Ind AS 101, First-time Adoption of Ind AS, Important Questions with Solutions for CA Final Financial Reporting May & Nov 2021 Exams
Question 1 –
ABC Ltd is a government company and is a first-time adopter of Ind AS. As per the previous GAAP, the contributions received by ABC Ltd. from the government (which holds 100% shareholding in ABC Ltd.) which is in the nature of promoters’ contribution have been recognised in capital reserve and treated as part of shareholders’ funds in accordance with the provisions of AS 12, Accounting for Government Grants.
State whether the accounting treatment of the grants in the nature of promoters’ contribution as per AS 12 is also permitted under Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance. If not, then what will be the accounting treatment of such grants recognised in capital reserve as per previous GAAP on the date of transition to Ind AS.
Solution –
Paragraph 2 of Ind AS 20, “Accounting for Government Grants and Disclosure of Government Assistance” inter alia states that the Standard does not deal with government participation in the ownership of the entity.
Since ABC Ltd. is a Government company, it implies that government has 100% shareholding in the entity. Accordingly, the entity needs to determine whether the payment is provided as a shareholder contribution or as a government. Equity contributions will be recorded in equity while grants will be shown in the Statement of Profit and Loss.
Where it is concluded that the contributions are in the nature of government grant, the entity shall apply the principles of Ind AS 20 retrospectively as specified in Ind AS 101 ‘First Time Adoption of Ind AS’. Ind AS 20 requires all grants to be recognised as income on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate. Unlike AS 12, Ind AS 20 requires the grant to be classified as either a capital or an income grant and does not permit recognition of government grants in the nature of promoter’s contribution directly to shareholders’ funds.
Where it is concluded that the contributions are in the nature of shareholder contributions and are recognised in capital reserve under previous GAAP, the provisions of paragraph 10 of Ind AS 101 would be applied which states that, which states that except in certain cases, an entity shall in its opening Ind AS Balance Sheet:
- recognise all assets and liabilities whose recognition is required by Ind AS;
- not recognise items as assets or liabilities if Ind AS do not permit such recognition;
- reclassify items that it recognised in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with Ind AS; and
- apply Ind AS in measuring all recognised assets and liabilities.”
Accordingly, as per the above requirements of paragraph 10(c) in the given case, contributions recognised in the Capital Reserve should be transferred to appropriate category under ‘Other Equity’ at the date of transition to Ind AS.
Question 2 –
XYZ Pvt. Ltd. is a company registered under the Companies Act, 2013 following Accounting Standards notified under Companies (Accounting Standards) Rules, 2006. The Company has decided to voluntary adopt Ind AS w.e.f 1st April, 2018 with a transition date of 1st April, 2017.
The Company has one Wholly Owned Subsidiary and one Joint Venture which are into manufacturing of automobile spare parts.
The consolidated financial statements of the Company under Indian GAAP are as under:
Consolidated Financial Statements
| (Rs.in Lakhs) | ||
| Particulars | 31.03.2018 | 31.03.2017 |
| Shareholder’s Funds
Share Capital Reserves & Surplus Non-Current Liabilities Long Term Borrowings Long Term Provisions Other Long-Term Liabilities |
7,953 16,547
1,000 1,101 5,202 |
7,953 16,597
1,000 691 5,904 |
| Current Liabilities
Trade Payables Short Term Provisions |
9,905 500 |
8,455 475 |
| Total | 42,208 | 41,075 |
| Non-Current Assets
Property Plant & Equipment Goodwill on Consolidation of subsidiary and JV Investment Property Long Term Loans & Advances Current Assets Trade Receivables Investments Other Current Assets |
21,488 1,507 5,245 6,350
4,801 1,263 1,554 |
22,288 1,507 5,245 6,350
1,818 3,763 104 |
| Total | 42,208 | 41,075 |
Additional Information:
The Company has entered into a joint arrangement by acquiring 50% of the equity shares of ABC Pvt. Ltd. Presently, the same has been accounted as per the proportionate consolidated method. The proportionate share of assets and liabilities of ABC Pvt. Ltd. included in the consolidated financial statement of XYZ Pvt. Ltd. is as under:
| Particulars | Rs. in Lakhs |
| Property, Plant & Equipment | 1,200 |
| Long Term Loans & Advances | 405 |
| Trade Receivables | 280 |
| Other Current Assets | 50 |
| Trade Payables | 75 |
| Short Term Provisions | 35 |
The Investment is in the nature of Joint Venture as per Ind AS 111.
The Company has approached you to advice and suggest the accounting adjustments which are required to be made in the opening Balance Sheet as on 1st April, 2017.
Solution –
As per paras D31AA and D31AB of Ind AS 101, when changing from proportionate consolidation to the equity method, an entity shall recognise its investment in the joint venture at transition date to Ind AS.
That initial investment shall be measured as the aggregate of the carrying amounts of the assets and liabilities that the entity had previously proportionately consolidated, including any goodwill arising from acquisition. If the goodwill previously belong ed to a larger cash-generating unit, or to a group of cash-generating units, the entity shall allocate goodwill to the joint venture on the basis of the relative carrying amounts of the joint venture and the cash-generating unit or group of cash-generating units to which it belonged. The balance of the investment in joint venture at the date of transition to Ind AS, determined in accordance with paragraph D31AA above is regarded as the deemed cost of the investment at initial recognition.
Accordingly, the deemed cost of the investment will be
| Property, Plant & Equipment | 1,200 |
| Goodwill (Refer Note below) | 119 |
| Long Term Loans & Advances | 405 |
| Trade Receivables | 280 |
| Other Current Assets | 50 |
| Total Assets | 2054 |
| Less: Trade Payables | 75 |
| Short Term Provisions | 35 |
| Deemed cost of the investment in JV | 1944 |
Calculation of proportionate goodwill share of Joint Venture ie ABC Pvt. Ltd.
| Property, Plant & Equipment | 22,288 |
| Goodwill | 1,507 |
| Long Term Loans & Advances | 6,350 |
| Trade Receivables | 1,818 |
| Other Current Assets | 104 |
| Total Assets | 32,067 |
| Less: Trade Payables | 8,455 |
| Short Term Provisions | 475 |
| 23,137 |
Proportionate Goodwill of Joint Venture
= [(Goodwill on consolidation of subsidiary and JV/Total relative net asset) x Net asset of JV]
= (1507 / 23,137) x 1825 = 119 (approx.)
Accordingly, the proportional share of assets and liabilities of Joint Venture will be removed from the respective values assets and liabilities appearing in the balance sheet on 31.3.2017 and Investment in JV will appear under non-current asset in the transition date balance sheet as on 1.4.2017.
Adjustments made in IGAAP balance sheet to arrive at Transition date Ind AS Balance Sheet
| Particulars | 31.3.2017 | Ind AS Adjustment | Transition date Balance Sheet as per Ind AS |
| Non-Current Assets | |||
| Property Plant & Equipment | 22,288 | (1,200) | 21,088 |
| Intangible assets – Goodwill on Consolidation | 1,507 | (119) | 1,388 |
| Investment Property | 5,245 | – | 5,245 |
| Long Term Loans & Advances | 6,350 | (405) | 5,945 |
| Non- current investment in JV | – | 1,944 | 1,944 |
| Current Assets | – | ||
| Trade Receivables | 1,818 | (280) | 1,538 |
| Investments · | 3,763 | – | 3,763 |
| Other Current Assets | 104 | (50) | 54 |
| Total | 41,075 | (110) | 40,965 |
| Shareholder’s Funds | |||
| Share Capital | 7,953 | – | 7,953 |
| Reserves & Surplus | 16,597 | – | 16,597 |
| Non-Current Liabilities | |||
| Long Term Borrowings | 1,000 | 1,000 | |
| Long Term Provisions | 691 | 691 | |
| Other Long-Term Liabilities | 5,904 | 5,904 | |
| Current Liabilities | |||
| Trade Payables | 8,455 | (75) | 8,380 |
| Short Term Provisions | 475 | (35) | 440 |
| Total | 41,075 | (110) | 40,965 |
Question 3 –
Mathur India Private Limited has to present its first financials under Ind AS for the year ended 31st March, 20X3. The transition date is 1st April, 20X1.
The following adjustments were made upon transition to Ind AS:
(a) The Company opted to fair value its land as on the date on transition. The fair value of the land as on 1st April, 20X1 was Rs.10 crores. The carrying amount as on 1st April, 20X1 under the existing GAAP was Rs.4.5 crores.
(b) The Company has recognised a provision for proposed dividend of Rs.60 lacs and related dividend distribution tax of Rs.18 lacs during the year ended 31st March, 20X1. It was written back as on opening balance sheet date.
(c) The Company fair values its investments in equity shares on the date of transition. The increase on account of fair valuation of shares is Rs.75 lacs.
(d) The Company has an Equity Share Capital of Rs.80 crores and Redeemable Preference Share Capital of Rs.25 crores.
(e) The reserves and surplus as on 1st April, 20X1 before transition to Ind AS was Rs.95 crores representing Rs.40 crores of general reserve and Rs.5 crores of capital reserve acquired out of business combination and balance is surplus in the Retained Earnings.
(f) The company identified that the preference shares were in nature of financial liabilities.
What is the balance of total equity (Equity and other equity) as on 1st April, 20X1 after transition to Ind AS? Show reconciliation between total equity as per AS (Accounting Standards) and as per Ind AS to be presented in the opening balance sheet as on 1st April, 20X1.
Ignore deferred tax impact.
Solution –
Computation of balance total equity as on 1st April, 20X1 after transition to Ind AS
| Rs. in crore | |||
| Share capital- Equity share Capital | 80 | ||
| Other Equity | |||
| General Reserve | 40 | ||
| Capital Reserve | 5 | ||
| Retained Earnings (95-5-40) | 50 | ||
| Add: Increase in value of land (10-4.5) | 5.5 | ||
| Add: De recognition of proposed dividend (0.6 + 0.18) | 0.78 | ||
| Add: Increase in value of Investment | 0.75 | 57.03 | 102.03 |
| Balance total equity as on 1st April, 20X1 after transition to Ind AS |
182.03 |
Reconciliation between Total Equity as per AS and Ind AS to be presented in the opening balance sheet as on 1st April, 20X1
| Rs. in crore | ||
| Equity share capital | 80 | |
| Redeemable Preference share capital | 25 | |
| 105 | ||
| Reserves and Surplus | 95 | |
| Total Equity as per AS | 200 | |
| Adjustment due to reclassification | ||
| Preference share capital classified as financial liability | (25) | |
| Adjustment due to derecognition | ||
| Proposed Dividend not considered as liability as on 1st April 20X1 | 0.78 | |
| Adjustment due to remeasurement | ||
| Increase in the value of Land due to remeasurement at fair value | 5.5 | |
| Increase in the value of investment due to remeasurement at fair value | 0.75 | 6.25 |
| Equity as on 1st April, 20X1 after transition to Ind AS | 182.03 |
Question 4 –
On April 1, 20X1, Sigma Ltd. issued 30,000 6% convertible debentures of face value of Rs.100 per debenture at par. The debentures are redeemable at a premium of 10% on March 31, 20X5 or these may be converted into ordinary shares at the option of the holder. The interest rate for equivalent debentures without conversion rights would have been 10%. The date of transition to Ind AS is April 1, 20X3.
Suggest how should Sigma Ltd. account for this compound financial instrument on the date of transition.
The present value of Re. 1 receivable at the end of each year based on discount rates of 6% and 10% can be taken as:
|
End of year |
6% | 10% |
| 1 | 0.94 | 0.91 |
| 2 | 0.89 | 0.83 |
| 3 | 0.84 | 0.75 |
| 4 | 0.79 | 0.68 |
Solution –
Ind AS 32, ‘Financial Instruments: Presentation’, requires an entity to split a compound financial instrument at inception into separate liability and equity components. If the liability component is no longer outstanding, retrospective application of Ind AS 32 would involve separating two portions of equity. The first portion is recognised in retained earnings and represents the cumulative interest accreted on the liability component. The other portion represents the original equity component. However, in accordance with Ind AS 101, a first- time adopter need not separate these two portions if the liability compone nt is no longer outstanding at the date of transition to Ind AS.
In the present case, since the liability is outstanding on the date of transition, Sigma Ltd. will need to split the convertible debentures into debt and equity portion on the date of transition. Accordingly, we will first measure the liability component by discounting the contractually determined stream of future cash flows (interest and principal) to present value by using the discount rate of 10% p.a. (being the market interest rate for si milar debentures with no conversion option).
| Rs. | |
| Interest payments p.a. on each debenture | 6 |
| Present Value (PV) of interest payment on each debenture for years 1 to 4 (6 x 3.17) (Note 1) | 19.02 |
| PV of principal repayment on each debenture (including premium) 110 x 0.68 (Note 2) | 74.80 |
| Total liability component on each debenture (A) | 93.82 |
| Total equity component per debenture (Balancing figure) (B) = (C) – (A) | 6.18 |
| Face value per debenture (C) | 100.00 |
| Equity component per debenture | 6.18 |
| Total equity component for 30,000 debentures | 1,85,400 |
| Total debt amount (30,000 x 93.82) | 28,14,600 |
Thus, on the date of transition, the amount of Rs. 30,00,000 being the amount of debentures will be split as under:
| Debt | Rs. 28,14,600 |
| Equity | Rs. 1,85,400 |
Notes:
- 17 is annuity factor of present value of Re. 1 at a discount rate of 10% for 4 years.
- On maturity, Rs. 110 will be paid (Rs. 100 as principal payment + Rs. 10 as premium)