Taxmann's Financial Reporting | All-in-One | Set of 2 Volumes

CONTENTS .

O N E G A P

About the Book

I-5

Abbreviation & Acronyms

I-7

Corresponding Accounting Standards

I-9

Checklist - RTP/MTP Questions

I-11

Checklist - Previously Asked Exam Questions

I-17

Recent Amendments (upto 31st October, 2021)

I-21

Study Planner

I-23

CHAPTER 6 :

2.1 3.1

5.1

s w o l F h s a C f o t n e m e t a t S : 7 S A d n I

CHAPTER 5 :

1.1

4.1

s e i r o t n e v n I : 2 S A d n I

CHAPTER 4 :

s t n e m e t a t S l a i c n a n i F f o n o i t a t n e s e r P : 1 S A d n I

CHAPTER 3 :

3 1 0 2 , t c A s e i n a p m o C e h t o t I I I e l u d e h c S f o I I n o i s i v i D

CHAPTER 2 :

S A d n I r e d n u g n i t r o p e R l a i c n a n i F r o f k r o w e m a r F l a u t p e c n o C

CHAPTER 1 :

n o i t c u d o r t n I ) S A d n I ( s d r a d n a t S g n i t n u o c c A n a i d n I

CHAPTER

6.1

I-25

.

O N E G A P

s e x a T e m o c n I : 2 1 S A d n I

t n e m p i u q E d n a t n a l P , y t r e p o r P : 6 1 S A d n I s t i f e n e B e e y o l p m E : 9 1 S A d n I

e c n a t s i s s A t n e m n r e v o G f o e r u s o l c s i D & s t n a r G t n e m n r e v o G r o f g n i t n u o c c A : 0 2 S A d n I s e t a R e g n a h c x E n g i e r o F n i s e g n a h C f o s t c e f f E e h T : 1 2 S A d n I s t s o C g n i w o r r o B : 3 2 S A d n I

s e r u s o l c s i D y t r a P d e t a l e R : 4 2 S A d n I e r a h S r e P s g n i n r a E : 3 3 S A d n I

g n i t r o p e R l a i c n a n i F m i r e t n I : 4 3 S A d n I

s t e s s A f o t n e m r i a p m I : 6 3 S A d n I

s t e s s A t n e g n i t n o C d n a s e i t i l i b a i L t n e g n i t n o C , s n o i s i v o r P : 7 3 S A d n I s t e s s A e l b i g n a t n I : 8 3 S A d n I

y t r e p o r P t n e m t s e v n I : 0 4 S A d n I

e r u t l u c i r g A : 1 4 S A d n I

S A d n I f o n o i t p o d A e m i t t s r i F : 1 0 1 S A d n I

t n e m y a P d e s a B e r a h S : 2 0 1 S A d n I

s n o i t a r e p O d e u n i t n o c s i D d n a e l a S r o f d l e H s t e s s A t n e r r u c n o N : 5 0 1 S A d n I

25.1* CHAPTER 25 :

23.1* CHAPTER 23 :

d o i r e P g n i t r o p e R e h t r e t f A s t n e v E : 0 1 S A d n I

2 . l o V *

See

24.1* CHAPTER 24 :

22.1 CHAPTER 22 :

20.1 CHAPTER 20 :

18.1 CHAPTER 18 :

21.1 CHAPTER 21 :

19.1 CHAPTER 19 :

17.1 CHAPTER 17 :

15.1 CHAPTER 15 :

13.1 CHAPTER 13 :

16.1 CHAPTER 16 :

14.1 CHAPTER 14 :

12.1 CHAPTER 12 :

10.1 CHAPTER 10 :

8.1 CHAPTER 8 :

11.1 CHAPTER 11 :

9.1 CHAPTER 9 :

7.1 CHAPTER 7 :

s r o r r E d n a s e t a m i t s E g n i t n u o c c A n i s e g n a h C , s e i c i l o P g n i t n u o c c A : 8 S A d n I CHAPTER

CONTENTS I-26

.

O N E G A P

t n e m e r u s a e M V F : 3 1 1 S A d n I

s r e m o t s u C h t i w s t c a r t n o C m o r f e u n e v e R : 5 1 1 S A d n I s e s a e L : 6 1 1 S A d n I

g n i r u t c u r t s e R e t a r o p r o C & n o i t a n i b m o C s s e n i s u B s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C

s t n e m u r t s n I l a i c n a n i F f o g n i t r o p e R & g n i t n u o c c A s t n e m e t a t S l a i c n a n i F f o s i s y l a n A g n i t r o p e R d e t a r g e t n I

y t i l i b i s n o p s e R l a i c o S e t a r o p r o C

2 . l o V *

See

34.1* CHAPTER 34 :

32.1* CHAPTER 32 :

35.1* CHAPTER 35 :

33.1* CHAPTER 33 :

31.1* CHAPTER 31 :

29.1* CHAPTER 29 :

27.1* CHAPTER 27 :

30.1* CHAPTER 30 :

28.1* CHAPTER 28 :

26.1* CHAPTER 26 :

s t n e m g e S g n i t a r e p O : 8 0 1 S A d n I CHAPTER

I-27 CONTENTS

HINTS & SOLUTIONS (CHAPTER-WISE)

A.1* SOLVED PAPER - DECEMBER 2021 (SUGGESTED ANSWERS)

P.1*

CONTENTS .

O N E G A P

About the Book

I-5*

Abbreviation & Acronyms

I-7*

Corresponding Accounting Standards

I-9*

Checklist - RTP/MTP Questions

I-11*

Checklist - Previously Asked Exam Questions

I-17*

Recent Amendments (upto 31st October, 2021)

I-21*

Study Planner

I-23*

CHAPTER 7 : 1 . l o V

*

See

s r o r r E d n a s e t a m i t s E g n i t n u o c c A n i s e g n a h C , s e i c i l o P g n i t n u o c c A : 8 S A d n I

CHAPTER 6 :

2.1* 3.1*

5.1*

s w o l F h s a C f o t n e m e t a t S : 7 S A d n I

CHAPTER 5 :

1.1*

4.1*

s e i r o t n e v n I : 2 S A d n I

CHAPTER 4 :

s t n e m e t a t S l a i c n a n i F f o n o i t a t n e s e r P : 1 S A d n I

CHAPTER 3 :

3 1 0 2 , t c A s e i n a p m o C e h t o t I I I e l u d e h c S f o I I n o i s i v i D

CHAPTER 2 :

S A d n I r e d n u g n i t r o p e R l a i c n a n i F r o f k r o w e m a r F l a u t p e c n o C

CHAPTER 1 :

n o i t c u d o r t n I ) S A d n I ( s d r a d n a t S g n i t n u o c c A n a i d n I

CHAPTER

I-5

6.1* 7.1*

t n e m p i u q E d n a t n a l P , y t r e p o r P : 6 1 S A d n I s t i f e n e B e e y o l p m E : 9 1 S A d n I

e c n a t s i s s A t n e m n r e v o G f o e r u s o l c s i D & s t n a r G t n e m n r e v o G r o f g n i t n u o c c A : 0 2 S A d n I s e t a R e g n a h c x E n g i e r o F n i s e g n a h C f o s t c e f f E e h T : 1 2 S A d n I s t s o C g n i w o r r o B : 3 2 S A d n I

s e r u s o l c s i D y t r a P d e t a l e R : 4 2 S A d n I e r a h S r e P s g n i n r a E : 3 3 S A d n I

g n i t r o p e R l a i c n a n i F m i r e t n I : 4 3 S A d n I s t e s s A f o t n e m r i a p m I : 6 3 S A d n I

s t e s s A t n e g n i t n o C d n a s e i t i l i b a i L t n e g n i t n o C , s n o i s i v o r P : 7 3 S A d n I s t e s s A e l b i g n a t n I : 8 3 S A d n I

y t r e p o r P t n e m t s e v n I : 0 4 S A d n I

e r u t l u c i r g A : 1 4 S A d n I

S A d n I f o n o i t p o d A e m i t t s r i F : 1 0 1 S A d n I

t n e m y a P d e s a B e r a h S : 2 0 1 S A d n I

s n o i t a r e p O d e u n i t n o c s i D d n a e l a S r o f d l e H s t e s s A t n e r r u c n o N : 5 0 1 S A d n I s t n e m g e S g n i t a r e p O : 8 0 1 S A d n I

26.1 CHAPTER 26 :

24.1 CHAPTER 24 :

s e x a T e m o c n I : 2 1 S A d n I

25.1 CHAPTER 25 :

23.1 CHAPTER 23 :

21.1* CHAPTER 21 :

19.1* CHAPTER 19 :

22.1* CHAPTER 22 :

20.1* CHAPTER 20 :

18.1* CHAPTER 18 :

16.1* CHAPTER 16 :

14.1* CHAPTER 14 :

17.1* CHAPTER 17 :

15.1* CHAPTER 15 :

13.1* CHAPTER 13 :

11.1* CHAPTER 11 :

9.1* CHAPTER 9 :

12.1* CHAPTER 12 :

10.1* CHAPTER 10 :

8.1* CHAPTER 8 :

.

O N E G A P

CHAPTER

d o i r e P g n i t r o p e R e h t r e t f A s t n e v E : 0 1 S A d n I

1 . l o V *

See

CONTENTS I-6

.

O N E G A P

s e s a e L : 6 1 1 S A d n I

g n i r u t c u r t s e R e t a r o p r o C & n o i t a n i b m o C s s e n i s u B s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C

s t n e m u r t s n I l a i c n a n i F f o g n i t r o p e R & g n i t n u o c c A s t n e m e t a t S l a i c n a n i F f o s i s y l a n A g n i t r o p e R d e t a r g e t n I

y t i l i b i s n o p s e R l a i c o S e t a r o p r o C

35.1 CHAPTER 35 :

33.1 CHAPTER 33 :

s r e m o t s u C h t i w s t c a r t n o C m o r f e u n e v e R : 5 1 1 S A d n I

34.1 CHAPTER 34 :

32.1 CHAPTER 32 :

30.1 CHAPTER 30 :

28.1 CHAPTER 28 :

31.1 CHAPTER 31 :

29.1 CHAPTER 29 :

27.1 CHAPTER 27 :

t n e m e r u s a e M V F : 3 1 1 S A d n I CHAPTER

I-7 CONTENTS

HINTS & SOLUTIONS (CHAPTER-WISE)

A.1 SOLVED PAPER - DECEMBER 2021 (SUGGESTED ANSWERS)

P.1

CHAPTER 31 Consolidated Financial Statements

Ind AS 27, 28, 110, 111, 112

CHAPTER FLOW

Ind AS 110, Consolidated Financial Statements Ind AS 28, Investments in Associates and Joint Ventures

Ind AS 111, Joint Arrangements

Ind AS 27, Separate Financial Statements

Disclosures (Ind AS 112 + Ind AS 27)

महत्वपूर्ण सारा​ांश Investor

JOINT CONTROL Classify Joint Arrangement as per Ind AS 111

OUTRIGHT CONTROL

• Ind AS 103 → Accounting Aspects on the date of acquisition (Goodwill, NCI, Identifiable Assets/Liabilities).

• Ind AS 110 → Period after the date of acquisition while consolidating accounts.

Note: 100% net assets added on line-by-line basis.

JOINT OPERATION

JOINT VENTURE

Account for assets, liabilities, revenue and expenses.

Account for interest as per Equity Method. (Ind AS 28/111)

Ind AS 112 → Disclosures.

31.1

SIGNIFICANT INFLUENCE

OTHER INVESTMENT

Account for interest as per Equity Method.

(Ind AS 28)

Financial Asset (Ind AS 109) + Disclosure under Ind AS 107 or any other applicable Ind AS.

31.2

FINANCIAL REPORTING

FROM AS TO IND AS

Companies (Ind AS) Rules, 2015 (More detailed) Ind AS 110: Consolidated Financial Statements

to establish principles for presentation & preparation of CFS when entity controls one or more entities.

Ind AS 111: Joint Arrangements

to establish principles for financial reporting by entities that have an interest in arrangements that are controlled jointly (Joint Arrangements).

Ind AS 28: Investments in Associates & Joint Ventures

to prescribe accounting for investments in associates & requirements for application of Equity Method when accounting for investments in associates & joint ventures.

Ind AS 27: Separate Financial Statements

to prescribe accounting & disclosure requirements for investments in subsidiaries, joint ventures & associates when an entity prepares SFS.

Ind AS 112: Disclosure of Interests in Other Entities

to require an entity to disclose information that enables users of its FS to evaluate.

Companies (AS) Rules, 2006 • AS 21: Consolidated Financial Statements • AS 23: Accounting for Investments in Associates in Consolidated Financial Statements • AS 27: Financial Reporting of Interests in Joint Ventures

Substance over form. It is de-facto evaluation rather than de-jure evaluation that determines the relationship of subsidiary, joint arrangement or associate.

CONSOLIDATED FINANCIAL STATEMENTS

31.3

Ind AS 110, Consolidated Financial Statements - CFS → Present financial position of entire group (parent + its group companies).

- SFS → Present financial position of single entity for which the FS are prepared.

Introduction

- For decision making purpose of various stakeholders → CFS provide complete overview of operations & profitability of entire group which is controlled by parent rather than just SFS of parent.

- In current business scenario, various large corporates frequently do business restructuring/expansion by creating more group companies in order to achieve benefits like tax savings, operational efficiency, etc. → CFS imperative to have a complete understanding of profitability & financial position of entire group.

DEFINITIONS Consolidated financial statements FS of a group in which assets, liabilities, equity, income, expenses & cash flows of the parent and its subsidiaries are presented as those of a single economic entity.

Group

Parent

Subsidiary

A parent and its subsidiaries.

An entity that controls one or more entities.

An entity that is controlled by another entity.

Non–controlling interest Equity in a subsidiary not attributable, directly or indirectly, to a parent.

31.4

Objective

FINANCIAL REPORTING

To establish principles for presentation and preparation of CFS when an entity (the parent) CONTROLS one or more other entities (subsidiaries).

A parent who controls one or more entities is required to present CFS.

However, a parent is not required to present CFS if it meets all of the following four conditions: Condition 1:

The parent is either a wholly owned or partly 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 CFS.

Condition 2:

Equity or debt instruments of parent are not traded in a public market (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 FS with a securities commission or other regulatory organisation 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 CFS), produces FS that are available for public use and comply with Ind AS, in which subsidiaries are consolidated or are measured at FVTPL in accordance with Ind AS 110.

Rajasthan Ltd.

Scope

Abu Ltd.

Alwar Ltd.

Ajmer Ltd.

Amer Ltd.

Example: • Rajasthan Ltd. is a listed company and prepares Ind AS compliant CFS. • Abu Ltd. & Alwar Ltd. do not have their securities publically traded & they are not in the process of issuing securities in public market.

• Rajasthan Ltd. does not require its subsidiary Alwar Ltd. to prepare CFS. • Abu Ltd. is a wholly-owned subsidiary of Rajasthan Ltd. • Abu Ltd. is not required to prepare CFS. • Alwar Ltd. is not required to prepare CFS; provided the NCI holders have been informed about, and do not object to Alwar Ltd. presenting CFS.

Further, a parent who fulfils the following two conditions is also not required to present CFS: Condition 1:

The parent is an investment entity.

Condition 2:

The parent is required to measure all its subsidiaries at FVTPL.

Investment entity does not consolidate its subsidiaries (unless the subsidiary provides services that relate only to entity’s own investment activities).

Accounts for subsidiaries at FVTPL (Ind AS 109)

Does not apply to post-employment benefit plans or other long term employee benefit plans to which Ind AS 19, applies.

CONSOLIDATED FINANCIAL STATEMENTS 1. Exception to Prepare CFS: Scenario A: Following is the structure of a group headed by Gujarat Ltd.: Gujarat Ltd. 100% Surat Ltd. 100% Diamond Ltd.

100% Textile Ltd.

Gujarat Ltd. is a listed entity in India and prepares consolidated financial statements as per the requirements of Ind AS. Surat Ltd. is an unlisted entity and it is not in the process of listing any of its instruments in public market. Gujarat Ltd. does not object to Surat Ltd. not preparing consolidated financial statements. Whether Surat Ltd. is required to prepare consolidated financial statements as per the requirements of Ind AS 110?

Scenario B: Assume the same facts as per Scenario A except, Gujarat Ltd. is a foreign entity and is listed in stock exchange of a foreign country and it prepares its financial statements as per the generally accepted accounting principles (GAAP) applicable to that country. Will your answer be different in this case?

Scenario C: Assume the same facts as per Scenario A except, 100% of the investment in Surat Ltd. is held by Mr. Ahmedabad (an individual) instead of Gujarat Ltd. Will your answer be different in this case?

31.5

A Shorts: Scenario A: Surat Ltd. → Not required to prepare CFS: • Not a listed entity nor in process of listing, • Parent prepares CFS as per Ind AS which is available for public use.

• Parent does not object Surat Ltd. not preparing CFS. Scenario B: Surat Ltd. → Cannot avail exemption from preparation of CFS: • CFS of parent not prepared under Ind AS. Scenario C: Surat Ltd. → Cannot avail exemption from preparation of CFS: • Mr. Ahmedabad (being an individual and not an entity) would not be preparing its FS as per Ind AS which is available for public use.

A. Scenario A: In this case, Surat Ltd. satisfies all the conditions for not preparing consolidated financial statements i.e. it is not a listed entity nor it is in the process of listing, the parent of Surat Ltd. prepares consolidated financial statements as per Ind AS which is available for public use and parent of Surat Ltd. does not object to Surat Ltd. not preparing consolidated financial statements.

Hence, Surat Ltd. is not required to prepare consolidated financial statements.

Scenario B: In this case, the consolidated financial statements of parent of Surat Ltd. are not prepared under Ind AS. Hence, Surat Ltd. cannot avail the exemption from preparation of consolidated financial statements.

Scenario C: In this case, Mr. Ahmedabad (an individual) would not be preparing its financial statements as per the requirements of Ind AS which is available for public use.

Hence, Surat Ltd. cannot avail the exemption from preparation of consolidated financial statements.

FINANCIAL REPORTING

31.6 2. Exception to Prepare CFS: Scenario A: Following is the structure of a group headed by Rajasthan Ltd. Rajasthan Ltd. 100% Jaipur Ltd.

60% Udaipur Ltd. 100% LakeCity Ltd.

Rajasthan Ltd. is a listed entity in India and prepares consolidated financial statements as per the requirements of Ind AS. Udaipur Ltd. is an unlisted entity and it is not in the process of listing any of its instruments in public market. 60% of the equity share capital of Udaipur Ltd. is held by Rajasthan Ltd. and balance 40% equity share capital is held by other outside investors. Rajasthan Ltd. does not object to Udaipur Ltd. not preparing consolidated financial statements. Whether Udaipur Ltd. is required to prepare consolidated financial statements as per the requirements of Ind AS 110?

Scenario B: Assume the same facts as per Scenario A except that the balance 40% of the equity share capital of Udaipur Ltd. is held by Jaipur Ltd. State whether Udaipur Ltd. is required to inform its other owner Jaipur Ltd. (owning 40%) of its intention to not prepare consolidated financial statements as mentioned in paragraph 4(a(i)?

A Shorts: Scenario A: Udaipur Ltd. → • Partly owned subsidiary of Rajasthan Ltd. → Inform other 40% equity shareholders about not preparing CFS • If they do not object → Udaipur Ltd. can avail exemption from preparing CFS. Scenario B: Udaipur Ltd. → • 100% held by Rajasthan Ltd. (60% direct investment + 40% through Jaipur Ltd.).

• Not required to inform Jaipur Ltd. of not preparing CFS & can avail exemption from preparing CFS. Scenario A: Udaipur Ltd. is a partly owned subsidiary of Rajasthan Ltd. In such case, Udaipur Ltd. should inform the other 40% equity shareholders about Udaipur Ltd. not preparing consolidated financial statements and if they do not object, then only Udaipur Ltd. can avail the exemption from preparing consolidated financial statements.

Scenario B: In this scenario, Udaipur Ltd. is 100% held by Rajasthan Ltd. (60% direct investment and 40% investment through Jaipur Ltd.). Hence, Udaipur Ltd. is not required to inform to Jaipur Ltd. of not preparing consolidated financial statements and can avail the exemption from preparing the consolidated financial statements.

CONSOLIDATED FINANCIAL STATEMENTS

31.7

CONTROL Investor → Determine whether it is a PARENT by assessing whether it CONTROLS the investee.

An investor controls an investee if and only if the investor has all the following 3 ELEMENTS:

CONTROL

(ii) Exposure, or rights, to variable returns from its involvement with investee.

(i) Power over investee.

(iii) Ability to use its power over investee to affect the amount of investor’s returns.

‘खास बातें ’ • ☝️ Consider all facts & circumstances when assessing whether it controls an investee + Reassess if facts & circumstances indicate that 1 or more of the 3 elements of control have changed.

• Two or more investors collectively (individually) control an investee when they must act together to direct the relevant activities → Account for its interest in investee as per relevant Ind ASs (Ind AS 111/Ind AS 28/Ind AS 109).

• ☝️ Consider the PURPOSE & DESIGN of investee i.e. o Identification of relevant activities, o how decisions about relevant activities are made, o who has the current ability to direct those activities, and o who receives returns from those activities.

- Investee may be controlled by equity instruments → Consider voting rights.

- In complex cases → Consider other factors, E.g., when any voting rights relate to administrative tasks only & the relevant activities are directed by means of contractual arrangements → Also consider the risks to which investee was designed to be exposed, the risks it was designed to pass on to parties involved with investee & whether the investor is exposed to some or all of those risks (downside/upside risk).

31.8

FINANCIAL REPORTING

POWER Power over an investee when the investor: has EXISTING RIGHTS

that give it the CURRENT ABILITY

to direct RELEVANT ACTIVITIES (activities that significantly affect investee’s returns).

- Sometimes assessing power is straightforward, e.g., with voting rights.

- In other cases, assessment may be complex & require more than one factor to be considered, e.g., when power results from one or more contractual arrangements.

- Investor can have power over investee even if other entities have existing rights that give them current ability to participate in the direction of relevant activities, for e.g., when another entity has significant influence.

- Investor that holds only protective rights → No power/control over investee.

Substantive Rights ✔

Protective Rights ✘

Relevant Activities & its Direction - For many investees → A range of operating and financing activities significantly affect their returns.

- Examples:  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;  Establishing operating & capital decisions of investee, including budgets;  Appointment, remuneration & termination of KMP/service providers.

- If 2 or more investors each have existing rights that give them unilateral ability to direct different relevant activities → The investor that has the current ability to direct activities that most significantly affect the returns of investee, has power over investee.

- If relevant facts or circumstances change → Reconsider the assessment over time.

CONSOLIDATED FINANCIAL STATEMENTS

31.9

Example: Two investors form an investee to develop and market a medical product. One investor is responsible for developing and obtaining regulatory approval of the medical product—that responsibility includes having the unilateral ability to make all decisions relating to the development of the product and to obtaining regulatory approval. Once the regulator has approved the product, the other investor will manufacture and market it—this investor has the unilateral ability to make all decisions about the manufacture and marketing of the project. If all the activities—developing and obtaining regulatory approval as well as manufacturing and marketing of the medical product—are relevant activities, each investor needs to determine whether it is able to direct the activities that most significantly affect the investee’s returns. Accordingly, each investor needs to consider whether developing and obtaining regulatory approval or the manufacturing and marketing of the medical product is the activity that most significantly affects the investee’s returns and whether it is able to direct that activity. In determining which investor has power, the investors would consider: a) the purpose and design of the investee; b) the factors that determine the profit margin, revenue and value of the investee as well as the value of the medical product; c) the effect on the investee’s returns resulting from each investor’s decision-making authority with respect to the factors in (b); and d) the investors’ exposure to variability of returns.

In this particular example, the investors would also consider: e) the uncertainty of, & effort required in, obtaining regulatory approval (considering investor’s record of successfully developing & obtaining regulatory approval of medical products); f) which investor controls the medical product once the development phase is successful.

Current Ability to Direct Relevant Activities - Current ability to direct relevant activities → if investor were able to make decisions at the time those decisions need to be taken, even if it does not actively direct the activities of investee.

- Current ability not limited to being able to act today → May be steps to be taken in order to act - for e.g., initiating a meeting before investor can exercise its voting or other rights that give it power. However, such a delay would not prevent the investor from having power, assuming that there are no other barriers that would prevent the investor from exercising its rights when it chooses to do so.

- For some investees, decisions not made continuously i.e. may be made only if particular events occur or circumstances arise → Ability to make those decisions if and when they arise is a source of a current ability to direct the relevant activities.

- Current ability to direct the activities → Arise from rights (voting rights, potential voting rights, rights within other arrangements or a combination of these).

- In some situations, activities both before and after a particular set of circumstances arises or event occurs may be relevant activities. When 2 or more investors have the current ability to direct relevant activities & those activities occur at different times → Determine which investor is able to direct the activities that most significantly affect those returns consistently with the treatment of concurrent decision-making rights.

- Reconsider the assessment over time if relevant facts or circumstances change.

31.10

FINANCIAL REPORTING

3. Different Investors have Ability to Direct Different Relevant Activities: Calcutta Ltd. and Howrah Ltd. have formed a new entity Bengal Ltd. for constructing and selling a scheme of residential units consisting of 100 units. Construction of the residential units will be done by Calcutta Ltd. and it will take all the necessary decision related to the construction activity. Howrah Ltd. will do the marketing and selling related activities for the units and it will take all the necessary decisions related to marketing and selling. Based on above, who has the power over Bengal Ltd.?

A Shorts: • Both Calcutta Ltd. & Howrah Ltd. have rights to unilaterally direct different relevant activities of Bengal Ltd. • Determine which activities can most significantly affect returns of investee.

• Investor having ability to direct those activities → Considered to have power over investee.

• If construction related activities most significantly affect returns → Calcutta Ltd. has power.

• If marketing & selling related activities most significantly affect returns → Howrah Ltd. has power.

A. In this case, both the investors Calcutta Ltd. and Howrah Ltd. have the rights to unilaterally direct different relevant activities of Bengal Ltd. Here, investors shall determine which activities can most significantly affect the returns of the investee and the investor having the ability to direct those activities would be considered to have power over the investee. Hence, if the investors conclude that the construction related activities would most significantly affect the returns of Bengal Ltd., then Calcutta Ltd. would be said to have power over Bengal Ltd. On the other hand, if it is concluded that marketing and selling related activities would most significantly affect the returns of Bengal Ltd., then Howrah Ltd. would be said to have power over Bengal Ltd.

4. Determining the Relevant Activities: Agra Ltd. is an asset manager of a venture capital fund i.e. Fund Taj. Out of the total outstanding units of the fund, 10% units are held by Agra Ltd. and balance 90% units are held by other investors. Majority of the unit holders of the fund have right to appoint a committee which will manage the day to day administrative activities of the fund.

However, the decisions related to the investments/divestments to be done by Fund Taj is taken by asset manager i.e. Agra Ltd. Based on above, who has power over Fund Taj?

A Shorts: • Agra Ltd. has power → Able to direct activities that most significantly affect returns of Fund Taj. • Not necessarily control → Consider other elements of control evaluation (Exposure to variable returns + Link between power & exposure to variable returns).

A. In this case, Agra Ltd. is able to direct the activities that can most significantly affect the returns of Fund Taj. Hence, Agra Ltd. has power over the investee. However, this does not mean that Agra Ltd. has control over the fund and consideration will have to be given to other elements of control evaluation as well i.e. exposure to variable returns and link between power and exposure to variable returns.

CONSOLIDATED FINANCIAL STATEMENTS 5. Current Ability to Direct the Relevant Activities: An investment vehicle (the investee) is created and financed with a debt instrument held by an investor (the debt investor) and equity instruments held by a number of other investors. The equity tranche is designed to absorb the first losses and to receive any residual return from the investee. One of the equity investors who holds 30 per cent of the equity is also the asset manager.

The investee uses its proceeds to purchase a portfolio of financial assets, exposing the investee to the credit risk associated with the possible default of principal and interest payments of the assets. The transaction is marketed to the debt investor as an investment with minimal exposure to the credit risk associated with the possible default of the assets in the portfolio because of the nature of these assets and because the equity tranche is designed to absorb the first losses of the investee.

The returns of the investee are significantly affected by the management of the investee’s asset portfolio, which includes decisions about the selection, acquisition and disposal of the assets within portfolio guidelines and the management upon default of any portfolio assets.

All those activities are managed by the asset manager until defaults reach a specified proportion of the portfolio value (i.e. when the value of the portfolio is such that the equity tranche of the investee has been consumed). From that time, a third-party trustee manages the assets according to the instructions of the debt investor.

Based on the above, who has power over the investment vehicle?

31.11

A Shorts: • Relevant activity = Managing investee’s asset portfolio.

• Asset manager has ability to direct relevant activities until defaulted assets reach specified proportion of portfolio value.

• Debt investor has ability to direct relevant activities when value of defaulted assets surpasses that specified proportion of portfolio value.

• Asset manager & debt investor each → Determine whether they are able to direct activities that most significantly affect investee’s returns.

• ☝️ Consider purpose & design of investee + Each party’s exposure to variability of returns.

A. Managing the investee’s asset portfolio is the relevant activity of the investee.

The asset manager has the ability to direct the relevant activities until defaulted assets reach the specified proportion of the portfolio value; the debt investor has the ability to direct the relevant activities when the value of defaulted assets surpasses that specified proportion of the portfolio value.

The asset manager and the debt investor each need to determine whether they are able to direct the activities that most significantly affect the investee’s returns, including considering the purpose and design of the investee as well as each party’s exposure to variability of returns.

31.12

FINANCIAL REPORTING

Rights that give Investor Power over Investee

Substantive Rights

Protective Rights

Substantive Rights - For a right to be substantive → Holder must have the practical ability to exercise that right.

- Depends on facts & circumstances → Apply judgment.

FACTORS that determine WHETHER RIGHTS ARE SUBSTANTIVE OR NOT could be classified into three categories:

① Barriers preventing exercise

② Exercise requires agreement of other parties

- Economic barriers or other.

- Examples of barriers include:  Financial penalties & incentives  High exercise price or conversion price  Restrictive terms and conditions  Absence of explicit, reasonable mechanism in founding documents of investee or in applicable laws or regulations  Inability to obtain reasonable information for exercising the rights  Operational barriers or incentives  Prohibitory legal or regulatory environment

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. ③ Benefit accrues to the right holder Whether the holder of right is going to be benefited by exercising the right.

E.g., Suppose LaxmiBai Ltd. holds in a listed entity Jhansi Ltd., optionally convertible debentures which are currently exercisable. Jhansi Ltd. 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 → Not be substantive.

CONSOLIDATED FINANCIAL STATEMENTS

31.13

Various INDICATORS of substantive rights, individually or in combination with each other (may be clubbed in following pecking order)

① Primary Indicators (Examples)

② Priority Indicators (Examples)

 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 KMP 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.

If difficult to determine whether investor’s rights are sufficient to give it power over an investee → Consider evidence of practical ability to direct the relevant activities unilaterally.

E.g.,  The investor can, without having the contractual right to do so, appoint or approve the investee’s KMP who have the ability to direct the relevant activities.  The investor can, without having the contractual right to do so, direct investee to enter into, or can veto any changes to, significant transactions for the benefit of 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 KMP are related parties of investor (e.g., the CEO of investee and the CEO of investor are the same person).  Majority of members of investee’s governing body are related parties of the investor.

③ Special Relation Indicators (Examples) Indications that investor has a special relationship with investee, i.e. investor has more than a passive interest in investee → May have power:  Investee’s KMP who have the ability to direct the relevant activities are current or previous employees of investor.  Investee’s operations are dependent on investor, such as in the following situations: • Investee depends on the investor to fund a significant portion of its operations.

• Investor guarantees a significant portion of the investee’s obligations.

• Investee depends on investor for critical services, technology, supplies or raw materials.

• Investor controls assets such as licences or trademarks that are critical to investee’s operations.

• Investee depends on investor for KMP, such as when investor’s personnel have specialised knowledge of investee’s operations.  Significant portion of investee’s activities either involve or are conducted on behalf of investor.  Investor’s exposure, or rights, to returns from its involvement with investee is disproportionately greater than its voting or other similar rights. E.g., Investor is entitled, or exposed, to more than half of returns of investee but holds less than half of voting rights of investee.

FINANCIAL REPORTING

31.14

Protective Rights  Designed to protect the interests of their holders without giving that party power over 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 activities of an investee or apply in exceptional circumstances.

E.g., • 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 NCI 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 lender’s right to seize the assets of a borrower if the borrower fails to meet specified loan repayment conditions.

महत्वपूर्ण सारा​ांश Case

Substantive right held by

Protective right held by

Power with

I

Investor

Other Parties

Investor

II

Other Parties

Investor

Other Parties

III

Investor + Other Parties

-

Further evaluation needed.

Franchises - A franchise agreement → Investee = Franchisee & Investor = Franchisor with rights that are designed to protect the franchise brand + some decision-making rights with respect to operations of franchisee.

- Indicators → Rights of a franchisor in a franchise agreement are protective rights i.e. franchisor → No power over franchisee: • Franchisee has made a unilateral decision to operate its business in accordance with the terms of the franchise agreement, but for its own account.

• If other parties (franchisor) have existing rights that give them the current ability to direct relevant activities of franchisee.

- Control over fundamental decisions as the legal form of the franchisee and its funding structure may be determined by parties other than the franchisor and may significantly affect the returns of the franchisee.

- The lower the level of financial support provided by the franchisor and the lower the franchisor’s exposure to variability of returns from the franchisee the more likely it is that the franchisor has only protective rights.

CONSOLIDATED FINANCIAL STATEMENTS

31.15

6. Voting Rights are Substantive or Not: Scenario A: Following is the voting power holding pattern of Gorakhpur Ltd. • 10% voting power held by Geeta Press Ltd. • 90% voting power held by 9 other investor each holding 10%

A. Scenario A: If the investors holding 90% of the voting power exercise their right to terminate the management agreement, then it will result in Gorakhpur Ltd. having to pay huge penalty which will affect the returns of Gorakhpur Ltd. This is a barrier that prevents such investors from exercising their rights and hence such rights are not substantive.

All the investors have entered into a management agreement whereby they have granted the decision-making powers related to the relevant activities of Gorakhpur Ltd. to Geeta Press Ltd. for a period of 5 years.

Scenario B: To take back the decision-making rights from Geeta Press Ltd., investors holding majority of the voting power need to vote in favour of removal of rights from Geeta Press Ltd. However, the investors having disputes with Geeta Press Ltd. do not have majority voting power and hence, the rights held by them are not substantive.

After 2 years of the agreement, the investors holding 90% of the voting powers have some disputes with Geeta Press Ltd. and they want to take back the decision-making rights from Geeta Press Ltd. This can be done by passing a resolution with majority of the investors voting in favour of the removal of rights from Geeta Press Ltd. However, as per the termination clause of the management agreement, Gorakhpur Ltd. will have to pay a huge penalty to Geeta Press Ltd. for terminating the agreement before its stated term.

Whether the rights held by investors holding 90% voting power are substantive?

Scenario B: Assume the same facts as per Scenario A except, there is no penalty required to be paid by Gorakhpur Ltd. for termination of agreement before its stated term. However, instead of all other investors, there are only 4 investors holding total 40% voting power that have disputes with Geeta Press Ltd. and want to take back decision-making rights from Geeta Press Ltd. Whether the rights held by investors holding 40% voting power are substantive?

A Shorts: Scenario A: Rights held by others → Not substantive.

• If investors holding 90% voting power exercise their right to terminate management agreement → Gorakhpur Ltd. will have to pay huge penalty affecting returns of Gorakhpur Ltd. → Barrier preventing such investors from exercising their rights.

Scenario B: Rights held by investors having disputes with Geeta Press Ltd. → Not substantive.

• To take back decision-making rights from Geeta Press Ltd. → Majority voting power required.

• Investors having disputes with Geeta Press Ltd. → No majority voting power.

7. Removal Rights are Substantive or Not: A venture capital fund is managed by an asset manager who has right to take the investment and divestments decisions related to the fund corpus. The asset manager is also holding some stake in the fund. The other investors of the fund have right to remove the asset manager.

However, in the present scenario, there is absence of other managers who are willing or able to provide specialised services that the current asset manager is providing and purchase the stake that the current asset manager is holding in the fund. Whether the removal rights available with other investors are substantive?

A Shorts: Removal rights held by other investors → Not substantive.

• If other investors exercise their removal rights → It will impact operations (& ultimately returns) of fund since there is no substitute of current asset manager available.

A. If the other investors exercise their removal rights, then it will impact the operations of the fund and ultimately the returns of the fund since there is no substitute of the current asset manager available who can manage the corpus of the fund. Hence, the removal rights held by other investors are not substantive.

Financial Reporting All-in-One (Set of 2 Volumes) AUTHOR PUBLISHER DATE OF PUBLICATION EDITION

: : : :

PRIYANKA R. AGRAWAL TAXMANN FEBRUARY 2022 1ST EDITION

ISBN NO : 9789393656681 PAGE NO. : 2464 BINDING TYPE : PAPERBACK

Rs. 2695 | USD 103

DESCRIPTION This is the first-ever ‘theoretically interactive’ book available for CA-Final | Financial Reporting. The objective of the book is as follows: u Completeness for the lengthiest & critical subject of CA-Final – Financial Reporting u Conciseness is maintained by condensing the ICAI study material, among other things, to save time u Creative Presentation to increase students’ memory retention power u Student-centric approach is followed throughout this book The Present Publication is the Latest Edition for CA-Final | New Syllabus | May/Nov. 2022 Exams, authored by CA Priyanka R. Agrawal, with the following noteworthy features: u Charts, Diagrams, Eye-catching Symbols & Words! n [Original & Unique Charts & Diagrams] are given to present the subject matter briefly n [Helps you in Saving Time] so that the entire subject can be covered with ease n [Easy to Memorise, Revise & Recollect] n [Keepin’ it Lively] u Content & Theory n [Most Updated & Amendment Contents] relevant for CA Final Exams (May 2022 onwards) & incorporates all amend

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