© The Institute of Chartered Accountants of India

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

A.
Applicable for May, 2014 examination
(i)
Buy Back of Securities (Amendment) Regulations, 2013
In exercise of the powers conferred under section 30 of the Securities and Exchange
Board of India Act, 1992 read with clause (f) of sub-section (2) of Section 77A of the
Companies Act, 1956 SEBI made Securities and Exchange Board of India (Buy-back of
Securities) (Amendment) Regulations, 2013 to amend the Securities and Exchange
Board of India (Buy back of Securities) Regulations, 1998. The important provisions of
the new regulations (applicable for listed companies) are: (i) No offer of buy-back for
fifteen per cent or more of the paid up capital and free reserves of the company shall be
made from the open market. (ii)A company shall not make any offer of buyback within a
period of one year reckoned from the date of closure of the preceding offer of buy-back,
if any. (iii)The company shall ensure that at least fifty per cent of the amount earmarked
for buy-back is utilized for buying-back shares or other specified securities. These new
regulations can be downloaded from the link http://203.199.247.102/cms/sebi_data/
attachdocs/1375961931576.pdf
(ii) Securities and Exchange Board of India Mutual Funds (Amendment) Regulations, 2013
In exercise of the powers conferred by section 30 of the Securities and Exchange Board
of India Act, 1992 (15 of 1992), the Board vide notification No. LAD-NRO/GN/201314/03/5652 dated April 16, 2013 had made amendment to the Securities and Exchange
Board of India (Mutual Funds) Regulations, 1996. These Regulations may be called as
the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations,
2013. The SEBI (Mutual Funds) (Amendment) Regulations, 2013 can be downloaded
from the link http://www.sebi.gov.in/cms/sebi_data/attachdocs/1366172455558.pdf
(iii) Securities and Exchange Board of India (Mutual Funds) (Third Amendment)
Regulations, 2013
In exercise of the powers conferred by section 30, read with clause (c) of sub-section (2)
of section 11 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the
SEBI made new regulations to further amend the Securities and Exchange Board of India
(Mutual Funds) Regulations, 1996, namely Securities and Exchange Board of India
(Mutual Funds) (Third Amendment) Regulations, 2013. These new regulations can be
downloaded from the link http://203.199.247.102/cms/sebi_data/attachdocs/
1376972189079.pdf.
(iv) Securities and Exchange Board of India (Stock Brokers And Sub-Brokers)
(Amendment) Regulations, 2013
In exercise of the powers conferred by section 30 of the Securities and Exchange Board
of India Act, 1992 (15 of 1992), the Board vide notification No. LAD-NRO/GN/2013-
The Institute of Chartered Accountants of India
FINAL EXAMINATION: MAY, 2014
14/01/8129 dated April 5, 2013 had made amendment to the Securities and Exchange
Board of India (Mutual Funds) Regulations, 1996. These Regulations may be called as
the Securities and Exchange Board of India (Stock Brokers and Sub-brokers)
(Amendment) Regulations, 2013. The SEBI (Stock Brokers and Sub-brokers)
(Amendment) Regulations, 2013 can be downloaded from the link
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1365161667044.pdf
(v)
Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) (Second
Amendment) Regulations, 2013
SEBI has issued Securities and Exchange Board of India (Stock Brokers and Sub-Brokers)
(Second Amendment) Regulations, 2013 vide notification No. LAD-NRO/GN/201314/25/24775 dated 27th September, 2013. As per theses regulations, "clearing corporation,
"clearing member" "proprietary trading member self-clearing member and "stock broker
have been defined. These new regulations can be downloaded from the link
http://www.sebi.gov.in/cms/sebi_data/attachdocs/ 1380282501004.pdf.
(vi) Requirement of Base Minimum Capital for Stock Trading Member

The BMC (Base Minimum Capital) deposit requirement for stock brokers trading on stock
exchange has been prescribed by SEBI to be commensurate with the risks (other than
market risk), that the broker may bring to the system. The various technological changes
and the increased speeds of trading have brought to fore the greater quantum of risks
arising during the course of execution of transactions. In light of this, based on
deliberations at various forums, it has been decided to realign the BMC requirements
with the risk profiles of the stock brokers / trading members in cash / derivative segment
of the stock exchange vide circular no. CIR/MRD/DRMNP/ 36 /2012 dated December 19,
2012 which shall be implemented by March 31, 2013. This circular is being issued in
exercise of powers conferred under Section 11(1) of the Securities and Exchange Board
of India Act, 1992 to protect the interests of investors in securities and to promote the
development of, and to regulate the securities market.
Accordingly, the requirement of BMC would be implemented in the following manner:
(i)
It shall be enhanced for members holding registration as stock-broker in cash

segment.
(ii)
BMC shall be introduced for members holding registration as trading member in

any derivative segment.
(iii) Stock brokers / trading members shall maintain the prescribed BMC based on their
profiles
Categories
Deposit Only Proprietary trading without Algorithmic trading (Algo)
BMC
Deposit
` 10 Lacs
Trading only on behalf of Client (without proprietary trading) and

without Algo
`15 Lacs
Proprietary trading and trading on behalf of Client without Algo
` 25 Lacs
All Trading Members/Brokers with Algo
` 50 Lacs
Explanation: The profiling of members may be explained with the following example
A scenario may arise, wherein, a member has registration as a stock broker as
well as a trading member and is engaged as a principal doing proprietary trading
on cash segment and is also engaged as an agent and transacting only on behalf of
the clients in the derivatives segment.
Further, the member may not have availed facility for algorithmic trading. In such a
case, the profile of such a member shall be assessed as Proprietary trading and
trading on behalf of client without Algo. The applicable BMC deposit for such a
member shall be ` 25 Lacs.
This BMC deposit requirement stipulated in the above table, is applicable to all
stock brokers / trading members of exchanges having nation-wide trading terminals.
(iv) For stock brokers / trading members of exchanges not having nation-wide trading
terminals, the deposit requirement shall be 40% of the above said BMC deposit
requirements.
(v)
The BMC deposit shall be maintained for meeting contingencies in any segment of
the exchange. For members having registration for more than one segment of the
same exchange, the BMC deposit requirement shall not be additive for such
number of segments and shall be the highest applicable BMC deposit, across
various segment.
(v)
No exposure shall be granted against such BMC deposit. The Stock Exchanges
shall be permitted to prescribe suitable deposit requirements, over and above the
SEBI prescribed norms, based on their perception and evaluation of risks involved.
(vi) Minimum 50% of the deposit shall be in the form of cash and cash equivalents. The
existing guidelines on collateral composition shall continue to remain applicable.
The relevant SEBI circular no SMD/SED/RCG/270/96 dated January 19, 1996 and
circular no MRD/DoP/SE/Cir-07/2005 dated February 23, 2005, stand modified suitably.
All other relevant provisions shall continue to remain applicable.
(vii) Presentation of Foreign Currency Monetary Item Translation Difference
Account (FCMITDA)
In the Revised Schedule VI format, no line item has been specified for the presentation
of Foreign Currency Monetary Item Translation Difference Account (FCMITDA).
Therefore, the Council of the Institute at its 324th meeting held on March 24-26, 2013 at
New Delhi, decided that debit or credit balance in FCMITDA should be shown on the
Equity and Liabilities side of the balance sheet under the head Reserves and Surplus
as a separate line item.
(viii) Criteria for Classification of Entities and Applicability of Accounting Standards
Due to recent changes in the enhancement of tax audit limit, the Council of the ICAI has
recently decided to change the 1st criteria of Level II Non-Corporate Entities i.e.
determination of SME on turnover basis from ` 40 lakhs to ` 1 Crore vide
announcement Revision in the Criteria for classifying Level II Non-Corporate Entities
issued by ICAI on 7th March, 2013. This revision is applicable with effect from the
accounting year commencing on or after April 1, 2012.
(ix) Amendments to SEBI (Employee Stock Option Scheme and Employee Stock
Purchase Scheme) Guidelines, 1999 and Equity Listing Agreement
SEBI has noticed that some listed entities have been framing their own employees benefit
schemes wherein Trusts have been set up to deal in their own securities in the secondary
market. It is apprehended that some entities may frame such schemes with the purpose of
dealing in its own securities with the object of inflating, depressing, maintaining or causing
fluctuation in the price of the securities by engaging in fraudulent and unfair trade practices.
In order to address the concerns over acquisition of shares by employee welfare Trusts
from the secondary market, it has been decided to prohibit the listed entities from
framing any employee benefit schemes involving acquisition of own securities from the
secondary market. To implement this decision, some amendments (applicable with
immediate effect) are being made in the SEBI (ESOS and ESPS) Guidelines 1999 and
Equity Listing Agreement vide circular no CIR/CFD/DIL/3/2013 dated January 17, 2013.
Equity Listing Agreement
Certain listing conditions are hereby specified by way of inserting Clause 35C in the
Equity Listing Agreement as given below:
(i) The issuer agrees that all the employee benefit schemes involving the securities of
the company shall be in compliance with SEBI (ESOS and ESPS) Guidelines, 1999
and any other guidelines, regulations etc. framed by SEBI in this regard.
(ii)
The issuer further agrees that all the employee benefit schemes already framed and
implemented by the company involving dealing in the securities of the company,
before the insertion of this clause shall be aligned with and made to conform to
SEBI (ESOS and ESPS) Guidelines, 1999 by June 30, 2013.
SEBI (ESOS and ESPS) Guidelines, 1999

In respect of those companies, which have already framed and implemented before the
date of this circular any employee benefit schemes involving dealing in the securities of
the company, which are not in accordance with SEBI (ESOS and ESPS) Guidelines, it
has been decided that:(i)
such companies will be required to inform the details of their schemes to the Stock
Exchanges within 30 days from date of this circular, in the prescribed format
provided.
(ii)
such companies shall align any existing employee benefit schemes with SEBI
(ESOS and ESPS) Guidelines on or before June 30, 2013.
A new clause 22B has also been inserted after clause 22A in the SEBI (ESOS and
ESPS) Guidelines 1999 as given below:
Prohibition on acquisition of securities from secondary market: No ESOS/ESPS
shall involve acquisition of securities from the secondary market.
(x) Amendment to para 46 of Accounting Standard 11 of the Companies (Accounting
Standards) Rules, 2006
Ministry of Corporate Affairs vide its notification number G.S.R 913(E), dated 29th December,
2011, has amended the para 46 of AS 11 of the Companies (Accounting Standards)
Amendment Rules, 2011. Through this notification, the MCA has extended the option (for the
enterprises) to capitalize the exchange differences arising on reporting of long term foreign
currency monetary items till 31st March, 2020 instead of 31st March, 2012.
(xi) Insertion of para 46A in Accounting Standard 11 of the Companies (Accounting
Standards) Rules, 2006
Ministry of Corporate Affairs vide its notification number G.S.R 914(E), dated
29th December, 2011, inserted under-mentioned para 46A in AS 11 of the Companies
(Accounting Standards) Rules, 2006.
46A. (1) In respect of accounting periods commencing on or after the 1st April, 2011,
for an enterprise which had earlier exercised the option under paragraph 46 and at the
option of any other enterprise (such option to be irrevocable and to be applied to all such
foreign currency monetary items), the exchange differences arising on reporting of longterm foreign currency monetary items at rates different from those at which they were
initially recorded during the period, or reported in previous financial statements, in so far
as they relate to the acquisition of a depreciable capital assets, can be added to or
deducted from the cost of the assets and shall be depreciated over the balance life of the
assets, and in other cases, can be accumulated in a Foreign Currency Monetary Item
Translation Difference Account in the enterprises financial statements and amortized
over the balance period of such long term assets or liability, by recognition as income or
expense in each of such periods, with the exception of exchange differences dealt with in
accordance with the provisions of paragraph 15 of the said rules.
(2) To exercise the option referred to in sub-paragraph (1), an asset or liability shall be
designated as long-term foreign currency monetary item, if the asset or liability is
expressed in a foreign currency and has a term of twelve months or more at the date of
origination of the asset or the liability.
Provided that the option exercised by the enterprise shall disclose the fact of such option
and of the amount remaining to be amortized in the financial statements of the period in
which such option is exercised and in every subsequent period so long as any exchange
difference remains unamortized.
Note: The principal regulations were published in the Gazette of India Extraordinary, Part
II, Section 3, Sub Section (i) vide G.S.R 739(E), dated the 7th December, 2006 and
amended vide notification number G.S.R. 212(E), dated the 27th March, 2008 and
subsequently amended by No. G.S.R. 225(E) dated 31st March, 2009 and No. G.S.R.
378(E), dated 11th May, 2011.
(xii) Clarification on Para 46A of notification number G.S.R. 914(E) dated 29.12.2011 on
Accounting Standard 11 relating to "The effects of Changes in Foreign Exchange
Rates"
The Ministry has received several representations from industry associations that Para 6
of AS 11 and Para 4(e) of AS 16 are posing problems in proper implementation of Para
46A of AS 11 inserted vide notification 914(E) dated 29.12.2011. In order to resolve the
problems faced by industry, MCA had further clarified vide Circular No. 25/2012 dated
09.08.2012 that Para 6 of AS 11 and Para 4(e) of the AS 16 shall not apply to a company
which is applying clause Para 46A of AS 11.
(xiii) Application of AS 30, Financial Instruments: Recognition and Measurement, for the
accounting periods ending on or before 31st March 2011 and from 1st April, 2011
onwards
1.
Accounting Standard Board of ICAI has issued a clarification regarding applicability

of AS 30 (dated 11th February, 2011). It is clarified that in respect of the financial
statements or other financial information for the accounting periods commencing on
or after 1st April 2009 and ending on or before 31st March 2011, the status of AS 30
would be as below:
(i)
To the extent of accounting treatments covered by any of the existing notified

accounting standards (for eg. AS 11, AS 13 etc,) the existing accounting
standards would continue to prevail over AS 30.
(ii)
In cases where a relevant regulatory authority has prescribed specific

regulatory requirements (eg. Loan impairment, investment classification or
accounting for securitizations by the RBI, etc), the prescribed regulatory
requirements would continue to prevail over AS 30.
(iii) The preparers of the financial statements are encouraged to follow the
principles enunciated in the accounting treatments contained in AS 30. The
aforesaid is, however, subject to (i) and (ii) above.
2.
3.
From 1st April 2011 onwards,

(i)
the entities to which converged Indian accounting standards will be applied as

per the roadmap issued by MCA, the Indian Accounting Standard (Ind AS) 39,
Financial Instruments; Recognition and Measurement , will apply.
(ii)
for entities other than those covered under paragraph 2(i) above, the status of
AS 30 will continue as clarified in paragraph 1 above.
The abovementioned clarifications would also be relevant to the existing AS 31,

Financial Instruments: Presentation and AS 32, Financial Instruments: Disclosures
as well as for Ind AS 32, Financial Instruments: Presentation and Ind AS 107,
Financial Instruments: Disclosures, after 1st April 2011 onwards.
Note: Ind AS, have not been notified till date. AS 30, 31 and 32 have also not been
notified. However, AS 30, 31 and 32 will presumed as encouraged to be followed
by all the entities.
B.
Not applicable for May, 2014 examination

Ind ASs issued by the Ministry of Corporate Affairs
The Ministry of Corporate Affair (MCA) has hosted 35 Converged Indian Accounting
Standards (known as Ind-AS), without announcing the applicability date. The issuance
of Ind-AS is a significant step towards the implementation of converged standards in
India. The MCA will intimate the implementation date later. However, Ind ASs are not
made applicable for May, 2014 examination.
PART II : QUESTIONS AND ANSWERS
QUESTIONS
IFRS vis-a-vis AS applicable in India

1.
Differentiate the following items with reference to Accounting Standards (applicable in

India) and IFRS:
(i)
Impairment of assets.
(ii)
Presentation of associate results.
(iii) Changes in Accounting Policy and Prior period items.

AS 2
2.
(a) T Ltd. commenced its manufacturing activities from 1st April, 2012. In the course of
production the company generated certain by-products. As at 31st March 2013 the
company did not value the by-products considering the value as insignificant. The
management of the company is of the opinion that the by-products are inventory of
the company and it should be valued and brought into books of account. Comment.
AS 3
(b) The following are the changes in the account balances taken from the balance
sheets of Leela Ltd. as at the beginning and end of the year:
Debit (`)
8% Debentures
Debenture Discount
Plant and Machinery at cost
Depreciation on Plant and Machinery
Trade receivables
Inventory including Work-in-Progress
Trade payables
Net Profit for the year
Dividend paid in respect of earlier year
Provision for Doubtful Debts
Trade Investments at cost
Bank
Total
Credit (`)
1,50,000
3,000
1,80,000
43,200
1,50,000
1,15,500
35,400
2,29,500
90,000
9,900
1,41,000
6,79,500
2,11,500
6,79,500
You are informed that:
During the year Plant costing ` 54,000 against which Depreciation Provision of
` 40,500 was lying was sold for ` 21,000.
During the middle of the year, ` 1,50,000 Debentures were issued for cash at a
discount of ` 3,000.
The net Profit for the year was after crediting the profit on sale of plant and
charging Debenture Interest.
Prepare a Cash Flow Statement which will explain why Bank Borrowing has
increased by ` 2,11,500 during the year end, ignore taxation.
AS 4
(c) State with reasons, how the following events would be dealt with in the financial
statements of Pradeep Ltd. for the year ended 31st March, 2013:
(i)
An agreement to sell a land for ` 30 lakh to another company was entered into
on 1st March, 2013. The value of land is shown at ` 20 lakh in the Balance
Sheet as on 31st March, 2012. However, the Sale Deed was registered on
15th April, 2013.
(ii)
The negotiation with another company for acquisition of its business was
started on 2nd February, 2013. Pradeep Ltd. invested ` 40 lakh on 12th April,
2013.
AS 5
3.
(a) Cost of a machine acquired on 01.04.2009 was ` 5,00,000. The machine is

expected to realize ` 50,000 at the end of its working life of 10 years. Straight-line
depreciation of ` 45,000 per year has been charged upto 2011-2012. For and from
2012-13, the company switched over to 15% p.a. reducing balance method of
depreciation in respect of the machine. The new rate of depreciation is based on
revised useful life of 15 years. The new rate shall apply with retrospective effect
from 01.04.2009. State how would you deal with the above in the annual accounts
of the Company for the year ended 31st March, 2013 in the light of AS 5.
AS 6 and Guidance Note on Accounting for Depreciation in Companies

(b) Narmada Ltd. purchased an existing bottling unit from Kaveri Ltd. Kaveri Ltd.
followed straight line method of charging depreciation on machinery of the sold unit
whereas Narmada Ltd. followed written down value method in its other units. The
directors of Narmada Ltd. want to continue to charge depreciation for the acquired
unit on Straight Line Method which is not consistent with the WDV method followed
in other units.
Discuss the contention of the directors with reference to the Accounting Standard.
Further during the year, Narmada Ltd. set up a new plant on coastal land. In view of
the corrosive climate, the Company felt that its machine life is reducing faster. Can
the Company charge a higher rate of depreciation?
AS 9
(c) A Ltd. entered into a contract with B Ltd. to despatch goods valuing ` 25,000 every
month for 4 months upon receipt of entire payment. B Ltd. accordingly made the
payment of ` 1,00,000 and A Ltd. started despatching the goods. In third month,
due to a natural calamity, B Ltd. requested A Ltd. not to despatch goods until further
notice though A Ltd. is holding the remaining goods worth ` 50,000 ready for
despatch. A Ltd. accounted ` 50,000 as sales and transferred the balance to
Advance Received against Sales. Comment upon the treatment of balance amount
with reference to the provisions of Accounting Standard 9.
AS 10
4.
(a) Amna Ltd. contracted with a supplier to purchase a specific machinery to be

installed in Department A in two months time. Special foundations were required
for the plant, which were to be prepared within this supply lead time. The cost of
site preparation and laying foundations were ` 47,290. These activities were
supervised by a technician during the entire period, who is employed for this
purpose of ` 15,000 per month. The Technician's services were given to
Department A by Department B, which billed the services at ` 16,500 per month
after adding 10% profit margin.
The machine was purchased at invoice value of ` 52,78,000. Sales Tax was
10
charged at 4% on the invoice and ` 18,590 transportation charges were incurred to

bring the machine to the factory. An Architect was engaged at a fee of ` 10,000 to
supervise machinery installation at the factory premises. Also, payment under the
invoice was due in 3 months. However, the Company made the payment in 2 nd
month. Ascertain the amount at which the asset should be capitalized under AS 10.
AS 11
(b) Beekay Ltd. purchased fixed assets costing ` 5,000 lakh on 01.04.2012 payable in
foreign currency (US$) on 05.04.2013. Exchange rate of 1 US$ = ` 50.00 and
` 54.98 as on 01.04.2012 and 31.03.2013 respectively.
The company also obtained a long term foreign currency soft loan of US$ 1 lakh on
01.04.2012 payable in three annual equal instalments. First instalment was due on
01.05.2013.
You are required to state, how these transactions would be accounted for in the
books of accounts ending 31st March, 2013.
AS 13
5.
(a) K Ltd. had 5 subsidiaries as at 31st March, 2013 and the investments in
subsidiaries are considered as long term and valued at cost. Two of the
subsidiaries net worth eroded as at 31st March, 2013 and the prospects of their
recovery are very bleak and the other three subsidiaries are doing exceptionally
well. The company did not provide for the decline in the value of investments in
two subsidiaries because the overall investment portfolio in subsidiaries did not
suffer any decline' as the other three subsidiaries are doing exceptionally well.
Comment.
AS 15
(b) X Limited has prepared draft accounts for the year ended 31st March 2013 which
contains the following accounting policy relating to employee benefits:
"The company has obtained an actuarial valuation for the first time for its pension
scheme which revealed a surplus of ` 18 lakhs". It wants to spread the same over
the next 3 years by reducing the annual contribution by ` 6 Lakhs. There are no
other disclosures.
Comment on the accounting policy adopted by the company in context of AS 15.
AS 17
(c) Following details are given for Sunder Ltd. for the year ended 31st March, 2013:
(` in lakhs)
Sales (including inter-segment sales):
Food Products
10,000
(` in lakhs)
Plastic and Packaging
11
1,240
Health and Scientific
690
Others
364
12,294
Expenses:
Food products
7,170
800
444
Others
400
8,814
Other items:
General corporate expenses
1,096
Income from investments
252
Interest expenses
126
Identifiable assets:
Food products
15,096
4,000
1,400
Others
1,364
General corporate assets
21,860
1,664
Other information:
(` 000)
(a) Inter-segment sales are as below:
Food Products
120
168
36
Others
(b) Operating profit includes `(000) 66 on inter-segment sales.
10
You are required to identify reportable segments.

AS 19
6.
(a) Naveen Ltd. has initiated a lease for three years in respect of an equipment costing
` 3,00,000 with expected useful life of 4 years. The asset would revert to Naveen
Ltd. under the lease agreement. The other information available in respect of lease
agreement is:
(i)
The unguaranteed residual value of the equipment after the expiry of the lease
12
term is estimated at ` 40,000.

(ii)
The implicit rate of interest is 10%. Present value factor at 10% are 0.909,
0.827 and 0.751 at the end of first, second and third years respectively.
(iii) The annual payments have been determined in such a way that the present
value of the lease payment plus the residual value is equal to the cost of asset.
Ascertain in the hands of Naveen Ltd.
(i)
The annual lease payment.
(ii)
The unearned finance income.
(iii) The segregation of finance income.

AS 20
(b) The following information is available for Raja Ltd. for the accounting year 2012-13
and 2013-14:
Net profit for
Year 2012-13
25,00,000
Year 2013-14
40,00,000
No. of shares outstanding prior to right issue 12,00,000 shares.

Right issue
One new share for each three outstanding i.e. 4,00,000 shares
Right issue price ` 22
Last date to exercise rights 30-6-2013
Fair value of one equity share immediately prior to exercise of rights on 30-6-2013 = ` 28.
You are required to compute the earnings per share for the years 2012-13 and
2013-14.
AS 22
7.
(a) Alpha Ltd. prepares its accounts annually on 31st March. The company has
incurred a loss of ` 1,00,000 in the year 2010 and made profits of ` 50,000 and
` 60,000 in year 2011 and year 2012 respectively. It is assumed that under the tax
laws, loss can be carried forward for 8 years and tax rate is 40% and at the end of
year 2010, it was virtually certain, supported by convincing evidence, that the
company would have sufficient taxable income in the future years against which
unabsorbed depreciation and carry forward of losses can be set-off. It is also
assumed that there is no difference between taxable income and accounting income
except that set off of loss is allowed in years 2011 and 2012 for tax purposes.
Calculate profit (loss) after tax effect as per AS 22, in all the three years.
13
AS 23
(b) H Limited, a company registered with SEBI, has three subsidiaries and one
associate. While doing the audit of Consolidated Financial Statements (CFS) of H
Limited you have come to know that the associate entity had made a provision for
proposed dividend in its financial statements. H Limited computed its share of the
results of operations of the associate after taking into account the proposed
dividend. Comment.
AS 24
8.
(a) A cosmetic items producing company provides the following information:

Fairness Cream
Vanishing Cream
January, 2012 - September, 2012 per month
2,00,000
2,00,000
October, 2012 - December, 2012 per month
2,00,000
3,00,000
4,00,000
January, 2013 - March, 2013 per month
The company has enforced a gradual change in product-line on the basis of an

overall plan. The Board of Directors of the Company has passed a resolution in
March, 2012 to this effect. The company follows calendar year as its accounting
year. Should this be treated as a discontinuing operation? Give reasons in support
of your answer.
AS 26
(b) X Ltd is engaged in the business of newspaper and radio broadcasting. It operates
through different brand names. During FY 12-13 it incurred substantial amounts on
external trade, business communication and branding expenses by participation in
various corporate social responsibility initiatives. The company expects to receive
benefits by this expenditure by attracting new customers over a period of time and
accordingly it has capitalized the same under brand development expenses and
intends to amortize the same over the period in which it expects the benefits to flow.
Comment on this in line with the relevant Accounting Standard.
AS 28
9.
(a) Big Publishers Limited owns 300 magazine titles of which 140 were purchased and
160 were self-created. The price paid for a purchased magazine title is recognized
as an intangible asset. The cost of creating magazine titles and maintaining the
existing titles are recognized as an expense when incurred. Cash inflows from direct
sales and advertising are identifiable for each magazine title. Titles are managed by
customer segments. The level of advertising income for a title depends on the range
of titles in the customer segment to which the title relates. The management has a
policy to abandon old titles before the end of their economics lives and replace them
immediately with new titles for the same customer segment. The company treats all
14
magazine titles as one Cash Generating Unit (CGU) for impairment testing.
Comment whether this treatment is correct in line with provisions of AS 28.
AS 29
(b) Raja Ltd. had announced a Voluntary Retirement Scheme (VRS) for its employees
on 1st January 2012. The scheme is scheduled to close on 30th June 2012. The
scheme envisaged an initial lump-sum payment of maximum of ` 2 Lakhs and
monthly payments over the balance period of service of employees coming under
the plan. 200 employees opted for the scheme as on 31 st March 2012. The total
lump sum payment for these employees would be ` 250 Lakhs and the aggregate of
future payments to them would amount to ` 1,500 Lakhs. However no payment had
been made to the employees under the scheme up to 31st March 2012. The
Company had not made any provision in its accounts towards any liability under the
scheme. Give your views on the above.
Guidance Note on Measurement of Income Tax Expenses for Interim Financial
Reporting in the Context of AS 25
10. (a)
Estimated annual income
` 1,00,000
(inclusive of estimated capital gains of ` 20,000 earned in

quarter II)
Assumed tax rates:
On capital gains
10%
On other income:
First ` 40,000
30%
Balance income
40%
Assuming there is no difference between the estimated taxable income and the
estimated accounting income; calculate tax expense and weighted average annual
effective tax rate. Also, calculate tax expense for each quarter, when the estimated
income of each quarter is ` 25,000 and income for 2nd quarter of ` 25,000 includes
capital gain of ` 20,000.
Guidance Note on Accounting Treatment for CENVAT
(b) Vikas Ltd. purchased a plant for ` 50 lakhs from Yash Ltd. during 2012 - 2013 and
installed immediately. The price includes excise duty of ` 5 lakhs. During 2012 2013, the company produced excisable goods on which the excise authority
charged excise duty to the extent of ` 4.5 lakhs. Show the necessary Journal
Entries explaining the treatment of CENVAT credit. You are also required to indicate
the value of plant at which it should be recorded in Fixed Asset register.
15
Corporate Restructuring Amalgamation

11. Ram Limited and Shyam Limited carry on business of a similar nature and it is agreed
that they should amalgamate. A new company, Ram and Shyam Limited, is to be formed
to which the assets and liabilities of the existing companies, with certain exception, are to
be transferred. On 31st March 2013 the Balance Sheets of the two companies were as
under:
Ram Limited
Balance Sheet as at 31st March, 2013
Liabilities
Assets
Issued and Subscribed
Freehold Property, at cost
Share capital:
Plant and Machinery, at cost less
30,000 Equity shares of ` 10
depreciation
each, fully paid
2,10,000
50,000
3,00,000 Motor Vehicles, at cost
General Reserve
1,60,000 less depreciation
Profit and Loss Account
40,000 Inventory
Trade Payables
1,50,000 Trade Receivables

Cash at Bank
6,50,000
20,000
1,20,000
1,64,000
86,000
6,50,000
Shyam Limited
Balance Sheet as at 31st March, 2013
Liabilities
Assets
Issued and Subscribed
Freehold Property, at cost
Share Capital:
Plant and Machinery, at cost less
16,000 Equity shares of ` 10

each, fully paid
Profit and Loss Account
6% Debentures
Trade Payables
depreciation
1,60,000 Inventory
40,000 Trade Receivables
1,20,000 Cash at Bank
1,20,000
30,000
1,56,000
42,000
36,000
64,000
3,84,000
3,84,000
16
Assets and Liabilities are to be taken at book-value, with the following exceptions:
(a) Goodwill of Ram Limited and of Shyam Limited is to be valued at ` 1,60,000 and
` 60,000 respectively.
(b) Motor Vehicles of Ram Limited are to be valued at ` 60,000.
(c)
The debentures of Shyam Limited are to be discharged by the issue of 6% Debentures

of Ram and Shyam Limited at a premium of 5%.
(d) The trade receivables of Shyam Ltd. realized fully and bank balance of Shyam Ltd, are
to be retained by the liquidator and the trade payables of Shyam Ltd. are to be paid out
of the proceeds thereof.
You are required to:
(i)
Compute the basis on which shares in Ram and Shyam Limited will be issued to the
shareholders of the existing companies assuming that the nominal value of each share
in Ram and Shyam Limited is ` 10.
(ii)
Draw up a Balance Sheet of Ram and Shyam Limited as of 1st April, 2013, the date of
completion of amalgamation.
(iii) Write up journal entries, including bank entries, for closing the books of Shyam Limited.
Consolidated Financial Statements
12. Evil Ltd. purchased control of Devil Ltd. on 01.10.2012. Following are the summarized
Balance Sheets of Evil Ltd. and Devil Ltd. as at 31st March, 2013:
Liabilities
Evil Ltd.
Devil Assets
Ltd.
Equity Capital (` 10) 6,00,000

General Reserves
60,000
Profit & Loss Account 1,00,000
Trade Payables
1,00,000
3,00,000
50,000
1,00,000
80,000
8,60,000
5,30,000
Goodwill
Land & Buildings
Plant & Machinery
Investment:
22,500 Shares of
Devil Ltd.
Inventory
Trade
Receivables
Cash at Bank
Evil Ltd.
Devil
Ltd.
10,000
40,000
1,00,000 1,00,000
2,00,000 1,80,000
3,37,500
1,17,500 1,00,000
50,000
90,000
45,000
20,000
8,60,000 5,30,000
On 01.04.2012, Devil Ltd. had ` 50,000 in General Reserve and ` 60,000 in Profit and
Loss A/c. On 30th September 2012, 10% dividend was declared by Devil Ltd. in respect
17
of financial year 2011-12 from its profit and loss account. Evil Ltd. credited its share of
dividend, on receipt, to the Profit and Loss Account.
Trade receivables of Devil Ltd. include ` 10,000 due from Evil Ltd. Machinery of Devil
Ltd. standing in books at ` 2,00,000 as on 1.4.2012, was revalued at ` 2,40,000.
Inventory of Evil Ltd. includes goods valued at ` 16,000 purchased from Devil Ltd., on
which the latter made a profit of 1/3rd on cost price.
Prepare the Consolidated Balance Sheet of Evil Ltd. and its subsidiary Devil Ltd. as on
31.03.2013.
Accounting and Reporting of Financial Instruments
13. You are required to
(i)
Identify the Equity and Liability components;
(ii)
Compute bond liability at the end of each year; and
(iii) Give necessary journal entries for recording finance charges from the information
given below:
Number, value and period of convertible
bonds
Proceeds received
Interest rate on the bond
Conversion
Prevailing market rate

Present value factors for 9%
4,000 bonds, issued at the beginning of

year 1, face value is ` 1,000 per bond (3
years validity)
` 40 lacs
6% p.a. payable annually
At the bond holders' discretion, conversion
into 250 ordinary shares for each bond of
` 1000
9% per annum, for bonds issued without
conversion option
0.917, 0.841, 0.772
Share Based Payments

14. Arihant Limited has its share capital divided into equity shares of ` 10 each. On
1-10-2012, it granted 20,000 employees stock option at ` 50 per share, when the market
price was ` 120 per share. The options were to be exercised between 10th December,
2012 and 31st March, 2013. The employees exercised their options for 16,000 shares
only and the remaining options lapsed. The company closes its books on 31st March
every year. Show Journal Entries (with narration) as would appear in the books of the
company up to 31st March, 2013.
Valuation of Business
15. Jayadev Ltd. had earned a PAT of ` 48 lakhs for the year ended 2013. It wants you to
ascertain the value of its business, based on the following information.
18
1.
Tax rate for the year 2013 was 36%. Future tax rate is estimated at 34%.
2.
The company's equity shares are quoted at ` 120 at the Balance Sheet date. The
company had an equity capital of ` 100 lakhs, divided into shares of ` 50 each.
3.
Profits for the year 2013 have been calculated after considering the following in the
Profit and Loss Account:
(i)
Subsidy ` 2 lakhs received from the Government towards fulfilment of certain

social obligations. The Government has withdrawn this subsidy and hence, this
amount will not be received in future.
(ii)
Interest ` 8 lakhs is on term loan. The final instalment of this term loan was
fully settled in this year.
(iii) Managerial remuneration ` 15 lakhs. The shareholders have approved an

increase of ` 6 lakhs in the overall managerialremuneration, from the next
year onwards.
(iv) Loss on sale of fixed assets and Investments amounting to ` 8 lakhs.
Valuation of Intangibles
16. During the financial year 2011-2012, Smart Ltd. had the following transactions:
(i)
On 1st April 2011, Smart Ltd. purchased new asset of Ok Ltd. for ` 7,20,000. The
fair value of Ok Ltd.s identifiable net assets was ` 3,44,000. Smart Ltd. is of the
view that due to popularity of Ok Ltd.s products, the life of resulting goodwill is
unlimited.
(ii)
On May 2011, Smart Ltd., purchased a franchise to operate boating service from
the State Government for ` 1,20,000 and at an annual fee of 1% of boating
revenues. The franchise expires after 5 years. Boating revenues were ` 40,000
during financial year 2011-2012. Smart Ltd. projects future revenue of ` 80,000 in
2012-2013 and ` 1,20,000 per annum for 3 years thereafter.
(iii) On 5th July 2011, Smart Ltd. was granted a patent that had been applied for by Ok Ltd.
During 2011-12, Smart Ltd. incurred legal costs of ` 1,02,000 to register the patent and
an additional ` 1,70,000 to successfully prosecute a patent infringement suit against a
competitor. Smart Ltd. expects the patents economic life to be 10 years. Smart Ltd.
follows an accounting policy to amortize all intangibles on straight line basis over the
maximum period permitted by accounting standard taking a full year amortization in the
year of acquisition.
Prepare
(a) An extract showing the intangible section in Smart Ltd. balance sheet at 31st March
2012.
(b) An extract showing the related expenses that would appear in the Statement of
Profit and Loss of Smart Ltd. for 2011-2012.
19
Mutual Fund
17. On 1st April, 2013, Fair Return Mutual Fund has the following shares and prices at 3.00 p.m.
Shares of
P Ltd.
Q Ltd.
R Ltd.
S Ltd.
T Ltd.
No. of units of fund
Calculate:
No. of shares
5,000
25,000
5,000
50,000
15,000
Market price per share (` )

19.70
482.60
264.40
674.90
25.90
4,00,000 units
(a) NAV of the Fund.

(b) Assuming Mr. Mohan, sent a cheque of ` 25,00,000 to the Fund on 1st April, 2013
and Fund Manager purchases 9,000 shares of R Ltd. and balance is held in bank.
What will be the new position of the fund?
(c) Now suppose on 2nd April 2013, at 3.00 p.m. the market price of shares is as
follows:
Shares
P Ltd.
Q Ltd.
R Ltd.
S Ltd.
T Ltd.
`
20.30
513.70
290.80
671.90
44.20
Calculate the new NAV?

Non Banking Finance Companies and Stock Brokers
18. (a) Templeton Finance Ltd. is a non-banking finance company. The extracts of its
balance sheet are given below:
Liabilities
Amount
Assets
` in 000
Amount
` in 000
Paid-up equity capital
100
Leased out assets
Free reserves
500
Investment:
Loans
Deposits
400
400
In shares of subsidiaries
group companies
100
In debentures of
subsidiaries and group
100
800
20
Cash and bank balances

Deferred expenditure
200
200
1,400
1,400
You are required to compute 'Net owned Fund' of Templeton Finance Ltd. as per the NBFC
(Deposit Accepting or Holding) Companies Prudential Norms (RBI) Directions 2007.
(b) Write short note on Books of account required to be maintained by a Stock Broker.
Value Added Statement
19. Vaidant Ltd. has been consistently preparing Value Added Statement (VAS) as part of
Financial Reporting. The Human Resource department of the Company has come up with a
new scheme to link employee incentive with Value Added as per VAS. As per the scheme
an Annual Index of Employee cost to Value Added annually (% of employee cost to Value
Added rounded off to nearest whole number) shall be prepared for the last 5 years and the
best index out of results of the last 5 years shall be selected as the Target Index. The
Target Index percentage shall be applied to the figure of Value Added for a given year to
ascertain the target employee cost. Any saving in the actual employee cost for the given year
compared to the target employee cost will be rewarded as Variable incentive to the extent of
70% of the savings. From the following given data, you are requested to ascertain the
eligibility of Variable Incentive for the year 2012-2013 for the employees of the Vaidant Ltd.
Value added statement of Vaidant Ltd. for last 5 years (` lakhs)
Year
Sales
Less: Bought out goods and services
Value added
2007-08
6,400
4,200
2,200
2008-09 2009-10
6,500
5,800
4,160
3,880
2,340
1,920
2010-11
7,600
5,020
2,580
2011-12
9,800
6,400
3,400
2010-11
1,200
380
600
400
2011-12
1,500
420
500
980
Application of Value Added

Year
To Pay Employees
To Providers of Capital
To Government Tax
For Maintenance and expansion
2007-08
1,040
320
420
420
2008-09
960
340
380
660
2009-10
900
240
440
340
Summarized Profit and Loss Account of the Vaidant Ltd. for 2012-2013
(` in lakhs)
Sales
Less:
Material consumed
Wages
Production salaries
11,940
3,900
800
260
21
Production expenses
Production depreciation
Administrative salaries
Administrative expenses
Administrative depreciation
Interest
Selling and distribution salaries
1,000
300
300
400
200
300
240
Selling expenses
Selling depreciation
Profit
700
240
8,640
3,300
Economic Value Added

20. (a) You are given the following information about Ram Ltd.:
(i)
Beta for the year 2010-11
1.05
(ii)
Risk Free Rate
12%
(iii) Long Range Market Rate (based on BSE Sensex)
15.14%
(iv) Extracts from the liability side of Balance Sheet as at 31st March, 2011.
(` in lakhs )
29,160
43,740
72,900
8,100
81,000
Equity
Reserves and surplus
Shareholders fund
Loan funds
Total funds (long-term)
(v) Profit after tax
` 20,394.16 lakhs
(vi) Interest deducted from profit
` 487.00 lakhs
(viii) Effective tax rate (i.e. (Provision for Tax/PBT) x 100)
24.45%
Calculate Economic Value Added of Ram Ltd. as on 31st March 2011.

Human Resource Accounting
(b) Yoga Ltd. has a capital base of ` 2 crore and has earned profits to the tune of
` 22 lakhs. The Return on Investment (ROI) of the particular industry to which the company
belongs is 12.5%. If the services of a particular executive are acquired by the company, it is
expected that the profits will increase by ` 5 lakhs over and above the target profit.
Determine the amount of maximum bid price for that particular executive and the
maximum salary that could be offered to him.
22
SUGGESTED ANSWERS / HINTS

1.
(i)
Impairment of assets
AS
IFRS
Timing
of
impairment
review
AS 28 does not require the

annual impairment testing for
the goodwill unless there is
an indication of impairment.
IAS 36 requires annual

impairment testing for an
intangible asset with an
indefinite useful life or not
yet available for use and
goodwill acquired in a
business combination.
Allocation of
goodwill
to
cashgenerating
units (CGUs)
In AS 28, goodwill is
allocated to CGUs only when
the allocation can be done on
a reasonable and consistent
basis. If that requirement is
not met for a specific CGU
under review, the smallest
CGU to which the carrying
amount of goodwill can be
allocated on a reasonable
and consistent basis must be
identified and the impairment
test carried out at this level.
Thus, when all or a portion of
goodwill cannot be allocated
reasonably and consistently
to the CGU being tested for
impairment, two levels of
impairment tests are carried
out, viz., bottom-up test and
top-down test.
In IAS 36, goodwill is

allocated to cash-generating
units (CGUs) or groups of
CGUs that are expected to
benefit from the synergies of
the business combination
from which it arose.
AS 28 requires that the

impairment loss recognised
for goodwill should be
reversed in a subsequent
period when it was caused by
a specific external event of
an exceptional nature that is
not expected to recur and
subsequent external events
IAS 36 prohibits the

reversals of impairment loss
for goodwill recognised in
earlier periods.
Even as per IFRIC 10, an
entity should not reverse an
impairment loss recognised
in a previous interim period
in respect of goodwill or an
Reversals of
impairment
loss
for
goodwill
There is no bottom-up or
top-down
approach
for
allocation of goodwill.
23
that have occurred reverse investment in either an

the effect of that event.
equity instrument or a
financial asset carried at
cost.
(ii) Presentation of associate results
ASs
IFRS/IAS
In consolidated financial statements

equity method is used. Share of posttax results is shown in standalone
financials at cost less impairment.
In consolidated financial statements

equity method is used. Share of post-tax
results is shown in standalone financials
at cost or in accordance with IFRS 9.
(iii) Changes in Accounting Policy and Prior period items

IFRS
AS
Definition
of
Prior
Period
Errors
Broad definition of Prior

Period items includes all the
items
in
the
financial
statements.
AS 5 covers only Income

and Expenses in the
definition of prior period
items.
Correction of
Prior
Period
Errors
Prior Period errors are to be

corrected retrospectively and
restate the opening balances
of assets, liability and equity
There is no requirement of
restating the comparatives
of the prior periods.
Prior
Errors
Period
Errors also include fraud

within its scope. Standard
says errors may be intentional
or unintentional.
The standard does not

consider fraud as an error
i.e. errors are unintentional
mistakes which may arise
due to several reasons.
When can an
entity change
its Accounting
Policies
As per IAS 8, an entity can

change its accounting policy in
two instances i.e. if the
change:
(a) Is required by an IFRS;
or
(b) Results in the financial
statements providing reliable
and more relevant information
about
the
effects
of
transactions, other events or
conditions on the entity's
financial position, financial
performance or cash flows.
AS 5 allows a change in an
accounting policy in the
three instances i.e.
(a) If the adoption of a
different accounting policy
is required by statute; or
(b) For compliance with
an accounting standard; or
(c) If it is considered that
the change would result in
a
more
appropriate
presentation
of
the
financial statements of the
enterprise.
24
2.
IAS 8 does not permit an

entity to change an accounting
policy even if it is required by
the statute.
AS 5 allows change in an
accounting policy in case
the change is required by
the Statute.
Change
in
Accounting
Policies
This standard is silent that

whether
a
change
in
accounting policy to be
accounted
for
either
retrospectively
or
prospectively.
Any change in an accounting
policy, which has a material
effect, should be disclosed.
Where the effect of such
change is not ascertainable
wholly or in part, the fact
should be indicated.
If an entity changes an
accounting
policy
voluntarily, it needs to
apply
the
change
retrospectively.
When a change in an
accounting
policy
is
applied retrospectively, an
entity should adjust the
opening balance of each
affected component of
equity for the earliest prior
period presented and
disclose the comparative
amounts for each prior
period presented.
Impending
Changes
It requires disclosure of any

impending
change
in
accounting policy.
It does not require such

disclosure.
(a) As per AS 2 on Valuation of Inventories, a production process may result in more

than one product being produced simultaneously. This is the case when joint
products are produced or when there is a main product & a by-product. If the costs
of conversion of each product are not separable, they are allocated on a rational &
consistent basis.
Most of the by-products as well as scrap or waste materials, by their nature, are
immaterial. They are often measured at net realizable value and this value is
deducted from the cost of the main product. In the given case, as the value of the
by-products is insignificant, the realizable value of by products should be
ascertained and it should be deducted from the cost of the main product.
Hence, T Ltd. should deduct the realizable value of its by products from the cost of
production of main product.
(b)
Cash Flow Statement of Leela Ltd.
Cash flow from Operating Activities

Net profit before Taxation (given)
2,29,500
25
Adjustments for
Depreciation (W.N.2)
83,700
Debenture Interest (1,50,000 x 8% x 6/12)
6,000
Provision for Doubtful Debts
9,900
Profit/Gain on Sale of Plant (W.N. 1)
(7,500)
Operating Profit before Working Capital Changes
92,100
3,21,600
Adjustments for
Increase in Inventory
(1,15,500)
Increase in Trade receivables
(1,50,000)
Increase in Trade payables
35,400
Net Cash Flow from/(Used in) Operating Activities [A]
(2,30,100)
91,500
Cash flow from Investing Activities

Purchase of Plant & Machinery (W.N. 3)
(2,34,000)
Purchase of Trade Investments
(1,41,000)
Sale of Machinery
21,000
Net Cash Flow from/(used In) Investing Activities [B]
(3,54,000)
Cash flow from Financing Activities

Proceeds from issue of 8% Debentures (1,50,0003,000)
1,47,000
Interest paid on 8% Debentures
(6,000)
Dividends paid in respect of earlier year
(90,000)
Net Cash Flow from/(used in) Financing Activities[C]

Net Increase/(Decrease) in Cash and Cash Equivalents
(A+B+C)
51,000
(2,11,500)
Working Notes:
1.
Profit on Sale of Plant
= Net Book Value (i.e, Gross Block less Accumulated

Depreciation) Less Sale Value
= (54,000-40,500) less 21,000
= ` 7,500 Gain/Profit
2.
Depreciation for current year = Increase in Depreciation as given above +

Accumulate Depreciation on Plant Sold
= 43,200 + 40,500 = ` 83,700
26
3.
Cash Outflow towards assets purchase = Increase in Plant and Machinery at

Cost + Gross Cost of Plant sold
= 1,80,000 +54,000 = ` 2,34,000.
(c)
(i) According to AS 4 Contingencies and Events Occurring after the Balance

Sheet Date, assets and liabilities should be adjusted for events occurring after
the balance sheet date that provide additional evidence to assist the estimation
of amounts relating to conditions existing at the balance sheet date.
In the given case, sale of immovable property was carried out before the
closure of the books of accounts. Agreement to sell was effected on 1st March,
2013 i.e. before the balance sheet date. Registration of the sale deed on 15th
April, 2013, simply provides additional information relating to the conditions
existing at the balance sheet date. Therefore, adjustment to assets for sale of
land is necessary in the financial statements of Pradeep Ltd. for the year
ended 31st March, 2013.
(ii) AS 4 (Revised) defines "Events occurring after the balance sheet date" as
those significant events, both favorable and unfavorable, that occur between
the balance sheet date and the date on which the financial statements are
approved by the Board of Directors in the case of a company. Accordingly, the
acquisition of another company is an event occurring after the balance sheet
date. However, no adjustment to assets and liabilities is required as the event
does not affect the determination and the condition of the amounts stated in
the financial statements for the year ended 31st March, 2013.
Applying provisions of the standard which clearly state that disclosure should
be made in the report of the approving authority of those events occurring after
the balance sheet date that represent material changes and commitments
affecting the financial position of the enterprise, the investment of ` 40 lakhs in
April, 2013 in the acquisition of another company should be disclosed in the
report of the Board of Directors to enable users of financial statements to make
proper evaluations and decisions.
3.
(a) WDV of asset at the end of year 2011-12= ` 5,00,000 (` 45,000 x 3) = ` 3,65,000
WDV of asset at the end of year 2011-12 (by reducing balance method)
= ` 5,00,000 (1 0.15)3 = ` 3,07,062.50
Depreciation to be charged in year 2012-13
= (` 3,65,000 ` 3,07,062.50) + 15% of ` 3,07,062.50
` 57,937.50 + 46,059.38 = ` 1,03,997 (approx.)
As per AS 5 Net profit or loss for the period, Prior Period Items and Changes in
Accounting Policies the revision of remaining useful life is change in accounting
27
estimate, and adoption of reducing balance method of depreciation instead of the

straight-line method is change in accounting policy. Since it is difficult to segregate
impact of these two changes, the entire amount of difference between depreciation at
old rate and depreciation charged in 2012-13 (` 1,03,997- ` 45,000 = ` 58,997) is
regarded as an effect of change in accounting estimate as per provisions of the
standard. The effect of this change in accounting estimate should be properly disclosed
in the financial statements of the company for the year ended 31st March, 2013.
(b) According to the Guidance Note on Accounting for Depreciation in Companies, a
company may adopt more than one method of depreciation. It is also permissible to
follow different methods for different types of assets provided the same methods are
consistently adopted from year to year in accordance with Section 205(2) of the
Companies Act. The statute governing an enterprise may provide the basis for
computation of the depreciation. For example, the Companies Act lays down the
rates of depreciation in respect of various assets. Where the managements
estimate of the useful life of an asset of the enterprise is shorter than that envisaged
under the provisions of the relevant statute, the depreciation provision is
appropriately computed by applying a higher rate. Therefore, in the given case, the
Company can charge higher rates of depreciation based on its estimate of the
useful life of machinery, provided that such estimate is not less than the rate
prescribed by the Companies Act, for that class of assets. However, such higher
depreciation rates and/or the reduced useful lives of the assets should be disclosed
by way of notes to the accounts in the Financial Statements.
According to para 12 of AS 6 Deprecation Accounting, there are several methods
of allocating depreciation over the useful life of the assets. The management of a
business selects the most appropriate method(s) based on various important factors
e.g., (i) type of asset, (ii) the nature of the use of such asset and (iii) circumstances
prevailing in the business. A combination of more than one method is sometimes
used. A company may adopt different methods of depreciation for different types of
assets, provided the same methods are followed consistently. Thus Narmada Ltd.
can continue to charge depreciation for the acquired unit as per straight line
method.
(c) As per para 11 of AS 9 Revenue Recognition, in a transaction involving the sale of
goods, performance should be regarded as being achieved when the following
conditions are fulfilled:
(i)
the seller of goods has transferred to the buyer the property in the goods for a
price or all significant risks and rewards of ownership have been transferred to
the buyer and the seller retains no effective control of the goods transferred to
a degree usually associated with ownership; and
(ii)
no significant uncertainty exists regarding the amount of the consideration that

will be derived from the sale of the goods.
28
In the given case, transfer of property in goods results in or coincides with the
transfer of significant risks and rewards of ownership to the buyer. Also, the sale
price has been recovered by the seller. Hence, the sale is complete but delivery has
been postponed at buyers request. A Ltd. should recognize the entire sale of
` 1,00,000 (` 25,000 x 4) and no part of the same is to be treated as Advance
Receipt against Sales.
4.
(a) Calculation of Cost of Fixed Asset (i.e. Machine)

Particulars
Purchase Price
Given
Add:
Sales Tax at 4% on invoice price
` 52,78,000 x 4%
Site Preparation Cost
Given
47,290
Technicians Salary
Specific/Attributable*
overheads for 2
months (See Note)
30,000
Initial Delivery Cost
Transportation
18,590
Professional Fees for Installation
Architects Fees
10,000
Total Cost of Asset
52,78,000
2,11,120
55,95,000
Note: *Internally booked profits should be eliminated in arriving at the cost of Fixed
Assets.
(b) As per AS 11 (Revised) The Effects of Changes in Foreign Exchange Rates,
exchange differences arising on the settlement of monetary items or on reporting an
enterprises monetary items at rates different from those at which they were initially
recorded during the period, or reported in previous financial statements, should be
recognised as income or as an expense in the period in which they arise. However,
Ministry of Corporate Affairs has recently amended AS 11 through a notification. As
per the notification, exchange difference arising on reporting of long-term foreign
currency monetary items at rates different from those at which they were initially
recorded during the period, or reported in previous financial statements, in so far as
they relate to requisition of depreciable capital asset, can be added to or deducted
from cost of asset. The MCA has given an option for the enterprises to capitalize the
exchange differences arising on reporting of long term foreign currency monetary
items till 31st March, 2020. Thus the company can capitalize the exchange
differences arising due to long term loans linked with the acquisition of fixed assets.
Transaction 1: Calculation of exchange difference on fixed assets
Foreign Exchange Liability =
5,000
50
= US $ 100 lakhs
Exchange Difference = US $ 100 lakhs x (` 54.98 ` 50) = ` 498 lakhs.
29
Loss due to exchange difference amounting ` 498 lakhs will be capitalised and
added in the carrying value of fixed assets. Depreciation on the unamortised
amount will be provided in the remaining years
Transaction 2: Soft loan exchange difference (US $ 1 lakh i.e ` 50 lakhs)
Value of loan 31.3.13 US $ 1 lakh x 54.98 = ` 54,98,000
AS 11 also provides that in case of liability designated as long-term foreign currency
monetary item, the exchange difference is to be accumulated in the Foreign
Currency Monetary Item Translation Difference (FCMITD) and should be written off
over the useful life of such long-term liability, by recognition as income or expenses
in each of such periods.
Exchange difference between reporting currency (INR) and foreign currency (USD)
as on 31.03.2013 = US$1.00 lakh X ` (54.98 50) = ` 4.98 lakh.
Loan account is to be increased to 54.98 Iakh and FCMITD account is to be debited
by 4.98 lakh. Since loan is repayable in 3 equal annual instalments, ` 4.98 lakh/3 =
` 1.66 lakh is to be charged in Profit and Loss Account for the year ended 31st
March, 2013 and balance in FCMITD A/c ` (4.98 lakh 1.66 lakh) = ` 3.32 lakh is
to be shown on the 'Equity & Liabilities' side of the Balance Sheet as a negative
figure under the head 'Reserve and Surplus' as a separate line item.
Note: The above answer is given on the basis that the company has availed the
option under para 46A of AS 11
5.
(a) As per AS 13 Accounting for Investments long-term investments are usually of

individual importance to the investing enterprise. The carrying amount of long-term
investments is therefore determined on an individual investment basis. Investments
classified as long term investments should be carried in the financial statements at
cost. However, provision for diminution shall be made to recognize a decline, other
than temporary, in the value of the investments, such reduction being determined
and made for each investment individually.
Keeping in view the above, K Ltd should provide for the decline in the value of
investments in two subsidiaries despite the fact that the overall investment portfolio
in subsidiaries did not suffer any decline.
(b) According to para 92 of AS 15 (Revised 2005) 'Employee Benefits', actuarial gains
and losses should be recognized immediately in the statement of profit and loss as
income or expense. Therefore, surplus amount of ` 18 lakhs is required to be
credited to the profit and loss statement of the current year.
Asset or liability which is expressed in foreign currency and has a term of 12 months or more at the
time of origination of the asset or liability.
30
Besides, this change relating to actuarial valuation for its pension scheme should be
disclosed in accordance with AS 5 (Revised). In addition to this, the financial
statements of X Limited should disclose: (a) the method for determination of these
retirement benefit costs; (b) whether the actuarial valuation was made at the end of
the period or at an earlier date (also specify date); and (iii) the method by which the
accrual for the period has been determined (if the same is not based on the report
of the actuary).
Therefore, the accounting policy adopted by the company is not up to the mark and
needs improvements as explained above.
(c) As per AS 17 Segment Reporting, a business segment or geographical segment
should be identified as a reportable segment, if
(i)
Its revenue from sales to external customers and from transactions with other
segments is 10% or more of the total revenue, external and internal, of all
segments; or
(ii)
Its segment result whether profit or loss is 10% or more of

(1) The combined result of all segments in profit; or
(2) The combined result of all segments in loss,
whichever is greater in absolute amount; or
(iii) Its segment assets are 10% or more of the total assets of all segments.
Further, if the total external revenue attributable to reportable segments constitutes
less than 75% of total enterprise revenue, additional segments should be identified
as reportable segments, even if they do not meet the 10% threshold until atleast
75% of total enterprise revenue is included in reportable segments.
Calculation of Segment Result
Food products
Plastic & packaging
Health & scientific
Other
Sales
(` in lakhs)
10,000
1,240
690
364
Expenses
(` in lakhs)
7,170
800
444
400
Segment result
(` in lakhs)
2,830
440
246
(36)
Sunder Ltd. operates through four segments, namely, Food Products, Plastic and
Packaging, Health and Scientific and Others. The relevant information about
these segments is given in the following table:
31
(` in lakhs)
Food
Products
Plastic
and
Packaging
Health
and
Scientific
Others
Total
21,860
1.
Segment Assets
15,096
4,000
1,400
1,364
2.
Segment assets as a
percentage of total
assets of all segments
69.06%
18.3%
6.4%
6.24%
3.
Segment Results
2,830
440
246
(36)
4.
Combined Result of all

Segments in profits
2,830
440
246
5.
Combined Result of all

Segments in loss
6.
Segment Result as a
percentage of the
greater of the totals
arrived at 4 and 5
above in absolute
amount (i.e., 3516)
80.49%
12.51%
7%
1.02%
7.
Segment Revenue
10,000
1,240
690
364
8.
Total Revenue of each

segment as a
percentage of total
revenue of all
segments
81.34%
10.09%
5.61%
2.96%
3,480
3,516
(36)
12,294
(a) On the basis of Revenue criteria segments Food Products and Plastic and
Packaging are reportable segments.
(b) On the basis of Result criteria, segments Food Products and Plastic and
Packaging are reportable segments (since their results in absolute amount is
10% or more of ` 3516 lakhs).
(c) On the basis of Asset criteria, Food Products and Plastic and Packaging
are reportable segments.
32
6.
(a) (i)
Calculation of Annual Lease Payment

`
Cost of the equipment
3,00,000
Unguaranteed Residual Value
40,000
PV of residual value for 3 years @ 10% (` 40,000 x 0.751)
30,040
Fair value to be
(` 3,00,000 ` 30,040)
recovered
from
Lease
Payment
2,69,960
PV Factor for 3 years @ 10%
2.487
Annual Lease Payment (` 2,69,960/ PV Factor for 3 years

@ 10% i.e. 2.487)
1,08,550
(approx.)
(ii) Unearned Finance Income

3,25,650
Total lease payments [` 1,08,550 x 3]

Add: Residual value
40,000
Gross Investments
3,65,650
Less: Present value of Investments (` 2,69,960 + ` 30,040)
3,00,000
Unearned Financial Income
65,650
(iii) Segregation of Finance Income

Year
0
1
2
3
Lease Rentals
Finance Charges @ Repayment

10% on outstanding
amount of the year
Outstanding
Amount
1,08,550
1,08,550
1,48,550
3,65,650
30,000
22,145
13,505
65,650
78,550
86,405
1,35,045
3,00,000
3,00,000
2,21,450
1,35,045
--
Annual lease payments are considered to be made at the end of each accounting year.
` 1,48,550 includes unguaranteed residual value of equipment amounting ` 40,000
(b)
33
Computation of earnings per share (EPS)

Year
2012-13
(`)
Year
2013-14
(`)
EPS for the year 2012-13 as originally reported

=
Net profit of the year attributable to equity shareholders
Weighted average number of equity shares outstanding during the year
` 25,00,000
12,00,000 shares
EPS for the year 2012-13 restated for rights issue

` 25,00,000
=
(12,00,000 shares 1.06)
2.08
1.97
(approx.)
EPS for the year 2013-14 including effects of right issue

40,00,000
=
3
9
12,00,000 1.06 12 + 16,00,000 12
2.64
(approx.)
Working Notes:
1.
Computation of theoretical ex-rights fair value per share
Fair value of all outstanding shares immediatel y prior to exercise of rights + total amount received from exercise
Number of shares outstanding prior to exercise + number of shares issued in the exercise
=
2.
(` 28 12,00,000 shares) + (` 22 4,00,000 shares)

= ` 26.50
12,00,000 shares + 4,00,000 shares
Computation of adjustment factor

=
Fair value per share prior to exercise of rights

` 28
=
= 1.06 (approx.)
` 26.5
Theoretical ex-right value per share
The number of equity shares to be used in calculating basic earnings per share for periods prior to the
rights issue is the number of equity shares outstanding prior to the issue, multiplied by the adjustment
factor. The adjustment factor has been calculated in Working Note 2.
34
7.
(a)
Statement of Profit and Loss

(for the three years ending 31st March, 2010, 2011, 2012)
(` in thousands)
Profit (loss)
Less: Current tax (Refer W.N.)
2010
2011
2012
(100)
50
60
(4)
(100)
50
56
(20)
(20)
30
36
Adjustment of Deferred tax:

Tax effect of timing differences originating during the year
40
Tax effect of timing differences reversing during the year

Profit (loss) after tax effect
(60)
Working Note:
Loss of the year 2010, ` 100 thousands is set off from the profits of the year 2011
and 2012. After set-off of loss, remaining profit of the year 2012 to the extent of
` 10 thousands is taxable @ 40%.
(b) As per AS 23 on Accounting for Investments in Associates in Consolidated Financial
Statements, Adjustments to the carrying amount of investment in an investee arising
from changes in the investees equity that have not been included in the statement
of profit and loss of the investee are directly made in the carrying amount of
investment without routing it through the consolidated statement of profit and loss.
The corresponding debit/ credit is made in the relevant head of the equity interest in
the consolidated balance sheet. In the given case an associate has made a
provision for proposed dividend in its financial statements, the investors share of
the results of operations of the associate is computed without taking in to
consideration the proposed dividend. Applying these provisions to the given
problem, H Limited should have computed its share of the results of operations of
the associate without taking into consideration the proposed dividend. Therefore,
treatment made by H Ltd is not correct.
8.
(a) Business enterprises frequently close facilities, abandon products or even product
lines and reduce the size of their workforce in response to market forces. These
kinds of terminations, generally, are not in themselves discontinuing operations
unless they satisfy the definition criteria. By gradually reducing the size of
operations in the product line of Fairness cream, as given in para 3 of AS 24
Discontinuing Operations, the company has increased its scale of operations in
vanishing cream. Such a change is a gradual or evolutionary, phasing out of a
product line or class of services does not meet definition criteria in paragraph 3(a)
of AS 24 namely, disposing of substantially in its entirety a component of the
35
enterprise. Hence, this change over is not a discontinuing operation.

(b) As per AS 26 on Intangible Assets, Expenditure on an intangible item should be
recognised as an expense when it is incurred unless it forms part of the cost of an
intangible asset that meets the recognition criteria. In the given case, it incurred
substantial amounts on external trade, business communication and branding
expenses by participation in various corporate social responsibility initiatives. The
company expects to receive benefits by this expenditure by attracting new
customers over a period of time and accordingly it has capitalized the same under
brand development expenses. Here, no intangible assets or other asset is acquired
or created that can be recognized. Therefore the accounting treatment by the
company to amortize the entire expenditure over the period in which it expects the
benefits to flow is not correct and the same should be debited to the profit & loss
account.
9.
(a) The contention of the Big Publisher Limited is not acceptable.

As per para 4 of AS 28 "Impairment of Assets", A cash generating unit is the smallest
identifiable group of assets that generates cash inflows from continuing use that are
largely independent of the cash inflows from other assets or groups of assets.
It is likely that the recoverable amount of an individual magazine title can be
assessed. Even though the level of advertising income for a title is influenced, to a
certain extent, by the other titles in the customer segment, cash inflows from direct
sales and advertising are identifiable for each title.
In addition, although titles are managed by customer segments, decisions to
abandon titles are made on an individual title basis. Therefore, it is likely that
individual magazine titles generate cash inflows that are largely independent one
from another and that each magazine title is a separate cash-generating unit (CGU).
Therefore, the decision of the Big Publisher Limited to treat all magazine titles as
one cash-generating unit is wrong. In this case each individual magazine title
generates cash flow and the same is independent from another magazine hence
each individual magazine is a separate cash generating unit. Besides, as per AS
28, an impairment loss should be recognised for a cash generating unit if, and only
if, its recoverable amount is less than its carrying amount. The impairment loss
should be allocated to reduce the carrying amount of the assets of the unit in the
following order:
(a) first, to goodwill allocated to the cash-generating unit (if any); and
(b) then, to the other assets of the unit on a pro-rata basis based on the carrying
amount of each asset in the unit.
These reductions in carrying amounts should be treated losses on individual assets
and recognised in accordance with para 58 of AS 28. The Impairment testing as
per AS 28 would be done for each cash generating unit as explained above.
36
(b)
Recognition- As per AS 29 a provision should be recognized if the following

conditions are satisfied.
Condition -1
Present obligation is a result
of past event
VRS started in January 2012
and existed on the balance
sheet date. As on the balance
sheet date, nearly 200
employees had opted for the
scheme
evidencing
the
existence of a liability on the
balance sheet date.
Condition -2
Outflow
of
the
resources to settle the
obligation is probable
As and when the
employees
applications
are
accepted, the outflow
of resources to settle
the
obligation
is
probable. Also it is
probable that the
liability will increase, if
more people opt for
VRS.
Condition -3
Reliable estimate of
the amount can be
made.
Lumpsum payment is
` 250 lakhs and
estimated payment is
` 1,500 lakhs (given).
Treatment and Conclusion: Since all the conditions for recognition of a Provision
are satisfied, a Provision should be recognized for the year ending 31st March 2012.
Hence, the treatment of the Company for not recognizing the provision violates AS
29 requirements.
10. (a) Tax Expense
`
Tax on capital gain portion of annual income: 10% of ` 20,000
2,000
Tax on other income: 30% of `40,000 + 40% of remaining ` 40,000
28,000
Total
30,000
Weighted average annual effective tax rate:

Rate on capital gain portion of annual income =
Rate on other income =
2,000
x 100 = 10%
20,000
28,000
x 100 = 35%
80,000
Tax expense for each quarter:
Quarter I
Income
`
25,000
Tax Expense
35% of ` 25,000 =
`
8,750
Quarter II
Capital Gain
Other income
20,000
5,000
25,000
25,000
Quarter III
Quarter IV
Total tax expense for the year
(b) (i)
37
10% of ` 20,000 = 2,000

35% of ` 5,000 = 1,750
35% of ` 25,000 =
35% of ` 25,000 =
3,750
8,750
8,750
30,000
Journal Entries
` in lakhs
(a) Plant and Machinery A/c
Cenvat credit receivable on capital goods A/c
Dr.
45
Dr.
To Bank A/c or Creditors A/c
50
(Being capitalization of plant and machinery)

(b) Excise duty A/c
Dr.
4.5
To Cenvat credit receivable on capital goods A/c
2.5
To Bank A/c
(Being excise duty set off available to the extent of

50% in the first year of acquisition of capital asset)
(ii) Value of plant to be recorded in Fixed Asset Register: As per Guidance
Note on "Accounting Treatment for CENVAT", fixed assets have to be
capitalised net of refundable amounts.
The plant and machinery will be recorded at ` 45 lakhs (` 50 lakhs - ` 5 lakhs)

in the fixed asset register.
11
Calculation of Purchase consideration

Ram Ltd. Shyam Ltd.
Purchase Consideration:
Goodwill
Freehold property
Plant and Machinery
Motor vehicles
Inventory
Trade Receivables
Cash at Bank
Less: Liabilities:
6% Debentures (1,20,000 x 105%)
`
1,60,000
2,10,000
50,000
60,000
1,20,000
1,64,000
86,000
8,50,000
`
60,000
1,20,000
30,000
1,56,000
3,66,000
(1,26,000)
38
Trade Payables
(1,50,000)
Net Assets taken over
7,00,000
70,000
To be satisfied by issue of shares of Ram and Shyam Ltd. @ `10
each
2,40,000
24,000
Balance Sheet Ram & Shyam Ltd. as at 1st April,2013
Particulars
Note No
Amount
`
1
Equity and Liabilities
Shareholders' funds
(a)
Share capital
9,40,000
(b)
Reserves and Surplus
6,000
Non-current liabilities
(a)
Long-term borrowings
Current liabilities
(a)
1,20,000
Trade payables
1,50,000
12,16,000
Total
1
(a)
ASSETS
Non-current assets
Fixed assets
Tangible assets
4,70,000
ii
Intangible assets
2,20,000
Current assets
(a)
Inventories(1,20,000+1,56,000)
2,76,000
(b)
Trade receivables
1,64,000
(c)
Cash and cash equivalents
86,000
Total
12,16,000
39
Notes to accounts
`
1.
Share Capital
Equity share capital

94,000 shares of `10 each
2.
9,40,000
Reserves and Surplus
Securities Premium A/c (W.N.)

3.
6,000
Long-term borrowings
Secured
6% Debentures
4.
1,20,000
Tangible assets
Freehold property
Ram Ltd.
2,10,000
Shyam Ltd.
1,20,000
3,30,000
Plant and Machinery

Ram Ltd.
50,000
Shyam Ltd.
30,000
80,000
60,000
Motor vehicles Ram Ltd.
5.
Intangible assets
Goodwill
4,70,000
Ram Ltd.
Shyam Ltd.
1,60,000
60,000
2,20,000
In the books of Shyam Ltd.

Journal Entries
`
1.
Realisation A/c
To Freehold Property
To Plant and Machinery
Dr.
3,48,000
1,20,000
30,000
40
2.
3.
4.
5.
6.
7.
8.
9.
To Inventory
To Trade Receivables
(Being all assets except cash transferred to
Realisation Account)
6% Debentures A/c
Dr.
Trade Payables A/c
Dr.
To Realisation A/c
(Being all liabilities transferred to Realisation
Account)
Equity Share Capital A/c
Dr.
Profit and Loss A/c
Dr.
To Equity shareholders A/c
(Being equity transferred to equity shareholders
account)
Ram and Shyam Ltd.
Dr.
To Realisation A/c
(Being purchase consideration due)
Bank A/c
Dr.
To Realisation A/c
(Being cash realized from debtors in full)
Realisation A/c
Dr.
To Bank A/c
(Being payment made to creditors)
Shares in Ram and Shyam Ltd.
Dr.
To Ram and Shyam Ltd.
(Being purchase consideration received in the form
of shares of Ram and Shyam Ltd.)
Realisation A/c
Dr.
To Equity shareholders A/c
(Being profit on Realisation account transferred to
shareholders account)
Equity shareholders A/c
Dr.
To Shares in Ram and Shyam Ltd.
To Bank A/c
(Being final payment made to shareholders)
1,56,000
42,000
1,20,000
64,000
1,84,000
1,60,000
40,000
2,00,000
2,40,000
2,40,000
42,000
42,000
64,000
64,000
2,40,000
2,40,000
54,000
54,000
2,54,000
2,40,000
14,000
41
Working Note:
Calculation of Securities Premium balance

Debentures issued by Ram and Shyam Ltd. to Shyam Ltd. at 5% premium
Therefore, securities premium account will be credited with (` 1,20,000 x 5%) ` 6,000.
12.
Consolidated Balance Sheet of Evil Ltd. with its subsidiary

Devil Ltd. as on 31st March, 2013
Notes
No.
I.
Equity and Liabilities

(1) Shareholder's Funds
(a) Share Capital
(b) Reserves and Surplus
(2) Minority interest (W.N. 4)
(3) Current Liabilities
Trade payables
1
2
6,00,000
1,93,000
1,23,500
1,70,000
10,86,500
4
5
6,28,000
50,000
6
7
8
2,13,500
1,30,000
65,000
10,86,500
Total
II.
Assets
(1) Non-current assets
Fixed assets
Tangible assets
Intangible assets
(2) Current assets
(a) Inventories
(b) Trade receivables
(c) Cash and cash equivalents
Total
Notes to Accounts
`
1.
Share Capital
6,00,000
Equity shares of ` 10 each, fully paid up

2.
Reserves and surplus
Capital reserve (W.N.3)
33,750
General reserve
60,000
Profit and loss account (W.N. 6)
99,250
1,93,000
42
3.
Trade Payables
Evil Ltd.
1,00,000
Devil Ltd.
80,000
1,70,000
Less: Mutual indebtedness
4.
(10,000)
1,70,000
Tangible Assets
Land and buildings
Evil Ltd.
1,00,000
Devil Ltd.
1,00,000
2,00,000
Plant and machinery

Evil Ltd.
Devil Ltd.
Add: Upward revaluation
2,00,000
1,80,000
50,000
2,30,000
Less: Excess Depreciation

on upward revaluation
5.
6.
(2,000) 2,28,000
4,28,000
6,28,000
Intangible Assets
Evil Ltd.
10,000
Devil Ltd.
40,000
50,000
Inventories
Evil Ltd.
1,17,500
Devil Ltd.
1,00,000
2,17,500
Less: Unrealised profit
7.
(4,000)
2,13,500
Trade receivables
Evil Ltd.
50,000
Devil Ltd.
90,000
1,40,000
Less: Mutual indebtness
8.
(10,000)
1,30,000
Cash and cash equivalents

Bank Balances
Evil Ltd.
45,000
Devil Ltd.
20,000
65,000
43
Working Notes:
1.
Analysis of Reserves and Profits of Devil Ltd. as on 31.03.2013
General reserve as on 31.3.2013

Profit and loss account as on 31.3.2013
Less: Opening Balance
60,000
Less: Dividend for 2011-12 (out of
pre-acquisition profits) (30,000)
Profit earned during the year
Upward revaluation of plant and machinery as
on 1.10.2012 (W.N.2)
Excess depreciation (for 6 months) due to
upward revaluation (W.N.2)
Total
Minority Interest (25%)
Share of Evil Ltd. (75%)
2.
Pre-acquisition
Postprofit upto
acquisition
1.10.2012
profits
(2.10.2012
31.3.2013)
(Capital profits) Profit and
loss account
50,000
1,00,000
30,000
70,000
30,000
35,000
35,000
50,000
1,65,000
41,250
1,23,750
(2,000)
33,000
8,250
24,750
Revaluation of Plant & Machinery of Devil Ltd. and its book value as on
31.3.2013
Depreciation during the year = Opening Balance less Closing Balance = 2,00,000
1,80,000 = ` 20,000
Depreciation rate = (20,000/2,00,000) x 100 = 10%
(a) Computation of Revaluation Gain / Loss
Revalued Amount on 01.10.2012 (date of acquisition)
`
2,40,000
Less: Book Value on 01.10.2012 (date of acquisition)
Value on 01.04.2012
` 2,00,000
Less: Depreciation for 6 months at 10% (`10,000)
Revaluation Gain i.e. Capital Profit
1,90,000
50,000
44
(b) Computation of Depreciation on Revaluation Gain / Loss
`
Depreciation on Revalued Plant for 6 months
= ` 2,40,000 6/12 10%
12,000
Less: Depreciation already provided on ` 2,00,000 6/12 10%
Revenue Loss
3.
2,000
Calculation of cost of control
`
2,25,000
1,23,750
3,48,750
Share capital in Devil Ltd.

Add: Capital profit
Less: Cost of Investments
Less: Pre-acquisition dividend received for 2011-12
3,37,500
(22,500)
Capital Reserve
4.
(3,15,000)
33,750
Calculation of minority interest [25%]
`
75,000
41,250
8,250
1,24,500
(1,000)
1,23,500
Share capital
Capital (pre-acquisition) profits [W.N.1]
Revenue (post-acquisition) profits - Profit and loss [W.N.1]
Less: Unrealised profit [W.N. 5]
5.
(10,000)
Stock reserve (plant and machinery)
16,000 x 1/3
Unrealised profit =
= ` 4,000
4/3
To be adjusted from minority interest and consolidated profit and loss account in the
ratio of 25:75.
6.
Consolidated profit and loss account as on 31.3.2013
`
Profit and loss account balance of Evil Ltd. as on 31.3.2013
Less: Pre-acquisition dividend wrongly credited
1,00,000
(22,500)
77,500
45
Add: Share in post-acquisition profit and loss account of Devil Ltd. (W.N.1)
24,750
Less: Unrealised profit [W.N. 5]
(3,000)
99,250
Note: Unrealized profits on closing stock have been eliminated to the extent of
holding companys share in Profit and Loss Account and balance adjusted in
Minority Interest as it relates to upstream transaction.
13. (i)
(a) Ascertaining Fair Value of Liability Component
Had the bonds been issued at 9% p.a. the present value would emerge as
below:
Present value of ` 40 lacs repayable after 3rd year
30,88,000
(40 lacs x 0.772)
Present value of interest payable at the end of
Year 1 (2,40,000 x 0.917)
2,20,080
Year 2 (2,40,000 x 0.841)
2,01,840
Year 3 (2,40,000 x 0.772)
1,85,280
Liability component (Total of Present value)
36,95,200
(b) Ascertaining Equity Component
Fair Value of Instrument
40,00,000
Less: Liability component
(36,95,200)
Equity component
3,04,800
(c) Initial Recognition at the inception of the Bond
Cash/Bank A/c
Dr.
Debit
Credit
`
40,00,000
To Convertible Bond Liability A/c
36,95,200
To Equity A/c
3,04,800
(ii) Bond liability at the end of each year
Beginning
Add: Interest @ 9%
Year 1
Year 2
Year 3
`
36,95,200
3,32,568
40,27,768
`
37,87,768
3,40,900
41,28,668
`
38,88,668
3,49,980
42,38,648
46
1,352
Less: Interest @ 6%
(2,40,000)
(2,40,000)
(2,40,000)
Carrying amount
37,87,768
38,88,668
40,00,000
Rounding off adjustment
(iii) For recording Finance Charge of each year

Journal Entries
End of Year 1
Finance Charges A/c
To Bonds A/c
To Cash or Bank A/c

End of Year 2
Finance Charges A/c
To Bonds A/c
To Cash or Bank A/c
End of Year 3
Finance Charges A/c
To Bonds A/c
To Cash or Bank A/c
14
Dr.
Debit
Credit
3,32,568
92,568
2,40,000
Dr.
3,40,900
1,00,900
2,40,000
Dr.
3,51,332
1,11,332
2,40,000
Journal Entries in the books of Arihant Ltd.
`
10.12.12 Bank A/c (16,000 x 50)
Dr.
to
31.3.13
Dr. 11,20,000
Employee compensation expense A/c (16,000 x 70)

To Equity share capital A/c (16,000 x 10)
8,00,000
1,60,000
To Securities premium A/c (16,000 x 110)
17,60,000
(Being shares issued to the employees against the

options vested to them in pursuance of Employee
Stock Option Plan)
31.3.13
Profit and Loss A/c
Rounding off is due to approximation of discounting factor @ 9%.

` 3,49,980 + ` 1,352 = ` 3,51,332
Dr. 11,20,000
To Employee compensation expense A/c
47
11,20,000
(Being transfer of employee compensation expenses

to Profit and Loss Account)
15.
Computation of Future Maintainable Profits

Particulars
Profit after tax for the year 2013
48,00,000
Add:
Tax epense (Tax is 36%, So, PAT = 64%. Hence, Tax

= 48,00,000 x 36/64)
Profit before tax for the year 2013

Add/ (Less)
27,00,000
75,00,000
Adjustments in respect of non-recurring items

Subsidy income not receivable in future
Interest on term loan not payable in future, hence saved
Additional managerial remuneration
Loss on sale of fixed assets and investments (nonrecurring)
Future maintainable profits before tax

Less: Tax expense at 34%
Future maintainable profits after tax equity earnings
(2,00,000)
8,00,000
(6,00,000)
8,00,000
83,00,000
(28,22,000)
54,78,000
Computation of capitalization rate and value of business

Particulars
(a) Profit after tax for the year 2013
(b) Number of equity shares (` 100 lakhs / ` 50 per share)

(e) Earnings per share (EPS) = PAT/Number of Equity Shares
(d) Market price per share on balance sheet date
(e) Price Earnings Ratio = MPS / EPS
(f)
Capitalisation Rate = (1 / PE Ratio) x 100
(g) Value of Business = Future Maintainable Profits /Capitalisation Rate

= ` 54.78 Lakhs / 20%
`
` 48 lakhs
2 lakhs
`24
`120
5
20%
` 273.90
lakhs
48
16. (a)
Smart Ltd.
Balance Sheet (Extract)
(Extract relating to intangible asset)
as on 31st March 2012
Note No.
6,79,200
Assets
(1) Non- current asset
Intangible assets
(b)
Statement of Profit and Loss (Extract)

for the year ended 31st March 2012
Note No.
`
40,000
?
Amortization
88,800
Other expenses
400
Reveue from Operations

Total Revenue
Expenses:
Total Expenses
Notes to Accounts (Extract)
`
1.
Intangible assets
Goodwill (Refer to note 1)
Franchise (Refer to Note 2)
Patents
2.
3.
3,38,400
96,000
2,44,800
6,79,200
Amortization expenses
Goodwill
37,600
Franchise
24,000
Legal Cost
27,200
88,800
Other expenses
Franchise annual fee for 1% of 40,000
400
49
Working Notes:
(1)
Cash Paid
Less: Fair value of net assets
Goodwill
Less: Amortisation (over 10 years as per SLM)
Balance to be shown in the balance sheet

(2)
Franchise
Less: Amortisation (over five years)

(3)
`
7,20,000
(3,44,000)
3,76,000
(37,600)
3,38,400
1,20,000
(24,000)
96,000
Legal Costs (1,02,000 + 1,70,000)
2,72,000
Less: Amortisation (over ten years as per SLM)
(27,200)
2,44,800
(4) As per para 63 of AS 26, Intangible Assets, there is a rebuttable presumption

that useful life of a intangible asset will not exceed ten years. If life is taken for
more than 10 years, then company will have to disclose the significant reasons
for the assumption. Here, Smart Ltd. has simply stated that life is unlimited by
saying that Ok Ltd.s products are popular. However, this cannot be
constituted as significant reason. Therefore, this assumption has not been
taken into consideration.
17. (a)
NAV of the Fund on 1st April, 2013 =
Net Assets
No. of units of fund
` 98,500 + ` 1,20,65,000 + ` 13,22,000 + ` 3,37,45,000 + ` 3,88,500

4,00,000 units
` 4,76,19,000
= ` 119.0475
4,00,000 units units
(b) The revised position of fund
Shares
No. of shares
Price
Amount (`)
P Ltd.
5000
19.70
98,500
Q Ltd.
25000
482.60
1,20,65,000
R Ltd.
(5,000+9,000) 14,000
264.40
37,01,600
S Ltd.
50,000
674.90
3,37,45,000
50
T Ltd.
15,000
Cash
25.90
3,88,500
[25,00,000 - (9,000 x 264.40)]
1,20,400
5,01,19,000
(c) No. of units of fund = 4,00,000 +
25,00,000
= 4,21,000 units
119.0475
Calculation of the NAV of fund on 2nd April, 2013
Shares
No. of shares
Price
Amount (`)
P Ltd.
5,000
20.30
1,01,500
Q Ltd.
25,000
513.70
1,28,42,500
R Ltd.
14,000
290.80
40,71,200
S Ltd.
50,000
671.90
3,35,95,000
T Ltd.
15,000
44.20
6,63,000
Cash
1,20,400
5,13,93,600
NAV as on 2nd April 2013 =

18. (a)
` 5,13,93,600
= ` 122.075 per unit
4,21,000 units
Statement showing computation of 'Net Owned Fund'
` in 000
Paid up Equity Capital
100
Free Reserves
500
600
Less: Deferred expenditure
(200)
A
400
Investments
In shares of subsidiaries and group companies
100
In debentures of subsidiaries and group companies
100
B
10% of A
Excess of Investment over 10% of A (200-40)
Net Owned Fund [(A) - (C)] (400-160)
200
40
160
240
51
(b) Every stock broker is required to maintain the following books of account, records
and documents as per Rule 15 of the Securities Contracts (Regulation) Rules, 1957
and Regulation 17 of the SEBI (Stock Brokers and Sub-Brokers) Rules, 1992:
(a) Register of transactions (Sauda book);

(b) Clients ledger;
(c) General ledger;
(d) Journals;
(e) Cash book;
(f)
Bank Pass Book;
(g) Documents register, containing, inter alia, particulars of securities received

and delivered in physical form and the statement of account and other relating
to receipt and delivery of securities provided by the depository participants in
respect of dematerialized securities;
(h) Members contract book showing details of all contracts entered into by him
with other members of the stock exchange or counterfoils or duplicates of
memos of confirmation issued to such other members;
(i)
Counterfoils or duplicates of contract notes issued to clients;
(j)
Written consent of clients in respect of contracts entered into as principals;
(k) Margin deposit book;

(l)
Register of accounts of sub-brokers;
(m) An agreement with a sub-broker specifying the scope of authority and

responsibilities of the stock broker and such sub-brokers.
(n) An agreement with the sub-broker and with the client of sub-broker to establish
privities of the contract between the stock broker and the client of the stock
broker.
19. 1.
Calculation of Target index

Year
( ` in lakhs)
2007-08
2008-09
2009-10
2010-11
2011-12
Employees cost
1,040
960
900
1,200
1,500
Value added
2,200
2,340
1,920
2,580
3,400
52
Percentage of
Employee cost to
Value added (to
the nearest whole
number)
47%
41%
47%
47%
44%
Target index percentage is taken as least of the above from companies viewpoint
on conservative basis i.e. 41%.
2.
Value Added Statement for the year 2012-13

(` in lakhs)
Sales
(` in lakhs)
11,940
Less: Cost of bought in goods & services
Material consumed
3,900
Production expenses
1,000
Administrative expenses
400
Selling expenses
700
Added value
3.
(6,000)
5,940
Employee cost for 2012-13

(` in lakhs)
Wages
800
Production salaries
260
Administrative salaries
300
Selling salaries
240
1,600
4.
Calculation of target employee cost = Target Index Percentage x Value added
= 41% x ` 5,940 lakhs = ` 2,435.4 lakhs

5.
6.
Calculation of savings
Target employee cost
= ` 2,435.4 lakhs
Less: Actual Cost
= ` 1,600 lakhs
Saving
= ` 835.4 lakhs
Calculation of Variable incentive for the year 2012-13:
70% of saving is variable incentive = 70% x ` 835.4 lakhs = ` 584.78 lakhs.
53
20. (a) We know that EVA = NOPAT Cost of Capital Employed
Where
EVA = Economic Value Added

NOPAT = Net Operating Profit After Tax
Required calculations are as follows:

(i)
(ii)
NOPAT
Profit After Tax
` 20,394.16 lakhs
Add: Interest Net of Tax [` 487 lakhs (1-0.2445)]
NOPAT
` 20,762.09 lakhs
367.93 lakhs
Cost of Equity:
Cost of Equity = Risk free Rate + [Market Rate Risk Free Rate]
= 12% + 1.05 x (15.14 12.00)
= 12% + 3.30% = 15.30%
(iii) Cost of Debt
Cost of Debt =
Interest on Loan Funds (1 Tax Rate)

100
Loan funds
Cost of Debt =
487x(1 0.2445)
100 = 4.54%
8,100
(iv) Weighted Average Cost of Capital (WACC)
Equity
Debt
Amount
(` in lakhs)
72,900
8,100
81,000
Weight
Cost
WACC %
.90
.10
1.00
15.30
4.54
13.77
0.454
14.224
(v) Cost of Capital Employed= ` 81,000 x 14.224% = ` 11,521.44 lakhs

(vi) EVA = NOPAT Cost of Capital Employed
= ` 20,762.09 lakhs ` 11,521.44 lakhs = ` 9,240.65 lakhs
(b)
Capital Base
` 2,00,00,000
Actual Profit
22,00,000
Target Profit @ 12.5%
25,00,000
54
Expected Profit on employing the particular executive

= ` 25,00,000 + ` 5,00,000 = ` 30,00,000
Additional Profit = Expected Profit Actual Profit
= ` 30,00,000 ` 22,00,000 = ` 8,00,000
Maximum bid price =
Additional Pr ofit
8,00,000
100= ` 64,00,000
=
12.5
Rate of Re turn on Investment
Maximum salary that can be offered = 12.5% of ` 64,00,000 i.e., ` 8,00,000

Maximum salary can be offered to that particular executive upto the amount of
additional profit i.e., ` 8,00,000.

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PAPER 1 : FINANCIAL REPORTING

PART I : RELEVANT AMENDMENTS, NOTIFICATIONS AND ANNOUNCEMENTS

Applicable for May, 2014 examination

Buy Back of Securities (Amendment) Regulations, 2013