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Pending answers Question 5
Old Course answers November 2020
1(a) (i) Since, net realisable value is less than cost, closing inventory will be valued at Rs. 4000. Therefore, closing inventory is Rs. 4,000 x 50 = 2,00,000/-
1(a) (ii) The event is a non-adjusting event since it occurred after the year-end and does not relate to the conditions existing at the year-end. However, it is necessary to consider the validity of the going concern assumption having regard to the extent of insurance cover.
1(a) (iii) The sale of property should be treated as an adjusting event since contracts had been exchanged prior to the year-end. The effect of the sale would be reflected in the financial statements ended on 31.3.2020 and the profit on sale of property Rs.2,00,000 would be treated as an extraordinary item.
1(b)(ii) Present obligation as a result of a past obligating event - On the basis of the evidence available when the financial statements were approved, there is no present obligation as a result of past events.
Conclusion - No provision is recognised (definition of ‘present obligation’ and paragraph 15).
The matter is disclosed as a contingent liability unless the probability of any outflow is regarded as remote (paragraph 68).
1(b)(iii) AS 29 “Provisions, Contingent Liabilities and Contingent Assets” provides that when an enterprise has a present obligation, as a result of past events, that probably requires an outflow of resources and a reliable estimate can be made of the amount of obligation, a provision should be recognised. Sun Ltd. has the obligation to deliver the goods within the scheduled time as per the contract. It is probable that Sun Ltd. will fail to deliver the goods within the schedule and it is also possible to estimate the amount of compensation.
Therefore, company should provide for the contingency amounting Rs. 15,00,000 as per AS 29.
Since there is insurance policy for Rs. 30,00,000 goods lost, the net amount available will be only 23,00,000/-. No impact of this to be set off with the provision.
1(c)
Direct Method Cash Flow Statement [Paragraph 18(a)]
Cash flows from operating activities
1(d)
2 **Answered at Bottom**
3
4(a)(i) Machinery Spares: The existing AS 2 explains that inventories do not include spare parts, servicing equipment and standby equipment which meet the definition of property, plant and equipment as per AS 10, Property, Plant and Equipment.
Such items are accounted for in accordance with Accounting Standard (AS) 10, Property, Plant and Equipment. Ind AS 2 does not contain specific explanation in respect of such spares as this aspect is covered under Ind AS 16.
4(a)(ii) Subsequent Assessment of NRV: Ind AS 2 provides detailed guidance in case of subsequent assessment of net realisable value. It also deals with the reversal of the write-down of inventories to net realisable value to the extent of the amount of original write-down, and the recognition and disclosure thereof in the financial statements. The existing AS 2 does not deal with such reversal.
4(a)(iii) Cost Formulae: The existing AS 2 specifically provides that the formula used in determining the cost of an item of inventory should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition whereas Ind AS 2 does not specifically state so and requires the use of consistent cost formulas for all inventories having a similar nature and use to the entity.
4(b)IndAS 40
Definition
Investment property is property (land or building or part of a building or both) held (by the owner or by the lessee as a right of use asset) to earn rentals or for capital appreciation or both, rather than for
a) use in the production or supply of goods or services or for administrative purposes or
b) sale in the ordinary course of business
Part wise answer
(i) Yes, IP
(ii) Yes, IP
(iii) No (Ind AS 116)
(iv) No (Ind AS 2)
5 **Pending**
6(a)
6(b)
7(a)(i) Revenue from such sales should not be recognised until goods are delivered. However, when experience indicates that most such sales have been consummated, revenue may be recognised when a significant deposit is received.
7(a)(ii) For such transactions that are in substance a financing agreement, the resulting cash inflow is not revenue as defined and should not be recognised as revenue.
7(a)(iii) Revenue from such sales can generally be recognised if significant risks of ownership have passed, however, in some situations the buyer may in substance be an agent and in such cases the sale should be treated as a consignment sale.
7(a)(iv)
Insurance Agency Commissions
Revenue should be recognised when the service is completed. Insurance agency commissions should be recognised on the effective commencement or renewal dates of the related policies.
7(b) Net owned funds = Owned funds (-) Investment in shares of subsidiaries (-) Investments in debentures of group companies (to the extend exceeds 10% of owned funds)
= Rs 200 + Rs. 600 - Rs. 250 - Rs. 400 - 10% of (Rs. 200 + Rs. 600)
= Rs. 230
7(c)
7(d) Sale and lease back transaction - In Ind AS 116, the approach for computation of gain/loss for a completed sale is different. The amount of gain/loss should reflect the amount that relates to the right transferred to the buyer lessor.
(As per AS 19, if a sale and leaseback transaction results in a finance lease, excess, if any, of the sale proceeds over the carrying amount shall be deferred and amortised by the seller-lessee over the lease term in proportion to depreciation of the leased asset.)
Ind AS 116 requires a seller lessee and a buyer-lessor to use the definition of a sale as per Ind AS 115, Revenue from Contracts with Customers to determine whether a sale has occurred in a sale and leaseback transaction. If the transfer of the underlying asset satisfies the requirements of Ind AS 115 to be accounted for as a sale, the transaction will be accounted for as a sale and a lease by both the lessee and the lessor. If not, then the sellerlessee shall recognise a finance liability and the buyer-lessor will recognise a financial asset to be accounted for as per the requirements of Ind AS 109, Financial Instruments.
(AS 19 does not contain such specific requirement.)
Classification
Ind AS 116 eliminates the requirement of classification of leases as either operating leases or finance leases for a lessee and instead, introduces a single lessee accounting model which requires lessee to recognise assets and liabilities for all leases unless it applies the recognition exemption applies.
(AS 19 requires a lessee to classify leases as either finance leases or operating leases.)
7(e)
2.
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