Taxmann's Financial Reporting (FR) | CRACKER

CHAPTER/TOPIC-WISE MARKS DISTRIBUTION

S. No. Chapter May 18 Nov. 2018 May 19 Nov. 2019 Nov. 20 Jan. 21 July 21 Dec. 2021 May 22 Nov. 2022 Average (Past 10 attempt) 1. Framework for Financial Reporting Under IND AS

5 5 6 1.6 2. IND AS 1: Presentation of Financial Statements

4 5 4 5 1.8 3. IND AS 34: Interim Financial Reporting

5 6 4 1.5 4. IND AS 7: Cash Flow Statements 8 5 6 1.9 5. IND AS 115: Revenue from Contracts with Customers

5 8 18 12 12 10 14 20 9.9 6. IND AS 8: Accounting Policies, Changes in Accounting Estimates and Errors

5 5 1 7. IND AS 10: Events After Reporting Period

8 8 1.6 8. IND AS 113: Fair Value Measurements

5 8 4 5 5 2.7

MARKS DISTRIBUTION

S. No. Chapter May 18 Nov. 2018 May 19 Nov. 2019 Nov. 20 Jan. 21 July 21 Dec. 2021 May 22 Nov. 2022 Average (Past 10 attempt)

9. IND AS 20: Accounting for Government Grants and Disclosure of Government Assistance

10. IND AS 102: Share Based Payment

11. IND AS 101: First-Time Adoption of IND AS

5 4 4 8 2.1

10 8 8 8 5 6 6 6 5.7

8 6 8 2.2

12. IND AS 2: Inventories 4 4 5 1.3

13. IND AS 16: Property, Plant and Equipment

8 8 5 8 2.9

14. IND AS 116: Leases 8 6 4 10 8 3.6

15. IND AS 23: Borrowing Costs 8 7 1.5

16. IND AS 36: Impairment of Assets

10 8 6 8 3.2

17. IND AS 38: Intangible Assets 5 8 10 2.3

18. IND AS 40: Investment Property Special Issue

19. IND AS 105: Non-Current Assets (NCA) held for Sale & Discontinued Operations (DO)

5 0.5

8 10 8 2.6

20. IND AS 41: Agriculture 4 9 6 1.9

21. IND AS 19: Employee Bene ts

5 6 7 1.8

S. No. Chapter May 18 Nov. 2018 May 19 Nov. 2019 Nov. 20 Jan. 21 July 21 Dec. 2021 May 22 Nov. 2022 Average (Past 10 attempt)

22. IND AS 37: Provision, Contingent Liability and Contingent Assets

4 0.4 23. IND AS 12: Income Taxes 6 4 5 6 2.1 24. IND AS 21: The Effects of Changes in Foreign Exchange Rates

5 4 5 5 6 2.5 25. IND AS 24: Related Party Disclosures

26. IND AS 33: Earnings Per Share

8 8 8 4 8 3.6 27. IND AS 108: Operating Segments

6 4 8 5 2.3 28. IND AS 109: Financial Instruments (FI) –Recognition and Measurement

8 12 12 14 18 19 24 29 19 17 17.2 29. IND AS 103: Business Combination

10 4 8 20 8 5 19 20 9.4 30. IND AS 110: Consolidated Financial Statements

31. IND AS 111: Joint Arrangements

32. IND AS 28: Investment In Associates and Joint Ventures 33. IND AS 32: Financial Instruments (FI) – Presentation

15 16 15 10 20 16 20 11.2

20 16 8 4.4

S. No. Chapter May 18 Nov. 2018 May 19 Nov. 2019 Nov. 20 Jan. 21 July 21 Dec. 2021 May 22 Nov. 2022 Average (Past 10 attempt) 34. Integrated Reporting 6 6 6 1.8 35. Corporate Social Responsibility 4 5 6 6 6 2.7

PREVIOUS EXAMS TREND ANALYSIS

Year Question No. Compulsory Chapter Name Marks Category

Jan. 2020

1(a) Yes Ind AS-110 15 Practical 1(b) Yes Ind AS-1 5 Practical 2(a) Ind AS-10 8 Practical 2(b) Ind AS-115 12 Practical 3(a) Ind AS-116 6 Practical 3(b) Ind AS-38 10 Practical 3(c) Ind AS-108 4 Practical 4(a) Ind AS-109 14 Practical 4(b) CSR 6 Theory or 4(b) Integrated Reporting 6 Practical

5(a) Ind AS-102 12 Practical 5(b) Ind AS-12 4 Practical 5(c) Ind AS-41 4 Practical 6(a) Ind AS-16 5 Practical 6(b) Ind AS-109 5 Practical 6(c) Ind AS-7 5 Practical 6(d) Ind AS-28 5 Practical

July 2021 1(a) Yes Ind AS-110 16 Practical 1(b) Yes Ind AS-1 4 Practical 2(a) Ind AS-16 8 Practical 2(b) Ind AS-115 12 Practical 3(a) Ind AS-41 9 Practical 3(b) Ind AS-36 6 Practical 3(c) Ind AS-21 5 Practical 4(a) Ind AS-109 14 Practical 4(b) Ind AS-101 6 Practical or 4(b) CSR 6 Theory 5(a) Ind AS-33 8 Practical

Year Question

No.

Compulsory Chapter Name Marks Category

5(b) Ind AS-108 8 Practical 5(c) Ind AS-116 4 Practical 6(a) Ind AS-32 5 Practical 6(b) Ind AS-32 5 Practical 6(c) Ind AS-102 5 Practical 6(d) Ind AS-103 5 Practical Dec. 2021

1(a) Yes Ind AS-109 12 Practical 1(b) Yes Ind AS-101 8 Practical 2(a) Ind AS-103 14 Practical 2(b) Ind AS-7 6 Practical 3(a) Ind AS-21 5 Practical 3(b) Ind AS-12 5 Practical 3(c) Ind AS-115 10 Practical 4(a) Ind AS-116 10 Practical 4(b) Ind AS-102 6 Practical 4(c) Ind AS-34 4 Practical or 4(c) Ind AS-113 4 Practical 5(a) Ind AS-109 12 Practical 5(b) Ind AS-33 8 Practical 6(a) Ind AS-8 5 Practical 6(b) Ind AS-109 5 Practical 6(c) Ind AS-2 5 Practical 6(d) Ind AS-103 5 Practical May 2022

1(a) Yes Ind AS-103 15 Practical 1(b) Yes Ind AS-1 5 Practical 2(a) CSR 6 Practical 2(b) Ind AS-115 6 Practical 2(c) Ind AS-115 8 Practical 3(a) Ind AS-19 7 Practical 3(b) Ind AS-23 7 Practical 3(c) Ind AS-21 6 Practical 4(a) Ind AS-32 14 Practical 4(b) Framework 6 Theory or 4(b) Integrated Reporting 6 Theory 5(a) Ind AS-20 8 Practical 5(b) Ind AS-105 8 Practical 5(c) Ind AS-33 4 Practical

Year Question

No.

Compul-

sory

Chapter Name Marks Category

6(a) Ind AS-113 5 Practical

6(b) Ind AS-109 5 Practical

6(c) Ind AS-40 5 Practical 6(d) Ind AS-36 & Ind AS-103 5 Practical

Nov. 2022

1(a) Yes Ind AS 110 15 Practical

1(b) Yes Ind AS 113 5 Practical

2(a) Ind AS 115 6 Practical

2(b) Ind AS 115 10 Practical

2(c) Ind AS 115 4 Practical

3(a) Ind AS 36 8 Practical

3(b) Ind AS 12 6 Practical

3(c) Framework 6 Theory

3(c) OR Integrated Reporting 6 Theory

4(a) Ind AS 109 12 Practical 4(b) Ind AS 116 8 Practical

5(a) Ind AS 41 6 Practical

5(b) Ind AS 33 8 Practical 5(c) Ind AS 102 6 Practical

6(a) Ind AS 8 5 Practical

6(b) Ind AS 109 5 Practical 6(c) Ind AS 108 5 Practical 6(d) Ind AS 28 5 Practical

CHAPTER-WISE COMPARISON WITH STUDY MATERIAL

S. No.

Chapter Name Study Material Chapter

1. Framework for Financial Reporting Under IND AS Chapter 1

2. IND AS 1: Presentation of Financial Statements Chapter 2, Unit 1 3. IND AS 34: Interim Financial Reporting Chapter 2, Unit 2 4. IND AS 7: Cash Flow Statements Chapter 2, Unit 3 5. IND AS 115: Revenue from Contracts with Customers Chapter 3 6. IND AS 8: Accounting Policies, Changes in Accounting Estimates and Errors Chapter 4, Unit 1 7. IND AS 10: Events After Reporting Period Chapter 4, Unit 2

8. IND AS 113: Fair Value Measurements Chapter 4, Unit 3

9. IND AS 20: Accounting for Government Grants and Disclosure of Government Assistance Chapter 5, Unit 1

10. IND AS 102: Share Based Payment Chapter 5, Unit 2 11. IND AS 101: First-Time Adoption of IND AS Chapter 6

12. IND AS 2: Inventories Chapter 7, Unit 1 13. IND AS 16: Property, Plant and Equipment Chapter 7, Unit 2 14. IND AS 116: Leases Chapter 7, Unit 3 15. IND AS 23: Borrowing Costs Chapter 7, Unit 4

16. IND AS 36: Impairment of Assets Chapter 7, Unit 5

17. IND AS 38: Intangible Assets Chapter 7, Unit 6

18. IND AS 40: Investment Property Special Issue Chapter 7, Unit 7 19. IND AS 105: Non-Current Assets (NCA) held for Sale & Discontinued Operations (DO) Chapter 7, Unit 8

20. IND AS 41: Agriculture Chapter 8

21. IND AS 19: Employee Bene ts Chapter 9, Unit 1

22. IND AS 37: Provision, Contingent Liability and Contingent Assets Chapter 9, Unit 2

23. IND AS 12: Income Taxes Chapter 10, Unit 1 24. IND AS 21: The Effects of Changes in Foreign Exchange Rates Chapter 10, Unit 2

S. No.

Chapter Name Study Material Chapter

25. IND AS 24: Related Party Disclosures Chapter 11, Unit 1 26. IND AS 33: Earnings Per Share Chapter 11, Unit 2 27. IND AS 108: Operating Segments Chapter 11, Unit 3 28. IND AS 109: Financial Instruments (FI) – Recognition and Measurement Chapter 12, Unit 5 29. IND AS 103: Business Combination Chapter 13 30. IND AS 110: Consolidated Financial Statements Chapter 14 31. IND AS 111: Joint Arrangements Chapter 14, Unit 5 32. IND AS 28: Investment in Associates and Joint Ventures Chapter 14, Unit 6 33. IND AS 32: Financial Instruments (FI) – Presentation Chapter 12 34. Integrated Reporting Chapter 16 35. Corporate Social Responsibility Chapter 17

Contents

PAGE

Chapter/Topic-wise Marks Distribution I-5

Previous Exams Trend Analysis I-9

Chapter-wise Comparison with Study Material I-13

CHAPTER 1

Framework for Financial Reporting under Ind AS 1.1

CHAPTER 2

Ind AS 1 : Presentation of Financial Statements 2.1

CHAPTER 3

Ind AS 34: Interim Financial Reporting 3.1

CHAPTER 4

Ind AS 7 : Cash Flow Statement 4.1

CHAPTER 5

Ind AS 115 : Revenue from Contracts with Customers 5.1

CHAPTER 6

Ind AS 8 : Accounting Policies, Changes in Accounting Estimates and Errors 6.1

CHAPTER 7

Ind AS 10 : Events after Reporting Period 7.1

CHAPTER 8

Ind AS 113 : Fair Value Measurements 8.1

CHAPTER 9

Ind AS 20 : Accounting for Government Grants and Disclosure of Government Assistance 9.1

CHAPTER 10

Ind AS 102 : Share Based Payment 10.1

CHAPTER 11

Ind AS 101: First-Time Adoption of Ind AS 11.1

CHAPTER 12

Ind AS 2 : Inventories 12.1

CHAPTER 13

Ind AS 16 : Property, Plant and Equipment 13.1

CHAPTER 14

Ind AS 116 : Leases 14.1

CHAPTER 15

Ind AS 23 : Borrowing Costs 15.1

CHAPTER 16

Ind AS 36 : Impairment of Assets 16.1

CHAPTER 17

Ind AS 38 : Intangible Assets 17.1

CHAPTER 18

Ind AS 40 : Investment Property 18.1

CHAPTER 19

Ind AS 105 : Non-Current Assets (NCA) held for Sale & Discontinued Operations (DO) 19.1

CHAPTER 20

Ind AS 41 : Agriculture 20.1

CHAPTER 21

Ind AS 19 : Employee Benefits 21.1

CHAPTER 22

Ind AS 37 : Provision, Contingent Liability and Contingent Assets 22.1

CHAPTER 23

Ind AS 12 : Income Taxes 23.1

CHAPTER 24

Ind AS 21 : The effects of changes in foreign exchange rates 24.1

CHAPTER 25

Ind AS 24 : Related Party Disclosures 25.1

CHAPTER 25A

Ind AS 27 : Separate Financial Statements 25A.1

CHAPTER 26

Ind AS 33 : Earnings per Share 26.1

CHAPTER 27

Ind AS 108 : Operating Segments 27.1

CHAPTER 28

Ind AS 109 : Financial Instruments (FI) – Recognition and Measurement 28.1

CHAPTER 29

Ind AS 103 : Business Combination 29.1

CHAPTER 30

Ind AS 110 : Consolidated Financial Statements 30.1

CHAPTER 31

Ind AS 111 : Joint Arrangements 31.1

CHAPTER 32

Ind AS 28 : Investment in Associates and Joint Ventures 32.1

CHAPTER 33

Ind AS 32 : Financial Instruments (FI) - Presentation 33.1

CHAPTER 34

Integrated Reporting 34.1

CHAPTER 35

Corporate Social Responsibility 35.1

5

SCOPE OF IND AS 115

Que. 1. Same line of business + No commercial substance: A Ltd. and B Ltd. both are engaged in manufacturing of homogenous bottles. A Ltd. operates in northern, eastern and central parts of India. B Ltd. operates in western and southern parts of India. A Ltd. fulfils the demands of its customers based on western and southern India by using the bottles manufactured by B Ltd. Similarly, B Ltd. fulfils the demands of customer based on northern, eastern and central parts of India by delivering bottles manufactured by A Ltd.

How A Ltd. and B Ltd. should recognize the revenue?

[Educational Material]

Ans. : In this case, the exchange of bottles qualifies as a non-monetary exchange between customers in the same line of business. Accordingly, A Ltd. and B Ltd. should not recognize any revenue on account of exchange of goods as Ind AS 115 will not apply to the contract.

Que. 2. Different line of business:

A Ltd. a telecommunication company, entered into an agreement with B Ltd. which is engaged in generation and supply of power. The agreement provided that A Ltd. will provide 1,00,000 minutes of talk time to employees of B Ltd. in exchange for getting power equivalent to 20,000 units. A Ltd. normally charges Re.0.50 per minute and B Ltd. charges ` 2.5 per unit.

How should revenue be measured in this case?

[Educational Material]

Ans. : The current scenario will be covered under Ind AS 115 since the same is exchange of dissimilar goods or services.

Measurement of revenue:

On the basis of the above, revenue recognized by A Ltd. will be the consideration in the form of power units that it expects to be entitled for talk-time sold, i.e. ` 50,000 (20,000 units × ` 2.5).

The revenue recognized by B Ltd. will be the consideration in the form of talk time that it expects to be entitled for the power units sold, i.e., ` 50,000 (1,00,000 minutes × Re. 0.50).

Que. 3. [Based on Para No. 6 + Appendix A of Ind AS 115]

ABC Limited is a pharmaceutical company. As a part of its sales promotion activities, it distributes gifts (mobile phones, decorative items and the like) along with its product catalogues to doctors to encourage them to prescribe medicines manufactured by it. No conditions are attached with the items distributed.

Would the distribution of gifts to doctors be covered by Ind AS 115, Revenue from Contracts with Customers?

If not, how should the same be accounted for by ABC Limited?

Issue No. 4 of ITFG Clarification Ind AS Bulletin No. 22

Ans. :

Answer to First Part of the Question: Analysis to First Part of the Question:

In the given case:

Gifts are distributed by ABC Limited to doctors as a part of its sales promotion activities without there being an agreement between ABC Limited and the doctors creating enforceable rights and obligations.

The doctors to whom gifts are distributed are not ‘customers’ of ABC Limited – they have not contracted with it to obtain goods or services in exchange for consideration.

The items distributed as gifts are not an output of ABC Limited’s ordinary activities.

Conclusion to First Part of the Question:

In view of the above, the distribution of gifts to doctors does not fall under the scope of Ind AS 115.

Answer to Second Part of the Question:

Refer Para Nos. 5, 48, 63, 64, 69 and 69A of Ind AS 38;

Analysis to Second Part of the Question:

Items acquired by ABC Limited to be distributed as gifts as a part of sales promotion activities have no other purpose than to undertake those activities. In other words, the only benefit of those items for ABC Limited is to develop or create brands or customer relationships, which in turn generate revenue.

Paragraph 69 of Ind AS 38 requires an entity to recognize expenditure on such items as an expense when the entity has a right to access those goods.

Paragraph 69A of Ind AS 38 states that an entity has a right to access goods when it owns them, or otherwise has a right to access them regardless of when it distributes the goods.

Conclusion to Second Part of the Question:

In view of the above, ABC Limited should recognize the expenditure on items to be distributed as gifts as an expense when it owns those items, or otherwise has a right to access them, regardless of when it distributes the items to doctors.

5-STEP MODEL

Que. 4. Advance has been received:

An entity G Ltd. enters into a contract with a customer P Ltd. for the sale of a machinery for ` 20,00,000. P Ltd. intends to use the said machinery to start a food processing unit. The food processing industry is highly competitive and P Ltd. has very little experience in the said industry.

P Ltd. pays a non-refundable deposit of ` 1,00,000 at inception of the contract and enters into a long-term financing agreement with G Ltd. for the remaining 95 per cent of the agreed consideration which it intends to pay primarily from income derived from its food processing unit as it lacks any other major source of income. The financing arrangement is provided on a non-recourse basis, which means that if P Ltd. defaults then G Ltd. can repossess the machinery but cannot seek further compensation from P Ltd., even if the full value of the amount owed is not recovered from the machinery. The cost of the machinery for G Ltd. is ` 12,00,000. P Ltd. obtains control of the machinery at contract inception. When should G Ltd. recognize revenue from sale of machinery to P Ltd. in accordance with paragraph 9 of Ind AS 115?

[Educational Material; RTP November 2019]

Ans. : Step A – Para 9 (5 conditions):

[Para 9 – Collection should be probable]

In the given case, it is not probable that G Ltd. will collect the consideration to which it is entitled in exchange for the transfer of the machinery. P Ltd.’s ability to pay may be uncertain due to the following reasons:

(

a) P Ltd. intends to pay the remaining consideration (which has a signi cant balance) primarily from income derived from its food processing unit (which is a business involving signi cant risk because of high competition in the said industry and P Ltd.’s little experience);

(b) P Ltd. lacks other income or assets that could be used to repay the balance consideration; and

(c) P Ltd.’s liability is limited because the nancing arrangement is provided on a non-recourse basis.

In accordance with the above, the criteria in paragraph 9 of Ind AS 115 are not met.

Step B – Advance has been received:

Yes.

Step C – Evaluation of Para 15 conditions:

Are the 3 conditions of Set I met OR the 2 conditions of Set II met?

Conditions of Set I:

1. Entity has no obligations.

2. All or substantially all the consideration has been received.

3. The amount received is non-refundable.

The entity has not received substantially all of the consideration – only 5% has been received.

Conditions of Set II:

1. The contract has been terminated.

2. The amount received is non-refundable.

The contract has not been terminated.

Fails Fails

Para 16:

1. G Ltd. should account for the non-refundable deposit of ` 1,00,000 payment as a deposit liability.

2. G Ltd. will continue to assess the contract to determine whether the criteria in paragraph 9 are subsequently met or whether the events in paragraph 15 of Ind AS 115 have occurred.

CONTRACT MODIFICATIONS:

Que. 5. Goods and services are distinct + Modification fails the conditions of Para 20 (Therefore, Para 21(a) is applied):

Entity A Ltd. enters into a three-year service contract with a customer C Ltd. for ` 4,50,000 (` 1,50,000 per year). The standalone selling price for one year of service at inception of the contract is ` 1,50,000 per year. A Ltd. accounts for the contract as a series of distinct services.

At the beginning of the third year, the parties agree to modify the contract as follows:

(i) the fee for the third year is reduced to ` 1,20,000; and

(ii) C Ltd. agrees to extend the contract for another three years for ` 3,00,000 (` 1,00,000 per year).

The standalone selling price for one year of service at the time of modification is ` 1,20,000.

How should A Ltd. account for the modification?

[Educational Material; MTP April 2021]

Ans :

Step I:

KB’s 3-Step Model:

Are the remaining goods and services DISTINCT or not? Yes

The additional products are distinct from the original products – stated clearly in the question.

No

[It can trigger either Para 20 or Para 21(a)] N.A.

Go to Step II

Step II: Are the conditions of Para 20 met?

Are both the conditions met?

Condition 1:

Scope has increased because of the addition of promised goods or services – Yes additional period of 3 years has been added.

Condition 2:

Price has increased – commensurate to the standalone selling prices – No, because the price of the contract did not increase by an amount of consideration that reflects the standalone selling price of the additional services.

Yes No N.A. Apply Para 21(a)

The modification will be treated as if it were a termination of the existing contract and the creation of a new contract.

In such a case, we will apply prospective accounting i.e.; spread over the sum total of the following over the remaining period of the contract:

(a) Unrecognized portion of Transaction Price (TP) of the existing contract i.e.; ` 1,20,000; and

(b) Additional consideration of the contract modi cation - ` 3,00,000

Thus, A Ltd. will recognize a total of ` 4,20,000 (` 1,20,000 + ` 3,00,000) over the remaining four-year service period (one year remaining under the original contract plus three additional years) or `1,05,000 per year.

IDENTIFYING THE PERFORMANCE OBLIGATIONS (PO):

Que. 6. Telco T Ltd. enters into a two-year contract for internet services with Customer C. C also buys a modem and a router from T Ltd. and obtains title to the equipment. T Ltd. does not require customers to purchase its modems and routers and will provide internet services to customers using other equipment that is compatible with T Ltd.’s network. There is a secondary market in which modems and routers can be bought or sold for amounts greater than scrap value.

Determine how many performance obligations does the entity T Ltd. have?

[MTP October 2021]

Ans. :

S. No. Para No. Particulars

1. 27(a) Criterion 1:

Analysis:

Capable of being distinct:

C can benefit from the modem and router on their own because they can be resold for more than scrap value.

C can benefit from the internet services in conjunction with readily available resources – i.e. either the modem and router are already delivered at the time of contract set - up, they could be bought from alternative retail vendors or the internet service could be used with different equipment.

2. 27(b) Criterion 2:

Distinct within the context of the contract: T Ltd. does not provide a signi cant integration service.

The modem, router and internet services do not modify or customise one another.

C could bene t from the internet services using routers and modems that are not sold by T Ltd. Therefore, the modem, router and internet services are not highly dependent on or highly inter-related with each other.

Remarks

Pass

Pass

Conclusion:

T Ltd. concludes that the modem and router are each distinct and that the arrangement includes three performance obligations (the modem, the router and the internet services) based on the above evaluation chart.

Que. 7. A property sale contract includes the following:

(a) Common areas

(b) Construction services and building material

(c) Property management services

(d) Golf membership

(e) Car park

(f) Land entitlement

Whether they could be considered as separate performance obligations as per the requirements of Ind AS 115?

[Educational Material; RTP May 2021]

Ans. : The following table discusses whether the common goods and services in property sale contract should be considered as separate performance obligation or not:

Goods/Service Whether a separate performance obligation (PO) or not?

Common areas Unlikely to be separate PO

Reason

Construction services and building materials

Unlikely to be separate PO

Common areas are unlikely to be a separate performance obligation because the interests received in common areas are typically undivided interests that are not separable from the property itself.

However, if the common areas were sold separately by the developer, then they could be considered as a separate performance obligation provided that it is distinct in the context of the contract.

Construction services and building materials can meet the first criterion as they are items that can be used in conjunction with other readily available goods or services.

However, the developer would be considered to be providing a significant integration service as it is bringing together all the separate elements to deliver a completed building.

Goods/Service

Reason

Property management services and Golf membership

Likely to be separate PO

Property management services and golf membership are likely to be separate performance obligations as they may be used in isolation or with the property already acquired, i.e., management services can be used with the property.

These types of services are not significantly customized, integrated with, or dependent on the property. This is because there is no change in their function with or without the property.

Also, a property management service could be undertaken by a third party.

Car park Land entitlement Analysis required Items such as car parks and land entitlements generally meet the first criterion – i.e., capable of being distinct – as the buyer benefits from them on their own.

Whether the second criterion is met depends on the facts and circumstances. For example, if the land entitlement can be sold separately or pledged as security as a separate item, it may indicate that it is not highly dependent on, or integrated with, other rights received in the contract.

In an apartment scenario, the customer can receive an undivided interest in the land on which the apartment block sites. This type of right is generally considered as highly inter-related with the apartment itself.

[See Note below]

Note:

However, if title to the land is transferred to the buyer separately – for example in a single party development – then the separately identifiable criterion may be met.

VARIABLE CONSIDERATION

Que. 8. [Revenue recognition policy + Journal Entries]

ABC Limited supplies plastic buckets to wholesaler customers. As per the contract entered into between ABC Limited and a customer for the

Whether a separate performance obligation (PO) or not?

financial year 2019-20, the price per plastic bucket will decrease retrospectively as sales volume increases within the stipulated time of one year.

The price applicable for the entire sale will be based, on sales volume bracket during the year.

Price per unit (INR) Sales volume 90 0 - 10,000 units 80 10,001 - 35,000 units 70 35,001 units & above

All transactions are made in cash.

(1) Suggest how revenue is to be recognised in the books of account of ABC Limited as per expected value method, considering a probability of 15%, 75% and 10% for sales volumes of 9,000 units, 28,000 units and 36,000 units respectively. For workings, assume that ABC Limited achieved the same number of units of sales to the customer during the year as initially estimated under expected value method for the nancial year 2019-20.

(2) In case ABC Limited decides to measure revenue, based on most likely method instead of expected value method, how will be the revenue recognised in the books of account of ABC Limited based on above available information? For workings, assume that ABC Limited achieved the same number of units of sales to the customer during the year as initially estimated under most likely value method for the nancial year 2019-20.

(3) You are required to pass Journal entries in the books of ABC Limited if the revenue is accounted for as per expected value method for nancial year 2019-20.

[November 2020 Examination - 14 Marks]

Ans. : The requirement of the question can be arranged as under: Treatment of Discount (Variable consideration)

[Creating a Revenue Recognition Policy + Its Accounting entries]

Creating Revenue recognition policy

This will involve 2 things:

1. Volume expected to be achieved.

2. Price per unit at which revenue recognition will take place.

Based on EVM [Expected value method]

Step I – Volume:

Decide the weighted average volume expected to be achieved.

Step II – Price per unit: Decide the weighted average price at which revenue will be recognized.

Based on MLO [Most likely outcome]

Step I – Volume:

Decide the volume expected to be achieved based on highest probability.

Note: Alternatively, we can consider the weighted average volume computed as per EVM.

Step II – Price per unit: Decide the price (based on highest probability) at which revenue will be recognized.

Accounting entries:

Accounting entries will be same under both methods. But the amounts will differ.

Bank (Amount invoiced and collected)

To Revenue (Based on revenue recognition policy)

To Liability (Balancing figure – to be deferred and reversed or recognized as revenue at a later date)

Let us now, solve the question;

Requirement No. 1: Determination of how revenue is to be recognized in the books of ABC Ltd. as per expected value method:

Step I - Computation of probability weighted sales volume:

Sales volume (units)

Probability

Probability-weighted sales volume (units)

9,000 15% 1,350 28,000 75% 21,000 36,000 10% 3,600 25,950

Computation of probability weighted sales value:

Sales volume (units) Sales price per unit (`)

Probability

Probability-weighted sales value (`)

9,000 90 15% 1,21,500 28,000 80 75% 16,80,000 36,000 70 10% 2,52,000 20,53,500

Step II - Average unit price:

= Probability weighted sales value/ Probability weighted sales volume

= 20,53,500 / 25,950 = ` 79.13 per unit

Revenue recognition policy – Based on EVM: Revenue is recognized at ` 79.13 for each unit sold.

Particulars Remarks

Initial 10,000 units First 10,000 units sold will be booked at ` 90 per unit and liability is accrued for the difference price of ` 10.87 per unit (` 90 – ` 79.13), which will be reversed upon subsequent sales of 15,950 units.

Next 15,950 units For, subsequent sale of 15,950 units, contract liability is accrued at ` 0.87 (80 – 79.13) per unit and revenue will be deferred.

Requirement No. 2:

Determination of how revenue is to be recognized in the books of ABC Ltd. as per most likely method:

Alternative 1: Step I - Computation of probability weighted sales volume: It is assumed that the sales volume of 28,000 units given under the expected value method, with highest probability is the sales estimated under most likely method too.

Step II - Average unit price:

28,000 units × ` 80 per unit = ` 22,40,000 Thus, Average unit price applicable = ` 80

Revenue recognition policy – Based on MLO: Revenue is recognized at ` 80 for each unit sold.

Particulars

Remarks

Initial 10,000 units First 10,000 units sold will be booked at ` 90 per unit and liability of ` 1,00,000 is accrued for the difference price of ` 10 per unit (` 90 – ` 80), which will be reversed upon subsequent sales of 18,000 units.

Next 18,000 units The liability accrued above will be reversed upon subsequent sales of 18,000 units.

Alternative 2: Step I - Computation of probability weighted sales volume:

Alternatively, the question may be solved based on 25,950 units (as calculated under expected value method assuming that the targets were met).

Step II - Average unit price:

25,950 units × ` 80 per unit = ` 20,76,000 Thus, Average unit price applicable = ` 80.

Revenue recognition policy – Based on MLO:

Revenue is recognized at ` 80 for each unit sold.

Particulars Remarks

Initial 10,000 units First 10,000 units sold will be booked at ` 90 per unit and liability is accrued for the difference price of ` 10 per unit (` 90 – ` 80), which will be reversed upon subsequent sales of 15,950 units. Next 18,000 units The liability accrued above will be reversed upon subsequent sales of 15,950 units.

Requirement No. 3:

Journal Entries in the books of ABC Ltd.:

(when revenue is accounted for as per EVM for financial year 2019-20)

Alternative 1 (Passing entries in 2 blocks i.e.; 10,000 units + 15,950 units)

S. No. Particulars Debit Credit

1. Bank A/c (10,000 × ` 90)

To Revenue A/c (10,000 × ` 79.13)

To Liability (10,000 × ` 10.87) (Being Revenue recognized on sale of first 10,000 units)

9,00,000 7,91,300 1,08,700

Case I – Customer pays after deducting the excess of ` 1,00,000: [10,000 × 10 per unit]

2. Bank A/c [(25,950 × ` 80)- 9,00,000]

Liability

To Revenue A/c (15,950 × ` 79.13)

[Being Revenue recognized on sale of remaining 15,950 units (25,950 - 10,000)]

3. Liability (1,08,700 – 86,124)

To Revenue A/c [25,950 × (80-79.13)]

(Being reversal of liability at the end of the financial year 2019-20 i.e. after completion of stipulated time)

11,76,000 86,124 12,62,124

22,576 22,576

Case II – Customer pays full amount + Company will refund the excess:

2. Bank A/c (15,950 × ` 80)

To Revenue A/c (15,950 × ` 79.13)

To Liability

(Being Revenue recognized on sale of remaining 15,950 units (25,950 - 10,000))

12,76,000 12,62,124 13,876

S. No Particulars Debit Credit

3. Liability (1,08,700 + 13,876)

To Revenue A/c [25,950 × (80-79.13)]

To Bank (Being reversal of liability at the end of the financial year 2019-20 i.e. after completion of stipulated time and excess amount refunded)

1,22,576 22,576 1,00,000

Alternative 2 (Passing entries in 1 block i.e.; 25,950 units)

S. No. Particulars Debit Credit

1. Bank A/c (25,950 × ` 80)

To Revenue A/c (25,950 × ` 79.13)

To Liability (25,950 × ` 0.87) (Being Revenue recognized on sale of 25,950 units)

20,76,000 20,53,424 22,576

Que. 9. Entity I sells a piece of machinery to the customer for ` 2 million, payable in 90 days. Entity I is aware at contract inception that the customer might not pay the full contract price. Entity I estimates that the customer will pay at least ` 1.75 million, which is sufficient to cover entity I’s cost of sales (` 1.5 million) and which entity I is willing to accept because it wants to grow its presence in this market. Entity I has granted similar price concessions in comparable contracts.

Entity I concludes that it is highly probable that it will collect ` 1.75 million, and such amount is not constrained under the variable consideration guidance.

What is the transaction price in this arrangement? [MTP March 2021]

Ans. :

accept an amount less than ` 2 million

exchange for the machinery. The consideration is therefore variable.

Conclusion:

The transaction price in this arrangement is ` 1.75 million, as this is the amount which entity I expects to receive after providing the concession and it is not constrained under the variable consideration guidance.

Entity I can also conclude that the collectability threshold is met for ` 1.75 million and therefore contract exists.

Que. 10. Entity K sells electric razors to retailers for CU 50 per unit. A rebate coupon is included inside the electric razor package that can be redeemed by the end consumers for CU 10 per unit.

Entity K estimates that 20% to 25% of eligible rebates will be redeemed, based on its experience with similar programmes and rebate redemption rates available in the market for similar programmes. Entity K concludes that the transaction price should incorporate an assumption of 25% rebate redemption, as this is the amount for which it is highly probable that a significant reversal of cumulative revenue will not occur if estimates of the rebates change.

How should entity K determine the transaction price?

[MTP March 2021]

Ans. :

Step Para No. Particulars

Analysis:

Remarks 1. 51 Is the rebate variable? Yes 2. 56 Is it highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved?

Yes 3. 53 Which method will apply to measure the variable consideration? Most Likely Amount

Conclusion:

Entity K records sales to the retailer at a transaction price of ` 47.50 (` 50 less 25% of ` 10).

Notes:

1. The difference between the per unit cash selling price to the retailers and the transaction price is recorded as a liability for cash consideration expected to be paid to the end customer.

2. Entity K will update its estimate of the rebate and the transaction price at each reporting date if estimates of redemption rates change.

Que. 11. A manufacturer enters into a contract to sell goods to a retailer for ` 1,000. The manufacturer also offers price protection, whereby it will reimburse the retailer for any difference between the sale price and the lowest price offered to any customer during the following six months. This clause is consistent with other price protection clauses offered in the past, and the manufacturer believes that it has experience which is predictive for this contract.

Management expects that it will offer a price decrease of 5% during the price protection period. Management concludes that it is highly probable that a significant reversal of cumulative revenue will not occur if estimates change.

How should the manufacturer determine the transaction price?

[MTP March 2021]

Ans. : Analysis:

Step Para No. Particulars

Remarks

1. 51 Is the price protection variable? Yes

2. 56 Is it highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved?

3. 53 Which method will apply to measure the variable consideration?

Conclusion:

Yes

Most Likely Amount

The transaction price is ` 950, because the expected reimbursement is ` 50. The expected payment to the retailer is reflected in the transaction price at contract inception, as that is the amount of consideration to which the manufacturer expects to be entitled after the price protection.

Notes:

1. The manufacturer will recognise a liability for the difference between the invoice price and the transaction price, as this represents the cash that it expects to refund to the retailer.

2. The manufacturer will update its estimate of expected reimbursement at each reporting date until the uncertainty is resolved.

Que. 12. AST Limited enters into a contract with a customer to build a manufacturing facility. The entity determines that the contract contains one performance obligation satisfied over time.

Construction is scheduled to be completed by the end of the 36th month for an agreed-upon price of ` 25 crores.

The entity has the opportunity to earn a performance bonus for early completion as follows:

15 per cent bonus of the contract price if completed by the 30th month (25% likelihood)

10 per cent bonus if completed by the 32nd month (40% likelihood)

5 per cent bonus if completed by the 34th month (15% likelihood)

In addition to the potential performance bonus for early completion, AST Limited is entitled to a quality bonus of ` 2 crores if a health and safety inspector assigns the facility a gold star rating as defined by the agency in the terms of the contract. AST Limited concludes that it is 60% likely that it will receive the quality bonus.

Determine the transaction price. [MTP April 2021]

Ans. :

Step Para No. Particulars

Analysis:

Remarks 1. 51 Is the performance bonus and quality bonus variable? Yes 2. 56 Is it highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved?

Yes 3. 53 Which method will apply to measure the variable consideration?

Expected Value + Most Likely Amount

Conclusion:

In determining the transaction price, AST Limited separately estimates variable consideration for each element of variability i.e. the early completion bonus and the quality bonus.

AST Limited decides to use the expected value method to estimate the variable consideration associated with the early completion bonus because there is a range of possible outcomes and the entity has experience with a large number of similar contracts that provide a reasonable basis to predict future outcomes.

Therefore, the entity expects this method to best predict the amount of variable consideration associated with the early completion bonus.

AST Limited decides to use the most likely amount to estimate the variable consideration associated with the potential quality bonus because there are only two possible outcomes.

Measurement of Variable Consideration:

AST’s best estimate of the early completion bonus is ` 2.13 crores, calculated as shown in the following table:

Bonus % Amount of bonus (` in crores)

Probability

Probability-weighted amount (` in crores)

15% 3.75 25% 0.9375

10% 2.50 40% 1.00 5% 1.25 15% 0.1875 0% - 20%2.125

AST Limited decides to use the most likely amount to estimate the variable consideration associated with the potential quality bonus because there are only two possible outcomes (` 2 crores or ` Nil) and this method would best predict the amount of consideration associated with the quality bonus. AST Limited believes the most likely amount of the quality bonus is ` 2 crores.

Que. 13. A contractor enters into a contract with a customer to build an asset for ` 1,00,000, with a performance bonus of ` 50,000 that will be paid based on the timing of completion. The amount of the performance bonus decreases by 10% per week for every week beyond the agreed-upon completion date. The contract requirements are similar to those of contracts that the contractor has performed previously, and management believes that such experience is predictive for this contract. The contractor concludes that the expected value method is most predictive in this case. The contractor estimates that there is a 60% probability that the contract will be completed by the agreed-upon completion date, a 30% probability that it will be completed one week late, and a 10% probability that it will be completed two weeks late.

Determine the transaction price.

Ans. :

[RTP November 2020]

Analysis:

Step Para No. Particulars Remarks

1. 51 Is the performance bonus variable? Yes

Step Para No. Particulars Remarks

2. 56 Is it highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved?

Yes

3. 53 Which method will apply to measure the variable consideration? Expected Value

Conclusion:

The transaction price should include management’s estimate of the amount of consideration to which the entity will be entitled for the work performed.

Measurement of Transaction Price (including Variable Consideration):

Particulars Amount

`1,50,000 (fixed fee plus full performance bonus) × 60% ` 90,000

`1,45,000 (fixed fee plus 90% of performance bonus) × 30% ` 43,500 `1,40,000 (fixed fee plus 80% of performance bonus) × 10% ` 14,000

Total probability-weighted consideration ` 1,47,500

Note:

The contractor will update its estimate at each reporting date (as per Para No. 59). Que. 14. On 1 January 20X8, entity J enters into a one-year contract with a customer to deliver water treatment chemicals. The contract stipulates that the price per container will be adjusted retroactively once the customer reaches certain sales volume, defined, as follows:

Price per container

Cumulative sales volume

` 100 1 - 1,000,000 containers ` 90 1,000,001 - 3,000,000 containers ` 85 3,000,001 containers and above

Volume is determined based on sales during the calendar year. There are no minimum purchase requirements. Entity J estimates that the total sales volume for the year will be 2.8 million containers, based on its experience with similar contracts and forecasted sales to the customer.

Entity J sells 700,000 containers to the customer during the first quarter ended 31 March 20X8 for a contract price of ` 100 per container. How should entity J determine the transaction price?

[RTP May 2020, MTP March 2021]

Ans. :

Step Para No.

Particulars

Analysis:

Remarks

1. 51 Is the price variable? Yes

2. 56 Is it highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved?

3. 53 Which method will apply to measure the variable consideration?

Conclusion:

Yes

Consider ` 90 as the price

The transaction price is ` 90 per container based on entity J’s estimate of total sales volume for the year, since the estimated cumulative sales volume of 2.8 million containers would result in a price per container of ` 90.

Entity J concludes that based on a transaction price of ` 90 per container, it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty is resolved. Revenue is therefore recognised at a selling price of ` 90 per container as each container is sold.

Entity J will recognise a liability for cash received in excess of the transaction price for the first 1 million containers sold at ` 100 per container (that is, ` 10 per container) until the cumulative sales volume is reached for the next pricing tier and the price is retroactively reduced.

For the quarter ended 31st March, 20X8, entity J recognizes revenue of ` 63 million (700,000 containers × ` 90) and a liability of ` 7 million [700,000 containers × (` 100 - ` 90)].

Note:

Entity J will update its estimate of the total sales volume at each reporting date until the uncertainty is resolved.

SPECIAL ISSUE: SALES WITH A RIGHT TO RETURN:

Que. 15. Comprehensive Example:

An entity enters into 1,000 contracts with customers. Each contract includes the sale of one product for ` 50 (1,000 total products × ` 50 = ` 50,000 total consideration). Cash is received when control of a product transfers. The entity’s customary business practice is to allow a customer to return any unused product within 30 days and receive a full refund. The entity’s cost of each product is ` 30.

The entity applies the requirements in Ind AS 115 to the portfolio of 1,000 contracts because it reasonably expects that, in accordance with paragraph 4, the effects on the financial statements from applying these requirements to the portfolio would not differ materially from applying the requirements to the individual contracts within the portfolio. Since the contract allows a customer to return the products, the consideration received from the customer is variable. To estimate the variable consideration to which the entity will be entitled, the entity decides to use the expected value method (see paragraph 53(a) of Ind AS 115) because it is the method that the entity expects to better predict the amount of consideration to which it will be entitled. Using the expected value method, the entity estimates that 970 products will not be returned.

The entity estimates that the costs of recovering the products will be immaterial and expects that the returned products can be resold at a profit.

Determine the amount of revenue, refund liability and the asset to be recognized by the entity for the said contracts.

[MTP April 2019, April 2021]

Ans. : The entity also considers the requirements of Ind AS 115 on constraining estimates of variable consideration to determine whether the estimated amount of variable consideration of ` 48,500 (` 50 × 970 products not expected to be returned) can be included in the transaction price.

The entity considers the factors in paragraph 57 of Ind AS 115 and determines that although the returns are outside the entity’s influence, it has significant experience in estimating returns for this product and customer class. In addition, the uncertainty will be resolved within a short time frame (i.e. the 30-day return period).

Thus, the entity concludes that it is highly probable that a significant reversal in the cumulative amount of revenue recognized (i.e. ` 48,500) will not occur as the uncertainty is resolved (i.e. over the return period).

The entity estimates that the costs of recovering the products will be immaterial and expects that the returned products can be resold at a profit.

Accounting:

Upon transfer of control of the 1,000 products, the entity does not recognize revenue for the 30 products that it expects to be returned. Consequently, the entity passes the following journal entries:

Particulars

Bank (` 50 × 1,000 products)

To Revenue (` 50 × 970 products)

To Refund Liability (` 50 × 30 products)

Debit Credit

50,000 48,500 1,500

To COGS 900 900

Inventory (` 30 × 30 products)