
equipment that were impaired, lost or given up. In accordance with the requirement of
paragraph 11 of Ind AS 8, the company shall apply those requirements.
Paragraph 65 of Ind AS 16, Property, Plant and Equipment, states as follows:

“Compensation from third parties for items of property, plant and equipment that were
impaired, lost or given up shall be included in profit or loss when the compensation becomes
receivable.”


“Impairments or losses of items of property, plant and equipment, related claims for or
payments of compensation from third parties and any subsequent purchase or construction of
replacement assets are separate economic events and are accounted for separately as follows:
(a) impairments of items of property, plant and equipment are recognised in accordance with
Ind AS 36;
(b) derecognition of items of property, plant and equipment retired or disposed of is determined
in accordance with this Standard;
(c) compensation from third parties for items of property, plant and equipment that were
impaired, lost or given up is included in determining profit or loss when it becomes receivable;
and
(d) the cost of items of property, plant and equipment restored, purchased or constructed as
replacements is determined in accordance with this Standard.”
Therefore, the loss of goods is not offset against the insurance claim. The loss of goods is
recognised the moment the loss occurs.
Paragraph 3.1.1 of Ind AS 109, Financial Instruments, states as under on recognition of

financial assets:
“An entity shall recognise a financial asset or a financial liability in its balance sheet when,
and only when, the entity becomes party to the contractual provisions of the instrument. When
an entity first recognises a financial asset, it shall classify it in accordance with paragraphs
4.1.1-4.1.5 and measure it in accordance with paragraphs 5.1.1-5.1.3. when an entity first
recognises a financial liability, it shall classify it in accordance with paragraphs 4.2.1 and
4.2.2 and measure it in accordance with paragraph 5.1.1.”
Therefore, an insurance claim receivable is recognised when the right to receive arises, that is,
when the claim is duly lodged with the insurer.
Paragraph 4.1.1 of Ind AS 109 states as under on classification of financial assets:

“Unless paragraph 4.1.5 applies, an entity shall classify financial assets as subsequently
measured at amortised cost, fair value through other comprehensive income or fair value
through profit or loss on the basis of both:
a. The entity’s business model for managing the financial assets; and
b. The contractual cash flow characteristics of the financial asset.”
In absence of any further details, it is assumed that the entity holds the insurance claim
receivable to collect contractual cash flows. The contractual cash flow characteristics of an
insurance claim receivable resemble that of a basic lending arrangement comprising solely
principal and interest payments.
Paragraph 4.1.2 states the following on classification of a financial asset:

“A financial asset shall be measured at amortised cost if both of the following conditions are
met:
a. The financial asset is held within a business model whose objective is to hold financial
assets in order to collect contractual cash flows; and
b. The contractual terms of the financial asset give rise on specified dates to cash flows that
are solely payments of principal and interest on the principal amount outstanding.

Paragraphs B4.1.1 – B4.1.26 provide guidance on how to apply these conditions.”
Therefore, an insurance claim receivable meets both the conditions of paragraph 4.1.2 of Ind
AS 109. Accordingly, an insurance claim receivable will be classified as measured at amortised
cost.
Paragraph 5.1.1 states as under on initial measurement of financial asset:

“At initial recognition, an entity shall measure a financial asset or financial liability at its fair
value plus or minus, in the case of a financial asset or financial liability not at fair value
through profit or loss, transaction costs that are directly attributable to the acquisition or issue
of the financial asset or financial liability.”
Appendix A of Ind AS 109 defines transaction cost as under:

“Incremental costs that are directly attributable to the acquisition, issue or disposal of a
financial asset or financial liability (see paragraph B5.4.8). An incremental cost is one that
would not have been incurred if the entity had not acquired, issued or disposed of the financial
instrument.”
Fair value of insurance claim receivable is the present value of the amount expected to be
received along with transaction costs incurred in the lodging of such claim. For measurement
of the present value of the amount expected to the received as insurance income, the company
shall apply the requirements in paragraph 56 and 57 of Ind AS 115 on constraining estimates of
variable consideration considering the requirement of paragraph 11 of Ind AS 8 discussed
earlier.
Paragraph 5.2.1 of Ind AS 109 states as under on subsequent measurement of financial asset:
“5.2.1 After initial recognition, an entity shall measure a financial asset in accordance with
paragraph 4.1.1-4.1.5 at:
a. Amortised cost;
b. Fair value through other comprehensive income
c. Fair value through profit or loss.”
Therefore, the insurance claim receivable shall be subsequently measured at amortised cost.
Paragraph 5.2.2 of Ind AS 109 states as under:

“5.2.2 An entity shall apply the impairment requirements in Section 5.5 to financial assets that
are measured at amortised cost in accordance with paragraph 4.1.2 and to financial assets that
are measured at fair value through other comprehensive in come in accordance with paragraph
4.1.2A.”
Paragraph 5.5.1 states the following with regard to impairment:

“5.5.1 An entity shall recognise a loss allowance for expected credit losses on a financial
asset that is measured in accordance with paragraphs 4.1.2 or 4.1.2A, a lease receivable, a
contract asset or a loan commitment and a financial guarantee contract to which the
impairment requirements apply in accordance with paragraphs 2.1(g), 4.2.1(c) or 4.2.1(d).”
Therefore, a loss allowance should be recognised for insurance claim receivable at an amount
equal to lifetime or 12-month expected credit losses.

Paragraph 3.2.3 of Ind AS 109 states as under on derecognition of financial asset:

“3.2.3 An entity shall derecognise a financial asset when, and only when:
a. The contractual rights to the cash flows from the financial asset expire; or
b. It transfers the financial asset as set out in paragraph 3.2.4 and 3.2.5 and the transfer
qualifies for derecognition in accordance with paragraph 3.2.6.
(See paragraph 3.1.2 for regular way sales of financial assets).”
The contractual rights to the cash flows from insurance claim receivable expires:
a. On realisation of insurance claim; or
b. On dismissal of insurance claim by insurer
Therefore, the insurance claim receivable shall be derecognised when any one of the above two
condition become applicable.

Issue Id: 2337 – Non-cumulative Redeemable Preference Shares

Issue/Query:
Can a company treat Redeemable non-cumulative Preference shares having dividend at
discretion of company and company having no past record of giving dividend since inception
of term of preference shares I.e. 15 years as compound Financial instrument, when equity
shareholders are majority holders of preference shares And motive of issuing preference share
instead of issuing equity shares was to save issue costs and compliances
Response:
The classification of financial instrument into financial liability and equity is done based on the
contractual terms of the financial instrument. In the given case, the preference shares are non-
cumulative redeemable preference shares having dividend at discretion of the company.
Therefore, the cash flows characteristics of the preference shares resemble that of a compound
financial instrument with the dividend cash flow being equity component and principal cash
flow on redemption being liability component. Therefore, the preference shares will be treated
as compound financial instrument even though the equity shareholders are the majority holders
of preference shares and motive of issuing preference share instead of equity shares was to save
issue costs and compliances.

Issue Id: 2349 – Classification of units issued by Alternative

Investment Fund
Facts of the case:
There is an Alternative investment which collects capital contribution from investors and till
the time units are not allotted they show the funds received from investors as a liability. But as
per our understanding the substance of the transaction is equity and hence amount received
should be shown under unitholder's fund.
Issue/Query:
How the same should be accounted in Balance sheet as per relevant standards till the time unit
are not allotted?
Response:
Paragraph 11 of Ind AS 32, Financial Instruments: Presentation, defines ‘puttable instrument’
as follows:
“A puttable instrument is a financial instrument that gives the holder the right to put the
instrument back to the issuer for cash or another financial asset or is automatically put back to
the issuer on the occurrence of an uncertain future event or the death or retirement of the
instrument holder.”
In absence of any details on the cash flow characteristics of the units of the Alternative
Investment Fund, it is assumed that they are puttable instruments.
Paragraph 11 of Ind AS 32 defines ‘financial liability’ as follows:

“A financial liability is any liability that is:
(a) a contractual obligation :
that are potentially unfavourable to the entity; or
(b) a contract that will or may be settled in the entity's own equity instruments and is:
(i) a non-derivative for which the entity is or may be obliged to deliver a variable number of
the entity's own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash
or another financial asset for a fixed number of the entity's own equity instruments. For this
purpose, rights, options or warrants to acquire a fixed number of the entity's own equity
instruments for a fixed amount of any currency are equity instruments if the entity offers the
rights, options or warrants pro rata to all of its existing owners of the same class of its own
non-derivative equity instruments. Apart from the aforesaid, the equity conversion option
embedded in a convertible bond denominated in foreign currency to acquire a fixed number of
the entity's own equity instruments is an equity instrument if the exercise price is fixed in any
currency. Also, for these purposes the entity's own equity instruments do not include puttable
financial instruments that are classified as equity instruments in accordance with paragraphs
16A and 16B, instruments that impose on the entity an obligation to deliver to another party a
pro rata share of the net assets of the entity only on liquidation and are classified as equity
instruments in accordance with paragraphs 16C and 16D, or instruments that are contracts for
the future receipt or delivery of the entity's own equity instruments.

As an exception, an instrument that meets the definition of a financial liability is classified as

an equity instrument if it has all the features and meets the conditions in paragraphs 16A and
16B or paragraphs 16C and 16D.”
Puttable instruments are financial liabilities as per the definition of financial liabilities given in
paragraph 11 of Ind AS 32 above. However, if such puttable instruments have required features
that meet the conditions in paragraphs 16A and 16B, they are classified as equity. The
classification is done on the date the Alternative Investment Fund starts accepting cash or
issues units, whichever is earlier.

“The issuer of a financial instrument shall classify the instrument, or its component parts, on
initial recognition as a financial liability, a financial asset or an equity instrument in
accordance with the substance of the contractual arrangement and the definitions of a
financial liability, a financial asset and an equity instrument.”
The querist may refer the contractual terms based on which such classification is being done. If
there is nothing in the contract to evidence that the instrument before being issued is financial
liability and after issuing units is equity, the classification by the fund will not be proper.
Paragraph 5 of Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors,

defines ‘prior period error’ as follows:
“Prior period errors are omissions from, and misstatements in, the entity’s financial statements
for one or more prior periods arising from a failure to use, or misuse of, reliable information
that:
(a) was available when financial statements for those periods were approved for issue; and
(b) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud.”
Where the classification by the fund is not proper, the classification done will be regarded as
prior period error as per the definition given in para 5 of Ind AS 8 above. Paragraph 42 of Ind
AS 8 states as follows:
“Subject to paragraph 43, an entity shall correct material prior period errors retrospectively in
the first set of financial statements approved for issue after their discovery by:
(a) restating the comparative amounts for the prior period(s) presented in which the error
occurred; or
(b) if the error occurred before the earliest prior period presented, restating the opening
balances of assets, liabilities and equity for the earliest prior period presented.”
Accordingly, where the effect of the rectification of prior period error is material the fund shall
rectify the error retrospectively in accordance with paragraph 42 of Ind AS 8 reproduced above.

Issue Id: 2351 – Equity Investments at Fair Value through Other

Comprehensive Income
Facts of the case:
Equity instruments initially measured at fair value through Other comprehensive Income.
Issue/Query:
Whether any gain/loss on disposal of equity instruments initially measured at fair value through
Other comprehensive Income will be transferred to Statement of Profit/Loss or Other
Comprehensive Income?
Response:
The querist has asked about the recognition of the gain / loss on disposal of equity instruments
that are measured at fair value through other comprehensive income. Paragraph 5.7.1 of Ind AS
109 Financial Instruments provides the following guidance on recognition of gain or loss on a
financial asset or financial liability that is measured at fair value as under:
“5.7.1 A gain or loss on financial asset or financial liability that is measured at fair value
shall be recognised in profit or loss unless:
(a)It is part of a hedging relationship (see paragraphs 6.5.8 – 6.5.14);
(b)It is an investment in an equity instrument and the entity has elected to present gains and
losses on that investment in other comprehensive income in accordance with paragraph 5.7.5;
(c)It is a financial liability designated as a fair value through profit or loss and the entity is
required to present the effects of changes in the liability’s credit risk in other comprehensive
income in accordance with paragraph 5.7.7; or
(d)It is a financial asset measured at fair value through other comprehensive income in
accordance with paragraph 4.1.2A and the entity is required to recognise some changes in fair
value in other comprehensive income in accordance with paragraph 5.7.10.”
Paragraph 5.7.5 of Ind AS 109 states as under for investments in equity instruments:
“5.7.5 At initial recognition, an entity may make an irrevocable election to present in
other comprehensive income subsequent changes in the fair value of an investment in an equity
instrument within the scope of this Standard that is neither held for trading nor contingent
consideration recognised by an acquirer in a business combination to which Ind AS 103
applies. (See paragraph B5.7.3 for guidance on foreign exchange gains or losses).”
Therefore, any gain or loss on a financial asset that is an investment in an equity instrument
and the entity has elected to present subsequent changes in fair value of that investment in
other comprehensive income shall be recognised in other comprehensive income including any
gain or loss on disposal of that investment.

Issue Id: 2411 – Receivable settled with Property, Plant and

Equipment
Facts of the case:
There is a Joint Venture (JV) A which has two JV partners A & B who are required to
contribute ₹100 in JV as an obligation. A has given his share of ₹100 in cash, however B has
given an asset in lieu of his contribution of ₹100 whose carrying amount in B’s books is ₹90.
Issue/Query:
How would JV A account for the contribution which it has received from B in its books of
accounts i.e. at Fair value or at carrying amount of the asset received? If JV A would account
this transaction at fair value, then who will do its valuation i.e. a registered valuer as per the
Companies (Registered Valuers and Valuation) Rules, 2017 or any valuer can do its valuation?
Response:
From the facts of the case, the following can be gathered:
1. There is a joint venture entity JVA
2. JVA has two joint venturers, A and B
3. JVA has an outstanding receivable from both A and B
4. A settles the receivable by cash
5. B settles the receivable by contributing property, plant and equipment
6. The query is how to account for such contribution in the books of JVA which is receiving
property, plant and equipment in lieu of cash.
Paragraphs 24 to 26 of Ind AS 16 Property, Plant and Equipment provide the required guidance
on measuring the cost of an item of property, plant and equipment in case of exchange of assets
as under:
“24 One of more items of property, plant and equipment may be acquired in exchange for a
non-monetary asset or assets, or a combination of monetary and non-monetary assets. The
following discussion refers simply to an exchange of one non-monetary asset for another, but it
also applies to all exchanges described in the preceding sentence. The cost of such an item of
property, plant and equipment is measured at fair value unless
(a)The exchange lacks commercial substance; or
(b)The fair value of neither the asset received, nor the asset given up is reliably measurable.
The acquired item is measured in this way even if an entity cannot immediately derecognise the
asset given up. If the acquired item is not measured at fair value, its cost is measured at the
carrying amount of the asset given up.
25 An entity determines whether an exchange transaction has commercial substance by

considering the extent to which its future cash flows are expected to change as a result of the
transaction. An exchange transaction has commercial substance if:
(a)The configuration (risk, timing and amount) of the cash flows of the asset received differs
from the configuration of the cash flows of the asset transferred; or
(b)The entity-specific value of the portion of the entity’s operations affected by the transaction
changes as a result of the exchange; and
(c)The difference in (a) or (b) is significant relative to the fair value of the assets exchanged.

For the purpose of determining whether an exchange transaction has commercial substance,
the entity-specific value of the portion of the entity’s operations affected by the transaction
shall reflect post-tax cash flows. The result of these analyses may be clear without an entity
having to perform detailed calculations.
26 The fair value of an asset is reliably measurable if

(a)The variability in the range of reasonable fair value measurements is not significant for that
asset; or
(b)The probabilities of the various estimates within the range can be reliably assessed and used
when measuring fair value.
If an entity is able to measure reliably the fair value of either the asset received or the asset
given up, then the fair value of the asset given up is used to measure the cost of the asset
received unless the fair value of the asset received is more clearly evident.”
Therefore, the JVA must measure the item of property, plant and equipment received in lieu of
cash at its fair value. The difference between the fair value of the item of property, plant and
equipment and the carrying amount of receivable from A would be recognised as a gain or loss
in profit or loss.
The query as to whether the valuation is required to be done by a registered valuer as per the
Companies (Registered Valuers and Valuation) Rules, 2017 or any valuer, relates to application
of requirements of Companies Act, 2013 rather than notified Ind AS. Therefore, the querist is
recommended to seek the help of an expert on company law in this regard.

Issue Id: 2521 – Goodwill on Common Control Business

Combination
Facts of the case:
In the month of May 2017, Company A completed a 100% acquisition of Company X and
incorporated the same as a 100% subsidiary under its group. This acquisition resulted in
recognition of goodwill.
During September 2017, Company X was merged into Company A under pooling of interests
method.
Under pooling of interests method, all the assets and liabilities of Company X was merged into
Company A.
Goodwill was adjusted against the reserves of Company A.
Issue/Query:
Is it appropriate to adjust goodwill upon acquisition against the reserves of the Company A
upon merger of a subsidiary under Ind-AS?
Response:
As per the facts submitted by the querist, Company A completed 100% acquisition of Company
X resulting in recognition of Goodwill. In absence of details, it is assumed that Company X
and Company A are businesses as defined in Appendix A of Ind AS 103 Business
Combinations. The acquisition happened on May 2017. During September 2017, Company X
was merged into Company A under pooling of interests method. Appendix C of Ind AS 103
defines common control business combinations as under:
“Common control business combinations means a business combination involving entities or
businesses in which all the combining entities or businesses are ultimately controlled by the
same party or parties both before and after the business combination, and that control is not
transitory.”
Assuming that the control of Company A over Company X is not transitory, the merger of
Company X into Company A is a business combination under common control. Paragraphs 8 to
12 of Appendix C of Ind AS 103 specify the method of accounting for common control
business combinations of which the paragraph relevant to the case under consideration is
paragraph 9 which states as under:
“9 The pooling of interests method is considered to involve the following:
i. The assets and liabilities of the combining entities are reflected at their carrying
amounts.
ii. No adjustments are made to reflect fair values, or recognise any new assets or
liabilities. The only adjustments that are made are to harmonise accounting policies.
iii. The financial information in the financial statements in respect of prior periods should
be restated as if the business combination had occurred from the beginning of the
preceding period in the financial statements, irrespective of the actual date of the
combination. However, if business combination had occurred after that date, the prior
period information shall be restated only from that date.”
On acquisition of Company X, Goodwill is recognised in the consolidated financial statements

of Company A Group and not the separate financial statements of Company A. Basis the
limited facts, it is assumed that Company A has only one subsidiary Company X and no

associate or joint venture. The merger of Company X into Company A would mean that
Company A has no subsidiary and therefore, need not prepare consolidated financial
statements. Thus, the merger of Company X into Company A shall be accounted in individual
financial statements of Company A which do not contain any Goodwill. Therefore, the question
of adjusting Goodwill to reserves does not arise.
It seems that Company A has pushed down the assets and liabilities recognised in consolidated
financial statements into its individual financial statements. Paragraph 9(i) of Appendix C of
Ind AS 103 requires assets and liabilities of combining entities to be reflected at their carrying
amounts. Entities that are combining are Company X and Company A. It may be noted that
paragraph 9(i) of Appendix C of Ind AS 103 does not require recognition of assets and
liabilities of the combined entities or assets and liabilities from consolidated financial
statements of the parent. Accordingly, such push down accounting is not permitted by
Appendix C of Ind AS 103.
There could be situations where push down accounting provides better information of the
financial position of the combining entities. However, in absence of permission of push down
accounting by Appendix C of Ind AS 103, I do not agree to the adjustment of Goodwill into
reserves.
The question of adjustment of Goodwill does not arise as the merger is required to be
accounted in individual financial statements of Company A by combining assets and liabilities
of Company A and Company X. The merger of Company X into Company A cannot be
accounted by pushing down the assets and liabilities recognised in consolidated financial
statements of Company A Group to individual financial statements of Company A.

Section II – 25 Examples of Non-compliance with Ind AS

Sr. Video Link Title of the Non-compliance example
No.
1 https://youtu.be/0hUqu6Q_rFs Non-compliance of Ind AS 1
2 https://youtu.be/CROOR0DJyhw Non-compliance of Ind AS 1 and Schedule
III to the Companies Act, 2013
3 https://youtu.be/jdq9vKtQ5aM Non-compliance of Ind AS 7
4 https://youtu.be/PgjFaSr3Ppg Non-compliance of Ind AS 7
5 https://youtu.be/WzTikkU8XR0 Non-compliance of Ind AS 1
6 https://youtu.be/F438pGLUvS0 Non-compliance of Ind AS 1 and Ind AS 20
7 https://youtu.be/AHc8FfXFbKg Non-compliance of Ind AS 1
8 https://youtu.be/Dwk-0feq99w Non-compliance of Ind AS 109
9 https://youtu.be/ABV7l8W_tnk Non-compliance of Ind AS 1 and Schedule
10 https://youtu.be/GkaYvC_44tQ Non-compliance of Ind AS 115
11 https://youtu.be/Tk5zsC7OiQs Non-compliance of Ind AS 1 and Schedule
12 https://youtu.be/Xllws7hBbx8 Non-compliance of Ind AS 12
13 https://youtu.be/zpRuNiN9HoE Non-compliance of Ind AS 1 and Ind AS 7
14 https://youtu.be/vedKwR3LPnU Non-compliance of Ind AS 7
15 https://youtu.be/pwkYumS1-Fc Non-compliance of Ind AS 1
16 https://youtu.be/YtzZ8rZ_3Hg Non-compliance of Ind AS 7 and Ind AS 16
17 https://youtu.be/0_afDNGS24U Non-compliance of Ind AS 1 and Schedule
18 https://youtu.be/yTB6bU942_Y Non-compliance of Ind AS 1
19 https://youtu.be/6-qC59MFSr4 Non-compliance of Ind AS 27
20 https://youtu.be/Hd681nSKZZk Non-compliance of Ind AS 1
21 https://youtu.be/XyDMF2_I7YQ Non-compliance of Ind AS 16
22 https://youtu.be/y1vz__vQE3U Non-compliance of Ind AS 1
23 https://youtu.be/b9-ES-dK4Ko Non-compliance of Ind AS 16
24 https://youtu.be/NX3zOCBX7dI Non-compliance of Ind AS 12
25 https://youtu.be/Dzqj0Wjm3F8 Non-compliance of Ind AS 1 and Ind AS 16

Example 1 – Non-compliance of Ind AS 1

What has the Company Reported:
Observations:
“An entity shall present a statement of changes in equity as required by paragraph 10. The
statement of changes in equity includes the following information:
(a) total comprehensive income for the period, showing separately the total amounts
attributable to owners of the parent and to non-controlling interests;
(b) for each component of equity, the effects of retrospective application or retrospective
restatement recognised in accordance with Ind AS 8;
(c) [Refer Appendix 1]
(d) for each component of equity, a reconciliation between the carrying amount at the
beginning and the end of the period, separately (as a minimum) disclosing changes resulting
from:
(i) profit or loss;
(ii) other comprehensive income;
(iii)transactions with owners in their capacity as owners, showing separately contributions
by and distributions to owners and changes in ownership interests in subsidiaries that do not
result in a loss of control; and
(iv) any item recognised directly in equity such as amount recognised directly in equity as
capital reserve with paragraph 36A of Ind AS 103.”
Having known the requirements of Ind AS 1 on presentation of Statement of Changes in

Equity, let us understand how a listed company has applied the same. The picture shows the
Other Equity section of the Statement of Changes in Equity presented by a listed company.
The company has presented a reconciliation of opening and closing balance of each
component of other equity by reporting changes on account of amalgamation as adjustment to
opening balance, profit for the year, each item of other comprehensive income recognised
during the year, dividends to shareholders, income tax on those dividends and transfer to

general reserve. From the Other Equity section of Statement of Change in Equity presented
by the company, it is observed that the company has not separately disclosed transactions
with owners in their capacity as owners, showing separately distributions to owners required
by paragraph 106(d)(iii) of Ind AS 1. Due to this, the Statement of Changes in Equity has not
been presented in accordance with Ind AS 1.

Example 2 – Non-compliance of Ind AS 1 and Schedule III to the

Companies Act, 2013
Observations:
Clause 8 of General Instructions for the Preparation and Presentation of Financial Statements
of a Company required to comply with Ind AS of Division II and Division III of Schedule III
to the Companies Act, 2013 states as follows:
“For the purpose of this Schedule, the terms used herein shall have the same meanings
assigned to them in Indian Accounting Standards.”
Therefore, if some item is considered as cash equivalent, that item must be aggregated with
cash equivalent unless required by Ind AS otherwise.
Having read the requirements of Schedule III with respect to the aggregation of items, let us
understand how a listed company has applied the same. The picture shows the components of
cash and cash equivalents disclosed by a listed company in notes to statement of cash flows.
The company has regarded investment in liquid mutual funds as cash equivalent. However,
the company has aggregated investment in liquid mutual funds with current investments
instead of cash and cash equivalents. Paragraph 54 of Ind AS 1, Presentation of Financial
Statements, states investments accounted for using the equity method as one of the line items
in Balance Sheet. Apart from that line item, there is no line item on investments in paragraph
54 of Ind AS 1. Thus, the line item of ‘investments’ is a creation of Schedule III to the
Companies Act, 2013. Schedule III does not define ‘investments’. Therefore, if the company
considered an investment as cash equivalent, the company should have aggregated with cash
and cash equivalents. Accordingly, the company has not complied with the requirements of
Schedule III to the Companies Act, 2013. The company has also considered bank overdrafts
as cash equivalents. Therefore, one may argue that as per the view expressed above, the
company should have aggregated bank overdrafts with cash equivalents. I do not agree with
that argument because bank overdraft is a financial liability whereas cash and cash equivalent
is a financial asset. Unless the requirements of offsetting of financial assets and financial
liabilities given in paragraph 42 of Ind AS 32, Financial Instruments: Presentation, are met,

bank overdrafts cannot be aggregated with cash equivalents though considered as component
of cash equivalents.
Paragraph 7 of Ind AS 1 explains obscuring information. One of the examples of

circumstances that may result in material information being obscured is dissimilar items,
transactions or other events are inappropriately aggregated. In the given case, the company
has inappropriately aggregated cash equivalent with investment. Therefore, the company has
presented the balance sheet and notes in an obscuring manner.


Observations:
Paragraph 44A of Ind AS 7 states as follows:
“An entity shall provide disclosures that enable users of financial statements to evaluate
changes in liabilities arising from financing activities, including both changes arising from
cash flows and non-cash changes.”
Paragraph 44A of Ind AS 7 requires a company to provide disclosures that enable users of
financial statements to evaluate changes in liabilities arising from financing activities,
including both changes arising from cash flows and non-cash changes.
Paragraph 44D of Ind AS 7 states as follows:

“One way to fulfil the disclosure requirement in paragraph 44A is by providing a
reconciliation between the opening and closing balances in the balance sheet for liabilities
arising from financing activities, including the changes identified in paragraph 44B. Where
an entity discloses such a reconciliation, it shall provide sufficient information to enable
users of the financial statements to link items included in the reconciliation to the balance
sheet and the statement of cash flows.”
Paragraph 44D of Ind AS 7 explains that one way to fulfil the disclosure requirement in
paragraph 44A is by providing a reconciliation between the opening and closing balances in
the balance sheet for liabilities arising from financing activities, including the changes
identified in paragraph 44B. Paragraph 44D clearly states that where an entity discloses such
a reconciliation, it shall provide sufficient information to enable users of the financial
statements to link items included in the reconciliation to the balance sheet and the statement
of cash flows.
Having read the requirements of 44D of Ind AS 7, let us understand how a listed company
has applied the same. The picture shows what the company has reported in cash flows from
financing activities for the current year ended 31 March 2018 and the statement reconciling
opening and closing balances of Non-current, Other financial liabilities and Current
borrowings showing separately cash and non-cash changes. The company has presented

repayment of non-current borrowings in cash flows from financing activities. However, no

change in non-current borrowings due to cash payment is reported in the reconciliation
statement. The cash outflow due to repayment of non-current borrowings seems to have been
reported in the reconciliation as an outflow of Other financial liabilities. The company has
reported cash outflows from changes in acceptances on net basis, payment of finance costs,
payment of dividend and dividend tax. However, the reconciliation does not report those cash
outflows. The reconciliation has reported an outflow from current borrowings whereas the
said amount is not found in cash flows from financing activities. Thus, the company has not
provided sufficient information to enable users of the financial statements to link items
included in the reconciliation to the statement of cash flows as required by paragraph 44D of
Ind AS 7. Accordingly, the company has not complied with the requirements of paragraph
44D of Ind AS 7.


Observations:
Paragraph 44A of Ind AS 7 requires a company to provide disclosures that enable users of
financial statements to evaluate changes in liabilities arising from financing activities,
including both changes arising from cash flows and non-cash changes. The question that
arises is changes of which liabilities are to be disclosed as arising from financing activities.
Paragraph 44C of Ind AS 7 explains that liabilities arising from financing activities are
liabilities for which cash flows were, or future cash flows will be, classified in the statement
of cash flows as cash flows from financing activities. Therefore, a company needs to look at
the reporting of cash flows from financing activities in the Statement of Cash Flows to
determine changes in which liabilities need to be disclosed under paragraph 44A of Ind AS 7.
There could be cash flows of financial liabilities that are not reported as cash flows from
financing activities. For example, bank overdraft is considered as a component of cash and
cash equivalent. In such a case, bank overdraft will be reported as current borrowings
whereas the cash flows of the same will not be reported as cash flows from financing
activities. The cash flows of such bank overdrafts will not form part of disclosure of changes
in liabilities arising from financing activities.
Having read the requirements of 44C of Ind AS 7, let us understand how a listed company has
applied the same. The picture shows three tables. The first table is disclosure of components
of cash and cash equivalents wherein bank overdraft has been considered as one of the
components. The second table shows the note on borrowings wherein the company has
disclosed bank overdrafts as current borrowings. The third table shows the disclosure of
changes in liabilities arising from financing activities. It is observed that the company has

disclosed movement in bank overdraft considered as a component of cash and cash

equivalent in changes in liabilities arising from financing activities. Thus, the company has
not disclosed the reconciliation as per the explanation given in paragraph 44C of Ind AS 7.
Accordingly, the company has not complied with the requirements of paragraph 44A and 44C
of Ind AS 7.


Observations:
The picture shows the accounting policy on impairment disclosed by the company. The
policy is on impairment of assets other than financial assets. This can be concluded only after
reading the policy. The heading suggests the policy is on impairment of all assets including
financial assets. In the policy, the company has stated that impairment losses are recognised
in the Statement of Profit and Loss and included in the depreciation and amortization
expense. In our view, this presentation policy is not in accordance with Ind AS 1.
Ind AS 36 defines impairment loss as the amount by which the carrying amount of an asset or
cash-generating unit exceeds its recoverable amount. Ind AS 16 and Ind AS 38 contain
definitions of depreciation and amortisation. Depreciation and amortisation have been
defined as the systematic allocation of the carrying amount of an asset over its useful life.
Therefore, the nature of impairment differs from that of depreciation and amortisation
expense. Paragraph 99 of Ind AS 1 requires analysis of expenses to be presented in
accordance with only nature of expense method. Therefore, the company is required to
present impairment loss separately from depreciation and amortisation expense. Paragraph
30A of Ind AS 1 states that a company shall not reduce understandability of financial
statements by aggregating material items of different natures. Thus, the company by
aggregating impairment with depreciation and amortisation has reduced the understandability
of financial statements. Paragraph 7 of Ind AS 1 considers aggregation of dissimilar items as
obscuring information. Therefore, the company has not complied with the requirements of
paragraphs 30A and 99 of Ind AS 1 and has presented obscuring information in the Statement
of Profit and Loss.

Example 6 – Non-compliance of Ind AS 1 and Ind AS 20

The Company has received refundable government loans at below-market rate of interest
which are accounted in accordance with the recognition and measurement principles of Ind
AS 109, Financial Instruments. The benefit of below market rate of interest is measured as
the difference between the initial carrying value of loan determined in accordance with Ind
AS 109 and the proceeds received. It is recognized as income when there is a reasonable
assurance that the Company will comply with all necessary conditions attached to the loans.
Income from such benefit is recognized on a systematic basis over the period in which the
related costs that are intended to be compensated by such grants are recognized.
Presentation:
Income from the above grants and subsidies are presented under Revenue from Operations.
Observations:
An extract of the accounting policy published by a listed company on government grants has
been given. The company recognises income from the grant under Revenue from Operations.
In our view, this presentation is not in accordance with paragraph 29 of Ind AS 20 which
states as follows:
“Grants related to income are presented as part of profit or loss, either separately or under a
general heading such as ‘Other income’; alternatively, they are deducted in reporting the
related expense.”
Thus, paragraph 29 of Ind AS 20 provides the following policy choices for presentation of
grants related to income:
1. as a separate line item;
2. under a general heading of ‘Other Income’; or
3. deducted in reporting the related expense.
Therefore, the company may present the grant related to below market rate loan either
separately in profit or loss or aggregate the same with Other Income or reduce the finance
costs. However, the company has aggregated the same with Revenue from Operations.
Therefore, the company has not complied with the requirements of Ind AS 20.
Paragraph 7 of Ind AS 1 describes ‘obscuring information as follows:

“Information is obscured if it is communicated in a way that would have a similar effect for
primary users of financial statements to omitting or misstating that information. The
following are examples of circumstances that may result in material information being
obscured: -
(a) information regarding a material item, transaction or other event is disclosed in the
financial statements but the language used is vague or unclear;
(b) information regarding a material item, transaction or other event is scattered throughout
the financial statements;
(c) dissimilar items, transactions or other events are inappropriately aggregated;
(d) similar items, transactions or other events are inappropriately disaggregated; and

(e) the understandability of the financial statements is reduced as a result of material

information being hidden by immaterial information to the extent that a primary user is
unable to determine what information is material.”
The company has aggregated government grants related to below market loan with Revenue
from Operations and thus, has provided obscuring information. Accordingly, the company has
not complied with Ind AS 1. Due to this, Statement of Profit and Loss and Notes have been
impacted.


Critical accounting estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at
the reporting date, that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year, are described below:
a. Income taxes
The Company’s tax jurisdiction is India. Significant judgements are involved in estimating
budgeted profits for the purpose of paying advance tax, determining the provision for income
taxes, including amount expected to be paid/recovered for uncertain tax positions (Refer note
18).
b. Business combinations and intangible assets
Business combinations are accounted for using IND AS 103, Business Combinations. IND
AS 103 requires the identifiable intangible assets and contingent consideration to be fair
valued in order to ascertain the net fair value of identifiable assets, liabilities and contingent
liabilities of the acquiree. Significant estimates are required to be made in determining the
value of contingent consideration and intangible assets. These valuations are conducted by
independent valuation experts.
c. Property, plant and equipment
Property, plant and equipment represent a significant proportion of the asset base of the
Company. The charge in respect of periodic depreciation is derived after determining an
estimate of an asset’s expected useful life and the expected residual value at the end of its life.
The useful lives and residual values of Company’s assets are determined by the management
at the time the asset is acquired and reviewed periodically, including at each financial year
end. The lives are based on historical experience with similar assets as well as anticipation of
future events, which may impact their life, such as changes in technical or commercial
obsolescence arising from changes or improvements in production or from a change in
market demand of the product or service output of the asset.
d. Impairment of Goodwill
Goodwill is tested for impairment on an annual basis and whenever there is an indication that
the recoverable amount of a cash generating unit is less than its carrying amount based on a
number of factors including operating results, business plans, future cash flows and economic
conditions. The recoverable amount of cash generating units is determined based on higher of
value-in-use and fair value less cost to sell. The goodwill impairment test is performed at the
level of the cash generating unit or groups of cash-generating units which are benefitting
from the synergies of the acquisition and which represents the lowest level at which goodwill
is monitored for internal management purposes. Market related information and estimates are
used to determine the recoverable amount. Key assumptions on which management has based
its determination of recoverable amount include estimated long term growth rates, weighted
average cost of capital and estimated operating margins. Cash flow projections take into
account past experience and represent management’s best estimate about future
developments.
e. Defined Benefit Obligation
The costs of providing pensions and other post-employment benefits are charged to the
Statement of Profit and Loss in accordance with IND AS 19 ‘Employee benefits’ over the
period during which benefit is derived from the employees’ services. The costs are assessed

on the basis of assumptions selected by the management. These assumptions include salary
escalation rate, discount rates, expected rate of return on assets and mortality rates. The same
is disclosed in Note 39, ‘Employee benefits’.
f. Fair value measurement of financial instruments
When the fair values of financial assets and financial liabilities recorded in the balance sheet
cannot be measured based on quoted prices in active markets, their fair value is measured
using valuation techniques, including the discounted cash flow model, which involve various
judgements and assumptions.
Observations:
A note on critical accounting estimates and assumptions disclosed by a listed company has
been reproduced. Paragraph 125 of Ind AS 1 states as follows:
“An entity shall disclose information about the assumptions it makes about the future, and
other major sources of estimation uncertainty at the end of the reporting period, that have a
significant risk of resulting in a material adjustment to the carrying amounts of assets and
liabilities within the next financial year. In respect of those assets and liabilities, the notes
shall include details of:
(a) their nature, and
(b) their carrying amount as at the end of the reporting period.”

“Sometimes it is impracticable to disclose the extent of the possible effects of an assumption
or another source of estimation uncertainty at the end of the reporting period. In such cases,
the entity discloses that it is reasonably possible, on the basis of existing knowledge, that
outcomes within the next financial year that are different from the assumption could require a
material adjustment to the carrying amount of the asset or liability affected. In all cases, the
entity discloses the nature and carrying amount of the specific asset or liability (or class of
assets or liabilities) affected by the assumption.”
The company has not disclosed the carrying amount of the specific asset or liability (or
classes of assets or liabilities) affected by the assumption in the note on critical accounting
estimates and assumptions. In such a case, the company could have complied with the
requirements of paragraph 125 and 131 of Ind AS 1 by cross-referencing any other note that
discloses the carrying amount of the specific asset or liability (or class of assets or liabilities)
affected by the assumption. The company has cross-referenced only in case of income taxes
and defined benefit obligation. Thus, the company has not disclosed the carrying amount of
the assets and liabilities affected by the assumption in all cases. Accordingly, the company
has not complied with Ind AS 1. Due to this, notes have been impacted.


Observations:
A listed company in its published financial statements has aggregated interest accrued on
investments in debentures or bonds measured at Fair Value Through Other Comprehensive
Income with Other Financial Assets. In our view, this is not in accordance with Ind AS 109.
Para 5.7.11 of Ind AS 109 explains that if a financial asset is measured at fair value through
other comprehensive income in accordance with para 4.1.2A, the amounts that are recognised
in profit or loss are the same as the amounts that would have been recognised in profit or loss
if the financial asset had been measured at amortised cost. Therefore, a financial asset
measured at FVOCI in accordance with para 4.1.2A follows dual measurement model. The
financial asset is measured at fair value in balance sheet whereas in profit or loss, interest is
recognised based on effective interest method. First, the financial asset is measured at
amortised cost which includes interest accrued. The effective interest on the financial asset is
recognised in profit or loss. Second, the amortised cost is compared with fair value at the end
of the reporting period. The financial asset is remeasured at fair value and the difference
between the amortised cost and fair value is recognised in OCI. Therefore, the aggregation of
interest accrued with other financial assets is not proper for financial assets measured at fair
value through other comprehensive income in accordance with para 4.1.2A of Ind AS 109.
This indicates that the balance sheet of the company carries more than the fair value of the
financial asset. Therefore, the company has not complied with Ind AS 109. Due to this non-
compliance, all components of financial statements except statement of cash flows have been
impacted.


Companies Act, 2013
Observations:
A listed company in its published financial statements has presented the equity share capital
section of the Statement of Changes in Equity as shown in the picture above. In our view, the
presentation is not in compliance with Ind AS 1 and Schedule III to the Companies Act, 2013.
Para 79 of Ind AS 1 requires disclosure of details of equity share capital either in the Balance
Sheet or in the Statement of Changes in Equity or in the Notes. I have not observed any
company disclosing the details required by para 79 in Balance Sheet. The company has also
not disclosed the details in the Statement of Changes in Equity. Therefore, a reader having
reasonable knowledge of applicable financial reporting standards will assume the company
would have disclosed the same in notes. Para 113 of Ind AS 1 requires each item in the
balance sheet, in the statement of profit and loss, in the statement of changes in equity and of
cash flows to be cross-referenced to related information in the notes. Clause 4(ii) of General
Instructions for Preparation and Presentation of Financial Statements of a Company required
to comply with Ind AS of Division II and Division III of Schedule III to the Companies Act,
2013 also require the same except that Schedule III is silent on cash flows. Anyways the
requirements of Ind AS prevails over the requirements of Schedule III. The company has not
cross-referenced the equity share capital section of the Statement of Changes in Equity to the
note disclosing the details required by para 79 of Ind AS 1. Therefore, the company has not
complied with the requirements of Ind AS 1 and Schedule III to the Companies Act, 2013.


Observations:
A listed company in its published financial statements has presented the note reconciling
gross revenue with revenue from contracts with customers. In our view, this disclosure is not
in accordance with Ind AS 115.
Paragraph 126AA of Ind AS 115 states as follows:

“An entity shall reconcile the amount of revenue recognised in the statement of profit and loss
with the contracted price showing separately each of the adjustments made to the contract
price, for example, on account of discounts, rebates, refunds, credits, price concessions,
incentives, performance bonuses, etc., specifying the nature and amount of each such
adjustment separately.”
Para 126AA of Ind AS 115 requires an entity to reconcile the amount of revenue recognised
in the statement of profit and loss with the contracted price showing separately each of the
adjustments made to the contract price, for example, on account of discounts, rebates,
refunds, incentives etc. specifying nature and amount of each such adjustment separately. The
company has reconciled gross revenue with net revenue recognised from contracts with
customers. Contracted price is not gross revenue. The concept of gross and net comes in case
of principal and agent relationships. Thus, the company has misled the users of financial
statements by reporting higher revenue than permitted by Ind AS 115. Accordingly, the
company has not complied with the requirements of Ind AS 115.


Companies Act, 2013
Observations:
A listed company in its published financial statements has disclosed a note disaggregating the
items aggregated with other liabilities line item in the balance sheet. The note has presented
three line items:
Revenue received in advance;
Statutory dues payable; and
Deferred income arising from government grant
In our view, the disclosure is not in accordance with Ind AS 1 and Schedule III to the
Companies Act, 2013.

“An entity shall disclose all of the following:
(a) the opening and closing balances of receivables, contract assets and contract liabilities
from contracts with customers, if not otherwise separately presented or disclosed;
(b) revenue recognised in the reporting period that was included in the contract liability
balance at the beginning of the period; and
(c) revenue recognised in the reporting period from performance obligations satisfied (or
partially satisfied) in previous periods (for example, changes in transaction price).”
Para 116 of Ind AS 115 requires revenue recognised in the reporting period that was included
in the contract liability balance at the beginning of the period to be disclosed in notes. The
company has not disclosed this information in the note in which the line-item revenue
received in advance has been disclosed. Further, the company has not cross-referenced any
note disclosing the information required by para 116 of Ind AS 115. This lack of cross-
reference is not in accordance with para 113 of Ind AS 1 and Clause 4(ii) of General
Instructions for Preparation and Presentation of Financial Statements of a Company required
to comply with Ind AS of Division II and Division III of Schedule III to the Companies Act,
2013. Moreover, the company has presented notes in a scattered manner which is considered
as presentation of obscuring information by para 7 of Ind AS 1. Accordingly, the company
has not complied with Ind AS 1 and Schedule III to the Companies Act, 2013. Due to this
notes have been impacted.


Observations:
A listed company in its published financial statements has disclosed the note on major
components of deferred tax (liabilities) / assets on account of timing differences. In our view,
the disclosure is not in accordance with Ind AS 12.
Paragraph 81(g) of Ind AS 12 states as follows:

“The following shall also be disclosed separately:
(g) in respect of each type of temporary difference, and in respect of each type of unused tax
losses and unused tax credits:
(i) the amount of the deferred tax assets and liabilities recognised in the balance sheet for
each period presented;
(ii) the amount of the deferred tax income or expense recognised in profit or loss, if this is not
apparent from the changes in the amounts recognised in the balance sheet;”
Para 81(g) of Ind AS 12 requires the disclosure in respect of each type of temporary
difference, the deferred tax assets and liabilities recognised in the balance sheet. The
company has disclosed major components of deferred tax (liabilities)/assets arising on
account of timing differences, that is, the company has not disclosed deferred tax assets and
liabilities in respect of each type of temporary difference. Therefore, the disclosure is not in
accordance with para 81(g) of Ind AS 12.


Observations:
A listed company in its published financial statements has reported different amount of
finance costs in profit or loss section of the Statement of Profit and Loss and as adjustment to
profit before tax to arrive at cash flows from operating activities under indirect method. In
our view, this is not in accordance with Ind AS 1 and Ind AS 7 and impacts all components of
financial statements and not just Statement of Cash Flows.

“Under the indirect method, the net cash flow from operating activities is determined by
adjusting profit or loss for the effects of:
(a) changes during the period in inventories and operating receivables and payables;
(b) non-cash items such as depreciation, provisions, deferred taxes, unrealised foreign
currency gains and losses, and undistributed profits of associates; and
(c) all other items for which the cash effects are investing or financing cash flows.
Alternatively, the net cash flow from operating activities may be presented under the indirect
method by showing the revenues and expenses disclosed in the statement of profit and loss
and the changes during the period in inventories and operating receivables and payables.”
Para 20 of Ind AS 7 states that the net cash flow from operating activities is determined under
direct method by adjusting profit or loss for the effects of items for which the cash flow
effects are investing or financing cash flows. Para 31 of Ind AS 7 requires interest paid to be
classified as financing cash flows. The company has adjusted profit before tax for finance
costs in statement of cash flows more than that reported in Statement of Profit and Loss. This

means that either the company has not recognised finance costs properly in Statement of
Profit and Loss or in Statement of Cash Flows. A corresponding effect of such incorrect
recognition of finance costs in profit or loss will be on balance sheet, statement of changes in
equity and notes. Therefore, all components of financial statements are impacted due to this
error.
Para 15 of Ind AS 1 requires financial statements to present true and fair view which the
company has not presented. Accordingly, the company has not presented financial statements
in accordance with Ind AS 1 and Ind AS 7.


Observations:
A listed company other than NBFC in its published financial statements has reported cash
flows from financing activities as shown in the image. The company has reported repayment
of long-term borrowings and has specified that the same is on net basis. This is not in
accordance with Ind AS 7.

“An entity shall report separately major classes of gross cash receipts and gross cash
payments arising from investing and financing activities, except to the extent that cash flows
described in paragraphs 22 and 24 are reported on a net basis.”
“Cash flows arising from the following operating, investing or financing activities may be
reported on a net basis:
(a) cash receipts and payments on behalf of customers when the cash flows reflect the activities
of the customer rather than those of the entity; and
(b) cash receipts and payments for items in which the turnover is quick, the amounts are large,
and the maturities are short.”

“Cash flows arising from each of the following activities of a financial institution may be
reported on a net basis:
(a) cash receipts and payments for the acceptance and repayment of deposits with a fixed
maturity date;
(b) the placement of deposits with and withdrawal of deposits from other financial institutions;
and
(c) cash advances and loans made to customers and the repayment of those advances and
loans.”
Para 21 of Ind AS 7 requires an entity to report separately major classes of gross cash receipts
and gross cash payments arising from investing and financing activities except for cash flows
described in para 22 and 24 of Ind AS 7. Para 22 of Ind AS 7 specifies cash receipts and
payments on behalf of customers and cash receipts and payments for items in which the
turnover is quick and maturities are short. Therefore, the exception in para 22 does not apply
in the given case of repayment of long-term borrowings. Para 24 of Ind AS 7 is applicable for
cash flows of a financial institution. The company is not an NBFC and therefore, para 24 of
Ind AS 7 does not apply to it. Accordingly, the company should have presented repayment of

long-term borrowings on gross basis in accordance with para 21 of Ind AS 7. Due to this
error, Statement of Cash Flows has not been reported in accordance with Ind AS 7.


Observations:
A listed company other than NBFC in notes to cash flow statements has reported that the
previous year’s figures have been regrouped and reclassified wherever considered necessary
to conform to the current year’s figures. This is not in accordance with Ind AS 1.
Para 41 of Ind AS 1 states as follows:

“If an entity changes the presentation or classification of items in its financial statements, it
shall reclassify comparative amounts unless reclassification is impracticable. When an entity
reclassifies comparative amounts, it shall disclose (including as at the beginning of the
preceding period):
(a) the nature of the reclassification;
(b)the amount of each item or class of items that is reclassified; and
(c)the reason for the reclassification.”
The company has not disclosed the details of the reclassification as required by paragraph 41
of Ind AS 1 in the notes to cash flow statement. Further, the company has not cross-
referenced any note disclosing the same as required by paragraph 113 of Ind AS 1. Therefore,
the company has not complied with Ind AS 1 and due to this, statement of cash flows and
notes have been impacted.


Observations:
A listed company other than NBFC has reported notes to cash flow statement as shown in the
image above. In the previous example, I discussed how the note on reclassification of
previous year’s figures was not in accordance with Ind AS 1. In the same note, the company
has disclosed that the purchase of fixed assets reported in cash flows from investing activities
are inclusive of movements of capital WIP, assets under development and capital advances.
Movements in capital WIP may include non-cash items such as the transfer from capital WIP
to property, plant and equipment, capitalization of interest, provision for impairment etc. Para
43 of Ind AS 7 states that investing and financing transactions that do not require the use of
cash and cash equivalents shall be excluded from statement of cash flows. Therefore, the
company has not complied with para 43 of Ind AS 7.
Having read the note on inclusion of movements of capital WIP in purchase of fixed assets,
let us see what has the company reported in the note on capital WIP. The company has
reported interest during the construction period separately. The interest capitalized could have
been paid. Para 31 of Ind AS 7 requires interest paid to be reported as cash flows from
financing activities. Para 32 of Ind AS 7 clarifies that the total amount of interest paid during
a period is disclosed whether it has been recognised as an expense in profit or loss or
capitalized in accordance with Ind AS 23. The company has reported cash flows of interest
paid as cash flows from purchase of fixed asset. This is not in accordance with para 31 of Ind
AS 7. Further, the amount of interest capitalized includes accrued interest which is a non-cash
item. Therefore, the company has also not complied with para 43 of Ind AS 7 which prohibits
non-cash items from being reported as cash flows from investing activities.
The company has not reported opening balance of capital WIP, the expenditures recognised
during the period in capital WIP and the expenditures transferred from capital WIP to
Property, Plant and Equipment during the period.

“The financial statements shall also disclose:

(a) the existence and amounts of restrictions on title, and property, plant and equipment
pledged as security for liabilities;
(b) the amount of expenditures recognised in the carrying amount of an item of property, plant
and equipment in the course of its construction;
(c) the amount of contractual commitments for the acquisition of property, plant and
equipment; and
(d) if it is not disclosed separately in the statement of profit and loss, the amount of
compensation from third parties for items of property, plant and equipment that were impaired,
lost or given up that is included in profit or loss.”
Para 74(b) of Ind AS 16 requires the amount of expenditures recognised in the carrying
amount of an item of property, plant and equipment in the course of construction which the
company has not disclosed. Therefore, the company has not complied with Ind AS 16 too.


Companies Act, 2013
Observations:
A listed company other than NBFC has reported non-current assets in Balance Sheet as
shown in the slide. The company has presented Investments in Subsidiaries as a separate line
item which is in compliance with para 58 and 59 of Ind AS 1. However, the company has
presented the line item not within financial assets.
Paragraph 2.1(a) of Ind AS 109 states as follows:

“This Standard shall be applied by all entities to all types of financial instruments except:
(a) those interests in subsidiaries, associates and joint ventures that are accounted for in
accordance with Ind AS 110 Consolidated Financial Statements, Ind AS 27 Separate
Financial Statements or Ind AS 28 Investments in Associates and Joint Ventures. However, in
some cases, Ind AS 110, Ind AS 27 or Ind AS 28 require or permit an entity to account for an
interest in a subsidiary, associate or joint venture in accordance with some or all of the
requirements of this Standard. Entities shall also apply this Standard to derivatives on an
interest in a subsidiary, associate or joint venture unless the derivative meets the definition of
an equity instrument of the entity in Ind AS 32 Financial Instruments: Presentation.”
Para 2.1(a) of Ind AS 109 scopes out investments in subsidiaries that are measured at cost. It
may be noted that the very fact that Ind AS 109 had to scope out such investments means that
those investments meet the definition of financial instruments. Had para 2.1(a) not scoped out
investment in subsidiaries measured at cost, there would arise inconsistency between Ind AS
27 and Ind AS 109. Thus, investment in subsidiaries that are measured at cost in accordance
with para 10 of Ind AS 27 are financial assets but scoped out of Ind AS 109.
Clause 8 of General Instructions for Preparation and Presentation of Financial Statements of a

Company required to comply with Ind AS of Division II of Schedule III to the Companies
Act, 2013 states that for the purpose of this Schedule, the terms used herein shall have the
same meanings assigned to them in Ind AS. Therefore, the presentation of line items in
Balance Sheet, Statement of Profit and Loss and Statement of Changes in Equity as per
Schedule III is based on the definition of that item in Ind AS. As investment in subsidiaries

meets the definition of financial assets, the company should have presented investment in
subsidiaries separately within financial assets. Therefore, the company has not complied with
Schedule III to the Companies Act, 2013. Due to this, the Balance Sheet has been impacted.


The standalone financial statements has been prepared in accordance and comply in all
material aspects with Indian Accounting Standards (Ind AS) notified under Section 133 of the
Companies Act, 2013 (the Act) [Companies (Indian Accounting Standards) Rules, 2015] and
other relevant provisions of the Act and read with Rule 3 of the Companies (Indian
Accounting Standards) Rules, 2015 and Companies (Indian Accounting Standards)
Amendment Rules, 2016.
Observations:
“An entity whose financial statements comply with Ind ASs shall make an explicit and
unreserved statement of such compliance in the notes. An entity shall not describe financial
statements as complying with Ind ASs unless they comply with all the requirements of Ind
ASs.”
Para 16 of Ind AS 1 requires an entity to make an explicit and unreserved statement of

compliance with Ind AS in notes. The company has disclosed that the financial statements
have also been prepared as per the other relevant provisions of the Act. Thus, the company
has made an explicit but reserved statement of compliance with Ind AS which is not in
accordance with Ind AS 1. Further, the company has not detailed what other relevant
provisions of the Act have been considered for preparing and presenting the financial
statements. Para 7 of Ind AS 1 considers disclosure of information regarding a material item,
transaction, or other event with vague or unclear language as obscuring. The company, by not
disclosing the details of other relevant provisions of the Act that were considered while
preparing financial statements apart from the requirements of Ind AS, has made a vague and
unclear statement. Accordingly, the statement of compliance disclosed by the company is
obscuring in accordance with Ind AS 1. Due to this, notes have been impacted.


Observations:
A listed company has reported the statement of compliance with Ind AS as shown in the slide.
In the previous example, I had discussed how this statement of compliance is not in
accordance with Ind AS 1. In this example you will understand how the same statement of
compliance with Ind AS is not in accordance with Ind AS 27. Para 17(a) of Ind AS 27
requires disclosure of the fact that the financial statements are separate financial statements.
Standalone financial statements can be either individual financial statements or separate
financial statements. The company has not disclosed this fact and therefore, has not complied
with Ind AS 27.
Technically, there are 4 types of financial statements:

1. Individual financial statements
These financial statements are prepared by an entity that does not have any subsidiary, joint
venture or associate
2. Separate financial statements
These financial statements are prepared by the investor in joint venture or associate and by
parent of a group. Group has been defined as parent and its subsidiaries in Ind AS 110. Thus,
joint venture or associate do not form part of a group. In these financial statements
investments are presented as separate assets of the investor or parent, as the case may be.
3. Consolidated Financial Statements
These are the financial statements of a Group in which the assets, liabilities, income,
expenses and cash flows of the parent and its subsidiaries are presented as those of a single
economic entity.
4. Economic Entity Financial Statements
These are the financial statements prepared by an investor in joint venture or associate in
which the investments in joint venture or associate are measured as per the equity method.
Practically, Economic entity financial statements are also addressed as consolidated financial
statements.
Thus, Ind AS does not define ‘standalone financial statements’. A standalone financial
statements can be either individual financial statements or separate financial statements.
Accordingly, disclosure of the fact that the financial statements are separate financial
statements is important.


All assets and liabilities have been classified as current or non-current as per the Company’s
normal operating cycle and other criteria set out in the Schedule III to the Companies Act,
2013.
Observations:
In the previous 2 examples, I discussed how the statement of compliance with Ind AS
disclosed by a listed company in notes is not in accordance with Ind AS 1 and Ind AS 27. In
this example, I discuss another disclosure by the same company on the classification of assets
and liabilities. The company has disclosed that all assets and liabilities have been classified as
current or non-current as per the Company’s normal operating cycle and other criteria set out
in Schedule III to the Companies Act, 2013. The conditions specified for classification of
assets and liabilities as current or non-current are same in Ind AS 1 and Schedule III.
However, para 68 and 70 to 75 of Ind AS 1 provide further guidance on the classification
which is not there in Schedule III. The result of application of the guidance given in those
paragraphs could be that the classification of an asset or liability could be different under Ind
AS 1 and Schedule III to the Companies Act, 2013. Clause 2 of General Instructions for
Preparation of Financial Statements of a Company required to comply with Ind AS of
Division II and Division III of Schedule III states the requirements of Ind AS prevails over
that of Schedule III. Therefore, a company cannot ignore the guidance given in para 68 and
para 70 to 75 of Ind AS 1 for classifying assets and liabilities into current and non-current.
The company has ignored that guidance. Further, para 16 states an entity can make the
explicit and unreserved statement of compliance with Ind AS only if all the requirements of
Ind AS have been complied with. As the company has ignored the guidance in Ind AS 1
relating to classification of assets and liabilities, the statement of compliance with Ind AS
disclosed by the company is also not proper. Due to this, Balance Sheet and Notes have been
impacted.


The cost and related accumulated depreciation are eliminated from the financial statements
upon sale or retirement of the asset.
Observations:
A listed company has disclosed in its accounting policy on property, plant and equipment that
the cost and related accumulated depreciation are eliminated from the financial statements
upon sale or retirement of the asset. Ind AS 16 contains reference to retirement of an item of
property, plant and equipment in three paragraphs.
Para 55 of Ind AS 16 states that depreciation does not cease when the asset is retired from
active use. Para 66 of Ind AS 16 states that derecognition of items of property, plant and
equipment retired or disposed of is determined in accordance with this standard. Para 79 of
Ind AS 16 encourages an entity to disclose the carrying amount of property, plant and
equipment retired from active use.
Para 67 of Ind AS 16 states that the carrying amount of an item of property, plant and
equipment shall be derecognized either on disposal or when no future economic benefits are
expected from its use or disposal. Thus, items of property, plant and equipment retired from
active use are not derecognized.
The company has derecognized on retirement of asset. Thus, the company has not recognised
depreciation on assets retired from active use and has recognised loss on retirement of asset
which impacts Statement of Profit and Loss. As the profit numbers are carried in Statement of
Changes in Equity and Statement of Cash Flows, both these statements are also impacted.
Due to incorrect elimination, the carrying amount of property, plant and equipment reported
in balance sheet is also incorrect and thus, balance sheet has also been impacted due to this
incorrect accounting policy.


Investment Properties
Investment properties comprises of Immovable Property that are held for rental yield and/or
capital appreciation.
Investment property is measured initially at its cost, including related transaction costs and
where applicable borrowing costs. Subsequent expenditure is capitalized to the asset’s
carrying amount only when it is probable that future economic benefits associated with the
item will flow to the Company and the cost of the item can be measured reliably. All other
repairs and maintenance costs are expensed as and when incurred. When part of an
investment property is replaced, the carrying amount of the replaced part is derecognised.
Observations:
A listed company has disclosed accounting policy on investment property as shown above.
Ind AS 1 was amended to require disclosure of material accounting policy information. The
amendment is applicable for accounting periods beginning on or after 1 April 2023. Para 117
of Ind AS 1 states that accounting policy information is material if, when considered together
with other information included in an entity’s financial statements, it can reasonably be
expected to influence decisions that the primary users of general purpose financial statements
make on the basis of those financial statements. One of the conditions in para 117B of Ind AS
1 for an accounting policy information to be regarded as material is that the information must
relate to material transaction, other events or conditions. Therefore, while reading the
accounting policies of a company, it is important that we keep an eye on the items presented
in balance sheet, statement of profit and loss, statement of changes in equity and statement of
cash flows. Let us see what items have been presented by the company in its balance sheet.
The extract of the non-current assets reported by the company has been given above. There is
no line item of investment property in balance sheet. Thus, the company has disclosed an
accounting policy that relates to immaterial item. This was not in accordance with erstwhile
para 117 which required significant accounting policies and from 1 April 2023 such a policy
will be considered as not in accordance with revised para 117 requiring disclosure of material
accounting policy information. Further, disclosure of such immaterial accounting policies
obscures the user from material information in financial statements. Therefore, the company
has presented obscuring information in its financial statements and thus has not complied
with para 7 of Ind AS 1.


Depreciation is computed using Straight Line Method (SLM) over the useful lives of the
assets as specified in Schedule II to the Companies Act, 2013.
Observations:
A listed company has disclosed accounting policy on depreciation stating that depreciation is
computed using straight-line method, in short, SLM, over the useful lives of the assets as
specified in Schedule II to the Companies Act, 2013. Para 56 of Ind AS 16 states the factors
to be considered in determining the useful life of the asset. Para 57 states that the useful life
of an asset is defined in terms of the asset’s expected utility to the entity. Thus, the useful life
of an asset differs from company to company and a company is required to estimate the
useful life of an asset based on the factors stated in para 56 of Ind AS 16. The accounting
policy disclosed by the company reveals that the company has not estimated the useful life as
required by Ind AS 16 but has taken the useful lives specified in Schedule II to the
Companies Act for depreciation purposes. It may be noted that Schedule II provides an
indicative list of useful lives. If the useful lives estimated as per Ind AS 16 is different from
that indicated in Schedule II, the company is required to disclose the fact. Anyways, para 73
of Ind AS 16 requires disclosure of useful life of each class of property, plant and equipment.
Therefore, the company has not complied with Ind AS 16. Due to this, depreciation reported
in the Statement of Profit and Loss has been impacted. As the profit numbers are carried in
the Statement of Changes in Equity and Statement of Cash Flows, both these statements are
also impacted. Further, the balance sheet has been impacted due to incorrect carrying amount
of property, plant and equipment.


The current tax expense or credit for the period is the tax payable on the current period’s
taxable income based on the applicable income tax rate for each jurisdiction adjusted by
changes in deferred tax assets and liabilities attributable to temporary differences and to
unused tax losses.
Observations:
A listed company has disclosed in accounting policy that the current tax expense or credit for
the period is the tax payable on the current period’s taxable income based on the applicable
income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities
attributable to temporary differences and to unused tax losses. Para 5 of Ind AS 12 defines tax
expense or tax income as the aggregate of current tax and deferred tax. Current tax is the
amount of income taxes payable or recoverable in respect of taxable profit or tax loss for the
period. Thus, current tax is not adjusted by changes in deferred tax assets and liabilities as
reported by the company. For changes in deferred tax assets and liabilities, deferred tax is
adjusted. Accordingly, the policy is not in accordance with Ind AS 12. Tax expense as
reported by the company has been presented after the accounting policy. The presentation of
tax expense in profit or loss does not provide any idea of the extent of the adjustments made.
Thus, the current tax and deferred tax reported in statement of profit and loss and balance
sheet has been inappropriately adjusted for an unspecified amount due to which both these
statements have been impacted along with notes.

Example 25 – Non-compliance with Ind AS 1 and Ind AS 16

The company accounts for insurance claims when there is certainty that the claims are
realizable and acknowledged by insurance company and amount recognized in books of
accounts is as under:
• In case of loss of asset /goods by transferring, either the carrying cost of the relevant asset /
goods or insurance value (subject to deductibles), whichever is lower under the head “Claims
Recoverable-Insurance”.
• In case insurance claim is, less than carrying cost the difference is charged to Profit and
Loss statement. As and when claims are finally received from insurer, the difference, if any,
between Claims Recoverable-Insurance and claims received is adjusted to Profit and Loss
statement.
Observations:
A listed company has disclosed a detailed accounting policy on accounting for insurance
claims. The policy suggests that the company offsets insurance claim receivable and loss on
insured assets. The company reports the net amount as insurance income or loss on assets
destroyed in statement of profit and loss. This policy is not in accordance with para 66 of Ind
AS 16.
Para 66 of Ind AS 16 states that impairments or losses of items of property, plant and
equipment, related claims for or payments of compensation from third parties and any
subsequent purchase or construction of replacement assets are separate economic events and
are accounted separately. Thus, as per para 66 of Ind AS 16, a company needs to report loss
on assets destroyed and insurance claim income in profit or loss on gross basis. The company
offsets insurance claim receivable and loss on assets destroyed and reports net amount in
profit or loss. Due to this, the users do not get information on the amount of loss to the
company due to insured event happening and the amount of insurance income. Therefore, the
statement of profit and loss has been impacted. The company reports insurance claim
receivable in balance sheet too on net basis and therefore, balance sheet of the company has
also been impacted. Para 32 of Ind AS 1 states that an entity shall not offset assets and
liabilities or income and expenses, unless required or permitted by an Ind AS. Para 66 of Ind
AS 16 prohibits offsetting of loss on assets destroyed and insurance claim income. Still, the
company has offset these items and therefore, has also not complied with para 32 of Ind AS
1.

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25 Issues

Copyright © 2023 by Manish Chidambaram Iyar

Author: Manish Chidambaram Iyar

Publishers’ Address: 110, SKA GREEN MANSION, NEAR SAINI VILLAGE,

E-book published and circulated in India

CA Manish C. Iyer | Director | GAAP Advisors Page | 1

CA Manish C. Iyer | Director | GAAP Advisors Page | 2

CA Manish C. Iyer | Director | GAAP Advisors Page | 3

He served as Deputy Director in the Technical Directorate Department of The Institute of

He offers the following services on traditional mode:

CA Manish C. Iyer | Director | GAAP Advisors Page | 4

CA Manish C. Iyer | Director | GAAP Advisors Page | 5

CA Manish C. Iyer | Director | GAAP Advisors Page | 6

CA Manish C. Iyer | Director | GAAP Advisors Page | 7

CA Manish C. Iyer | Director | GAAP Advisors Page | 8

CA Manish C. Iyer | Director | GAAP Advisors Page | 9

CA Manish C. Iyer | Director | GAAP Advisors Page | 10

Section I – 25 Issues on Ind AS - Table of Contents

CA Manish C. Iyer | Director | GAAP Advisors Page | 11

Issue Id: 1 – Offsetting of Interest Income and Interest Expense

Paragraph 99 of Ind AS 1, Presentation of Financial Statements, states as follows:

Thus, paragraph 99 of Ind AS 1 mandates analysis of expenses based on nature of expense

CA Manish C. Iyer | Director | GAAP Advisors Page | 12

Issue Id: 234 – Classification of Cash Flows

CA Manish C. Iyer | Director | GAAP Advisors Page | 13

Issue Id: 251 – Classification of Convertible Loan by Holder

Paragraph 4.1.4 of Ind AS 109 states as follows:

CA Manish C. Iyer | Director | GAAP Advisors Page | 14

Issue Id: 252 – Classification of Convertible Loan by Issuer

CA Manish C. Iyer | Director | GAAP Advisors Page | 15

Paragraph 28 of Ind AS 32 states as follows:

CA Manish C. Iyer | Director | GAAP Advisors Page | 16

Issue Id: 310 – Change in Depreciation Method

Therefore, alignment of method of depreciation on group basis cannot be a justification for

CA Manish C. Iyer | Director | GAAP Advisors Page | 17

Issue Id: 313 – Accounting for Weather Insurance

CA Manish C. Iyer | Director | GAAP Advisors Page | 18

Appendix A of Ind AS 109 defines a derivative as under:

CA Manish C. Iyer | Director | GAAP Advisors Page | 19

Issue Id: 321 – Determination of Effective Interest Rate

Appendix A of Ind AS 109 Financial Instruments defines transaction costs as under:

CA Manish C. Iyer | Director | GAAP Advisors Page | 20

Issue Id: 328 – Disclosure of Other Long-term Employee Benefits

Paragraph 17 of Ind AS 24 requires the following disclosure:

Paragraph 112 of Ind AS 1 states as under:

CA Manish C. Iyer | Director | GAAP Advisors Page | 21

CA Manish C. Iyer | Director | GAAP Advisors Page | 22

Issue Id: 529 – Current / Non-current Classification

Notwithstanding anything contained above, where there is a breach of a material provision of a

CA Manish C. Iyer | Director | GAAP Advisors Page | 23

Paragraph 10 of Ind AS 10 states as follows:

CA Manish C. Iyer | Director | GAAP Advisors Page | 24

Issue Id: 1276 – Interest free Rental Deposit

CA Manish C. Iyer | Director | GAAP Advisors Page | 25

CA Manish C. Iyer | Director | GAAP Advisors Page | 26

Issue Id: 1277 – Accounting for Modification in terms of Preference

Paragraph 28 of Ind AS 32, Financial Instruments: Presentation, states as follows:

CA Manish C. Iyer | Director | GAAP Advisors Page | 27

According to paragraph 16 of Ind AS 32, an instrument is said to be having equity component

Paragraph 42 of Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors,