PAPER 1: FINANCIAL REPORTING PART I : RELEVANT AMENDMENTS, NOTIFICATIONS AND ANNOUNCEMENTS

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1 PAPER 1: FINANCIAL REPORTING PART I : RELEVANT AMENDMENTS, NOTIFICATIONS AND ANNOUNCEMENTS A. Applicable for November, 2016 Examination 1. Indian Accounting Standards The topic Introduction of Indian Accounting Standards (Ind AS); Comparative study of ASs vis-à-vis Ind ASs; Carve outs/ins in Ind ASs vis-à-vis International Financial Reporting Standards (IFRSs) had been included in the syllabus and is applicable for November, 2016 Examination. Considering the significance and relevance of Ind AS, the above topic has been included in the syllabus and the students are expected to have an overall knowledge of the contents covered therein. However, considering the extensive coverage of the contents covered in such topic, from the examination perspective, simple problems involving conceptual or application issues may be asked in the examination. 2. Applicability of Ind AS 32, 107 and 109 on the topic Accounting and Reporting of Financial Instruments The entire IAS 39 Financial Instruments: Recognition and Measurement, on which AS 30 Financial Instruments: Recognition and Measurement was based, has been replaced by IFRS 9 Financial Instruments. Therefore, the Government of India opted to notify Ind AS 109 Financial Instruments in correspondence to IFRS 9 and not IAS 39. Also, AS 30, AS 31 and AS 32 on Financial Instruments were earlier proposed to be made mandatory for Level I entities only. However, after notification of Ind AS in February, 2015, these entities will be applying the provisions stated in Ind AS 32, Ind AS 107 and Ind AS 109 and not AS 30, AS 31 and AS 32 for accounting of financial instruments. Therefore, it is felt appropriate to make applicable Ind AS 32, Ind AS 107 and Ind AS 109 in place of AS 30, AS 31 and AS 32 to the topic Accounting for Financial Instruments. Accordingly, Ind AS 32 Financial Instruments: Presentation, Ind AS 107 Financial Instruments: Disclosures and Ind AS 109 Financial Instruments are made applicable to the topic Accounting for Financial Instruments instead of AS 30 Financial Instruments: Recognition and Measurement, AS 31 Financial Instruments: Presentation and AS 32 Financial Instruments: Disclosures for November, 2016 examination. In view of the complexities involved, simple practical problems involving conceptual issues or application issues may be asked in the examination.

2 2 FINAL EXAMINATION: NOVEMBER, Applicability of certain new Guidance Notes Following two New Guidance Notes are applicable for November, 2016 examination for the first time viz- a. Guidance Note on Accounting for Expenditure on Corporate Social Responsibility Activities. b. Guidance Note on Guidance Note on Accounting for Derivative Contracts. Both the abovementioned Guidance Notes may be referred at the following links respectively: Dividend Distribution Tax (a) With effect from 1 st Oct, 2014 dividend and income distribution tax is leviable on gross dividend / income and not on the net dividend / income distributed to shareholders and unit holders as per Income- tax Act, (b) The rate of DDT is fifteen per cent (excluding surcharge of 12% plus secondary and higher education cess is (2+1) 3%). 5. Relevant Sections of the Companies Act, 2013 The relevant Sections of the Companies Act, 2013 notified up to 30 th April, 2016 are applicable for November, 2016 Examination. B. Not applicable for November, 2016 examination 1. Non-applicability of Amendments made by MCA in the Companies (Accounting Standards) Rules, 2006 and Companies (Indian Accounting Standards) Rules, 2015 Any new AS or Ind AS or revised version of AS or Ind AS, notified by the MCA, is being made applicable for CA examination only after one year of its notification. Accordingly, amendments made by the MCA on in the Companies (Accounting Standards) Rules, 2006 and Companies (Indian Accounting Standards) Rules, 2015 are not made applicable for November, 2016 examination. 2. Overview of International Financial Reporting Standards (IFRS) The topic Overview of International Accounting Standards (IAS) / International Financial Reporting Standards (IFRS), Interpretations by International Financial Reporting Interpretation Committee (IFRIC), Significant differences vis-a-vis Indian Accounting Standards; Understanding of US GAAPs, Applications of IFRS and US has been excluded from the syllabus and the same is not applicable for November, 2016 Examination.

3 PAPER 1 : FINANCIAL REPORTING 3 AS 1 PART II : QUESTIONS AND ANSWERS QUESTIONS 1. (a) A Ltd. has filed an application with the High Court to merge with its subsidiary B Ltd. with effect from As per the books of accounts, a loan was given by A Ltd. to B Ltd. and B Ltd. had given assets to A Ltd. on lease. In view of the aforesaid pending application, A Ltd. had neither disclosed the interest income on the loan given to B Ltd. nor the lease rentals payable by it to B Ltd. during the year Comment whether the treatment done by A Ltd. is correct in light with AS 1. AS 2 AS 3 (b) Z Limited ordered 13,000 kg. of chemicals at ` 90 per kg. The purchase price includes excise duty of `5 per kg. in respect of which full CENVAT credit is admissible. Further, state VAT is leviable at ` 2.5 per kg on purchase price. Freight incurred amounted to ` 30,000. Normal transit loss is 4%. The company actually received 12,400 kg and consumed 10,000 kg. of chemicals. The company has received trade discount later on in the form of their credit note of ` 1 per kg. The chemicals were delivered in containers. The containers were not reusable, hence sold for ` 500. The administrative expenses incurred to bring the chemicals were `10,000. Compute the value of inventory and allocate the material cost as per AS (a) Classify the following into operating, investing or financing activities as per AS 3 Cash Flow Statement : AS 4 (i) (ii) Interest paid by the financial enterprise Dividend paid (iii) Tax deducted at source on interest received from the subsidiary company (iv) Deposit with Bank for a term of two years (v) Insurance claim received towards loss of machinery by fire. (b) Which activity does the purchase of business falls under and whether netting off of aggregate cash flows from disposal and acquisition of business units is possible? 3. (a) With reference to AS 4 "Contingencies and Events Occurring after the Balance Sheet Date", state whether the following events will be treated as contingencies,

4 4 FINAL EXAMINATION: NOVEMBER, 2016 AS 5 AS 7 adjusting events or non-adjusting events occurring after balance sheet in case of a company which prepares accounts on the basis of financial year. (i) (ii) A major fire has damaged the assets in a factory on 5 th April, 2016, 5 days after the year end. However, the assets are fully insured and the books have not been approved by the Directors. A suit against the company's advertisement was filed by a party on 10 th April, 2016, 10 days after the year end claiming damages of ` 20 lakh. (iii) It sends a proposal to sell an immovable property for ` 30 lakh on 31 st March, The book value of the property is ` 20 lakh as on year-end date. However, the deed was registered as on 15 th April, (iv) The terms and conditions for acquisition of business of another company have been decided by March, 2016 end. But the financial resources were arranged in April, 2016 and amount invested was ` 40 lakh. (v) Theft of cash of ` 2 lakhs by the cashier on 31 st March, 2016 was detected the next day after the financial statements have been approved by the Directors. (b) XYZ Ltd. is in the process of finalizing its account for the year ended 31 st March, The company seeks your advice on the following: (i) (ii) The company's sale tax assessment for assessment year has been completed on 14 th February, 2016 with a demand of `5.40 crore. The company paid the entire due under protest without prejudice to its right of appeal. The company files its appeal before the appellate authority wherein the grounds of appeal cover tax on additions made in the assessment order for a sum of `3.70 crore. The company has entered into a wage agreement in May 2016 whereby the labour union has accepted a revision in wage from June The agreement provides that the hike till May 2016 will not be paid to the employees but will be settled to them at the time of retirement. The company agrees to deposit the arrears in Government Bonds by September Assume that the negotiations for hike in wages had already started in the year i.e. before the balance sheet date. 4. (a) Plus Constructions undertake to construct a bridge for the Government of Uttar Pradesh. The construction commenced during the financial year ending and is likely to be completed by the next financial year. The contract is for a fixed price of ` 12 crore with an escalation clause. The cost to complete the whole contract is estimated at ` 9.50 crore. You are given the following information for the year ended :

5 PAPER 1 : FINANCIAL REPORTING 5 Cost incurred upto Cost estimated to complete the contract ` 4 crore ` 6 crore AS 9 Escalation in cost is 5% and accordingly the contract prices increased by 5%. You are required to ascertain the stage of completion and also to state the revenue and profit to be recognized for the year as per AS 7. (b) Easy Ltd. is preparing its financial statements for the year ended The management is proposing to show the total excise duty of ` 6,25,000 and the basic custom duty paid for ` 3,50,000 as a deduction from the gross sales of ` 56,25,000 while preparing the Statement of Profit and Loss. However, the accountant of the company feels that by doing so the net sales will be shown at lesser value and this will not give a good picture of the company. Therefore, he suggested that the excise duty may not be shown as deduction from the sales value. Comment on the views of the management as well as of the accountant in light with the relevant existing accounting standard. Also calculate the net sales of Easy Ltd. AS 11 and AS (a) Huge Ltd. acquired at the start of the financial year a fixed asset from USA at a price of US $ 1,25,000 and made a down payment of US $ 25,000. The exchange rate was ` per dollar at the date of transaction. The balance amount was payable in 4 equal half yearly instalments with 8% per annum. The exchange rates on due dates of instalment have been ` 61.60; ` 61.80; ` 61.90; and ` The asset was under construction during the period of six months from its acquisition. Ascertain the amount to be capitalized and the gain or loss to be recognized in each of the years. AS 12 AS 13 (b) Anshuman Ltd. purchased a fixed asset for `50,00,000. Government grant received towards it is 20%. Residual value is `8,00,000 and useful life is 8 years. Assumed that the depreciation is on the basis of Straight Line Method, asset is shown in the Balance Sheet net of grant. After one year, grant becomes refundable to the extent of `7,00,000 due to noncompliance of certain conditions. Pass Journal entries for 1 st and 2 nd year in the books of the company. 6. (a) Dynamic Ltd. invested in the shares of another company on 31 st October, 2015 at a cost of ` 4,50,000. It also earlier purchased Gold of ` 5,00,000 and Silver of ` 2,25,000 on 31 st March, 2013.

6 6 FINAL EXAMINATION: NOVEMBER, 2016 j AS 14 AS 15 Market values as on 31 st March, 2016 of the above investments are as follows: Shares `3,75,000; Gold `7,50,000 and Silver `4,35,000 How will the above investments be shown in the books of account of Dynamic Ltd. for the year ending 31 st March, 2016 as per the provision of AS13? (b) Astha Ltd. is absorbed by Nistha Ltd.; the consideration being the takeover of liabilities, the payment of cost of absorption not exceeding ` 10,000 (actual cost ` 9,000) the payment of the 9% debentures of ` 50,000 at a premium of 20% in 8% debentures issued at a premium of 25% at face value and the payment of `15 per share in cash and allotment of three 11% preference shares of ` 10 each at a discount of 10% and four equity share of `10 each at a premium of 20% fully paid for every five shares in Astha Ltd. The number of share of the vendor company are 1,50,000 of ` 10 each fully paid. Calculate purchase consideration as per AS (a) A company has a scheme for payment of settlement allowance to retiring employees. Under the scheme, retiring employees are entitled to reimbursement of certain travel expenses for class they are entitled to as per company rule and to a lump-sum payment to cover expenses on food and stay during the travel. Alternatively employees can claim a lump sum amount equal to one month pay last drawn. AS 19 The company s contentions in this matter are: (i) (ii) Settlement allowance does not depend upon the length of service of employee. It is restricted to employee s eligibility under the Travel rule of the company or where option for lump-sum payment is exercised, equal to the last pay drawn. Since it is not related to the length of service of the employees, it is accounted for on claim basis. State whether the contentions of the company are correct as per relevant Accounting Standard. Give reasons in support of your answer. (b) On 1 st January, 2015, Sahara Ltd. sold equipment for ` 6,14,460. The carrying amount of the equipment on that date was ` 1,00,000. The sale was a part of the package under which Help Ltd. leased the asset to Sahara Ltd. for ten years term. The economic life of the asset is estimated as 10 years. The minimum lease rents payable by the lessee has been fixed at ` 1,00,000 payable annually beginning from 31 st December, The incremental borrowing interest rate of Sahara Ltd. is estimated at 10% p.a. Calculate the net effect on the Statement of Profit and Loss in the books of Sahara Ltd.

7 PAPER 1 : FINANCIAL REPORTING 7 AS (a) Goonj Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second year of its operation. Depreciation timing difference resulting in a tax liability in year 1 and 2 is ` 200 lakhs and ` 400 lakhs respectively. From the third year it is expected that the timing difference would reverse each year by ` 10 lakhs. Assuming tax rate of 40%, find out the deferred tax liability at the end of the second year and any charge to the Profit and Loss account. AS 25 AS 20 (b) Dhyaan Limited reported a Profit Before Tax (PBT) of ` 4 lakhs for the third quarter ending On enquiry you observe the following based on which give the treatment required under AS 25: (i) (ii) Dividend income of ` 4 lakhs received during the quarter has been recognized to the extent of ` 1 lakh only. 80% of sales promotion expenses ` 15 lakhs incurred in the third quarter has been deferred to the fourth quarter as the sales in the last quarter is high. (iii) In the third quarter, the company changed depreciation method from WDV to SLM, which resulted in excess depreciation of ` 12 lakhs. The entire amount has been debited in the third quarter, though the share of the third quarter is only ` 3 lakhs. (iv) ` 2 lakhs extra-ordinary gain received in third quarter was allocated equally to the third and fourth quarter. (v) Cumulative loss resulting from change in method of inventory valuation was recognized in the third quarter of ` 3 lakhs. Out of this loss ` 1 lakh relates to previous quarters. (vi) Sale of investment in the first quarter resulted in a gain of ` 20 lakhs. The company had apportioned this equally to the four quarters. Prepare the adjusted profit before tax for the third quarter. 9. From the information furnished you are required to compute the Basic and Diluted EPS (earnings per share) for accounting year to and adjusted EPS for the year to Net profit for the year ended ` 75,50,000 Net profit for the year ended ` 1,00,25,000 No. of equity shares as on ,00,250 Bonus issue on share for every 2 held No. of 12% Convertible Debentures of ` 100 each 1,00,000

8 8 FINAL EXAMINATION: NOVEMBER, 2016 AS 29 issued on Conversion ratio of Debentures Tax rate 10 shares per debenture 30 percent 10. (a) The company has not made provision for warrantee in respect of certain goods considering that the company can claim the warranty cost from the original supplier. Comment. Guidance Note on Accounting for Derivatives (b) Almighty Ltd. is an exporter of goods. In the month of July 2015, it receives the order for supply of goods to US customers in the month of January 2016 and as per the payment cycle with the customers, it expects to realise USD 100,000 in April Almighty Ltd. has decided to fully hedge the sales from foreign currency risk. Immediately after getting the order, to hedge the firm commitment in foreign currency it enters into a derivative transaction with Wealth Bank, for future sale of USD 100,000 in the month of April ` 65 per USD (Spot Rate was ` per USD). For this purpose, it is assumed that the company has entered into a cash flow hedge, which is generally the case for hedging foreign currency risk. Further, it is assumed that: At the time of booking of sale in January 2016, the USD rate was ` 61, and forward rate for delivery on April 30, 2016 was ` On the reporting date on March 31, 2016, the USD rate was ` 60.50, and forward rate for delivery on April 30, 2016 was ` At the time of realisation USD rate was ` 60 on April 30, The above transaction should be accounted by ignoring the impact of discounting of MTM of the hedging instrument. Pass necessary journal entries. Ind AS Differencesvis-a-vis existing AS 11. (a) Explain some key differences between Ind AS 1 Presentation of Financial Statements and Existing notified AS 1 Disclosure of Accounting Policies. Carve outs in Ind AS from IFRS (b) Explain carve out in Ind AS 17 from IAS 17 with respect to Leases alongwith the reason.

9 PAPER 1 : FINANCIAL REPORTING 9 Applicability of Ind AS (c) Company A is a listed company and has three Subsidiaries Company X, Company Y and Company Z. As on 31 st March 2014, the net worth of Company A is ` 600 crore, net worth of Company X is ` 100 crore, Company Y is ` 400 crore and Company Z is ` 210 crore. All the three subsidiaries are non-listed public companies. Comment in case of following three situation: A B C During the financial year , Company A has sold off its entire investment in Company X on 31 st December Therefore, Company X is no longer a subsidiary of Company A for the purposes of preparation of financial statements as on 31 st March Should Company X prepare its financial statements as per the Companies (Accounting Standards) Rules, 2006 or the Companies (Indian Accounting Standards) Rules, 2015? During the financial year , Company A has sold off its investment in Company Y on 31st December, Therefore, Company Y is no longer a subsidiary of Company A for the purposes of preparation of financial statements as on 31 March Should Company Y prepare its financial statements as per the Companies (Accounting Standards) Rules, 2006 or the Companies (Indian Accounting Standards) Rules, 2015? During the financial year , Company A has sold off its investment in Company Z on 31 st December 2016, therefore company Z is no longer a subsidiary of Company A for the purposes of preparation of financial statements as on 31 st March Should Company Z prepare its financial statements as per the Companies (Accounting Standards) Rules, 2006 or the Companies (Indian Accounting Standards) Rules, 2015? Corporate Financial Reporting Schedule III to the Companies Act, (a) Y Ltd purchased goods on 24 months credit but the creditor has the call option that can be exercised after 15 months. On the reporting date such trade payable was outstanding for 4 months (i.e. payable after 20 months from the reporting date). Is the trade payable current or non-current? (b) Where should the balances with banks to the extent held as margin money or security against the borrowings, guarantees, other commitments be disclosed? (c) Would it make any difference if the agreement allows the lender to demand immediate repayment of loan in case of default or breach of other debt covenant?

10 10 FINAL EXAMINATION: NOVEMBER, 2016 However, the lender has not demanded repayment till authorization of financial statements for issue. Accounting for Corporate Restructuring 13. (a) Following is the summarized Balance Sheet of C Ltd. as on 31 st March, 2016: Liabilities Equity shares of `10 each fully paid up 12,50,000 Bonus shares 1,00,000 Share option outstanding Account 4,00,000 Revenue Reserve 15,00,000 Securities Premium 2,50,000 Profit & Loss Account 1,25,000 Capital Reserve 1,00,000 Revaluation Reserve 1,00,000 Unpaid dividends 1,00,000 12% Debentures (Secured) 18,75,000 Advance from related parties (Unsecured) 10,00,000 Current maturities of long term borrowings 16,50,000 Application money received for allotment due for refund 2,00,000 ` 86,50,000 Fixed Assets 46,50,000 Current Assets 40,00,000 86,50,000 The Company wants to buy back 25,000 equity shares of `10 each, on 1 st April, 2016 at `20 per share. Buy back of shares is duly authorised by its Articles and necessary resolution has been passed by the Company towards this. The payment for buy back of shares will be made by the Company out of sufficient bank balance available shown as part of Current Assets. Comment with your calculations, whether buy back of shares by the Company is within the provisions of the Companies Act, If yes, pass necessary journal entries towards buy back of shares and prepare the Balance Sheet after buy back of shares.

11 PAPER 1 : FINANCIAL REPORTING 11 (b) Given below are the Balance Sheet of two companies as on 31 st December, A Limited Liabilities ` Assets ` Share Capital: Patent 1,00,000 Issued and fully paid up Building 5,40,000 50,000 8% Cumulative 5,00,000 Plant and Machinery 15,10,000 Preference Shares of Rs. 10 each 1,50,000 Equity shares of ` 10 each Furniture 75,000 15,00,000 Investment 1,55,000 General Reserve 7,65,000 Stock 3,58,000 Profit and Loss account 1,25,000 Sundry Debtors 72,000 Sundry Creditors 60,000 Cash and Bank 1,40,000 B Limited 29,50,000 29,50,000 Liabilities ` Assets ` Share Capital: Goodwill 62,000 Issued and fully paid Motor Car 1,26,000 50,000 Shares of ` 10 each 5,00,000 Furniture 58,000 Profit and Loss Account 45,000 Stock 2,40,000 Sundry Creditors 31,000 Sundry Debtors 70,000 Cash and Bank 20,000 5,76,000 5,76,000 It has been agreed that both these companies should be wound up and a new company AB Ltd. should be formed to acquire the assets of both the companies on the following terms and conditions: (i) AB Ltd. is to have an authorized capital of ` 36,00,000 divided into 60,000, 8% cumulative preference shares of `10 each and 3,00,000 equity shares of ` 10 each. (ii) AB Ltd. is to purchase the whole of the assets of A Ltd. (except cash and bank balances) for ` 28,25,000 to be settled as to ` 5,75,000 in cash and as to the balance by issue of 1,80,000 equity shares, credited as fully paid, to be treated as valued at ` each. (iii) AB Ltd. is to purchase the whole of the assets of B Ltd. (except cash and bank balances) for `4,91,000 to be settled as to ` 16,000 in cash and as to the

12 12 FINAL EXAMINATION: NOVEMBER, 2016 balance by issue of 38,000 equity shares, credited as fully paid, to be treated as valued at `12.50 each. (iv) A Ltd. and B Ltd. both are to be wound up, the two liquidators distributing the shares in AB Ltd. in kind among the equity shareholders of the respective companies. (v) The liquidator of A Ltd. is to pay the preference shareholders `12 in cash for every share held in full satisfaction of their claims. (vi) AB Ltd. is to make a public issue of 60,000, 5% cumulative preference shares at a premium of 10% and 30,000 equity shares at the issue price of ` per share, all amount payable in full on application. It is estimated that the cost of liquidation (including the liquidators' remuneration) will be `10,000 in case of A Ltd. and ` 5,000 in case of B Ltd. and that the preliminary expenses of AB Ltd. will amount to ` 24,000 exclusive of the underwriting commission of `38,900 payable on the public issue. You are required to prepare the initial Balance Sheet of AB Ltd. on the basis that all assets other than goodwill are taken over at the book value. Consolidated Financial Statements 14. (a) On , the Balance Sheet of Arohi Ltd. and Soumaya Ltd. were as follows: Share Capital (` 100 each) Arohi Ltd. Soumaya Ltd. 15,00,000 5,00,000 Land & Building Arohi Ltd. Soumaya Ltd. 5,34,000 1,35,000 Reserves 9,50,000 1,50,000 Plant & 11,15,000 4,28,000 Machinery Sundry 4,38,000 3,83,000 Stock 6,42,000 3,92,000 Creditors Provision for Taxation 3,53,000 2,11,000 Debtors 7,80,000 2,70,000 Profit & 80,000 1,05,000 Prepaid 32,000 6,000 Loss A/c Expenses Cash at 2,18,000 1,18,000 Bank 33,21,000 13,49,000 33,21,000 13,49,000 Both companies have arrangements with their bankers for overdraft facilities to meet contingencies.

13 PAPER 1 : FINANCIAL REPORTING 13 On , Arohi Ltd. acquired 80% of the share in Soumaya Ltd. to pay them, Arohi Ltd. allotted, by way of consideration, 7.5% fully paid Redeemable Preference Shares (newly created) of the value of ` 6,00,000 in the capital of the company. The shares are redeemable after 10 years. Trading results for showed that Arohi Ltd. had earned a profit of ` 3,00,000 after writing off 10% depreciation on Plant and Machinery and after providing for taxation. It paid a dividend of 12% on equity shares. After writing off 10% depreciation on its Plant and Machinery, Profit and Loss Account of Soumaya Ltd. showed loss of ` 1,20,000. Arohi Ltd. decided to make a provision in its books against its share of loss of Soumaya Ltd. There was no addition to or retirement of fixed assets in The current assets and liabilities (other than bank balance or overdraft) stood as follows on : Assets Arohi Ltd. Soumaya Ltd. Stock 6,10,000 4,08,000 Debtors 7,50,000 2,60,000 Prepaid Expenses 22,000 6,000 Soumaya Ltd. 1,10,000 - Liabilities Arohi Ltd. - 90,000 Sundry Creditors 4,50,000 2,50,000 Provision for Taxation 2,90,000 - Prepare the Consolidated Balance Sheet of the two companies as at (b) Jointly Controlled Entity (JCE) sold to venturer (who holds 40% share in JCE) goods costing ` 1,00,000 at ` 1,50,000. Entire stock is held at ` 1,20,000 at net realisable value by venturer. Show how the stock will be reflected in the Consolidated Financial Statement. Financial Instruments 15. Arush Ltd. issued Debentures amounting to ` 100 lacs. As per the terms of the issue it has been agreed to issue equity shares amounting to ` 150 lacs to redeem the debentures at the end of 3 rd year. Assume that comparable market yield is 10% for year 0 and 1, and 10.5% for Year 2 end. Show accounting entries. Share Based Payments 16. At the beginning of year 1, the enterprise grants 1,000 stock options to each member of its sales team, conditional upon the employees remaining in the employment of the

14 14 FINAL EXAMINATION: NOVEMBER, 2016 enterprise for three years, and the team selling more than 50,000 units of a particular product over the three-year period. The fair value of the stock options is ` 15 per option at the date of grant. During year 2, the enterprise increases the sales target to 1,00,000 units. By the end of year 3, the enterprise has sold 55,000 units, and the stock options do not vest. Twelve members of the sales team have remained in service for the three-year period. Comment in light of the relevant Guidance Note that whether the company should recognise the expenses on the base of options granted or not. Also state will your answer differ if, instead of modifying the performance target, the enterprise had increased the number of years of service required for the stock options to vest from three years to ten years. Mutual Fund 17. A Mutual Fund raised 100 lakh on April 1, 2016 by issue of 10 lakh units of ` 10 per unit. The fund invested in several capital market instruments to build a portfolio of ` 90 lakh. The initial expenses amounted to ` 7 lakh. During April, 2016, the fund sold certain securities of cost ` 38 lakh for ` 40 lakh and purchased certain other securities for ` lakh. The fund management expenses for the month amounted to ` 4.50 lakh of which ` 0.25 lakh was in arrears. The dividend earned was ` 1.20 lakh. 75% of the realized earnings were distributed. The market value of the portfolio on was ` lakh. Determine NAV per unit. Valuation of Goodwill 18. The following is the extract from the Balance Sheets of Famous Ltd.: Liabilities As at ` in lakhs As at ` in lakhs Assets As at ` in lakhs As at ` in lakhs Share capital Fixed assets General reserve % Investment Profit and Loss account Inventory % Term loan Trade Receivables Trade Payables Cash at bank Provision for tax Fictitious assets 10 8 Proposed dividend ,286 1,363 1,286 1,363

15 PAPER 1 : FINANCIAL REPORTING 15 Additional information: (i) Replacement values of fixed assets were ` 1,100 lakhs on and ` 1,250 lakhs on respectively. (ii) Rate of depreciation adopted on fixed assets was 5% p.a. (iii) 50% of the inventory is to be valued at 120% of its book value. (iv) 50% of investments were trade investments. (v) Trade Receivables on 31 st March, 2015 included foreign trade receivables of $ 35,000 recorded in the books at ` 35 per U.S. Dollar. The closing exchange rate was $ 1= ` 39. (vi) Trade Payables on 31 st March, 2015 included foreign trade payables of $ 60,000 recorded in the books at $ 1 = ` 33. The closing exchange rate was $ 1 = ` 39. (vii) Profits for the year included ` 60 lakhs of government subsidy which was not likely to recur. (viii) ` 125 lakhs of Research and Development expenditure was written off to the Profit and Loss Account in the current year. This expenditure was not likely to recur. (ix) Future maintainable profits (pre-tax) are likely to be higher by 10%. (x) Tax rate during was 50%, effective future tax rate will be 40%. (xi) Normal rate of return expected is 15%. One of the directors of the company Arvind, fears that the company does not enjoy goodwill in the prevalent market circumstances. Critically examine this and establish whether Famous Ltd. has or has not any goodwill. If your answers were positive on the existence of goodwill, show the leverage effect it has on the company s result. Industry average return was 12% on long-term funds and 15% on equity funds. Value Added Statement 19. Prepare a value added statement for the year ended on and reconciliation of total value added with profit before taxation, from the profit and loss account of Heaven Ltd. for the year ended on Income: (`in lakhs) Sales Other income 6.00 Total Expenditure:

16 16 FINAL EXAMINATION: NOVEMBER, 2016 Operating cost Excise duty Interest on bank overdraft 1.00 Interest on 9% debentures Profit before depreciation Depreciation 4.10 Profit before tax 6.70 Provision for tax 2.40 Profit after tax 4.30 Proposed dividend 0.30 Retained profit 4.00 The following additional information are given: (i) (ii) Sales represents net sales after adjusting discounts, returns and sales tax. Operating cost includes `82.00 lakhs as wages, salaries and other benefits to employees. (iii) Bank overdraft is temporary. Economic Value Added 20. (a) Upwell Ltd. has provided the following information: (` in thousand) Equity Share Capital (` 10 each) % Preference Share Capital (` 10 each) 200 Reserves and Surplus % Debentures % Non-trade Investments (Nominal Value ` 100 thousand) 140 Land and Building held as Investment 20 Advance given for Purchase of Plant 10 Capital Work in Progress 30 Underwriting Commission (not written off) 20 Earnings per share 16 Tax rate 30% Beta factor 1.65

17 PAPER 1 : FINANCIAL REPORTING 17 Market rate of return 16.25% Risk free rate 9.85% Calculate Economic Value Added by the company. Human Resource Accounting (b) The following information is supplied to you about Support Ltd. Capital & Reserves Equity Shares of ` 100 each of which ` 75 has been called up 5,00,000 Equity Shares in respect of which calls are in 25 per share ` 1,00,000 General Reserve ` 10,00,000 Profit & Loss account (balance at beginning of the year) ` (25,00,000) Profit/(loss) for the year ` (1,80,000) Industry Average Profitability 12.50% 8% Debentures of ` 10 each 8,00,000 Support Ltd. is proposing to hire the services of Mr. X to turn the company around. Minimum take home salary per month demanded by Mr. X ` 4,00,000 Average Income tax rate on salaries above ` 3 lakhs per annum 25% Provident Fund contribution by Employer per month ` 50,000 Profits over and above target expected by hiring Mr. X 10% You are required to analyze the proposal and see whether it is worthwhile to employ Mr. X and also suggest the maximum emoluments that could be paid to him. Note: (i) (ii) PF contributions are tax exempt. Take home salary is that remaining after employee's contribution to ` 50,000 per month and after deduction of Income-tax on salary. SUGGESTED ANSWERS / HINTS 1. (a) Para 27 of AS 1 Disclosure of Accounting Policies requires that if the fundamental accounting assumptions, viz. Going Concern, Consistency and Accrual are followed in financial statements, specific disclosure is not required. However, if a fundamental accounting assumption is not followed, the fact should be disclosed.

18 18 FINAL EXAMINATION: NOVEMBER, 2016 Since the decision of the High Court was pending till the date of preparation of the financial statements, it is not appropriate to assume that the two companies had merged in the said financial year. Accordingly, not recognizing the interest income as well as lease rent payable to the subsidiary company in the financial statements of , although they have become due, tantamount to not following the accrual concept with regard to AS 1. This is also contrary to the provisions of the section 128(1) of the Companies Act, 2013 which states that the books of accounts should be kept on accrual basis and according to the double entry system of accounting. Further as per the section, financial statements for every financial year shall give true and fair view of the state of the affairs of the company. (b) Computation of cost of inventory and allocation of material cost Purchase price [13,000 kg. x ` (90-1)] 11,57,000 Less:Excise duty on which CENVAT credit is admissible (13,000 kg. x ` 5) (65,000) ` 10,92,000 Add: Freight 30,000 Allocated administrative expenses 10,000 A. Total material cost 11,32,000 B. Number of units to be normally received = 96% of 13,000 kg. 12,480kg. C. Normal cost per kg. (A/B) ` Allocation of material cost Kg. `/Kg. ` Materials consumed 10,000 9,07,050 Cost of inventory (12,400-10,000) 2, (approx.) 2,17,692 Abnormal loss 80 7,258* Total material cost 12,480 11,32,000 *The difference due to rounding off of cost per kg. has been adjusted. Thus, the inventory will be valued at ` 2,17,692. Notes: 1. Abnormal loss will be recognized as a separate expense. 2. Containers are used for delivery of the chemicals and are not reusable. Cost of these containers is treated as selling and distribution expense. The sale value of these containers will be credited to Profit and Loss Account and shall not be

19 PAPER 1 : FINANCIAL REPORTING 19 considered for the purpose of valuation of inventory. Alternatively, candidates may deduct ` 500, the sales value of container assuming that the same is applicable to the purchases made, while computing material cost. In that case the material cost will be computed as ` 11,31,500 (`11,32,000 `500) instead of ` 11,32,000. Accordingly the allocation of material cost will get change. 3. State VAT has not been included in the cost of material assuming that the input credit is admissible on the same. 2. (a) Table showing classification of items into operating, investing or financing activities S. No. Items Activity (i) Interest paid by the financial enterprise Cash flow from operating activities (ii) Dividend paid Cash flow from financing activities (iii) (iv) (v) TDS on interest received from the subsidiary company Deposit with bank for a term of two years Insurance claim received against loss of machinery by fire Cash flow from investing activities Cash flow from investing activities Extraordinary item to be shown as a separate heading under Cash flow from investing activities (b) Purchase of business falls under Investing Activities as per AS 3 Cash Flow Statement. As per para 37 of the standard, the aggregate cash flows arising from acquisitions and from disposals of other business units should be presented separately and classified as investing activities. Also as per para 39, the separate presentation of the cash flow effects of acquisitions and disposals of subsidiaries and other business units as single line items helps to distinguish those cash flows from other cash flows. The cash flow effects of disposals are not deducted from those of acquisitions. Accordingly, netting of aggregate cash flows from disposal and acquisition of business units would not be appropriate as per the standard. 3. (a) According to AS 4 Contingencies and Events Occurring after the Balance Sheet Date, adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date. However, adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet date, if such events do not relate to conditions

20 20 FINAL EXAMINATION: NOVEMBER, 2016 existing at the balance sheet date. Contingencies used in the Standard is restricted to conditions or situations at the balance sheet date, the financial effect of which is to be determined by future events which may or may not occur. (i) (ii) Fire has occurred after the balance sheet date and since no information in this regard exist on the balance sheet date, it is a non-adjusting event. Also the loss is totally insured. Therefore, the event becomes immaterial but disclosure with this regard might be made in the financial statements. The contingency is restricted to conditions existing at the balance sheet date. However, in the given case, suit was filed against the company s advertisement by a party on 10 th April, 2016 for amount of ` 20 lakh. Therefore, it does not fit into the definition of a contingency. Also no condition for filing of suit against the company existed on the balance sheet date. Hence it is a non-adjusting event. (iii) In the given case, proposal for sale of immovable property was sent before the closure of the books of accounts. This is a non-adjusting event as only the proposal was sent and no agreement was effected in the month of March, 2016 i.e. before the balance sheet date. Alternatively, it may be assumed that the proposal was sent only after advance negotiation. Hence, it shall be considered as an adjusting event. Accordingly, the adjustment may be made to the book value of the asset. (iv) As the term and conditions of acquisition of business of another company had been decided by the end of March, 2016, acquisition of business shall be considered as an adjusting event occurring after the balance sheet date since arrangement of resources is merely for completion of the transaction. Hence, adjustment to assets and liabilities is required in the financial statements for the financial year ended on 31 st March, 2016 since the event occurring after the balance sheet date i.e. investment of ` 40 lakh merely confirms the deal/investment and its amount. (v) (b) (i) Since the financial statements have been approved before detection of theft by the cashier of ` 2,00,000, it becomes a non-adjusting event and no disclosure is required in the report of the approving authority. Since the company is not appealing against the addition of ` 1.70 crore (` 5.40 crore less ` 3.70 crore), therefore, the same should be provided/ expensed off in its accounts for the year ended on 31 st March, However, the amount paid under protest can be kept under the heading Long-term Loans & Advances / Short-term Loans and Advances as the case may be alongwith disclosure as contingent liability of ` 3.70 crore.

21 PAPER 1 : FINANCIAL REPORTING 21 (ii) The arrears for the period from June, 2015 to March, 2016 are required to be provided for in the accounts of the company for the year ended on 31 st March, (a) Calculation of total estimated cost of construction ` in crore Cost of construction of bridge incurred upto Add: Estimated future cost 6.00 Total estimated cost of construction Contract Price (12 crore x 1.05) Stage of completion Percentage of completion till date to total estimated cost of construction = (4/10) 100 = 40% crore Revenue and Profit to be recognized for the year ended 31 st March, Proportion of total contract value recognized as revenue = Contract price x percentage of completion =` crore x 40% = `5.04 crore 2. Profit for the year ended 31 st March, 2016 = ` 5.04 crore ` 4 crore =` 1.04 crore (b) As per the Explanation to para 10 of AS 9 Revenue Recognition the amount of excise duty to be deducted from the turnover should be the total excise duty for the year except the excise duty related to the difference between the closing stock and opening stock. However, standard does not require basic custom duty to be shown as deduction from sales. Basic custom duty is an expense of the company and should have been shown as a charge in the Statement of Profit and Loss. Showing basic custom duty as a deduction to sales will tantamount to contradiction of Generally Accepted Accounting Principles. Therefore, the managements contention that excise duty shall be deducted from gross sales is correct but with respect to deduction of basic custom duty, there contention is not correct. Calculation of net sales: Turnover (Gross) 56,25,000 `

22 22 FINAL EXAMINATION: NOVEMBER, 2016 Less: Excise Duty (6,25,000) Turnover (Net) 50,00, (a) As per AS 16, Borrowing Costs, an asset will be considered as a qualifying asset only when it takes substantial period of time to get ready for its intended use. Ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case. In the given case, since the asset was under construction for the period of six months from its acquisition, it is considered as a non-qualifying asset in an ordinary case. Accordingly, borrowing cost will not be capitalized. Further, the company may opt to capitalize the exchange difference arising on the settlement of monetary items or on reporting an enterprise s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, or to recognise as income or expense in the period in which they arise. Applying the provisions of AS 11 (option to capitalize) amount to be capitalized in each of the years will be as follows: Purpose Initial cost at the time of acquisition of fixed asset On payment of 1 st instalment Interest paid with 1 st instalment On payment of 2 nd instalment Interest paid with 2 nd instalment Exchange difference on closing balance of long term foreign currency Amount to be capitalised US $ 1,25,000 x ` ,87,500 US $ 25,000 x ` ( ) 2,500 ` Interest to be charged to profit and loss account (1,00,000 x 8% x 6/12)x ,46,400 US $ 25,000 x ` ( ) 7,500 (75,000 x 8% x 6/12) x ,85,400 US $ 50,000 x ` ( ) 15,000 At the end of the year 1 77,12,500 4,31,800 ` As per the clarification given by MCA dated , Para 6 of AS 11 and Para 4(e) of the AS 16 shall not apply to a company which is applying Para 46A of AS 11.

23 PAPER 1 : FINANCIAL REPORTING 23 On payment of 3 rd instalment Interest paid with 3 rd instalment On payment of 4 th instalment Interest paid with 4 th instalment US $ 25,000 x ` ( ) 2,500 (50,000 x 8% x 6/12) x ,23,800 US $ 25,000 x ` ( ) (25,000 x 8% x 6/12) x ,500 62,100 At the end of the year 2 10,000 1,85,900 The entire amount of exchange difference of ` 35,000 (25, ,000) will be capitalized to Fixed Asset account. This capitalized exchange difference will be depreciated over the useful life of the asset. (b) Journal Entries in the books of Anshuman Ltd. Year Particulars ` in lakhs (Dr.) 1 st year Fixed Asset Account (50 10) Dr. 40 ` in lakhs (Cr.) To Bank Account 40 (Being government grant on asset received which decreased the cost of fixed asset) Depreciation Account (W.N.) Dr. 4 To Fixed Asset Account 4 (Being depreciation charged on SLM on fixed asset) Profit & Loss Account Dr. 4 To Depreciation Account 4 (Being depreciation transferred to Profit and Loss Account at the end of year 1) 2 nd year Fixed Asset Account Dr. 7 To Bank Account 7 (Being government grant on asset partly refunded which increased the cost of fixed asset) Depreciation Account (W.N.) Dr. 5 To Fixed Asset Account 5

24 24 FINAL EXAMINATION: NOVEMBER, 2016 Working Note: (Being depreciation charged on SLM on revised value of fixed asset prospectively) Profit & Loss Account Dr. 5 To Depreciation Account 5 (Being depreciation transferred to Profit and Loss Account at the end of year 2) Depreciation for year 1 and 2 ` in lakhs Cost of the Asset 50 Less: Government grant received (10) 40 8 Less: Depreciation for the first year 8 Book value at the end of 1 st year 36 Add: Government grant refundable in 2 nd year 7 Depreciation for the second year (a) As per AS 13 Accounting for Investments, if the shares are purchased with an intention to hold for short-term period then investment will be shown at the market value. In the given case, shares purchased on 31 st October, 2015, will be valued at ` 3,75,000 as on 31 st March, Gold and silver are generally purchased with an intention to hold it for long term period until and unless given otherwise. Hence, the investment in gold and silver (purchased on 31 st March, 2013) shall continue to be shown at cost as on 31 st March, 2016 i.e., ` 5,00,000 and ` 2,25,000 respectively, though their realizable values have been increased. Thus the shares, gold and silver will be shown at ` 3,75,000, ` 5,00,000 and ` 2,25,000 respectively and hence, total investment will be valued at ` 11,00,000 in the books of account of Dynamic Ltd. for the year ending 31 st March, 2016 as per provisions of AS (4) 43 5

25 PAPER 1 : FINANCIAL REPORTING 25 Alternatively, if equity shares are acquired with an intention to hold for long term period then it will continue to be shown at cost in the Balance Sheet of the company. However, provision for diminution shall be made to recognize a decline, if other than temporary, in the value of the investments. In the given case, shares purchased on 31 st October, 2015, will be valued at ` 4,50,000 as on 31 st March, 2016 assuming that the fall in market value of the shares as on 31 st March, 2016 is temporary in nature. (b) As per AS 14 Accounting for Amalgamations, the term consideration has been defined as the aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company. The payment made by transferee company to discharge the Debenture holders and outside liabilities and cost of winding up of transferor company shall not be considered as part of purchase consideration. Computation of Purchase Consideration Cash payment `15 x 1,50,000 22,50,000 11% Preference Shares of ` 10 10% discount [(1,50,000 x 3/5) x ` 9] ` 8,10,000 Equity shares of ` 10 20% premium [(1,50,000 x 4/5) x ` 12] 14,40,000 Total Purchase consideration 45,00, (a) The present case falls under the category of defined benefit scheme under Para 49 of AS 15 (Revised) Employee Benefits. The said para encompasses cases where payment promised to be made to an employee at or near retirement presents significant difficulties in the determination of periodic charge to the statement of profit and loss. The contention of the Company that the settlement allowance will be accounted for on claim basis is not correct even if company s obligation under the scheme is uncertain and requires estimation. In estimating the obligation, assumptions may need to be made regarding future conditions and events, which are largely outside the company s control. Thus, (1) Settlement allowance payable by the company is a defined retirement benefit, covered by AS 15 (Revised). (2) A provision should be made every year in the accounts for the accruing liability on account of settlement allowance. The amount of provision should be calculated according to actuarial valuation.

26 26 FINAL EXAMINATION: NOVEMBER, 2016 (3) Where, however, the amount of provision so determined is not material, the company can follow some other method of accounting for settlement allowances. (b) Net effect on the Statement of Profit and Loss in the year of sale in the books of Lessee (Sahara Ltd.) For calculation of net effect on the statement of profit and loss on sale of equipment, it has to be judged whether lease is an operating lease or finance lease. The lease term is for 10 years which covers the entire economic life of the equipment. At the inception of the lease, the present value of the minimum lease payments (MLP) is ` 6,14,400 [` 1,00,000 x (Annuity factor of ` for 10 years)] and amounts to at least substantially all of the fair value (sale price i.e. ` 6,14,460) of the leased equipment. Thus lease is a finance lease. As per para 48 of AS 19 Leases, if a sale and leaseback transaction results in a finance lease, profit of ` 5,14,460 (Sale value ` 6,14,460 less carrying amount ` 1,00,000) will not be recognized as income in the year of sale in the books of lessee i.e. Sahara Ltd. It should be deferred and amortised over the lease term in proportion to the depreciation of the leased asset. Therefore, assuming that depreciation is charged on straight line basis, Sahara Ltd. will recognize depreciation of ` 61,446 per annum for 10 years (` 6,14,460/ 10) and amortise profit of ` 5,14,460 over the lease term of 10 years, i.e. ` 51,446 p.a. The net effect is a debit of (` 61,446 - ` 51,446) ` 10,000 p.a. to the Statement of Profit and Loss, for 10 years as covered under the lease term. Note: Had there been no sale and lease back transaction, the Statement of Profit and Loss for each year (covered in the lease term) would have been charged by (` 1,00,000/10) ` 10,000, towards depreciation. Thus, the sale and lease back transaction will have no impact on profit or loss account to be reported by the lessee (vendor in the sales transaction) over the lease period. 8. (a) As per para 13 of AS 22, Accounting for Taxes on Income, deferred tax in respect of timing differences which originate during the tax holiday period and reverse during the tax holiday period, should not be recognised to the extent deduction from the total income of an enterprise is allowed during the tax holiday period as per the provisions of sections 10A and 10B of the Income-tax Act. Deferred tax in respect of timing differences which originate during the tax holiday period but reverse after the tax holiday period should be recognised in the year in which the timing differences originate. However, recognition of deferred tax assets should be subject to the consideration of prudence. For this purpose, the timing differences which originate first should be considered to reverse first. Out of ` 200 lakhs depreciation, timing difference amounting `80 lakh (` 10 lakh x 8 years) will reverse in the tax holiday period and therefore, should not