Module 5 FR

Final Course
(Revised Scheme of Education and Training)
Study Material
(Modules 1 to 7)
Paper 1
Financial Reporting
Module - 5
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
© The Institute of Chartered Accountants of India

ii
This Study Material has been prepared by the faculty of the Board of Studies. The
objective of the Study Material is to provide teaching material to the students to enable
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may write to the Director of Studies.
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for the students. However, the Study Material has not been specifically discussed by the
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Edition : August, 2017
Website : www.icai.org
E-mail : bosnoida@icai.in
Committee/ : Board of Studies

Department
ISBN No. : 978-81-8441-897-2
Price : 1100/- (For All Modules)
Published by : The Publication Department on behalf of The Institute of

Chartered Accountants of India, ICAI Bhawan, Post Box No.
7100, Indraprastha Marg, New Delhi 110 002, India.
Printed by : Sahitya Bhawan Publications, Hospital Road, Agra -282 003

August/2017/P2147 (New)

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CONTENTS
MODULE – 1
Chapter 1: Application of Accounting Standards

Unit 1: AS 15 “Employee Benefits”
Unit 2: AS 25 “Interim Financial Reporting”
Unit 3: AS 28 “Impairment of Assets”
Unit 4: AS 21 “Consolidated Financial Statements”
Unit 5: AS 23 “Accounting for Investments in Associates in Consolidated Financial Statements”
Unit 6: AS 27 “Financial Reporting of Interests in Joint Ventures”
Chapter 2: Application of Guidance Notes
MODULE – 2
Chapter 3: Framework for Preparation and Presentation of Financial Statements
Application of Indian Accounting Standards (Ind AS)
Chapter 4: Ind AS on Presentation of Items in the Financial Statements
Unit 1: Ind AS 1 “Presentation of Financial Statements” Unit
2: Ind AS 34 “Interim Financial Reporting”
Unit 3: Ind AS 7 “Statement of Cash Flows”
Chapter 5: Ind AS on Recognition of Revenue in the Financial Statements
Unit 1: Ind AS 11 “Construction Contracts”
Unit 2: Ind AS 18 “Revenue”
Chapter 6: Ind AS on Measurement based on Accounting Policies
Unit 1: Ind AS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” Unit
2: Ind AS 10 “Events after the Reporting Period”

iv
Unit 3: Ind AS 113 “Fair Value Measurement”
Chapter 7: Other Ind AS
Unit 1: Ind AS 20 “Accounting for Government Grants and Disclosure of Government

Assistance”
Unit 2: Ind AS 114 “Regulatory Deferral Accounts”
Chapter 8: Ind AS 101 “First-time Adoption of Indian Accounting Standards”
MODULE – 3
Chapter 9: Ind AS on Assets of the Financial Statements
Unit 1: Ind AS 2 “Inventories”
Unit 2: Ind AS 16 “Property, Plant and Equipment”
Unit 3: Ind AS 17 “Leases”
Unit 4: Ind AS 23 “Borrowing Costs”
Unit 5: Ind AS 36 “Impairment of Assets”
Unit 6: Ind AS 38 “Intangible Assets”
Unit 7: Ind AS 40 “Investment Property”
Unit 8: Ind AS 105 “Non-current Assets Held for Sale and Discontinued Operations”
MODULE – 4
Chapter 10: Ind AS on Liabilities of the Financial Statements
Unit 1: Ind AS 19 “Employee Benefits”
Unit 2: Ind AS 37 “Provisions, Contingent Liabilities and Contingent Assets”
Chapter 11: Ind AS on Items impacting the Financial Statements
Unit 1: Ind AS 12 “Income Taxes”
Unit 2: Ind AS 21 “The Effects of Changes in Foreign Exchange Rates”

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Chapter 12: Ind AS on Disclosures in the Financial Statements
Unit 1: Ind AS 24 “Related Party Disclosures”
Unit 2: Ind AS 33 “Earnings per Share”
Unit 3: Ind AS 108 “Operating Segments”
MODULE – 5
Chapter 13: Consolidated and Separate Financial Statements
Unit 1 : Introduction to Consolidated Financial Statements Unit
2 : Important Definitions
Unit 3 : Separate Financial Statements
Unit 4 : Consolidated Financial Statements
Unit 5 : Consolidated Financial Statements: Accounting of Subsidiaries Unit
6 : Joint Arrangements
Unit 7 : Investment in Associates & Joint Ventures
Unit 8 : Disclosures
Test Your Knowledge
Chapter 14: Industry Specific Ind AS
Unit 1 : Ind AS 41 “Agriculture”
Unit 2 : Ind AS 104 “Insurance Contracts”
Unit 3 : Ind AS 106 “Exploration for and Evaluation of Mineral Resources”

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MODULE – 6
Chapter 15: Business Combinations and Corporate Restructuring
Chapter 16: Accounting and Reporting of Financial Instruments
Unit 1: Financial Instruments: Scope and Definitions
Unit 2: Financial Instruments: Equity and Financial Liabilities
Unit 3: Classification and Measurement of Financial Assets and Financial Liabilities
Unit 4: Recognition and Derecognition of Financial Instruments
Unit 5 : Derivatives and Embedded Derivatives
Unit 6: Disclosures
Unit 7: Hedge Accounting
Chapter 17: Accounting for Share Based Payment
MODULE – 7
Chapter 18: Analysis of Financial Statements
Chapter 19: Accounting for Carbon Credits
Chapter 20: Accounting for E-commerce Business
Emerging trends in Reporting
Chapter 21: Integrated Reporting
Chapter 22: Corporate Social Responsibility Reporting
Chapter 23: Human Resource Reporting
Chapter 24: Value Added Statement

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DETAILED CONTENTS
CHAPTER 13 –CONSOLIDATED FINANCIAL STATEMENTS

Learning Outcomes ................................................................................................................ 13.1
Chapter Overview ................................................................................................................... 13.2
Contents:
Unit 1: Introduction to Consolidated Financial Statements
1.1 Introduction ............................................................................................................... 13.5
1.2 Purpose ..................................................................................................................... 13.6
1.3 From AS to Ind AS .............................................................................................................. 13.6
1.4 Significant differences in Ind AS vis-à-vis existing AS ..................................................... 13.8
1.4.1 Ind AS 27 on ‘Separate Financial Statements’ vs. AS ..................................... 13.8
1.4.2 Ind AS 110 on ‘Consolidated Financial Statements’ vs.
AS 21 on ‘Consolidated Financial Statements’ ................................................. 13.9
1.4.3 Ind AS 28 on ‘Investments in Associates and Joint Ventures’
Vs. AS 23 on ‘Accounting for Investment in Associates in
Consolidated Financial Statements’ ............................................................ 13.11
1.4.4 Ind AS 111 on ‘Joint Arrangements’ Vs. AS 27 on
‘Financial Reporting of Interests in Joint Venturers’ ....................................... 13.12
Unit 2: Important definitions............................................................................................... 13.14
Unit 3: Separate Financial Statements
3.1 Introduction ............................................................................................................. 13.18
3.2 Preparation of Separate Financial Statements .......................................................... 13.19
Unit 4: Consolidated Financial Statements
4.1 Objective ................................................................................................................. 13.22
4.2 Scope ...................................................................................................................... 13.22
4.3 Concept of Control ................................................................................................... 13.24

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4.4 i Assessment of Control ............................................................................................. 13.27
4.4.1 Step 1: Purpose of the Investee ..................................................................... 13.27

4.4.2 Step 2: Design of the Investee ....................................................................... 13.27
4.4.3 Step 3: Relevant activities of the Investee that significantly affect its returns ..... 13.27
4.4.4 Step 4: Examining the decision making process for the relevant activities ......... 13.28
4.4.5 Step 5: Whether the decision maker is empowered
and has the right to take those decisions?.............................................. 13.29
4.4.6 Step 6: Whether investor has exposure, or rights, to variable returns
from an investee? ................................................................................... 13.40
4.4.7 Step 7: Is there a link between power & returns? ................................................ 13.40
4.5 Comparison of Ind AS with the Companies Act, 2013 ............................................... 13.45
4.6 Consolidated Financial Statements-Investment Entities ............................................ 13.47
4.6.1 Identification....................................................................................................... 13.47
4.6.2 Reassessing Status of an Entity (investment entity or not)................................. 13.52
4.6.3 Consolidation not required ................................................................................. 13.52
Unit 5: Consolidated Financial Statements: Accounting of Subsidiaries
5.1 Statutory Requirements ........................................................................................... 13.53
5.1.1 The Companies Act, 2013 requirements............................................................. 13.53
5.1.2 The Companies (Accounts) Rules, 2014 ............................................................ 13.53
5.2 Components of Consolidated Financial Statements .................................................. 13.54
5.3 Consolidation procedures ........................................................................................ 13.55
5.3.1 Process .............................................................................................................. 13.55
5.3.2 Calculation of Goodwill/Capital Reserve ............................................................ 13.55
5.3.3 Acquisition of interest in subsidiaries at different dates ...................................... 13.63
5.3.4 Acquisition of interest in subsidiaries without consideration ............................... 13.65
5.4 Uniform Accounting Policies .................................................................................... 13.66
5.5 Measurement .......................................................................................................... 13.67
5.5.1 Profit or loss of subsidiary companies ................................................................ 13.67
5.5.2 Potential voting rights ......................................................................................... 13.69
5.5.3 Dividend received from subsidiary companies .................................................... 13.69

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5.5.4 Preparation of Consolidated Balance Sheet ....................................................... 13.78
5.5.5 Elimination of intra-group transactions ............................................................... 13.82
5.5.6 Preparation of consolidated profit & loss ............................................................ 13.85
5.5.7 Preparation of consolidated cash flows .............................................................. 13.86
5.5.8 Chain holdings ................................................................................................. 13.101
5.5.9 Reporting date ................................................................................................. 13.106
5.5.10 Non controlling interests................................................................................... 13.107
5.5.11 Loss of control.................................................................................................. 13.112
Unit 6- Joint Arrangements
6.1 Introduction ........................................................................................................... 13.120
6.2 Scope .................................................................................................................... 13.120
6.3 Concept of Joint Control ........................................................................................ 13.120
6.4 Features of Joint Arrangements ............................................................................. 13.124
6.4.1 Contractual Arrangement ................................................................................. 13.124
6.4.2 Joint Control ..................................................................................................... 13.124
6.5 Types of Joint Arrangements ................................................................................. 13.125
6.5.1 Joint Operations ......................................................................................... 13.125
6.5.2 Joint Ventures ............................................................................................ 13.126
6.6 Classification of Joint Arrangements ...................................................................... 13.127
6.6.1 Structure of the Joint Arrangement ............................................................... 13.127
6.6.2 Assessing the terms of the Contractual Arrangement ................................... 13.128
6.6.3 Assessing other facts and circumstances ..................................................... 13.129
6.7 Financial Statement of parties to a Joint Arrangement............................................ 13.132
6.7.1 Joint Operations .......................................................................................... 13.132
6.7.2 Joint Venture ............................................................................................... 13.133
Unit 7: Investment in Associates & Joint Ventures
7.1 Introduction ........................................................................................................... 13.136
7.2 Scope .................................................................................................................... 13.136
7.3 Significant influence ............................................................................................... 13.136

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7.4 Potential voting rights ............................................................................................ 13.140
7.5 Equity Method ....................................................................................................... 13.140
7.6 Application of Equity Method.................................................................................. 13.142
7.6.1 Exemption from applying the Equity Method ................................................. 13.142
7.6.2 Discontinuing of Equity Method .................................................................... 13.143
7.6.3 Equity Method Procedures ........................................................................... 13.143
7.6.4 Impairment Losses ....................................................................................... 13.146
Unit 8: Disclosures
8.1 In Separate Financial Statements .......................................................................... 13.148
8.2 In Consolidated Financial Statement ...................................................................... 13.149
Test Your Knowledge ....................................................................................................... 13.154
Practical Questions ............................................................................................................. 13.154
Answers to Practical Questions ........................................................................................... 13.161
CHAPTER 14- INDUSTRY SPECIFIC IND AS

UNIT 1: Indian Accounting Standard 41: Agriculture
Learning Outcomes ................................................................................................................ 14.1
Unit Overview ......................................................................................................................... 14.2
Contents:
1.1 Introduction and objective .......................................................................................... 14.3
1.2 Scope ........................................................................................................................ 14.3
1.3 Relevant definitions ................................................................................................... 14.5
1.4 Recognition of assets ................................................................................................ 14.6
1.5 Measurement ............................................................................................................ 14.7
1.6 Gains and Losses ...................................................................................................... 14.9
1.7 Government Grants ................................................................................................. 14.10
1.8 Disclosure ............................................................................................................... 14.11
Test Your Knowledge ......................................................................................................... 14.16
Unit 2: Indian Accounting Standard 104: Insurance Contracts

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Learning Outcomes .............................................................................................................. 14.17
Unit Overview ....................................................................................................................... 14.18
Contents:
2.1 Objective ................................................................................................................. 14.19
2.2 Scope ...................................................................................................................... 14.19
2.3 Definitions ............................................................................................................... 14.21
2.4 Definition of an insurance contract ........................................................................... 14.23
2.5 Embedded derivatives ............................................................................................. 14.31
2.6 Unbundling of deposit components .......................................................................... 14.34
2.7 Recognition and measurement ................................................................................ 14.40
2.7.1 Temporary exemptions from Ind AS 8 .................................................................. 14.40
2.7.2 No exemption from Ind AS 8 ................................................................................. 14.40
2.7.3 Liquidity adequacy test ..................................................................................... 14.40
2.7.4 Impairment of reinsurance assets .................................................................. 14.42
2.7.5 Changes in accounting policies ...................................................................... 14.42
2.7.6 Insurance contracts acquired in a business Combination or portfolio transfer .... 14.45
2.7.7 Discretionary participation features ................................................................ 14.46
2.8 Disclosure requirements .......................................................................................... 14.48
2.8.1 Explanation of recognized amounts ............................................................... 14.48
2.8.2 Nature and extent of risks arising from insurance contacts ........................... 14.48
Summary .............................................................................................................................. 14.50

Practical Questions ............................................................................................................... 14.52
Answers to Practical Questions ............................................................................................ 14.53
Unit 3: Indian Accounting Standard 106: Exploration for and Evaluation of Mineral Resources
Learning Outcomes .............................................................................................................. 14.56
Unit Overview ....................................................................................................................... 14.57

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Contents:
3.1 Objective ................................................................................................................. 14.58
3.2 Scope ...................................................................................................................... 14.58
3.3 Exclusions from other standards .............................................................................. 14.60
3.4 Initial recognition and measurement of E&E assets .................................................. 14.61
3.5 Expenses that can be included in E&E assets .......................................................... 14.61
3.5.1 Specific cost .................................................................................................. 14.61
3.5.2 Administrative and other general overhead costs ........................................... 14.63
3.5.3 License acquisition costs ............................................................................... 14.64
3.5.4 Borrowing costs ............................................................................................. 14.64
3.5.5 Decommissioning/Site restoration liability ....................................................... 14.64
3.6 Classification of E&E assets .................................................................................... 14.65
3.7 Measurement after recognition ................................................................................. 14.66
3.8 Changes in accounting policies ................................................................................ 14.67
3.9 Reclassification of exploration and evaluation assets ............................................... 14.68
3.10 Impairment .............................................................................................................. 14.68
3.11 Level at which impairment is assessed .................................................................... 14.69
3.12 Disclosure ............................................................................................................... 14.69
Practical Question ................................................................................................................ 14.70
Answer to Practical Question ................................................................................................ 14.70

13
CONSOLIDATED FINANCIAL
STATEMENTS
LEARNING OUTCOMES
After studying this chapter, you would be able to:
 Examine the term ‘control’ and analyse it under different facts and situations.
 Evaluate relationship amongst various entities
 Determine the entity for whom and when to prepare consolidated financial statements
 Distinguish among a consolidated financial statement, a separate financial statement and an
individual financial statement
 Understand the purpose and design of an investee
 Comprehend the relevant activities of the investee that significantly affect its returns and
direction of relevant activities
 Examine the rights which give an investor power over an investee
 Analyse that whether the investor has exposure or rights to variable returns from an investee
 Co-relate the link between power and returns
 Prepare the consolidated financial statements
 Deal with various situations while accounting for and preparation of consolidated financial
statements
 Present the consolidated financial statements as per the format prescribed under the statute
 Define joint control & classify the joint arrangements.
 Prepare the financial statements of the parties to a joint arrangement.
 Apply equity method in the case of associates & joint ventures while preparing the
consolidated financial statements
 Comprehend the disclosure requirements prescribed under various Ind AS related to
Consolidation.

13.2 FINANCIAL REPORTING
CHAPTER OVERVIEW
The chapter is divided into 8 units.

a) Unit 1 ‘Introduction to Consolidated Financial Statements’ discusses a brief introduction
of Group entities and its emergence, purpose of consolidated financial statements and the
path from ‘Accounting Standards’ to ‘Indian Accounting Standards’
b) Unit 2 ‘Important Definitions’ contains glossary of terms as per Ind AS commonly used in
the chapter to provide an easy and direct reference point to important terms such as,
associate, consolidated financial statements, control of an investee, equity method, group,
investment entity, joint arrangement, joint control, joint operation, joint venture, non –
controlling interest, parent, power, protective rights, relevant activities, separate financial
statements, separate vehicle, significant influence, structured entity & subsidiary.
c) Unit 3 ‘Separate financial statements’, is based on Ind AS 27, Separate financial
statements. It is necessary to distinguish between a consolidated financial statement, a
separate financial statement and an individual financial statement.
An Individual financial statements are prepared by an entity that does not have a
subsidiary, an associate or a joint venture’s interest in a joint venture.
Separate financial statements are statements of an investor where investments in the
subsidiary, joint venture and associate are accounted for at cost or in accordance with Ind
AS 109, Financial Instruments.
Consolidated financial statements are the financial statements of a group in which
the assets, liabilities, equity, income and cash flows of the parent and its subsidiaries
are presented as those of a single entity. Financial statements in which equity method
is applied for investments in joint ventures and associates and there is no subsidiary
are technically called 'Economic Entity Financial Statements'. However, in India, the
'Economic Entity Financial Statements' (EEFS) are also termed as Consolidated
Financial Statements.
Unit 3 after discussing the concept, provides guidance on the preparation of separate
financial statements. The disclosure requirements of Ind AS 27 are discussed in unit 8.
d) Unit 4 ‘Consolidated Financial Statements’ briefly discusses the objective and scope of
Ind AS 110, Consolidated Financial Statements.
The consolidation is based on the principle of ‘control’ that is defined and discussed in detail, later
in this unit. The unit discusses the concept of control and how the assessment of control is done
to identify whether an investor controls an investee so as to consolidate the investee. The
assessment of control has to be done in a systematic manner that involves the following key
steps:

CONSOLIDATED FINANCIAL STATEMENTS 13.3
Understand the purpose and design of an investee

Understand the relevant activities and direction of relevant activities
What are the rights that give an investor power over an investee?
Whether the investor has exposure, or rights, to variable returns from an investee?
Is there a link between power and returns?
The principle of control is also discussed in relation to the definition of subsidiary as per the
Companies Act, 2013.
Ind AS introduces a concept of investment entities that receives funds from the investors to
provide them the investment management services where funds are invested solely for
capital appreciation, investment income or both & measures and evaluates its investment on
fair value basis. In certain circumstances, the investment entities need not prepare
consolidated financial statements. The unit provides guidance on identification & exception
to consolidation requirements for investment entities.
e) Unit 5 ‘Consolidated Financial Statements: Accounting of Subsidiaries’ sets out the
accounting requirements for the preparation of consolidated financial statements with respect
to subsidiaries. It discusses the requirements of consolidation as per the Companies Act,
2013 besides other topic as under:
a. Consolidation procedures
i. Calculation of good will /capital reserve
ii. Acquisition of interest in subsidiaries at different dates
b. Uniform accounting policies
c. Measurement
i. Profit or loss of subsidiary companies
ii. Potential voting rights
iii. Dividend received from subsidiary companies
iv. Preparation of Consolidated Balance Sheet
v. Elimination of intra – group transactions
vi. Preparation of Consolidated Statement of Profit and Loss
vii. Preparation of Consolidated Cash Flow
viii. Chain holding
ix. Treatment of subsidiary – preference shares
x. Inter-company holdings
xi. Investment in debentures

d. Reporting date
e. Non – controlling interests
f. Loss of control
f) Unit 6 ‘Joint Arrangements’ is based on Ind AS 111, Joint Arrangements. It discusses the
concept of joint control & defines & classifies the joint arrangements. It also deliberates on
the financial statements of the parties to a joint arrangement.
g) Unit 7 ‘Investment in Associates & Joint Ventures’ is based on Ind AS 28, Investment in
Associates & Joint Ventures and provides guidance on equity method with accounting
requirements in the case of associates & joint ventures.
h) Unit 8 ‘Disclosures’ is based on the disclosure requirements in separate financial
statements as per Ind AS 27, Separate Financial Statements and in consolidated financial
statements as per Ind AS 112, Disclosure of Interest in Other entities.
Whether the entity has full control over another entity?
Yes
No
Follow Ind AS 110 and Make Disclosure as Whether the entity has joint
consolidated the financial per Ind AS 112 control on another entity
statements of that entity
Yes No
Follow Ind AS 111 Whether the entity

If Joint Operation and classify the joint If Joint Venture has significant
arrangement influence
Yes
No
Account for assets, Account for interest as per
liabilities, revenue and the Equity method
expenses
Follow Ind AS on
Disclosure as per Financial Instrument
Ind AS 112 and other Ind AS
Disclosure as per other Ind AS

UNIT 1 :
INTRODUCTION TO CONSOLIDATED FINANCIAL
STATEMENTS
1.1 INTRODUCTION
A business is defined as an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return in the form of dividends, lower cost
or other economic benefits directly to investors or other owners, members or participants.
Moreover, one of the key objectives of the business is to grow. This growth can be organic or
inorganic. Thus in the market place, entities get restructured, merged, demerged, acquired,
disposed of etc., to meet the objectives of various stakeholders.
A business combination is a transaction or other events in which an acquirer obtains control of
one or more business. The acquiree may get completely merged with the acquirer and may loose
its separate identity or it maintains its separate identity but is closely or otherwise associated with
the acquirer. Where the acquiree maintains a separate legal entity, depending upon the terms of
association the nature of relationship between the acquirer and acquiree is defined.
If there is a total control on operating and financial policies by the acquirer, the acquiree is termed
as a subsidiary and acquirer as a parent. If there is a joint arrangement whereby the parties that
have joint control of the arrangement have rights to the net assets of the arrangement, it is known
as joint venture and a party that has joint control of that joint venture is known as joint venturer.
Where the acquirer has significance influence but no control over these policies, the acquiree is
an associate and acquirer is an investor.
Depending upon the relationship identified, the types of financial statements required to be prepared
and accounting treatment to be followed for preparation of such financial statements are determined.
The parent is required to present consolidated financial statements. The parent may also prepare
separate financial statements. Further, exemptions from preparing consolidated financial statements
are given in paragraph 4A of Ind AS 110. A venturer or an investor in an associate may in addition
present separate financial statements.
The above terms at times confuse the preparers and other users of financial statements. Thus, it
is essential to understand the meanings of these terms.
Consolidated financial statements are financial statements of a group rather than an entity.
A group in very simple terms, comprises of a parent and its subsidiaries. Each of these entities
are linked to each other with a common thread. Under Accounting Standard (AS), the common
thread was predominantly static & through operation of law and was pretty straightforward (such

as voting rights or composition of the Board of Directors). Under Ind AS, this common thread
is more dynamic & through judgment that hinges on ‘control’.
A group typically consists of a
holding company,
subsidiaries,
Besides, holding companies, subsidiaries, joint ventures and associates, we now also have structured
entities, investment entities, special vehicles etc. To define these relationships, the concept of corporate
veil is no longer valid. The relationship is examined from the design stage, from the initial drawing board
of the board of directors.
Hitherto, determination of a subsidiary was straightforward through an analysis of majority of
voting power or composition of board of directors. Now, even with 40% holding, an entity may
be a parent of another entity in one set of circumstances. The same 40% holding in another
set of circumstances, the relationship may be that of an investor and an associate and the facts
may change after a period. Thus, a comprehensive, rigorous & continuous assessment of the
relationship is the need of the hour at each reporting date.
1.2 PURPOSE
The business has become complex, the structures have become complex, the business
transactions have become complex and this complex situation has become all the more complex
with information overload. An investor gets lost if he intends to understand a group from a financial
perspective. Consolidated financial statements paves the way to a large extent for a stakeholder
to achieve the desired objective.
Ind AS defines the various terms be it group, subsidiary, associate, et al, when & how the
relationship has to be deciphered, what accounting procedures have to be performed to prepare
and present consolidated financial statements. The objective is to bring, as is true with any
accounting standard, a very high level of standardization through interpretation & disclosures with
minimal exceptions.
1.3 FROM AS TO IND AS

1. Under the Companies (Accounting Standards) Rules 2006, the following accounting
standards provided guidance on preparation of consolidated financial statements:
a. Accounting Standard (AS) 21 : Consolidated Financial Statements

b. Accounting Standard (AS) 23 : Accounting for Investments in Associates in

Consolidated Financial Statements
c. Accounting Standard (AS) 27 : Financial Reporting of Interests in Joint Ventures
2. Under Ind AS, the guidance is much more detailed. As per the Companies (Indian Accounting
Standards) Rules 2015, the following accounting standards provides guidance on preparation
of consolidated financial statements:
a. Indian Accounting Standard (Ind AS) 110 : Consolidated Financial Statements
b. Indian Accounting Standard (Ind AS) 111 : Joint Arrangements
c. Indian Accounting Standard (Ind AS) 112 : Disclosure of Interests in Other Entities
d. Indian Accounting Standard (Ind AS) 28 : Investments in Associates and Joint Ventures
3. The focus in Ind AS is on substance over form. It is the de-facto evaluation rather than the de-
jure evaluation that determines the relationship of subsidiary, joint arrangement or associate.
4. The objective of Ind AS 110, Consolidated Financial Statements, is to establish principles for
the presentation and preparation of consolidated financial statements when an entity controls
one or more entities.
5. The objective of Ind AS 111, Joint Arrangements, is to establish principles for financial
reporting by entities that have an interest in arrangements that are controlled jointly (Joint
arrangements).
6. The objective of Ind AS 112, Disclosure of Interests in Other Entities, is to require an entity
to disclose information that enables users of its financial statements to evaluate.
7. The objective of Ind AS 27, Separate Financial Statements, is to prescribe the accounting
and disclosure requirements for investments in subsidiaries, joint ventures and associates
when an entity prepares separate financial statements.
8. The objective of Ind AS 28, Investments in Associates & Joint Ventures, is to prescribe the
accounting for investments in associates and to set out the requirements for the application
of the equity method when accounting for investments in associates & joint ventures.
1.4 SIGNIFICANT DIFFERENCES IN IND AS VIS-À-VIS

AS
There are significant differences between Ind AS & AS. The major ones are tabulated as under:

1.4.1 Ind AS 27 on ‘Separate Financial Statements’ vs AS
S. Topic Ind AS AS
No.
Ind AS 27- Separate Financial Statements (SFS) No
equivalent
standard
1 Scope Does not mandate to follow Ind AS 27
2 Preparation Should be prepared in accordance with all applicable Ind

of separate AS.
financial Account for investment in subsidiaries, JV, Associates
statements either at cost or as per Ind AS 109 ‘Financial
Instruments’.
If classified as held for sale, should be accounted for as per
Ind AS 105 ‘Non-current Assets Held for Sale and
Discontinued Operations’.
3 Treatment of Recognize in the Statement of Profit and Loss (SPL) when

dividend the right to receive dividend is established.
received from
a subsidiary,
a joint
venture or an
associate
4 Disclosure If an entity does not prepare CFS and prepares only

Requirements SFS, it shall disclose: the facts of doing so, exemption
used, list of investments, method used to account them,
etc.
1.4.2 Ind AS 110 on ‘Consolidated Financial Statements’ vs AS 21 on

‘Consolidated Financial Statements’
S.No. Topic Ind AS AS

Ind AS 110 ‘Consolidated AS 21 ‘Consolidated
Financial Statements’ Financial Statements’
1 Control Principle based: Rule based:
Investor controls investee when it is  Ownership of more than
exposed or has rights to variable half voting power.
returns from involvement with


investee and has ability to affect  Control of composition of
those returns through its power over board.
investee.
2 Potential Needs to be considered for control Are not considered for control
Voting Rights assessment. assessment.
3 Uniform To be followed and no recognition If not practicable, facts to be
Accounting of situation of impracticability. disclosed with brief description.
Policies
4 Notes to Such clarifications are not required in  All notes appearing in
consolidated Ind AS as Ind AS considers CFS as SFS of parent and its
financial primary and SFS as secondary subsidiaries need not be
statements whereas under AS, SFS is primary included in the notes to
and CFS is secondary. CFS.
 Notes necessary for true
& fair view and notes
involving material items
should be disclosed.
 Additional statutory
information disclosed in
SFS of subsidiaries or
parent having no bearing
on true & fair view of CFS
need not be disclosed.
5 Exclusion of All subsidiaries are consolidated. If subsidiary acquired with
subsidiary intention to dispose of within
from 12 months or it operates
consolidation under severe long term
restrictions which impair its
ability to transfer funds to
parent, then subsidiaries need
not be consolidated.
6 Treatment in Two investors control an investee When an entity is controlled
case of more when they must act together to by two enterprises as per the
than one direct the activities. Each investor definition of control, it will be
parent of a would account for its interest in the considered as subsidiary of
subsidiary investee in accordance with both controlling enterprises,
relevant Ind AS. Such as therefore both need to
Ind AS 111, 28, 109. consolidate the financial


statement of that entity as per
AS 21.
7 Reporting The difference in reporting dates The difference in reporting
Dates should not be more than 3 months dates should not be more
than 6 months
8 Presentation Should present within equity, Presented separately from
of minority separately from the equity of the liabilities and equity of the
interest owners of the parent parent’s shareholder.
9 Allocation of Losses should be attributed to owners
Excess of loss applicable to
losses to of parent & to non- controlling interest
minority over the minority
minority separately even if it results in deficit
interest in the equity of
interest of non- controlling interest. subsidiary and any further
losses applicable to minority
This is because Ind AS 110 is based are adjusted against majority
on entity concept whereas AS 21 is interest except to the extent
based on proprietary concept. minority has a binding
obligation to, and is able to,
make good the losses.
10 Disposals Change in the parent’s ownership No specific guidance

interest in a subsidiary without the
loss of control are accounted for as
equity transaction.
If parent loses control over
Any loss on control shall be
subsidiaries, it shall be accounted as:
accounted for in Consolidated
 Derecognize asset & liabilities. statement of profit & loss.
 Recognize any investment

retained in the former
subsidiary at its fair value
(Ind AS 109)
 Recognize the gain or loss
associated with loss of control.
11 Structures Defined under Ind AS. No specific guidance
entities

1.4.3 Ind AS 28 on ‘Investments in Associates and Joint Ventures’ vs

AS 23 on ‘Accounting for Investment in Associates in Consolidated
Financial Statements’
S. Topic Ind AS AS
No.
Ind AS 28 ‘Investments in AS 23 ‘Accounting for Investments
Associates and Joint in Associates in Consolidated
Ventures’ Financial Statements’
1 Significant Power to participate in Power to participate in financial and/
Influence financial and operating or operating policy decisions but not
policy decisions but not control over those policies.
control or joint control over
those policies.
2 Potential Voting Are considered for Are not considered for determining
Rights determining significant significant influence.
influence.
3 Exception to Investment entities are Exceptions to equity method are
equity method exempted from equity available
method if they measure all
investments at FVPL.
4 Option where a The part so held could be No such exemption
part of the measured at fair value.
investment in Equity method to be
associate is held applied to the remaining
indirectly through portion.
certain specific
modes
5 Share of losses Carrying amount of Only carrying amount of interests shall
in entity investment with long term be considered.
interests shall be
considered. Discontinue
when such carrying amount
becomes Nil.
6 Loss of A loss of significant No specific guidance
significant influence results in
influence over an cessation of equity
associate method. If any gain/ loss is
resulted, the same is

S. Topic Ind AS AS
No.
accounted for in profit or
loss. The share of loss of
associate recognised in
OCI is reclassified to profit
/ loss if such reclassificatio is
required by other standards
7 Capital reserve/ Should be recognized Should be included in carrying amount

negative goodwill directly in equity, on any of associate but disclosed separately.
acquisition
8 Uniform To be followed unless it is If not practicable, facts to be
accounting impracticable to do so. disclosed with brief description.
policies
9 Reporting date The difference in reporting No specific guidance
dates should not be more
than 3 months
10 Impairment Objective evidence. Recognize any decline other than
temporary.
1.4.4 Ind AS 111 on ‘Joint Arrangements’ vs. AS 27 on ‘Financial

Reporting of Interests in Joint Ventures’

Ind AS 111- Joint AS 27- Financial Reporting of
Arrangements Interests in Joint Ventures
1 Defined Terms Joint control Joint control
Joint arrangement Joint venture
Joint operation
Joint venture
2 Accounting Can either be joint operation Prescribes 3 forms of joint
Method or joint venture, the venture:
classification depends on Jointly controlled operations
rights and obligations of Jointly controlled assets
parties to arrangement.
Jointly controlled entities

3 Accounting of Accounted for either at cost or As per AS 13 at cost less

interest in jointly as per Ind AS 109. provision for other than temporary
controlled entity in If classified as held for sale, decline.
the separate should be accounted for as
financial per Ind AS 105.
statements Equity method should be
applied if venturer does not
prepare separate financial
statements.
4 Explanation on It is deleted because it is Explanation given in Ind AS 27.
the term ‘near covered under Ind AS 105.
future’
5 Disclosure of No specific guidance Shown separately under the
venturer’s share relevant reserve while applying
in post- proportionate consolidation
acquisition method.
reserves of a
jointly controlled
entity
6 Accounting in No recognition of such cases In exceptional cases, when an
case of joint enterprise over a contractual
control over an arrangement establishes joint
entity which is a control over subsidiary of that
subsidiary of the enterprise, it is consolidated
entity under AS 21.

UNIT 2 :
IMPORTANT DEFINITIONS
Following are the key definitions, as per Ind AS, commonly used in the chapter. These definitions will
help to understand the chapter and will provide an easy and direct reference to the concepts discussed
hereafter.
1. Associate
An associate is an entity over which the investor has significant influence.
2. Consolidated financial statements
Consolidated financial statements are the financial statements of a group in which assets,
liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are
presented as those of a single economic entity.
3. Control of an investee
An investor controls an investee when the investor is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those returns through its power
over the investee.
4. Equity method
The equity method is a method of accounting whereby the investment is initially recognised
at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the
investee’s net assets. The investor’s profit or loss includes its share of the investee’s profit
or loss and the investor’s other comprehensive income includes its share of the investee’s
other comprehensive income.
5. Group
A parent and its subsidiaries.
6. Investment entity
An entity that:
(a) obtains funds from one or more investors for the purpose of providing those investor(s)
with investment management services;
(b) commits to its investor(s) that its business purpose is to invest funds solely for returns
from capital appreciation, investment income, or both; and
(c) measures and evaluates the performance of substantially all of its investments on a fair
value basis.

7. Joint arrangement
A joint arrangement is an arrangement of which two or more parties have joint control.
8. Joint control
Joint control is the contractually agreed sharing of control of an arrangement, which exists
only when decisions about the relevant activities require the unanimous consent of the
parties sharing control.
9. Joint operation
A joint arrangement whereby the parties that have joint control of the arrangement have
rights to the assets, and obligations for the liabilities, relating to the arrangement.
10. Joint venture
A joint venture is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement.
11. Joint venturer
A joint venturer is a party to a joint venture that has joint control of that joint venture.
12. Non–controlling interest
Equity in a subsidiary not attributable, directly or indirectly, to a parent.
13. Parent
An entity that controls one or more entities.
14. Power
Existing rights that give the current ability to direct the relevant activities.
Examples of indicators relating to practical ability to direct the investee:

 Non- contractual ability to appoint investees KMP
 Non- contractual ability to direct investee to enter into significant transactions or veto
such transactions.
 Ability to dominate the nomination of members to investees governing body.
 Investees KMP or majority of governing body are related parties to investor (for example
investee and investor share the same CEO)

15. Substantive rights

Substantive rights are those rights that an investor holds that gives it current ability to direct the
investee’s relevant activities. In order for a right to be substantive, the holder must have the
practical ability to exercise the right.
Examples of substantive rights:

 Voting rights held by the majority shareholder giving it the current ability to unilaterally
direct relevant activities.
16. Protective rights

Rights designed to protect the interest of the party holding those rights without giving that party
power over the entity to which those rights relate.
An investor that only holds protective rights, which meet this definition, has no power over an
investee and consequently does not control the investee.
Examples of protective rights are:

 A lender’s right to restrict borrower’s activities (if these could change credit risk
significantly to the detriment of the lender)
 Capital expenditure greater than that required in the ordinary course of business
requiring approval by non-controlling interest holders
 Issue of debt or equity instruments requiring approval by non-controlling interest holders
 A lender’s right to seize assets of a borrower in the event of default.
17. Relevant activities

For the purpose of this Ind AS, relevant activities are activities of the investee that
significantly affect the investee’s returns.
18. Separate financial statements
Separate financial statements are those presented by a parent (i.e an investor with control
of a subsidiary) or an investor with joint control of, or significant influence over, an investee,
in which the investments are accounted for at cost or in accordance with Ind AS 109,
Financial Instruments.
19. Separate vehicle
A separately identifiable financial structure, including separate legal entities or entities recognised
by statute, regardless of whether those entities have a legal personality.

20. Significant influence

Significant influence is the power to participate in the financial and operating policy decisions of
the investee but is not control or joint control of those policies.
21. Structured entity
An entity that has been designed so that voting or similar rights are not the dominant factor
in deciding who controls the entity, such as when any voting rights relate to administrative
tasks only and the relevant activities are directed by means of contractual arrangements.
22. Subsidiary
An entity that is controlled by another entity.

UNIT 3:
SEPARATE FINANCIAL STATEMENTS
3.1 INTRODUCTION
1. It is necessary to distinguish between a consolidated financial statements, a separate
financial statements and an Individual financial statements.
a. An individual financial statement is prepared by an entity that does not have a
subsidiary, an associate or a joint venture’s interest in a joint venture.
b. Separate financial statements are statements of an investor where investments in the
subsidiary, joint venture and associate are accounted for at cost or in accordance with
Ind AS 109, Financial Instruments.
c. Consolidated financial statements are the financial statements of a group in which the
assets, liabilities, equity, income and cash flows of the parent and its subsidiaries are
presented as those of a single entity.
Note: Financial statements in which equity method is applied for investments in joint ventures
and associates, technically referred to as economic entity financial statements, are also
termed as consolidated financial statements.
2. Separate financial statements are presented in addition to:
a. Consolidated Financial Statements (prepared in case of a subsidiary or subsidiaries);
or
b. Financial Statements in which investments in associates and joint ventures are
accounted for using equity method.
Note: These financial statements are not separate financial statements.
3. Entity may present separate financial statements as its only financial statements if it is:
a. Exempt from consolidation; or
b. Exempt from applying equity method; or
c. An investment entity and apply exception to consolidation for all of its subsidiaries.

Example :
Entity A Limited has a subsidiary, a joint venture and an associate. It is required to
prepare consolidated financial statements. In the consolidated financial statements, it
will consolidate:
 The subsidiary as per full consolidation method.
 The associate as per equity method.
 Joint ventures are consolidated as per equity method in CFS whereas joint
operations are consolidated as per proportionate consolidation method in IFS
3.2 PREPARATION OF SEPARATE FINANCIAL

STATEMENTS
1. Separate financial statements shall be prepared in accordance with all applicable Ind AS,
except that it shall account for investments in subsidiaries, joint ventures and associates
either:
a. At cost: Account for in accordance with Ind AS 105, ‘Non-current Assets Held for Sale
and Discontinued Operations’ (if investment is classified as held for sale then cost will
be accounted for as per Ind AS; or
b. In accordance with Ind AS 109 ‘Financial Instruments’.
2. The entity shall apply the same accounting for each category of investments.
For example, an entity that has investments in subsidiaries, associates & joint ventures can
account for its investments in subsidiaries & associates at cost and investments in joint ventures in
accordance with Ind AS 109. However, if that entity has investments in two associates, it cannot
account investment in one associate as cost & investment in other associate in accordance with
Ind AS 109. It has to choose either of the method for both the investments in associates.
3. An entity may be required to classify its investments in subsidiaries, joint ventures and
associates as held for sale (or included in a disposal group that is classified as held for sale)
in accordance with Ind AS 105. In such a situation, when these investments are accounted
for at cost, they will henceforth be accounted for and measured as per Ind AS 105. However,
the measurement of investments accounted as per Ind AS 109, is not changed in such
circumstances.

4. Exceptions:
a. Investments in associates and joint ventures could also be held by a venture capital
organization, mutual fund, unit trust, investment linked insurance funds or similar
entities. In accordance with paragraph 18 of Ind AS 28 ‘Investments in Associates and
Joint Ventures', these entities may elect to measure investments in associates and joint
ventures at fair value through profit or loss in accordance with Ind AS 109 in its
consolidated financial statements. In these circumstances, the entity shall also
measure those investments in associates or joint ventures at fair value through profit or
loss in accordance with Ind AS 109 in its separate financial statements also.
b. An investment entity is not required to consolidate its subsidiaries or apply Ind AS 103,
Business Combinations, when it obtains control of another entity. Instead it measures
its investment in subsidiaries at fair value through profit or loss in accordance with
Ind AS 109 in its consolidated financial statements. It is required to account for its
investment in that ‘unconsolidated’ subsidiary in its separate financial statements also
at fair value through profit or loss in accordance with Ind AS 109. It should be noted
that an investment entity is required to consolidate a subsidiary or apply Ind AS 103
when that subsidiary provides services that relates to the investment activities of the
investment entity. In such a situation, the aforesaid requirement does not apply.
5. Measurement where change of status in case of Investment entities:
a. When an entity ceases to be an investment entity it shall measure its investment in
subsidiary either
(i) at cost (fair value of subsidiary at date of status shall be considered as deemed
cost); or
(ii) continue to account for as per Ind AS 109
b. When an entity becomes an investment entity:
(i) it shall account for investment in subsidiary at Fair value through profit & loss as
per Ind AS 109;
(ii) the difference between the carrying value and fair value shall be recognized in
profit or loss;
(iii) any previous fair value adjustments in Other Comprehensive Income (OCI) shall
be treated as if investment entity had disposed off those subsidiary at the date of
change in status.
6. Recognition of dividend:
Dividend shall be recognized when its right to receive is established.

7. Measurement where parent reorganized the group:

a. A parent may reorganize the structure of its group by establishing a new entity as its
parent in a manner that satisfies the following criteria:
(i) New parent obtains control by issuing equity instruments in exchange of existing
equity instruments.
(ii) Assets & liabilities of new & original group are same immediately before and after
reorganization.
(iii) Owners have same absolute & relative interest in net assets of original group and
the new group, immediately before and after reorganization
(iv) The new parent accounts for its investment in the original parent in its separate
financial statements,
b. In these circumstances, the new parent shall measure cost at the carrying amount of its
share of the equity items shown in the separate financial statements of the original
parent at the date of the reorganization.
c. Similarly, an entity that is not a parent might establish a new entity as its parent in a
manner that satisfies the criteria above. The above requirements apply equally to such
reorganizations.

UNIT 4:
CONSOLIDATED FINANCIAL STATEMENTS
4.1 OBJECTIVE
The objective of Ind AS 110 ‘Consolidated Financial Statements’ is to establish principles for the
presentation and preparation of consolidated financial statements when an entity (the parent) controls
one or more other entities (subsidiaries).
4.2 SCOPE
A parent who controls one or more entities is required to present consolidated financial
statements.
However, a parent is not required to present consolidated financial statements if it meets all of the
following four conditions.
Condition 1: The parent is either a wholly owned subsidiary or a partially owned subsidiary
of another entity. Further its other owners (including those not entitled to vote)
have been informed and do not object, to the parent not presenting the
consolidated financial statements.
Condition 2: The equity instruments or the debt instruments of the parent are not traded in a
public market. The public market could be a domestic or foreign stock
exchange or an over the counter market including local and regional markets.
Condition 3: The parent has neither filed nor is in the process of filing, its financial
statements with a securities commission or other regulatory organization
for the purpose of issuing any class of instruments in a public market.

Condition 4: The ultimate or any intermediate parent, of the parent (that is required to
present consolidated financial statements), produces financial statements
that are available for public use and comply with Ind AS, in which
subsidiaries are consolidated or are measured at fair value through profit
or loss in accordance with Ind AS 110.
Further, a parent who fulfils the following two conditions is also not required to present
consolidated financial statements:
Condition 1: The parent is an investment entity
Condition 2: The parent is required to measure all its subsidiaries at fair value through
statement of profit or loss.
Also, Ind AS 110 does not apply to post – employment benefit plans or other long term employee
benefit plans to which Ind AS 19 ‘Employee Benefits’, applies.
Example: Exemption from preparing consolidated financial statements.

Entity X owns the following other entities:
1. 100% interest in entity Y. Entity Y owns 60% interest in entity Z.
2. 80% interest in entity M. Entity M owns 60% interest in entity N.
The structure is illustrated as follows:
X
100% 80%
Y M
0% 60%
Z N
Entity X is a listed company and prepares IND AS compliant consolidated financial statements.
Entities Y & M do not have their securities publically traded & they are not in the process of issuing
securities in public markets. Entity X does not require its subsidiary M to prepare consolidated
financial statements. Entity Y is a wholly- owned subsidiary of entity X. Entity Y is not required
to prepare consolidated financial statements.
Entity M is not required to prepare consolidated financial statements provided, the non-controlling
interest holders have been informed about, and do not object to Entity M presenting consolidated
financial statements.

Example: Where local regulations govern the participation of consolidated financial statements.
At times local regulations dictate when, and for what periods, an entity must present consolidated
or separate financial statements. Local regulations might allow or require an intermediate parent
to produce separate financial statements prepared in accordance with Ind AS, instead of
consolidated financial statements.
Where local regulations permit an entity not to prepare consolidated financial statements, the
entity should still consider the exemptions as per Ind AS 110 and determine whether it is exempt
from preparing consolidated financial statements.
4.3 CONCEPT OF CONTROL

a. As per Ind AS 110, consolidation of an investee shall begin from the date the investor (parent)
obtains control of the investee (subsidiary);
Analysis
Thus:
(i) Parent (Investor) is an entity that controls one or more entities;
(ii) Subsidiary (Investee) is an entity that is controlled by another entity;
b. An investor controls an investee if and only if the investor has all the following 3 elements:
(i) Power over the investee;
(ii) Exposure, or rights, to variable returns from its involvement with the investee; and
(iii) The ability to use its power over the investee to affect the amount of the investor’s
returns.
An investor shall consider all facts and circumstances to assess whether it controls an
investee. It should re-assess the control when facts and circumstances suggest that there is
a change in any of the aforesaid 3 elements.
There could be situations where no single investor controls an investee. In these types of
situation, the interest and relationship of the investor with the investee would be determined
in accordance with:
- Ind AS 111, Joint Arrangements;
- Ind AS 28, Investments in Associates and Joint Ventures; or
- Ind AS 109, Financial Instrument.

c. The definition of control is in 3 limbs or elements, all of which should co - exist:

(i) Power over the investee;
(ii) Exposure to variable returns;
(iii) Ability to use power to impact returns.
d. Power over the investee
(i) An investor has power over an investee when the investor:
 has existing rights
 that give it the current ability
 to direct relevant activities (activities that significantly affect the investee’s
returns).
(ii) In simple situations, control can be demonstrated through voting rights. If an entity
controls over 50% of voting rights, entity controls the investee;
(iii) However, in complex situations, voting rights may not be the sole indicator. As required
by Ind AS, the principle of substance over form shall prevail.
e. Exposure to variable returns:
(i) An investor is exposed, or has rights, to variable returns from its involvement with the
investee when the investor’s returns from its involvement can vary because of investee’s
performance. The returns can be only positive, only negative or both positive and
negative.
(ii) Even though only one investor can control the investee, more than one party can share
the returns of an investee, such as holders of non – controlling interests.
f. Link between power and returns:
(i) An investor should, in addition to power and exposure to variable returns, have the
ability to use the power to affect its return from the investee for determining control.
(ii) There could be a situation when a person (agent) may have the decision making rights
in an investee and its remuneration is also based on the performance of the investee
but it may be acting on behalf of another person (principal). In this situation, the agent
does not control an investee.

Power
Returns
Linkage
between
power
and
return
eturn
Control
g. The following seven steps should be adopted to assess control. Steps 1 to 5 assist in
establishing whether an investor has power over the investee. Step 6 discusses the exposure
to variable returns whereas step 7 deliberates on link between power & returns.
Step 1: What is the purpose of the investee?
Step 2: What is the design of the investee?
Step 3: What are the relevant activities of the investee that significantly affect its returns?
Step 4: How decisions about the relevant activities are made?
Step 5: Whether the decision maker is empowered and has the right to take those
decisions?
Step 6: The investor should examine whether it is exposed to or have variable returns
from its involvement with the investee.
Variable returns are returns that are not fixed and have the potential to vary as
a result of the performance of an investee. Variable returns can be only positive,
only negative or both positive and negative.
Step 7: Link between power & variable returns.
This step needs examination whether the investor can use its power to impact
the variable returns. If so, this condition is also satisfied.
We will now discuss each of these steps in detail.

4.4 ASSESSMENT OF CONTROL

4.4.1 Step 1: Purpose of the investee
It should be determined that why the investee has been formed or incorporated? What is the
purpose and objective of the investee? Whether it has been incorporated to implement a vertical
or a horizontal expansion program of the investee? Whether the purpose is to enter into a new
line of business? Whether it has been formed to comply with a particular regulatory requirement?
What is the purpose to enter into collaboration with other entities or persons?
An investor may form a trust to carry out its CSR activities or to implement its ESOP plans or to provide
post-employment benefits to its employees. An investee may be incorporated to undertake
concession agreements as Public Private Partnership (PPP) model of the government.
4.4.2 Step 2: Design of the investee
One has to look at the structure.
Is it a firm, trust, listed company, public company, private company, society, SPV etc?
Is it controlled through voting rights, shareholders’ agreements, convertible instruments,
contractual arrangements, exposure to risks & rewards?
Who takes the decision for the design?
4.4.3 Step 3: Relevant activities of the investee that significantly affect
its returns
Relevant activities are the range of operating and financing activities that significantly affect the
investee’s returns such as (the list is not exhaustive):
 Selling and purchasing of goods & services;
 Managing financial assets during their life;
 Selecting, acquiring or disposing of assets;
 Researching and developing new products or processes;
 Determining a funding structure or obtaining funding;
 Appointment, remuneration and termination of key managerial person.
Not all activities would be relevant at a particular point of time. It depends on the facts and
circumstances of the situation. Judgment has to be applied to determine which of the activities
are relevant activities at that point of time that significantly affect the investee’s return.

Illustration 1: Identification of relevant activities

Entity PS Ltd. issues loan notes to investors in Rupees, but it purchases financial assets in Pound
Sterling and USD. It hedges cash flow differences through currency and interest rate swaps.
What would be its relevant activities?
Solution
Its relevant activities are as under:
 Selling and purchasing of assets
 Managing financial assets during their life
 Determining a funding structure and obtaining funding for its activities
 Hedging the currency and interest rate risks arising from its activities.
These activities are likely to most significantly affect entity PS’s returns
4.4.4 Step 4: Examining the decision making process for the relevant
activities
After having identified the relevant activities that significantly impact the investee’s return, the
next step is to determine how decision about the particular relevant activity is taken and what is
the process of making the decision. Thus in step 4, it is identified, ‘Who is the decision maker’.
In some situations, activities both before and after a particular set of circumstances arises or event
occurs may be relevant activities. When two or more investors have the current ability to direct
relevant activities and those activities occur at different times, the investors shall determine which
investor is able to direct the activities that most significantly affect those returns consistently with
the treatment of concurrent decision making rights. The investors shall reconsider this
assessment over time if relevant facts or circumstances change.
Example: The relevant activity that may have significant impact on the returns of an
investee
AB Ltd., which is a scientific research organization is going to appointment the Chief Research Officer.
The key determinant will be who is authorized to appoint the Chief Research Officer. Assuming it
is the management committee.
Then one should look, who controls the management committee. AB Limited has two
shareholders, A Limited (who holds 60% and controls the Board of Directors) and B Limited (who
holds 40% but through a shareholder agreement controls the management committee).
In this case, it may be concluded that B Limited controls AB Limited.

Illustration 2
B Ltd. and C Ltd. had incorporated BC Ltd. to construct & operate a toll bridge. Construction of
toll bridge will take 3 years. B Ltd. is responsible for construction. The toll bridge will be operated
by C Ltd. Can it be concluded during the construction phase that when B Ltd. has all the authority
to take decision that C Ltd. controls BC Ltd.?
Solution
It may appear from the question that B Ltd. has the current ability to direct relevant activities, but
this may not be correct. When two or more investors have the current ability to direct relevant
activities and those activities occur at different times, the investors shall determine which investor
is able to direct the activities that most significantly affect those returns consistently with the
treatment of concurrent decision making rights. The investors shall reconsider this assessment
over time if relevant facts or circumstances change.
Illustration 3
In continuation to the facts given in Illustration 2, further if it is given that the toll bridge will be
constructed under supervision of NHAI by B Ltd. NHAI will reimburse the cost of construction.
B Ltd. is entitled to a margin on the construction but from the cash flows of the toll collection before
any payment to C Ltd. The toll revenue will be fixed by C Ltd. who is entitled to management fee.
From the toll revenue amount the toll expenses will be paid, then margin will be paid to B Ltd. and
then management fee will be paid to C Ltd. The balance will be shared equally by B Ltd. and
C Ltd.
Solution
In this case C Ltd. has power since C Ltd. is able to direct the activities that most significantly
affect the returns. Cost of construction of bridge that is the responsibility of B Ltd. is reimbursed
by NHAI therefore it does not significantly affect the returns. Whereas the significant return to the
investor is through toll collection activities being the responsibility of C Ltd.
4.4.5 Step 5 : Whether the decision maker is empowered and has the right
to take those decisions?
1. In step 4, it was identified, ‘Who takes the decisions about the relevant activities? It could be
the shareholders. It could be the Board of Directors. It could be a contractually appointed
person. But the question arises here is that whether the decision maker is empowered?
In simple situations, the answer may be evident but there are complex situations. Whether
the person taking the decision is a principal or infact an agent of the investor; this needs to
be examined or the decision making was inherent in the purpose & design of the investee.
The test is - who has the power?

2. Power arises from rights. Here the rights of the investor have to be examined. The investor
should have the current ability to direct the relevant activities.
3. The rights of the investor could be substantive rights or protective rights. It is a matter
of judgment which shall take into consideration all the facts and circumstances. Only
substantive rights are to be considered.
1. Substantive rights
Ownership of more than fifty percent of the voting rights, generally gives an investor the
power. But this could be subject to regulatory restrictions, rights held by the other
parties. Thus the voting rights may not be substantive.
To be substantive, rights also need to be exercisable when decisions about the direction
of the relevant activities need to be made. Usually, to be substantive, the rights need
to be currently exercisable. However, sometimes rights can be substantive, even
though the rights are not currently exercisable.
Facts
At the AGM of the investee, decision to direct relevant activities are made. The next
shareholders meeting is scheduled in 8 months. However, shareholders individually or
collectively holding 5% or more of the voting right can call special meeting to change existing
policies or relevant activities, but there is a requirement to give notice to other shareholders
atleast 30 days before the meeting. Policies over the relevant activities can be changed only
at special or scheduled shareholders’ meetings.
Based on the above facts, following three illustrations have been described. Each illustration shall
be considered in isolation.
Illustration 4
An investor holds a majority of the voting rights in the investee. Does the investor have
current ability to direct the relevant activities given the fact that it takes 30 days to hold
shareholder’s meeting to take decisions regarding relevant activities?
Solution
The investor’s voting rights are substantive because the investor is able to make decisions
about the direction of the relevant activities when they need to be made. The fact that it
takes 30 days before the investor can exercise its voting rights does not stop the investor
from having the current ability to direct the relevant activities from the moment the investor
acquires the shareholding.
Illustration 5
An investor is party to a forward contract to acquire the majority of shares in the investee.
The forward contract’s settlement date is in 25 days. Is the investor’s forward contract a
substantive right even before settlement of contract?

Solution
The investor becomes majority shareholder in the investee after the settlement of forward
contract in 25 days. As per the facts given in the ‘Facts’ above, the existing shareholders
are unable to change the existing policies over the relevant activities because a special
meeting cannot be held for at least 30 days, at which point the forward contract would have
been settled. Thus, the investor has rights that are essentially equivalent to the majority
shareholder in Illustration 4 above (i.e. the investor holding the forward contract can make
decisions about the direction of the relevant activities when they need to be made).
Therefore, the investor’s forward contract is a substantive right that gives the investor the
current ability to direct the relevant activities even before the forward contract is settled.
Illustration 6
If in the illustration given above, the investor’s forward contract shall be settled in 6 months instead
of 25 days, would existing shareholders have the current ability to direct the relevant activities?
Solution
Since the date of settlement of forward contact is in 6 months, the existing shareholders can hold
a meeting within 30 days and direct relevant activities at which point the forward contract would
not be settled. Therefore, the existing shareholders have substantive rights currently.
Factors that determine whether rights are substantive or not could be classified into
three categories:
 Barriers preventing exercise
The decision maker has the rights but barriers exists that prevent the right holder
to exercise their rights. These could be economic barriers or other than economic
barriers. Thus the rights may not in substance be substantive.
Examples of barriers include:

 Heavy financial penalties and incentives
 High exercise price or conversion price
 Restrictive terms and conditions
 Inability to obtain reasonable information for exercising the rights
 Operational barriers or incenting
 Prohibitory legal or regulatory environment

 Exercise requires agreement of other parties

The exercise of right may require agreement of other parties. The agreement could be
achieved only though a mechanism where all such parties may agree. Absence of such
a mechanism may indicate that the rights are not substantive. Also, existence of large
number of parties whose agreement is required may be an indication that rights may
not be substantive.
 Benefit accrues to the right holder
It has to be identified whether the holder of right is going to be benefitted by exercising
the right.
Example:
Suppose A Limited holds in a listed entity C Limited, optionally convertible
debentures which are currently exercisable. C Limited is in loss and it is not likely
to be in profits for some time in future. The conversion price is much higher than
the listed price. The holder would prefer redemption rather than conversion as
debentures are out of money. The rights may not be substantive.
2. Protective rights
Protective rights are designed to protect the interests of their holders without giving that party
power over the investee to which those rights relate. An investor that holds only protective rights
cannot have power or prevent another party from having power over an investee. Protective rights
relate to fundamental changes to the activities of an investee or apply in exceptional
circumstances.
Examples of protective rights include:
 A lender’s right to restrict a borrower from undertaking activities that could significantly
change the credit risk of the borrower to the detriment of the lender.
 The right of a party holding a non-controlling interest in an investee to approve capital
expenditure greater than that required in the ordinary course of business, or to approve
the issue of equity or debt instruments.
 The right of a lender to seize the assets of a borrower if the borrower fails to meet
specified loan repayment conditions.
4. The decision maker is thus empowered when he has the substantive rights that gives it
current ability to direct the relevant activities. Various indicators of substantive rights,
individually or in combination with each other may provide that ability to the investors. These
indicators may be clubbed in the following pecking order:

 Primary indicators
Examples of primary indicators

 rights in the form of voting rights (or potential voting rights) of an investee;
 rights to appoint, reassign or remove members of an investee’s key management
personnel who have the ability to direct the relevant activities;
 rights to appoint or remove another entity that directs the relevant activities;
 rights to direct the investee to enter into, or veto any changes to, transactions for
the benefit of the investor; and
 other rights (such as decision-making rights specified in a management contract)
that give the holder the ability to direct the relevant activities.
 Priority indicators
Examples of priority indicators

 The investor can, without having the contractual right to do so, appoint or approve
the investee’s key management personnel who have the ability to direct the
relevant activities.
 The investor can, without having the contractual right to do so, direct the investee
to enter into, or can veto any changes to, significant transactions for the benefit of
the investor.
 The investor can dominate either the nomination process for electing members of
the investee’s governing body or obtaining of proxies from other holders of voting
rights.
 The investee’s key management personnel are related parties of the investor (for
example, the chief executive officer of the investee and the chief executive officer
of the investor are the same person).
 The majority of the members of the investee’s governing body are related parties
of the investor.
 Economic indicators
Example of economic indicators

 The investee’s key management personnel who have the ability to direct the
relevant activities are current or previous employees of the investor.

 The investee’s operations are dependent on the investor, such as in the following
situations:
 The investee depends on the investor to fund a significant portion of its
operations.
 The investor guarantees a significant portion of the investee’s obligations.
 The investee depends on the investor for critical services, technology,
supplies or raw materials.
 The investor controls assets such as licences or trademarks that are critical
to the investee’s operations.
 The investee depends on the investor for key management personnel, such
as when the investor’s personnel have specialised knowledge of the
investee’s operations.
 A significant portion of the investee’s activities either involve or are conducted
on behalf of the investor.
 The investor’s exposure, or rights, to returns from its involvement with the
investee is disproportionately greater than its voting or other similar rights. For
example, there may be a situation in which an investor is entitled, or exposed,
to more than half of the returns of the investee but holds less than half of the
voting rights of the investee.
5. Voting rights
 Generally, an investor who holds more than half of the voting rights of an investee has
the current ability through voting rights to direct the relevant activities in the following
situations:
 the relevant activities are directed by a vote of the holder of the majority of the
voting rights, or
 a majority of the members of the governing body that directs the relevant activities
are appointed by a vote of the holder of the majority of the voting rights.
 However, these voting rights should be substantive.
For example, an investor that has more than half of the voting rights in an investee
cannot have power if the relevant activities are subject to direction by a government,
court, administrator, receiver, liquidator or regulator.
 An investor can have power even if it holds less than a majority of the voting rights of
an investee. An investor can have power with less than a majority of the voting rights
of an investee, for example, through:
 a contractual arrangement between the investor and other vote holders;

 rights arising from other contractual arrangements;

 the investor’s voting rights;
 potential voting rights; or
 a combination of above.
 Contractual arrangement with other vote holders:
A shareholder holding less than majority of the voting power may enter into agreement
with other holders of the voting power that may enable it to increase its voting power
beyond half. The contractual arrangement might ensure that the investor can direct
enough other vote holders on how to vote to enable the investor to make decisions
about the relevant activities.
 Rights from other contractual arrangements:
Other decision-making rights, in combination with voting rights, can give an investor the
current ability to direct the relevant activities. For example, the rights specified in a
contractual arrangement in combination with voting rights may be sufficient to give an
investor the current ability to direct the manufacturing processes of an investee or to direct
other operating or financing activities of an investee that significantly affect the investee’s
returns.
However, in the absence of any other rights, economic dependence of an investee
on the investor (such as relations of a supplier with its main customer) does not lead
to the investor having power over the investee.
 The investor’s voting rights
An investor with less than a majority of the voting rights has rights that are sufficient to give it
power when the investor has the practical ability to direct the relevant activities unilaterally.
When assessing whether an investor’s voting rights are sufficient to give it power, an
investor considers all facts and circumstances, including:
 the size of the investor’s holding of voting rights relative to the size and dispersion
of holdings of the other vote holders, noting that:
 more the voting rights an investor holds, the more likely the investor is to have
existing rights that give it the current ability to direct the relevant activities;
 more the voting rights an investor holds relative to other vote holders, the
more likely the investor is to have existing rights that give it the current ability
to direct the relevant activities;
 more the parties that would need to act together to outvote the investor, the
more likely the investor is to have existing rights that give it the current ability
to direct the relevant activities;
 potential voting rights held by the investor, other vote holders or other parties;

 rights arising from other contractual arrangements; and

 any additional facts and circumstances that indicate the investor has, or does not
have, the current ability to direct the relevant activities at the time that decisions
need to be made, including voting patterns at previous shareholders’ meetings.
Illustration 7
A Limited has 48% of the voting rights of B Limited. The remaining voting rights are
held by thousands of shareholders, none individually holding more than 1 per cent of
the voting rights. None of the shareholders has any arrangements to consult any of the
others or make collective decisions. Does A Limited have sufficiently dominant voting
interest to meet power criterion?
Solution
In the above case, based on the absolute size of A Limited’s holding (48%) and the relative
size of the other shareholdings, A Limited may conclude that it has a sufficiently dominant
voting interest to meet the power criterion.
Illustration 8
An investor A Limited holds 45% of the voting rights of an investee. Eleven other
shareholders, each holding 5% of the voting rights of the investee. None of the shareholders
has contractual arrangements to consult any of the others or make collective decisions. Can
we conclude that investor A Limited has power over the investee?
Solution
In this case, the absolute size of the investor’s holding and the relative size of the other
shareholdings alone are not conclusive in determining whether the investor has rights
sufficient to give it power over the investee. Additional facts and circumstances that
may provide evidence that the investor has, or does not have, power shall be
considered.
Illustration 9
A Limited holds 48% of the voting rights of B Limited. X Limited and Y Limited each hold
26% of the voting rights of B Limited. There are no other arrangements that affect decision-
making. Who has power to take decisions in the present case?
Solution
In this case, the size of A Limited, voting interest and its size relative to the
shareholdings of X Limited and Y Limited are sufficient to conclude that A Limited does
not have power.
Only two other investors would need to co-operate to be able to prevent investor A from
directing the relevant activities of the investee.

Illustration 10
Investor A holds 40% of the voting rights of an investee and six other investors each
hold 10% of the voting rights of the investee. A shareholder agreement grants investor
A the right to appoint, remove and set the remuneration of management responsible for
directing the relevant activities. To change the agreement, a two-thirds majority vote of
the shareholders is required. Is the absolute size of the investor’s holding and the
relative size of the other shareholdings alone is conclusive in determining whether the
investor has rights sufficient to give it power?
Solution
No, the absolute size of investor’s holding and the relative size of other’s shareholdings
are not conclusive in determining whether investor has power. Investor A’s contractual
right to appoint, remove and set the remuneration of management is also to be
considered to conclude that it has power over the investee. The fact that investor A
might not have exercised this right or the likelihood of investor A exercising its right to
select, appoint or remove management shall not be considered when assessing whether
investor A has power.
Illustration 11
An investor holds 35% of the voting rights of an investee. Three other shareholders
each hold 5% of the voting rights of the investee. The remaining voting rights are held
by numerous other shareholders, none individually holding more than 1% of the voting
rights. None of the shareholders has arrangements to consult any of the others or make
collective decisions. Decisions about the relevant activities of the investee require the
approval of a majority of votes cast at relevant shareholders’ meetings — 75% of the
voting rights of the investee have been cast at recent relevant shareholders’ meetings.
Does the investor have ability to direct the relevant activities of the investee unilaterally?
Solution
The active participation of other shareholders at recent shareholders’ meetings
indicates that the investor would not have the practical ability to direct the relevant
activities unilaterally, regardless of whether the investor has directed the relevant
activities because a sufficient number of other shareholders voted in the same way as
the investor.
 Potential voting rights:
Potential voting rights are rights to obtain voting rights of an investee, such as those
arising from convertible instruments or options. Those potential voting rights are
considered only if the rights are substantive. When considering potential voting rights,
an investor shall consider the purpose and design of the instrument, as well as the
purpose and design of any other involvement the investor has with the investee. This

includes an assessment of the various terms and conditions of the instrument as well
as the investor’s apparent expectations, motives and reasons for agreeing to those
terms and conditions. If the investor also has voting or other decision-making rights
relating to the investee’s activities, the investor assesses whether those rights, in
combination with potential voting rights, give the investor power.
Illustration 12
Entity P Ltd. develops pharmaceutical products. It has acquired 47% of entity S Ltd
with an option to purchase remaining 53%. Entity S is a specialist entity that develops
latest technology and does research in pharmaceuticals. Entity P has acquired stake
in S Ltd. to complement its own technological research. The remaining 53% is held by
key management of P Ltd. who are key to running a major project that will market a
medicine with features completely new to the industry. However, if P Ltd. exercises the
option the management personnel are likely to leave. They have unique technological
knowledge in relation to the specific medicine. Option strike price is 5 times the value
of entity’s share price. Is the option substantive?
Solution
The option may not be substantive if entity P would derive no economic benefit from
exercising it. High strike price and likely loss of key management indicate that the
option may not be substantive.
Illustration 13
AB Ltd holds 40% in BC Ltd. CD Ltd holds 60% in BC Ltd. BC Ltd. is controlled through
voting rights. AB Ltd. has call option exercisable in next 3 years for further 40% of
investee. The option is deeply out of money and is expected to be the same over the
life of the option. Further, investor would not gain any non-financial benefits from the
exercise of option. Investor CD has been exercising its votes and is actively directing
the relevant activities of the investee. Is right of AB Ltd substantive?
Solution
The option of AB Ltd. is not substantive. This is because although AB Ltd. has current ability
to exercise his right to purchase additional voting rights (that, if exercised, would give it a
majority of the voting rights in the investee) but option is deeply out of money and is likely to
remain so during option period and there are no other benefits gained from the exercise.
Illustration 14
Investor A and two other investors each hold one third of the voting rights of an investee.
The investee’s business activity is closely related to investor A. In addition to its equity
instruments, investor A also holds debt instruments that are convertible into ordinary shares
of the investee at any time for a fixed price that is out of the money (but not

deeply out of the money). If the debt were converted, investor A would hold 60% of the
voting rights of the investee. Investor A would benefit from realizing synergies if the
debt instruments were converted into ordinary shares. Does investor A have power
over investee?
Solution
Investor A has power over the investee because it holds voting rights of the investee together
with substantive potential voting rights that give it the current ability to direct the relevant
activities.
6. There could be situations where it may appear that the investor has no relationship with the
investee. Persons controlling investee may have no / distant relationship with the investor.
But in fact these persons may be acting as an agent of the investor. The following are
examples of such other parties that, by the nature of their relationship, might act as de facto
agents for the investor:
 the investor’s related parties.
 a party that received its interest in the investee as a contribution or loan from the
investor.
 a party that has agreed not to sell, transfer or encumber its interests in the investee
without the investor’s prior approval (except for situations in which the investor and the
other party have the right of prior approval and the rights are based on mutually agreed
terms by willing independent parties).
 a party that cannot finance its operations without subordinated financial support from
the investor.
 an investee for which the majority of the members of its governing body or for which its
key management personnel are the same as those of the investor.
 a party that has a close business relationship with the investor, such as the relationship
between a professional service provider and one of its significant clients.
4.4.6 Step 6 : Whether investor has exposure, or rights, to variable
returns from an investee?
The investor should examine whether it is exposed to or have variable returns from its involvement
with the investee. Variable returns are returns that are not fixed and have the potential to vary as
a result of the performance of an investee. Variable returns can be only positive, only negative
or both positive and negative. An investor assesses whether returns from an investee are variable
and how variable those returns are on the basis of the substance of the arrangement and
regardless of the legal form of the returns.
For example, an investor can hold a bond with fixed interest payments. The fixed interest

payments are variable returns for the purpose of this Ind AS because they are subject to default
risk and they expose the investor to the credit risk of the issuer of the bond. The amount of
variability (i.e. how variable those returns are) depends on the credit risk of the bond. Similarly,
fixed performance fees for managing an investee’s assets are variable returns because they
expose the investor to the performance risk of the investee. The amount of variability depends
on the investee’s ability to generate sufficient income to pay the fee.
Examples of returns include:
 Dividends, other distributions of economic benefits from an investee (e.g. interest from debt
securities issued by the investee) and changes in the value of the investor’s investment in
that investee.
 Remuneration for servicing an investee’s assets or liabilities, fees and exposure to loss from
providing credit or liquidity support, residual interests in the investee’s assets and liabilities
on liquidation of that investee, tax benefits, and access to future liquidity that an investor has
from its involvement with an investee.
 Returns that are not available to other interest holders. For example, an investor might use
its assets in combination with the assets of the investee, such as combining operating
functions to achieve economies of scale, cost savings, sourcing scarce products, gaining
access to proprietary knowledge or limiting some operations or assets, to enhance the value
of the investor’s other assets.
4.4.7 Step 7: Is there a link between power & returns?
Illustration 15
A decision maker (fund manager) establishes, markets and manages a publicly traded, regulated
fund according to narrowly defined parameters set out in the investment mandate as required by
its local laws and regulations. The fund was marketed to the investors as an investment in a
diversified portfolio of equity securities of publicly traded entities. Within the defined parameters,
the fund manager has discretion about the assets in which to invest. The fund manager has made
a 10% pro rata investment in the fund and receives a market-based fee for its services equal to
1% of the net asset value of the fund. The fees are commensurate with the services provided.
The fund manager does not have any obligation to fund losses beyond its 10% investment. The
fund is not required to establish, and has not established, an independent board of directors. The
investors do not hold any substantive rights that would affect the decision-making authority of the
fund manager, but can redeem their interests within particular limits set by the fund. Does the
fund manager have control over the fund?
Solution
Although operating within the parameters set out in the investment mandate and in accordance
with the regulatory requirements, the fund manager has decision-making rights that give it the

current ability to direct the relevant activities of the fund — the investors do not hold substantive
rights that could affect the fund manager’s decision-making authority. The fund manager receives
a market-based fee for its services that is commensurate with the services provided and has also
made a pro rata investment in the fund. The remuneration and its investment expose the fund
manager to variability of returns from the activities of the fund without creating exposure that is of
such significance that it indicates that the fund manager is a principal.
Consideration of the fund manager’s exposure to variability of returns from the fund together with
its decision-making authority within restricted parameters indicates that the fund manager is an
agent. Thus, the fund manager concludes that it does not control the fund.
Example
A decision maker establishes, markets and manages a fund that provides investment opportunities
to a number of investors. The decision maker (fund manager) must make decisions in the best
interests of all investors and in accordance with the fund’s governing agreements. Nonetheless,
the fund manager has wide decision-making discretion. The fund manager receives a market-
based fee for its services equal to 1 per cent of assets under management and 20 per cent of all
the fund’s profits if a specified profit level is achieved. The fees are commensurate with the
services provided.
Although it must make decisions in the best interests of all investors, the fund manager has
extensive decision-making authority to direct the relevant activities of the fund. The fund manager
is paid fixed and performance-related fees that are commensurate with the services provided. In
addition, the remuneration aligns the interests of the fund manager with those of the other
investors to increase the value of the fund, without creating exposure to variability of returns from
the activities of the fund that is of such significance that the remuneration, when considered in
isolation, indicates that the fund manager is a principal. The above fact pattern and analysis
applies to Illustrations 16, 17 and 18 described below. Each illustration is considered in isolation.
Illustration 16
The fund manager also has a 2 per cent investment in the fund that aligns its interests with those
of the other investors. The fund manager does not have any obligation to fund losses beyond its
2 per cent investment. The investors can remove the fund manager by a simple majority vote, but
only for breach of contract. Considering the facts given, does the fund manager control the fund?
Solution
The fund manager’s 2 per cent investment increases its exposure to variability of returns from the
activities of the fund without creating exposure that is of such significance that it indicates that the
fund manager is a principal. The other investors’ rights to remove the fund manager are
considered to be protective rights because they are exercisable only for breach of contract.
Although the fund manager has extensive decision-making authority and is exposed to variability
of returns from its interest and remuneration, the fund manager’s exposure indicates that the fund

manager is an agent. Thus, in these circumstances we conclude fund manager does not control
the fund.
Illustration 17
The fund manager has a more substantial pro rata investment in the fund, but does not have any
obligation to fund losses beyond that investment. The investors can remove the fund manager by
a simple majority vote, but only for breach of contract. Does the fund manager in this case control
the fund?
Solution
The other investors’ rights to remove the fund manager are considered to be protective rights
because they are exercisable only for breach of contract. Although the fund manager is paid fixed
and performance-related fees that are commensurate with the services provided, the combination
of the fund manager’s investment (i.e. substantial pro rata investment) together with its
remuneration could create exposure to variability of returns from the activities of the fund that is
of such significance that it indicates that the fund manager is a principal. The greater the
magnitude of, and variability associated with, the fund manager’s economic interests (considering
its remuneration and other interests in aggregate), the more emphasis the fund manager would
place on those economic interests in the analysis, and the more likely the fund manager is a
principal. Therefore, we conclude that the fund manager controls the fund.
Note: Having considered fund manager’s remuneration and the other factors, we might consider
a 20 per cent investment to be sufficient to conclude that it controls the fund. However, in different
circumstances (i.e. if the remuneration or other factors are different), control may arise when the
level of investment is different.
Illustration 18
The fund manager has a 20% pro rata investment in the fund, but does not have any obligation to fund
losses beyond its 20% investment. The fund has a board of directors, all of whose members are
independent of the fund manager and are appointed by the other investors. The board appoints the
fund manager annually. If the board decided not to renew the fund manager’s contract, the services
performed by the fund manager could be performed by other managers in the industry. Does the fund
manager control the fund?
Solution
Although the fund manager is paid fixed and performance-related fees that are commensurate
with the services provided, the combination of the fund manager’s 20% investment together with
its remuneration creates exposure to variability of returns from the activities of the fund that is of
such significance that it indicates that the fund manager is a principal. However, the investors
have substantive rights to remove the fund manager—the board of directors provides a
mechanism to ensure that the investors can remove the fund manager if they decide to do so. In
this example, the fund manager places greater emphasis on the substantive removal rights in the

analysis. Thus, although the fund manager has extensive decision-making authority and is
exposed to variability of returns of the fund from its remuneration and investment, the substantive
rights held by the other investors indicate that the fund manager is an agent. Thus, we conclude
that it does not control the fund.
Illustration 19
An investee Noor Ltd. is floated to invest in a portfolio of equity oriented mutual funds, funded by
fixed rate debentures and equity instruments. The equity instruments will receive any residual
returns of the investee. The transaction was marketed to potential debt investors as an investment
in a portfolio of asset-backed securities with exposure to the credit risk associated with the
possible default of the issuers of the asset-backed securities in the portfolio and to the interest
rate risk associated with the management of the portfolio. On formation, the equity instruments
represent 15% of the value of the assets purchased by Noor Ltd. A decision maker (the asset
manager) of Noor Ltd. manages the portfolio by making investment decisions strictly as per
investee’s prospectus. For services rendered by manager, receives a fixed fee (i.e. 0.5 percent of
assets under management) and performance-related fee (i.e. 2 percent of profits) if profits exceed
10% over & above of previous financial year. The asset manager holds 40 per cent of the equity
in the investee. The remaining 60 per cent of the equity, and all the debentures are held by a
large number of widely dispersed unrelated third party investors. The asset manager can be
removed, without cause, by a simple majority decision of the other investors.
Solution
The asset manager is paid fixed and performance-related fees that depends on variability of
portfolio performance backed by equity oriented mutual funds i.e the remuneration and interest of
other investors aligns to increase the value of the fund. The asset manager has exposure to
variability of returns from the relevant activities of the fund because it holds 40 per cent of the
equity and from its remuneration.
Although operating within the guidelines set out in the investee’s prospectus, the asset manager has
the current ability to make investment decisions that significantly affect the investee’s returns—the
removal rights held by widely unrelated dispersed investors receive little weighting because those rights
are held by a large number of widely unrelated dispersed investors.
In given illustration, the asset manager has greater exposure to variability of returns of the fund
from its 40 per cent equity interest, which is subordinate to the debt instruments. Holding 40 per
cent of the equity creates exposure to losses and rights to returns of the investee, which are of
such significance that it indicates that the asset manager is a principal and not mere an agent.
Therefore, it is concluded that the asset manager controls the investee Noor Ltd.
Illustration 20
A decision maker Aditya Birla Money Ltd. (ABML) sponsors a debt oriented mutual fund, which issues
its units instruments to unrelated third party investors. The transaction was marketed as

an investment in a portfolio of highly AAA rated long-term & medium-term assets with minimal
credit risk exposure of the assets in the portfolio. Various transferors sell above long term &
medium-term asset portfolios to the fund. Each transferor services the portfolio of assets that it
sells to the fund and manages receivables on default for a market-based servicing fee. Each
transferor also provides first loss protection against credit losses from its asset portfolio through
over-collateralization of the assets transferred to the fund. The sponsor (ABML) establishes the
terms of the fund and manages the operations of the fund for a market-based fee. The sponsor
(ABML) approves the sellers permitted to sell to the fund, approves the assets to be purchased
by the fund and makes decisions about the funding of the fund. The sponsor is entitled to any
residual return of the fund and also provides liquidity facilities to the fund. The credit enhancement
provided by the sponsor absorbs losses of up to 5 per cent of all of the funds fund’s assets, after
losses are absorbed by the transferors. The liquidity facilities are not advanced against defaulted
assets. The investors do not hold substantive rights that could affect the decision-making authority
of the sponsor.
Solution
Even though the sponsor is paid a market-based fee for its services that is commensurate with
the services provided, the sponsor has exposure to variability of returns from the activities of the
fund because of its rights to any residual returns of the fund and the provision of credit
enhancement and liquidity facilities (ie the fund is exposed to liquidity risk by using short-term
debt instruments to fund medium-term assets). Even though each of the transferors has decision-
making rights that affect the value of the assets of the fund, the sponsor has extensive decision-
making authority that gives it the current ability to direct the activities that most significantly affect
the fund’s returns (ie the sponsor established the terms of the fund, has the right to make decisions
about the assets (approving the assets purchased and the transferors of those assets) and the
funding of the fund (for which new investment must be found on a regular basis)). The right to
residual returns of the fund and the provision of credit enhancement and liquidity facilities expose
the sponsor to variability of returns from the activities of the fund that is different from that of the
other investors. Accordingly, that exposure indicates that the sponsor is a principal and thus the
sponsor concludes that it controls the fund. The sponsor’s obligation to act in the best interest of
all investors does not prevent the sponsor from being a principal.
4.5 COMPARISON OF IND AS WITH THE COMPANIES ACT,

2013
1. Section 2(46) defines holding company as under:
 “holding company”, in relation to one or more other companies, means a company of
which such companies are subsidiary companies;

2. Section 2(87) defines subsidiary as under:

 “subsidiary company” or “subsidiary”, in relation to any other company (that is to say
the holding company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total share capital either at its own
or together with one or more of its subsidiary companies.
Provided that such class or classes of holding companies as may be prescribed shall
not have layers of subsidiaries beyond such numbers as may be prescribed.
Explanation—For the purposes of this clause—
(a) a company shall be deemed to be a subsidiary company of the holding
company even if the control referred to in sub-clause (i) or sub-clause (ii) is
of another subsidiary company of the holding company;
(b) the composition of a company’s Board of Directors shall be deemed to be
controlled by another company if that other company by exercise of some
power exercisable by it at its discretion can appoint or remove all or a majority
of the directors;
3. Section 2(6) defines associate as under:
 “associate company”, in relation to another company, means a company in which that
other company has a significant influence, but which is not a subsidiary company of the
company having such influence and includes a joint venture company.
Explanation — For the purposes of this clause, “significant influence” means control of at
least twenty per cent of total share capital, or of business decisions under an agreement;
 Joint venture is not defined in the Companies Act, 2013.
4. Section 2(27) defines control as under:
 “control” shall include the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person or persons acting individually or
in concert, directly or indirectly, including by virtue of their shareholding or management
rights or shareholders’ agreements or voting agreements or in any other manner;
Analysis of ‘Control’ as per the Companies Act, 2013:
“Control” shall include:
 the right to appoint majority of the directors or
 to control the management or policy decisions
exercisable by a person or persons acting individually or in concert, directly or
indirectly, including by virtue of their:
 shareholding rights; or

 management rights; or
 shareholders’ agreements; or
 voting agreements; or
 in any other manner;
 Certain key attributes of the definition:
 It is an inclusive definition;
 2 situations are mentioned:
 First: Right to appoint majority of directors. This finds a mention in the definition
of subsidiary also;
 Second: Control the management or policy decisions
 Control can be exercised individually or with somebody;
 Control can be exercised directly or indirectly (through somebody who is under
control – like in a principal / agent relationship);
 Control can be obtained in a variety of manners.
4.6 CONSOLIDATED FINANCIAL STATEMENTS -

INVESTMENT ENTITIES
4.6.1 Identification
Parent shall determine whether it is an investment entity.
4.6.1.1 As per Ind AS 110, Investment entity is an entity:
a. That obtains funds from investors for providing investment management services to those
investors;
b. Whose business purpose is to invest funds solely for returns from capital appreciation,
investment income, or both as committed to its investor;
c. Which Measures and evaluates the performance of substantially all of its investments on a
fair value basis.
4.6.1.2 Documents that indicate entity’s objective are:
i memorandum,
ii publications distributed by the entity and
iii other corporate or partnership documents,
4.6.1.3 Entity may also participate in many investment related activities:
i Providing management services & strategic advice to investee
ii Providing financial support like giving loan or providing capital commitments or guarantee

4.6.1.4 In order to demonstrate that it meets this element of the definition, an

investment entity:
i provides investors with fair value information
ii reports fair value information internally to the entity’s key management personnel.
4.6.1.5 For assessing ‘Investment entity’, an entity also has to consider some typical
characteristics as declared below (however absence of any characteristic does not
necessarily disqualify an entity from being an investment entity):
a. Whether it has more than one investment:
In some cases, holding one investment does not prevent it from meeting definition if the
entity:
i is in start-up period;
ii has not yet made investment to replace those dispose of;
iii is established to pool investor fund to invest in single investment under certain
circumstances;
iv is in process of liquidation
b. whether it has more than one investor:
In some cases having one investor does not prevent the entity from meeting definition if the entity:
i is within its initial offering period & entity is still identifying suitable investor;
ii has not identified suitable investor to replace ownership interest that have been
redeemed
iii is in process of liquidation
c. Whether its Investors are not related parties of the entity:
 Having unrelated investors would make it less likely that the entity, or other members
of the group containing the entity, would obtain benefits other than capital appreciation
or investment income
 However, an entity may still qualify as an investment entity even though its investors
are related to the entity.
For example, an investment entity may set up a separate ‘parallel’ fund for a group of its
employees (such as key management personnel) or other related party investor(s), which
mirrors the investments of the entity’s main investment fund. This ‘parallel’ fund may qualify as
an investment entity even though all of its investors are related parties.

d. Whether it has ownership interests in the form of equity or similar interest:

An entity that has significant ownership interests in the form of debt that, may still qualify as
an investment entity, provided that the debt holders are exposed to variable returns from
changes in the fair value of the entity’s net assets.
In assessing whether an entity is an investment entity the following three steps may be performed.
Step 1: Whether it meets the three elements of the definitions
Step 2: Whether it meets all the four typical characteristics
Step 3: If it does not meet all the four typical characteristics, whether it still is investment
entity based on the presumption of substance over form.
Determination of an
investment entity
Step I: Whether it meets all Yes Step II: Whether it meets

the three elements of the Yes
all the four typical
definitions No characteristics
Element 1: Entity obtains funds Characteristic 1: Whether it has
from investors for providing more than one investment
investment management services to
those investors
Characteristic 2: Whether it
Element 2: Entity’s business has more than one investor
No purpose is to invest funds solely for
returns from capital appreciation, Characteristic 3: Whether its
investment income, or both investors are not related parties
of the entity
Element 3: Entity measures and
evaluates the performance of Characteristic 4: Whether it
substantially all of its investments has ownership interests in the
on a fair value basis form of equity or similar interest
Step III: Whether it still is

It is an
investment entity based Yes
investment entity
on the presumption of
It is not an investment entity
substance over form.

Illustration 21
A fund has been set up by its manager; initially the manager is the only shareholder. As at its first
period end, the fund has not been successful in receiving funds from other prospective shareholders;
but it is actively soliciting new investors. The fund invests in global equities and equity-related
derivatives; and it provides its one shareholder with investment management services (as mandated in
its prospectus). Its prospectus states that it expects to buy and sell investments regularly, and it expects
holding periods of more than one year to be rare.
The fund generates returns from capital appreciations and investment income in the form of
dividends. The fund fair values all investments and these valuations are the basis for
subscriptions and redemptions into and out of the fund. Subscriptions and redemptions can occur
daily.
Is the fund an investment entity?
Solution
The fund is an investment entity. It meets the definition of an investment entity:
 It has been set up to provide investment management services to its investors. For this
period, it has only one manager-shareholder and so it is providing investment management
services to itself, but this is not its longer-term manager intention.
 It is carrying on its investment activities with the objective of capital appreciation and
investment income.
 It measures its underlying investments on a fair value basis and fair value is the basis for
subscriptions and redemptions into and out of the fund.
The fund displays the following characteristics:
 It holds multiple investments.
 It does not have multiple investors; but, this is expected to be temporary and the fund
manager is actively soliciting new investors.
 It does not have unrelated investors, because it has only a single investor.
 It issues ownership interests in the form of redeemable units that entitle the holders to a
share of net assets.
Although the fund has a single investor, this is expected to be temporary. Failing to meet this
typical characteristic does not mean that the fund is not an investment entity. In the context of
the definition and the fund’s overall business purpose, it is an investment entity. The fund is
required to make appropriate disclosures in its financial statements on why it qualifies as an
investment entity even when it has only one investor.

Illustration 22
A fund is set up by a corporate entity that runs a power plant. The corporate entity (which owns
all of the units in the fund) needs to keep funds available in case of a technical failure of the power
plant. The entity does not have the expertise to manage the fund, so it appoints a third party
asset manager. The entity can remove the fund manager on four months’ notice.
The fund invests in traded equity and debt instruments (as set out in the investment management
agreement and fund founding documents) and its maximum exposure to one investment is not
more than 11% of monies invested. The objective of the fund is to generate returns either from
dividends and interest or from selling the instruments. The fund does not invest in the power
industry and the corporate entity has no other relationship with the fund; for example, it does not
have options to buy any of the investments made by the fund.
The fund reports fair value information internally and to its corporate parent; and its performance
is evaluated against a benchmark stock exchange index.
The fund issues units that are redeemable at any time. The redeemable shares pay the net asset
value of the fund when liquidated, and they are accounted for by the fund as equity under
Ind AS 32. The units do not carry voting rights.
Is the fund an investment entity? How does the corporate entity account for its interest in the
fund?
Solution
The fund is an investment entity. It meets the definition of an investment entity to the extent that:
 It provides investment management services to its investor.
 Its business purpose is to invest in debt and equity instruments for capital appreciation and
investment income.
 It measures and evaluates the performance of its investments on a fair value basis.
The fund displays two of the four typical characteristics 
 The fund holds multiple investments.
 The fund only has one investor but in these circumstances that is not inconsistent with its
overall business purpose and with the definition of an investment entity.
 The fund does not have unrelated investors, because there is only one investor; but, again,
in these circumstances this is not inconsistent with the definition of an investment entity.
 Units issued by the fund entitle the holder to a proportionate share of the net asset value of
the fund.
Two of the characteristics are not satisfied because the fund has a single investor. When
examining all the facts and circumstances, however, the fund concludes that it is an investment

entity and that the failure to meet two of the typical characteristics is not inconsistent with the definition.
The corporate entity is not an investment entity. It consolidates the fund (including any controlled
investments made by the fund).
4.6.2 Reassessing Status of an entity (investment entity or not)
 If there are changes in one or more of the three elements of the definition; or
 If there are changes in one or more of the four typical characteristics
Then,
Account for change (if any in status) prospectively, whether from investment entity to normal entity or
vice versa.
Example:
Due to change in market conditions, investors in a fund are redeeming their units. As a result of
this redemption, one significant investor remains in the fund. The fund should reassess its
investment entity status. In this case, the fund might continue to meet the definition and remain
an investment entity, in either of the following situations: if its business continues to be
management of investments for capital appreciation and/or income, but now for one investor
instead of many; or if it expects that this will be temporary situation.
4.6.3 Consolidation not required

 An investment entity shall not consolidate its subsidiaries.
 Instead it shall measure its investment in subsidiaries at fair value through profit or loss in
accordance with Ind AS 109.
There are two exceptions to the said rule:
i An investment entity shall consolidate that subsidiary which provides services related to
investment entity’s investment activities.
ii A parent of an investment entity shall consolidate all entities that it controls, including those
controlled through an investment entity subsidiary, unless the parent itself is an investment
entity.

UNIT 5 :
CONSOLIDATED FINANCIAL STATEMENTS :
ACCOUNTING OF SUBSIDIARIES
5.1 STATUTORY REQIUIREMENTS

5.1.1 The Companies Act, 2013 requirements
Section 129 sub-section (3) & (4) of the Companies Act, 2013 provides for the consolidation of
accounts. The relevant text is as under:
 129 (3) : Where a company has one or more subsidiaries, it shall, in addition to financial
statements provided under sub–section (2), prepare a consolidated financial statement of
the company and all its subsidiaries in the same form and manner as that of its own which
shall also be laid before the annual general meeting of the company along with the laying of
its financial statement under sub–section (2).
Provided that the company shall also attach along with its financial statement a separate
statement containing the salient features of the financial statement of its subsidiary or subsidiaries
in such form as may be prescribed.
Provided further that the Central Government may provide for the consolidation of accounts
of companies in such manner as may be prescribed.
Explanation: For the purpose of this sub–section, the word ‘subsidiary’ shall include
associate and joint venture.
 129 (4): The provisions of this Act, applicable to the preparation, adoption and audit of
the financial statements of a holding company shall, mutatis mutandis, apply to the
consolidated financial statements referred to in sub-section (3).
5.1.2 The Companies (Accounts) Rules, 2014
The relevant rules are rules 5 & 6 of the Companies (Accounts) Rules, 2014. The relevant extracts of
these rules are reproduced as under:
 Form of statement containing salient features of financial statements of subsidiaries
– Rule 5 : The statement containing the salient features of the financial statement of a company’s
subsidiary or subsidiaries, associate company or companies and joint venture or ventures under
the first proviso to sub–section (3) of section 129 shall be in Form AOC – 1 (appended as
Annexure I at the end of this chapter).

 Manner of consolidation of accounts – Rule 6 : The consolidation of financial

statements of the company shall be made in accordance with the
 provisions of Schedule III of the Act and
 the applicable standards.
Provided that in case of a company covered under sub–section (3) of section 129 which is
not required to prepare consolidated financial statements under the Accounting Standards,
it shall be sufficient if the company complies with provisions on consolidated financial
statements provided in Schedule III of the Act. (Refer Annexure II at the end of the chapter)
Provided further that nothing in this rule shall apply in respect of preparation of consolidated
financial statements by a company if it meets the following conditions:
i It is a wholly owned subsidiary or is a partially owned subsidiary of another company
and all its members, including those not otherwise entitled to vote, having been
intimated in writing and for which proof of delivery of such intimation is available with
the company, do not object to the company not presenting consolidated financial
statements;
ii It is a company whose securities are not listed or are not in the process of listing on any
stock exchange, whether in India or outside India; and
iii Its ultimate or any intermediate holding company files consolidated financial statements
with the Registrar which are in compliance with the applicable Accounting Standards.
5.2 COMPONENTS OF CONSOLIDATED FINANCIAL

STATEMENTS
Ind AS 110, ‘Consolidated Financial Statements’ and Division II of Schedule III to the Companies
Act, 2013 (Refer Annexure II) should be applied in the preparation and presentation of
consolidated financial statements which includes:
i Consolidated Balance Sheet;
ii Consolidated Statement of Profit and Loss;
iii Consolidated Statement of Changes in Equity;
iv Consolidated Cash Flow Statement;
v Consolidated Notes to the Financial Statements.
When a company is required to prepare Consolidated Financial Statements, the company shall mutatis
mutandis follow the requirements of Schedule III to the Companies Act, 2013 as applicable to a
company in the preparation of balance sheet, statement of changes in equity and statement

of profit and loss in addition, the consolidated financial statements shall disclose the information
as per the requirements specified in the applicable Indian Accounting Standards notified under
the Companies (lndian Accounting Standards) Rules 2015. In addition, the company shall disclose
additional information as required by Ind AS 27 and Ind AS 112 (Refer Unit 8).
5.3 CONSOLIDATION PROCEDURES

5.3.1 Process
1. Consolidation of an investee shall begin from the date the investor obtains control of the
investee and cease when the investor loses control of the investee.
2. Consolidated financial statements:
 combine like items of assets, liabilities, equity, income, expenses and cash flows of the
parent with those of its subsidiaries.
 offset (eliminate) the carrying amount of the parent’s investment in each subsidiary and
the parent’s portion of equity of each subsidiary (Ind AS 103 ‘Business Combination’
explains how to account for any related goodwill).
 eliminate in full intragroup assets and liabilities, equity, income, expenses and cash
flows relating to transactions between entities of the group (profits or losses resulting
from intragroup transactions that are recognised in assets, such as inventory and fixed
assets, are eliminated in full).
3. Intragroup losses may indicate an impairment that requires recognition in the consolidated
4. Ind AS 12, Income Taxes, applies to temporary differences that arise from the elimination of
profits and losses resulting from intragroup transactions.
5.3.2 Calculation of goodwill / capital reserve
1. It will be useful to refer the provisions of Ind AS 103, ‘Business Combinations’ when
computing the goodwill / capital reserve in the case of acquisition of a subsidiary. As per
Ind AS 103:
 Business combination is a transaction or other event in which an acquirer obtains control
of one or more businesses;
 Non–controlling interest is the equity not attributable, directly or indirectly, to a parent.
2. As per para 32 of Ind AS 103, the acquirer shall recognize goodwill as of the acquisition date
measured as the excess of (a) over (b) below:
(a) the aggregate of:

(i) the consideration transferred is measured in accordance with Ind AS 103, which
generally requires acquisition-date fair value; and
(ii) the amount of any non-controlling interest in the subsidiary measured in
accordance with Ind AS 103;
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the
liabilities assumed measured in accordance with Ind AS 103.
3. As per para 19 of Ind AS 103, for each acquisition of a subsidiary, the investor shall measure
at the acquisition date components of non-controlling interest in the subsidiary that are
present ownership interests and entitle their holders to a proportionate share of the entity’s
net assets in the event of liquidation at either:
(a) Fair value; or
(b) The present ownership instruments’ proportionate share in the recognized amounts of
the subsidiary’s identifiable net assets.
4. The computation of goodwill / bargain purchase price (capital reserve) involves following
steps:
Step 1 : Determine the fair value of consideration transferred by the parent;
Step 2 : Determine the amount of non–controlling interest.
 This can be computed by two methods:
As per method 1 : ‘Fair Value method’ - compute the fair value of non–controlling interest.
Example:
A Limited acquires 80% of B Limited at a valuation of ` 150.00 crores (excluding control
premium) by payment in cash of ` 120.00 crores. The value of non–controlling interest is
` 30 crores.
As per method 2 : ‘Proportionate Share method’
Example: Continuing with the above example in method 1
Assume that the value of recognized amount of subsidiary’s identifiable net assets is
` 130.00 crores, as determined in accordance with Ind AS 103. The value of non–controlling
interest is ` 26.00 crores (i.e. ` 130 crores x 20%).
Step 3: The value of recognized amount of subsidiary’s identifiable net assets, as
determined in accordance with Ind AS 103;
Step 4 : Determine goodwill / bargain purchase price :
 Goodwill arises where aggregate of amount determined in step 1 and step 2 exceeds
amount determined in step 3.
In the aforesaid example, as per method 1, goodwill is determined at ` 20.00 crore whereas
as per method 2, the amount of goodwill is ` 16.00 crore

Method 1 – Fair Value Method (All figures in crores)
Dr. Cr.
Net Identifiable Assets Dr. 130.00
Goodwill (Balancing figure) Dr. 20.00
To Consideration payable 120.00
To Non–controlling Interest 30.00
Method 2 – Proportionate Share Method (All figures in crores)
Dr. Cr.
Goodwill (Balancing figure) Dr. 16.00

 Bargain purchase price (capital reserve) arises when amount determined in step 3
exceeds aggregate of amount determined in step 1 and step 2.
Example:
In the aforesaid example, if the consideration is ` 90 instead of ` 120.00 crore, then
the amount of bargain purchase is determined at ` 10.00 crore whereas as per method
2, the amount of bargain purchase is ` 14.00 crore.
Method 1 – Fair Value Method (All figures in crores)
Cr.
Dr.
Net Identifiable Assets Dr.
130.00
To Bargain Purchase Price (included in consideration) 10.00

Method 2 – Proportionate Share Method (All figures in crores)
Dr. Cr.
To Bargain Purchase Price (included in consideration) 14.00
Illustration 1: Goodwill recognised depends on how NCI is measured.

Ram Ltd. acquires Shyam Ltd. by purchasing 60% of its equity for ` 15 lakh in cash. The fair
value of non-controlling interest is determined as ` 10 lakh. The net aggregate value of
identifiable assets and liabilities, as measured in accordance with Ind AS 103 is determined as
` 5 lakh.
How much goodwill is recognized based on two measurement bases of non-controlling interest (NCI)?
Solution
A. NCI is measured at NCI’s proportionate share of the acquiree’s identifiable net assets
Ram Ltd. recognizes 100% of the identifiable net assets on the acquisition date and decides
to measure NCI at proportionate share (40%) of Shyam Ltd. identifiable net assets.
The journal entry recorded on the acquisition date for the 60% interest acquired is as follows:
(in lakhs)
Dr. (` in Cr. (` in
lakh) lakh)
Identifiable net assets Dr. 5
Goodwill (Balancing figure) Dr. 12
To Cash 15
To NCI 2
NCI is (` 5 lakh x 40%) = ` 2 lakh. Hence, goodwill of ` 12 lakh is calculated as consideration

` 15 lakh plus NCI ` 2 lakh less identifiable net assets and liabilities ` 5 lakh.

The goodwill recognized under Ind AS 103, therefore, represents entity A’s 60% share of the
total goodwill attributable to Shyam Ltd. It does not include any amount of goodwill
attributable to 40% NCI.
B. NCI is measured at fair value
The facts are as above, but Ram Ltd decides to measure NCI at fair value rather than at its share
of identifiable net assets.
The fair value of NCI is determined as ` 10 lakh (given in the question), which is the same
as the fair value on a per-share basis of the purchased interest.
The acquirer recognizes at the acquisition date
(i) 100% of the identifiable net assets,
(ii) NCI at fair value, and
(iii) Goodwill.
Dr. (` in lakh) Cr. (` in lakh)
Goodwill (Balancing figure) Dr. 20
To Cash 15
To NCI 10
Therefore, goodwill recognized where NCI is measured at fair value as per Ind AS 103
represents the group’s share to total goodwill attributable to Shyam Ltd. and the NCI’s share
of the total goodwill attributable to Shyam Ltd.
Illustration 2: Gain on a bargain purchase when NCI is measured at fair value
Seeta Ltd. acquires Geeta Ltd. by purchasing 70% of its equity for ` 15 lakh in cash. The fair
value of NCI is determined as ` 6.9 lakh. Management have elected to adopt full goodwill method
and to measure NCI at fair value. The net aggregate value of the identifiable assets and liabilities,
as measured in accordance with the standard is determined as ` 22 lakh. (Tax consequences
being ignored).

Solution
The bargain purchase gain is calculated as follows:
(` in lakh)
Fair value of consideration transferred 15.00
Fair value of NCI 6.90
Fair value of previously held equity interest n/a
21.90
Less: Recognised value of 100% of the net identifiable assets, measured in
accordance with the standards (22.00)
Gain on bargain purchase (0.10)
The recognized amount of the identifiable net assets is greater than the fair value of the
consideration transferred plus fair value of NCI. Therefore, a bargain purchase gain of
` 0.10 lakh is either recognised in OCI and accumulated in equity as capital reserve or directly in
equity as capital reserve.
The journal entry recorded on the acquisition date for 70% interest is as follows:

Identifiable net assets Dr. 22.00
To Cash 15.00
To Gain on bargain purchase 0.10
To NCI 6.90
Since NCI is required to be recorded at fair value, a bargain purchase is recognized for ` 0.1 lakh.
Illustration 3: Gain on a bargain purchase when NCI is measured at proportionate share of
identifiable net assets.
Continuing the facts as stated in the above illustration, except that Seeta Ltd. chooses to measure NCI
using a proportionate share method for this business combination. (Tax consequences have been
ignored).
Solution
This method calculates the bargain purchase same as under the fair value method, except that
NCI is measured as the proportionate share of the identifiable net assets.

The bargain purchase gain is as follows:
(` in lakh)
Fair value of consideration transferred 15.00
Fair value of NCI (30% of ` 22.0 lakh) 6.60
Fair value of previously held equity interest N/A
21.60
Less: Recognised value of 100% of the net identifiable assets, measured in

accordance with the standards (22.00)
Gain on bargain purchase (0.40)
As the recognized amount of the identifiable net assets is greater than the fair value of consideration
transferred, plus the recognized amount of NCI (at proportionate share), a bargain purchase gain of `
0.4 lakh is either recognised in OCI and accumulated in equity as capital reserve or directly in equity as
capital reserve.
The journal entry recorded on the acquisition date for 70% interest is as follows:
Identifiable net assets Dr. 22.0
To Cash 15.0
To Gain on bargain purchase 0.4
To NCI 6.6
Under the proportionate share method, NCI is recorded at its proportionate share of its net
identifiable assets and not at fair value.
Illustration 4: Measurement of goodwill when there is no non-controlling interest
X Ltd. acquired Y Ltd. on payment of ` 25 crore cash and transferring a retail business, the fair value of
which is ` 15 crore. Assets acquired and liabilities assumed in the acquisition are
` 36 crore.
Find out the Goodwill.

Solution
(All figures are ` in crores)

Fair value of the consideration paid (` 25 cr + ` 15 cr) 40
Fair value of assets acquired net of fair value of liabilities assumed (36)
Goodwill 4
Illustration 5: Measurement of goodwill when there is non-controlling interest

Raja Ltd. purchased 60% shares of Ram Ltd. paying ` 525 lakh. Number of issued capital of
Ram Ltd. is 1 lakh. Fair value of identifiable assets of Ram Ltd. is ` 640 lakh and that of liabilities
is ` 50 lakh. As on the date of acquisition, market price per share of Ram Ltd. is ` 775. Find out
the value of goodwill.
Solution
(` in lakh)
(i) Fair value of consideration paid 525
(ii) Fair value of non-controlling interest (40% x 1 lakh x ` 775) 310
(A) 835
Fair value of identified assets 640
Less: Fair value of liabilities (50)
Fair value of Net Identified Assets (B) 590
Goodwill [(A) – (B)] 245
Note: When goodwill is measured taking non-controlling interest at fair value, it is often termed
as full goodwill.
On the other hand, it is possible to measure non-controlling at the proportionate value of net
assets.
Amount in lakhs
(i) Fair value of consideration paid 525
(ii) Proportionate value of non-controlling interest (40% x 590 lakh) 236
(A) 761

Fair value of identified assets 640
Minus fair value of liabilities (50)
Fair value of Net assets (B) 590
Goodwill [(A)-(B)] 171
When non-controlling interest is measured at proportionate share of net asset, the goodwill is popularly
termed as partial goodwill.
5.3.3 Acquisition of interest in subsidiaries at different dates
1. An investor sometimes obtains control of a subsidiary in which it held an equity interest
immediately before the acquisition date.
Example
On 31 December 20X1, Entity A holds a 35% non-controlling equity interest in Entity B. On
that date, Entity A purchases an additional 40% interest in Entity B, which gives it control of
Entity B.
Ind AS refers to such a transaction as a business combination achieved in stages, sometimes also
referred to as a step acquisition.
2. In a business combination achieved in stages, the investor (parent) shall re-measure its
previously held equity interest in the investee (now subsidiary) at its acquisition-date fair
value and recognize the resulting gain or loss, if any, in profit or loss or other comprehensive
income, as appropriate.
3. In prior reporting periods, the investor (parent) may have recognized changes in the value of
its equity interest in the investee in other comprehensive income. If so, the amount that was
recognized in other comprehensive income shall be recognized on the same basis as would
be required if the investee (parent) had disposed directly of the previously held equity
interest.
Illustration 6: Step acquisition when control is obtained.
Entity D has a 40% interest in entity E. The carrying value of the equity interest, which has been
accounted for as an associate in accordance with Ind AS 28 is ` 40 lakh. Entity D purchases the
remaining 60% interest in entity E for ` 600 lakh in cash. The fair value of the 40% previously
held equity interest is determined to be ` 400 lakh., the net aggregate value of the identifiable
assets and liabilities measured in accordance with Ind AS 103 is determined to be identifiable
` 880 lakh. The tax consequences have been ignored. How does entity D account for the business
combination?

Solution
Entity D recognizes at the acquisition date:
i. 100% of the identifiable net assets
ii. Goodwill as the excess of 1 over 2 below:
1. The aggregate of:
 Consideration transferred
 The amount of any non-controlling interest (Not applicable in this example)
 In a business combination achieved in stages, the acquisition date fair value of the
acquirer’s previously held equity interest in the acquire.
2. The assets and the liabilities recognized in accordance with Ind AS 103.
The journal entry recorded on the date of acquisition of the 60% controlling interest is as follows:

Goodwill Dr. 120
To Cash 600
To Associate interest 40
To Gain on equity interest 360
Goodwill is calculated as follows:
` in lakh
Fair value of consideration transferred 600
Fair value of previously held equity interest 400
1,000
Less: Recognised value of 100% of the identifiable net assets, measured in

accordance with the standards (880)
Goodwill recognised 120
The gain on the 40% previously held equity interest is recognized in the income statement. The
fair value of the previously held equity interest less the carrying value of the previously held equity
interest is ` 360 lakh (400 – 40).

5.3.4 Acquisition of interest in subsidiaries without consideration

1. An entity (say entity A) sometimes obtains control of another entity (say entity B) without
transferring consideration. Such circumstances include:
 That another entity (entity B) repurchases a sufficient number of its own shares for an
existing investor (entity A) to obtain control;
 Minority veto rights lapse that previously kept the investor (entity A) from controlling that
another entity (entity B) in which the investor (entity a) held the majority voting rights.
 The investor (entity A) and investee (entity B) agree to combine their businesses by
contract alone. The investor (entity A) transfers no consideration in exchange for control
of the investee (entity B) and holds no equity interests in the investee, either on the
acquisition date or previously. Examples of business combinations achieved by
contract alone include bringing two businesses together in a stapling arrangement or
forming a dual listed corporation.
2. In a business combination achieved by contract alone, the investor (entity A) shall attribute
to the owners of the investee (entity B) the amount of the investee’s (entity B) net assets
recognized in accordance with Ind AS 103. In other words, the equity interests in the investee
(entity B) held by parties other than the investor (entity A) are a non-controlling interest in
the investor’s (entity A) post-combination financial statements even if the result is that all of
the equity interests in the investor (entity A) are attributed to the non-controlling interest.
5.4 UNIFORM ACCOUNTING POLICIES

A parent shall prepare consolidated financial statements using uniform accounting policies for like
transactions and other events in similar circumstances.
If a member of the group uses accounting policies other than those adopted in the consolidated
financial statements for like transactions and events in similar circumstances, appropriate adjustments
are made to that group member’s financial statements in preparing the consolidated financial
statements to ensure conformity with the group’s accounting policies.
Illustration 7
PQR Ltd. is the subsidiary company of MNC Ltd. In the individual financial statements prepared
in accordance with Ind AS, PQR Ltd. has adopted Straight-line method (SLM) of depreciation and
MNC Ltd. has adopted Written-down value method (WDV) for depreciating its property, plant and
equipment. As per Ind AS 110, Consolidated Financial Statements, a parent shall prepare
consolidated financial statements using uniform accounting policies for like transactions and other
events in similar circumstances.
How will these property, plant and equipment be depreciated in the consolidated financial statements of
MNC Ltd. prepared as per Ind AS?

Solution
As per paragraph 60 and 61 of Ind AS 16, ‘Property, Plant and Equipment’, a change in the method of
depreciation shall be accounted for as a change in an accounting estimate as per Ind AS 8, ‘Accounting
Policies, Changes in Accounting Estimates and Errors’.
Therefore, the selection of the method of depreciation is an accounting estimate and not an accounting
policy.
The entity should select the method that most closely reflects the expected pattern of consumption
of the future economic benefits embodied in the asset. That method should be applied
consistently from period to period unless there is a change in the expected pattern of consumption
of those future economic benefits in separate financial statements as well as consolidated
Therefore, there can be different methods of estimating depreciation for property, plant and equipment,
if their expected pattern of consumption is different. The method once selected in the individual financial
statements of the subsidiary should not be changed while preparing the consolidated financial
statements.
Accordingly, in the given case, the property, plant and equipment of PQR Ltd. (subsidiary
company) may be depreciated using straight line method and property, plant and equipment of
parent company (MNC Ltd.) may be depreciated using written down value method, if such method
closely reflects the expected pattern of consumption of future economic benefits embodied in the
respective assets.
5.5 MEASUREMENT
5.5.1 Profit or loss of subsidiary companies
An entity includes the income and expenses of a subsidiary in the consolidated financial
statements from the date it gains control until the date when the entity ceases to control the
subsidiary. Income and expenses of the subsidiary are based on the amounts of the assets and
liabilities recognized in the consolidated financial statements at the acquisition date.
An entity shall attribute the profit or loss and each component of other comprehensive income to
the owners of the parent and to the non-controlling interests. The entity shall also attribute total
comprehensive income to the owners of the parent and to the non-controlling interests even if this
results in the non-controlling interests having a deficit balance.
Illustration 8
A Ltd. acquired 70% of equity shares of B Ltd. on 1.04.20X1 at cost of ` 10,00,000 when B Ltd.
had an equity share capital of ` 10,00,000 and other equity of ` 80,000. In the four consecutive
years B Ltd. fared badly and suffered losses of ` 2,50,000, ` 4,00,000, ` 5,00,000 and ` 1,20,000

respectively. Thereafter in 20X5-20X6, B Ltd. experienced turnaround and registered an annual profit of
` 50,000. In the next two years i.e. 20X6-20X7 and 20X7-20X8, B Ltd. recorded annual profits of `
1,00,000 and ` 1,50,000 respectively. Show the non- controlling interests and cost of control at the end
of each year for the purpose of consolidation.
Assume that the assets are at fair value.
Solution
Year Profit/loss Non- Additional NCI’s share of Cost of

controlling Consolidated losses borne by Control
Interest P & L (Dr.) A Ltd.
(30%) Cr.
` Balance
At the time 3,24,000
of (W.N.)
acquisition
in 20X1
20X1-20X2 (2,50,000) (75,000) (1,75,000) 2,44,000
(W.N.)
2,49,000
20X2-20X3 (4,00,000) (1,20,000) (2,80,000) 2,44,000
1,29,000
20X3-20X4 (5,00,000) (1,50,000) (3,50,000) 2,44,000
(21,000)
20X4-20X5 (1,20,000) (36,000) (84,000) 2,44,000
(57,000)
20X5-20X6 50,000 15,000 35,000 2,44,000
(42,000)
20X6-20X7 1,00,000 30,000 70,000 2,44,000
(12,000)
20X7-20X8 1,50,000 45,000 1,05,000 2,44,000
33,000

Working Note:
Calculation of Non-controlling interest: `

Share Capital 10,00,000
Other equity 80,000
Total 10,80,000
NCI (30% X 10,80,000) 3,24,000
NCI is measured at NCI’s proportionate share of the acquiree’s identifiable net assets.
(Considering the carrying amount of share capital & other equity to be fair value).
Calculation of Goodwill/ cost of control: `

Consideration 10,00,000
Non-controlling interest 3,24,000
Less: Net Assets (10,80,000)
Goodwill 2,44,000
5.5.2 Potential Voting Rights

When potential voting rights, or other derivatives containing potential voting rights, exist, the
proportion of profit or loss and changes in equity allocated to the parent and non - controlling
interests in preparing consolidated financial statements is determined solely on the basis of
existing ownership interests and does not reflect the possible exercise or conversion of potential
voting rights and other derivatives, unless the below mentioned provision applies.
In some circumstances an entity has, in substance, an existing ownership interest as a result of a
transaction that currently gives the entity access to the returns associated with an ownership
interest. In such circumstances, the proportion allocated to the parent and non-controlling
interests in preparing consolidated financial statements is determined by taking into account the
eventual exercise of those potential voting rights and other derivatives that currently give the entity
access to the returns.
Ind AS 109 does not apply to interests in subsidiaries that are consolidated. When instruments
containing potential voting rights in substance currently give access to the returns associated with
an ownership interest in a subsidiary, the instruments are not subject to the requirements of
Ind AS 109. In all other cases, instruments containing potential voting rights in a subsidiary are
accounted for in accordance with Ind AS 109.

5.5.3 Dividend received from subsidiary companies

As per para 5.7.1A of Ind AS 109, dividends are recognized in profit or loss by an investor entity only
when:
 The entity’s right to receive payment of the dividend is established;
 It is probable that the economic benefits associated with the dividend will flow to the entity;
and
 the amount of the dividend can be measured reliably.
As per para 12 of Ind AS 27, an entity shall recognize a dividend from a subsidiary in its separate
financial statements when its right to receive the dividend is established.
As per the Companies Act, 2013, the entity’s right to receive the dividend is established when it
is declared by the shareholders in the annual general meeting of the Company.
Recognition of dividends depends on the how the investment in subsidiary is measured in separate
financial statements of the parent. Where the investment in subsidiary is measured at cost as at
fair value through profit or loss, dividends are recognised in profit or loss and where the investment
in subsidiary is measured at fair value through other comprehensive income, dividend that clearly
represents a recovery of part of the cost of the investment is not recognised in profit or loss
(paragraph B5.7.1 of Ind AS 109). Thus dividend could be return on investment (dividend income)
or return of investment (a deduction from the cost of capital) in case of investment in subsidiary
measured at fair value through other comprehensive income. The accounting treatment of
dividend is thus based on substance of the transaction rather than the form. Judgment needs to
be applied.
Example:
Consider a case where an entity A Limited receives dividend for the year ended 31 st March 20X2 from a
subsidiary B Limited acquired on 1st October 20X1. The dividend is declared in the annual general
meeting of B Limited held on 25th May 20X2 and received on 31st May 20X2. A Limited should reduce
50% (as it acquired B Limited on 1st October 20X1) of the dividend received during the year ending on
31st March 20X3 from its cost of acquisition of B Limited.
Illustration 9
H Ltd. acquired 3,000 shares in S Ltd., at a cost of ` 4,80,000 on 1st November, 20X1. The
capital of S Ltd. consisted of 5,000 shares of ` 100 each fully paid. The Statement of Profit and
Loss of this company for year ended 31st March 20X2 showed an opening balance as on 1st April
20X1 of ` 2,00,000 and profit for the year 31st March 20X2 of ` 2,00,000. After the end of the
year in the ensuing annual general meeting, it declared a dividend of 40%. Discuss the treatment
in the books of H Ltd., in respect of the dividend.

Solution
The requirement as to recognition of dividends under Ind AS is given in the following paragraphs:
 Paragraph 5.7.1A of Ind AS 109 Financial Instruments:
“Dividends are recognised in profit or loss only when:
a. The entity’s right to receive payment of the dividend is established;
b. It is probable that the economic benefits associated with the dividend will flow to the
entity; and
c. The amount of the dividend can be measured reliably.”
 Paragraph B5.7.1 of Ind AS 109:
“Paragraph 5.7.5 permits an entity to make an irrevocable election to present in other
comprehensive income changes in the fair value of an investment in an equity investment that is
not held for trading. This election is made on an instrument-by-instrument (ie share-by- share)
basis. Amounts presented in other comprehensive income shall not be subsequently transferred to
profit or loss. However, the entity may transfer the cumulative gain or loss within equity. Dividends
on such investments are recognised in profit or loss in accordance with paragraph 5.7.6 unless the
dividend clearly represents a recovery of part of the cost of the investment.”
 Paragraph 12 of Ind AS 27 Separate Financial Statements
“Dividends from a subsidiary, joint venture or an associate are recognised in the separate financial
statements of an entity when the entity’s right to receive the dividend is established.”
 Paragraph 10 of Ind AS 28 Investments in Associates and Joint Ventures:
“Under the equity method, on initial recognition the investment in an associate or a joint
venture is recognised at cost, and the carrying amount is increased or decreased to
recognised the investor’s share of the profit or loss of the investee after the date of
acquisition. The investor’s share of the investee’s profit or loss is recognised in the investor’s
profit or loss. Distributions received from an investee reduce the carrying amount of the
investment. Adjustments to the carrying amount may also be necessary for changes in the
investor’s proportionate interest in the investee arising from changes in the investee’s other
comprehensive income. Such changes include those arising from the revaluation of property,
plant and equipment and from foreign exchange translation differences. The investor’s share
of those changes is recognised in the investor’s other comprehensive income (see Ind AS 1,
Presentation of Financial Statements).”
The case under consideration is of dividend from investment in subsidiary. Therefore, paragraph
10 of Ind AS 28 is not applicable in this case. The issue that now arises is whether all the other
paragraphs, paragraph 12 of Ind AS 27, paragraph 5.7.1A and B5.7.1 of Ind AS 109 are applicable

to the given case. Paragraph B5.7.1 applies to dividends from equity investments that are
measured at fair value through other comprehensive income whereas paragraph 5.7.1A applies
to all dividends arising from investments that are within the scope of financial instruments
standard. In this regard, attention is drawn to the requirements of paragraph 2.1(a) of Ind AS 109
as under:
“2.1 This Standard shall be applied by all entities to all types of financial instruments except:
a. Those interests in subsidiaries, associates and joint ventures that are accounted for in
accordance with Ind AS 110 Consolidated Financial Statements, Ind AS 27 Separate
Financial Statements or Ind AS 28 Investments in Associates and Joint Ventures.
However, in some cases Ind AS 110, Ind AS 27 or Ind AS 28 require or permit an entity
to account for an interest in a subsidiary, associate or joint venture in accordance with
some or all of the requirements of this Standard. Entities shall also apply this Standard
to derivatives on an interest in a subsidiary, associate or joint venture unless the
derivative meets the definition of an equity instrument of the entity in Ind AS 32 Financial
Instruments: Presentation.”
Therefore, whether paragraph 12 of Ind AS 27 will apply or whether paragraphs 5.7.1A and B5.7.1
will apply in the given case depends on how the investment in subsidiary S Ltd. is accounted for
in the separate financial statements of H Ltd. In this regard, attention is drawn to the requirements
of paragraph 10 of Ind AS 27 as under:
“10 When an entity prepares separate financial statements, it shall account for investments in
subsidiaries, joint ventures and associates either:
a. At cost; or
b. In accordance with Ind AS 109.
The entity shall apply the same accounting for each category of investments. Investments
accounted at cost shall be accounted for in accordance with Ind AS 105, Non-Current Assets Held
for Sale and Discontinued Operations, when they are classified as held for sale (or included in a
disposal group that is classified as held for sale). The measurement of investments accounted
for in accordance with Ind AS 109 is not changed in such circumstances.”
Since in the illustration, it is not specified how the investment in subsidiary S Ltd. is being
accounted for in the separate financial statements of H Ltd. Given below is an analysis in both
the cases where the investment in subsidiary S Ltd. is measured at cost and where the investment
in subsidiary S Ltd. is measured in accordance with Ind AS 109.
 Investment in subsidiary S Ltd. is measured at cost:
In such a case, paragraph 12 of Ind AS 27 will apply which requires recognition of dividends
in profit or loss. Paragraphs 5.7.1A and B5.7.1 of Ind AS 109 are not applicable as the
investment is scoped out of Ind AS 109 Financial Instruments requirements. Therefore, in
such a case, dividends will not be apportioned into return on investment and return of
investment. Entire dividend shall be recognised in profit or loss.

 Investment in subsidiary S Ltd. is measured in accordance with Ind AS 109:

 In this case, paragraph 5.7.1A will be applicable which requires dividend to be
recognised in profit or loss. Therefore, if H Ltd. measures the investment at fair value
through profit or loss, both the fair value changes and dividends will be recognised in
profit or loss.
 If H Ltd. measures the investment at fair value and elects to recognise all fair value
gains and loss in other comprehensive income, paragraph B5.7.1 will also be applicable.
In this case, dividends will be bifurcated into return on investment and return of
investment where it is very clear that part of the dividends represent recovery of the
cost of the investment. In the given case, it is very clear that dividends have been
declared out of pre-acquisition profits. Therefore, 7 months’ profits will be considered
as pre-acquisition to be reduced from cost of investment and 5 months’ profit will be
considered as post-acquisition to be recognised in profit or loss.
Illustration 10
XYZ Ltd. purchased 80% shares of ABC Ltd. on 1st April, 20X1 for ` 1,40,000. The issued capital
of ABC Ltd., on 1st April, 20X1 was ` 1,00,000 and the balance in the statement of Profit & Loss
was ` 60,000.
For the year ending on 31st March, 20X2 ABC Ltd. has earned a profit of ` 20,000 and later on,
it declared and paid a dividend of ` 30,000.
Assume, the fair value of non-controlling interest is same as the fair value on a per-share basis of the
purchased interest. All net assets are identifiable net assets, there are no non-identifiable assets. The
fair value of identifiable net assets is ` 1,50,000.
Show by an entry how the dividend should be recorded in the books of XYZ Ltd. whenever it is received
after approval in the ensuing annual general meeting.
What is the amount of non-controlling interest as on 1st April, 20X1 and 31st March, 20X2 using
Fair Value method. Also pass a journal entry on the acquisition date.
Solution
XYZ Ltd.’s share of dividend = ` 30,000 x 80% = ` 24,000
` `
Bank A/c Dr. 24,000
To Statement of Profit & Loss 24,000
This assumption is only for illustration purpose. However, in the practical scenarios, the fair
value of NCI will be lower than the fair value of CI (Controlling Interest) since the consideration
paid for acquiring controlling interest will include control premium..

Calculation of Non- controlling interest and Journal Entry

NCI on 1st April 20X1 = 20% of Fair value on a per-share basis of the purchased interest.
= 20% x ` 1,75,000 (W.N 1) = ` 35,000
` `
Identifiable net assets Dr. 1,50,000
Goodwill (Balancing Figure) Dr. 25,000
To Cash 1,40,000
To NCI 35,000
Working Note 1
Fair value on a per-share basis of the purchased = Consideration transferred x 100/80
interest/ Fair Value of Identifiable net assets = 1,40,000 x 100/80 = ` 1,75,000
NCI on 31st March 20X2 = 20% of Fair value on a per-share basis of the purchased interest.
= 20% x ` 1,70,000 (W.N 2) = ` 34,000
Working Note 2
Fair Value of identifiable net assets at the end of year
= Fair Value at opening date + profits for the year ended 31st March 20X2 – Dividend)
= 1,50,000 + 20,000 – 0* = ` 1,70,000
*Dividend as per Ind AS will be recognized only when approval by the shareholder is received in
the annual general meeting.
Illustration 11
From the facts given in the above illustration, calculate the amount of non-controlling interest as
on 1st April, 20X1 and 31st March, 20X2 Using NCI’s proportionate share method.
Also pass a Journal entry on the acquisition Date.
Solution
NCI on 1st April 20X1 = 20% of Fair value of Identifiable net assets
= 20% x ` 1,50,000
= ` 30,000

` `
To Cash 1,40,000
To NCI 30,000
NCI on 31st March 20X2 = 20% of Fair value of Identifiable net assets
= 20% x `1,70,000 (WN 1)
= ` 34,000
Working Note
Fair Value of Identifiable net assets at the end of year = Fair Value at opening date + profits for
the year ended 31st March 20X2 – Dividend
= 1,50,000 + 20,000 – 0*
= ` 1,70,000
* Dividend as per Ind AS will be recognized only when approval by the shareholder is received.
Note:
Students may note that in both the approaches followed in Illustration 10 and 11, there is
difference in the amount of goodwill. Fair valuing of NCI results in higher goodwill. This is because
recognizing NCI at Fair value gives full goodwill value whereas recognizing NCI proportionately
gives partial goodwill value. Therefore, conceptually, fair valuation of NCI is better than
proportionate interest.
Illustration 12
The facts are same as in the above illustration except that the fair value of net identifiable assets
is ₹ 1,60,000. Calculate NCI and Pass Journal Entry on the acquisition date, using fair value
method.
Solution
Calculation of Non- controlling interest and Journal entry
NCI on 1st April 20X1 = 20% of Fair value on a per-share basis of the purchased interest.
= 20% X ` 1,75,000 (WN 1) = ` 35,000

` `
To Cash 1,40,000
To NCI 35,000
Working Note 1:
Fair value on a per-share basis of the purchased = Consideration transferred x 100/80
interest/ Fair Value of Identifiable net assets = 1,40,000 x 100/80
= ₹1,75,000
NCI on 31st March 20X2 = 20% of Fair value on a per-share basis of the purchased interest.
= 20% x ₹ 1,80,000 (WN 2)
= ₹ 36,000
Working Note 2:
the year ended 31st March 20X2– Dividend
= 1,60,000 + 20,000 – 0*
= ₹1,80,000
Illustration 13
The facts are same as in the above illustration except that the fair value of net identifiable assets
is ₹ 1,60,000. Calculate NCI and Pass Journal Entry on the acquisition date, using NCI’s
proportionate share method.
Solution
NCI on 1st April 20X1 = 20% of Fair value of Identifiable net assets
= 20% x ₹ 1,60,000
= ₹ 32,000

` `
To Cash 1,40,000
To NCI 32,000
NCI on 31st March 20X2 = 20% of Fair value of Identifiable net assets
= 20% X `1,80,000 (WN 1) = ` 36,000
Working Note 1
the year ended 31st March 20X2 – Dividend
= 1,60,000 + 20,000 – 0* = `1,80,000
Illustration 14
From the following data, determine in each case:
(1) Non-controlling interest at the date of acquisition and at the date of consolidation using
proportionate share method.
(2) Goodwill or Gain on bargain purchase.
(3) Amount of holding company’s profit in the consolidated Balance Sheet assuming holding
company’s own retained earnings to be ` 2,00,000 in each case
Case Subsidiary % of Cost Date of Acquisition Consolidation date
company shares 1.04.20X1 31.03.20X2
owned
Share Retained Share Retained
Capital earnings Capital earnings
[A] [B] [C] [D]
Case 1 A 90% 1,40,000 1,00,000 50,000 1,00,000 70,000
Case 2 B 85% 1,04,000 1,00,000 30,000 1,00,000 20,000
Case 3 C 80% 56,000 50,000 20,000 50,000 30,000
Case 4 D 100% 1,00,000 50,000 40,000 50,000 56,000
The company has adopted an accounting policy to measure Non-controlling interest at NCI’s
proportionate share of the acquiree’s identifiable net assets.

Solution
(1) Non-controlling Interest = the equity in a subsidiary not attributable, directly or indirectly, to
a parent. Equity is the residual interest in the assets of an entity after deducting all its
liabilities i.e. in this given case Share Capital + Statement of Profit & Loss (Assuming it to
be the net aggregate value of identifiable assets in accordance with Ind AS)
% Shares Non-controlling Non-controlling

Owned by interest as at the interest as at the date
NCI [E] date of acquisition of consolidation
[E] x [A + B] [E] X [C + D]
Case 1 [100 - 90] 10% 15,000 17,000
Case 2 [100 - 85] 15% 19,500 18,000
Case 3 [100 - 80] 20% 14,000 14,000
Case 4 [100 - 100] Nil Nil Nil
(2) Calculation of Goodwill or Gain on bargain purchase
Consideration Non- Net Goodwill Gain on

[G] controlling Identifiable [G] + [H] bargain
interest assets – [I] Purchase
[H] [A] + [B] = [I] [I] – [G] – [H]
Case 1 1,40,000 15,000 1,50,000 5,000 -
Case 2 1,04,000 19,500 1,30,000 - 6,500
Case 3 56,000 14,000 70,000 Nil Nil
Case 4 1,00,000 0 90,000 10,000 -
(3) The balance in the Statement of Profit & Loss on the date of acquisition (1.04.20X1) is Capital
Profit, as such the balance of Consolidated Profit & Loss Account shall be equal to Holding
Co.’s Profit.
On 31.03.20X2 in each case the following amount shall be added or deducted from the
balance of holding Co.’s Retained earnings.

% Share Retained Retained Retained Amount to be

Holding earnings as earnings as earnings post- added/(deducted)
[K] on 31.03.20X1 on acquisition from holding’s
[L] consolidation [N] = [M] – [L] Retained
Date [M] earnings
[O] = [K] x [N]
1 90% 50,000 70,000 20,000 18,000
2 85% 30,000 20,000 (10,000) (8,500)
3 80% 20,000 20,000 Nil Nil
4 100% 40,000 55,000 15,000 15,000
5.5.4 Preparation of consolidated balance sheet

 When preparing the consolidated balance sheet, assets and outside liabilities of the
subsidiary company are merged with those of the holding company. Equity share capital and
other equity of the subsidiary company are apportioned between holding company and non–
controlling interests (erstwhile minority shareholders as per AS 21). These items, along with
investments of holding company in shares of subsidiary company are not separately shown
in consolidated balance sheet. The net amounts resulting from various computations on these
items, shown as (a) non - controlling interest (b) cost of control (c) holding company’s share
in post-acquisition profits of the subsidiary company (added to appropriate concerned account
of the holding company) are entered in consolidated balance sheet. The method of calculation
of these items with detailed treatment of other relevant issues has been dealt with in various
places in this unit separately.
 As per Ind AS 110, if an entity makes two or more investments in another entity at different
dates and eventually obtain control of the other entity the consolidated financial statements are
presented only from the date on which holding-subsidiary relationship comes in existence.
 As per Ind AS 103, goodwill is computed only once when control is obtained. Any previously
held interests in the acquiree is fair valued and aggregated with consideration for
computation of goodwill / bargain purchase gain.
5.5.5 Elimination of intra – group transactions
In order to present financial statements for the group in a consolidated format, the effect of
transactions between group entities should be eliminated. Para B86 of Ind AS 110 states that
intra - group balances and intra - group transactions and resulting unrealized profits should be
eliminated in full. Unrealized losses resulting from intra - group transactions should also be
eliminated unless cost cannot be recovered.

Liabilities due to one group entity by another will be set off against the corresponding asset in the
other group entity’s financial statements; sales made by one group entity to another should be
excluded from turnover and from purchase (or related head) or the appropriate expense heading
in the consolidated statement of profit and loss.
To the extent that the buying entity has further sold the goods in question to a third party, the
eliminations to sales and cost of sales are all that is required, and no adjustments to consolidated
profit or loss for the period, or to net assets, are needed. However, to the extent that the goods
in question are still on hand at year end, they may be carried at an amount that is in excess of
cost to the group and the amount of the intra-group profit must be eliminated, and assets are
reduced to cost to the group.
For transactions between group entities, unrealized profits resulting from intra-group transactions that
are included in the carrying amount of assets, such as inventories and Property, Plant and Equipment,
Intangible Assets and Investment Property, are eliminated in full. The requirement to eliminate such
profits in full applies to the transactions of all subsidiaries that are consolidated – even those in which
the group’s interest is less than 100%.
5.5.5.1 Unrealised profit in inventories:
Where a group entity sells goods to another, the selling entity, as a separate legal entity, records
profits made on those sales. If these goods are still held in inventory by the buying entity at the
year end, however, the profit recorded by the selling entity, when viewed from the standpoint of
the group as a whole, has not yet been earned, and will not be earned until the goods are
eventually sold outside the group. On consolidation, the unrealized profit on closing inventories
will be eliminated from the group’s profit, and the closing inventories of the group will be recorded
at cost to the group.
5.5.5.2 Unrealised profit on transfer of non-current asset:
Similar to the treatment described above for unrealized profits in inventories, unrealized inter- company
profits arising from intra-group transfers of Property, Plant and Equipment, Intangible Assets and
Investment Property are also eliminated from the consolidated financial statements.
5.5.5.3 Unrealised losses:
Unrealised losses resulting from intra-group transactions that are deducted in arriving at the carrying
amount of assets are also eliminated unless cost cannot be recovered.
Illustration 15: Elimination of intra-group profit on sale of assets by a subsidiary to its
parent
A parent owns 60% of a subsidiary. The subsidiary sells some inventory to the parent for
` 35,000 and makes a profit of ` 15,000 on the sale. The inventory is in the parent’s balance
sheet at the year end.

Solution
The parent must eliminate 100% of the unrealized profit on consolidation. The inventory will, therefore,
be carried in the group’s balance sheet at ` 20,000 (` 35,000 - ` 15,000). The consolidated income
statement will show a corresponding reduction in profit of ` 15,000.
The double entry on consolidation is as follows:
` ’000 `’000
Revenue Dr 35
To Cost of sales 20
To Inventory 15
The reduction of group profit of ` 15,000 is allocated between the parent company and non- controlling
interest in the ratio of their interests – 60% and 40%.
Illustration 16: Elimination of intra-group profit on sale of assets by a parent to its
subsidiary
In the above illustration, assume that it is the parent that makes the sale. The parent owns 60%
of a subsidiary. The parent sells some inventory to the subsidiary for ₹ 35,000 and makes a profit
of ₹ 15,000. On the sale the inventory is in the subsidiary’s balance sheet at the year end.
Solution
The parent must eliminate 100% of the unrealized profit on consolidation. The inventory will,
therefore, be carried in the group’s balance sheet at ₹ 20,000. (₹ 35,000 – ₹ 15,000). The
consolidated income statement will show a corresponding reduction in profit of ` 15,000.
The double entry on consolidation is follows:
`’000 `’000
Revenue A/c Dr 35
To Cost of sales A/c 20
To Inventory A/c 15
In this case, since it is the parent that has made the sale, the reduction in profit of `15,000 is allocated
entirely to the parent company.
Illustration 17: Inventories of subsidiary out of purchases from the parent
A Ltd, a parent company sold goods costing ` 200 lakh to its 80% subsidiary B Ltd. at ` 240 lakh. 50%
of these goods are lying at its stock. B Ltd. has measured this inventory at cost i.e. at
` 240 lakh. Show the necessary adjustment in the consolidated financial statements (CFS). Assume
30% tax rate.

Solution
A Ltd., shall reduce the inventories of ` 120 lakh of B Ltd., by ` 20 lakh in CFS. This will increase
expenses and reduce consolidated profit by ` 20 lakh. It shall also create deferred tax asset of
` 6 lakh since accounting base of inventories (` 100 lakh) is lower than its tax base (` 120 lakh).
Illustration 18: Inventories of the parent out of purchase from subsidiary
Ram Ltd., a parent company purchased goods costing ` 100 lakh from its 80% subsidiary
Shyam Ltd. at ` 120 lakh. 50% of these goods are lying at the godown. Ram Ltd. has measured
this inventory at cost i.e. at ` 60 lakh. Show the necessary adjustment in the consolidated financial
statements (CFS). Assume 30% tax rate.
Solution
Ram Ltd., shall reduce the inventories of ` 60 lakh of Shyam Ltd., by 80% of ` 10 lakh in CFS i.e.
` 8 lakh.
This will increase expenses and reduce consolidated profit by ` 8 lakh. It shall also create
deferred tax asset of ` 2.4 lakh since accounting base of inventories (` 52 lakh) is lower than its
tax base (` 60 lakh).
5.5.6 Preparation of consolidated profit & loss
For preparation of Consolidated Profit and Loss Account of holding company and its subsidiaries,
the revenue items are to be added on line by line basis and from the consolidated revenue items
inter-company transactions should be eliminated. For example, a holding company may sell
goods or services to its subsidiary, receives consultancy fees, commission, royalty etc. These
items are included in sales and other income of the holding company and in the expense items of
the subsidiary. Alternatively, the subsidiary may also sell goods or services to the holding
company. These inter-company transactions are to be eliminated in full.
If there remains any unrealized profit in the inventory of good, of any of the group company, such
unrealized profit is to be eliminated from the value of inventory to arrive at the consolidated profit.
However, preparation of Consolidated Profit and Loss Account can prove to be a challenge when
the fair value of net assets acquired at the acquisition date were different from the carrying amount
specified in subsidiary's books. In such a case, the income and expense should be with reference
to those fair values plus the values reported by the subsidiary and not simply the values reported
by the subsidiary
5.5.7 Preparation of consolidated cash flows
Same as consolidated Statement of Profit and Loss, the preparation of consolidated cash flow
statement is also not difficult. All the items of cash flow from operating activities and financing activities
are to be added on line by line basis and from the consolidated items, inter – company transactions
should be eliminated.

I llustration 19
Given below are Balance Sheet of P Ltd and Q Ltd as on 31.3.20X1: (` in lakhs)
Balance Sheets P Ltd. Q Ltd.
Assets
Non-current Assets
Property Plant Equipment 1,07,000 44,000
Financial Assets:
Non-Current Investments 5,000 1,000
Loans 10,000
Current Assets
Inventories 20,000 10,000
Financial Assets:
Trade Receivables 8,000 10,000
Cash and Cash Equivalents 38,000 1,000
Total Assets 1,88,000 66,000
Equity and Liabilities
Shareholders Fund
Share Capital 20,000 10,000
Other equity 1,20,000 40,000
Non-current Liabilities
Financial liabilities:
Long term liabilities 30,000 10,000
Deferred tax liabilities 5,000 1,000
Long term provisions 5,000 1,000
Current Liabilities
Financial liabilities:

Trade Payables 6,000 2,000

Short term Provisions 2,000 2,000
Total Equity & Liabilities 1,88,000 66,000
Notes to Financial Statements P ltd Q ltd
Reserve & Surplus
General Reserve 1,00,000 30,000
Retained earnings 20,000 10,000
1,20,000 40,000
Inventories
Raw Material 10,000 5,000
Finished Goods 10,000 5,000
20,000 10,000
On 1.4.20X1, P Ltd acquired 70% of equity shares (700 lakhs out of 1000 lakhs shares) of Q Ltd.
at ` 36,000 lakhs. The company has adopted an accounting policy to measure Non-controlling
interest at fair value (quoted market price) applying Ind AS 103. Accordingly, the company
computed full goodwill on the date of acquisition. Shares of both the companies are of face value
` 10 each. Market price per share of Q Ltd. as on 1.4.20X1 is ` 55. Entire long term borrowings
of Q Ltd. is from P Ltd. The fair value of net identifiable assets is at ` 50,000 lakhs.
Presented below are the financial statements of P Ltd. & Q Ltd. for the year 20X1-X2.
(` in lakhs)
Statement of Profit and Loss
For the year ended on 31 March, 20X2
Notes P Ltd Q Ltd
I. Statement of Profit and Loss for the year ended on 31 March 20X2
Sales 1 2,00,000 80,000
Other Income 2 3,000
Total Revenue 2,03,000 80,000

Expenses
Raw Material Consumed 3 1,10,000 48,000
Change in inventories finished stock 4 (5,000) (3,000)
Employee benefit expenses 30,000 10,000
Finance Costs 5 2,700 1,000
Depreciation 7,000 4,000
Other Expenses 6 10,350 6,040
Total expenses 1,55,050 66,040
Profit Before Tax 47,950 13,960
Tax Expense:
Current Tax 11 15,000 4,000
Deferred Tax 2,000 1,000
17,000 5,000
Profit After Tax 30,950 8,960
II. Statement of Other Comprehensive Income
Fair value gain on investment in subsidiary 8 1,000 0
Fair value gain on other non-current investments* 8 500 250
1,500 250
*Note: Statement of Other Comprehensive Income shall present ‘Items that will not be
reclassified to profit or loss’ and ‘Items that will be reclassified to profit and loss’. However, such
bifurcations had not been made above.

Statement of changes in Equity

For the year ended on 31 March 20X2
P Ltd. Share General Profit Fair Total
Capital Reserve &Loss Value
Reserve
Balance as on 1.4.20X1 20,000 1,00,000 20,000 1,40,000
Dividend for the year 20X1-20X2 (8,000) (8,000)
Dividend distribution tax (1,350) (1,350)
Profit for the year 20X1-20X2 30,950 30,950
Fair value gain on investment in 1,000 1,000
subsidiary See Note 7
Fair value gain on other non- 500 500
current investments see note 7
Transfer to reserve 20,000 (20,000)
Balance as on 31.3.20X2 20,000 1,20,000 21,600 1,500 1,63,100
Q Ltd
Balance as on 1.4.20X1 10,000 30,000 10,000 50,000
Dividend for the year 20X1-20X2 (2,400) (2,400)
Dividend distribution tax (400) (400)
Profit for the year 20X1-20X2 8,960 8,960
Fair value gain on other non- 250 250
current investments see note 7
Transfer to reserve 5,000 (5,000)
Balance as on 31.3.20X2 10,000 35,000 11,160 250 56,410
Balance Sheet as on 31 March, 20X2 Note P Ltd Q Ltd
Assets
Non-current Assets
Fixed Assets
Property Plant Equipment 7 1,17,000 45,000
Financial Assets:

Non-Current Investments 8 40,820 1,250

Long term loans 10,000
Current Assets
Inventories 35,000 15,000
Financial Assets:
Trade Receivables 10,000 8,000
Cash and Cash Equivalents
(See Statement of cash flows) 930 4,200
45,930 27,200
Total Assets 2,13,750 73,450
Share Capital 20,000 10,000
Other Equity (See Statement of changes in Equity) 1,43,100 46,410
1,63,100 56,410
Financial Liabilities:
Borrowings 30,000 10,000
Deferred tax liabilities 7,000 2,000
Long term provisions 9 4,600 930
41,600 12,930
Current Liabilities
Short term Provisions 10 1,050 110
9,050 4,110
Total Liabilities 50,650 17,040
Total Equity & Liabilities 2,13,750 73,450

Statement of Cash Flows

P Ltd Q Ltd
I. Cash flows from operating activities
Profit after Tax 30,950 8,960
Add Back:
Current Tax 15,000 4,000
Deferred Tax 2,000 1,000
Depreciation 7,000 4,000
Finance Costs 2,700 1,000
Change in Provisions (1,350) (1,960)
Reversal of Interest Income (1,000) 0
Working capital adjustments
Inventories (15,000) (5,000)
Trade Receivables (2,000) 2,000
40,300 16,000
Less: Advance Tax (15,000) (4,000)
25,300 12,000
I. Cash flows from investment activities
Purchase of Property Plant Equipment (17,000) (5,000)
Acquisition of subsidiary (36,000) 0
Interest Income 1,000
Dividend Income 1,680
(50,320) (5,000)

II. Cash flow from financing activities

Dividend Payment (8,000) (2,400)
Dividend distribution tax (1,350) (400)
Interest payment (2,700) (1,000)
(12,050) (3,800)
Net Changes in Cash Flows (I+II+III) (37,070) 3,200
Balance of Cash and Cash Equivalents as on 1.4.20X1 38,000 1,000
Balance of Cash and Cash Equivalents as on 31.3.20X2 930 4,200
Notes P Ltd. Q Ltd.

Note 1- Sales
Sales to Q Ltd. 20,000
Other Sales 1,80,000 80,000
2,00,000 80,000
Note 2- Other Income
Interest from Q Ltd 1,000
Royalty from Q Ltd 2,000
3,000
Note 3- Raw Material Consumed
Opening Stock 10,000 5,000
Purchases from P Ltd 20,000
Other Purchases 1,20,000 30,000
Closing Stock 20,000 7,000
1,10,000 48,000

Note 4- Change in inventories of finished stock

Opening Stock 10,000 5,000
Closing Stock 15,000 8,000
(5,000) (3,000)
Note 5- Finance costs
Interest 2,700
Interest to P Ltd 1,000
2,700 1,000
Note 6- Other Expenses
Long term provisions 100 30
Short term provisions 50 10
Royalty to P Ltd 2,000
Others 10,000 4,000
Acquisition Expenses 200
10,350 6,040
Note 7- Property Plant Equipment
New Purchases 17,000 5,000
Note 8- Fair value of non-current investments
Investments in subsidiary 37,000
Other Investments 5,500 1,250
42,500 1,250
Fair value gain
Investments in subsidiary 1,000 0
Other investments 500 250
1,500 250

Note 9- Long term provisions

Balance as on 1.4.20X1 5,000 1,000
Transfer to short term provisions (500) (100)
New Provision 100 30
Balance as on 31.3.20X2 4,600 930
Note 10- Short term provisions
Balance as on 1.4.20X1 2,000 2,000
Transfer from long term provisions 500 100
Payment (1,500) (2,000)
New 50 10
Balance as on 31.3.20X2 1,050 110
Note 11- Provision for Tax & Advance Tax
Tax Provision 15,000 4,000
Less: Advance Tax 15,000 4,000
0 0
P Ltd has decided to account for investment in subsidiary at fair value as per Ind AS 27. Other non-
current investments are classified as financial assets at fair value through equity by rrevocable
choice as per Ind AS 109. There is no tax on long term capital gains.
i
The group has paid dividend for the year 20X0-20X1 and transferred to reserve out of profit for 0X1-
20X2 as follows (` in lakhs):
2
P Ltd Q Ltd
Dividend for the year 20X0-20X1 Total Share of P Non-Controlling
Ltd. interest
Dividend 8,000 2,400 1,680 720
Dividend distribution tax 1,350 400 280 120
9,350 2,800 1,960 840
Transfer to Reserve out of profit for the
year 20X1-20X2

Trade Receivables of P Ltd, includes ` 3,000 lakhs due from Q Ltd.

Based on the above financial statements for the year ended on 31 March, 20X2 and information given,
prepare Consolidated Financial Statements. Also draft disclosure as per Schedule III to the Companies
Act, 2013, Form AOC I of the Companies (Accounts) Rules, 2014 & Ind AS 112.
Solution
Consolidated Financial Statements of P Ltd. Group (` In lakhs)
Consolidated Statement of Comprehensive Income

For the year ended on 31 March, 20X2
I. Statement of Profit and Notes P Ltd Q Ltd Workings Group
loss
Sales 1 2,00,000 80,000 2,00,000+80,000- 2,60,000
20,000
Other Income 2 3,000 0 3,000-3,000 0
Total Revenue 2,03,000 80,000 2,60,000
Expenses
Raw materials consumed 3 1,10,000 48,000 1,10,000+48,000- 1,38,000
20,000
Change in inventories finished 4 -5,000 -3,000 (-5,000-3,000) -8,000
stock
Employee benefit expenses 30,000 10,000 30,000+10,000 40,000
Finance Costs 5 2,700 1,000 2,700+1,000- 2,700
1,000
Depreciation 7,000 4,000 7,000+4,000 11,000
Other expense 6 10,350 6,040 10,350+6,040- 14,390
2,000
Total Expenses 1,55,050 66,040 1,98,090
Profit Before Tax 47,950 13,960 61,910
Tax Expense :
Current Tax 15,000 4,000 15,000+4,000 19,000
Deferred Tax 2,000 1,000 2,000+1,000 3,000
17,000 5,000 22,000

Profit After Tax 30,950 8,960 39,910

Profit attributable to :
Parent 37,222
Non-controlling interest 2,688
II. Statement of Other
Comprehensive Income
Fair value gain on investment 8 1,000 0 1,000+0-1,000 0
in subsidiary
Fair value gain on other non- 8 500 250 500+250 750
current investments
1,500 250 750
Other comprehensive income
attributable to :
Parent 675
Non Controlling Interests 75
Consolidated Statement of changes in Equity

Share General Retained Fair Total Non- Group Total
Capital Reserve earnings Value Controlling
Reserve Interest
Balance as on 20,000 1,00,000 20,000 1,40,000 16,500 1,56,500
1.4.20X1
Dividend for the (8,000) (8,000) (8,000)
year 20X0-20X1
Dividend (1,350) (1,350) (1,350)
distribution tax
Profit for the year 37,222 37,222 2,688 39,910
20X1-20X2
Fair value gain
on investment in
subsidiary

Fair value gain 675 675 75 750

on other non-
current
investments
Transfer to 20,000 (20,000) 0 0
reserve
Dividend from (1,680) (1,680) (720) (2,400)
subsidiary
Dividend
distribution tax
of subsidiary (280) (280) (120) (400)
Balance as on
31.3.20X2 20,000 1,20,000 25,912 675 1,66,587 18,423 1,85,010
Dividend and dividend distribution tax paid by the subsidiary is deducted from profit and non controlling
interest.
Note: As per the response to Issue 1 given in ITFG Bulletin 9, in the consolidated financial
statements of parent company, the dividend income earned by parent company from subsidiary
company and dividend recorded by subsidiary company in its equity will both get eliminated as
a result of consolidation adjustments. DDT paid by subsidiary company outside the
consolidated Group i.e. to the tax authorities should be charged as expense in the consolidated
statement of Profit and Loss of holding company.
If DDT paid by the subsidiary is allowed as a set off against the DDT liability of its parent (as
per the tax laws), then the amount of such DDT should be recognised in the consolidated
statement of changes in equity of parent company.
Consolidated Balance Sheet
As on 31 March 20X2
(Amount in ` lakhs)
P Ltd Q Ltd Workings Group

Assets
Non-Current Assets
Fixed Assets
Property Plant Equipment 1,17,000 45,000 1,17,000+45,000 1,62,000
Goodwill 2,500-1,680 820

Financial Assets:
Non-Current Investments 40,820 1,250 5,500+1,250 6,750
Long term loans 10,000 0 10,000+0-10,000 0
1,67,820 46,250 1,69,570
Current Assets
Inventories 35,000 15,000 35,000+15,000 50,000
Financial Assets:
Trade Receivables 10,000 8,000 10,000+8,000- 15,000
3,000
Cash and Cash Equivalents 930 4,200 930+4,200 5,130
45,930 27,200 70,130
Total Assets 2,13,750 73,450 2,39,700

Share Capital 20,000 10,000 SOCE 20,000
Other Equity 1,43,100 46,410 SOCE 1,46,587
Non-controlling interest SOCE 18,423
1,63,100 56,410 1,85,010
Borrowings 30,000 10,000 30,000+10,000- 30,000
10,000
Deferred tax liabilities 7,000 2,000 7000+2,000 9,000
Long term provisions 4,600 930 4,600+930 5,530
41,600 12,930 44,530

Current Liabilities
Trade Payables 8,000 4,000 8,000+4,000-3,000 9,000
Short term Provisions 1,050 110 1,050+110 1,160
9,050 4,110 10,160
Total Liabilities 50,650 17,040 54,690
Total Equity & Liabilities 2,13,750 73,450 2,39,700
Statement of Cash Flows

P Ltd Q Ltd Workings Group

I. Cash flows from operating
activities
Profit after Tax 30,950 8,960 39,910
Add Back
Current Tax 15,000 4,000 15,000+4,000 19,000
Deferred Tax 2,000 1,000 2,000+1,000 3,000
Depreciation 7,000 4,000 7,000+4,000 11,000
Finance Costs 2,700 1,000 2,700+1,000- 2,700
1,000
Change in Provisions (1,350) (1,960) (1350) +1960 (3,310)
Reversal of Interest Income (1,000) 0 (1,000) +0 0
+1,000
Working capital adjustments
Inventories (15,000) (5,000) 30,000- -20,000
50,000
Trade Receivables (2,000) 2,000 18,000- 3,000
15,000
Trade Payables 2,000 2,000 8,000-9,000 1,000
40,300 16,000 56,300

Less: Advance Tax (15,000) (4,000) 15,000+4,000 (19,000)

25,300 12,000 37,300
II. Cash flows from investment

activities
Purchase of Property Plant Equipment (17,000) (5,000) (17,000)- (22,000)
5,000
Acquisition of subsidiary (36,000) 0 (36,000)+0 (36,000)
Interest Income 1,000 1,000-1,000 0
Dividend Income 1,680 1,680-1,680 0
(50,320) (5,000) (58,000)
III. Cash flow from financing activities
Dividend Payment (8,000) (2,400) (8,000)- (8,720)
2,400+1,680
Dividend distribution tax (1,350) (400) (1,350)-400 (1,750)
Interest payment (2,700) (1,000) (2,700)- (2,700)
1,000+1,000
(12,050) (3,800) (13,170)
Net Changes in Cash Flows (I+II+III) (37,070) 3,200 (33,870)
Balance of Cash and Cash Equivalents 38,000 1,000 38,000+1,000 39,000
as on 1.4.20X1
Balance of Cash and Cash Equivalents 930 4,200 5,130
as on 31.3.20X2
While preparing Consolidated Statement of Cash flows also intra-group transactions are
eliminated.
Schedule III Net assets i.e. total assets Amount Share in profit Amount
Disclosures minus total liabilities % of and loss % of
consolidated net assets consolidated
profit or loss
Parent 88.16 % 1,63,100 77.55 % 30,950
Subsidiary 11.84% 21,910 22.45 % 8,960

Minority 9.96 % 18,423 6.74 % 2,688

Interest
Total 1,85,010 39,910
Ind AS 112 Disclosures AOC I Disclosures

See Paragraphs 12(a)-(g) & B10-
B11
Name of the subsidiary Q ltd Name of the subsidiary Q ltd
Principal place of business Reporting period April 1-31 March
Proportion of ownership interest 30% Reporting Currency Indian Rupee
held by non-controlling interest
Proportion of voting right by non- 30% Share capital 10,000
controlling interest
Profit or loss of subsidiary 2,688 Reserve & Surplus 46,410
allocated to non-controlling
interest during the period
Accumulated non-controlling 18,423 Total assets 73,450
interest of the subsidiary
Summarized financial interest of Total liabilities 17,040
the subsidiary
Dividend paid to Non-controlling -720 Investment 1,250
interest
Non Current assets 46,250 Turnover (Gross Sales) 90,000
Current Assets 27,200 Profit before taxation 13,960
Noncurrent liabilities 12,930 Provision for tax 5,000
Current liabilities 4,110 Current tax 4,000
Revenue 80,000 Deferred tax 1,000
Expenses 1,98,090 Profit after tax 8,960
Profit or loss 39,910 Proposed Dividend 2,400
Other Comprehensive Income 250 % of shareholding 70%

Cash flows information:

Cash flow from operating 12,000
activities
Cash flow from Investment (5,000)
activities
Cash flow from financing (3,800)
activities
5.5.8 Reporting date

 The financial statements of the parent and its subsidiaries used in the preparation of the
consolidated financial statements shall have the same reporting date.
 When the end of the reporting period of the parent is different from that of a subsidiary, the
subsidiary prepares, for consolidation purposes, additional financial information as of the
same date as the financial statements of the parent to enable the parent to consolidate the
financial information of the subsidiary, unless it is impracticable to do so.
 If it is impracticable to do so, the parent shall consolidate the financial information of the
subsidiary using the most recent financial statements of the subsidiary adjusted for the
effects of significant transactions or events that occur between the date of those financial
statements and the date of the consolidated financial statements.
 In any case, the difference between the date of the subsidiary’s financial statements and that
of the consolidated financial statements shall be no more than three months, and the length
of the reporting periods and any difference between the dates of the financial statements
shall be the same from period to period.
5.5.9 Non–controlling interests
A parent shall present non-controlling interests in the consolidated balance sheet within equity,
separately from the equity of the owners of the parent.
Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of
the subsidiary are equity transactions (ie transactions with owners in their capacity as owners).
An entity shall attribute the profit or loss and each component of other comprehensive income to
the owners of the parent and to the non-controlling interests. The entity shall also attribute total
comprehensive income to the owners of the parent and to the non - controlling interests even if
this results in the non-controlling interests having a deficit balance.
If a subsidiary has outstanding cumulative preference shares that are classified as equity and are held
by non-controlling interests, the entity shall compute its share of profit or loss after adjusting for the
dividends on such shares, whether or not such dividends have been declared.

5.5.9.1 Changes in the proportion held by non-controlling interests:

When the proportion of the equity held by non-controlling interest changes, an entity shall adjust
the carrying amounts of the controlling and non-controlling interests to reflect the changes in their
relative interests in the subsidiary. The entity shall recognize directly in equity any difference
between the amount by which the non-controlling interests are adjusted and the fair value of the
consideration paid or received, and attribute it to the owners of the parent.
Illustration 20: Treatment of goodwill and non controlling interest where a parent holds an
indirect interest in a subsidiary.
A parent company (entity A) has an 80% owned subsidiary (entity B). Entity B makes an
acquisition for cash of a third company (entity C), which it then wholly owns. Goodwill of
` 1,00,000 arises on the acquisition of entity C.
How should that goodwill be reflected in consolidated financial statement of entity A? Should it
be reflected as:
a. 100% of the goodwill with 20% then being allocated to the non- controlling interest; or
b. 80% of the goodwill that arises?
Solution
Assuming that entity B prepares consolidated financial statements, 100% of the goodwill would
be recognized on the acquisition of entity C in those financial statements. Entity A should reflect
100% of goodwill and allocate 20% to the non- controlling interest in its consolidated financial
statements. This is because the non- controlling interest is a party to the transaction and the
goodwill forms part of the net assets of the sub group (in this case, the sub group being the group
headed by entity B).
Illustration 21: Sale of 20% interest in a wholly- owned subsidiary
Entity P sells a 20% interest in a wholly- owned subsidiary to outside investors for ` 100 lakh in cash.
The carrying value of the subsidiary’s net assets is ` 300 lakh, including goodwill of
` 65 lakh from the subsidiary’s initial acquisition.
Pass journal entries to record the transaction.
Solution
The accounting entry recorded on the disposition date for the 20% interest sold as follows:
` in lakh ` in lakh
Cash Dr. 100
To Non-controlling interest (20% * 300 lakh) 60
To Other Equity (Gain on sale of interest in subsidiary) 40

As per para B96 of Ind AS 110, where proportion of the equity of NCI changes, then group shall adjust
controlling and non-controlling interest and any difference between NCI (60 lakhs) is adjusted and fair
value of consideration received (100 lakhs) to be attributed to parent in other equity ie. 40 lakhs.
Illustration 22: Acquisition of 20% interest in a subsidiary

Entity A acquired 60% of entity B two years ago for ` 6,000. At the time entity B’s fair value
was ` 10,000. It had net assets with a fair value of ` 6,000 (which for the purposes of this
example was the same as book value). Goodwill of ` 2,400 was recorded (being ` 6,000 – (60%
* ` 6,000). On 1 October 20X0, entity A acquires a further 20% interest in entity B, taking its
holding to 80%. At that time the fair value of entity B is ` 20,000 and entity A pays ` 4,000 for
the 20% interest. At the time of the purchase the fair value of entity B’s net assets is ` 12,000
and the carrying amount of the non- controlling interest is ` 4,000.
Pass journal entries to record the transaction.
Solution
The accounting entry recorded for the purpose of the non- controlling interest is as follows:
` `
Non-controlling interest Dr. 2,000
Other Equity (Loss on acquisition of interest in subsidiary) Dr. 2,000
To Cash 4,000
controlling and non-controlling interest and any difference between NCI (` 2,000) is adjusted and fair
value of consideration received (` 4,000) to be attributed to parent in other equity ie. ` 2,000.
I llustration 23
A Ltd. acquired 10% additional shares of its 70% subsidiary. The following relevant informatio n
i s available in respect of the change in non-controlling interest on the basis of Balance shee t
f inalized as on 1.4. 20X0:
` in thousand
Separate financial statements As on 31.3.20X0
Investment in subsidiary (70% interest) – at cost 14,000
Purchase price for additional 10% interest 2,600
Consolidated financial statements
Non-controlling interest (30%) 6,600

Consolidated profit & loss account balance 2,000

Goodwill 600
The reporting date of the subsidiary and the parent is 31 March, 20X0. Prepare note showing
adjustment for change of non-controlling interest. Should goodwill be adjusted for the change?
Solution
The following accounting entries are passed:
` ’000 ` ’000
Other Equity (Loss on acquisition of interest in subsidiary) Dr. 400
Non-controlling interest Dr. 2,200
To Bank 2,600
controlling and non-controlling interest and any difference between NCI (` 22,00,000) is adjusted and
fair value of consideration received (` 26,00,000) to be attributed to parent in other equity ie. `
4,00,000.
Consolidated goodwill is not adjusted.
I llustration 24
A ltd. acquired 70% of shares of B ltd. On 1.4.20X0 when fair value of net assets of B Ltd. wa s
` 200 lakh. During 20X0-20X1, B ltd. made profit of ` 10 lakh. Individual and consolidate d
balance sheets as on 31.3. 20X1 are as follows:
(` in lakhs)
A B Group
Assets
Goodwill 10
PPE 627 200 827
Financial Assets:
Investments 150
Cash 200 30 230
Other Current Assets 23 70 93
1,000 300 1,160


Share Capital 200 100 200
Other Equity 800 200 870
Non-controlling interest 90
1,000 300 1,160
Notes:
Profit for the year 100
As on 1.4. 20X1
Purchase Consideration 150
30% Non-controlling Interest 60
210
Fair Value of net assets 200
Goodwill 10
Now A ltd. purchases another 10% stake in B ltd which 32
reduces non-controlling interest to 20%
Proportionate carrying amount of non-controlling 30
interest
A ltd. acquired another 10% stake in B ltd on 1.4. 20X1 at ` 32 lakh. The proportionate carryin
amount of the non-controlling interest is ` 30 lakh. Show the individual and consolidated balanc sheet g
of the group immediately after the change in non-controlling interest. e
Solution (` in lakhs)
A B Workings Group
Assets
Goodwill 10
PPE 627 200 827
Financial Assets:
Investments 182 0

Cash* 168 30 (200+30)-32 198

Other Current Assets 23 70 93
1,000 300 1,128
Share Capital 200 100 200
Other Equity 800 200 870-2 868
Non-controlling interest 90-30 60
1,000 300 1,128
Other Equity (Loss on acquisition of interest in subsidiary) Dr. 2
Non-controlling interest Dr. 30
To Bank 32
*Cash has been adjusted through Individual Balance Sheet.
5.5.10 Loss of control
A parent can lose control of subsidiaries in a number of ways. These include:
 Loss of control due to outright sale – where the entire stake is sold off;
 Loss of control due to partial sale – where the parent retains interest as an associate, jointly
controlled entity or a financial asset;
 Deemed loss of control where no consideration is received but the parent’s interest is diluted
in some other manner such as
 voting rights issued to a new investor;
 control on relevant activities;
 consolidation of voting rights of other shareholder’s;
 an investor acquiring substantial stake from the stock exchange.
 In addition to Ind AS 110, for Consolidated Balance Sheet, requirements of Ind AS 105, Non–
current Assets Held for Sale and Discontinued Operations should also be considered.
If a parent loses control of a subsidiary, the parent:
 derecognizes the assets and liabilities of the former subsidiary from the consolidated balance
sheet.
 recognizes any investment retained in the former subsidiary at its fair value when control is
lost and subsequently accounts for it and for any amounts owed by or to the former subsidiary

in accordance with relevant Ind ASs. That fair value shall be regarded as the fair value on
initial recognition of a financial asset in accordance with Ind AS 109 or, when appropriate,
the cost on initial recognition of an investment in an associate or joint venture.
 recognizes the gain or loss associated with the loss of control attributable to the former
controlling interest.
A parent might lose control of a subsidiary in two or more arrangements (transactions). However,
sometimes circumstances indicate that the multiple arrangements should be accounted for as a
single transaction. In determining whether to account for the arrangements as a single
transaction, a parent shall consider all the terms and conditions of the arrangements and their
economic effects. One or more of the following indicate that the parent should account for the
multiple arrangements as a single transaction:
 They are entered into at the same time or in contemplation of each other.
 They form a single transaction designed to achieve an overall commercial effect.
 The occurrence of one arrangement is dependent on the occurrence of at least one other
arrangement.
 One arrangement considered on its own is not economically justified, but it is economically
justified when considered together with other arrangements. An example is when a disposal
of shares is priced below market and is compensated for by a subsequent disposal priced
above market.
If a parent loses control of a subsidiary, it shall:
 derecognize:
 the assets (including any goodwill) and liabilities of the subsidiary at their carrying
amounts at the date when control is lost; and
 the carrying amount of any non-controlling interests in the former subsidiary at the date
when control is lost (including any components of other comprehensive income
attributable to them).
 recognize:
 the fair value of the consideration received, if any, from the transaction, event or
circumstances that resulted in the loss of control;
 if the transaction, event or circumstances that resulted in the loss of control involves a
distribution of shares of the subsidiary to owners in their capacity as owners, that
distribution; and
 any investment retained in the former subsidiary at its fair value at the date when control
is lost.

 reclassify to profit or loss, or transfer directly to retained earnings if required by other Ind
ASs, the amounts recognized in other comprehensive income in relation to the subsidiary on
the basis described in paragraph B99.
 recognize any resulting difference as a gain or loss in profit or loss attributable to the parent.
If a parent loses control of a subsidiary, the parent shall account for all amounts previously
recognized in other comprehensive income in relation to that subsidiary on the same basis as
would be required if the parent had directly disposed of the related assets or liabilities. Therefore,
if a gain or loss previously recognized in other comprehensive income would be reclassified to
profit or loss on the disposal of the related assets or liabilities, the parent shall reclassify the gain
or loss from equity to profit or loss (as a reclassification adjustment) when it loses control of the
subsidiary. If a revaluation surplus previously recognized in other comprehensive income would
be transferred directly to retained earnings on the disposal of the asset, the parent shall transfer
the revaluation surplus directly to retained earnings when it loses control of the subsidiary.
Illustration 25: Reduce interest in subsidiary
Amla Ltd. purchase a 100% subsidiary for ` 10,00,000 at the end of 20X1 when the fair value of
the subsidiary’s Lal Ltd. net asset was ` 8,00,000.
The parent sold 40% of its investment in the subsidiary in March 20X4 to outside investors for
` 9,00,000. The parent still maintains a 60% controlling interest in the subsidiary. The carrying value of
the subsidiary’s net assets is ` 18,00,000 (including net assets of ` 16,00,000 & goodwill of `
2,00,000).
Calculate gain or loss on sale of interest in subsidiary as on 31st March 20X4.
Solution
As per Ind AS 110, a change in ownership that does not result in a loss of control. The identifiable
net assets (including goodwill) remain unchanged and any difference between the amount by
which the non-controlling interest is recorded (including the non controlling interest portion of
goodwill) and a fair value of the consideration received is recognized directly in equity and
attributed to the controlling interest. For disposals that do not result in the loss of control, the
change in the non-controlling interest is recorded at its proportionate interest of the carrying value
of the subsidiary.
Gain on the sale of the investment of ` 5,00,000 in parent’s separate financial statements
calculated as follows: `’000
Sale proceeds 900
Less: cost on investment in subsidiary (` 10,00,000 X 40% ) (400)
Gain on sale in the parent’s separate financial statement 500
As discussed above, the group’s consolidated income statement for 31st March 20X4 would show no
gain on the sale of the interest in the subsidiary. Instead, the difference between the fair value

of the consideration received and the amount by which the non controlling interest is recorded is
recognized directly in equity.
`’000
Sale proceeds 900
Less: recognition of non controlling interest (` 18,00,000 X 40%) 720
Credit to other equity 180
The entry recognized in the consolidated accounts under Ind AS 110 is :
`’000 `’000
Cash Dr. 900
To Non controlling interest 720 (1,800 X 40%)
To Other Equity (Gain on sale of interest on subsidiary) 180
The difference between the gain in the parent’s income statement and the increase reported in
the group’s consolidated equity is ` 3,20,000. This difference represents the share of post
acquisition profits retained in the subsidiary ` 3,20,000 [(that is, 18,00,000 – 10,00,000) X 40%]
that have been reported in the groups income statement upto the date of sale.
The non-controlling interest immediately after the disposal will be 40% of the net carrying value
of the subsidiary’s net assets including goodwill in the consolidated balance sheet of ` 18,00,000,
that is, ` 7,20,000.
Illustration 26: Subsidiary issues shares to a third party and parent loses control
In March 20X1 a group had a 60% interest in subsidiary with share capital of 50,000 ordinary shares.
The carrying amount of goodwill is ` 20,000 at March 20X1 calculated using the partial goodwill
method. On 31 March 20X1, an option held by the minority shareholders exercised the option to
subscribe for a further 25,000 ordinary shares in the subsidiary at ` 12 per share, raising
` 3,00,000. The net assets of the subsidiary in the consolidated balance sheet prior to the option’s
exercise were ` 4,50,000, excluding goodwill.
Calculate gain or loss on loss of interest in subsidiary due to option exercised by minority shareholder.
Solution
Shareholdings
Before After
No % No %
Group 30,000 60 30,000 40
Other party 20,000 40 45,000 60
50,000 100 75,000 100

Net assets `’000 % `’000 %

Group’s share 270 60 300 40
Other party’s share 180 40450 60
450 100 750 100
Calculation of group gain on deemed disposal `’000
Fair value of 40% interest retained (`12 X 30,000)** 360
Less:
Net assets derecognized (450)
Non-controlling interest derecognized 180
Goodwill (20)
Gain on deemed disposal 70
**Note: For simplicity, it has been assumed the fair value per share is equal to the subscription price.
As control of the subsidiary is lost, the retained interest is recognized at its fair value at the date control
is lost. The resulting remeasurement gain is recognized in profit and loss.
Illustration 27: Calculation of gain on outright sale of subsidiary
A parent purchased an 80% interest in a subsidiary for ` 1,60,000 on 1 April 20X1 when the fair
value of the subsidiary’s net assets was ` 1,75,000. Goodwill of ` 20,000 arose on consolidation
under the partial goodwill method. An impairment of goodwill of ` 8,000 was charged in the
consolidated financial statements to 31 March 20X3. No other impairment charges have been
recorded. The parent sold its investment in the subsidiary on 31 March 20X4 for ` 2,00,000. The
book value of the subsidiary’s net assets in the consolidated financial statements on the date of
the sale was ` 2,25,000 (not including goodwill of ` 12,000). When the subsidiary met the criteria
to be classified as held for sale under Ind AS 105, no write down was required because the
expected fair value less cost to sell (of 100% of the subsidiary) was greater than the carrying
value.
The parent carried the investment in the subsidiary at cost, as permitted by Ind AS 27.
Calculate gain or loss on disposal of subsidiary in parent’s separate and consolidated financial
statements as on 31st March 20X4.

Solution
The parent’s separate statement of profit and loss for 20X3-20X4 would show a gain on the sale
of investment of ` 40,000 calculated as follow:
` ‘000
Sale proceeds 200
Less: Cost of investment in subsidiary (160)
Gain on sale in parent’s account 40
However, the group’s statement of profit & loss for 20X3-20X4 would show a gain on the sale of
subsidiary of ` 8,000 calculated as follows:
`’000
Sale proceeds 200
Less: share of net assets at date of disposal (` 2,25,000 X 80%) (180)
Goodwill on consolidation at date of sale (W.N 1) (12) (192)
Gain on sale in the group’s account 8
Working Note
The goodwill on consolidation (assuming partial goodwill method) is calculated as follows:
`’000
Fair value of consideration at the date of acquisition 160
Non- controlling interest measured at proportionate share of the
acquiree’s identifiable net assets (1,75,000 X 20%) 35
Less: fair value of net assets of subsidiary at date of acquisition (175) (140)
Goodwill arising on consolidation 20
Impairment at 31 March 20X3 (8)
Goodwill at 31 March 20X4 12
Illustration 28: Partial disposal where subsidiary becomes an associate
AT Ltd. purchased a 100% subsidiary for ` 50,00,000 on 31st March 20X1 when the fair value of
the BT Ltd. whose net assets was ` 40,00,000. Therefore, goodwill is `10,00,000. The AT Ltd.
sold 60% of its investment in BT Ltd. on 31st March 20X3 for ` 67,50,000, leaving the AT Ltd. with
40% and significant influence. At the date of disposal, the carrying value of net assets of BT Ltd.,
excluding goodwill is ` 80,00,000. Assume the fair value of the investment in associate BT Ltd.
retained is proportionate to the fair value of the 60% sold, that is ` 45,00,000.
Calculate gain or loss on sale of proportion of BT Ltd. in AT Ltd’s separate and consolidated financial

Solution
AT Ltd.’s statement for profit or loss of 20X2-20X3 would show a gain on the sale of investment
of ` 37,50,000 calculated as follows:
`’ lakhs
Sale proceeds 67.5
Less: cost on investment in subsidiary (` 50,00,000 X 60%) (30.0)
Gain on sale in the parent’s financial statement 37.5
In the consolidated financial statements, the group will calculate the gain or loss on disposal
differently. The carrying amount of all of the assets including goodwill is derecognized when
control is lost. This is compared to the proceeds received and the fair value of the investment
retained.
The gain on the disposal will, therefore, be calculated as follows:
`’ lakhs
Sale proceeds 67.5
Fair value of 40% interest retained 45.0
112.5
Less: Net assets disposed, including goodwill (80,00,000+ 10,00,000) (90.0)
Gain on sale in the group’s financial statements 22.5
The gain on loss of control would be recorded in profit or loss. The gain or loss includes the gain
of ` 13,50,000 [` 67,50,000 – (` 90,00,000 X 60%)] on the portion sold. However, it also includes
a gain on remeasurement of the 40% retained interest of ` 9,00,000 (` 36,00,000* to
` 45,00,000). The entity will need to disclose the portion of the gain that is attributable to
remeasuring any remaining interest to fair value, that is, ` 9,00,000.
* 90,00,000x 40%= 36,00,000
Illustration 29: Partial disposal where 10% investment in former subsidiary is retained.
The facts of this example as same as example 31, except that the group AT Ltd. disposes of a
90% interest for ` 85,50,000, leaving the AT Ltd. with a 10% investment. The fair value of the
remaining interest is ` 9,50,000 (assumed for simplicity to be pro rata to the fair value of the 90%
sold).
Calculate gain or loss on sale of proportion of BT Ltd. in AT Ltd.’s separate and consolidated financial

Solution
The parent’s AT Ltd. income statement in its separate financial statements for 20X1 would show
a gain on the sale of the investment of ` 40,50,000 calculated as follows:
` in lakhs
Sale proceeds 85.5
Less: cost on investment in subsidiary (` 50,00,000 X 90%) (45.0)
Gain on sale in the parent’s financial statement 40.5
In the consolidated financial statements, all of the assets, including goodwill are derecognized
when control is lost. This is compared to the proceeds received and the fair value of the investment
retained.
` in lakhs
Sale proceeds 85.5
Fair value of 10% interest retained 9.5
95.0
Less: Net assets disposed, including goodwill (80,00,000+ 10,00,000) (90.0)
Gain on sale in the group’s financial statements 5.0
The gain on loss of control would be recorded in profit or loss. The gain or loss includes the gain
of ` 4,50,000 related to the 90% portion sold [ ` 85,50,000 – (` 90,00,000 X 90%)] as well as
` 50,000 related to the remeasurement to fair value of 10% retained interest (` 9,00,000 to
` 9,50,000)

UNIT 6 :
JOINT ARRANGEMENTS
6.1 INTRODUCTION
Ind AS 111, Joint Arrangements, describes principles for financial reporting by parties to a joint
agreement. It is important for the management to understand the scope, impact and requirements
for presentation of financial statement and balance sheet in case of any kind of joint arrangements.
It has been observed that some agreements are called as ‘joint arrangements’ or ‘joint ventures’
but in reality, only one party has control. On the other hand, some arrangements are not referred
as ‘joint arrangement’ or ‘joint control’, but may still be treated as joint arrangements, as defined
by Ind AS 111. Hence the terminology used is not important to describe the arrangement. Here
the management needs to carefully evaluate the terms and conditions based on which the
arrangement is set up, and the relevant facts and circumstances, and thereby determine if it is
eligible to be called as a joint arrangement. The accounting treatment will be decided based on
the substance of the arrangement and the kind of interest investors have in it.
6.2 SCOPE
It covers all the entities that are party to a joint arrangement including venture capital organisations,
mutual funds, unit trusts, investment-linked insurance funds and similar entities.
6.3 CONCEPT OF JOINT CONTROL

Two or more parties are said to be in joint arrangement only when there is joint control. It
requires that all the decisions about the relevant activities are being taken unanimously by the
parties sharing control.
1. Collective control: - Here, no single party enjoys full control. Here it is important to assess
whether the contract gives all the parties or a group of parties, control of the arrangement.
For this we first need to identify the relevant activities of the arrangement. This can be done
by understanding the purpose of the arrangement and risk and returns involved in the
activities. The activities which significantly affect the returns or the outcome of the
arrangements can be determined as relevant activities. Then management needs to check
whether all parties or group of parties are having collective control over these activities.
2. Unanimous decision: - There has to be unanimous consent of all the parties having joint
control on the decisions for the arrangement. The requirement for unanimous consent means
that any party with joint control of the arrangement can prevent any of the other parties, or a

group of the parties, from making unilateral decisions (about the relevant activities) without
its consent. Hence there is no single party that controls the arrangement.
There may be cases where the contract necessitates a minimum percentage of the voting rights to
make decisions about the relevant activities. If that minimum required proportion of the voting
rights can be achieved by more than one combination of the parties agreeing together, that
arrangement is not a joint arrangement unless the contractual arrangement specifies which parties
(or combination of parties) are required to agree unanimously to take decisions about the relevant
activities of the arrangement.
Illustration 1
Two parties A & B agree in their contractual arrangement to establish an arrangement. Each has
50% of the voting rights. The contract specifies that at least 51% of the voting rights are required
to make decisions with respect to the relevant activities. Do A & B have joint control over the
arrangement?
Solution
A & B have implicitly agreed that they have joint control of the arrangement as all the relevant decisions
can be made only when both the A & B agree.
Illustration 2
There is an arrangement in which Ram and Shyam each have 35% of the voting rights in the
arrangement with the remaining 30% being widely dispersed. Decisions about the relevant
activities require approval by a majority of the voting rights. Do Ram & Shyam have joint control
over the arrangement?
Solution
Ram and Shyam have joint control of the arrangement only if the contractual arrangement
specifies that decisions about the relevant activities of the arrangement require both Ram and
Shyam agreeing.
Illustration 3
An arrangement has three parties: Om has 50% of the voting rights in the arrangement and Jay
and Jagdish each have 25%. The contractual arrangement between Om, Jay and Jagdish
specifies that at least 75% of the voting rights are required to make decisions about the relevant
activities of the arrangement. Discuss the different combinations of joint control that can affect
the decision making of the relevant activities of the arrangement?
Solution
Om can block any decision, it does not control the arrangement because it needs the agreement
of either Jay or Jagdish. Om, Jay and Jagdish collectively control the arrangement. However,
there is more than one combination of parties that can agree to reach 75% of the voting rights (ie

either Om and Jay or Om and Jagdish). In such a situation, to be a joint arrangement the
contractual arrangement between the parties would need to specify which combination of the
parties is required to agree unanimously to take decisions about the relevant activities of the
arrangement.
Illustration 4
Hari and Ram enter into a contractual arrangement to buy a two storied music store, which they
will lease to other parties. Hari will be responsible for leasing first floor and Ram will be
responsible for leasing second floor. They can make all decisions related to their respective floors
and keep all of the income with respect to their floors. Ground floor will be jointly managed — all
decisions and with respect to ground floor must be unanimously agreed between Hari and Ram.
Discuss the applicability of Ind AS 111.
Solution
There are three arrangements:
1. First floor that Hari controls and hence will not be accounted under Ind AS 111.
2. Second floor that Ram controls and thus will not be accounted under Ind AS 111.
3. Ground floors that Hari and Ram jointly control is a joint arrangement (within the scope of
Ind AS 111).
Illustration 5
Company AB and Company CD enter into an agreement for the production and sale of garments.
In the industry, there are three activities that will significantly make impact on the returns of the
arrangement:
1. Production of the garments — Company AB makes all the decisions for this activity
2. Sales and Marketing activities — Company CD is makes all the decisions for these activities
3. Both the companies must approve all financial related matters
Discuss whether company AB and CD have joint control over the arrangement?
Solution
In first two matters, unanimous consent is not required as long as parties are working within the
approved budgets and financial constraints. Thus, the parties have liberty to perform their respective
responsibilities.
Here, the parties have to examine which of the three activities most significantly affect the returns
of the arrangement. If any of the first two activities determine the profits of the arrangement
significantly, there is no joint control over the arrangement.
However, there may be the case where the financial policies majorly impact the execution of other

two activities and hence determine the profit of the arrangement. Since unanimous consent is required
for financial policies, management may conclude that there is joint control.
Agreements established by informal decisions
Illustration 6
CDEF limited is a strategic co-operation between investors C, D, E and F to provide property
development services. CDEF Limited is an incorporated entity, and the investors’ share ownership
is 20:30:25:25 respectively. There is a formal contractual agreement in place that requires a
voting majority on all relevant activities. Investors C, D and E have informally agreed to vote
together. This informal agreement has been effective in practice.
Does C, D & E have control over the joint arrangement?
Solution
To make decisions, it is sufficient to have agreement from any three out of the four investors. In
this case, a single investor cannot prevent a majority decision. However, three of the investors
have agreed to make unanimous decisions. Investors C, D and E, therefore, have joint control
over CDEF Limited, with investor F having significant influence at best. The agreement between
investors C, D and E does not have to be formally documented as long as there is evidence of its
existence (for example, via correspondence and minutes of meetings).

6.4 FEATURES OF JOINT ARRANGEMENTS

Sometimes ventures are named as joint arrangement but one party has control over the activities
of the entity. In such cases the Ind AS – 111 will not apply. On the other hand, there may be
arrangements which are not referred as joint arrangements but still complies with the requirement
of the Standard and hence follow the guidelines.
A joint arrangement is an arrangement where two or more parties have joint control over an entity under
the contractual agreement. The two key characteristics are
6.4.1 Contractual Arrangement
Normally, there is a written contract that binds the parties. It outlines the terms and conditions based
on which the parties will contribute in the arrangement. Most of the times each contractual agreement
creates a single joint agreement. However, there may be cases where one master agreement
creates several separate joint agreements. The contract, generally, includes matters such as
a. Purpose of the arrangement
b. Duration of the arrangement
c. Scope of activities
d. How the members of the governing body shall be appointed
e. Contribution of capital by the parties
f. Sharing of assets, liabilities, revenues, expenses, profits or losses.
6.4.2 Joint Control
The control is shared when all the parties involved in the arrangement, considered collectively,
can make the relevant decisions of the arrangement.
Illustration 7
Shareholders C and D form a new joint arrangement (entity CD). Entity CD’s article of association
including a clause stating that all shareholders must unanimously agree on the entity’s relevant
activities. The shareholders have not entered into any other agreement to manage the activities
of entity CD. Determine whether clause in CD’s articles of association is sufficient to meet the
definition of joint arrangement?
Solution
Entity CD meets the definition of a joint arrangement even though there is no separate joint venture
agreement. The clause in entity CD’s articles of association is sufficient for meeting the definition
of a joint arrangement, provided entity CD’s articles of association are legally binding.

Illustration 8: Impact of managing an arrangement

ECL Limited has a wholly owned subsidiary, entity B, that holds a portfolio of buildings.
ECL Limited wishes to reduce its exposure to this market. It sells 50% of its investment in entity
B to Investment Bank. ECL Limited and Investment Bank enter into a contractual agreement,
whereby decisions regarding entity B’s relevant activities are made jointly. ECL Limited continues
to act as asset manager of entity B for a specified fee, and decisions are made in line with the
entity B’s pre- approved budgets and business plan. Is entity B jointly controlled?
Solution
Entity B is jointly controlled, as ECL Limited and investment bank are required to agree unanimously on
relevant activities, and ECL Limited must manage the entity’s operations in line with these decisions.
Solution
Illustration 9: Chairman with casting vote
M Limited and N Limited set up a joint venture company, MN Limited, by signing a joint operating
agreement. Both investors delegate three directors each to entity MN’s board of directors.
Decisions are made by simple majority. In the event of a deadlock, the chairman (a director of
N Limited) has the casting vote. Does N Limited has control over MN Limited?
It is likely that N Limited has control over MN Limited, as decisions made on behalf of N Limited cannot
be prevented by M Limited.
Once it is established that there is a Joint Arrangement, it is required to classify whether the
arrangement is joint venture or joint operation.
6.5 TYPES OF JOINT ARRANGEMENTS

6.5.1 Joint Operations
In case of joint operations, each party (known as “Joint Operators”) recognizes its share of assets,
liabilities, revenues and expenses of the joint arrangement. Here the contract determines the
share of each joint operator based on rights and obligations of each party. The joint operator shall
then apply the corresponding IND ASs to the particular asset, liability, revenue and expenses.
It covers all the arrangements that are not structured through separately identifiable financial
structure, including separate legal entities (“Separate Vehicle”).
For example, two parties may decide to enter into a joint arrangement to manufacture stationery
products. Each party has its own set of activities using its own assets. In the process each party
will incur its own liabilities. The contract will define the method of sharing the revenues and
expenses. Therefore, each joint operator shall record the assets and liabilities used in the
arrangement, and recognises its share of the revenues and expenses in accordance with the
contractual specifications.

However, Joint operations may also include some joint arrangements which are not structured through
separate vehicle depending its structure, the terms of the contractual arrangement; and other facts and
circumstances.
Illustration 10 : Joint Operation
Three separate aerospace companies form an alliance to jointly manufacture an aircraft. They
carry responsibility for different areas of expertise such as :
 Manufacturing engines
 Manufacturing fuselage and wings; and
 Aerodynamics
They carry out different parts of the manufacturing process, each using its own resources and
expertise in order to manufacture, market and distribute the aircraft jointly. The three entities
share the revenues from the sale of aircraft and jointly incur expenses. The revenues and common
costs are shared, as agreed in the consortium contract.
Parties also incur their own separate costs such as labour costs, manufacturing costs, supplies,
inventory of unused parts and work in progress. Each party recognizes its separately incurred
costs in full. Would the arrangement be classified as joint operation?
Solution
This arrangement is classified as a joint operation because:
 The arrangement is not structured through a separate vehicle;
 Each party has obligations for the costs it incurs separately; and
 The contractual agreement outlines that each party is entitled to a share of revenue and
associated costs from the sale of aircrafts based on the pre-determined agreement.
6.5.2 Joint Ventures
In a joint venture, each party (known as “Joint Venturer”) recognizes its interest in a joint venture
as an investment. The investment is accounted for using the equity method in accordance with
Ind AS 28, Investments in Associates and Joint Ventures, unless the entity is exempted from
applying the equity method as specified in that standard.
6.6 CLASSIFICATION OF JOINT ARRANGEMENTS

As stated above, all the joint arrangements which are not structured through separate vehicle are Joint
operations.
Further, the arrangements which are structured through separate vehicle can be classified as Joint
operation or Joint venture depending on the following

6.6.1 Structure of the Joint Arrangement

Structure or the legal form of the joint arrangement is important in assessing the type of joint
arrangement. It determines the initial assessment of parties’ rights to the assets and obligations
for the liabilities held in the separate vehicle. The legal form specifies whether the parties have
interests in the assets held in the separate vehicle and whether they are liable for the liabilities
held in the separate vehicle.
For Example, two parties may conduct a joint arrangement where the assets and liabilities of the
separate vehicle are not individually controlled by the parties. Assets and liabilities so held are
the assets and liabilities of the separate vehicle. Hence it will be a Joint venture.
If the parties have right to individual assets and obligation for liabilities, then it will be a joint operation.
Illustration 11
Two parties structure a joint arrangement in an incorporated entity. Each party has a 50 per cent
ownership interest in the incorporated entity. The incorporation enables the separation of the
entity from its owners and as a consequence the assets and liabilities held in the entity are the
assets and liabilities of the incorporated entity.
(i) Identify the type of arrangement?
(ii) If the parties modify the features of corporation though a contractual arrangement such that
each has an interest in assets and each is liable for liabilities what type of joint arrangement
would that be?
Solution
(i) On assessment of the rights and obligations conferred upon the parties by the legal form of
the separate vehicle indicates that the parties have rights to the net assets of the
arrangement. In this case it would be classified as joint venture.
(ii) If the parties modify the features of the corporation through their contractual arrangement so
that each has an interest in the assets of the incorporated entity and each is liable for the
liabilities of the incorporated entity in a specified proportion. Such contractual modifications
to the features of a corporation can cause an arrangement to be a joint operation.
Illustration 12: Legal form may not provide separation
Entities B and C form a partnership to own and operate a crude oil refinery. Each party has a
50% interest in the net profits of the partnership. What considerations would the management
have to consider in classifying the arrangement as joint venture or joint arrangement?

Solution
The joint arrangement is structured through a vehicle, and the venture parties each have a 50%
interest in the net profits of the partnership; so this appears to be a joint venture. However,
management needs to evaluate whether the partnership creates separation, that is simply are the
assets and liabilities those of the separate vehicle or do the parties have direct rights to the assets
and have direct obligations for the liabilities held by the entity . Should the parties to the
partnership have a direct interest in the assets and liabilities, this would indicate a joint operation.
Management should therefore, evaluate the terms of the partnership agreement to assess the
rights and obligations of each party.
6.6.2 Assessing the terms of the contractual arrangement
It is essential to understand the terms of the contractual arrangement in order to classify the joint
arrangement. The pertinent questions, to be analysed from the contract, are
a. Do the parties have rights to assets and obligation to liabilities of the joint arrangements?
b. Do the parties share all interests (e.g. rights, title or ownership) in the assets relating to the
arrangement in a specified proportion?
c. Do parties share all liabilities, obligations, costs and expenses in a specified proportion?
d. Does the allocation of revenue and expenses are agreed on the basis of the relative
performance of each party to the joint arrangement?
If the answer to the above questions is ‘yes’, then the arrangement shall be classified as joint
operation. However where the parties are sharing net assets in the joint arrangement, the
arrangement shall be treated as joint venture.
Illustration 13: Joint Construction and use of a pipeline
Two parties, W and F form a limited company to build and use a pipeline to transport gas. Each
party has a 50% interest in the company. Under their contractual terms, entities W and F must
each use 50% of the pipeline capacity; unused capacity is charged at the same price as used
capacity. Entities W and F can sell their share of the capacity to a third party without consent from
both investors. The Price entities W and F pay for the gas transport is determined in a way that
ensures all costs incurred by the company can be recovered. The Joint arrangement is structured
through a separate vehicle. Each party has a 50% interest in the company. However, the
contractual terms require a specific level of usage by each party and, because of the pricing
structure, and the entities have an obligation for the company’s liabilities. What type of joint
arrangement the company might be?
Solution
This entity might be a joint operation despite its legal form.

6.6.3 Assessing other facts and circumstances

When the terms of the contractual arrangement do not specify that the parties have rights to the assets,
and obligations for the liabilities, relating to the arrangement, the parties shall consider other facts and
circumstances to assess whether the arrangement is a joint operation or a joint venture.
It will then be worthwhile to consider whether the activities of the arrangement primarily aim to
provide parties with an output. This indicates that parties shall have rights to all the benefits of
the assets of the arrangement. The parties will make sure that the output is not sold to the third
parties but used by them only. Such are joint operations.
Illustration 14
Two parties structure a joint arrangement in an incorporated entity (entity D) in which each party
has a 50 per cent ownership interest. The purpose of the arrangement is to manufacture materials
required by the parties for their own, individual manufacturing processes. The arrangement
ensures that the parties operate the facility that produces the materials to the quantity and quality
specifications of the parties. The legal form of entity D (an incorporated entity) through which the
activities are conducted initially indicates that the assets and liabilities held in entity D are the
assets and liabilities of entity D. The contractual arrangement between the parties does not
specify that the parties have rights to the assets or obligations for the liabilities of entity D.
(i) What type of joint arrangement would entity D be?
(ii) Would your classification change if the parties instead of using the share of output
themselves sold to third parties?
(iii) If the parties changed the terms of contractual arrangement such that entity D would be able
to sell the output to third parties, would your answer be the same as in part (i) above?
Solution
(i) The legal form of entity D and the terms of the contractual arrangement indicate that the
arrangement is a joint venture.
However, the parties also consider the following aspects of the arrangement:
 The parties agreed to purchase all the output produced by entity D in a ratio of 50 : 50.
Entity D cannot sell any of the output to third parties, unless this is approved by the two
parties to the arrangement. Because the purpose of the arrangement is to provide the
parties with output they require, such sales to third parties are expected to be
uncommon and not material.
 The price of the output sold to the parties is set by both parties at a level that is designed
to cover the costs of production and administrative expenses incurred by entity D. On
the basis of this operating model, the arrangement is intended to operate at a break-
even level.

From the fact pattern above, the following facts and circumstances are relevant:
 The obligation of the parties to purchase all the output produced by entity D reflects the
exclusive dependence of entity D upon the parties for the generation of cash flows and,
thus, the parties have an obligation to fund the settlement of the liabilities of entity D.
 The fact that the parties have rights to all the output produced by entity D means that
the parties are consuming, and therefore have rights to, all the economic benefits of the
assets of entity D.
These facts and circumstances indicate that the arrangement is a joint operation.
(ii) The conclusion about the classification of the joint arrangement in these circumstances would
not change if, instead of the parties using their share of the output themselves in subsequent
manufacturing process, the parties sold their share of the output to third parties.
(iii) If the parties changed the terms of the contractual arrangement so that the arrangement was
able to sell output to third parties, this would result in entity D assuming demand, inventory
and credit risks. In that scenario, such a change in the facts and circumstances would require
reassessment of the classification of the joint arrangement. Such facts and circumstances
would indicate that the arrangement is a joint venture.
Conditions Yes No
Structure of Does the legal form give If yes, the joint If no, obtain more
the joint the parties rights to the arrangement is information.
arrangement assets and obligations for concluded to be a
the liabilities relating to the joint operation
arrangement?
Assessing the Do the terms of the If yes, the joint If no, obtain more
terms of the Contractual arrangement arrangement is information.
contractual specify that the parties concluded to be a
arrangement have rights to the assets joint operation
and obligations for the
liabilities relating to the
arrangement?
Assessing other Does the arrangement so If yes, the joint If no, the joint
facts and designed that its activities arrangement is arrangement is a
circumstances mainly provide the parties concluded to be a joint venture.
with an output and so that joint operation.
it depends on the parties on
a regular basis for settling
the liabilities of the
arrangement?

6.7 FINANCIAL STATEMENT OF PARTIES TO A JOINT

ARRANGEMENT
6.7.1 Joint Operations
It is important for the joint operators to understand and analyse their joint arrangements in detail. Joint
operators must ensure that they are aware of all the rights and obligations therein, and the proportion in
which they are shared amongst the parties.
For joint operations, a joint operator accounts for the following in accordance with the applicable Ind
AS:
I. Its assets, including its share of any assets held jointly

II. Its liabilities, including its share of any liabilities incurred jointly
III. Its revenue from the sale of its share of the output arising from the joint operation
IV. Its share of revenue from the sale of the output by the joint operation
V. Its expenses, including its share of any expenses incurred jointly
Illustration 15
P and Q form a joint arrangement PQ using a separate vehicle. P and Q each own 50% of the
Capital in PQ. However, the contractual terms of the joint arrangement state that P has the rights
to all of Machinery and the obligation to pay Bank Loan in Q. P and Q have rights to all other
assets in PQ, and obligations for all other liabilities in PQ in proportion to their capital share (i.e.,
50%).
PQ’s balance sheet is as follows: (in `)
What would you record in P’s financial statements to account for its rights and obligations in PQ? Note:
P is not exposed to any variable returns in Q.
Solution
Under Ind AS 111, we would record the following in its financial statements, to account for its
rights to the assets in PQ and its obligations for the liabilities in PQ. This may differ from the
amounts recorded using proportionate consolidation.
Machinery 250,000
Cash 25,000
Capital 75,000
Bank Loan 75,000
Other Loan 32,500
6.7.2 Joint Venture

A joint venturer shall recognise its interest in a joint venture as an investment and shall account
for that investment using the equity method in accordance with Ind AS 28, Investments in

Associates and Joint Ventures, unless the entity is exempted from applying the equity method as
specified in that standard.
A party that participates in, but does not have joint control of, a joint venture shall account for its interest
in the arrangement in accordance with Ind AS 109, Financial Instruments, unless it has significant
influence over the joint venture, in which case it shall account for it in accordance with Ind AS 28.
Illustration 16: Implicit Joint control

Entity C and entity D operates in a telecommunication industry and entered into a joint
arrangement in order to combine their 4G access networks. The purpose of this arrangement is
to reduce operating cost for both parties, make capital infrastructure savings and obtain
economies of scale from jointly managing and maintaining a consolidated network.
All significant decisions about strategic investing and financing activities are decided by a simple
majority of the voting rights. Entity C and entity D each have one vote in the decision making process.
Discuss whether it is a joint arrangement or not.
Solution
All decisions about the relevant activities require consent of both parties, so the arrangement is a
joint arrangement. The contractual arrangement does not explicitly require unanimous consent,
but the fact that all decisions must be made by majority leads to implicit joint control.
Illustration 17: Implicit joint control
NFG Limited is owned by numerous shareholders with the following holdings:
 Shareholders N owns 51%
 Shareholders F owns 30%
 The rest of the shares are widely held by other investors, altogether 19%.
NFG Limited’s articles of association require a 75% majority to approve decisions about any of
the entity’s relevant activities. They also outline that each shareholder is entitled to vote in
proportion to its respective ownership interest. Is NFG ltd jointly controlled?
Solution
NFG Limited is jointly controlled by shareholders N and F. based on their ownership interest
(collectively 81%), they must act together to make decisions regarding NFG Limited’s relevant activities.
Shareholder N does not control NFG Limited, as it cannot unilaterally make decisions because a 75%
majority is required.

Illustration 18: Equal number of directors

Two entities, E and F, set up an entity and sign a joint operating agreement. The board is
comprised of three directors appointed by and representing each entity. The board is the entity’s
main decision-making body. Decisions are made by simple majority. Each party has a 50%
interest in the net profit generated. Discuss whether the entity is jointly controlled by E & F.
Solution
Entities E and F are likely to have joint control, because each party has a 50% interest in net profit
and both have a right to appoint three directors. This is because the three directors representing
a single shareholder would generally be presumed to vote in accordance with the wishes of that
shareholder. So the consent of both entity E and entity F would be required for decision making,
and this would represent joint control.
However, if the directors are not obliged to represent one shareholder, decisions will be made by
simple majority. It is possible that (say) one director of shareholder E agrees with three directors
of shareholder F and takes a decision that is against the interest of shareholder E. Although this
is expected to be unlikely in practice, such a situation would not represent joint control.
All relevant facts have to be considered before reaching such a conclusion.
Illustration 19: Board of directors and operating committee
Entities P and Q set up a joint venture company, entity PQ by signing a joint operating agreement.
Both investors delegate one director to entity PQ’s board of directors. Both directors have to agree
unanimously on the decisions on the annual budget. The joint operating agreement also sets up
an operating committee and specifies power delegated by the board of directors to the committee.
The operating committee has the main operational decision-making responsibility. Decisions are
made by simple majority in this committee. Only entity P can appoint members to the operating
committee.
Discuss if Entity PQ is a joint arrangement or not.
Solution
Entity PQ is not a joint arrangement; entity P has control over entity PQ. Decisions about relevant
activities are not made at the board of directors level but at the operating committee level. Entity
P has control over the operating committee because it can appoint its members. The fact that the
directors have veto rights over the annual budget is important, but the operating committee in this
example has the power to control entity PQ’s relevant activities.

UNIT 7 :
INVESTMENT IN ASSOCIATES & JOINT VENTURES
7.1 INTRODUCTION
Ind AS 28, Investments in Associates and Joint Ventures,
a) prescribes the accounting for investments in associates and
b) sets out the requirements for the application of the equity method when accounting for
investments in associates and joint ventures.
It is important to note here that Ind AS 111, describes joint arrangements including joint ventures
and prescribes equity method for joint ventures. But here, in Ind AS 28, the equity method is
described for both Associate and Joint Ventures.
7.2 SCOPE
This Standard shall be applied by all entities that are investors with joint control of, or significant
influence over, an investee.
7.3 SIGNIFICANT INFLUENCE

The concept of ‘significant influence’ signifies the close relationship between two entities where
one has the power to influence the decision making in the other entity. In today’s business world,
many companies do not have actual control over other companies but hold significant ownership
to influence the decision making in such companies. Many such investments are in the form of
joint ventures in which two or more companies form a new entity to carry out a specified operating
purpose.
For example, Microsoft and NBC formed MSNBC, a cable channel and online site to go with NBC’s
broadcast network. Each partner owns 50 percent of the joint venture. For each of these
investments, the investors do not possess absolute control because they hold less than a majority
of the voting stock. Thus, the preparation of consolidated financial statements is inappropriate.
However, the large percentage of ownership indicates that each investor possesses some ability to
affect the investee’s decision-making process.
Definition
Significant influence is the power to participate in the financial and operating policy decisions of
the investee but is not control or joint control of those policies.

Analysis
 HOLDING 20% OR MORE OF THE VOTING RIGHTS: If an entity holds, directly or indirectly
(eg through subsidiaries), 20 per cent or more of the voting power of the investee, it is
presumed that the entity has significant influence, unless it can be clearly demonstrated that
this is not the case.
 HOLDING LESS THAN 20% OF VOTING RIGHTS: Also, in cases where the entity holds,
directly or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of
the investee, it is presumed that the entity does not have significant influence, unless such
influence can be clearly demonstrated.
Illustration 1
X Ltd. owns 20 % of the voting rights in Y Ltd. and is entitled to appoint one director to the board,
which consist of five members. The remaining 80% of the voting rights are held by two entities,
each of which is entitled to appoint two directors.
A quorum of four directors and a majority of those present are required to make decisions. The
other shareholders frequently call board meeting at the short notice and make decisions in the
absence of X Ltd’s representative. X Ltd has requested financial information from Y Ltd, but this
information has not been provided. X Ltd’s representative has attended board meetings, but
suggestions for items to be included on the agenda have been ignored and the other directors
oppose any suggestions made by X Ltd. Is Y Ltd an associate of X Ltd.?
Solution
Despite the fact that the X Ltd owns 20% of the voting rights and has representations on the board,
the existence of other shareholders holding a significant proportion of the voting rights prevent
X Ltd. from exerting significant influence. Whilst it appears that X Ltd should have the power to
participate in the financial and operating policy decision, the other shareholders prevent X Ltd.’s
efforts and stop X Ltd from actually having any influence.
Since, significant influence requires participation in decision making process which X Ltd. has.
Therefore, X Ltd. has significant influence over Y Ltd. Hence, Y Ltd would be an associate of X
Ltd. Y Ltd. is jointly controlled by the other two entities.
Whether an investor has significant influence over the investee is a matter of judgment based on
the nature of the relationship between the investor and the investee. Existence of significant
influence may be judged by the following factors:
a) Representation on the board of directors or equivalent governing body of the investee;
Illustration 2
Kuku Ltd. holds 12% of the voting shares in Boho Ltd. Boho Ltd.’s board comprise of eight
members and two of these members are appointed by Kuku Ltd. Each board member has
one vote at meeting. Is Boho Ltd an associate of Kuku Ltd?

Solution
Boho Ltd is an associate of Kuku Ltd as significant influence is demonstrated by the presence of
directors on the board and the relative voting rights at meetings.
It is presumed that entity has significant influence where it holds 20% or more of the voting power
of the investee, but it is not necessary to have 20% representation on the board to demonstrate
significant influence, as this will depend on all the facts and circumstances. One board member
may represent significant influence even if that board member has less than 20% of the voting
power. But for significant influence to exist it would be necessary to show based on specific facts
and circumstances that this is the case, as significant influence would not be presumed.
b) Participation in policy-making processes, including participation in decisions about
dividends or other distributions;
Example:
X Ltd creates a separate legal entity in which it holds less than 20 % of the voting interests
but however controls that entity through contracts that ensures that decision-making
power and the distribution of profits and losses lies with X ltd. In such cases the investor
is able to exercise significant influence over its investee.
Example:
Info Ltd owns 9% equity in Sync Ltd. However, it has the approval or veto rights over critical
decisions of compensation, hiring, termination, and other operating and capital spending
decisions of Sync Ltd. The non-controlling rights are so restrictive that it is appropriate to infer
that control rests with the Info Ltd for all major decisions.
c) Material transactions between the entity and its investee;

Illustration 3
Q Ltd manufactures shoes for a leading retailer P Ltd. P Ltd provides all designs for the
shoes and participates in scheduling, timing and quantity of the production. The majority (i.e.
90%) of Q Ltd.’s sales are made to the retailer, P Ltd. P Ltd. has 10% shareholding in the
Q Ltd. It acquired this interest many years ago at the start of their relationship. Does
significant influence exist?
Solution
Q Ltd is highly dependent on the retailer for the continued existence of the business. Despite
having only a 10% interest in Q Ltd, P Ltd has significant influence

Illustration 4
X Ltd owns 15% of the voting rights of Y Ltd, and the remainder are widely dispersed among the
public.
X Ltd also is the only supplier of crucial raw materials to Y Ltd, further it provides certain expertise
guidance regarding the maintenance of Y Ltd’s factory.
Discuss the relationship between X Ltd and Y Ltd.
Solution
Y Ltd is effectively functioning because of the participation of X Ltd in the Y Ltd’s factory despite
having 15% interest in Y Ltd, X Ltd has significant influence.
d) Interchange of managerial personnel; or
Illustration 5
Entity X and entity Y, operate in the same industry, but in different geographical regions.
Entity X acquires a 10% shareholding in entity Y as a part of a strategic agreement. A new
production process is key to serve a fundamental change in the strategic direction of entity
Y. The terms of agreement provides for entity Y to start a new production process under the
supervision of two managers from entity X. The managers seconded from entity X, one of
whom is on entity X’s board, will oversee the selection and recruitment of new staff, the
purchase of new equipment, the training of the workforce and the negotiation of new
purchase contracts for raw materials. The two managers will report directly to entity Y’s board
as well as to entity X’s. Analyse.
Solution
The secondment of the board member and a senior manager from entity X to entity Y gives entity
X, a range of power over a new production process and may evidence that entity X has significant
influence over entity Y. This assessment take into the account what are the key financial and
operating policies of entity Y and the influence this gives entity X over those policies.
e) Provision of essential technical information.
Illustration 6
Soul Ltd has 18% interest in God Ltd. Soul Ltd manufacture mobile telephone handsets using
technology developed by God Ltd. God Ltd licenses the technology to Soul Ltd and updates the
licence agreement for new technology on a regular basis. The handsets are sold by Soul Ltd and
represent substantially Soul Ltd’s entire sale. Analyse.

Solution
Soul Ltd is dependent on the technology that God Ltd supplies since a high proportion of
Soul Ltd’s sales are based on that technology. Therefore, Soul Ltd is likely to be an associate
of God Ltd because of the provision of essential technical informational.
7.4 POTENTIAL VOTING RIGHTS

An investor may hold any instrument (such as share warrants, share call options, debt or equity
instruments) issued by an associate and terms of the instrument is that a holder will get an equity
rights on the expiry of the term i.e. they are convertible into ordinary shares, to give the entity
additional voting power or to reduce another party’s voting power over the financial and operating
policies of another entity (ie potential voting rights). Only an existing right will be considered for
determining the Significant influence. Any potential voting rights that will arise in future will not be
considered while determining Significant influence.
It is worth nothing that a substantial or majority ownership by another investor does not necessarily
preclude an entity from having significant influence
7.5 EQUITY METHOD

a) On the date of acquisition:
Under the equity method, on initial recognition the investment in an associate or a joint
venture is recognised at cost.

Investment in Associate A/c Dr.

To Cash A/c
b) Recognizing the share in Profit or loss:
Since the investor has the significant influence over the investee, the investor has an interest
in the performance of the investee. It can influence the dividend to be distributed irrespective
of the actuals profits made by the investee. Here the recognition of income based on profit
distributed may not be a true measure of the income earned by an investor on an investment
in an associate or a joint venture. The distributions made may bear little relation to the actual
performance of the associate or joint venture. Hence recognizing actual profit or loss
(irrespective of the amount of dividend distributed) is more reflective of the actual value of
the investment.
(i) If Associate or joint venture makes profit
Investment in Associate A/c Dr.

To Share in Profit from Associate A/c
(ii) If Associate or joint venture makes losses
Share in Losses from Associate A/c Dr.

To Investment in Associate A/c
(iii) Cash dividend received: Any distribution of dividend in the form of cash received from
the associate reduces the carrying amount of the investment.
Cash A/c Dr.

To Investment in Associate A/c
Illustration 7
Amar Ltd. acquires 40% shares of Ram Ltd. On 1 April, 20X1, the price paid is ` 10,00,000.
Ram Ltd has reported a profit of ` 2,00,000 and paid dividend of ` 1,00,000. Make necessary
journal entries in the books of Amar Ltd.

Solution
Amount Amount
` `
Investment in Associate A/c Dr. 10,00,000
To Cash A/c 10,00,000
Investment in Associate A/c Dr. 80,000
To Share in Profit from Associate A/c 80,000
Cash A/c Dr. 40,000
To Investment in Associate A/c 40,000
Adjustments to the carrying amount may also be necessary for a change in the investor’s proportionate
interest in the investee arising from changes in the investee’s other comprehensive income. Such
changes include those arising from the revaluation of property, plant and equipment and from foreign
exchange translation differences. The investor’s share of those changes is recognised in other
comprehensive income of the investor
7.6 APPLICATION OF EQUITY METHOD

The investor needs to apply equity method of accounting when it has joint control or significant
influence over the investee.
The rationale behind the application of the equity method is that in case of an associate or a joint
venture, an investor commences to gain the ability to influence the decision-making process of an
investee as the level of ownership rises. The investor, hence, has the ability to exercise significant
influence over operating and financial policies of an investee even though the investor holds
50 percent or less of the voting rights. Clearly, this is a subject of judgments and interpretations
in practice. Also, it is important to note that ‘significant influence’ is required to be present but
there is no requirement that any actual influence must have ever been applied.
However, the investor is exempt from the application of Equity Method under certain
circumstances.
7.6.1 Exemptions from applying the equity method
An entity need not apply the equity method to its investment in an associate or a joint venture if
the entity is a parent that is exempt from preparing consolidated financial statements by the scope
exception in paragraph 4(a) of Ind AS 110 or if all the following apply:
(a) The entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity
and its other owners, including those not otherwise entitled to vote, have been informed
about, and do not object to, the entity not applying the equity method.

(b) The entity’s debt or equity instruments are not traded in a public market (a domestic or foreign
stock exchange or an over-the-counter market, including local and regional markets).
(c) The entity did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory organisation, for the purpose of issuing any class of
instruments in a public market.
(d) The ultimate or any intermediate parent of the entity produces consolidated financial
statements available for public use that comply with Ind AS.
When an investment in an associate or a joint venture is held by, or is held indirectly through, an
entity that is a venture capital organisation, or a mutual fund, unit trust and similar entities
including investment-linked insurance funds, the entity may elect to measure investments in those
associates and joint ventures at fair value through profit or loss in accordance with Ind AS 109.
When an entity has an investment in an associate, a portion of which is held indirectly through a
venture capital organisation, or a mutual fund, unit trust and similar entities including investment- linked
insurance funds, the entity may elect to measure that portion of the investment in the associate at fair
value through profit or loss in accordance with Ind AS 109 regardless of whether the venture capital
organisation has significant influence over that portion of the investment. If the entity makes that
election, the entity shall apply the equity method to any remaining portion of its investment in an
associate that is not held through a venture capital organisation.
7.6.2 Discontinuing of equity Method
The investor should discontinue the use of Equity Method from the date the significant influence
or joint control ceases.
7.6.3 Equity method procedures
While preparing the consolidated financial statements, an investor applies equity method of accounting
for investments in associates and joint ventures. It includes the aggregate of the holdings in that
associate or joint venture by the parent and its subsidiaries taken together. The holdings of the group’s
other associates or joint ventures are ignored for this purpose.
When an associate or a joint venture has subsidiaries, associates or joint ventures, the profit or
loss, other comprehensive income and net assets taken into account in applying the equity method
are those recognised in the associate’s or joint venture’s financial statements (including the
associate’s or joint venture’s share of the profit or loss, other comprehensive income and net
assets of its associates and joint ventures), after any adjustments necessary to give effect to
uniform accounting policies.
In accounting, transactions between related companies are identified as either downstream or
upstream. Downstream transfers include investor’s sale of an item to investee. Conversely, a
downstream transfer means sales made by investee to investor. These two types of intra entity
transactions are examined separately.

Gains and losses resulting from ‘upstream’ and ‘downstream’ transactions between an entity
(including its consolidated subsidiaries) and its associate or joint venture are recognised in the
entity’s financial statements only to the extent of unrelated investors’ interests in the associate or
joint venture. The investor’s share in the associate’s or joint venture’s gains or losses resulting
from these transactions is eliminated.
Example:
Assume that Babu Ltd owns a 40% share of Sahu Ltd and accounts for this investment through
the equity method. In 20X1, Babu Ltd sells inventory to Sahu Ltd at a price of 50,000. This
figure includes a gross profit of 30%.
By the end of 20X1, Sahu Ltd has sold 40,000 of these goods to outside parties while retaining
10,000 in inventory for sale during the subsequent year.
The investor has made downstream sales to the investee. In applying the equity method,
recognition of the related profit must be delayed until the buyer disposes of these goods.
Although total intra-entity transfers amounted to 50,000, only 40,000 of this merchandise has
already been resold to outsiders, thereby justifying the normal reporting of profits.
For the 10,000 still in the investee’s inventory, the earning process is not finished. In
computing equity income, this portion of the intra-entity profit must be deferred until Sahu Ltd
disposes of the goods.
The gross profit on the original sale was 30 % of the transfer price; therefore, Sahu Ltd’s profit
associated with these remaining items is 3,000 (10,000 * 30%). However, because only 40 %
of the investee’s stock is held by Babu Ltd, just 1,200 (3,000 * 40%) of this profit is unearned.
Babu Ltd’s ownership percentage reflects the intra-entity portion of the profit. The total 3,000
gross profit within the ending inventory balance is not the amount deferred. Rather, 40 % of
that gross profit is viewed as the currently unrealized figure.
After calculating the appropriate deferral, the investor decreases current equity income by
1,200 to reflect the unearned portion of the intra-entity profit. This procedure temporarily
removes this portion of the profit from the investor’s books in 20X1 until the investee disposes
of the inventory in 20X2.
In the subsequent year, when this inventory is eventually consumed by Sahu Ltd. or sold to
unrelated parties, the deferral is no longer needed. The earning process is complete, and
Babu Ltd. should recognize the 1,200.
Example: Equity method accounting
B Ltd acquired a 30% interest in D Ltd and achieved significant influence. The cost of the
investment was ` 2,50,000. The associate has net assets of ` 5,00,000 at the date of acquisition.
The fair value of those net assets is ` 6,00,000 as a fair value of property, plant

& equipment is` 1,00,000 higher than its book value. This property, plant & equipment has a
remaining useful life of 10 years.
After acquisition D Ltd recognize profit after tax of ` 1,00,000 and paid a dividend out of these
profits of ` 9,000. D Ltd has also recognized exchange losses of ` 20,000 directly in other
comprehensive income.
B Ltd’s interest in D Ltd at the end the year is calculated as follows: `
Balance on requisition under the equity method (including goodwill of ` 70,000)
(` 2,50,000 – (30% x ` 6,00,000)) 2,50,000
B Ltd’s share of D Ltd’s after tax profit (30% x `1,00,000) 30,000
Elimination of dividend received by B Ltd from D Ltd (30% x `9,000) (2,700)
B Ltd’s share of D Ltd’s exchange differences (30% x `20,000) (6,000)
B Ltd’s share of amortisation of fair value uplift (30% x `10,000) (3,000)
B Ltd’s interest in D Ltd at the end of the year under the equity method
(including goodwill) 2,68,300
D Ltd has net assets at the end of the year of ` 5,71,000 (that is, net assets at the start of
the year of ` 5,00,000 , plus profit during the year of ` 1,00,000 , less dividend of ` 9,000 ,
less foreign exchange losses of ` 20,000).
B Ltd’s interest in D Ltd at the end of the year is made up of:
B Ltd’s share of D Ltd.’s net assets (30% x ` 5,71,000) 1,71,300
Goodwill 70,000
B Ltd’s share of D Ltd’s fair value adjustments (the initial fair value
difference of ` 1,00,000 has been reduced by `10,000 due to depreciation in
the year) (30% x ` 90,000) 27,000
B Ltd’s interest in D Ltd 2,68,300
7.6.4 Impairment losses

After application of the equity method, it is necessary to recognise any additional impairment loss
with respect to Investor’s net investment in the associate or joint venture. There has to be
substantial objective evidence of impairment as a result of one or more events that occurred after
the initial recognition of the net investment (a ‘loss event’) and that loss event (or events) has an
impact on the estimated future cash flows from the net investment that can be reliably estimated.
There may be combined multiple events that may result in impairment. It is important to note that
any losses expected from future events, no matter how likely, are not recognized. Objective

evidences may include

(a) significant financial difficulty of the associate or joint venture;
(b) a breach of contract, such as a default or delinquency in payments by the associate or joint
venture;
(c) the entity, for economic or legal reasons relating to its associate’s or joint venture’s financial
difficulty, granting to the associate or joint venture a concession that the entity would not
otherwise consider;
(d) it becoming probable that the associate or joint venture will enter bankruptcy or other financial
reorganisation; or
(e) the disappearance of an active market for the net investment because of financial difficulties
of the associate or joint venture.
Example:
X Ltd, an associate of Y Ltd, disappears from the active market as its financial instruments
are no longer publicly traded. However, this is not evidence of impairment. It has to supported
by other evidences.
Example:
There is a downgrade of an associate’s or joint venture’s credit rating. This, however, is not
an evidence of impairment, although it may be evidence of impairment when considered with
other available information.
Example:
There are significant changes with an adverse effect that have taken place in the
technological, market, economic or legal environment in which the associate or joint venture
operates, and indicates that the cost of the investment in the equity instrument may not be
recovered. A significant or prolonged decline in the fair value of an investment in an equity
instrument below its cost is also objective evidence of impairment.
Goodwill that forms part of the carrying amount of the net investment in an associate or a joint
venture is not separately recognized. Therefore, it is not tested for impairment separately by
applying the requirements for impairment testing goodwill in Ind AS 36, Impairment of Assets.
Instead, the entire carrying amount of the investment is tested for impairment in accordance with
Ind AS 36 as a single asset, by comparing its recoverable amount (higher of value in use and fair
value less costs to sell) with its carrying amount. Accordingly, any reversal of that impairment loss
is recognised in accordance with Ind AS 36 to the extent that the recoverable amount of the net
investment subsequently increases.

In determining the value in use of the net investment, an entity estimates:

(a) its share of the present value of the estimated future cash flows expected to be generated
by the associate or joint venture, including the cash flows from the operations of the associate
or joint venture and the proceeds from the ultimate disposal of the investment;
or
(b) the present value of the estimated future cash flows expected to arise from dividends to be
received from the investment and from its ultimate disposal.
Using appropriate assumptions, both methods give the same result.

UNIT 8 :
DISCLOSURES
8.1 IN SEPARATE FINANCIAL STATEMENTS

i. Disclosures will be as per all applicable Ind AS
ii. When parent elects not to prepare consolidated financial statements and prepares separate
financial statements:
a. Fact that financial statement is a separate financial statement
b. Exemption from consolidation used: entity have to disclose about exemption from
consolidation
c. Name & place of business (country of incorporation, if different) of entity those CFS is
produced for public use & where those CFS are obtainable: If entity produce any CFS
to pubic use those CFS are prepare as per Ind AS
d. List of significant investment in subsidiaries, JV & associates containing details
regarding investee
i. Name
ii. Principal place of business (country of incorporation, if different)
iii. Proportion of ownership interest held
e. Method used for accounting
iii. Parent (i.e. an investment entity) prepare separate financial statement as its only financial
statement:
a. Fact that financial statement is its only financial statement
b. Disclosures as per Ind AS 112
iv. Entity other than above:
a. Fact that financial statement is a separate financial statement
b. List of significant investment in subsidiaries, JV & associates containing details
regarding investee
i. Name
ii. Principal place of business (country of incorporation, if different)
iii. Proportion of ownership interest held
c. Method used for accounting

8.2 IN CONSOLIDATED FINANCIAL STATEMENT

i. The significant judgments and assumptions entity has made in determining:
a. Nature of its interest in another entity or arrangement;
b. Type of joint arrangement in which it has an invested;
c. That it meets the definition of an investment entity
ii. Information about its interests in:
a. subsidiaries
b. arrangements and associates
c. structured entities that are not controlled by the entity
iii. Investment entity status:
a. Change of status
b. Reason
c. Effect of change on financial statement:
i. Total fair value of subsidiaries ceases to be consolidated
ii. Total gain or loss
iii. Line item in Profit or loss
iv. Interest in subsidiaries:
a. Information that enable users to understand:
i. Composition of group
ii. Interest that non controlling Interests have in group activities & cash flows that
are material including:
1. Name of subsidiary
2. Principal place of business (country of Incorporation if different)
3. Proportion of ownership Interest (voting rights proportion, if different)
4. Profit & Loss allocated
5. Accumulated Non controlling interest
6. Summarized financial information about the subsidiary

b. Information to enable user to evaluate:

i. Nature and extent of significant restrictions on its ability to access or use assets,
and settle liabilities, of the group including:
1. To transfer cash or other assets
2. guarantees or other requirements or loans and advances being made or
repaid
3. the nature and extent to which protective rights of non-controlling interests
can significantly restrict the entity right
4. Carrying amount of assets & liabilities in CFS on which restriction applies
ii. Nature of and changes in, the risks associated with its interests in consolidated
structured entities including:
1. Terms of contractual arrangement-that require to provide financial support
2. Events & circumstances that could expose to risk
3. Provided any financial support:
a. Type & amount of support
b. Reason of support
4. Provided any support to previously unconsolidated structured entity, result in
controlling:
a. Reason of support
5. Intention of support or assist
iii. the consequences of changes in its ownership interest (no loss of control):
1. Schedule to show the effect of equity attributable
iv. the consequences of losing control of a subsidiary:
1. Gain or loss & line item in profit or loss
2. Gain or loss attributable to FV of investment in Subsidiary
c. Financial statement of subsidiary is of a different date:
i. End of reporting period date of the subsidiary
ii. Reason for using different date
v. Interest In unconsolidated Subsidiaries (by investment entities):
For each unconsolidated subsidiaries
a. Subsidiary name
b. Principal place of business (country of incorporation, if different)

c. Proportion of ownership interest

d. Financial statement of subsidiary & its parent
e. Significant restriction on the ability of an unconsolidated subsidiary:
i. Transfer fund (in form of cash dividends)
ii. Repay loans & advances
f. Current commitments or intention to provide support or assistance
g. Provided any financial support:
i. Type & amount of support
ii. Reason of support
h. Provided any support to previously unconsolidated structured entity, result in
controlling:
i. Reason of support
i. Terms of contractual arrangement-that require to provide financial support
j. Events & circumstances that could expose to risk
vi. Interest in joint arrangements & associates:
a. For nature, extent & financial effect: (for material joint arrangement & associates)
i. Name of joint arrangement or associate
ii. Nature of relationship
iii. Principal place of business (country of incorporation, if different)
iv. Proportion of ownership interest
v. Investment measured using Equity method or FV
vi. Summarized Financial information
vii. Investment valued using equity method-Then FV
viii. Financial information in aggregate for all individually immaterial:
i. Joint ventures
ii. Associates
ix. Significant restriction on the ability of joint ventures or associates:
i. Transfer fund (in form of cash dividends)
ii. Repay loans & advances

x. Financial statement used in applying equity method are of different date:

i. Reporting period end date
ii. Reason of different date
xi. Unrecognized share of losses of JV or associate (stop recognizing loss when
applying equity method)
b. Risk associated:
i. Commitments
ii. Contingent liabilities incurred relating to interest in Joint ventures or associates
vii. Interest in Unconsolidated structured entities:
a. Nature, extent: exposure of risk
b. Information to enable user to evaluate the nature of and changes in the risk
c. Qualitative & quantitative Information about unconsolidated structured entities
d. Information about sponsored entities:
a. How it has determined-which entity to sponsored
b. Income from that entities
c. Carrying amount of all assets transfer to those entities
e. Information in tabular format
f. Carrying amount of asset & liabilities of those entities, recongnised in financial & line
item in BS statement
g. Amount represent maximum loss & how it determined & if not determined then reason
h. Comparison of above loss with carrying amount of assets & liabilities recongnised
i. Current intention to provide support or assistance
j. Provide any financial support:
a. Type & amount of support
b. Reason of support
viii. Summarized financial Information for subsidiaries, Joint ventures & associates:
a. Subsidiary that has non-controlling interest that are material:
i. Dividends paid
ii. Financial information about asset, liability, profit or loss, cash flow (before
intercompany elimination)

b. Joint ventures and associate that are material:

i. Dividend received
ii. Financial information about asset, liability, profit or loss, cash flow
c. Joint Venture that are material:-
i. Cash & cash equivalent
ii. Current financial liability (excluding trade, trade payables, provisions)
iii. Non Current financial liabilities (excluding trade, trade payables, provisions)
iv. Depreciation & amortization
v. Interest income & expenses
vi. Income tax expenses
d. If entity uses equity method to account for Jv or associates interest:-
i. Ind AS financial statement of JV or associates should be adjusted ( FV adjustment)
ii. Reconciliation of adjustment
iii. But above disclosures are not required if:-
i. FV measured as per Ind AS 28;
ii. JV or associate does not prepare Ind AS financial statement

TEST YOUR KNOWLEDGE

Practical Questions
1. DEF Ltd. acquired 100% ordinary shares of `100 each of XYZ Ltd. on 1st October 20X1. On
March 31, 20X2 the summarised Balance Sheets of the two companies were as given below:
DEF Ltd. XYZ Ltd.

Assets
Property Plant Equipment
Land & Buildings 15,00,000 18,00,000
Plant & Machinery 24,00,000 13,50,000
Investment in XYZ Ltd. 34,00,000 -
Inventory 12,00,000 3,64,000
Financial Assets
Trade Receivable 5,98,000 4,00,000
Cash 1,45,000 80,000
Total 92,43,000 39,94,000
Equities & Liabilities
Equity Capital (Shares of ` 100 each fully paid) 50,00,000 20,00,000
Other Equity
Other reserves 24,00,000 10,00,000
Retained Earnings 5,72,000 8,20,000
Financial Liabilities
Bank Overdraft 8,00,000 -
Trade Payable 4,71,000 1,74,000
Total 92,43,000 39,94,000
The retained earnings of XYZ Ltd. showed a credit balance of ` 3,00,000 on 1st April 20X1 out of
which a dividend of 10% was paid on 1st November; DEF Ltd. has credited the dividend

received to retained earnings account; Fair Value of P& M as on 1st October 20X1 was
` 20,00,000. The rate of depreciation on plant & machinery is 10%.
Following are the changes in Fair value as per respective IND AS from Book value as on
1st October 20X1 which is to be considered while consolidating the Balance Sheets.
Liabilities Amount Assets Amount

Trade Payables 1,00,000 Land & Buildings 10,00,000
Inventories 1,50,000
Prepare consolidated Balance Sheet as on March 31, 20X2.

2. Ram Ltd. acquired 60% ordinary shares of ` 100 each of Krishan Ltd. on 1st October 20X1.
On March 31, 20X2 the summarised Balance Sheets of the two companies were as given
below:
Ram Ltd. Krishan Ltd.

Assets
Property, Plant Equipment
Land & Buildings 3,00,000 3,60,000
Plant & Machinery 4,80,000 2,70,000
Investment in Krishan Ltd. 8,00,000 -
Inventory 2,40,000 72,800
Financial Assets
Trade Receivable 1,19,600 80,000
Cash 29,000 16,000
Total 19,68,600 7,98,800
Equity & Liabilities
Equity Capital (Shares of ` 100 each fully paid) 10,00,000 4,00,000
Other Equity
Other Reserves 6,00,000 2,00,000

Retained earnings 1,14,400 1,64,000
Financial Liabilities
Bank Overdraft 1,60,000 -
Trade Payable 94,200 34,800
Total 19,68,600 7,98,800
The Retained earnings of Krishan Ltd. showed a credit balance of ` 60,000 on 1st April 20X1 out
of which a dividend of 10% was paid on 1st November; Ram Ltd. has credited the dividend
received to its Retained earnings; Fair Value of P& M as on 1st October 20X1 was ` 4,00,000;
The rate of depreciation on plant & machinery is 10%.
Following are the changes in Fair value as per respective IND AS from book value as on
1st October 20X1 which is to be considered while consolidating the Balance Sheets.
Liabilities Amount Assets Amount

Trade Payables 20,000 Land & Buildings 2,00,000
Inventories 30,000
Prepare consolidated Balance Sheet as on March 31, 20X2.

3. On 31 March 20X2, Blue Heavens Ltd. acquired 100% ordinary shares carrying voting rights
of Orange County Ltd. for ` 6,000 lakh in cash and it controlled Orange County Ltd. from
that date. The acquisition-date statements of financial position of Blue Heavens Ltd. and
Orange County Ltd. and the fair values of the assets and liabilities recognised on Orange
County Ltd. statement of financial position were:
Blue Heavens Ltd. Orange County Ltd.
Carrying Carrying Fair Value
Amount Amount
` (lakh) ` (lakh) ` (lakh)
Assets
Non-current assets
Building and other PPE 7,000 3,000 3,300
Investment in Orange County Ltd. 6,000

Current assets
Inventories 700 500 600
Trade receivables 300 250 250
Cash 1,500 700 700
Total assets 15,500 4,450
Equity and liabilities
Equity
Share capital 5,000 2,000
Current liabilities
Trade payables 300 150 150
Total liabilities and equity 15,500 4,450
Prepare the Consolidated Balance Sheet as on March 31, 20X2 of group of entities Blue Heavens
Ltd. and Orange County Ltd.
4. The facts are the same as in Question 3 above. However, Blue Heavens Ltd. acquires only
75% of the ordinary shares, to which voting rights are attached of Orange County Ltd. Blue
Heavens Ltd. pays ` 4,500 lakhs for the shares. Prepare the Consolidated Balance Sheet
as on March 31, 20X2 of group of entities Blue Heavens Ltd. and Orange County Ltd.
5. Facts are same as in Question 3 & 4, Blue Heavens Ltd. acquires 75% of Orange County
Ltd. Blue Heavens Ltd. pays ` 4,500 lakhs for the shares. At 31 March 20X3, i.e one year
after Blue Heavens Ltd. acquired Orange County Ltd., the individual statements of financial
position and statements of comprehensive income of Blue Heavens Ltd. and Orange County
Ltd. are:
Carrying Carrying
Amount Amount
`(lakh) `(lakh)
Assets
Non-current assets
Building and other PPE 6,500 2,750
Investment in Orange County Ltd. 4,500
11,000 2,750

Current assets
Inventories 800 550
Trade receivables 380 300
Cash 4,170 1,420
5,350 2,270
Total assets 16,350 5,020
Equity and liabilities
Equity
Share capital 5,000 2,000
16,000 4,850
Current liabilities
Trade payables 350 170
350 170
Total liabilities and equity 16,350 5,020
Statements of comprehensive income for the year ended 31 March 20X3:
Carrying Carrying
Amount Amount
`(lakh) `(lakh)
Revenue 3,000 1,900

Cost of sales (1,800) (1,000)
Gross profit 1,200 900
Administrative expenses (400) (350)
Profit for the year 800 550
Note: Blue Heavens Ltd. is unable to make a reliable estimate of the useful life of goodwill
and consequently, the useful life is presumed to be ten years. Blue Heavens Ltd. uses the
straight-line amortisation method for goodwill. The fair value adjustment to buildings and
other PPE is in respect of a building; all buildings have an estimated remaining useful life of
20 years from 31 March 20X2 and estimated residual values of zero. Blue Heavens Ltd.

uses the straight-line method for depreciation of PPE. All the inventory held by Orange
County Ltd. at 31 March 20X2 was sold during 20X3.
Prepare the Consolidated Balance Sheet as on March 31, 20X2 of group of entities Blue Heavens
Ltd. and Orange County Ltd.
6. P Pvt. Ltd. has a number of wholly-owned subsidiaries including S Pvt. Ltd. at 31st March
20X2. P Pvt. Ltd. consolidated statement of financial position and the group carrying amount
of S Pvt. Ltd. assets and liabilities (ie the amount included in that consolidated statement of
financial position in respect of S Pvt. Ltd. assets and liabilities) at 31st March 20X2 are as
follows:
Particulars Consolidated Group carrying amount of S Pvt.

(` In Ltd. asset and liabilities Ltd. (` In
millions) millions)
Assets
Non-Current Assets
Goodwill 380 180
Buildings 3,240 1,340
Current Assets
Inventories 140 40
Trade Receivables 1,700 900
Cash 3,100 1000
Total Assets 8,560 3,460
Equities & Liabilities
Equity
Share Capital 1600
Other Equity
Retained Earnings 4,260
Current liabilities
Trade Payables 2,700 900
Total Equity & Liabilities 8,560 900
Prepare consolidated Balance Sheet after disposal as on 31st March, 20X2 when P Pvt. Ltd.
group sold 100% shares of S Pvt. Ltd. to independent party for ` 3,000 millions.
7. Reliance Ltd. has a number of wholly-owned subsidiaries including Reliance Jio Infocomm
Ltd. at 31st March 20X2.
Reliance Ltd. consolidated statement of financial position and the group carrying amount of
Reliance Jio Infocomm Ltd. assets and liabilities (ie the amount included in that consolidated

statement of financial position in respect of Reliance Jio Infocomm Ltd. assets and liabilities) at
31st March 20X2 are as follows:
Particulars Consolidated Group carrying amount of Reliance

(` In ‘000) Jio Infocomm Ltd. asset and
liabilities Ltd. (` In ‘000)
Assets
Non-current Assets
Goodwill 190 90
Buildings 1,620 670
Current Assets
Inventories 70 20
Trade Receivables 850 450
Cash 1,550 500
Total Assets 4,280 1,730
Equity & Liabilities

Equity
Share Capital 800
Other Equity
Retained Earnings 2,130
2,930
Current liabilities
Trade Payables 1,350 450
Total Equity & Liabilities 4,280 450
Prepare consolidated Balance Sheet after disposal as on 31st March, 20X2 when Reliance
Ltd. group sold 90% shares of Reliance Jio Infocomm Ltd. to independent party for ` 1000 (‘
000)
8. Airtel Telecommunications Ltd. owns 100% share capital of Airtel Infrastructures Pvt. Ltd. On
1 April 20X1 Airtel Telecommunications Ltd. acquired a building from Airtel Infrastructures
Pvt. Ltd., for ` 11,00,000 that the group plans to use as its new headquarters office.
Airtel Infrastructures Pvt. Ltd. had purchased the building from a third party on 1 April 20X0
for
` 10,25,000. At that time the building was assessed to have a useful life of 21 years and a
residual value of ` 5,00,000. On 1 April 20X1 the carrying amount of the building was
` 10,00,000 in Airtel Infrastructures Pvt. Ltd.’s individual accounting records.

The estimated remaining useful life of the building measured from 1 April 20X1 is 20 years
and the residual value of the building is now estimated at ` 3,50,000. The method of
depreciation is straight-line.
Pass necessary accounting entries in individual and consolidation situations:
Answers to Practical Questions
1 Consolidated Balance Sheet of DEF Ltd. and its subsidiary, XYZ Ltd.
as on 31st March, 20X2
Particulars Note No. `

I. Assets
(1) Non-current assets
(i) Property Plant & Equipment 1 86,00,000
(2) Current Assets
(i) Inventories 2 17,14,000
(ii) Financial Assets
(a) Trade Receivables 3 9,98,000
(b) Cash & Cash equivalents 4 2,25,000
Total Assets 1,15,37,000
II. Equity and Liabilities
(1) Equity
(i) Equity Share Capital 5 50,00,000
(ii) Other Equity 6 49,92,000
(2) Current Liabilities

(i) Financial Liabilities
(a) Trade Payables 7 7,45,000
(b) Short term borrowings 8 8,00,000
Total Equity & Liabilities 1,15,37,000
Notes to accounts
1. Property Plant & Equipment

Land & Building 43,00,000
Plant & Machinery 43,00,000 86,00,000

2. Inventories
DEF Ltd. 12,00,000
XYZ Ltd. 5,14,000 17,14,000
3. Trade Receivables
DEF Ltd. 5,98,000
XYZ Ltd. 4,00,000 9,98,000
4. Cash & Cash equivalents

DEF Ltd. 1,45,000
XYZ Ltd. 80,000 2,25,000
7. Trade Payables
DEF Ltd. 4,71,000
XYZ Ltd. 2,74,000 7,45,000
8. Short-term borrowings
Bank overdraft 8,00,000 8,00,000
Statement of changes in Equity:
5. Equity share Capital
Balance at the Changes in Equity share Balance at the end of the

beginning of the capital during the year reporting period
reporting period
50,00,000 0 50,00,000
6. Other Equity
Share Equity Reserves & Surplus Total

application component
money Capital Retained Securities
reserve Earnings Premium
Balance at the 24,00,000 0 24,00,000

beginning
Total 0 3,72,000 3,72,000

comprehensive
income for the
year
Dividends 0
Total 0 3,35,000 3,35,000

comprehensive

income
attributable to
parent
Gain on Bargain 18,85,000 18,85,000

purchase
Balance at the 24,00,000 25,92,000 49,92,000

end of reporting
period
Working Notes:
1. The dividend @ 10% on 20,000 shares, ` 2,00,000 received by DEF Ltd. should have
been credited to the investment A/c, being out of pre-acquisition profits. DEF Ltd.,
must pass a correcting entry, viz.
Profit & Loss Account Dr. 2,00,000
To Investment 2,00,000
2. Adjustments of Fair Value
The Plant & Machinery of XYZ Ltd. would stand in the books at ` 14,25,000 on
1st October, 20X1, considering only six months’ depreciation on ` 15,00,000 total
depreciation being `1,50,000. The value put on the assets being ` 20,00,000 there is
an appreciation to the extent of ` 5,75,000.
3. Capital profits of XYZ Ltd.
`
Reserves on 1.4. 20X1 10,00,000
Profit & Loss Account Balance on 1.4. 20X1 3,00,000
Less: Dividend paid (2,00,000) 1,00,000
Profit for 20X2: Total ` 8,20,000 less `

1,00,000 i.e. ` 7,20,000; upto 1.10. 20X1 3,60,000
Total Appreciation including machinery
appreciation 16,25,000
Holding Co. Share 30,85,000

4. Revenue profits of XYZ Ltd.
Profit after 1.10. 20X1 [8,20,000-1,00,000]x 6/12 3,60,000

Less: 10% depreciation on ` 20,00,000 for 6 months less
depreciation already charged for 2nd half of 20X1-20X2 on
` 15,00,000 (1,00,000-75,000) (25,000)
Share of DEF Ltd. 3,35,000
5. No Non-controlling Interest as 100% shares is held by DEF Ltd. Of XYZ Ltd.

6. Cost of Control:
Amount paid for 20,000 shares 34,00,000
Less: Dividend paid out of pre- acquisitions profits (2,00,000) 32,00,000
Par value of shares 20,00,000

Capital profits share of DEF Ltd. 30,85,000 (50,85,000)
Gain on Bargain Purchase 18,85,000
7. Value of Plant & Machinery:
DEF Ltd. 24,00,000

XYZ Ltd. 13,50,000
Add: appreciation on 1.10. 20X1 5,75,000
19,25,000
Add: Depreciation for 2nd half charged on pre-
revalued value 75,000
Less: Depreciation on ` 20,00,000 for 6 months (1,00,000) 19,00,000
43,00,000
8. Profit & Loss account consolidated:
DEF Ltd. As given 5,72,000

Less: Dividend transferred to Investment A/c (2,00,000) 3,72,000
Share of DEF Ltd. In revenue profits 3,35,000
Gain on Bargain Purchase (W.N. 6) 18,85,000
25,92,000

2 Consolidated Balance Sheet of Ram Ltd. and its subsidiary, Krishan Ltd.
as on 31st March, 20X2
Particulars Note `
No.
I. Assets
(i) Property Plant & Equipment 1 17,20,000
(ii) Goodwill 2 1,65,800
(2) Current Assets
(i) Inventories 3 3,42,800
(a) Trade Receivables 4 1,99,600
(b) Cash & Cash equivalents 5 45,000
Total Assets 24,73,200
(1) Equity
(i) Equity Share Capital 6 10,00,000
(ii) Other Equity 7 7,30,600
(2) Non-controlling Interest (WN 5) 4,33,600
(a) Trade Payables 8 1,49,000
(b) Short term borrowings 9 1,60,000
Total Equity & Liabilities 24,73,200
Notes to accounts
`
Land & Building 8,60,000
Plant & Machinery 8,60,000 17,20,000
2. Goodwill 1,65,800 1,65,800
3. Inventories
Ram Ltd. 2,40,000
Krishan Ltd. 1,02,800 3,42,800

Ram Ltd. 1,19,600
Krishan Ltd. 80,000 1,99,600

Ram Ltd. 29,000
Krishan Ltd. 16,000 45,000
8. Trade Payables
Ram Ltd. 94,200
Krishan Ltd. 54,800 1,49,000
9. Short-term borrowings
Bank overdraft 1,60,000 1,60,000

Balance at the Changes in Equity share Balance at the end of the

beginning of the capital during the year reporting period
reporting period
10,00,000 0 10,00,000
7. Other Equity

Balance at 6,00,000 0 6,00,000

the
beginning
Total 0 90,400 90,400
comprehen
sive income
for the year
Dividends 0

Total 0 40,200 40,200

comprehen
sive income
attributable
to parent
Gain on 0 0
Bargain
purchase
Balance at 6,00,000 1,30,600 7,30,600

the end of
reporting
period
Working Notes:
1. The dividend @ 10% on 2,400 shares, ` 24,000 received by Ram Ltd. should have been
credited to the investment A/c, being out of pre-acquisition profits. Ram Ltd., must pass
a correcting entry, viz.
Profit & Loss Account Dr. 24,000
To Investment 24,000
2. Adjustments of Fair Value
The Plant & Machinery of Krishan Ltd. would stand in the books at ` 2,85,000 on 1st
October, 20X1, considering only six months’ depreciation on ` 3,00,000 total depreciation
being ` 30,000. The value put on the assets being ` 4,00,000 there is an appreciation to
the extent of ` 1,15,000.
3. Capital profits of Krishan Ltd.
Reserves on 1.4. 20X1 2,00,000

Profit & Loss Account Balance on 1.4. 20X1 60,000
Less: Dividend paid (40,000) 20,000
Profit for 20X1-20X2: Total ` 82,000 less ` 10,000 i.e.
` 72,000; upto 1.10. 20X1 72,000
Total Appreciation 3,25,000
Total 6,17,000
Holding Co. Share (60%) 3,70,200

4. Revenue profits of Krishan Ltd.
Profit after 1.10. 20X1 [1,64,000-20,000]x 6/12 72,000

Less: 10% depreciation on ` 2,00,000 for 6 months less
depreciation already charged for 2nd half of 20X1-20X2 on
` 3,00,000 (20,000-15,000) (5,000)
Total 67,000
Share of holding Co. (60%) 40,200
5. Non-controlling Interest:
Par value of 1600 shares 160,000

Add: 1/5 Capital Profits [WN 3] 1/5 2,46,800
Revenue Profits [WN 4] 26,800
4,33,600
6. Cost of Control:
Amount paid for 2,400 shares 8,00,000

Less: Dividend paid out of pre- acquisitions profits (24,000) 7,76,000
Par value of shares 2,40,000
Capital profits share of Ram Ltd. 3,70,200 (6,10,200)
Goodwill 1,65,800
7. Value of Plant & Machinery:
Ram Ltd. 4,80,000

Krishan Ltd. 2,70,000
Add: appreciation on 1.10. 20X1 1,15,000
3,85,000
Add: Depreciation for 2nd half charged on pre-revalued 15,000
value (20,000) 3,80,000
Less: Depreciation on ` 4,00,000 for 6 months 8,60,000
Profit & Loss account consolidated:
Ram Ltd. As given 1,14,400

Less: Dividend transferred to Investment A/c (24,000) 90,400
Share of Ram Ltd. In revenue profits 40,200
1,30,600

3. Blue Heavens Ltd. consolidated statement of financial position at 31 March 20X2 will be
calculated as follows: (in lakhs)
Blue Orange Consolidation Consolidated

Heavens Ltd. County Ltd. adjustments Blue Heavens
Ltd.
Carrying Carrying
amount amount
Assets
Non-current
assets
Goodwill 1,300 (WN 1) 1,300
Buildings and 7,000 3,000 300 10,300
other PPE
Financial
Assets
Investment in
Orange County 6,000 (6,000)
Ltd.
Current assets
Inventories 700 500 100 1,300
Financial
Assets 300 250 550
Trade 1,500 700 2,200
receivables
Cash
Total assets 15,500 4,450 15,650
Equity and
liabilities
Equity
Share capital 5,000 2,000 (2,000) 5,000
Other Equity 10,200 2,300 (2,300) 10,200
Trade payable 300 150 450
Total liabilities 15,500 4,450 15,650
and equity

Consolidation involves:
 Adding the statement of financial position of the parent and its subsidiary together line
by line.
 Eliminating the carrying amount of the parent’s investment in the subsidiary (because it
is replaced by the goodwill and the fair value of the assets, liabilities and contingent
liabilities acquired) and the pre-acquisition equity of the subsidiary (because that equity
was not earned or contributed by the group but is part of what was purchased) and
recognising the fair value adjustments together with the goodwill asset that arose on
acquisition of the subsidiary.
1. Working for goodwill: (` in lakhs)
Consideration paid 6,000
Less: Acquisition date fair value of Orange County Ltd. net assets (4,700)
Goodwill 1,300
2. Working for the acquisition date fair value of Orange County Ltd. net assets:
Acquisition date fair value of acquiree (Orange County Ltd.) assets
Buildings and other PPE 3,300
Inventories 600
Trade receivables 250
Cash 700
Less: fair value of trade payables (150)
Fair value of net assets acquired 4,700
4. Non-controlling interest
= 25 % × Orange County Ltd. identifiable net assets at fair value of ` 4,700
= ` 1,175.

Blue Heavens Ltd. consolidated statement of financial position at 31 March 20X2 will be
calculated as follows:
(in lakhs)
Blue Heavens Orange Consolidation Consolidated

Ltd. County Ltd. adjustments Blue Heavens
Ltd.
Carrying Carrying
amount amount
Assets
Non-current
assets
Goodwill 975 (WN 1) 975
Buildings and
other PPE 7,000 3,000 300 10,300
Financial
Assets
Investment in 4,500 (4,500)
Orange
County Ltd.
Current
assets 700 500 100 1,300
Inventories
Financial 300 250 550
Assets 3,000 700 3,700
Trade
receivables
Cash
Total assets 15,500 4,450 16,825
Equity and
liabilities
Equity
Share capital 5,000 2,000 (2,000) 5,000
Other Equity 10,200 2,300 (2,300) 10,200
Non-
controlling 1,175 1,175
interest
Current
liabilities

Financial
Liabilities
Trade 300 150 450
payables
Total
liabilities and 15,500 4,450 16,825
equity
Note: In this question, Blue Heavens Ltd.’s (and consequently the group’s) cash balance is
` 1,500 lakh higher than in Question above because, in this example, Blue Heavens Ltd.
paid ` 1,500 less to acquire Orange County Ltd. (ie ` 6,000 less ` 4,500).
1. Working for goodwill: `(lakhs)
Consideration paid 4,500
Non- controlling interest 1,175
Less: Acquisition date fair value of Orange County Ltd. net assets 4,700
(cal. as above)
Goodwill 975
(Goodwill recognised in the consolidated statement of financial position relates solely to the
acquirer’s proportion of the subsidiary; it does not include the non-controlling
interest’s share)
5. Alternative I for calculation of Non-controlling Interest:
The Non-controlling Interest proportion of Orange County Ltd. is 25 %.
At 31 March 20X3 the NCI in the consolidated statement of financial position would be calculated
as:
` (lakh)
NCI at date of acquisition (31 March 20X2) (see Question 4) 1,175
NCI’s share of profit for the year ended 31 March 20X3, being 25%
Of `435 lakh (being `550 profit of Orange County Ltd. as per
Orange County Ltd. financial statements less `100 group inventory
Fair value adjustment less `15 group depreciation on building
fair value adjustment)* 109
NCI as at 31 March 20X3 1,284

*In calculating the NCI’s share of profit for the year ended 31 March 20X3, no deduction
is made for goodwill amortisation because, as explained above, the goodwill arising on
consolidation relates solely to the acquirer’s proportion of the subsidiary and does not
include the non-controlling interest’s share.
Alternative II for calculation of Non-controlling Interest:
As an alternative to the above three-step approach, at 31 March 20X3 the NCI in the consolidated
statement of financial position is calculated as 25% (the NCI's proportion) of
` 5,135, which is ` 1,284. ` 5,135 is Orange County Ltd. net assets at 31 March 20X3 as
shown in Orange County Ltd. statement of financial position (` 4,850, being ` 5,020 assets
less ` 170 liabilities) plus the fair value adjustment to those assets as made in preparing the
group statement of financial position (` 285, being the fair value adjustment in respect of
Orange County Ltd. building, ` 300, less one year’s depreciation of that adjustment, ` 15).
Blue Heavens Ltd. consolidated statement of comprehensive income for the year ended 31 March
20X3 will be computed as follows:
Blue Orange Consolidate Consolidated

Heavens Ltd. County Ltd. adjustments
Revenue 3,000 1,900 4,900
Cost of sales (1,800) (1,000) (100) (WN 1) (2,900)
Profit for the year 1,200 900 2,000
Administrative
expenses (400) (350) (113) (WN 2) (863)
Total
comprehensive 800 550 1,137
income for the year
Total comprehensive income attributable to:

Owners of the parent (75%) 1,028
Non-controlling interest (25%) 109
1,137
 Adding the statement of comprehensive income of the parent and its subsidiary together
line by line
 Recognising the fair value adjustments and/ or amortisation thereof together with
amortisation of the goodwill asset that arose on acquisition of the subsidiary.

Blue Heavens Ltd. consolidated statement of financial position at 31 March 20X3 will be
computed as follows: (` in lakh)
Blue Orange Consolidation Consolidated

Heavens County Ltd. adjustments Blue Heavens
Ltd. Ltd.
Carrying Carrying
amount amount
Assets
Non-current
assets 975-98 (WN 3) 877
Goodwill
Buildings and 6,500 2,750 285 (WN 4) 9,535
other PPE
Financial Assets 4,500 (4,500)
Investment in
Entity B
Current assets
Inventories 800 550 1,350
Financial Assets
Trade receivables 380 300 680
Cash 4,170 1420 5,590
Total assets 16,350 5,020 18,032
Equity and
liabilities
Equity
Share capital 5,000 2,000 (2,000) 5,000
Other Equity 11,000 2,850 (2,622) (WN 5) 11,228
Non-controlling
interest 1,284 1,284
Current
liabilities 350 170 520

Financial
Liabilities
Trade payables
Total liabilities
and equity 16,350 5,020 18,032
 Adding the statement of financial position of the parent and its subsidiary together line
by line.
 Eliminating the carrying amount of the parent’s investment in the subsidiary (because it
is replaced by the goodwill and the fair value of the assets, liabilities and contingent
liabilities acquired) and the pre-acquisition equity of the subsidiary (because that equity
was not earned or contributed by the group but is part of what was purchased), and
recognising the fair value adjustments together with the goodwill asset that arose on
acquisition of the subsidiary as adjusted to reflect the first year post-acquisition
 Recognising the non-controlling interest in the net assets of Entity B.
Working Notes:
(1) Cost of sales adjustment:
` 100 = fair value adjustment in respect of inventories at 31 March 20X2.
(2) Administrative expenses adjustment:
` 113 = Amortisation of goodwill ` 98 (WN 3) + additional depreciation on building ` 15
(WN 4).
For simplicity it is assumed that all the goodwill amortisation and the additional buildings
depreciation is adjusted against administrative expenses.
(3) Working for goodwill:
Goodwill at the acquisition date, ` 975, less accumulated amortisation, which this year
is amortisation for one year, ` 98 (ie ` 975 ÷ 10 years) = ` 877.
(4) Working for building consolidation adjustment:
The fair value adjustment at 31 March 20X2 in respect of Orange County Ltd. building was `
300, that is, the carrying amount at 31 March 20X2 was ` 300 lower than was recognised in
the group’s consolidated statement of financial position. The building is being depreciated
over 20 years from 31 March 20X2. Thus at 31 March 20X3 the adjustment required on
consolidation to the statement of financial position will be ` 285, being ` 300 × 19/20 years’
estimated useful life remaining. The additional depreciation recognised in the consolidated
statement of comprehensive income is ` 15 (being
` 300 x 1/20).

(5) Reserves adjustment:

` 2,300 adjustment at the acquisition date (Illustration 4) plus ` 98 (WN 3) amortisation of
goodwill plus ` 15 (WN 4) additional depreciation on building plus ` 100 (WN 1) fair value
adjustment in respect of inventories plus ` 109 NCI’s share of Orange County Ltd. profit for the
year (as included in the consolidated statement of comprehensive income) = ` 2,622.
6. When 100% shares sold to independent party
Consolidated Balance Sheet of P Pvt. Ltd. and its remaining subsidiaries as
on 31st March, 20X2
Particulars Note (` in
No. millions)
I. Assets
(i) Property Plant & Equipment 1 1,900
(ii) Goodwill 2 200
(2) Current Assets

(i) Inventories 3 100
(a) Trade Receivables 4 800
(b) Cash & Cash equivalents 5 5,100
Total Assets 8,100
(1) Equity
(i) Equity Share Capital 6 1,600
(ii) Other Equity 7 4,700
(2) Non-controlling Interest

(a) Trade Payables 8 1,800
Total Equity & Liabilities 8,100

Notes to accounts:
(` in millions)
Land & Building 3,240
Less: S Pvt. Ltd. (1,340) 1,900
2. Goodwill 380
Less: S Pvt. Ltd. (180) 200
3. Inventories
Group 140
Group 1,700

Group (WN 2) 5,100 5,100
8. Trade Payables
Group 2,700
Less: S Pvt. Ltd. 900 1,800

Balance at the Changes in Equity Balance at the end of the

beginning of the share capital during the reporting period
reporting period year
1600 0 1600

7. Other Equity

Balance at 4,260 4,260
the
beginning
Total 0
comprehen
sive income
for the year
Dividends 0
Total 0
comprehen
sive income
attributable
to parent
Gain on 440 440
disposal of
S Pvt. Ltd.
Balance at 0 4,700 4,700
the end of
reporting
period
Working Notes:
1. When sold, the carrying amount of all assets and liabilities attributable to S Pvt. Ltd.
were eliminated from the consolidated statement of financial position.
2. Cash on hand (in millions):
Cash before disposal of S Pvt. Ltd. 3,100

Less: S Pvt. Ltd. Cash (1,000)
Add: Cash realized from disposal 3,000
Cash on Hand 5,100

3. Gain/ Loss on disposal of entity (in millions):
Proceeds from disposal 3,000

Less: Net assets of S Pvt. Ltd. (2,560)
Gain on disposal 440
4. Retained Earnings (in millions):
Retained Earnings before disposal 4,260

Add: Gain on disposal 440
Retained earnings after disposal 4,700
7. When 90% shares sold to independent party
Consolidated Balance Sheet of Reliance Ltd. and its remaining subsidiaries as
on 31st March, 20X2
Particulars Note (` In ‘000)

No.
I. Assets
(i) Property Plant & Equipment 1 950
(ii) Goodwill 2 100
(iii) Financial Assets
(a) Investments 3 128
(2) Current Assets
(i) Inventories 4 50
(b) Trade Receivables 5 400
(c) Cash & Cash equivalents 6 2,050
Total Assets 3,678
(1) Equity
(i) Equity Share Capital 7 800
(ii) Other Equity 8 1,978
(a) Trade Payables 9 900
Total Equity & Liabilities 3,678

Notes to accounts:
(` In ‘000)

Land & Building 1620
Less: Reliance Jio Infocomm Ltd. (670) 950
2. Goodwill 190
3. Investments
Investment in Reliance Jio Infocomm Ltd. (WN 2) 128 128
4. Inventories
Group 70
Group 850
Group (WN 3) 2,050 2,050
Trade Payables
Group 1,350
Less: Reliance Jio Infocomm Ltd. 450 900

Balance at the beginning Changes in Equity share Balance at the end of the
of the reporting period capital during the year reporting period
800 0 800

7. Other Equity

Balance at the 2,130 2,130
beginning
Total 0
comprehensi
ve income for
the year
Dividends 0
Total 0
comprehensi
ve income
attributable to
parent
Loss on (152) (152)

disposal of
Reliance Jio
Infocomm
Ltd.
Balance at 0 1,978 1,978
the end of
reporting
period
Working Notes:
1. When 90% being sold, the carrying amount of all assets and liabilities attributable to
Reliance Jio Infocomm Ltd. were eliminated from the consolidated statement of financial
position and further financial asset is recognized for remaining 10%.
2. Fair value of remaining investment (in ‘000):
Net Assets of Reliance Ltd. 1,280

Less: 90% disposal (1152)
Financial Asset 128

3. Cash on hand (in ‘000):
Cash before disposal of Reliance Jio Infocomm Ltd. 1,550

Less: Reliance Jio Infocomm Ltd. Cash (500)
Add: Cash realized from disposal 1,000
Cash on Hand 2,050
4. Gain/ Loss on disposal of entity (in ‘000):
Proceeds from disposal 1,000

Less: Proportionate (90%) Net assets of Reliance Jio
Infocomm Ltd. (90% of 1,280) (1,152)
Loss on disposal (152)
5. Retained Earnings (in ‘000):
Retained Earnings before disposal 2,130

Less: Loss on disposal (152)
Retained earnings after disposal 1,978
8. Journal Entries in Airtel Infrastructures Pvt. Ltd.

1. Assets(Land) A/c Dr. 10,25,000
To cash 10,25,000
2. Depreciation (P/L) A/c Dr. 25,000
To Asset (Land) 25,000
3. Cash A/c Dr. 11,00,000
To Asset (Land) 10,00,000
To P/L 1,00,000
Journal Entries in Airtel Telecommunications Ltd.
1. Asset (Land) A/c Dr. 11,00,000
To Cash 11,00,000
2. Depreciation (P/L) A/c Dr. 37,500
To Assets (Land) 37,500

Journal entry for consolidation:

1. Asset (Land) A/c Dr. 5,000 (WN 1)
To Depreciation set off 5,000
To be depreciation on original (10,00,000-3,50,000)/20 32,500

value
Depreciation charged (11,00,000-3,50,000)/20 37,500
Reversal of depreciation 5,000
Particulars Consolidated Individual Financial statements

financial
Airtel Airtel
statements
Telecommunications Infrastructures
Ltd. Pvt. Ltd.
31st March 20X1 10,00,000 0 10,00,000
1st April 20X1 0 11,00,000 (10,00,000)
purchase sale
Depreciation (32,500) (37,500) 0
31st March 20X2 9,67,500 10,62,500 0

Annexures
Annexure I
The format of Form No. AOC – 1 of Companies (Accounts) Rules, 2014 is as under:
Form No. AOC – 1

(Pursuant to first proviso to sub – section (3) of section 129 read with rule 5 of the
Companies (Accounts) Rules, 2014
Statement containing salient features of the financial statement of subsidiaries or
associate companies or joint ventures
Part A : Subsidiaries
(information in respect of each subsidiary to be presented with amount in Rs….)
1 Sl. No.
2
10
11
12
13
14
15
16
Notes : The following information shall be furnished at the end of the statement:

1. Names of subsidiaries which are yet to commence operations

2. Names of subsidiaries which have been liquidated or sold during the year
Part B : Associates and Joint Ventures
Statement pursuant to section 129(3) of the Companies Act, 2013 related to Associate
Companies and Joint Ventures
Name of Associates or Joint Ventures Name 1 Name 2
Name 3
3
4
(i)
(ii)
Notes : The following information shall be furnished at the end of the statement:
1. Names of associates or joint ventures which are yet to commence operations
2. Names of associates or joint ventures which have been liquidated or sold during the year
Note: This form is to be certified in the same manner in which the Balance Sheet is to be
certified.
Annexure II
The relevant extract of Ind AS compliant Schedule III of Companies Act, 2013 for consolidated financial
statements is as under:
PART III
GENERAL INSTRUCTIONS FOR THE PREPARATION OF CONSOLIDATED FINANCIAL
STATEMENTS
1. Where a company is required to prepare Consolidated Financial Statements, i.e.
consolidated balance sheet, consolidated statement of changes in equity and consolidated
statement of profit and loss, the company shall mutatis mutandis follow the requirements of
this Schedule as applicable to a company in the preparation of balance sheet, statement of

changes in equity and statement of profit and loss in addition, the consolidated financial
statements shall disclose the information as per the requirements specified in the applicable
Indian Accounting Standards notified under the Companies (lndian Accounting Standards) Rules
2015, including the following, namely:-
(i) Profit or loss attributable to 'non-controlling interest' and to 'owners of the parent' in the
statement of profit and loss shall be presented as allocation for the period Further, 'total
comprehensive income' for the period attributable to 'non-controlling interest' and to
'owners of the parent' shall be presented in the statement of profit and loss as allocation
for the period. The aforesaid disclosures for 'total comprehensive income' shall also be
made in the statement of changes in equity In addition to the disclosure requirements
in the Indian Accounting Standards, the aforesaid disclosures shall also be made in
respect of 'other comprehensive Income’.
(ii) 'Non-controlling interests' in the Balance Sheet and in the Statement of Changes in
Equity, within equity, shall be presented separately from the equity of the 'owners of the
parent'.
(iii) Investments accounted for using the equity method
2. In Consolidated Financial Statements, the following shall be disclosed by way of additional
information:
Name of the Net Assets ie Share in profit or Share in other Share in total
entity in the total assets loss comprehensive comprehensive
group minus total income income
liabilities
As % of Amt As % of Amt As % of Amt As % of total Amt
consolida consolida consolidated comprehensiv
ted net ted profit comprehensi e income
assets or loss ve income
Parent
Subsidiaries
Indian
1.
2.
3.
Foreign
1.
2.
3.
Non –
controlling
interest in all
subsidiaries
Associates
(Investment as

per the equity

method)
Indian
1.
2.
3.
Foreign
1.
2.
3.
Joint Ventures
(Investment as
per the equity
method)
Indian
1.
2.
3.
Foreign
1.
2.
3.
Total
3. All subsidiaries, associates and joint ventures (whether Indian or foreign) will be covered
under Consolidated Financial Statements.
4. An entity shall disclose the list of subsidiaries or associates or joint ventures which have not
been consolidated in the consolidated financial statements along with the reasons of not
consolidating.

14
INDUSTRY SPECIFIC IND AS

UNIT 1:
INDIAN ACCOUNTING STANDARD 41: AGRICULTURE
LEARNING OUTCOMES
After studying this unit, you will be able to:

 Understand the objective and scope of this standard
 Describe the terms agricultural activity, agricultural produce, bearer plant,
biological asset and biological transformation.
 Explain the principles of recognition and measurement.
 Compute the gain and loss on initial and subsequent measurement.
 Understand the treatment of grant relating to a biological asset.
 Describe the various disclosures prescribed in this standard.

UNIT OVERVIEW
Objective and Scope Recognition and Measurement
Agriculture
Ind AS 41
Government Grants Gains and losses

INDIAN ACCOUNTING STANDARD 41 14.3
1.1 INTRODUCTION AND OBJECTIVE

Ind AS 41, Agriculture is the first standard that specifically covers the accounting and reporting
requirements for the primary sector. Prior to this standard, there were no established guidance on
agriculture and allied industry. This Standard introduces a fair value model to agriculture
accounting which is a major shift away from the traditional cost model widely applied in primary
industry.
Ind AS 41 Agriculture sets out the accounting for agricultural activity, the management of the
transformation of biological assets (living plants and animals) into agricultural produce (harvested
product of the entity's biological assets). The standard generally requires biological assets to be
measured at fair value less costs to sell.
Ind AS 41 addresses following key critical issues:
(a) When should a biological asset or agricultural produce be recognised on the Balance Sheet?
(b) At what value should a recognised biological asset or agricultural produce be measured?
(c) How should the differences in value of a recognised biological asset or agricultural produce
be accounted for between two different reporting dates?
(d) What should be the key disclosures?
1.2 SCOPE
1. This Standard shall be applied to account for the following when they relate to agricultural
activity:
(a) biological assets;
(b) agricultural produce at the point of harvest; and
(c) government grants
2. Ind AS 41 does not apply to:
(a) land related to agricultural activity : for example, the land on which the biological assets
grow, regenerate and/or degenerate (Ind AS 16 Property, Plant and Equipment and
Ind AS 40 Investment Property);
(b) bearer plants related to agricultural activity. Such bearer plants covered within the
scope of Ind AS 16, Property, plant and Equipment as accounted as per the provisions
of that standard. However, this Standard applies to the produce on those bearer plants.

(c) government grants related to bearer plants (Ind AS 20 Accounting for Government
Grants and Disclosure of Government Assistance).
(d) intangible assets associated with the agricultural activity, for example licenses and
rights are covered under Ind AS 38 Intangible Assets and provisions of this standard
will be applicable.
This Standard is applied to agricultural produce, which is the harvested product of the entity’s
biological assets, only at the point of harvest. Thereafter, Ind AS 2 or another applicable
Standard is applied.
Example:
Processing of grapes into wine by a vintner who has grown the grapes. While such processing
may be a logical and natural extension of agricultural activity, and the events taking place may
bear some similarity to biological transformation, such processing is not included within the
definition of agricultural activity in this Standard.
Example:
Agriculture produce after the point of harvest, for example Wool, meat, fruit, rubber, logs that are
processed subsequently are not covered within purview of this standard and Ind AS 2 Inventories
will apply.
The table below provides examples of biological assets, agricultural produce, and products that
are the result of processing after harvest:
Biological assets Agricultural produce Products that are the result of

processing after harvest
Sheep Wool Yarn, carpet
Trees in a timber plantation Felled Trees Logs, lumber
Dairy Cattle Milk Cheese
Pigs Carcass Sausages, cured hams
Cotton plants Harvested cotton Thread, clothing
Sugarcane Harvested cane Sugar
Tobacco plants Picked leaves Cured tobacco
Tea bushes Picked leaves Tea
Grape vines Picked grapes Wine

Fruit trees Picked fruit Processed fruit

Rubber trees Harvested latex Rubber products
Some plants, for example, tea bushes, grape vines, oil palms and rubber trees, usually meet the
definition of a bearer plant and are within the scope of Ind AS 16, Property, plant and Equipment.
However, the produce growing on bearer plants, for example, tea leaves, grapes, oil palm fruit
and latex, is within the scope of Ind AS 41.
1.3 RELEVANT DEFINITIONS

The following are the key Agriculture-related definitions:
(a) Agricultural activity refers to the management by an entity of the biological transformation
and harvest of biological assets for sale or for conversion into agricultural produce or into
additional biological assets.
(b) Biological Asset is defined as a living animal or plant.
(c) Biological transformation comprises the processes of growth, degeneration, production,
and procreation that cause qualitative or quantitative changes in biological asset.
Biological Transformation
Processes
(Casuing Qualitative or Quantitative
changes in a Biological Asset)
Growth Degeneration Production Procreation
An increase in quantity A decrease in the

Of agricultural produce
or Improvement in quantity or Creation of additional
such as latex, tea leaf,
quality of an animal or deterioration in quality living animals or plants
wool, and mik
plant) of an animal or plant
(d) Agricultural produce is the harvested product of the entity’s biological assets.
(e) Harvest is the detachment of produce from a biological asset or the cessation of a biological
asset’s life processes.
(f) Fair Value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. (The definition
of Fair value is as given in Ind AS 113, Fair Value Measurement)

(g) Costs to sell are the incremental costs directly attributable to the disposal of an asset,
excluding finance costs and income taxes.
(h) Bearer plant may be defined as a living plant that:
i. is used in the production or supply of agricultural produce;
ii. is expected to bear produce for more than one period; and
iii. has a remote likelihood of being sold as agricultural produce, except for incidental scrap
sales.
For example, tea bushes, grape vines, oil palms and rubber trees, usually meet the definition of a
bearer plant and are outside the scope of Ind AS 41 and covered under Ind AS 16.
However, produce growing on bearer plant is a biological asset.
Illustration 1
ABC Ltd grows vines, harvests the grapes and produces wine. Which of these activities are in the
scope of Ind AS 41?
Solution
The grape vines are bearer plants that continually generate crops of grapes which are covered by
Ind AS 16, Property, Plant and Equipment.
When the entity harvests the grapes, their biological transformation ceases and they become
agricultural produce covered by Ind AS 41, Agriculture.
Vine involves a lengthy maturation period. This process is similar to the conversion of raw
materials to a finished product rather than biological transformation hence treated as inventory in
accordance with Ind AS 2, Inventories.
1.4 RECOGNITION OF ASSETS

Entities are required to recognise a biological asset or agricultural produce when, and only when, all of
the following conditions are met:
a) the entity controls the asset as a result of past events;
Control over biological assets or agricultural produce may be evidenced by legal ownership
or rights to control, for example legal ownership of cattle and the branding or otherwise
marking of the cattle on acquisition, birth, or weaning.
b) it is probable that future economic benefits associated with the asset will flow to the entity;
and

Future economic benefits are expected to flow to the enterprise from its ownership or control of
the asset. The future benefits are normally assessed by measuring the significant physical
attributes.
c) the fair value or cost of the asset can be measured reliably.
1.5 MEASUREMENT
Biological Asset should be measured on initial recognition and at the end of each reporting period at
its fair value less costs to sell, except for the case where the fair value cannot be measured reliably.
There is a presumption that fair value can be measured reliably for a biological asset. In the following
cases biological asset should be measured at its cost less any accumulated depreciation and any
accumulated impairment losses in accordance with Ind AS 2, Ind AS 16 and Ind AS 36:
 quoted market prices are not available for the biological assets and;
 alternative fair value measurements are determined to be clearly unreliable.
Once the fair value of such a biological asset becomes reliably measurable, an entity shall
measure it at its Fair value less costs to sell.
The presumption can be rebutted only on initial recognition. An entity that has previously
measured a biological asset at its fair value less costs to sell continues to measure the biological
asset at its fair value less costs to sell until disposal.
In all cases, an entity measures agricultural produce at the point of harvest at its fair value less
costs to sell. This Standard reflects the view that the fair value of agricultural produce at the point
of harvest can always be measured reliably.
Agricultural produce harvested from an entity’s biological assets should be measured at its fair value
less costs to sell at the point of harvest. Such measurement is the cost at that date when applying Ind
AS 2 or another applicable Standard.
The fair value measurement of a biological asset or agricultural produce may be facilitated by
grouping biological assets or agricultural produce according to significant attributes; for example,
by age or quality. An entity selects the attributes corresponding to the attributes used in the market
as a basis for pricing.
The fair value less cost to sell of a biological asset can change due to both physical changes and price
changes in the market.
Entities often enter into contacts to sell their biological assets or agricultural produce at a future date.
Contract prices are not necessarily relevant in measuring fair value, because fair value reflects the
current market conditions in which market participant buyers and sellers would enter

into a transaction. As a result, the fair value of a biological asset or agricultural produce is not adjusted
because of the existence of a contract.
Cost may sometimes approximate fair value, particularly when:
a) little biological transformation has taken place since initial cost incurrence (for example, for
fruit tree seedlings planted immediately prior to the end of a reporting period or newly
acquired livestock); or
b) the impact of the biological transformation on price is not expected to be material (for
example, for the initial growth in a 30-year pine plantation production cycle)
Biological assets are often physically attached to land (for example, trees in a plantation forest).
There may be no separate market for biological assets that are attached to the land but an active
market may exist for the combined assets, that is, the biological assets, raw land, and land
improvements, as a package. An entity may use information regarding the combined assets to
measure the fair value of the biological assets. For example, the fair value of raw land and land
improvements may be deducted from the fair value of the combined assets to arrive at the fair
value of biological assets.
Illustration 2
A farmer owned a dairy herd, of three years old cattle as at April 1, 20X1 with a fair value of
` 13,750 and the number of cattle in the herd was 250.
The fair value of three year cattle as at March 31, 20X2 was ` 60 per cattle. The fair value of four year
cattle as at March 31, 20X2 is `75 per cattle.
Calculate the measurement of group of cattle as at March 31, 20X2 stating price and physical change
separately.
Solution
Particulars Amount (`)
Fair value as at April 1, 20X1 13,750
Increase due to Price change [250 x {60 - (13,750/250)}] 1,250
Increase due to Physical change [250 x {75-60}] 3,750
Fair value as at March 31, 20X2 13,750
Illustration 3
XYZ ltd, on 1 December 20X3, purchased 100 sheep’s from a market for Rs 500,000 with a
transaction cost of 2%. Sheep’s fair value increased from Rs 500,000 to Rs 600,000 on
31 March 20X4.
Determine the fair value on the date of purchase and pass necessary journal entries.

Solution
The fair value less cost to sell of sheep’s on the date of purchase would be Rs 4,90,000 (5,00,000-
10,000). Expense of Rs 10,000 would be recognised in profit and loss.
On date of Purchase
Biological Asset Dr. 4,90,000
Expense on Purchase Dr. 10,000
To Bank 5,00,000
(Being biological asset purchased)
On 31 March 20X4 sheep’s would be measured at ` 5,88,000 as Biological Asset (6,00,000- 12,000)
and gain of ` 98,000 (5,88,000-4,90,000) would be recognised in profit or loss.
At the end of reporting period
Biological Asset Dr. 98,000
To Gain – Change in fair value 98,000
(Being change in fair value recognised at the end of reporting period)
1.6 GAINS AND LOSSES

1) Biological Asset:
A gain or loss arising on initial recognition of a Biological Asset at Fair value less costs to
sell and from a change in Fair value less costs to sell of a biological asset shall be included
in Profit or Loss for the period in which it arises.
A loss may arise on initial recognition of a biological asset, because cost to sell are deducted in
determining fair value less cost to sell of a biological asset. A gain may arise on initial recognition
of a biological asset, such as when a calf is born.
Example:
During the reporting period 20X1-20X2, an entity is having a cow which has given birth to a calf.
The fair value less estimated cost to sell for a calf is ` 5,000. The amount of ` 5,000 is,
therefore, immediately recognised in Statement of Profit or Loss.
2) Agriculture Produce:
A gain or loss arising on initial recognition of Agricultural produce at Fair value less costs to sell
shall be included in Profit or Loss for the period in which it arises.
A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting.

1.7 GOVERNMENT GRANTS

1) Biological Asset measured at fair value less cost to sell:-
a) Unconditional Grant:
An unconditional government grant related to a biological asset measured at its fair
value less costs to sell shall be recognised in Profit or Loss when, and only when, the
government grant becomes receivable.
b) Conditional Grant:
If a government grant related to a biological asset measured at its fair value less costs
to sell is conditional, including when a government grant requires an entity not to engage
in specified agricultural activity, an entity shall recognise the government grant in profit
or loss when, and only when, the conditions attaching to the government grant are
met.
Terms and conditions of government grants vary. For example, a grant may require an
entity to farm in a particular location for five years and require the entity to return the
entire grant if it farms for a period shorter than five years. In this case, the grant is not
recognised in Profit or Loss until the five years have passed. However, if the terms of
the grant allow part of it to be retained according to the time elapsed, the entity
recognises that part in profit or loss as time passes.
Example:
Sun Ltd cultivated a huge plot of land. The government offers a grant of ` 10 crore under the
condition that the land is being cultivated for 5 years. If the land will be cultivated for a shorter
period, the entity is required to return the entire grant.
Therefore, the government grant will be recognised as income only after 5 years of
cultivation. The situation would be different if the returning obligation referred to the years of
not cultivating the land is with respect to retention of grant for the period till which the entity
has cultivated the land. In this case, the amount of ` 10 crore would be recognised as income,
proportionately with the time period, meaning ` 2 crore per annum.
2) Biological Asset measured at its cost:-

If a government grant relates to a Biological Asset measured at its cost less any accumulated
depreciation and any accumulated impairment losses i.e. (i.e. inability to measure fair value
reliably), Ind AS 20 is applied.

Biological Asset
Measured at Fair value less cost to sell Measured at Cost
Conditional Grant
Condition attaching to Unconditional Grant
the government grant Government Grant Ind AS 20
are Met becomes Receivable
1.8 DISCLOSURE
1) Description of biological assets and activities.
The entity is required to a description of each group of biological assets. This disclosure may take
the form of a narrative or quantified description. An entity is encouraged to provide a quantified
description of each group of biological assets, distinguishing between consumable and bearer
biological assets or between mature and immature biological assets, as appropriate.
2) Gains and losses recognised during the period.
An entity shall disclose the aggregate gain or loss arising during the current period on initial
recognition of biological assets and agricultural produce and from the change in fair value
less costs to sell of biological assets.
3) Reconciliation of changes in biological assets.
A detailed reconciliation is required of changes in the carrying amount of biological assets
between the beginning and the end of the current period, which includes:
a) gain or loss arising from changes in fair value less costs to sell;
b) increases arising from purchases;
c) decreases attributable to sales and biological assets classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance with
Ind AS 105;
d) decreases due to harvest;
e) increases resulting from business combinations;

f) net exchange differences arising on the translation of financial statements into a

different presentation currency, and on the translation of a foreign operation into the
presentation currency of the reporting entity; and
g) other changes.
4) Restricted assets, commitments and risk management strategies.
The entity should disclose:
a) the existence and carrying amounts of biological assets whose title is restricted, and
the carrying amounts of biological assets pledged as security for liabilities;
b) the amount of commitments for the development or acquisition of biological assets; and
c) financial risk management strategies related to agricultural activity.
5) Additional disclosures when fair value cannot be measured reliably.
If biological assets within the scope of Ind AS 41 are measured at cost less any accumulated
depreciation and any accumulated impairment losses at the end of the period, the following
disclosures are required:
a) a description of the biological assets;
b) an explanation of why fair value cannot be measured reliably;
c) the range of estimates within which fair value is highly likely to lie;
d) the depreciation method used;
e) the useful lives or the depreciation rates used; and
f) the gross carrying amount and the accumulated depreciation and impairment losses at
the beginning and end of the period.
6) Government grants
The following disclosures are required for government grants relating to agricultural activity:
a) the nature and extent of government grants recognised;
b) unfulfilled conditions and other contingencies attaching to government grants; and
c) significant decreases expected in the level of government grants.
Illustration 4
Moon Ltd prepares financial statements to 31 March each year. On 1 April 20X1 the company carried
out the following transactions:
-- Purchased a land for ` 50 Lakhs.
-- Purchased 200 dairy cows (average age at 1 April 20X1 two years) for ` 10 Lakhs.

-- Received a grant of ` 1 million towards the acquisition of the cows. This grant was non-
refundable.
For the year ending 31 March 20X2, the company has incurred following costs:
-- ` 6 Lakh to maintain the condition of the animals (food and protection).
-- ` 4 Lakh as breeding fee to a local farmer.
On 1 October 20X1, 100 calves were born. There were no other changes in the number of animals
during the year ended 31 March 20X2. As of 31 March 20X2, Moon Ltd had 3,000 litres of unsold milk
in inventory. The milk was sold shortly after the year end at market prices.
Information regarding fair values is as follows:
Item Fair Value less cost to sell
1 April 20X1 1 October 20X1 31 March 20X2
` ` `
Land 50 Lakhs 60 Lakhs 70 Lakhs
New born calves (per calf) 1,000 1,100 1,200
Six month old calves (per calf) 1,100 1,200 1,300
Two year old cows (per cow) 5,000 5,100 5,200
Three year old cows (per cow) 5,200 5,300 5,500
Milk (per litre) 20 22 24
Prepare extracts from the Balance Sheet and Statement of Profit & Loss that would be reflected
in the financial statements of the entity for the year ended 31 March 20X2.
Solution
Extract from the Statement of Profit & Loss
Income WN Amount
Change in fair value of purchased dairy cow WN 2 1,00,000
Government Grant WN 3 10,00,000
Change in the fair value of newly born calves WN 4 1,30,000

Fair Value of Milk WN 5 72,000
Total Income 13,02,000
Less: Expenses
Maintenance Costs WN 2 6,00,000
Breeding Fees WN 2 4,00,000
Total Expense (10,00,000)
Net Income 3,02,000
Extracts from Balance Sheet
Property, Plant and Equipment:
Land WN 1 50,00,000
Dairy Cow WN 2 11,00,000
Calves WN 4 1,30,000
62,30,000
Inventory
Milk WN 5 72,000
72,000
Working Notes:
1. Land: The purchase of the land is not covered by Ind AS 41. The relevant standard which
would apply to this transaction is Ind AS 16. Under this standard the land would initially be
recorded at cost and depreciated over its useful economic life. This would usually be
considered to be infinite in the case of land and so no depreciation would be appropriate.
Under Cost Model no recognition would be made for post-acquisition changes in the value of
land. The allowed alternative treatment under Revaluation Model would permit the land to be
revalued to market value with the revaluation surplus taken to the other comprehensive
income. We have followed the Cost Model.
2. Dairy Cows: Under the ‘fair value model’ laid down in Ind AS 41 the mature cows would be
recognised in the Balance Sheet at 31 March 20X2 at the fair value of 200 x ` 5,500 =
`11,00,000.

Increase in price change 200 x (5,200-5,000) = 40,000

Increase in physical change 200 x (5,500-5,200) = 60,000
The total difference between the fair value of matured herd and its initial cost (` 11,00,000 –
` 10,00,000 = a gain of ` 1,00,000) would be recognised in the profit and loss along with the
maintenance costs and breeding fee of ` 6,00,000 and ` 4,00,000 respectively.
3. Grant: Grand relating to agricultural activity is not subject to the normal requirement of Ind
AS 20. Under Ind AS 41 such grants are credited to income as soon as they are
unconditionally receivable rather than being recognised over the useful economic life of the
herd. Therefore, ` 10,00,000 would be credited to income of the company.
4. Calves: They are a biological asset and the fair value model is applied. The breeding fees
are charged to income and an asset of 100 x ` 1,300 = ` 1,30,000 recognised in the Balance
sheet and credited to Profit and loss.
5. Milk: This is agricultural produce and initially recognised on the same basis as biological
assets. Thus the milk would be valued at 3,000 x ` 24 = ` 72,000. This is regarded as ‘cost’
for the future application of Ind AS 2 to the unsold milk

TEST YOUR KNOWLEDGE

Question
Define Agricultural activity. Also state, along with reasons, whether the following activities are
agricultural activities?
(a) Ocean fishing
(b) Deforestation
(c) Plantation

UNIT 2:
INDIAN ACCOUNTING STANDARD 104 : INSURANCE
CONTRACTS
LEARNING OUTCOMES

 Understand the meaning of insurance contract
 Understand the scenarios where insurance contract may not get covered
under Ind AS 104
 Understand the distinction between insurance and investment contracts
 Understand the accounting treatment of embedded derivatives contained
in insurance contracts
 Learn the presentation and disclosure requirements

UNIT OVERVIEW
Objective and Scope Recognition and Disclosure

measurement
• Embedded • Temporary • Explanation of

derivatives exemption from recognised
• Unbundling of some other IFRSs amounts
deposit • Temporary • Nature and extent
components exemption from of risks arising from
IFRS 9 insurance contracts
• Changes in
accounting policies
• Insurance contracts
acquired in a
business
combination or
portfolio transfer
• Discretionary
participation
features

2.1 OBJECTIVE
Ind AS 104 is an interim standard until the second phase of the project on insurance contracts is
completed. The objective of Ind AS 104 is to specify the financial reporting for insurance contracts by
any entity that issues such contracts (described in this Ind AS as an insurer).
In particular, Ind AS 104 prescribes:
(a) limited improvements to accounting by insurers for insurance contracts; and
(b) disclosure that identifies and explains the amounts in an insurer’s financial statements arising
from insurance contracts and helps users of those financial statements understand the
amount, timing and uncertainty of future cash flows from insurance contracts.
(c) Ind AS 104 is not restricted to insurance companies but applies to all issuers of insurance
contracts. This chapter does not deal with the specialized accounting that is required by
regulatory insurance companies or other companies for their insurance contracts. This
chapter deals with how Ind AS 104 may impact other entities that issue contracts which meet
the definition of insurance contracts.
2.2 SCOPE
Ind AS 104 is applicable to:
(a) insurance contracts (including reinsurance contracts) that an entity issues and
reinsurance contracts that it holds; and
(b) financial instruments that an entity issues with a discretionary participation feature.
Note: Ind AS 107 on ‘Financial Instruments: Disclosures’ requires disclosure about such financial
instruments.
Ind AS 104 is not applicable to the following:
S. No. Particulars Applicable Ind AS
1. Accounting for financial assets held by insurers and Ind AS 32, Ind AS 109 and
financial liabilities issued by insurers. Ind AS 107
2. Product warranties issued directly by a manufacturer, Ind AS 18 and Ind AS 37

dealer or retailer.

3. Employers’ assets and liabilities under employee Ind AS 19 and Ind AS 102
benefit plans.
4. Retirement benefit obligations reported by defined benefit —

retirement plans.
5. Contractual rights or contractual obligations that are Ind AS 17, Ind AS 18 and
contingent on the future use of, or right to use, a non- Ind AS 38
financial item (e.g., some licence fees, royalties,
contingent lease payments and similar items), as well
as a lessee’s residual value guarantee embedded in a
finance lease.
6. Financial guarantee contracts (refer note below). Ind AS 109, Ind AS 32 and
Ind AS 107
7. Contingent consideration payable or receivable in a Ind AS 103

business combination
8. Direct insurance contracts that the entity holds (i.e., -

where the entity is the policyholder). However, a cedant
shall apply this Standard to reinsurance contracts that
it holds
Note: Where the issuer has previously asserted explicitly that it regards financial guarantee
contracts as insurance contracts and has used accounting applicable to insurance contracts, in
that case the issuer may elect to apply to such financial guarantee contracts either:
(a) Ind AS 109, Ind AS 32 and Ind AS 107; or
(b) Ind AS 104.
The issuer may make that election contract by contract, but the election for each contract is irrevocable.
Points to be noted:
(a) As per Ind AS 104, any entity that issues an insurance contract is an insurer, whether or not
the issuer is regarded as an insurer for legal or supervisory purposes.
(b) A reinsurance contract is a type of insurance contract. Accordingly, all references in this
Ind AS 104 to insurance contracts should also apply to reinsurance contracts.

2.3 DEFINITIONS
S. No. Term Definition
1. Cedant The policyholder under a reinsurance contract.
2. Deposit A contractual component that is not accounted for as a derivative

component under Ind AS 109 and would be within the scope of Ind AS 109 if it
were a separate instrument.
3. Direct insurance An insurance contract that is not a reinsurance contract.

contract
4. Discretionary A contractual right to receive, as a supplement to guaranteed

participation benefits, additional benefits:
feature (a) that are likely to be a significant portion of the total
contractual benefits;
(b) whose amount or timing is contractually at the discretion
of the issuer; and
(c) that are contractually based on:
(i) the performance of a specified pool of contracts or a
specified type of contract;
(ii) realised and/or unrealised investment returns on
a specified pool of assets held by the issuer; or
(iii) the profit or loss of the company, fund or other entity
that issues the contract.
5. Fair value The price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between knowledgeable willing
parties in an arm’s length transaction.
6. Financial A contract that requires the issuer to make specified payments to

guarantee contract reimburse the holder for a loss it incurs because a specified debtor
fails to make payment when due in accordance with the original or
modified terms of a debt instrument.
7. Financial risk The risk of a possible future change in one or more of a

specified interest rate, financial instrument price, commodity
price, foreign exchange rate, index of prices or rates, credit

rating or credit index or other variable, provided in the case of

a non-financial variable that the variable is not specific to a
party to the contract.
8. Guaranteed Payments or other benefits to which a particular policyholder

benefits or investor has an unconditional right that is not subject to the
contractual discretion of the issuer.
9. Guaranteed An obligation to pay guaranteed benefits, included in a contract

element that contains a discretionary participation feature.
10. Insurance asset An insurer’s net contractual rights under an insurance contract.
11. Insurance contract A contract under which one party (the insurer) accepts significant
insurance risk from another party (the policyholder) by agreeing to
compensate the policyholder if a specified uncertain future event
(the insured event) adversely affects the policyholder.
12. Insurance liability An insurer’s net contractual obligations under an insurance

contract.
13. Insurance risk Risk, other than financial risk, transferred from the holder of a
contract to the issuer.
14. Insured event An uncertain future event that is covered by an insurance contract
and creates insurance risk.
15. Insurer The party that has an obligation under an insurance contract to
compensate a policyholder if an insured event occurs.
16. Liability adequacy An assessment of whether the carrying amount of an insurance

test liability needs to be increased (or the carrying amount of
related deferred acquisition costs or related intangible assets
decreased) based on a review of future cash flows.
17. Policyholder A party that has a right to compensation under an insurance

contract if an insured event occurs.
18. Reinsurance A cedant’s net contractual rights under a reinsurance contract

assets

19. Reinsurance An insurance contract issued by one insurer (the reinsurer) to

contract compensate another insurer (the cedant) for losses on one or
more contracts issued by the cedant.
20. Reinsurer The party that has an obligation under a reinsurance contract
to compensate a cedant if an insured event occurs.
21. Unbundle Account for the components of a contract as if they were separate
contracts.
2.4 DEFINITION OF AN INSURANCE CONTRACT

1. Insurance contract is a contract under which one party (the insurer) accepts significant
insurance risk from another party (the policyholder) by agreeing to compensate the
policyholder if a specified uncertain future event (the insured event) adversely affects the
policyholder.
2. Uncertain Future Event: Uncertainty (or risk) is the essence of an insurance contract.
Accordingly, at least one of the following is uncertain at the inception of an insurance
contract:
(a) whether an insured event will occur;
(b) when it will occur; or
(c) how much the insurer will need to pay if it occurs.
3. Insurance contracts may also cover the following type of insured events:
(a) the insured event is the discovery of a loss during the term of the contract, even if the
loss arises from an event that occurred before the inception of the contract.
(b) the insured event is an event that occurs during the term of the contract, even if the
resulting loss is discovered after the end of the contract term.
(c) the insured events that have already occurred, but whose financial effect is still
uncertain, e.g., a reinsurance contract that covers the direct insurer against adverse
development of claims already reported by policyholders, where the insured event is
the discovery of the ultimate cost of those claims.
4. Payments in Kind: Some insurance contracts require or permit payments to be made in
kind.

Examples
(a) an insurance contract where the insurer replaces a stolen article directly, instead of
reimbursing the policyholder.
(b) an insurance contract where an insurer uses its own hospitals and medical staff to
provide medical services covered by the contracts.
5. Some fixed-fee service contracts in which the level of service depends on an uncertain event
may meet the definition of an insurance contract under Ind AS 104.
Examples:
(a) a maintenance contract in which the service provider agrees to repair specified
equipment after a malfunction. The fixed service fee is based on the expected number
of malfunctions, but it is uncertain whether a particular machine will break down. The
malfunction of the equipment adversely affects its owner and the contract compensates
the owner (in kind, rather than cash).
(b) a contract for car breakdown services in which the provider agrees, for a fixed annual
fee, to provide roadside assistance or tow the car to a nearby garage. The contract may
meet the definition of an insurance contract even if the provider does not agree to carry
out repairs or replace parts.
6. Insurance Risks
The following are insurance risks:
(a) the risk of changes in the fair value of a non-financial asset if the fair value reflects not
only changes in market prices for such assets (a financial variable) but also the
condition of a specific non-financial asset held by a party to a contract (a non-
financial variable)
Example:
If a guarantee of the residual value of a specific car exposes the guarantor to the risk
of changes in the car’s physical condition, that risk is an insurance risk, and not a
financial risk.
(b) a pre-existing risk transferred from the policyholder to the insurer

The following are not insurance risks:
(a) A new risk created by the contract.
(b) Lapse or persistency risk (i.e., the risk that the counterparty will cancel the contract
earlier or later than the issuer had expected in pricing the contract) is not insurance risk

because the payment to the counterparty is not contingent on an uncertain future event that
adversely affects the counterparty.
(c) Expense risk (i.e., the risk of unexpected increases in the administrative costs
associated with the servicing of a contract, rather than in costs associated with
insured events) is not insurance risk because an unexpected increase in expenses does
not adversely affect the counterparty.
Exception:
If the issuer of a contract that exposes the issuer to lapse risk, persistency risk or
expense risk mitigates that risk by using a second contract to transfer part of that risk
to another party, the second contract exposes that other party to insurance risk.
7. Significant Insurance Risks
 A contract is an insurance contract only if it transfers significant insurance risk.
 The risk must be of insurance.
 Insurance risk is defined as any risk other than financial risk.
 Financial risk is the risk of a possible future change in one or more of a specified future
interest rate, financial instrument price, index of prices or rates, credit rating or credit
index or other variable, provided in the case of a non-financial variable that the variable
is not specific to a party to the contract.
 Some contracts expose the issuer to financial risk, in addition to significant insurance
risk, e.g., many life insurance contracts both guarantee a minimum rate of return to
policyholders (creating financial risk) and promise death benefits that at some times
significantly exceed the policyholder’s account balance (creating insurance risk in the
form of mortality risk). Such contracts are also insurance contracts.
 Under some contracts, an insured event triggers the payment of an amount linked to a
price index. Such contracts are insurance contracts, provided the payment that is
contingent on the insured event can be significant, e.g., a life-contingent annuity linked
to a cost-of-living index transfers insurance risk because payment is triggered by an
uncertain event—the survival of the annuitant. The link to the price index is an
embedded derivative, but it also transfers insurance risk. If the resulting transfer of
insurance risk is significant, the embedded derivative meets the definition of an
insurance contract, in which case it need not be separated and measured at fair value.
 An insurer can accept significant insurance risk from the policyholder only if the insurer
is an entity separate from the policyholder. In the case of a mutual insurer, the
mutual insurer accepts risk from each policyholder and pools that risk. Although
policyholders bear that pooled risk collectively in their capacity as owners, the mutual
insurer has still accepted the risk that is the essence of an insurance contract.

8. Assessment of Whether Insurance Risk is Significant: Ind AS 104 does not set a
numerical range for the level of insurance risk to be ‘significant’. Instead it describes
insurance risk as significant if, and only if, an insured event could cause an insurer to pay
significant additional benefits in any scenario (even the scenario with a low probability),
excluding scenarios that lack commercial substance (i.e., have no discernible effect on the
economics of the transaction).
The following are insurance contracts with significant insurance risk:
(a) if a contract pays a death benefit exceeding the amount payable on survival, the contract
is an insurance contract unless the additional death benefit is insignificant.
(b) An annuity contract that pays out regular sums for the rest of a policyholder’s life is an
insurance contract, unless the aggregate life-contingent payments are insignificant.
(c) a requirement to pay benefits earlier if the insured event occurs earlier and the
payment is not adjusted for the time value of money, e.g., whole life insurance for a
fixed amount (in other words, insurance that provides a fixed death benefit whenever
the policyholder dies, with no expiry date for the cover). It is certain that the policyholder
will die, but the date of death is uncertain. The insurer will suffer a loss on those
individual contracts for which policyholders die early, even if there is no overall loss on
the whole book of contracts.
The additional benefits refer to amounts that exceed those that would be payable if no insured
event occurred (excluding scenarios that lack commercial substance).
Additional benefits include:
(a) claims handling costs; and
(b) claims assessment costs.
Additional benefits exclude:
(a) the loss of the ability to charge the policyholder for future services.
Example:
In an investment-linked life insurance contract, the death of the policyholder means that
the insurer can no longer perform investment management services and collect a fee
for doing so. However, this economic loss for the insurer does not reflect insurance
risk.
(b) waiver on death of charges that would be made on cancellation or surrender.

(c) a payment conditional on an event that does not cause a significant loss to the
holder of the contract.

Example:
There is a contract that requires the issuer to pay one million rupees if an asset suffers
physical damage causing an insignificant economic loss of one rupee to the holder. In
this contract, the holder transfers to the insurer the insignificant risk of losing one rupee.
At the same time, the contract creates non-insurance risk that the issuer will need to
pay 999,999 rupees if the specified event occurs. Because the issuer does not accept
significant insurance risk from the holder, this contract is not an insurance contract.
(d) possible reinsurance recoveries.

An insurer should assess the significance of insurance risk contract by contract rather than
by reference to the materiality to the financial statements.
Exception:
(a) Contracts entered into simultaneously with a single counterparty (or contracts that are
otherwise interdependent) form a single contract.
(b) If a relatively homogeneous book of small contracts is known to consist of contracts that
all transfer insurance risk, an insurer need not examine each contract within that book
to identify a few non-derivative contracts that transfer insignificant insurance risk.
Note 1: If an insurance contract is unbundled into a deposit component and an insurance
component, the significance of insurance risk transfer is assessed by reference to the insurance
component.
Note 2: The significance of insurance risk transferred by an embedded derivative is
assessed by reference to the embedded derivative.
9. Adverse Effect on the Policy Holder: The definition of an insurance contract refers to “an
adverse effect on the policyholder”. The definition does not limit the payment by the
insurer to an amount equal to the financial impact of the adverse event.
Example:
Insurance contract includes ‘new-for-old’ coverage that pays the policyholder sufficient to permit
replacement of a damaged old asset by a new asset.
10. Examples of insurance contracts as per Ind AS 104

(a) Insurance against theft or damage to property.
(b) Insurance against product liability, professional liability, civil liability or legal expenses.
(c) Life insurance (although death is certain, it is uncertain when death will occur or, for some
types of life insurance, whether death will occur within the period covered by the insurance).

(d) Life-contingent annuities and pensions (i.e., contracts that provide compensation for the
uncertain future event: the survival of the annuitant or pensioner to assist the annuitant
or pensioner in maintaining a given standard of living, which would otherwise be
adversely affected by his or her survival).
(e) Disability and medical cover.
(f) Surety bonds, fidelity bonds, performance bonds and bid bonds (i.e., contracts that
provide compensation if another party fails to perform a contractual obligation, for
example an obligation to construct a building).
(g) Product warranties issued by another party for goods sold by a manufacturer, dealer or
retailer. However, product warranties issued directly by a manufacturer, dealer or
retailer are outside scope of Ind AS 104.
(h) Title insurance (i.e., insurance against the discovery of defects in title to land that were
not apparent when the insurance contract was written). In this case, the insured event
is the discovery of a defect in the title, not the defect itself.
(i) Travel assistance (i.e., compensation in cash or in kind to policyholders for losses
suffered while they are travelling).
(j) Catastrophe bonds that provide for reduced payments of principal, interest or both if a
specified event adversely affects the issuer of the bond (unless the specified event does
not create significant insurance risk, for example if the event is a change in an interest
rate or foreign exchange rate).
(k) Insurance swaps and other contracts that require a payment based on changes in
climatic, geological or other physical variables that are specific to a party to the contract.
(l) Reinsurance contracts
11. Examples of contracts that are not insurance contracts as per Ind AS 104
(a) Investment contracts that have the legal form of an insurance contract but do not expose
the insurer to significant insurance risk, e.g., life insurance contracts in which the insurer
bears no significant mortality risk.
(b) Contracts that have the legal form of insurance, but pass all significant insurance risk
back to the policyholder through non-cancellable and enforceable mechanisms that
adjust future payments by the policyholder as a direct result of insured losses, e.g.,
some financial reinsurance contracts or some group contracts.
(c) Self-insurance, in other words retaining a risk that could have been covered by
insurance (there is no insurance contract because there is no agreement with another
party).

(d) Contracts (such as gambling contracts) that require a payment if a specified uncertain
future event occurs, but do not require, as a contractual precondition for payment, that
the event adversely affects the policyholder.
(e) Derivatives that expose one party to financial risk but not insurance risk i.e. they require
that party to make payment based solely on changes in one or more of a specified
interest rate, financial instrument price, commodity price etc. provided in the case of a
non-financial variable that the variable in not specific to a party to the contract.
(f) A credit-related guarantee (or letter of credit, credit derivative default contract or credit
insurance contract) that requires payments even if the holder has not incurred a loss on
the failure of the debtor to make payments when due.
(g) Contracts that require a payment based on a climatic, geological or other physical
variable that is not specific to a party to the contract (commonly described as weather
derivatives).
(h) Catastrophe bonds that provide for reduced payments of principal, interest or both,
based on a climatic, geological or other physical variable that is not specific to a party
to the contract.
Illustration 1
Determine whether the following are insurance contracts as per Ind AS 104:
(a) A unit-linked contract that pays benefits linked to the fair value of a pool of assets. The benefit
is 100% of the unit value on surrender or maturity and 101% of the unit value on death.
(b) Pure endowment, i.e., the insured person receives a payment on survival to a specified date,
but beneficiaries receive nothing if the insured person dies before then.
(c) Deferred annuity, i.e., policyholder will receive, or can elect to receive, a life-contingent
annuity at rates guaranteed at inception.
(d) Deferred annuity, i.e., policyholder will receive, or can elect to receive, a life-contingent
annuity at rates prevailing when the annuity begins.
(e) Guarantee fund established by contract where the contract requires all participants to pay
contributions to the fund so that it can meet obligations incurred by participants (or even
others).
(f) Guarantee fund established by law.
(g) Product warranties, issued directly by a manufacturer, dealer or retailer.
(h) Group insurance contract that gives the insurer an enforceable and non-cancellable
contractual right to recover all claims paid out of future premiums, with appropriate
compensation for the time value of money.

(i) Catastrophe bond, i.e., bond in which principal, interest payments or both are reduced
significantly if a specified triggering event occurs and the triggering event includes a condition
that the issuer of the bond suffered a loss.
(j) An insurance contract issued to employees as a result of a defined contribution
pension plan. The contractual benefits for employee service in the current and prior periods
are not contingent on future service. The insurer also issues similar contracts on the same
terms to third parties.
(k) Loan contract containing a prepayment fee that is waived if prepayment results from the
borrower’s death.
(l) Loan contract that waives repayment of the entire loan balance if the borrower dies.
(m) A contract permits the issuer to deduct an MVA (market value adjustment) from
surrender values or maturity payments to reflect current market prices for the underlying
assets. The contract does not permit an MVA for death benefits.
(n) A contract permits the issuer to deduct an MVA from surrender payments to reflect current
market prices for the underlying assets. The contract does not permit an MVA for death and
maturity benefits. The amount payable on death or maturity is the amount originally invested
plus interest.
(o) An insurance contract is issued by one entity (i.e., a captive insurer) to another entity
in the same group.
(p) An agreement that entity A will compensate entity B for losses on one or more
contracts issued by entity B that do not transfer significant insurance risk.
Solution
(a) This contract contains a deposit component (100% of unit value) and an insurance
component (additional death benefit of 1%).
(b) It is an insurance contract unless the transfer of insurance risk is insignificant.
(c) It is an insurance contract unless the transfer of insurance risk is insignificant. The contract
transfers mortality risk to the insurer at inception, because the insurer might have to pay
significant additional benefits for an individual contract if the annuitant elects to take the life
contingent annuity and survives longer than expected (unless the contingent amount is
insignificant in all scenarios that have commercial substance).
(d) It is not an insurance contract at inception, if the insurer can re-price the mortality risk without
constraints.
(e) The contract that establishes the guarantee fund is an insurance contract.
(f) It is not an insurance contract because the commitment to contribute to the fund is not
established by any contract.

(g) Although they are insurance contracts, but excluded from the scope of Ind AS 104 as they
are covered under Ind AS 18 and Ind AS 37.
(h) It is not an insurance contract because the insurance risk is insignificant.
(i) The contract is an insurance contract, and contains an insurance component (with the issuer
as policyholder and the holder as the insurer) and a deposit component.
(j) It is an insurance contract. However, if the employer pays part or all of the employee’s
premiums, the payment by the employer is an employee benefit.
(k) It is not an insurance contract because it does not transfer a pre-existing risk from the
borrower.
(l) This contract contains a deposit component (the loan) and an insurance component (waiver
of the loan balance on death, equivalent to a cash death benefit).
(m) The policyholder obtains an additional death benefit because no MVA is applied on death. If
the risk transferred by that benefit is significant, the contract is an insurance contract.
(n) The policyholder obtains an additional benefit because no MVA is applied on death or
maturity. However, that benefit does not transfer insurance risk from the policyholder
because it is certain that the policyholder will live or die and the amount payable on death or
maturity is adjusted for the time value of money. The contract is an investment contract.
(o) In individual or separate financial statements of entities: It is an insurance contract.
In the consolidated financial statement of the entity: The transaction gets eliminated.
(p) The contract is an insurance contract if it transfers significant insurance risk from entity B to
entity A, even if some or all of the individual contracts do not transfer significant insurance
risk to entity B.
2.5 EMBEDDED DERIVATIVES

Insurance contracts can contain embedded derivatives.
Ind AS 109 applies to embedded derivatives contained in insurance contracts, unless the
embedded derivative is itself an insurance contract. Ind AS 109 requires an entity to separate
some embedded derivatives from their host contract, measure them at fair value and include
changes in their fair value in profit or loss.
An embedded derivative is a component of a hybrid (combined) instrument that also includes a
non-derivative host contract, with the effect that some of the cash flows of the combined
instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some
or all of the cash flows that otherwise would be required by the contract to be modified according
to a specified interest rate, financial instrument price, commodity price, foreign exchange rate,

index of prices or rates, credit rating or credit index, or other variable, provided in the case
of a nonfinancial variable that the variable is not specific to a party to the contract. A derivative
that is attached to a financial instrument but is contractually transferable independently of that
instrument, or has a different counterparty from that instrument, is not an embedded derivative,
but a separate financial instrument.
Basis Covered under Ind AS 109 Covered under Ind AS 104
Basic principle Derivatives embedded in an Embedded derivative is itself an

insurance contract. insurance contract.
Accounting Ind AS 109 requires an entity to There is no requirement of

Treatment separate some embedded separation and measurement at fair
derivatives from their host contract, value. It will be accounted for as an
measure them at fair value and insurance contract only under Ind
include changes in their fair AS 104.
value in profit or loss.
Examples A put option or cash surrender A policyholder’s option to surrender

option embedded in an insurance an insurance contract for a fixed
contract if the surrender value amount (or for an amount based on
varies in response to the change a fixed amount and an interest rate),
in a financial variable (such as an even if the exercise price differs from
equity or commodity price or index), the carrying amount of the host
or a non-financial variable that is insurance liability.
not specific to a party to the
contract.
The holder’s ability to exercise a put

option or cash surrender option is
triggered by a change in such a
variable (e.g., a put option that can
be exercised if a stock market index
reaches a specified level).
Illustration 2
Determine whether the following embedded derivatives are insurance contracts as per Ind AS
104:
(a) Death benefit linked to equity prices or equity index, payable only on death or
annuitisation and not on surrender or maturity.

(b) Death benefit that is greater of:

(i) Unit value of an investment fund (equal to the amount payable on surrender or
maturity); and
(ii) Guaranteed minimum.
(c) Option to take a life-contingent annuity at guaranteed rate (combined guarantee of interest
rates and mortality charges).
(d) Embedded guarantee of minimum annuity payments if the annuity payments are
contractually linked to investment returns or asset prices: guarantee relates only to payments
that are life-contingent.
(e) Embedded guarantee of minimum annuity payments if the annuity payments are
contractually linked to investment returns or asset prices: guarantee relates only to payments
that are not life-contingent.
(f) Policyholder can elect to receive life-contingent payments or payments that are not life-
contingent, and the guarantee relates to both. When the policyholder makes its election, the
issuer cannot adjust the pricing of the life-contingent payments to reflect the risk that
the insurer assumes at that time.
(g) Embedded guarantee of minimum equity returns available to the policyholder as either:
(i) a cash payment;
(ii) a period-certain annuity; or
(iii) a life-contingent annuity, at annuity rates prevailing at the date of annuitisation.
(h) Embedded guarantee of minimum equity returns available to the policyholder as either:
(i) a cash payment;
(ii) a period-certain annuity; or
(iii) a life-contingent annuity, at annuity rates set at inception.
(i) Contractual feature that provides a return contractually linked (with no discretion) to the
return on specified assets.
(j) Persistency bonus paid at maturity in cash (or as a period-certain annuity).
(k) Persistency bonus paid at maturity as an enhanced life-contingent annuity.
(l) Dual trigger contract, e.g., contract requiring a payment that is contingent on a
breakdown in power supply that adversely affects the holder (first trigger) and a specified
level of electricity prices (second trigger). The contingent payment is made only if both
triggering events occur.

Solution
(a) The equity-index feature is an insurance contract (unless the life-contingent payments are
insignificant), because the policyholder benefits from it only when the insured event occurs.
(b) Excess of guaranteed minimum over unit value is a death benefit. This meets the definition
of an insurance contract (unless the life-contingent payments are insignificant).
(c) The embedded option is an insurance contract (unless the life-contingent payments are
insignificant).
(d) The embedded guarantee is an insurance contract.
(e) The embedded derivative is not an insurance contract.
(f) The embedded option to benefit from a guarantee of life-contingent payments is an insurance
contract (unless the life-contingent payments are insignificant). The embedded option to
receive payments that are not life-contingent (‘the second option’) is not an insurance
contract.
(g) If the guaranteed payments are not contingent to a significant extent on survival, the option
to take the life-contingent annuity does not transfer insurance risk until the policyholder opts
to take the annuity. Therefore, the embedded guarantee is not an insurance contract. If the
guaranteed payments are contingent to a significant extent on survival, the guarantee is an
insurance contract.
(h) The whole contract is an insurance contract from inception (unless the life-contingent
payments are insignificant). The option to take the life-contingent annuity is an embedded
insurance contract.
(i) The embedded derivative is not an insurance contract.
(j) The embedded derivative (option to receive the persistency bonus) is not an insurance
contract (unless the persistency bonus is life-contingent to a significant extent). Insurance
risk does not include lapse or persistency risk.
(k) The embedded derivative is an insurance contract (unless the life-contingent payments are
insignificant).
(l) The embedded derivative is an insurance contract (unless the first trigger lacks commercial
substance).
2.6 UNBUNDLING OF DEPOSIT COMPONENTS

Some insurance contracts contain both an insurance component and a deposit component.
In some cases, an insurer is required or permitted to unbundle those components.

Unbundling is required if both the following conditions are met:

(a) the insurer can measure the deposit component (including any embedded surrender options)
separately (i.e., without considering the insurance component).
(b) the insurer’s accounting policies do not otherwise require it to recognise all obligations and
rights arising from the deposit component.
Unbundling is permitted, but not required, if the insurer can measure the deposit component
separately but its accounting policies require it to recognise all obligations and rights arising from the
deposit component, regardless of the basis used to measure those rights and obligations.
Unbundling is prohibited if an insurer cannot measure the deposit component separately.
Accounting treatment after unbundling
Insurance component Apply Ind AS 104
Deposit component Apply Ind AS 109
Does contract contain significant insurance

risk?
Yes No
Does contract need to be Does contract contain any discretionary

unbundled? participation features?
Yes No Yes
No
Insurance
Deposit
component
component
Insurance contract (Ind Investment contract Investment contract with

AS 104) (Ind AS 109) discretionary participation
features (Ind AS 104)

Example:
A cedant receives compensation for losses from a reinsurer, but the contract obliges the
cedant to repay the compensation in future years. That obligation arises from a deposit
component. If the cedant’s accounting policies would otherwise permit it to recognise the
compensation as income without recognising the resulting obligation, unbundling is required.
Illustration 3
A reinsurance contract has the following features:
(a) The cedant pays premiums of ` 10 at the beginning of every year for five years.
(b) An experience account is established, equal to 90% of cumulative premiums (including the
additional premiums discussed in (c) below) less 90% of cumulative claims.
(c) If the balance in the experience account is negative (i.e., cumulative claims exceed
cumulative premiums), the cedant pays an additional premium equal to the experience
account balance divided by the number of years left to run on the contract.
(d) At the end of the contract, if the experience account balance is positive (i.e.,
cumulative premiums exceed cumulative claims), it is refunded to the cedant; if the balance
is negative, the cedant pays the balance to the reinsurer as an additional premium.
(e) Neither party can cancel the contract before maturity.
(f) The maximum loss that the reinsurer is required to pay in any period is ` 200.
Assuming an appropriate discount rate @ 10%, prescribe the necessary accounting treatment in
the books of reinsurer as per Ind AS 104 in the following two cases:
(i) No claims during 5 years.
(ii) Claim of ` 150 in year 1.
Also find out the following:
(a) Present value at year 1 of incremental cash flows because of claim in year 1 under case (ii)
above.
(b) Changes in loan balance (assuming loan in case (i) and loan in case (ii) meets the criteria
for offsetting in Ind AS 32).
Solution
(Note -All calculations done to nearest rupee)
Case I: No claims during 5 years
If there are no claims, the cedant will receive ` 45 in year 5 (90% of the cumulative
premiums of ` 50). In substance, the cedant has given a loan, which the reinsurer will repay in

one instalment of ` 45 in year 5. If the reinsurer’s accounting policies require it to recognise its
contractual liability to repay the loan to the cedant, unbundling is permitted but not required.
However, if the reinsurer’s accounting policies would not require it to recognise the liability to
repay the loan, the reinsurer is required to unbundle the contract.
When the reinsurer is required, or elects, to unbundle the contract
Each payment by the cedant has two components:
(a) a loan advance (deposit component); and
(b) a payment for insurance cover (insurance component).
Applying Ind AS 109 to the deposit component, the reinsurer is required to measure it initially at
fair value. Fair value could be determined by discounting the future cash flows from the deposit
component.
Assuming an appropriate discount rate is 10% and that the insurance cover is equal in each year, so
that the payment for insurance cover is the same in every year. Each payment of ` 10 by the cedant is
then made up of a loan advance of ` 6.70 and an insurance premium of ` 3.30. The reinsurer
accounts for the insurance component in the same way that it accounts for a separate insurance
contract with an annual premium of ` 3.30.
The movements in the loan are as below:
Year end Opening Interest Advance Closing balance

Balance @ 10% p.a. (repayment)
` ` ` `
(a) (b) = (a) x 10% (c) (d) = (a) + (b) + (c)
0 - - 6.70 6.70
1 6.70 0.67 6.70 14.07
2 14.07 1.41 6.70 22.18
3 22.18 2.22 6.70 31.10
4 31.09 3.10 6.70 40.90
5 40.90 4.10 (45.00) -
Total 114.94 (11.50)

Case II: Claim of ` 150 in year 1

The changes in the experience account and resulting additional premiums are as follows:
Year Premium Additional Total Cumulative Claims Cumulative Cumulative Experie

end Premium Premium Premium Claim Premium nce
less claims account
` ` ` ` ` ` ` `
(a) (b) (c) = (a) (d) (e) (f) (g) = (d) – (h) = (g)
+ (b) (f) x 90%
0 10 - 10 10 - - 10 9
1 10 - 10 20 (150) (150) (130) (117)
2 10 39 49 69 - (150) (81) (73)
3 10 36 46 115 - (150) (35) (31)
4 10 31 41 157 - (150) 7 6
5 - - - 157 - (150) 7 6
106 156 (150)
Present value of incremental cash flows because of the claim in year 1
Year Additional Claims Refund Refund Net Present Present

end Premium in Case I in Case incremental value factor value
II cash flow @ 10%
` ` ` ` ` `
(a) (b) (c) (d) (e) = (a) + (b) (f) (g) = (e)
– (c) + (d) × (f)
0 0 0 0 0 0 - -
1 0 (150) 0 0 (150) 1.0000 (150)
2 39 0 0 0 39 0.9091 35
3 36 0 0 0 36 0.8264 30
4 31 0 0 0 31 0.7513 23
5 0 0 (45) 6 39 0.6830 27
Total 106 (150) (45) 6 (5) (35)

This contract is an insurance contract because it transfers significant insurance risk to the
reinsurer, e.g., in case (ii) discussed above, the reinsurer is required to pay additional
benefits with a present value, in year 1, of ` 35, which is clearly significant in relation to the
contract.
The incremental cash flows have a present value, in year 1, of ` 35. The cedant unbundles the
contract and applies Ind AS 109 to this deposit component (unless the cedant already recognises its
contractual obligation to repay the deposit component to the reinsurer).
If this were not done, the cedant should have recognised ` 150 received in year 1 as income, and
the incremental payments in years 2-5 as expenses. However, in substance, the reinsurer has
paid a claim of ` 35 and made a loan of ` 115 (` 150 less ` 35) that will be repaid in instalments.
Changes in the loan balance
Year end Opening Interest @ Payments as Additional Closing

Balance 10% per original payments Balance
schedule in case (ii)
` ` ` ` `
(a) (b) = (a) (c) (d) (e) = (a) +
x 10% (b) + (c) +
(d)
0 - - 6 - 6
1 6 1 7 (115) (101)
2 (101) (10) 7 39 (65)
3 (65) (7) 7 36 (29)
4 (29) (3) 6 31 5
5 5 1 (45) 39 0
Total (18) (12) 30

2.7 RECOGNITION AND MEASUREMENT

2.7.1 Temporary exemptions from Ind AS 8
Paragraphs 10–12 of Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors,
specify criteria for an entity to use in developing an accounting policy if no Ind AS applies specifically to
an item.
However, Ind AS 104 exempts an insurer from applying those criteria to its accounting policies
for:
(a) insurance contracts that it issues; and
(b) reinsurance contracts that it holds.
2.7.2 No exemption from Ind AS 8
Ind AS 104 does not exempt an insurer from implications of the following criteria in Ind AS 8:
(a) Insurer should not recognise as a liability any provisions for possible future claims, if those
claims arise under insurance contracts that are not in existence at the end of the reporting
period (such as catastrophe provisions and equalisation provisions).
(b) Insurer should carry out the liability adequacy test.
(c) Insurer should remove an insurance liability (or a part of an insurance liability) from its
balance sheet when, and only when, it is extinguished, i.e., when the obligation specified in
the contract is discharged or cancelled or expires.
(d) Insurer should not offset:
(i) reinsurance assets against the related insurance liabilities; or
(ii) income or expense from reinsurance contracts against the expense or income from the
related insurance contracts.
(e) Insurer should consider whether its reinsurance assets are impaired.
2.7.3 Liquidity Adequacy Test
An insurer should assess at the end of each reporting period whether its recognised insurance
liabilities are adequate, using current estimates of future cash flows under its insurance contracts.
If that assessment shows that the carrying amount of its insurance liabilities (less related deferred
acquisition costs and related intangible assets is inadequate in the light of the estimated future
cash flows, the entire deficiency should be recognised in profit or loss.

2.7.3.1 Minimum requirements under Ind AS 104

(a) The test should consider current estimates of all contractual cash flows, and of related
cash flows such as claims handling costs, as well as cash flows resulting from embedded
options and guarantees.
(b) If the test shows that the liability is inadequate, the entire deficiency should be
recognised in profit or loss.
2.7.3.2 Minimum requirements are met
If an insurer applies a liability adequacy test that meets specified minimum requirements,
Ind AS 104 does not impose any further requirements.
Note: If an insurer’s liability adequacy test meets the minimum requirements, the test is
applied at the level of aggregation specified in that test.
2.7.3.3 Minimum requirements are not met
If an insurer’s accounting policies do not require a liability adequacy test that meets the minimum
requirements, the insurer should follow the following steps:
Step I: Determine the carrying amount of the relevant insurance liabilities.
Note: The relevant insurance liabilities are those insurance liabilities (and related deferred
acquisition costs and related intangible assets) for which the insurer’s accounting policies do
not require a liability adequacy test that meets the minimum requirements.
Step II: Determine the carrying amount of:
(a) any related deferred acquisition costs.
(b) any related intangible assets.
Note: Related reinsurance assets are not considered because an insurer accounts for
them separately.
Step III: Step I minus Step II.
Step IV: Determine whether the amount of the carrying amount that would be required if the relevant
insurance liabilities were within the scope of Ind AS 37.
Step V: Compare amount in Step III and Step IV.
(a) If Step III minus Step IV is a negative amount: The insurer should recognise
the entire difference in profit or loss and decrease the carrying amount of the
related deferred acquisition costs or related intangible assets or increase the
carrying amount of the relevant insurance liabilities.
(b) If Step III minus Step IV is a positive amount: Ignore

Note: The above comparison should be made at the level of a portfolio of contracts that are
subject to broadly similar risks and managed together as a single portfolio.
2.7.4 Impairment of Reinsurance Assets
A reinsurance asset is impaired if, and only if:
(a) there is objective evidence, as a result of an event that occurred after initial recognition of
the reinsurance asset, that the cedant may not receive all amounts due to it under the terms
of the contract; and
(b) that event has a reliably measurable impact on the amounts that the cedant will receive from
the reinsurer.
If a cedant’s reinsurance asset is impaired, the cedant should reduce its carrying amount accordingly
and recognise that impairment loss in profit or loss.
2.7.5 Changes in Accounting Policies
Change in accounting policies refers to:
(a) changes made by an insurer that already applies Ind ASs; and
(b) changes made by an insurer adopting Ind ASs for the first time.
2.7.5.1 Conditions for change in accounting policies
An insurer may change its accounting policies for insurance contracts if, and only if, the change makes
the financial statements:
(a) more relevant and no less reliable; or
(b) more reliable and no less relevant.
An insurer may change its accounting policies for insurance contracts if, and only if, the change
makes the financial statements more relevant to the economic decision-making needs of users
and no less reliable, or more reliable and no less relevant to those needs. An insurer shall judge
relevance and reliability by the criteria in Ind AS 8.
Note: An insurer should judge relevance and reliability by the criteria in Ind AS 8. To justify changing its
accounting policies for insurance contracts, an insurer should show that the change brings its financial
statements closer to meeting the criteria in Ind AS 8, but the change need not achieve full compliance
with those criteria. The following specific issues are discussed below:
(a) current interest rates;
(b) continuation of existing practices;
(c) prudence;
(d) future investment margins; and
(e) shadow accounting.

2.7.5.2 Current market interest rates

1. Change in existing accounting policy permitted: An insurer is permitted, but not required,
to change its accounting policies so that it re-measures designated insurance liabilities
(including related deferred acquisition costs and related intangible assets) to reflect current
market interest rates and recognises changes in those liabilities in profit or loss.
2. Introduction of new accounting policy permitted: At that time, it may also introduce
accounting policies that require other current estimates and assumptions for the designated
liabilities.
3. Change in accounting policy for designated liabilities: The election in this paragraph
permits an insurer to change its accounting policies for designated liabilities, without
applying those policies consistently to all similar liabilities as Ind AS 8 would otherwise
require.
4. Consistent application: If an insurer designates liabilities for this election, it should continue
to apply current market interest rates (and, if applicable, the other current estimates and
assumptions) consistently in all periods to all these liabilities until they are extinguished.
2.7.5.3 Continuation of existing practices
An insurer may continue (not introduce) the following practices:
(a) measuring insurance liabilities on an undiscounted basis;
(b) measuring contractual rights to future investment management fees at an amount that
exceeds their fair value as implied by a comparison with current fees charged by other market
participants for similar services; and
(c) using non-uniform accounting policies for the insurance contracts (and related deferred
acquisition costs and related intangible assets, if any) of subsidiaries.
2.7.5.4 Prudence
1. No elimination of excessive prudence: An insurer need not change its accounting policies
for insurance contracts to eliminate excessive prudence.
2. No introduction of additional prudence: If an insurer already measures its insurance
contracts with sufficient prudence, it should not introduce additional prudence.
2.7.5.5 Future Investment Margins
An insurer need not change its accounting policies for insurance contracts to eliminate future
investment margins. However, there is a rebuttable presumption that an insurer’s financial statements
will become less relevant and reliable if it introduces an accounting policy that reflects future investment
margins in the measurement of insurance contracts, unless those margins affect the contractual
payments, e.g., using a discount rate that reflects the estimated return on the insurer’s assets.

An insurer may overcome the rebuttable presumption if, and only if, the other components of a change
in accounting policies increase the relevance and reliability of its financial statements sufficiently to
outweigh the decrease in relevance and reliability caused by the inclusion of future investment margins.
2.7.5.6 Shadow Accounting
Example:
An insurer’s existing accounting policies for insurance contracts involve excessively prudent
assumptions set at inception and a discount rate prescribed by a regulator without direct reference to
market conditions, and ignore some embedded options and guarantees. The insurer might make its
financial statements more relevant and no less reliable by switching to a comprehensive investor-
oriented basis of accounting that is widely used and involves:
● current estimates and assumptions;
● a reasonable (but not excessively prudent) adjustment to reflect risk and uncertainty;
● measurements that reflect both the intrinsic value and time value of embedded options
and guarantees; and
● a current market discount rate, even if that discount rate reflects the estimated return
on the insurer’s assets.
In some accounting models, realised gains or losses on an insurer’s assets have a direct effect
on the measurement of some or all of:
(a) its insurance liabilities;
(b) related deferred acquisition costs; and
(c) related intangible assets.
An insurer is permitted, but not required, to change its accounting policies so that a recognised
but unrealised gain or loss on an asset affects those measurements in the same way that a
realised gain or loss does.
The related adjustment to the insurance liability (or deferred acquisition costs or intangible assets)
should be recognised in other comprehensive income if, and only if, the unrealised gains or losses are
recognised in other comprehensive income. This practice is sometimes described as ‘shadow
accounting’.
Illustration 4
Under a jurisdiction, for an insurance contract, deferred acquisition costs (DAC) are amortised
over the life of the contract as a constant proportion of estimated gross profits (EGP). EGP

includes investment returns, including realised (but not unrealised) gains and losses. At the inception of
a contract, insurer A has DAC of ` 20 relating to that contract and the present
value, at inception, of EGP is ` 100. In other words, DAC is 20% of EGP at inception. In 20X1,
insurer A recognises unrealised gains of ` 10 on the assets backing the contract. In 20X2, insurer
A sells the assets for an amount equal to their fair value at the end of 20X1. Prescribe the
accounting under Ind AS 104.
Solution
Ind AS 104 permits, but does not require, insurer A to adopt shadow accounting. If insurer A
adopts shadow accounting, it amortises DAC in 20X1 by an additional ` 2 (20% of ` 10) as a
result of the change in the fair value of the assets. Since insurer A recognised the change in their
fair value in other comprehensive income, it should recognise the additional amortisation of ` 2 in
other comprehensive income. When insurer A sells the assets in 20X2, it should make no further
adjustment to DAC, but should reclassify DAC amortization of ` 2, relating to the now-realised
gain, from equity to profit or loss as a reclassification adjustment.
In summary, shadow accounting treats an unrealised gain in the same way as a realised gain, except
that the unrealised gain and resulting DAC amortisation are:
(a) recognised in other comprehensive income rather than in profit or loss; and
(b) reclassified from equity to profit or loss when the gain on the asset becomes realised. If
insurer A does not adopt shadow accounting, unrealised gains on assets should not affect
the amortisation of DAC.
2.7.6 Insurance Contracts Acquired in a Business Combination or
Portfolio Transfer
2.7.6.1 Accounting as per Ind AS 103
To comply with Ind AS 103, an insurer should, at the acquisition date, measure at fair value the
insurance liabilities assumed and insurance assets acquired in a business combination.
2.7.6.2 Alternative accounting as per Ind AS 104
However, an insurer is permitted, but not required, to use an expanded presentation to split the
fair value of acquired insurance contracts into two components:
(a) a liability measured in accordance with the insurer’s accounting policies for insurance
contracts that it issues; and
(b) an intangible asset, representing the difference between:
(i) the fair value of the contractual insurance rights acquired and insurance obligations
assumed; and
(ii) the amount described in (a).

The subsequent measurement of this asset should be consistent with the measurement of the related
insurance liability.
An insurer acquiring a portfolio of insurance contracts may also use the alternative accounting as per
Ind AS 104 (as explained above).
The intangible assets described above are excluded from the scope of Ind AS 38 and Ind AS 36.
However, Ind AS 38 and Ind AS 36 apply to customer lists and customer relationships reflecting
the expectation of future contracts that are not part of the contractual insurance rights and
contractual insurance obligations that existed at the date of a business combination or portfolio
transfer.
2.7.7 Discretionary Participation Features
2.7.7.1 Discretionary participation features in insurance contracts
Some insurance contracts contain a discretionary participation feature as well as a guaranteed element.
Options available to the issuer of such a contract under Ind AS 104
(a) Do not recognise them separately.
Classification: Issuer should classify the whole contract as a liability.
(b) Recognise them separately.
Classification: Issuer should classify the guaranteed element as a liability and the
discretionary participation feature as either a liability or a separate component of equity.
Note: The issuer of such a contract may recognise all premiums received as revenue without
separating any portion that relates to the equity component. The resulting changes in the
guaranteed element and in the portion of the discretionary participation feature classified as a
liability should be recognised in profit or loss. If part or all of the discretionary participation feature
is classified in equity, a portion of profit or loss may be attributable to that feature (in the same
way that a portion may be attributable to non-controlling interests). The issuer should recognise
the portion of profit or loss attributable to any equity component of a discretionary participation
feature as an allocation of profit or loss, not as expense or income.
Issuer should, if the contract contains an embedded derivative within the scope of Ind AS 109,
apply Ind AS 109 to that embedded derivative.
Insurer should continue its existing accounting policies for such contracts, unless it changes those
accounting policies in a way that complies with the criteria discussed in paragraph 2.7.5 of this
unit.

2.7.7.2 Discretionary participation features in financial instruments

Options available to the issuer of such a contract under Ind AS 104
(a) Do not recognise them separately.
Classification: Issuer should classify the whole contract as a liability.
(b) Recognise them separately.
Classification: Issuer should classify the guaranteed element as a liability and the
discretionary participation feature as either a liability or a separate component of equity.
Classification of discretionary participation feature Requirements under Ind AS 104
Liability component Issuer should apply the liability adequacy test to the whole contract (i.e.,
both the guaranteed element and the discretionary participation feature).
The issuer need not determine the amount that would result
from applying Ind AS 109 to the guaranteed element.
Equity component Issuer should ensure that the liability recognised for the whole
contract should not be less than the amount that would result
from applying Ind AS 109 to the guaranteed element. (Refer Note
below)
Note: The amount that would result from applying Ind AS 109 to the guaranteed element
should include the intrinsic value of an option to surrender the contract, but need not include its
time value if the option is exempted from measurement at fair value. The issuer need not disclose
the amount that would result from applying Ind AS 109 to the guaranteed element, nor is required
to present that amount separately. Furthermore, the issuer need not determine the amount if the
total liability recognised is clearly higher.
Recognition of premiums received: Although these contracts are financial instruments, the
issuer may continue to recognise the premiums for those contracts as revenue and recognise
as an expense the resulting increase in the carrying amount of the liability.
Disclosure under Ind AS 107: Although these contracts are financial instruments an issuer
applying Ind AS 107 to contracts with a discretionary participation feature should disclose the total
interest expense recognised in profit or loss, but need not calculate such interest expense using
the effective interest method.

2.8 DISCLOSURE REQUIREMENTS

2.8.1 Explanation of Recognised Amounts
An insurer should disclose information that identifies and explains the amounts in its financial
statements arising from insurance contracts.
To comply with above, an insurer should disclose:
(a) Its accounting policies for insurance contracts and related assets, liabilities, income and
expense.
(b) The recognised assets, liabilities, income and expense (and, if it presents its statement of
cash flows using the direct method, cash flows) arising from insurance contracts.
Furthermore, if the insurer is a cedant, it should disclose:
(i) gains and losses recognised in profit or loss on buying reinsurance; and
(ii) if the cedant defers and amortises gains and losses arising on buying reinsurance,
the amortisation for the period and the amounts remaining unamortised at the beginning
and end of the period.
(c) The process used to determine the assumptions that have the greatest effect on the
measurement of the recognised amounts described in (b) above. When practicable, an
insurer should also give quantified disclosure of those assumptions.
(d) The effect of changes in assumptions used to measure insurance assets and insurance
liabilities, showing separately the effect of each change that has a material effect on the
(e) Reconciliations of changes in insurance liabilities, reinsurance assets and, if any, related
deferred acquisition costs.
2.8.2 Nature and Extent of Risks Arising from Insurance Contracts
An insurer should disclose information that enables users of its financial statements to evaluate
the nature and extent of risks arising from insurance contracts.
(a) Its objectives, policies and processes for managing risks arising from insurance
contracts and the methods used to manage those risks.
(b) Information about insurance risk (both before and after risk mitigation by reinsurance),
including information about:
(i) Sensitivity to insurance risk (refer note below).

(ii) Concentrations of insurance risk, including a description of how management

determines concentrations and a description of the shared characteristic that identifies
each concentration (e.g., type of insured event, geographical area, or currency).
(iii) Actual claims compared with previous estimates (i.e., claims development).
The disclosure about claims development should go back to the period when the earliest
material claim arose for which there is still uncertainty about the amount and timing of the
claims payments, but need not go back more than ten years. An insurer need not disclose
this information for claims for which uncertainty about the amount and timing of claims
payments is typically resolved within one year.
(c) Information about credit risk, liquidity risk and market risk if the insurance contracts were
within the scope of Ind AS 107. However:
(i) An insurer need not provide the maturity analysis required by Ind AS 107 if it discloses
information about the estimated timing of the net cash outflows resulting from
recognised insurance liabilities instead. This may take the form of an analysis, by
estimated timing, of the amounts recognised in the balance sheet.
(ii) If an insurer uses an alternative method to manage sensitivity to market
conditions, such as an embedded value analysis, it may use that sensitivity analysis to
meet the requirement in Ind AS 107. Such an insurer should also provide the disclosures
required by Ind AS 107.
(d) Information about exposures to market risk arising from embedded derivatives contained
in a host insurance contract if the insurer is not required to, and does not, measure the
embedded derivatives at fair value.
Note: An insurer should disclose either (a) or (b) as follows:
(a) A sensitivity analysis that shows how profit or loss and equity would have been
affected if changes in the relevant risk variable that were reasonably possible at the end
of the reporting period had occurred; the methods and assumptions used in preparing
the sensitivity analysis; and any changes from the previous period in the methods and
assumptions used. However, if an insurer uses an alternative method to manage
sensitivity to market conditions, such as an embedded value analysis, it may meet this
requirement by disclosing that alternative sensitivity analysis and the disclosures
required by Ind AS 107.
(b) Qualitative information about sensitivity, and information about those terms and
conditions of insurance contracts that have a material effect on the amount, timing and
uncertainty of the insurer’s future cash flows.

SUMMARY
 Ind AS 104 is an interim standard until the second phase of the project on insurance contracts
is completed. The objective of Ind AS 104 is to specify the financial reporting for insurance
contracts by any entity that issues such contracts (described in this Ind AS as an insurer).
 Ind AS 104 is not restricted to insurance companies but applies to all issuers of insurance
contracts. This chapter does not deal with the specialized accounting that is required by
regulatory insurance companies or other companies for their insurance contracts. This
chapter deals with how Ind AS 104 may impact other entities that issue contracts which meet
the definition of insurance contracts
 Ind AS 104 is applicable to:
(a) insurance contracts (including reinsurance contracts) that an entity issues and
reinsurance contracts that it holds; and
(b) financial instruments that an entity issues with a discretionary participation feature.
 Insurance contract is a contract under which one party (the insurer) accepts significant
insurance risk from another party (the policyholder) by agreeing to compensate the
policyholder if a specified uncertain future event (the insured event) adversely affects the
policyholder.
 The standard clarifies that an insurer need not account for an embedded derivative
separately at fair value if the embedded derivative meets the definition of an insurance
contract.
 The standard requires an insurer to unbundle deposit components of some insurance
contracts.
 The standard permits an expanded presentation for insurance contracts acquired in a
business combination or portfolio transfer.
 The standard exempts an insurer from applying those criteria to its accounting policies for:
(a) insurance contracts that it issues; and
(b) reinsurance contracts that it holds.
 An insurer should assess at the end of each reporting period whether its recognised
insurance liabilities are adequate, using current estimates of future cash flows under its
insurance contracts. If that assessment shows that the carrying amount of its insurance
liabilities (less related deferred acquisition costs and related intangible assets is inadequate
in the light of the estimated future cash flows, the entire deficiency should be recognised in
profit or loss.

 Change in accounting policies refers to:

(a) changes made by an insurer that already applies Ind ASs; and
(b) changes made by an insurer adopting Ind ASs for the first time.
 An insurer should judge relevance and reliability by the criteria in Ind AS 8. To justify
changing its accounting policies for insurance contracts, an insurer should show that the
change brings its financial statements closer to meeting the criteria in Ind AS 8, but the
change need not achieve full compliance with those criteria. The following specific issues
have been discussed in the standard:
(a) current interest rates;
(b) continuation of existing practices;
(c) prudence;
(d) future investment margins; and
(e) shadow accounting.
 The standard explains certain aspects of discretionary participation features contained in
insurance contracts or financial instruments.
 An insurer should disclose information that identifies and explains the amounts in its financial
statements arising from insurance contracts.
(a) Its accounting policies for insurance contracts and related assets, liabilities, income and
expense.
(b) The recognised assets, liabilities, income and expense (and, if it presents its statement
of cash flows using the direct method, cash flows) arising from insurance contracts.
(c) The process used to determine the assumptions that have the greatest effect on the
measurement of the recognised amounts described in (b) above. When practicable, an
insurer should also give quantified disclosure of those assumptions.
(d) The effect of changes in assumptions used to measure insurance assets and
insurance liabilities, showing separately the effect of each change that has a material
effect on the financial statements.
(e) Reconciliations of changes in insurance liabilities, reinsurance assets and, if any,
related deferred acquisition costs.

TEST YOUR KNOWLEDGE

Practical Questions
1. A Ltd. is an insurer as per Ind AS 104. Its accounting policy does not require a liability
adequacy test that meets the minimum requirements specified in Ind AS 104. Following
information has been provided:
Particulars ` in lakhs
Carrying amount of insurance liabilities 130
Related deferred acquisition costs 20
Related intangible assets 10
Related reinsurance assets 15
Carrying amount that would be required if the relevant insurance
liabilities were within the scope of Ind AS 37 120
Do the necessary accounting as per Ind AS 104.
2. X Ltd is a dealer selling machines.The machines require servicing after each 50,000 units
are made and break down from time to time. The machines are sold by the dealer with
manufacturer’s warranty of 2 years. While selling a machine, X Ltd offers to its customers an
extended warranty covering repairs and maintenance of the machine for a fixed period. Under
this extended contract, X Ltd would be required to perform servicing and repairs to the
machines as necessary for an annual fixed fee.
Would this get covered within the scope of Ind AS 104? If no, in which case would such type
of contract get covered under Ind AS 104?
3. Determine whether the following are insurance contracts as per Ind AS 104:
(a) Death benefit that could exceed amounts payable on surrender or maturity.
(b) Life-contingent annuity.
(c) Investment contract that does not contain a discretionary participation feature.
(d) A credit-related guarantee that does not, as a precondition for payment, require that the
holder is exposed to, and has incurred a loss on, the failure of the debtor to make
payments on the guaranteed asset when due.
(e) Residual value insurance or residual value guarantee. Guarantee by one party of the
fair value at a future date of a non-financial asset held by a beneficiary of the insurance
or guarantee.

(f) Catastrophe bond, i.e., bond in which principal, interest payments or both are reduced
if a specified triggering does not include a condition that the issuer of the bond suffered
a loss.
4. ABC Ltd has ownership over a portfolio of properties. It enters into a contract with XYZ Ltd
outsourcing its property maintenance and repair on all of those properties for a period of 10
years for an agreed fee which remains fixed. XYZ Ltd is a company in the business of
property management. The fee includes property management as well as the cost of repair
work.
XYZ Ltd has complete responsibility in respect of all the repairs and maintenance required
to maintain the property to an agreed standard based on the condition at the time of inception
of the contract.
The contract covers normal wear and tear and some other conditions, such as dry rot and
damp should they be discovered in the course of any remedial work. Any repairs that may be
required due to any external events, eg. loss due to fire or storm, would continue to be
covered by ABC Ltd’s property insurance arrangements with a regulated insurance company.
Would this contract get covered within the scope of Ind AS 104?
Answers to Practical Questions
1. The insurer should follow the following steps:
Step I: Determine the carrying amount of the relevant insurance liabilities.
Note: The relevant insurance liabilities are those insurance liabilities (and
related deferred acquisition costs and related intangible assets) for which the
insurer’s accounting policies do not require a liability adequacy test that meets the
minimum requirements.
Step II: Determine the carrying amount of:
(a) any related deferred acquisition costs.
(b) any related intangible assets.
Note: Related reinsurance assets are not considered because an insurer
accounts for them separately.
Step III: Step I minus Step II
Step IV: Determine whether the amount the carrying amount that would be required if the relevant
insurance liabilities were within the scope of Ind AS 37.
Step V: Compare amount in Step III and Step IV
(a) If Step III minus Step IV is a negative amount: The insurer should

recognise the entire difference in profit or loss and decrease the carrying
amount of the related deferred acquisition costs or related intangible assets
or increase the carrying amount of the relevant insurance liabilities.
(b) If Step III minus Step IV is a positive amount: Ignore
Steps Particulars ` in lakhs
Step I Carrying amount of the relevant insurance liabilities 130
Step II Carrying amount of any related deferred acquisition 30

costs and any related intangible assets
Step III Step I – Step II 100
Step IV Carrying amount that would be required if the relevant 120

insurance liabilities were within the scope of Ind AS
37
(c) If Step III minus Step IV is a negative amount (i.e., ` 20 lakhs)

The insurer should recognise the entire difference in profit or loss and decrease
the carrying amount of the related deferred acquisition costs or related intangible
assets or increase the carrying amount of the relevant insurance liabilities.
2. The contract carries significant insurance risk in respect of the number of services to be
performed over the term of the contract or the nature of those services which remain
uncertain. This is because the issuer of the warranty and the extended warranty would be
required to compensate the customer if the machine breaks down and those additional
breakdowns will adversely affect the machine’s owner. The potential number and extent of
any breakdowns are unknown so the warranty and the extended warranty meet the uncertain
future event criteria of the insurance contract definition.
However, in respect of product warranties issued directly by the manufacturer, retailer or a
dealer, there is a specific scope exclusion as per paragraph 4(a) of Ind AS 104. These
contracts are warranty contracts issued by X Ltd, the dealer, and hence get excluded from
the scope of Ind AS 104.
Coverage under Ind AS 104
If the repairs and maintenance as mentioned in the above contract are provided by a party other
than the manufacturer, retailer or dealer, (such as a company specializing in repairs/maintenance
of such types of machines or a competing dealer) then this would get covered within the scope of
Ind AS 104.

3. (a) Insurance contract (unless contingent is significant in all scenarios that have
commercial substance). Insurer could suffer a significant loss on an individual contract
if the policyholder dies early.
(b) Insurance contract (unless contingent amount is insignificant in all scenarios that have
commercial substance).
(c) Investment contract is not an insurance contract. It is covered under Ind AS 109.
(d) Not an insurance contract. It’s a derivative within the scope of Ind AS 109.
(e) Insurance contract (unless changes in the condition of the asset have an insignificant
effect). The risk of changes in the fair value of the non-financial asset is not a financial
risk because the fair value reflects not only changes in market prices for such assets (a
financial variable) but also the condition of the specific asset held (a non-financial
variable).
However, if the contract compensates the beneficiary only for changes in market prices
and not for changes in the condition of the beneficiary’s asset, the contract is a
derivative and would be scoped out.
(f) The contract is not an insurance contract. It’s a financial instrument with embedded
derivative.
4. There can be a significant insurance risk when either the number of services to be performed
over a period or the nature of those services is not pre-determined. In the following areas,
there is uncertainty:
 Whether any particular repairs will be required;
 How much any particular repair will cost; and.
 When any particular repairs will be required.
As it is uncertain whether or when any particular repair will be required and how much it may cost,
there is a specified uncertain event. The significance of the insurance risk for XYZ Ltd would be
assessed contract by contract under Ind AS 104.
Insurance risk may be significant, even though there may be a minimal probability of material
losses for XYZ Ltd arising from all its property management contracts, because a significant
loss could arise on any one contract, such as the contract with ABC Ltd. If the insurance risk
is significant, this contract will be an insurance contract and Ind AS 104 will apply.

UNIT 3:
INDIAN ACCOUNTING STANDARD 106 : EXPLORATION
FOR AND EVALUATION OF MINERAL RESOURCES
LEARNING OUTCOMES

 Understand the Need, Objective and Scope of Ind AS 106
 Explain the meaning of Exploration for and Evaluation of Mineral
Resources
 Recognise the Exploration and Evaluation Assets
 Appreciate the Temporary exemption in the recognition of Exploration and

Evaluation Assets
 Measure the Exploration and Evaluation Assets at initial and subsequent
recognition
 Determine the accounting policy and situation where changes in
accounting policies is possible
 Present the Exploration and Evaluation Assets through its classification
and reclassification
 Assess the impairment of Exploration and Evaluation Assets
 Comply with the disclosure requirements.

UNIT OVERVIEW
Ind AS 106
Recognition of
E&E Assets
Measurement of • Determination of
E&E Assets at Accounting Policy
recognition • Elements of Cost
Measurement of
E&E Assets after • Change in the policy
recognition
• Classification of
E&E Assets
Presentation • Reclassification
of E&E Assets
Disclosure

3.1 OBJECTIVE
The purpose is to specifically address some of the accounting issues for those activities by specifying
the financial reporting for the expenditure incurred in the exploration for and evaluation of mineral
resources.
The need for issuance of a separate standard arises due to various reasons including the
following:
● The activities relating to the mineral rights and mineral resources are specialised in nature
and thus give rise to peculiar issues.
● Exploration and Evaluation (E&E) expenditures are significant to entities engaged in
extractive industries.
● Expenditures on these activities are excluded from the scope of Ind AS 38, Intangible Assets.
Mineral rights and mineral resources are also excluded from the scope of Ind AS 16,
Property, Plant and Equipment.
● Absence of guidance would result in diverse practices for such expenditure.
• To existing accounting practices

Limited Improvements for exploration and evaluation
expenditures
Entities that recognise exploration and • To assess and measure such

evaluation assets assets for impairment
• Identify and explain the amounts in

the entity’s financial statements
arising from the exploration for and
Disclosures evaluation of mineral resources
with reference to the amount,
timing and certainty of future cash
flows
3.2 SCOPE
Ind AS 106 addresses the recognition, measurement and disclosure only of exploration and
evaluation (E&E) expenditures incurred by entities engaged in the exploration for and evaluation
of mineral resources. Ind AS does not address other aspects of accounting by such entities.

E&E expenditure is defined in the Standard as “expenditures incurred by an entity in connection with
the exploration for and evaluation of mineral resources before the technical feasibility and commercial
viability of extracting a mineral resource are demonstrable”.
For the above purpose, exploration for and evaluation of mineral resources is defined as “the
search for mineral resources, including minerals, oil, natural gas and similar non- regenerative
resources after the entity has obtained legal rights to explore in a specific area, as well as the
determination of the technical feasibility and commercial viability of extracting the mineral
resource”.
Thus, an entity shall not apply the Standard to expenditures incurred in activities that precede the
exploration for and evaluation of mineral resources (pre-exploration activities), such as
expenditure incurred before obtaining the legal rights to explore a specific area. Similarly, the
Standard does not apply to expenditure incurred after the technical feasibility and commercial
viability of extracting a mineral resource are demonstrable (development activities).
The Framework for the Preparation and Presentation of Financial Statements in accordance with
Indian Accounting Standards issued by the ICAI and Ind AS 38, Intangible Assets, provide
guidance on the recognition of assets arising from development. The term ‘development’
refers to the phase when an identified mineral resource is prepared for production or
extraction (e.g., construction of access to the mineral resources). Thus, the term has a different
meaning than when used in relation to activities of research and development.
The chart below depicts the scope of Ind AS 106:
Activities
Not Covered in Covered in Ind

Ind AS 106 AS 106
Exploration and
Pre-exploration Development Evaluation
expenditures that
it incurs
Expenditures incurred before After the technical feasibility
the entity has obtained the and commercial viability of
legal rights to explore a specific extracting a mineral resource
area are demonstrable

Accordingly, an entity must develop a separate accounting policy for expenditure related to each
of:
● E&E activities.
● pre-exploration activities.
● development activities.
Ind AS 106 provides no guidance or exemptions for pre-exploration and development activities.
As such it also does not define pre-acquisition or pre-exploration expenditures. However, it
clarifies that expenditures before the entity has obtained legal rights to explore in a specific area
are not exploration and evaluation expenditures. Such expenditure should be accounted for in
accordance with applicable Ind AS. The expenditure incurred before the exploration for and
evaluation of mineral resources cannot usually be associated with any specific mineral property
and thus are likely to be recognised as an expense as incurred. However, such expenditures need
to be distinguished from expenditures on infrastructure - for example access roads necessary for
the exploration work to proceed. Such expenditures should be recognised as property, plant and
equipment in accordance with Ind AS 16.
3.3 EXCLUSIONS FROM OTHER STANDARDS

The application of Ind AS 106 provides partial or complete exemptions from the application
of certain other Ind AS as follows:
● Ind AS 16, Property, Plant and Equipment, does not apply to the recognition and
measurement of E&E assets but does apply to property, plant and equipment used to develop
or maintain E&E assets. The presentation requirements of Ind AS 16 do apply to E&E assets
that are also property, plant and equipment.
● Ind AS 16 does not apply to mineral rights and mineral reserves. However, the
Standard does apply to property, plant and equipment used to develop or maintain such
assets.
● Ind AS 38, Intangible Assets, does not apply to the recognition and measurement of E&E
assets. The presentation requirements of IAS 38 do apply to E&E assets that are also
intangible assets.
● Ind AS 38, Intangible Assets, does not apply to expenditure on the development and
extraction of mineral and similar resources.
Ind AS 108 Accounting Policies, Changes in Accounting Estimates and Errors, Paragraphs 11 and
12 (which specify sources of authoritative requirements and guidance that management is
required to consider in developing an accounting policy for an item if no Accounting
Standard applies specifically to that item) do not apply for accounting policies for recognition and

measurement of exploration and evaluation assets. In other words, to permit some flexibility, Ind
AS 106 suspends certain requirements of Ind AS 8 concerning the selection of accounting policies
for E&E expenditure. In particular, in developing a policy for recognition and measurement of E&E
expenditure, management need not consider other Ind AS (by analogy) and need not refer to the
definitions in the Framework.
Ind AS 103, Business Combinations, is applied to combinations in which an entity acquires a
business whose activities include exploration and evaluation. Subsequent to initial recognition,
E&E assets acquired in a business combination are expected to be within the scope of Ind AS
106.
3.4 INITIAL RECOGNITION AND MEASUREMENT OF E&E

ASSETS
 Exploration and evaluation assets shall be measured at cost.
 An entity shall determine an accounting policy specifying which expenditures are recognised
as exploration and evaluation assets and apply the policy consistently. In other words, for
each type of E&E expenditure, an entity adopts a policy either of immediate expense
or of capitalisation as an E&E asset.
 In making this determination, an entity considers the degree to which the expenditure can be
associated with finding specific mineral resources. Management must apply its judgment to
develop and apply a policy that results in relevant and reliable information.
3.5 EXPENSES THAT CAN BE INCLUDED IN E&E ASSET

3.5.1 Specific cost
The following are examples (provided by the Standard) of expenditures that might be included in
the initial measurement of exploration and evaluation asset (the list is not exhaustive):
(a) acquisition of rights to explore; (e.g., exploration licences)
(b) topographical, geological, geochemical and geophysical studies;
(c) exploratory drilling;
(d) trenching;
(e) sampling; and
(f) activities in relation to evaluating the technical feasibility and commercial viability of
extracting a mineral resource.

Specific expenditures included in the list above may, but need not always, be considered as E&E
expenditure eligible for capitalisation. The list of examples provided is not exhaustive and an entity may
identify other E&E expenditures that would qualify for capitalisation as E&E assets.
As an accounting policy, capitalisation or immediate expense of each type of E&E expenditure is
applied consistently between periods and to similar items and activities.
E&E expenditure that is not recognised as an E&E asset is expensed when incurred. E&E expenditure
of a type that is not sufficiently closely related to a specific mineral resource to support capitalisation
also is expensed as incurred. For example, general seismic data costs may not be sufficiently closely
related to a specific mineral resource to be capitalised as an E&E asset.
Example :
Success Ltd. applied to the Board regulating coal mines for acquiring rights to explore land which
it owns, and paid a fee of ` 4 crore. After the legal rights were acquired, the Company
then hired an expert to conduct topographical studies to determine the site for drilling of the
mine for ` 5.5 crore. After receiving the study report, the Company finalised a site for and
began with the exploratory work which took 5-6 months. The total expense incurred during such
period is ` 15 crore (which includes expense of ` 4 crore incurred for digging trenches during the
exploration stage and ` 8 crore for extracting, distribution and testing samples and
` 3 crore is other exploratory cost). After extracting the first batch of coal incurred ` 3.5 crore for
evaluating the technical feasibility and commercial viability of extracting the coal. The amount to
be recognised in the books of Success Ltd. as E&E asset is as follows:
Particulars of amount incurred Amount
Acquiring rights to explore land ` 4 crore
Topographical studies to determine the site for drilling of the mine ` 5.5 crore
Amount spent on digging of trenches ` 4 crore
Extracting, distribution and testing samples ` 8 crore
Other exploratory work ` 3 crore
Evaluating the technical feasibility and
commercial viability of extracting the coal ` 3.5 crore
Total E&E asset to be recognized ` 28 crore
Illustration 1
CR Ltd. incurred legal expenditure of ` 2 crores for acquiring land before obtaining the legal rights for
exploration. What is appropriate accounting treatment of such legal expenditure?

Solution
` 2 crores should be expensed in the period in which it is incurred.
Illustration 2
XYZ Ltd. has completed the activity of exploration and drilling of coal mine. It has also established the
commercial viability of extracting coal. Can the subsequent expenditure be accounted for E&E asset
under Ind AS 106?
Solution
All expenses incurred after this point cannot be treated as E&E asset.
Illustration 3
Tactful Ltd. has incurred Rs 1.5 crores to increase the grade of coal which they have
extracted from the mine. Can the expenditure to increase the grade be treated as E&E
expenditure?
Solution
The expenditure incurred to increase the grade of extracted coal cannot be treated as E&E
expenditure because it has been incurred after demonstrating technical feasibility and commercial
viability i.e., it does not represent expenditure on exploration and evaluation activity and is
instead an expenditure on development activity.
3.5.2 Administrative and other general overhead costs
● Ind AS 106 requires an entity to adopt an accounting policy of either expensing
administrative and other general overhead costs or of capitalising them in the initial
recognition and measurement of an E&E asset. While not stated by the Standard, the
appropriate approach would be that the selected policy should be consistent with the
approach in Ind AS to such costs incurred in relation either to inventories (Ind AS 2),
intangible assets (Ind AS 38) or property, plant and equipment (Ind AS 16).
● If an entity elects an accounting policy for administration and other general overhead costs
consistent with the treatment of property, plant and equipment, then administrative and
overhead costs will not qualify for initial recognition as E&E assets; instead, they would
be expensed as incurred.
● A policy based on the treatment of inventories or intangibles would require the
capitalisation of administrative and general overhead costs that are directly attributable to
the asset. In such a case it seems that, the following administrative and other general
overhead costs may qualify for inclusion as an E&E asset:
 payroll-related costs attributable to personnel working directly on a specific project,
including the costs of employee benefits for such personnel;

 certain management costs if their roles are specific to a project;

 sign-up bonuses paid to contractors involved in a particular project;
 legal or other professional costs specific to the project, for example, costs in respect of
obtaining certain permits and certifications.
(The above list is not exhaustive)
The policy for administrative and other general overhead costs is applied consistently to
comparable costs and between reporting periods. Any subsequent change is treated
as a change in accounting policy.
3.5.3 License acquisition costs
An entity may follow an accounting policy of recognising an exploration license as an E&E asset.
In such a case it would be appropriate that the cost of that license includes the directly
attributable costs of its acquisition such as non-refundable taxes and professional and legal
expenses incurred in obtaining the license.
3.5.4 Borrowing costs
Though not specifically stated in the Standard, it would be appropriate to include the borrowing costs on
qualifying E&E assets as part of such assets in accordance with Ind AS 23, Borrowing Costs.
3.5.5 Decommissioning/Site restoration liability
● In accordance with Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets,
any obligations for removal and restoration that are incurred during a particular period as a
consequence of having undertaken the exploration for and evaluation of mineral resources
should be recognised.
● Under Ind AS 37, decommissioning obligations are measured at the best estimate of the
expenditure to be incurred, discounted when material. The obligation for decommissioning
or site restoration is provided for in full immediately when the event occurs that gives
rise to the decommissioning obligation – the installation of the asset or preparation of the
site. For example, a provision is recognised for the expected cost of dismantling a test drilling
rig when it is installed.
Example :
On January 1, 20X1, a mining company signs a contract with the Government pursuant to which
it is given the permission to carry out its excavating operations for five years, at the end of which
the mine has to be filled up again and the entire land has to be landscaped. The present value of
the cost of such landscaping is expected to be ` 20.6 crore.

The liability of ` 20.6 crore has to be provided for when the mining company began its excavation
work. It cannot be provided gradually over the five years of the mining operations or in the fifth
year because a liability has to be recognised as soon as the entity performs any operations
affected by these environmental laws.
Decommissioning obligations are measured at the best estimate of the expenditure to be incurred,
discounted when material i.e., ` 20.6 crore in this case.
3.6 CLASSIFICATION OF E&E ASSETS

Ind AS 106 requires an entity to classify separately each exploration and evaluation asset as
tangible or intangible based on the nature of the asset and apply this classification consistently.
Many identifiable exploration and evaluation assets will be clearly tangible (e.g., vehicles,
drilling rigs) and other clearly intangible (e.g., exploration licences). The split of the assets into
tangible and intangible is to be applied consistently.
An intangible asset is defined in Ind AS 38 as an identifiable non-monetary asset without physical
substance. There is no requirement that the asset be held for a particular purpose. Examples of E&E
assets that may be classified as intangible in accordance with this definition include drilling rights,
acquired rights to explore, costs of conducting topographical, geological, geochemical and geophysical
studies.
Ind AS do not define ‘tangible’. However, most tangible assets will be identifiable items of property,
plant and equipment. These are defined as items that are held for use in the production or supply
of goods and services, for rental to others or for administrative purposes; and are expected to be
used during more than one period. Based on this definition, examples of E&E assets that may be
classified as tangible assets include, but are not limited to:
● equipment used in exploration, such as vehicles and drilling rigs;
● piping and pumps;
● tanks.
To the extent that a tangible asset is consumed in developing an intangible asset, the
amount reflecting that consumption may be part of the cost of the intangible asset created.
However, the asset being used remains a tangible asset.

Exploration and Evaluation Assets
Tangible Intangible
Vechicles; Drilling Rights;

Drilling Rigs; Trenching Costs;
Tanks; Sampling Costs;
Piping and Pumps; Exploratory Drilling Costs;
Example :
If a drilling rig is used only in the exploratory phase, then the equipment is tangible in nature and
will be classified as such. The depreciation expense recognised on the drilling rig represents the
consumption of the tangible asset in developing an intangible E&E asset, being the exploratory
well. The depreciation should be considered for capitalisation as part of the cost of the mine shaft
or well.
3.7 MEASUREMENT AFTER RECOGNITION

After recognition, an entity shall apply either the cost model or the revaluation model to the exploration
and evaluation assets.
Tangible E&E assets and intangible E&E assets with a finite life are depreciated/ amortised over their
useful lives. Intangible E&E assets with an indefinite useful life are not amortised. However, due to the
nature of the assets, it is expected that it will be extremely rare for an intangible E&E asset to be
assessed as having an indefinite useful life. Both tangible and intangible E&E assets should be tested
for impairment.
If the revaluation model is applied (either the model in Ind AS 16, Property, Plant and Equipment,
or the model in Ind AS 38) it shall be consistent with the classification of the assets. There are
some differences in the revaluation models for tangible and intangible assets under Ind ASs
(see Ind AS 16 and Ind AS 38 respectively). These revaluation models permit the revaluation of

assets only when specified requirements are met. The revaluation model in IAS 38 can be used
only if the asset’s fair value can be determined by reference to an active market; the revaluation
model in IAS 16 refers only to ‘market-based evidence’.
If an entity establishes that the criteria for the revaluation of tangible and intangible E&E assets
are met and elects to apply the revaluation model, then revaluations are made with such regularity
that the carrying amount of these assets does not differ materially from the fair value at the
reporting date. The frequency of revaluation will depend on the volatility of the fair value of the
E&E asset being valued.
3.8 CHANGES IN ACCOUNTING POLICIES

Ind AS 106 permits a change in an entity’s accounting policies for E&E expenditures only if the
change makes the financial statement more relevant to the economic decision- making needs of
users and no less reliable, or more reliable and no less relevant to those needs. In making such
a change, an entity should judge the relevance and reliability using the criteria in Ind AS 8.
As per Ind AS 8, in the absence of an Ind AS that specifically applies to a transaction, other event
or condition, the management should use its judgment in developing and applying an accounting
policy that results in information that is:
(a) relevant to the economic decision-making needs to users; and
(b) reliable, in that the financial statements:
(i) represent faithfully the financial position, financial performance and cash flows of the
entity;
(ii) reflect the economic substance of the transactions, other events and conditions, and
not merely the legal form;
(iii) are neutral, i.e., free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
To justify changing its accounting policies for exploration and evaluation expenditures, an entity
should demonstrate that the change brings its financial statements closer to meeting the criteria
in Ind AS 8, but the change need not achieve full compliance with those criteria.
While not stated in the Standard, it seems that this requirement would preclude entities in the oil
and gas sector that account for exploration and development activities using the successful-efforts
method from changing to the full-cost method. It can be argued that in this case the change in
policy is not considered to result in more relevant and/or reliable information to the user of financial
statements as it may result in capitalisation of unsuccessful costs; for example, costs related to

dry wells that do not represent future economic benefit. Conversely, a change in policy from the full-cost
method to one based upon the successful-efforts method or from capitalisation of all E&E expenditures
to expensing (at least some) costs as incurred would seem to be acceptable.
3.9 RECLASSIFICATION OF EXPLORATION AND

EVALUATION ASSETS
Ind AS 106 requires that an entity should no longer classify an exploration and evaluation asset
as such when the technical feasibility and commercial viability of extracting a mineral resource
are demonstrable. Exploration and evaluation assets should be assessed for impairment, and any
impairment loss recognised, before reclassification. E&E assets may be reclassified either as
tangible or intangible development assets. The reclassification of E&E assets to development
assets is an accounting policy choice that must be applied consistently.
3.10 IMPAIRMENT
Ind AS 106 requires an entity to apply Ind AS 36, Impairment of Assets, to measure, present and
disclose the impairment of E&E assets.
However, Ind AS 106 does provide some relief from the general requirements of Ind ASs on
assessing whether there is any indication of impairment. Under Ind AS 106, E&E assets are
assessed for impairment only when facts and circumstances suggest that the carrying amount of
an E&E asset may exceed its recoverable amount. Unlike other assets, there is no requirement to
assess whether an indication of impairment exists at each reporting date, until an entity has
sufficient information to reach a conclusion about commercial viability and the feasibility of
extraction.
This is because in case of exploration-only entities, there is insufficient information about the
mineral resources in a specific area for an entity to make reasonable estimates of exploration and
evaluation assets’ recoverable amount. As the exploration for and evaluation of the mineral
resources has not reached a stage at which information sufficient to estimate future cash flows is
available to the entity. Without such information, it is not possible to estimate either fair value less
costs to sell or value in use, the two measures of recoverable amount in Ind AS 36. This would
lead to an immediate write-off of exploration assets in many cases. Thus, until the entity had
sufficient data to determine technical feasibility and commercial viability, exploration and
evaluation assets need not be assessed for impairment. However, when such information
becomes available, or other facts and circumstances suggest that the asset might be impaired,
the exploration and evaluation assets must be assessed for impairment.
Ind AS 106 includes industry-specific examples of facts and circumstances that, if one or more
are present, indicate that an entity should test an E&E asset for impairment. These indicators are:

● The period for which the entity has the right to explore in the specific area has
expired during the period or will expire in the near future, and is not expected to be renewed.
● Substantive expenditure on further exploration and evaluation activities in the specific area
is neither budgeted nor planned.
● The entity has not discovered commercially viable quantities of mineral resources as a result
of E&E activities in the area to date and has decided to discontinue such activities in the
specific area.
● Even if development is likely to proceed, the entity has sufficient data indicating that the carrying
amount of the asset is unlikely to be recovered in full from successful development or by sale.
The list of impairment indicators is not exhaustive, and there may be additional facts and circumstances
that would suggest that an entity review E&E assets for impairment. Other impairment indicators may
include, for example, significant adverse changes in commodity prices and markets or changes in the
taxation or regulatory environment.
3.11 LEVEL AT WHICH IMPAIRMENT IS ASSESSED

The level identified by the entity for the purposes of testing exploration and evaluation assets for
impairment may comprise one or more cash-generating units. An entity shall determine an
accounting policy for allocating exploration and evaluation assets to cash-generating units
or groups of cash-generating units for the purpose of assessing such assets for impairment. Each
cash-generating unit or group of units to which an exploration and evaluation asset is allocated
shall not be larger than an operating segment determined in accordance with Ind AS 108,
Operating Segments.
3.12 DISCLOSURE
An entity is required to disclose information that identifies and explains the amounts recognised
in its financial statements arising from the exploration for and evaluation of mineral resources.
This would require an entity to disclose:
● Its accounting policies for exploration and evaluation expenditures including the
recognition of exploration and evaluation assets.
● The amounts of assets, liabilities, income and expense and operating and investing cash
flows arising from the exploration for and evaluation of mineral resources.
Further, an entity should treat exploration and evaluation assets as a separate class of
assets and make the disclosures required by either Ind AS 16 or Ind AS 38 consistent with how
the assets are classified.

TEST YOUR KNOWLEDGE

Practical Question
PQ Gas Ltd. is engaged in exploration, production and refining of crude oil. The company has two
exploration sites- Site A and Site B; the two sites form part of a single operating segment in accordance
with Ind AS 108, Operating Segments.
The company has recently acquired rights to explore the two sites and has paid ` 1 crore for
permission from authorities, legal expense to acquire the land were ` 20 crores. Consultation fee paid
to a topographical expert was ` 10 crores. Other expenses incurred by the company are digging
trenches ` 2 crores, sample testing ` 30 crores, drilling expenses ` 70 crores, present value of cost of
dismantling the test drilling rig is ` 30 crores, materials and fuel used ` 3 crores, employee costs ` 1.1
crores, administrative overheads ` 0.5 crore, payments made to contractors
` 2 crores, expenses paid to a consultant to determine the commercial viability of the extraction
is ` 1.5 crores.
Company has purchased two vehicles - Vehicle A and Vehicle B for each of the two sites, to transport
persons engaged in exploratory drilling of mine amounting to ` 4 crores.
During the year, there is a change in taxation rules, which has adversely affected the management
estimate of future prices. The recoverable amount of the each site is as follows:
Site A: ` 60 crores
Site B : ` 40 crores
How should the above expenses incurred be accounted for in the books of PQ Gas Ltd. (including
classification, measurement and recognition) assuming that the company accounts for evaluation and
development expenditure is accounted for using the successful efforts method of accounting, and
follows the cost model for subsequent measurement of E&E assets?
Answer to Practical Question
(a) Since the company is in exploration phase, it needs to establish its accounting policy
as to which all cost needs to be capitalised under successful efforts method, based on the
above facts.
● However expense that can be capitalised under Ind AS 106 are:
Particulars of amount incurred Amount
Intangible E&E assets

Acquiring rights to explore land ` 1.00 crores

Fee paid to topographical expert ` 10.00 crores

Amount spent on digging of trenches ` 2.00 crores
Samples testing costs ` 30.00 crores
Drilling expenses ` 70.00 crores
Charges paid to consultant for evaluating the technical ` 1.50 crores
feasibility and commercial viability of extracting the coal
Costs directly associated with an exploration well ` 6.60 crores
(material, labour, payment to contractors, administrative
overheads)
` 4.00 crores
Tangible E&E assets
Vehicles (A and B ) ` 125.10 crores
● Expense that should be expensed off:

Legal expense to acquire the land (before acquisition of exploration rights) –
` 20 crores
(b) Decommissioning liability
Provision should be recognised for the expected cost of dismantling a drilling rig of
` 30 crores. The amount of present value of decommissioning liability should be capitalised
at initial recognition along with the cost of related asset (as part of intangible E&E asset).
Thus, total E&E asset capitalised (if all items stated in (a) above are capiatlised) will amount
to ` 125.1 crores + ` 30 crores i.e., ` 155.1 crores.
(c) Subsequent measurement
Intangible E&E assets are subject to review for indicators of impairment at least once a
year.
No amortisation is charged during the exploration and evaluation phase.
Tangible E&E assets are depreciated on straight line basis over the management estimate
of useful life of 5 years. Hence a depreciation of ` 80 lakhs is recognised in the statement of
profit or loss every year (assuming it cannot be capitalised as part of intangible E&E
asset).
(d) Impairment: Since the change in tax laws has adversely affected the management
expectations of future mineral prices, it has resulted in an indicator of impairment which will
trigger impairment testing.
The E&E assets thus should be tested for impairment, the two sites together can be considered

as a single CGU since they are reported as a single operating segment as per Ind AS 108,
Operating Segments. The recoverable value of the CGU (two sites together) is ` 100 crores
while the carrying value is ` 125.1 crores, thus an impairment loss of ` 25.1 crores
(` 125.1 crores - ` 100 crores) should be recognised in the statement of profit or loss and the
carrying amount of E&E assets should be reduced accordingly.

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Final Course

(Revised Scheme of Education and Training)

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Edition : August, 2017

Committee/ : Board of Studies

ISBN No. : 978-81-8441-897-2

Price : 1100/- (For All Modules)

Published by : The Publication Department on behalf of The Institute of

Printed by : Sahitya Bhawan Publications, Hospital Road, Agra -282 003

© The Institute of Chartered Accountants of India

Chapter 1: Application of Accounting Standards

Chapter 2: Application of Guidance Notes

Chapter 3: Framework for Preparation and Presentation of Financial Statements

Application of Indian Accounting Standards (Ind AS)

Chapter 4: Ind AS on Presentation of Items in the Financial Statements

Unit 1: Ind AS 1 “Presentation of Financial Statements” Unit

2: Ind AS 34 “Interim Financial Reporting”

Unit 3: Ind AS 7 “Statement of Cash Flows”

Chapter 5: Ind AS on Recognition of Revenue in the Financial Statements

Unit 1: Ind AS 11 “Construction Contracts”

Unit 2: Ind AS 18 “Revenue”

Chapter 6: Ind AS on Measurement based on Accounting Policies

2: Ind AS 10 “Events after the Reporting Period”

© The Institute of Chartered Accountants of India

Unit 3: Ind AS 113 “Fair Value Measurement”

Chapter 7: Other Ind AS

Unit 1: Ind AS 20 “Accounting for Government Grants and Disclosure of Government

Unit 2: Ind AS 114 “Regulatory Deferral Accounts”

Chapter 8: Ind AS 101 “First-time Adoption of Indian Accounting Standards”

Chapter 9: Ind AS on Assets of the Financial Statements

Unit 1: Ind AS 2 “Inventories”

Unit 2: Ind AS 16 “Property, Plant and Equipment”

Unit 3: Ind AS 17 “Leases”

Unit 4: Ind AS 23 “Borrowing Costs”

Unit 5: Ind AS 36 “Impairment of Assets”

Unit 6: Ind AS 38 “Intangible Assets”

Unit 7: Ind AS 40 “Investment Property”

Chapter 10: Ind AS on Liabilities of the Financial Statements

Unit 1: Ind AS 19 “Employee Benefits”

Unit 2: Ind AS 37 “Provisions, Contingent Liabilities and Contingent Assets”

Chapter 11: Ind AS on Items impacting the Financial Statements

Unit 1: Ind AS 12 “Income Taxes”

Unit 2: Ind AS 21 “The Effects of Changes in Foreign Exchange Rates”

© The Institute of Chartered Accountants of India

Chapter 12: Ind AS on Disclosures in the Financial Statements

Unit 1: Ind AS 24 “Related Party Disclosures”

Unit 2: Ind AS 33 “Earnings per Share”

Unit 3: Ind AS 108 “Operating Segments”

Chapter 13: Consolidated and Separate Financial Statements

Unit 1 : Introduction to Consolidated Financial Statements Unit

Unit 3 : Separate Financial Statements

Unit 4 : Consolidated Financial Statements

Unit 5 : Consolidated Financial Statements: Accounting of Subsidiaries Unit

Unit 7 : Investment in Associates & Joint Ventures

Unit 1 : Ind AS 41 “Agriculture”

Unit 2 : Ind AS 104 “Insurance Contracts”

Unit 3 : Ind AS 106 “Exploration for and Evaluation of Mineral Resources”

© The Institute of Chartered Accountants of India

Chapter 15: Business Combinations and Corporate Restructuring

Chapter 16: Accounting and Reporting of Financial Instruments

Unit 1: Financial Instruments: Scope and Definitions

Unit 2: Financial Instruments: Equity and Financial Liabilities

Unit 3: Classification and Measurement of Financial Assets and Financial Liabilities