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Pinnacle Academy
Chapter Tests [CT] Series
August 2015 Batch
201-202, Florence Classic, Besides Unnati Vidhyalay,
Jain Derasar Road, Ashapuri Society, Akota, Vadodara-20. ph: 98258 561 55
Solution of Test of
Disclosure Accounting Standards
[FR – CA Final]
Conducted on 10th October 2015
(Solution is at the end with markings for self assessment)
Time Allowed-1 hour
Q1
(a)
Maximum Marks- 30
Decide whether disclosures are required for following transactions as per AS 18
citing appropriate reason for inclusion / exclusion:
i.
N Ltd. made sales to G Ltd. The sales were made at normal selling prices
followed by N Ltd. The Managing Director of N Ltd. owns 30% in G Ltd.
ii.
A Ltd. made sales to B Ltd. The sales were at cost plus 20%. B Ltd. is
subsidiary of D Ltd. and D Ltd. is associate of A Ltd.
iii.
R Ltd. is owned 100% by Government of Gujarat. It makes sales to K Ltd., in
which 60% holding is of Government of Maharashtra.
iv.
C Ltd. owned 25 % shares of E Ltd. However, its holding reduced to 5 % in E
Ltd. as it sold the shares in open market. C Ltd. sold goods to E Ltd. after the
reduction of its holding in E Ltd.
v.
T Ltd. sold goods to its subsidiary S Ltd. However, the sales to S Ltd. are less
than 5 % of total sales of T Ltd.
vi.
J Ltd. sells to L Ltd. Mr. ABC, a non-executive director, is on the board of
both the companies.
(b)
On 30th June 2011, A Ltd. incurred Rs.2,00,000 net loss from disposal of a business
segment. Also, on 30th July 2011, the company paid Rs.60,000 for property taxes
assessed for calendar year 2011. How shall these transactions be included in
determination of net income of A Ltd. for the six months interim period ended on 30th
September 2011?
(c)
ABC Ltd. has three segments namely A, B and C. The segment assets of the three
segments are Rs.200 lakhs, Rs.500 lakhs and Rs.1,300 lakhs respectively. Deferred
tax assets included in the assets of each segment are – A: Rs.30 lakhs; B: Rs.50
lakhs and C: Rs.25 lakhs. Applying the test of segment assets of AS 17 decide,
which are the reportable segments?
(9 + 3 + 3 = 15 Marks)
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Q2
(a)
(b)
R Pvt. Ltd. is a company registered in India. It is into the business of chemicals
(contributing 25% of its revenue), paints and dyes (contributing 45% of its revenue)
and detergents and soaps (contributing balance of its revenue). The total revenue
(turnover) of the company for the year ended 31st March 2013 is Rs.25 crores and it
has borrowings of only Rs.15 lakhs. No shares or any security of R Pvt. Ltd. is listed
or in the process of listing in India. The borrowings of R Pvt. Ltd. represent FCCB
which are listed on Luxemburg Stock Exchange. The accountant of the company is
of the view that R Pvt. Ltd. is a Small and Medium Company (SMC) to which AS 17
is not applicable and hence segment report need not be provided. The FCCB
represent Foreign Currency Convertible Bonds and not shares and hence the
accountant argues that its listing on foreign exchange does not matter. Do you agree
with the view of the accountant? Explain giving the definition of SMC.
(4 Marks)
Determine Basic and Diluted EPS (mandatory and voluntary) on the basis of
following information:
Profit before interest and tax
Equity Shares as on 01.04.13 (Face value Rs.10)
Extraordinary gain included in above profit
New issue of equity shares on 01.06.13 (ex-bonus)
Bonus shares on 01.06.13
Convertible Debentures (Face value Rs.1,000) issued on 01.04.09
Coupon rate of Convertible Debentures
Debentures convertible into equity shares on 01.04.16
5 % Non cumulative preference shares (non convertible)
Preference dividend is in arrears since last 2 years
Current year preference dividend is also not provided in books
Tax rate
Rs.19,05,000
2,10,000
1,15,000
1,20,000
1:1
Rs.5,00,000
6%
10 : 1
Rs.4,00,000
30 %
(11 Marks)
th
(Assessed answer papers shall be returned latest by 24 October 2015)
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Solution of Test of Disclosure Accounting Standards
Conducted on 10th October 2015
Q1
(a)
i.
As per AS 18 separate disclosure has to be given for transactions between reporting
enterprise and any entity where key management personnel (KMP) and their
relatives have control or significant influence. In this case, transaction of N Ltd. is
with G Ltd., where the managing director (KMP) of N Ltd. has significant influence
(30%). Hence, separate disclosure is required
ii.
As per AS 18 separate disclosure is required for transactions between reporting
enterprise and its associates. An associate of subsidiary is not a related party of the
reporting enterprise. Hence, separate disclosure is not required.
iii.
As per AS 18 transactions between state or central government entities are exempt
from disclosures. Hence, separate disclosure is not required.
iv.
As per AS 18 related party relationship exists if one party has ability to control or
significantly influence another party at any point of time during the period. In the
given case, transaction has taken place between C Ltd. (investor) and E Ltd.
(associate) after related party relationship came to an end. Hence, separate
disclosure is not required.
v.
As per AS 18 separate disclosure is required for transactions between reporting
enterprise and its subsidiaries. There is no condition under AS 18 about the volume
of transaction for disclosure. Hence, separate disclosure is required.
vi.
As per AS 18, two or more companies are not related party simply because they
have a common director. Further, the director that is common between the two given
entities in the case is a non-executive director, which normally is excluded from the
definition of KMP. Hence, separate disclosure is not required.
(1 ½ Marks each i.e. 9 Marks)
(b)
According to AS 25 “Interim Financial Reporting” an enterprise should treat an
interim period to be a separate accounting period (discrete approach). As on 30th
September 2011, A Ltd. will have to report entire Rs.2,00,000 loss on the disposal of
business segment since the loss was incurred during the period. Such loss cannot
be deferred and taken to another interim period.
However, a cost charged on an annual basis can be allocated to interim periods on
accrual basis. Since Rs.60,000 property taxes is for the entire calendar year 2011,
Rs.30,000 shall be reported as an expense for six months ended on 30th September
2011; while remaining Rs.30,000 would be reported as prepaid expenses.
(3 Marks)
(c)
As per AS 17 “Segment Reporting”, a segment is reportable if segment assets are
10 % or more than the total segment assets. However, segment assets do not
include income tax assets. Hence, deferred tax asset (DTA) should be excluded
from the segment assets to apply the test of segment assets for identifying
reportable segments.
Solution prepared by
CA. Ashish Lalaji
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(Rs. in lakhs)
Segment
A
B
C
Current DTA to be Revised
Segment Excluded Segment
Assets
Assets
200
30
500
50
1,300
25
Total Segment Assets
170
450
1,275
1,895
Thus, segments having assets of Rs.189.5 lakhs or more are reportable i.e.
segments B and C.
(3 Marks)
Q2
(a)
Small and Medium Company (SMC) as defined in Clause 2 (f) of the Companies
(Accounting Standards) Rules, 2006:
Small and Medium-sized Company (SMC) means, a company –
i.
whose equity or debt securities are not listed or are not in the process of listing on
any stock exchange, whether in India or outside India;
ii.
which is not a bank, financial institution or an insurance company;
iii.
whose turnover (excluding other income) does not exceed Rs.50 crores in the
immediately preceding accounting year;
iv.
which does not have borrowings (including public deposits) in excess of Rs.10
crores at any time during the immediately preceding accounting year; and
v.
which is not a holding or subsidiary company of a company which is not a small and
medium-sized company
In the given case, R Pvt. Ltd. fulfills condition (ii) to (v) but it fails to fulfill
condition (i). FCCBs issued by R Pvt. Ltd. are a debt security listed on a stock
exchange outside India. R Pvt. Ltd. is not SMC and hence AS 17 shall be
applicable. The view of the accountant is incorrect.
(2 Marks for definition; 2 marks for final conclusion)
(b)
Calculation of Profit to Equity Shareholders:
Amount
(Rs.)
PBIT as given
Less: Interest (5,00,000 X 6%)
PBT
Less: Tax @ 30%
PAT / Profit to equity shareholders
19,05,000
30,000
18,75,000
5,62,500
13,12,500
Notes:
i.
Profit to equity shareholders is inclusive of extraordinary gain
ii.
Preference dividend for non-cumulative preference shares is deducted only if
provided in books; otherwise ignored
(2 Marks)
Solution prepared by
CA. Ashish Lalaji
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Calculation of Weighted Average Number of Equity Shares (WANES) for the
year ended 31st March 2014:
Date
Particulars
No. of
shares
Time
Weight
Weighted
Product
01.04.13
At the beginning
Bonus shares*
2,10,000
2,15,000
12 / 12
12 / 12
2,10,000
2,15,000
01.06.13
Issued for cash
1,20,000
10 / 12
1,00,000
5,25,000
(3 Marks)
* Determination of Bonus shares issued:
Bonus ratio is 1:1 and bonus shares are issued on equity shares outstanding as on
01.04.13 i.e. 2,10,000 shares. Hence, bonus shares issued is 2,10,000. Further, a
company having convertible debentures shall have to issue bonus shares, through
reservation of shares, also on the convertible portion of such debentures.
500 debentures X 10 i.e. 5,000 equity shares X 1/1 = 5,000 bonus.
Thus, total bonus shares issued is 2,15,000 on 01.06.13. However, for the purpose
of WANES it shall be presumed as if the bonus shares were issued from the
beginning of the earliest reporting period.
(1 Mark)
Computation of Basic EPS for the year ended 31st March 2014:
Basic EPS = 13,12,500 / 5,25,000 = Rs.2.50
(1 Mark)
st
Computation of Diluted EPS for the year ended 31 March 2014:
On conversion of debentures, additional 5,000 (500 X 10) equity shares shall be
issued. There shall be savings of interest of Rs.30,000, which net of tax savings
shall increase the profit by Rs.21,000.
Diluted EPS = 13,12,500 + 21,000 / 5,25,000 + 5,000 = Rs.2.52
The EPS is increasing i.e. Convertible Debentures are anti-dilutive and hence
ignored. In other words, the given company does not have any diluted EPS.
(3 Marks)
Additional disclosure allowed by AS 20 (Voluntary):
A company can additionally also disclose EPS excluding extraordinary item. The
extraordinary gain net of tax is: 1,15,000 – 30% i.e. Rs.80,500
Basic EPS = 13,12,500 – 80,500 / 5,25,000 = Rs.2.35
Solution prepared by
(2 Marks)
CA. Ashish Lalaji
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