Assets and Liabilities Standards in Ind AS for CA Final

Understand Assets and Liabilities Standards

Key rules to remember

Inventory measurement (Ind AS 2)

Carrying amount = lower of cost and net realisable value (NRV)

NRV = estimated selling price − estimated costs of completion − estimated costs necessary to make the sale. Compare item by item or by group of similar items.

Cost of PPE (Ind AS 16)

Cost = purchase price + import duties and non-refundable taxes − trade discounts + directly attributable costs + initial estimate of dismantling and restoration costs

Exclude general overheads, training and initial operating losses. Depreciate each significant component separately over its own useful life.

Recoverable amount (Ind AS 36)

Recoverable amount = higher of (fair value less costs of disposal) and value in use

Impairment loss = carrying amount − recoverable amount, if carrying amount is higher. If either measure exceeds the carrying amount, there is no impairment.

Provision test (Ind AS 37)

Recognise if: present obligation from a past event AND outflow probable (more likely than not) AND reliable estimate

If any condition fails, do not recognise. Disclose a contingent liability unless outflow is remote.

Lease liability at commencement (Ind AS 116)

Lease liability = present value of unpaid lease payments, discounted at the rate implicit in the lease (or the lessee's incremental borrowing rate if it cannot be readily determined)

ROU asset = initial lease liability + lease payments made at or before commencement + initial direct costs + restoration cost estimate − incentives received.

Deferred tax (Ind AS 12)

Temporary difference = carrying amount − tax base; deferred tax = temporary difference × tax rate enacted or substantively enacted

For an asset, carrying amount above tax base gives a deferred tax liability (taxable temporary difference). Deferred tax assets need probable future taxable profit.

Intangibles: research and development (Ind AS 38)

Research phase: expense. Development phase: capitalise only when all six criteria are demonstrated

The six criteria are: - Technical feasibility of completing the asset so it is available for use or sale. - Intention to complete the asset and use or sell it. - Ability to use or sell the asset. - Probable future economic benefits, shown by a market for the output or by usefulness to the entity if used internally. - Availability of adequate technical, financial and other resources to complete the development. - Ability to measure reliably the expenditure attributable to the asset during development.

Government grant (Ind AS 20)

Grant related to an asset: present as deferred income and recognise in profit or loss on a systematic basis over the asset's useful life

Under Ind AS 20 you cannot deduct the grant from the asset's carrying amount. Grants related to income go to profit or loss in the periods the related costs are recognised, as other income or as a deduction from the expense.

How to solve Assets and Liabilities Standards questions

1. 1Read the facts and list each item: inventory, PPE, intangible, lease, obligation, grant or tax balance.
2. 2Name the governing Ind AS for each item. Check for overlaps: a lease goes to Ind AS 116, a property held for rent goes to Ind AS 40.
3. 3Test recognition: does it meet the definition and criteria (control and benefits for assets, present obligation and probable outflow for provisions)?
4. 4Measure initially: cost for assets, best estimate (discounted if material) for provisions, present value for lease liabilities.
5. 5Measure subsequently: depreciation or amortisation, cost or revaluation model, fair value for investment property if chosen, unwinding of discount, lease interest.
6. 6Check for impairment indicators and compute recoverable amount if any exist. Always test goodwill and intangibles not yet available for use annually.
7. 7Work out the tax effect and any grant effect, then state the journal entry, the amount in profit or loss and the balance sheet figure.
8. 8Write the conclusion in one line: standard, treatment, amount, and disclosure if asked.

Quickest way: Standard, test, number

Common mistakes in Assets and Liabilities Standards

• Recognising a provision for a future operating loss or for a restructuring that is only planned.

  Students treat any expected cost as a liability.

  Fix: Ask whether a present obligation exists from a past event. Future operating losses are never provided for. A restructuring provision needs a detailed formal plan and a valid expectation in those affected, for example through announcement or starting implementation.

• Using only the fair value to test impairment, or comparing impairment loss with the wrong figure.

  Students forget that recoverable amount has two measures.

  Fix: Take the higher of fair value less costs of disposal and value in use. If either exceeds the carrying amount, no impairment arises.

• Capitalising research cost or training cost as part of an asset.

  Students link any spending to future benefit.

  Fix: Expense research under Ind AS 38 and exclude training and general overheads from PPE cost under Ind AS 16. Capitalise development only when all criteria are proved.

• Treating all leases as operating leases in the lessee's books.

  Students remember the old AS 19 pattern.

  Fix: Under Ind AS 116 a lessee recognises an ROU asset and a lease liability for nearly all leases. The only optional exemptions are short-term leases and low-value assets.

• Depreciating a whole asset over one life when parts have different lives.

  Students skip componentisation.

  Fix: Identify significant parts with different useful lives or patterns of benefit, such as an aircraft engine or a furnace lining, and depreciate each separately.

• Recording a government grant in full as income on receipt.

  Cash receipt looks like income.

  Fix: Recognise when there is reasonable assurance of compliance and receipt, then spread over the periods of the related costs or the asset's life.

Worked examples