Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.1  

Gurukripa’s Guideline Answers to May 2015 Exam Questions CA Final – Financial Reporting

Question No.1 is compulsory (4 × 5 = 20 Marks). Answer any five questions from the remaining six questions (16 × 5 = 80 Marks). [Answer any 4 out of 5 in Q.7]

Working Notes should form part of the answers. Question 1 (a): AS – 2 5 Marks From the following information, value the Inventories as on 31st March, 2015: Raw Material has been purchased at ` 125 per kg. Prices of Raw Material are on the decline. The Finished Goods being manufactured with the Raw Material is also being sold at below Cost. The Stock of Raw Material is of 15,000 kg and the Replacement Cost of Raw Material is ` 100 per kg. Cost of Finished Goods per kg is as under:

Particulars ` per kg Material Cost 125 Direct Labour Cost 20 Direct Variable Production Overhead 10 Fixed Production Overhead for the year for a normal capacity of 1,00,000 kgs of production is ` 10 Lakhs. At the year end, there were 2,000 kgs of Finished Goods in stock. Net Realisable Value of Finished Goods is ` 140 per kg. Solution: Similar to Page 2.4, Q.No.16, Page 2.15, Q.No.50 of Padhuka’s Students’ Referencer on A/cg Standards[N 00]

1. Conversion Cost per kg of Finished Product = Direct Labour + Direct Variable Production OH + Fixed Production OH

= ` 20 + ` 10 + Kgs Lakh 1

Lakhs 10`= ` 40 per kg.

2. Inventory Valuation is as under – (A) For Finished Goods (a) Cost per kg for Finished Product = Material + Conversion 125 + 40 = ` 165 per kg (b) Net Realisable Value of Finished Product if sold after Conversion Given = ` 140 per kg (c) Hence, Valuation Rate for Finished Goods = (a) or (b), whichever is lower. ` 140 per kg (d) Value of Inventory 2,000 kg of Finished Product 2,000 kgs × ` 140 = ` 2,80,000

(B) For Raw Materials (a) Cost of Raw Material Given = ` 125 per kg

(b) Replacement Cost of Material, i.e. Sale without Conversion Given = ` 100 per kg (c) Valuation Rate for Raw Material (i.e. least of Cost or NRV, least of (a) and (b) ` 100 per kg (d) Value of Inventory 15,000 kg of Raw Material 15,000 kgs×` 100= ` 15,00,000 Note: When the Finished Products in which the Raw Material is incorporated, are expected to be sold below Cost

(NRV ` 140 vs Cost ` 165), it is preferable to sell the product without Conversion. In such case, the Raw Materials will be valued below cost, i.e. at NRV, being the Replacement Cost.

Question 1 (b): AS – 26 Impairment of Assets 5 Marks SMC Limited is having a Plant (an Asset) whose Carrying Amount as on 01–10–2012 is ` 38,000 Lakhs and the Plant was having a useful life till 31–03–2020. The estimated Residual Value is ` 900 Lakhs. The Selling Price on 31st March 2015 is expected to be ` 20,000 Lakhs and the Cost of Disposal is expected to be ` 100 Lakhs. The Expected Cash Flows from the Plant are as under –

Financial Year 2015–2016 2016–2017 2017–2018 2018–2019 2019–2020 Cash Flow ` Lakhs 4,100 5,900 6,000 7,800 4,500

The Company expects the Discount Rate of 10%. Discount Factor at 10% for 1, 2, 3, 4 and 5 years are 0.909, 0.826, 0.751, 0.683 and 0.621 respectively. The Company provides depreciation on SLM basis. You are required to determine as at 31st March 2015:

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.2  

(i) Value in Use of the Plant (ii) Impairment Loss, if any, to be recognized for the year. (iii) Revised Carrying Amount for the Financial Year ending 31st March 2015. Solution: Similar to Page 28.15, Q.No.31 of Padhuka’s Students’ Referencer on Accounting Standards [RTP]

1. Computation of Value in Use Fin. Year Cash Flow Discount Rate at 10% Discounted Cash Flow 2015–2016 ` 4,100 Lakhs 0.909 ` 3,726.90 Lakhs 2016–2017 ` 5,900 Lakhs 0.826 ` 4,873.40 Lakhs 2017–2018 ` 6,000 Lakhs 0.751 ` 4,506.00 Lakhs 2018–2019 ` 7,800 Lakhs 0.683 ` 5,327.40 Lakhs 2019–2020 ` 4,500 + ` 900 = ` 5,400 Lakhs 0.621 ` 3,353.40 Lakhs

Value in Use ` 21,787.10 Lakhs

2. Computation of Other Particulars Particulars ` Lakhs

1. Original Cost 38,000.00 2. Depreciation for Fin.Years 2012–2013, 2013–2014 and 2014–2015 (See Note below) (8,656.67) 3. Carrying Amount on 31.03.2015 before Impairment (1 – 2) 29,343.33 4. Recoverable Amount (Net Selling Price 19,900 [or] Value in Use 21,787.10, whichever is higher) 21,787.10 5. Impairment Loss = Carrying Amount Less Recoverable Amount (3 – 4) 7,556.23 6. Revised Carrying Amount = Old Carrying Amount Less Impairment Loss (3 – 5) 21,787.10 7. Depreciation Charge from 2015–2016 onwards (21,787.10 – 900) ÷ 5 Years 4,177.42 Note: • Depreciation as per Initial Cost, etc. = Depreciable Value (38,000 – 900) = ` 37,100 Lakhs divided by 7.5 years (i.e.

from 01.10.2012 to 31.03.2020) = ` 4,946.67 Lakhs for each of the full financial years (2013–2014 onwards), and ½ X ` 4,946.67 Lakhs = ` 2,473.33 Lakhs for the period 01.10.2012 to 31.03.2013 (6 months).

• Total Depreciation upto 31.03.2015 = 2,473.33 + 4,946.67 + 4,946.67 = ` 8,656.67 Lakhs. Question 1 (c): AS–9 5 Marks A Company sells the goods with right the return. The following pattern has been observed:

Timeframe of Return from date of purchase % of Cumulative Sales Within 10 days 5%

Between 11 days and 20 days 7% Between 21 days and 30 days 8% Between 31 days and 45 days 9%

The Company has made Sales of ` 30 Lakhs in the month of February 2015 and of ` 36 Lakhs in the month of March 2015. The Total Sales for the Financial Year have been ` 450 Lakhs and the Cost of Sales was ` 360 Lakhs. Determine the amount of Provision to be made and Revenue to be recognized in accordance with AS–9. A year may be considered of 360 days. Solution: See Principles in EAC Opinion on Provisioning towards Sales Returns

Similar to Page 9.11, Q.No.32 of Padhuka’s Students’ Referencer on Accounting Standards [M 12 (Aud)]

1. Principle: Delivery made, giving the Buyer an unlimited right of return: [Mar 2012 CA Journal Page 1355]: (a) A Provision should be created on the B/S date, for Sales Returns after the Balance Sheet date, at the best estimate

of the loss expected, along with any estimated incremental cost that would be necessary to resell the goods expected to be returned.

(b) Necessary adjustments to the provision should be made for actual sales return after Balance Sheet date up to the date of approval of Financial Statements.

2. Analysis and Conclusion: Month Feb 2015 March 2015

Revenue (i.e. Sales) to be recognised ` 30 Lakhs ` 36 Lakhs Relevant Percentage of Sales Returns based on B/s Date 31st March 9% – 8% = 1% 9%

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.3  

Month Feb 2015 March 2015Amount of Sales Returns expected ` 30,000 ` 3,24,000 Cost of Above Sales Returns (360 ÷ 450 = 80% on Sales Value) ` 24,000 ` 2,59,200

Provision for Loss due to Sales Returns = 100% – 80% = 20% of Returns ` 6,000 ` 64,800 Question 1 (d): AS–25 5 Marks Saurav Limited reported a Profit before Tax of ` 8.00 Lakhs for the 2nd quarter ending on 30th September 2014. On enquiry, following issues were noticed: (i) Property Tax of ` 60,000 paid during the quarter for the full year has been recognized in full. (ii) 1/5th of ` 15 Lakhs being Marketing Promotional Expenses incurred on 23rd September, 2014 has been recognized based

on past experience of higher sales in the last quarter of the year. (iii) 50% of the Loss of ` 2 Lakhs incurred on disposal of a Business Segment has been allocated to this quarter. (iv) Cumulative Loss of ` 3 Lakhs resulting from the change in the method of Valuation of Inventory was recognised in the 2nd

quarter, which included ` 2 Lakhs related to earlier quarters. (v) Gain of ` 15 Lakhs from Sale of Investments sold in the 1st quarter was apportioned equally over the full year.

You are required to give proper treatment as required by AS–25 on Interim Financial Reporting and to recast the adjusted Profit before Tax for the 2nd quarter.

Solution: Similar to Page No.25.12, Q.No.33 [N 08, M 12], and Page No.25.10 Q.No.29 [M 12] of Padhuka’s Students’ Referencer on Accounting Standards

Item Treatment

Property Taxes

Property Taxes of ` 60,000 relatable to the entire calendar year should be apportioned on time basis, i.e. 3 months period expense ` 15,000 will be reported as Expense.

Marketing Promotional Expenses

Costs should be anticipated or deferred only when – • It is appropriate to anticipate that type of cost at the end of the fin.year, and • Costs are incurred unevenly during the fin.year of an Enterprise. [Para 38] In this case, recognition of 1/5th of Expense is not proper.

Loss on Disposal of Business Segment

Net Loss on Disposal of Business Segment ` 2,00,000 should be reported in full, since the loss was incurred during the Interim Period.

Loss due to change in method of Valuation

The amount relating to earlier quarters to be taken and adjusted against those respective periods.

Gain on Invts Sale Apportioned Gain on Sale of Investments in first quarter to be reversed.

Particulars ` Lakhs PBT as reported 8.00

Add: Property Taxes to be recognised on time basis (0.60 – 0.15 to be recognised) Loss on change in method of Inventory Valuation relating to previous quarters

0.45 2.00

Less: Sales Promotion Expenses relating to this Quarter (4/5th i.e. 80% × 15.00) Loss on Disposal of Business Segment to be reported in full (balance 50% of 2.00) Apportioned Gain on Sale of Investments in first quarter to be reversed (15.00 ÷ 4)

(12.00) (1.00) (3.75)

Adjusted PBT for the Second Quarter (6.30) Note: The Company should also re–state the results of the previous quarters based on the above adjustments. Question 2: Corporate Restructuring – Amalgamation 16 Marks XY Limited has been incorporated with an Authorized Capital of 70 Lakhs Equity Shares of ` 10 each and 4 Lakhs Preference Shares of ` 100 each. The Subscribers to the Memorandum of Association have subscribed and paid for 1 Lakh Equity Shares. The expenses of incorporation incurred amounted to ` 8.09 Lakhs. XY Limited desires to amalgamate X Limited and Y Limited as at 1st April, 2015. Following information is available.

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.4  

Balance Sheet as on 31st March 2015 (Amounts in ` Lakhs)

Liabilities X Limited Y Limited Share Capital: Equity Shares (FV ` 100) 750 725 10% Preference Shares (FV ` 100) 420 180 Reserves and Surplus: Revaluation Reserve 125 75 Capital Reserve 270 190 Statutory Reserves 60 40 Profit and Loss Account 35 12 Loans Funds: Secured Loans: 12.5% Debentures (FV ` 100) 50 28 Unsecured Loans 25 0 Current Liabilities: Trade Payables 165 75

Total 1,900 1,325 Assets

Fixed Assets: Land and Building 470 290 Plant and Machinery 310 210 Investments 75 50 Current Assets: Trade Receivables 345 270 Inventories 345 254 Cash and Cash Equivalents 355 251

Total 1,900 1,325 Before amalgamation, X Ltd and Y Ltd will make the following adjustments in their Balance–Sheets: (i) Pay off the Unsecured Loans. (ii) X Limited will revalue its Land and Building by enhancing the Book Value by 10% and Y Limited will revalue the Land and

Building at ` 330 Lakhs. (iii) Y Limited will revalue its Plant and Machinery at ` 220 Lakhs. (iv) Investments will be disposed off. X Limited sold its Investments for ` 67 Lakhs and Y Limited disposed the same for ` 52 Lakhs. (v) Debentureholders of X Limited and Y Limited will be discharged by XY Limited by issued of 15% Debentures of ` 100 each

for such an amount which will not put any additional burden of interest outgo on XY Limited than presently payable by X Limited and Y Limited.

(vi) Preference Shareholders of X Limited and Y Limited will be issued 15% Preference Shares in XY Limited in the ratio 2:3, i.e. 2 Shares will be issued for every 3 Shares held at a premium of ` 25.

(vii) Equity Shares in XY Limited will be issued as under: (a) Shareholders of X Limited in the ratio of 4:1 at ` 35 per Share, and (b) Shareholders of Y Limited in the ratio of 3:1 at ` 32 per Share.

(viii) Statutory Reserves having met its purpose will be merged with Capital Reserves.

Prepare the amalgamated Balance Sheet of XY Limited as on 31st March 2015 as per Schedule III to the Companies Act, 2013 with Notes to Accounts. Solution: 1. Basic Information Selling Co: X Ltd, Y Ltd Date of B/S : 31.03.2015 Nature of Amalgamation:

Purchase (since all Assets are not taken over at Book Value) Buying Co: XY Ltd Date of Amg: 31.03.2015

2. Computation of Purchase Consideration: Particulars X Ltd Y Ltd Total

Number of Equity Shares 14

100750

× = 30 Lakh Equity Shares13

100725

× =21.75 Lakh Equity Shares 51.75

Number of Preference Shares 32

100420

× = 2.8 Lakh Pref. Shares 32

100180

× = 1.2 Lakh Pref. Shares 4.20

Purchase Consideration ` in Lakhs ` in Lakhs Total Equity Share Capital (` 10) 30×10 = 300.00 21.75 × 10 = 217.50 517.50 Premium on ESC at ` 25 & ` 22 30 × 25 = 750.00 21.75 × 22 = 478.50 1,228.50

(A) 1,050.00 696.00 1,746.00

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

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Particulars X Ltd Y Ltd Total Preference Share Capital (` 100) 2.8 × 100 = 280.00 1.2 × 100 = 120.00 400.00 Premium on PSC at ` 25 Per Share 2.8 × 25 = 70.00 1.2 × 25 = 30.00 100.00

(B) 350.00 150.00 500.00Total of A + B 1,400.00 846.00 2,246.00

2. Computation of Debentures to be issued

Total Debentures of X Ltd & Y Ltd (50 Lakhs + 28 Lakhs) = ` 78 Lakhs. Interest @ 12.5% thereon = ` 9.75 Lakhs

Number of 15% Debentures to be issued at ` 100 each = 15%

Lakhs 9.75 ×

1001

= 0.65 Lakhs

Thus, Total Value of 15% Debentures issued = 0.65 Lakhs × 100 = ` 65 Lakhs (X: Y as 50:28, i.e. ` 41.67 & ` 23.30 Lakhs) 3. Balance Sheet of X Ltd and Y Ltd as on 31.03.2015 (before absorption) in ` Lakhs Particulars as at 31st March Note X Ltd Y Ltd

I EQUITY AND LIABILITIES (1) Shareholders’ Funds:

(a) Share Capital – Equity Shares of ` 100 each 750 725 Preference Shares of ` 100 each 420 180 (b) Reserves & Surplus: (Note 1) 529 369

(2) Non – Current Liabilities: Secured Loan – 12.5% Debentures 50 28 (3) Current Liabilities: Trade Payables (Creditors) 165 75

Total 1,914 1,377II ASSETS (1) Non–Current Assets: Fixed Assets – Land & Building 470 + 47 = 517 Given = 330

Plant & Machinery 310 220 (2) Current Assets

(a) Inventories 345 254 (b) Trade Receivables – Debtors 345 270 (c) Cash and Cash Equivalents – (Note 2) 397 303 Total 1,914 1,377

Note 1: Reserves & Surplus (` Lakhs) Particulars X Ltd Y Ltd

Revaluation Reserves: Given Balance + Revaluation of L&B & P&M 125+10% of 470= 172 75+40+10 = 125 Capital Reserve (after Transfer of Statutory Reserves) 270 + 60 = 330 190+40 = 230 P&L A/C (Net of Loss/ Gain on Sale of Investments) 35 – 8 = 27 12 + 2 = 14

Total 529 369

Note 2: Cash & Cash Equivalents (` Lakhs) Particulars X Ltd Y Ltd

Given Balance 355 251 Less: Repayment of Unsecured Loan (25) – Add: Sale of Investments 67 52 Revised Balance 397 303

4. Computation of Goodwill / Capital Reserve on 31.03.2015 in ` Lakhs Particulars X Ltd Y Ltd Total

A) Assets taken over (a) Land & Building 517 330 847(b) Plant & Machinery 310 220 530(c) Trade Receivables 345 270 615(d) Inventories 345 254 599(e) Cash & Cash Equivalents 397 303 700

Total [A] 1,914 1,377 3,291

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

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Particulars X Ltd Y Ltd TotalLess: Liabilities taken over

(a) Trade Payables 165 75 240(b) Debentures issued 41.67 23.30 65

Total [B] 206.67 98.30 305 Net Worth [A–B] 2,986Less: Purchase Consideration 2,246

Capital Reserve 740

6. Other Adjustments (a) Subscribers to the Memorandum (Promoters) subscribed 1 Lakh Equity Shares at ` 10 each = ` 10 Lakhs. (b) Preliminary Expenses incurred = ` 8.09 Lakhs. Hence, Balance Cash in Hand = 10 – 8.09 = ` 1.91 Lakhs.

7. Balance Sheet of XY Ltd as on 31.03.2015 in ` Lakhs Particulars as at 31st March Note This Year Prev. Yr I EQUITY AND LIABILITIES

(1) Shareholders’ Funds: (a) Share Capital 1 927.50 (b) Reserves & Surplus 2 2,068.50

(2) Non–Current Liabilities: Long Term Borrowings – Secured Loan – 15% Debentures 65.00

(3) Current Liabilities: Trade Payables (Creditors) 240.00 Total 3,301.00

II ASSETS (1) Non–Current Assets

(a) Fixed Assets: (517 + 330 + 310 + 220) 1,377.00 (2) Current Assets

(a) Inventories 599.00 (b) Trade Receivables 615.00 (c) Cash & Cash Equivalents (1.91 + 397 + 303) 701.91 (d) Preliminary Expenses (See Note below) 8.09 Total 3,301.00

Note: It is assumed that the Preliminary Expenses shall be written off in the short term against Profits. Alternatively, the Company may resolve to write off Preliminary Expenses against Capital Reserve arising on Amalgamation.

Notes to the Balance Sheet

Note 1: Share Capital in ` Lakhs Particulars This Year Prev. Year

Authorised: 70 Lakhs Equity Shares of ` 10 each 700.00

4 Lakhs Preference Shares of ` 100 each 400.00

Issued, Subscribed & Paid up: 52.75 Lakhs Equity Shares of ` 10 each 527.50

4 Lakhs Preference Shares of ` 100 each 400.00 (Of the above, 51.75 Lakhs Equity Shares and 4 Lakhs Preference Shares are issued for Non–Cash Consideration pursuant to a scheme of amalgamation, Order No. …….. dated …/…/…)

Total 927.50 Shares Reconciliation Statement:

Particulars Equity Preference Lakh Shares ` Lakhs Lakh Shares ` Lakhs Opening Balance 1 10 – – Add: Issued on Amalgamation 51.75 517.50 4 400 Closing Balance 52.75 527.50 4 400

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.7  

Note 2: Reserves and Surplus Particulars Capital Reserve Share Premium Total

Opening Balance – – –Add: Acquired on Amalgamation 740 1,328.50 2,068.50 Closing Balance 740 1,328.50 2,068.50 Question 3: Consolidation of Financial Statements 16 Marks Draw the Consolidated Balance–Sheet as on 31st March 2015 as per Schedule–III with Notes to Accounts (following Indirect Method) based on the following information:

Balance Sheet as on 31st March 2015 (` in Lakhs) Liabilities P Q R

Share Capital: Equity Share Capital (FV ` 100) 600 400 100 Reserves and Surplus: Reserves 40 10 20 Surplus in Profit and Loss Account 60 40 30 Current Liabilities: Trade Payables 30 10 35 Other Payables: Q Limited 15 R Limited 50 Total 780 460 200

Assets P Q R Fixed Assets (Net of Depreciation) 230 150 100 Investments: Q Limited 320 R Limited 40 100 Current Assets: Inventories 50 30 40 Trade Receivables 60 50 20 Other Receivables: R Limited 40 P Limited 30 Bank Balance 80 90 10 Total 780 460 200 Additional Information: (a) P Limited acquired 1,50,000 (cum Bonus) Shares of Q Limited and 30,000 Shares or R Limited and Q Limited acquired

50,000 Shares of R Limited on 29th March 2014. (b) Q Limited fixed 1st April 2014 as Record Date for allotment of Bonus Shares in the ratio of 1:1 and the same were duly allotted. (c) P Limited proposed Dividend at 7.50% for the year ended on 31st March 2015. (d) In December 2014, Q Limited invoiced goods to P Limited for ` 30 Lakhs on a load of 25% on cost. 1/3rd of such goods are

in Stock with P Limited as at the end of the year. (e) R Limited sold to Q Limited on 1st January 2015, as asset costing ` 20 Lakhs and made a profit of 20% on Invoice Value. Q

has provided depreciation at 10% per annum on such assets. (f) As on 31st March 2014, the balances in Reserves and Profit & Loss Account of Q Limited were ` 5 Lakhs and ` 15 Lakhs

respectively. (g) R Limited made a Profit of ` 12.40 Lakhs during the current year. During the year, ` 0.55 Lakhs was received from

Insurance Company against Loss of Stock due to flood which occurred on 31st January 2014 in which goods worth ` 0.75 Lakhs were damaged and were part of R’s Stock as on 31st March 2014.

(h) R Limited transferred, at the year–end on 31st March 2015, an amount from Profit and Loss Account to Reserves which equals to 20% of the reported aggregate figures of Reserves and Profit and Loss Account in the Balance Sheet.

Solution:

Refer Page No. 3.108, Q.No 42 of Padhuka’s Students’ Guide on Financial Reporting [M 98, N 08, M 11] 1. Basic Information

Company Status Dates Holding Status Holding Company = P Subsidiary = Q Sub–Subsidiary = R

Acquisition: 29.03.2014 Consolidation: 31.03.2015

(a) Holding Co. (b) Minority Int.

Q (P) 75%

– 25%

R (P) 30%(Q) 50%

20%

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.8  

Note: Shareholding Pattern is as under – Company Held by P Held by Q Total Holdings Minority Interest Total No. of SharesQ 300 (75%) N.A. 300 (75%) 100 (25%) 400 (100%)R 30 (30%) 50 (50 %) 80 (80%) 20 (20%) 100 (100%)

2. Analysis of Reserves and Surplus of Subsidiary Companies (a) General Reserve (` in Lakhs)

Q R On B/s date ` 10 On B/s date ` 20

31.3.14 Less:

` 5 Bonus issue (2)

DoA to DoC ` 7 31.3.14 ` 10 (Bal. fig) Transfer (` 50 × 20%)

` 10

Pre Acquisition ` 3 Post Acquisition Pre Acquisition Post Acquisition

(b) Profit & Loss Account (` in Lakhs) Q R (See Note)

On B/s date ` 40 On B/s date ` 30

31.3.14 ` 15 DoA to DoC ` 25 31.3.14

Less: Adjustment` 17.60 (0.20)

DoA to DoCAdd: Adjustment

` 12.40 0.20

Pre Acquisition Post Acquisition Pre Acquisition 17.40 Post Acquisition 12.60 Note: Since loss on damaged goods (`0.75 – 0.55 = `0.20) relates to last year, it is added to Current year Profit and deducted from last year Profit i.e. Pre acquisition reserve.

3. Consolidation of Balances (` in Lakhs) Particulars Total Minority

InterestPre–Acqn. Post Acquisition

R Ltd (Holding – 80%, Minority – 20%) Reserves P&L A/c Equity Capital 100 20 80 – –

Reserves 20 48

(10 × 80%)8

(10 × 80%) –

P&L A/c 30 613.92

(17.40 × 80%)–

10.08(12.60 ×80%)

Unrealized Profit on Sale of Asset (4.875) (0.975) – – 4.875×80%=(3.9)Sub–Total 29.025 101.92 8 6.18Q Ltd (Holding – 75%, Minority – 25%) Equity Capital 400 100 300 – –

Reserves 10 2.52.25

(3×75%)5.25

(7×75%) –

P&L A/c 40 10 (15×75%)=11.25 – (25×75%)=18.75Stock Reserve [Upstream] (2) (0.5) – – (1.5)Share in Pre Acquisition Reserves of R Ltd

[(13.92+8) × Q’s Share 80%50%

× 25%)] 3.425 (3.425)

Minority’s Share in Post Acqn. Res. of R Ltd:

Gen. Res. (8× Q’s Share 80%50%

× 25%) 1.25 – (1.25) –

P&L A/c (6.18× Q’s Share 80%50%

× 25%) 0.966 – – (0.966)

Sub Total 117.641 310.075 4 16.284Total [Cr] Cost of Investment [Dr.] [320 + 40 + 100] – (460) – –Parent’s Balances in Reserves – – 40 60Proposed Dividend (7.5% × ` 600) – – – (45)For Consolidated B/s 146.666 48.005 52 37.464

Goodwill or Cost of Control

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

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Notes: • Sale by Q Ltd to P Ltd: Q Ltd has sold goods at ` 30 Lakhs at Cost Plus 25%. Therefore, the unrealized profit on

Upstream Transaction is ` 6 Lakhs [` 30×12525

]. Since only 1/3rd of such goods are in Stock, Proportionate unrealized

gain is ` 2 Lakhs [6 × 1/3]. The unrealized profits should be adjusted against Group Reserves and Minority Interest. • Sale of Fixed Assets by R Ltd to Q Ltd: (` in Lakhs)

Profit on Sale [` 20 × 8020

] 5

Less: Proportionate Depreciation [` 25 × 10% × 123

× 355

] (0.125)

Unrealized Profit 4.875 The above Unrealized Profit is in the nature of Upstream Transaction, and hence should be adjusted against Group Reserves and Minority Interest.

4. Consolidated Balance Sheet of P and its Subsidiaries Q and R as at 31.03.2015 (` in Lakhs) Particulars as at 31st March WN This Year Prev. Yr

I EQUITY AND LIABILITIES (1) Shareholders’ Funds:

(a) Share Capital: 6,00,000 Equity Shares of ` 100 each 600

(b) Reserves & Surplus 1 89.464 (2) Minority Interest 146.666 (3) Current Liabilities

(a) Trade Payables – Creditors (30 + 10 + 35)  75 (b) Short Term Provisions – Proposed Dividend 45

Total 956.13

II ASSETS (1) Non–Current Assets

Intangible Assets (Good Will or Cost of Control) 48.005 Fixed Assets – Tangible Assets (230 + 150+ 100 – 4.875) 475.125

(2) Current Assets (a) Inventories = 50 + 30 + 40 – 2 118 (b) Trade Receivables – Debtors (60 + 50 + 20) 130 (c) Cash and Cash Equivalents 2 185

Total 956.13 Note: Inter Company Owings have been eliminated in full. Detailed Notes under Schedule III Requirements have not been provided for the above items. Computational Notes for items in CBS: Note 1: Reserves and Surplus

Particulars ` Lakhs(a) Reserves 52.000 (b) Surplus (Balance in P & L A/c) 37.464

Total 89.464

Note 2: Cash and Cash Equivalents Particulars ` Lakhs

(a) Cheque in Transit = 40 + 30 – 15 – 50 5 (b) Bank Balance = 80 + 90 + 10 180

Total 185

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

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Question 4 (a): Financial Institutions 8 Marks Team Ltd is a Non–Banking Finance Company. It accepts Public Deposits and also deals in Hire Purchase business. It provides you with the following information regarding major hire purchase deals as on 31–03–2013. Few Machines were sold on Hire Purchase basis. The Hire Purchase Price was set at ` 100 Lakhs as against the Cash Price of ` 80 Lakhs. ` 20 Lakhs were payable as Down Payment and the balance was payable in 5 equal installments. The Hire Vendor collected the first installment as on 31–03–2014, but could not collect the second installment which was due on 31–03–2015. The Company was finalizing accounts for the year ended on 31–03–2015. Till 15–04–2015, the date on which the Board of Directors signed the accounts, the second installment was not collected. Presume IRR to be 10.42%. Required: (i) What should be the Principal Outstanding on 01–04–2014? Should the Company recognize Finance Charge for the year

2014–2015 as Income? (ii) What should be the Net Book Value of Assets as on 31–03–2015 as per NBFC Prudential Norms Requirement for

provisioning? (iii) What should be the amount of Provision to be made as per Prudential Norms of NBFC laid down by the RBI? Solution: Same as Page No. 6.27, Q.No.5 of Padhuka’s Students’ Guide on Financial Reporting [N 12]

1. Basic Computations Particulars ` in Lakhs

(a) HP Price 100 (b) Down Payment 20 (c) Balance amount payable (a) – (b) 80 (d) Amount payable in each instalment (80 Lakhs ÷ 5 instalments) 16 (e) Annuity Factor at 10.42% for 5 Years 3.7505 (f) PV of the instalments (d) × (e) 60 (g) Interest Component (c) – (f) 20

2. Loan Repayment Schedule Year Opening Principal Instalment Amt Interest Principal Repaid Closing Principal (1) (2) (3) (4)=(2)×10.42% (5) = (3) – (4) (6) = (2) – (5)

2013–2014 60.000 16 6.252 9.748 50.252 2014–2015 50.252 16 5.236 10.764 39.488 2015–2016 39.488 16 4.115 11.885 27.603 2016–2017 27.603 16 2.876 13.124 14.479 2017–2018 14.479 16 1.521 14.479 Nil

Total 80 20 60 Principal Outstanding as on 01.04.2014 = ` 50.252 Lakhs. Finance Charges for the year 2014–2015 can be recognized as Income, since the instalments are overdue for a period less than 12 months.

3.Computation of Net Book Value Assets Particulars ` in Lakhs

(a) Aggregate of Overdue and Future Instalments Receivable (` 16 Lakhs × 4) 64.000

(b) Balance of Unmatured Finance Charges (4.115 + 2.876 + 1.521) 8.512 (c) Provision for Non–Performing Assets (Note) 7.488 (d) Net Book Value of the Asset 48.000 Note:

Particulars ` in Lakhs(a) Aggregate of Overdue and Future Instalments Receivable 64.000 (b) Balance of Unmatured Finance Charges 8.512 (c) Depreciated Value of the Asset [` 80 Lakhs – (80 Lakhs × 20% × 2 years)] 48.000

(d) Provision to be created (a) – (b) – (c) 7.488

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.11  

Question 4 (b): AS–31 8 Marks Lovely Limited has advanced Staff Loan of ` 50 Lakhs to its Employees on 1st July 2014 at a concessional rate of 6% per annum, to be repaid in 5 semi–annual installments along with interest thereon. The prevailing rate is 8% per annum.

Find out the value at which the Loan should initially be recognsied and its amortization till closure thereof. Also give necessary journal entries with appropriate narration for financial year 2014–2015. The Discounted Values at 8% and 4% are as under:

Period 1 2 3 4 5 8% 0.9259 0.8573 0.7938 0.7350 0.6806 4% 0.9615 0.9246 0.8890 0.8548 0.8219

Solution: Similar to Page 32.14, Q.No.21 of Padhuka’s Students’ Referencer on Accounting Standards [M 10]

1. Computation of Initial Recognition Amount of Loan to Employees (Amount in `) Cash Inflow Total PVF at 4% Present Value

Period Principal Interest at 6% Jul to Dec 2014 10,00,000 50,00,000 × 6% × ½ yr = 1,50,000 11,50,000 0.9615 11,05,725 Jan to Jun 2015 10,00,000 40,00,000 × 6% × ½ yr = 1,20,000 11,20,000 0.9246 10,35,552 Jul to Dec 2015 10,00,000 30,00,000 × 6% × ½ yr = 90,000 10,90,000 0.8890 9,69,010 Jan to Jun 2016 10,00,000 20,00,000 × 6% × ½ yr = 60,000 10,60,000 0.8548 9,06,088 Jul to Dec 2016 10,00,000 10,00,000 × 6% × ½ yr = 30,000 10,30,000 0.8219 8,46,557

Present Value or Fair Value at Initial Recognition 48,62,932 Note: Discounting is at 8% p.a (or) 4% for the 6 Months Period.

2. Computation of Amortised Cost of Loan to Employees (Amount in `) Period Amortised Cost

(Opening Balance) Interest to be

recognized at 8%Repayment

(including interest) Amortised Cost

(Closing Balance) (1) (2) (3) (4) = (1) + (2) – (3)

Jul to Dec 2014 48,62,932 1,94,517 11,50,000 39,07,449 Jan to Jun 2015 39,07,449 1,56,298 11,20,000 29,43,747 Jul to Dec 2015 29,43,747 1,17,750 10,90,000 19,71,497 Jan to Jun 2016 19,71,497 78,860 10,60,000 9,90,357 Jul to Dec 2016 9,90,357 (bal. fig.) 39,643 10,30,000 Nil

3. Journal Entries for first half year (regarding Loan to Employees) S.No. Particulars Dr.(`) Cr.(`)

1 Staff Loan A/c Dr. 50,00,000 To Bank A/c 10,00,000 (Being the disbursement of Loans to Staff) 2 Staff Cost A/c (WN 2) (50,00,000 – 48,62,932) Dr. 1,37,068 To Staff Loan A/c 1,37,068 (Being write off of excess of Loan Balance over present value thereof, in order to

reflect the Loan at its Present Value of ` 48,62,932) [W.N. 1]

3 Profit and Loss A/c Dr. 1,37,068 To Staff Cost A/c 1,37,068 (Being transfer of balance in the Staff Cost A/c to P&L A/c) 4 Staff Loan A/c Dr. 1,94,517 To Interest on Staff Loan A/c 1,94,517 (Being Interest charged at market rate of 8% on the Loan, for first 6 months period) 5 Bank A/c Dr. 11,50,000 To Staff Loan A/c 11,50,000 (Being amount received on repayment) 6 Interest on Staff Loan A/c Dr. 1,94,517 To Profit & Loss A/c 1,94,517 (Being transfer of bal. in Staff Loan Int. A/c to P&L)

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.12  

Question 5 (a): Valuation of Business 8 Marks The summarized Balance Sheets of Rose Ltd for 3 years ended on 31st March are as follows: (` in Thousands)

Particulars as on 31st March 2013 31st March 2014 31st March 2015 Liabilities: 6,40,000 Equity Shares of ` 10 each fully paid up 6,400 6,400 6,400 General Reserves 4,800 5,600 6,400 Profit and Loss Account 560 640 960 Trade Payables 2,400 3,200 4,000

Total Liabilities 14,160 15,840 17,760 Assets: Goodwill 4,000 3,200 2,400 Tangible Assets (Net) 5,600 6,400 6,400 Inventories 4,000 4,800 5,600 Trade Receivables 80 640 1,760 Cash and Cash Equivalents 480 800 1,600

Total Assets 14,160 15,840 17,760 Additional Information: (i) Actual Valuation were as under:

Tangible Assets 7,200 8,000 8,800 Inventories 4,800 5,600 6,400 Net Profit (including Opening Balance after writing off Depreciation, Goodwill, Tax Provision and Transfer to General Reserves)

1,680 2,480 3,280

(ii) Capital Employed in the business at Market Value at the beginning of 2012–2013 was ` 1,46,40,000 which included Cost of Goodwill. The Normal Annual Return on Average Capital Employed in the line of business in which Rose Limited is engaged is 12.50%

(iii) The balance in General Reserve as on 1st April 2012 was ` 40 Lakhs. (iv) The Goodwill shown as on 31st March 2013 was purchased on 1st April 2012 for ` 40 Lakhs and the balance in Profit and

Loss Account as on 1st April 2012 was ` 4,80,000. (v) Goodwill is to be valued at 5 years’ purchase of Super Profit by using Simple Average Method.

Find out the Average Capital Employed in each year and Total Value of Business as on 31st March 2015. Solution: Refer Page No. 4.103, Q.No.1 of Padhuka’s Students’ Guide on Financial Reporting [N 03, M 09]

1. Computation of Average Maintainable Profit Year ending 31st March 2013 2014 2015

Net Profit as given 16,80,000 24,80,000 32,80,000Less: Opening Balance (4,80,000) (5,60,000) (6,40,000)Less: Undervaluation of Opening Stock – (8,00,000) (8,00,000)Add: Undervaluation of Closing Stock 8,00,000 8,00,000 8,00,000Add: Goodwill written off (Diff. between Closing & Opening Balance.) – 8,00,000 8,00,000Add: Transfer to Reserves (Diff. between Closing & Opening Balance.) 8,00,000 8,00,000 8,00,000 Adjusted Net Profit 28,00,000 35,20,000 42,40,000

2. Computation of Average Capital Employed Particulars As at 31.3.2013 As at 31.3.2014 As at 31.3.2015

Tangible Assets (Actual Amount) 72,00,000 80,00,000 88,00,000 Inventories (Actual Amount) 48,00,000 56,00,000 64,00,000 Trade Receivables 80,000 6,40,000 17,60,000 Cash and Cash equivalents 4,80,000 8,00,000 16,00,000Less: Trade Payables (24,00,000) (32,00,000) (40,00,000)A. Closing Capital Employed 1,01,60,000 1,18,40,000 1,45,60,000B. Opening Capital Employed (Excluding G/w) 1,06,40,000 1,01,60,000 1,18,40,000

Total of above 2,08,00,000 2,20,00,000 2,64,00,000C. Average Capital Employed = (A + B) ÷ 2 1,04,00,000 1,10,00,000 1,32,00,000

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.13  

3. Computation of Super Profits Year ending 31st March 2013 2014 2015

Adjusted Net Profit (WN 1) 28,00,000 35,20,000 42,40,000 Less: Normal Return at 12½% of Average Capital Employed

1,04,00,000 × 12½% = 13,00,000

1,10,00,000 × 12½% = 13,75,000

1,32,00,000 × 12½% = 16,50,000

Super Profits 15,00,000 21,45,000 25,90,000 Average Super Profits (15,00,000 + 21,45,000 + 25,90,000) ÷ 3 = ` 20,78,333 4. Valuation of Goodwill Goodwill = Amount of Super Profits × No. of. Years of Purchase of Super Profits agreed upon = ` 20,78,333 × 5 = ` 1,03,91,667 5. Valuation of Business Closing Capital Employed as at 31.3.2015 ` 1,45,60,000Add: Goodwill as per WN 4 above ` 1,03,91,667 Value of Business ` 2,49,51,667 Question 5 (b): Valuation of Brand 8 Marks Agile Limited is a Manufacturer–cum–Dealer of ‘R Tuff’ Brand of Trousers. With passage of time, its Brand has been well accepted in the market, the Company has been approached by a Foreign Company engaged in the same trade to enter as Partner in its business. Agile, in order to negotiate the deal, wants to get its Brand valued. The following information based on Market Research is available:

(i) Garment Industry of which Agile is a constituent, is expected to grow by 9% annum during the next five years. The present Market Size of the Industry is ` 7,500 Crores.

(ii) There are other brands both National and International in the market. The existence of Duplicate Brands is unavoidable. The Share of such players is estimated to be 63% of the Total Industry Market. The Market Share of other National Brands will increase @ 0.25% year–on–year basis in the next 5 years. The share of International Brands is expected to grow 1.5 times of National Brands. But the existence of Duplicate Brands is to fall by 2.5% over the period of next 5 years, spread equally.

(iii) The expected Foreign Partner needs the production line of the company to be re–engineered which will lead to an increase in the yield of the Company by 3% after one year over the present yield of 10%, followed thereafter by further increase of 5% year on year.

Following the Market–Oriented Approach, determine the Brand Value to be used for negotiation with the Foreign Company, considering the Discount Factor for 1st five years as 0.909, 0.826, 0.751, 0.683 and 0.621 (Monetary value in Crores to be rounded off to nearest 2 decimal places). Solution: Refer Page No. 4.8, Q.No.1 of Padhuka’s Students’ Guide on Financial Reporting

1. Market Share of Agile Ltd

(a) Current Market Share = 100% – (National + International + Duplicate Brands) = 100% – 63% = 37%

(b) Increase or Decrease in Market Share: National Brands 0.25% + International Brands 0.375% – Fall in Duplicate Brands 0.5% = 0.125% increase other product’s market share. Hence, Agile’s Market Share is expected to fall by 0.125% every year, from current 37%. Therefore, next year it will be 36.875%, the year after 36.75%, etc.

2. Brand Valuation under Market Approach (` Crores)

Year Market Size (%) Market Share (%)

Market Share (Amt) Expected Profit Discount

Factor at 15% PV of Profit

1 7,500.00 + 9% = 8,175.00 36.875% 3,014.53 @ 13% = 391.88 0.909 356.22 2 8,175.00 + 9% = 8,910.75 36.75% 3,274.70 @ 18% = 589.45 0.826 486.88 3 8,910.75 + 9% = 9,712.72 36.625% 3,557.28 @ 23% = 818.17 0.751 614.45 4 9,712.72 + 9% = 10,586.86 36.50% 3,864.20 @ 28% = 1081.98 0.683 738.99 5 10,586.86+ 9% = 11,539.67 36.375% 4,197.55 @ 33% = 1385.19 0.621 860.20 Brand Value 3,056.74

Brand Value of Agile Ltd under Market Oriented Approach is ` 3,056.74 Crores

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.14  

Question 6 (a): Value Added Statement 8 Marks Famous Corporation has been preparing Value Added Statement for the past five years. The Human Resource Manager of the Company has suggested introducing a Value Added Incentive Scheme to motivate the Employees for their better performance. To introduce the Scheme, it is proposed that the Best Index Performance (favourable to Employer), i.e. Employee Costs to Added Value for the last five years, will be used as the Target Index for future calculations of the bonus to be paid After the Target Index is determined, any actual improvement in the Index will be rewarded. The Employer & the Employee will be sharing any such improvement in the ratio 1:2. The bonus is given at the end of the year, after the profit for the year is determined.

The following information is available: Value Added Statement for 5 years (` in Thousands) Particulars 2010 2011 2012 2013 2014

Sales 5.600 7,600 9,200 10,400 12,000 Less: Bought in Goods, Services 2,560 4,000 5,000 5,600 6,400 Added Value 3,040 3,600 4,200 4,800 5,600 Employee Costs 1,300 1,520 1,680 1,968 2,240 Dividend 200 300 400 480 600 Taxes 640 760 840 1.000 1,120 Depreciation 520 620 720 880 1,120 Debenture Interest 80 80 80 80 80 Retained Earning 300 320 480 392 440

Added Value 3,040 3,600 4,200 4,800 5,600

Summarized Profit and Loss Account for the year ended on 31st March 2015 (` in Thousands) Particulars Amount

Income: Sales less Returns 13,600 Dividends and Interest 500 Miscellaneous Income 500 14,600 Expenditure: Production and Operational Expenses: Cost of Materials 5,000 Wages & Salaries 1,800 Other Manufacturing Expenses 1,400 8,200 Administrative Expenses: Administration Salaries 600 Administration Expenses 600 1,200 Selling and Distribution Expenses: Selling and Distribution Salaries 120 Selling Expenses 400 520 Finance Expenses: Debenture Interest 80 Depreciation 1,520 Total Expenditure 11,520 Profit before Taxation 3,080 Less: Provision for Taxation 770 Profit after Taxation 2,310 From the above information, prepare Value Added Statement for the year 2014–2015 and determine the amount of Bonus Payable to Employees, if any. Solution: Refer Page No. 7.14, Q.No.5 of Padhuka’s Students’ Guide on Financial Reporting 1. Computation of Target Index

Year ending 31st March 2010 2011 2012 2013 2014Employee Cost 1,300 1,520 1,680 1,968 2,240Value Added 3,040 3,600 4,200 4,800 5,600Ratio (Employee Cost ÷ Value Added) 42.76% 42.22% 40.00% 41.00% 40.00%Target Index is taken as least of the above on conservative basis = 40% (Favorable to Employer)

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.15  

2. Computation of Bonus for Year ending 31st March 2015 Particulars ` 000s ` 000s

Sales 13,600Less: Bought in Goods & Services: Cost of Materials 5,000 Production Expenses 1,400 Administration Office Expenses 600 Sales Office Expenses 400 7,400 Value Added from Manufacturing and Trading Activities 6,200Add: Other Income (500 + 500) 1,0001. Net Value Added 7,2002. Employees Cost, i.e. Wages & Salaries – [Wages & Salaries ` 1,800 + Administration Salaries ` 600 + Selling & Distribution Salaries ` 120]

2,520

3. AddedValueNetCostEmployee

for the Year 7,2002,520

35%

4. Improvement for the Year eligible for Bonus = Target 40% – Ratio as above 35% 5%5. Bonus Payable for the Year = Value Added ` 7,200 × 5% × Employee Share 2/3rd 240

3. Statement of Application of Value Added Particulars ` 000s ` 000s %

1. To Employees: As above 2,520 + Bonus 240 2,760 38.33%2. To Government: Taxes 770 10.69%3. To Providers of Capital: Interest on Debentures 80 1.11%4. To Retained Profits, etc. (a) Depreciation 1,520 (b) Retained Profits (given 2,310 – Incentive 240) 2,070 3,590 48.87%

Total 7,200 100.00%Note: It is assumed that Taxation Expense is not affected by the above Bonus/ Incentive Payment. Question 6 (b):IFRS vs AS 8 Marks Give major differences between IFRS and AS (applicable in India) with respect to Property, Plant and Equipment. Solution: Refer Page No. 9.79, Para 9B.3.16 of Padhuka’s Students’ Guide on Financial Reporting Particulars IFRS / IAS Indian A/cg Stds

Historical Cost, Revaluation, Fair Value, etc.

• Historical Cost or Revalued Amounts are used. • On opting for revaluation, regular valuations of

entire classes of assets are required. • Some Intangible Assets, Property, Plant and

Equipment and also Investments may be revalued to Fair Value.

• IFRS / IAS requires revaluation of Derivatives, Biological Assets and certain securities at Fair Value.

• Historical Cost is used. • Revaluations are permitted. But, frequency

of revaluation is not mentioned. • On revaluation, an entire class of assets is

revalued, or assets to be revalued are selected on systematic basis.

• Certain Financial Instruments (AS 30, 31, 32) are carried at Fair Value.

Non–Current Assets held for sale or disposal

• Non–Current Asset is classified as held for sale, if its Carrying Amount will be recovered through a sale transaction rather than through continuing use.

• A Non–Current Asset classified as held for sale is measured at the lower of its Carrying Amount and Fair Value less costs to sell.

• Comparative B/Sheet is not re–stated.

There is no specific requirement to classify and present an asset as held for sale on the face of

the Balance Sheet or in the Notes.

Biological Assets

Measured at Fair Value less estimated Point–of–Sale costs.

No specific guidance has been issued. Historical Cost is used in general.

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.16  

Question 7 (a): AS–10, 11, 16 4 Marks AB Limited acquired at the start of the financial year, Fixed Assets from USA at a price of US$ 1,25,000 and made a down payment of US$ 25,000. The Exchange Rate was ` 61.50 per Dollar at the date of transaction. The balance amount was payable in 4 equal half–yearly installments with interest @ 8% per annum. The Exchange Rate on the due dates of installment has been ` 61.60, ` 61.80, ` 61.90 and ` 62.10. 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 recognised in each of the years. Solution: Note: Borrowed Amount = Cost USD 1,25,000 (–) Down Payment USD 25,000 = 1,00,000 USD

1. Computation of Interest Costs & its treatment Repayment Principal Interest (USD) Total (USD) INR to USD Interest Exp `6th Month 25,000 10,0000×8% × 6/12 = 4,000 29,000 61.60 2,46,400 12th Month 25,000 75,000 × 8% × 6/12 = 3,000 28,000 61.80 1,85,400 18th Month 25,000 50,000 × 8% × 6/12 = 2,000 27,000 61.90 1,23,800 24th Month 25,000 25,000 × 8% × 6/12 = 1,000 26,000 62.10 62,100 Note: The above Interest Cost will be expensed in the Statement of P&L under the head “Finance Charges”. The above asset is a Qualifying Asset for Capitalizing Interest Costs on the following grounds – (a) Qualifying Asset is an asset that takes substantial period of time to get ready for its intended use. [Substantial Period of

Time = 12 months unless shorter time is justified] (b) It is given that the Asset was under construction for 6 months. So, it is assumed that the same is not a Qualifying Asset. (c) Even if it is assumed to be a Qualifying Asset, for capitalising the FOREX Costs as Borrowing Cost, the information on

prevailing interest rates in India is not available. Hence, no part of Interest Cost is capitalised.

Hence, Asset will be capitalized initially at ` 61.50 × USD 1,25,000 = ` 76,87,500 2.Computation of FOREX Loss on Settlement • As per AS 11, the Settlement Difference on account of FOREX Loan will be written off to the Statement of P&L. • Also, since the Forex Loan is a Monetary Item, the same has to be restated based on Closing Rate. The difference

thereon is taken to the Statement of P&L.

• The above loan is recognized initially @ ` 61.50 per USD. On repayment the Forex Loss /Gain is recognised. Repayment Loss on Settlement (`) Balance Loan O/s (USD) Restatement Loss on o/s Bal.6th Month (61.60–61.50) × 25,000 = 2,500 75,000 No restatement 12th Month (61.80–61.50) × 25,000 = 7,500 50,000 (61.80–61.50) × 50,000= 15,000 18th Month (61.90–61.80) × 25,000 = 2,500 25,000 No restatement 24th Month (62.10–61.80) × 25,000 = 7,500 0 No restatement 3.Summary of Debit to P&L A/c:

Year Interest Cost Settlement Loss Restatement LossYear 1 2,46,400 + 1,85,400 = 4,31,800 2,500 + 7,500 = 10,000 15,000 Year 2 1,23,800 + 62,100 = 1,85,900 2,500 + 7,500 =10,000 Note: Option is available to Companies, to adjust the Exchange Differences relating to Foreign Currency Borrowings for

Depreciable Fixed Assets, in the Cost of such Asset, as per MCA Notification. Question 7 (b): Guidance Note in Excise Duty 4 Marks HS Limited manufactures goods and caters to both national and international markets. As on 31st March 2015, it has the following Stocks in its Warehouse at Factory: • Goods meant for National Market – Sale Value of ` 100 Lakhs • Goods meant for International Market – Export Value of ` 50 Lakhs

The Company has a policy to mark up the products for national markets at one–third of cost while those for exports are marked up at 150% of its cost. Excise Duty on goods is payable @ 12.36%. The Management is of the opinion that Excise is payable only on clearance of goods from Factory and as such the same should not be a part of Cost of Inventory.

You are required to guide the Company in the light of relevant Guidance Note.

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May 2015.17  

Solution: Refer Page No. 8.14, Part 3 Illustration of Padhuka’s Students’ Guide on Financial Reporting 1. Local Market: As per the ICAI’s Guidance Note on Accounting Treatment for Excise Duty, Provision for the Unpaid

Liability of Excise Duty should be made. Therefore, in the above case, Excise Duty on the goods meant for Local Sales should be provided at the rate of 12.36% on the Selling Price, of ` 100 Lakhs for valuation of Stock.

2. Export Goods: Assuming that all the conditions specified in the Central Excise Rules, regarding export of excisable

goods without payment of duty are fulfilled by the Company, Excise Duty may not be provided for the goods meant for exports, even though the manufacture thereof is complete.

Question 7 (c): AS–9 8 Marks Krishna sold goods to Madhav for ` 100 Crores against an export order of Madhav. Subsequent to the sale by Krishna, the export order of Madhav was cancelled for unavoidable reasons. Madhav decided to sell the good in local market, provided a Price Discount is allowed by Krishna. Krishna acceded to the request of Madhav. Advise how the discount given shall be dealt in the books of accounts of Krishna. Solution: Similar to Page 9.8, Q.No.22 of Padhuka’s Students’ Referencer on A/cg Standards [M 06, M 00] 1. Krishna has “sold” goods for ` 100 Crores to Madhav. Hence, the sale is complete in all respects. Madhav’s decision to

sell the same in the domestic market at a discount does not affect the amount recognised as Sales Income by Krishna.

2. Price Discount offered by Krishna at the request of Madhav is not in the nature of discount given during the ordinary course of trade, since it would have been given at the time of sale itself.

3. As there appears to be an uncertainty relating to realisability of the Discount portion, which has arisen subsequent to the time of sale, Krishna should make a separate provision to reflect the uncertainty relating to collectibility, rather than to adjust the amount of Revenue originally recorded.

4. The Discount Allowed should be shown as an Expense in the Statement of P & L of Krishna separately, and not shown as deduction from the Sales figure.

Question 7 (d): AS–5 4 Marks A Company desires to make provision in respect of its non–moving or slow moving items of stock. The following information is available: (amounts ` in Lakhs)

Particulars Current Year Previous Year Value of Closing Stock 169 105 Provision based on No. of issues during the year 4.50 4.00 Provision based on products technicality 5.50 4.25

The Company has been making provision based on number of issues. However, from this year, the Management has decided to make provision based on technical evaluation.

Explain whether such change will amount to change in ‘Accounting Policy’. Also draw a suitable Note, if in your view the proposed change requires the same to be given in the Financial Statement of the Current Year. Solution:

Refer Page No.5.9, Q.No.29 of Padhuka’s Students’ Referencer on Accounting Standards [M 03, N 08, M 12] 1. Analysis:

(a) Changes: The Company’s accounting policy requires that provision should be made in respect of non–moving stocks. The method of estimating the provision can be changed based on new developments, additional information, etc. if a more prudent estimate of the amount can be made.

(b) Nature: The decision to make provision for non–moving stock on the basis of technical evaluation is only a change in accounting estimate, and does not amount to a change in accounting policy.

(c) Materiality: The change in the amount of required provision is ` 1,00,000 which is only 0.59 % of the Total Stock Value, and is hence not material.

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.18  

2. Conclusion: (a) Change in Provision from Number of issues to technical evaluation will not result in any change in accounting

policy, as there will only be a change in accounting estimate.

(b) The Company should be able to demonstrate reasonably that provision made on the basis of technical evaluation provides more satisfactory results than the provision based on Number of Issues. In such case, the Company can change the method of provision.

Question 7 (e): AS–29 4 Marks Lucky P Limited has been assessed to Income –Tax, in which a demand of ` 10 lakhs has been made. The Company has gone in appeal. The Company has deposited ` 6.00 Lakhs against the demand, on being pursued by the Department. The Company has been advised by its Counsel that there is 80% chance of losing in respect of one of the ground which may end up confirming the demand of ` 4.00 Lakhs, while on other ground, there is fair chance of winning the appeal. How the Company should treat the same while preparing the Final Accounts for the year ending 31st March 2015? Solution: Refer Page No.29.13, Q.No.29 of Padhuka’s Students’ Referencer on Accounting Standards 1. Recognition: As per AS – 29 a Provision should be recognized if the following conditions are satisfied –

Condition (1) Condition (2) Condition (3) Present obligation as a result of past

event. Outflow of Resources to settle the

obligation is probable. Reliable estimate of the

amount. Liability for Income Tax existed on the B/S date, as per the Demand Notice. There is a present obligation.

There will be an outflow of resources to settle the obligation, if the Company

does not win the case in appeal.

Tax Liability is ascertained at an amount of ` 10 Lakhs, as per the Demand Notice.

Note: Merely because an appeal has been made, the character of the obligation is not lost.

2. Provision and Contingent Liability:

(a) Since all the conditions for recognition of a Provision are satisfied, a Provision for Tax Liability ` 4 Lakhs should be recognized for 2014–2015, since the probability of confirmation of demand for this amount is very high 80%. This will be disclosed as “Short Term Provisions” under Current Liabilities

(b) For the balance portion of ` 6 Lakhs, where there is a fair chance of winning the appeal, the Company should disclose a Contingent Liability, in the Notes to Accounts.

(c) The amount paid as Deposit ` 6 Lakhs should be shown as “Other Non–Current Assets” in the Financial Statements, along with a clear description of the nature of item.

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.19  

STUDENTS’ NOTES

Gurukripa’s Guideline Answers for May 2015 CA Final Financial Reporting Exam

May 2015.20  

STUDENTS’ NOTES