As per para 5(b) of AS-21, X Ltd has control over composition of the corresponding governing body, that is, working of partners. It holds 60 per cent of capital and also has three-fourths share in profits. So, Y & Associate is an enterprise that is controlled by X Ltd, it is a subsidiary of X Ltd and, hence, its financial statement needs to be consolidated.

AS-22

X Ltd is a listed company which has declared dividends at 40 per cent to its shareholder in the current year. X Ltd seeks your advice regarding applicability of AS-22 on taxes that arise on distribution of dividends. Advice X Ltd and give reasons for your answer.

AS 22 does not deal with aspects relating to when, or how an enterprise should account for taxes that are payable on distribution of dividends, and other distributions made by the enterprise. Stated differently, AS-22 is not applicable in respect of taxes on dividend distributed.

a) Interest on term loans payable to scheduled banks accounted in books but not paid, Rs 20,000;

b) Bonus payable to employees, Rs 15,000;

c) Tax, cess, duties payable, Rs 15,000.

X Ltd expects a good cash flow during the forthcoming year. Is X Ltd justified in creating a deferred tax asset?

Yes. X Ltd. is justified in creating a deferred tax asset, inasmuch as there is a `reasonable certainty' about taxable income emerging is inferred from the phrase `X expects a good cash flow'. Such a position can also be verified from the past record of taxable income, registered by the company.

AS-23

X Ltd holds 6 per cent of shares in Y Ltd. Z Ltd holds 8 per cent of shares in Y Ltd. Z Ltd is a subsidiary of X Ltd, which virtually takes part in most of the operating and financial decisions of Y Ltd. Does X Ltd have significant influence over Y Ltd. Explain.

Yes. As per para 4 of AS-23, if the investor holds directly or indirectly through subsidiaries 20 per cent or more of voting power, he is said to have significant influence. X Ltd holds only 14 per cent (directly and indirectly) of the shares of Y Ltd. Although it holds only 14 per cent, it is said to have significant influence because its subsidiary Z Ltd virtually takes part in operating and financing decisions of the company. As per para 5, significant influence can be evidenced by participating in policy decision-making. So X Ltd has significant influence over Y Ltd.

The company at present holds 15 per cent stake. It ceases to have significant influence over the other company (subject to other conditions). Up to the date of withdrawal of investment, the investment should be accounted for as per "equity method" and thereafter as per AS-13 (Para 9 of AS-23).

AS-24

The directors of A Ltd approved a formal plan of discontinuance on April 15, 2003. The board of directors also made an announcement of the plan to the shareholders. The financial year of the company ends on March 31 2002, and the financial statements have not been approved by the board yet. Discuss the disclosure requirements in this regard.

Initial disclosure event, April 15, 2003; financial year ends on March 31, 2003 (financial statement still not approved by the board). Therefore, the initial disclosure event occurs between the balance-sheet date and date on which the financial statements are approved by the board. Disclosure as required by AS-4 shall be made (para 22 of AS-24)

Original cost — Rs 15 lakh

Less: Accumulated depreciation — Rs 8 lakh

WDV — Rs 7 lakh

Sale value — Rs 10 lakh

Profit on sale of asset — Rs 3 lakh

As per Para 23 of AS-24, the following shall be disclosed: a) gain or loss recognised on disposal of assets; and b) tax expense relating to the gain or loss. Such disclosures shall be included in the financial statements for the period (or the interim period) in which the events occur.

AS-25

In the last annual report, X Ltd, reported a contingent liability towards the bills discounted to the extent of Rs 50,000. During the current interim period, the amount of bills that was discounted rose up to Rs 2,50,000 should this be reported separately as part of Interim financial statements assuming that they have a material effect in the current interim period? Will your answer differ if the event does not have a material effect?

Paragraph 16 (i) of AS 25 contains disclosure requirements regarding contingent liabilities.

X Ltd should ensure that the information on contingent liability is reported in the interim financial reports on a year-to-date basis.

Assuming that the quantum of increase in contingent liability for bills discounted from Rs 50,000 in the first interim reporting period to Rs 2,50,000 in the subsequent interim reporting period has a material effect, this information ought to be reported separately.

If the volume and value of such discounted bills is not material, a separate disclosure is not necessary.

Nevertheless, in making assessment of materiality, it should be recognised that interim measurements has a greater reliance on estimates, than measurements of annual financial data.

AS 25 lays down principles of recognition and measurement of revenues received seasonally or occasionally. Dividend income from a subsidiary falls within the ambit of these principles. Such revenues should not be anticipated, or deferred, if anticipation or deferral is not appropriate at the end of the year of the enterprise.

In the instant case, recognition of dividend at the end of the year is governed by AS-9. Dividend is recognised when the "right to receive" is established. Right to receive does not emerge until the dividend is approved and declared. Accordingly, it would not be in order for X Ltd to recognise dividend income, even though it may be sure of declaration.

AS-26

What is the criterion for determining the carrying amount of intangibles?

Carrying amount = Cost less accumulated amortisation, and any accumulated impairment losses.

The amortisation period is the best estimate of its useful life. Amortisation should commence when asset is available for use.

The useful life of an IA is generally restricted to a rebuttable presumption period of 10 years. The period of legal rights may exceed 10 years, when

legal rights are renewable and renewal is virtually certain — both to apply cumulatively.

AS-27

Give an example of jointly-controlled operations.

Manufacture of an aircraft wherein each venturer undertakes to manufacture different parts of aircraft, that is, an aircraft engine is manufactured by one venturer, body by a second, and furnishing and electricals by a third and navigation equipment by a fourth (para 12).

Each venturer has to recognise such losses (excess of loss over the share of interest of investor) in proportion to his share in the venture, except to the extent that the investor has a binding obligation to make good the losses (para 38).

Consider the example of a JV in which there are two venturers with a share of 40 per cent each, and one investor with a share of 20 per cent. When the share of loss for investor exceeds 20 per cent (say, Rs 10,000), that excess will be recognised by each of the venturer. In the instant case, each venturer will take up an equal share of Rs 10,000, that is, Rs 5,000.

AS-28

X Ltd, a listed company revalued one of its assets from Rs 15,00,000 to Rs 28,00,000. This value was determined by analysing future market trends and this amount represents the market value of the asset as on date.

It is assumed that the disposal costs for the company would be Rs 2,500. Should X Ltd determine whether the asset is impaired?

As per Para 6 of AS-28, X Ltd shall assess whether there is any indication that the asset may be impaired. There is no indication that the asset may be impaired since the asset was revalued after analysing future market trend.

Since there is no indication that the asset is impaired X Ltd need not make a formal estimate of the recoverable amount, particularly because the disposal costs are not material and is a low figure of Rs 2,500 relative to the value of the asset.

i) Financial assets such as receivables accruing due to continued use of the asset.

ii) Outflows/obligations which have already been recognised as liabilities.

iii) Future capital expenditure that would improve the efficiency of the asset.

iv) Future cash savings expected to arise on re-structuring of the business.

v) Future overheads that can be attributed directly to the use of the asset.

vi) Outflow incurred before the asset is ready for use.

vii) Income-tax receipts/payments.

viii) Flows from financing activities.

ix) Terminal value realisable on the sale of the asset.

i) Exclude; ii) exclude; iii) exclude if the efficiency improvement were to enhance the asset beyond its originally assessed level of performance; iv)

exclude if such a restructuring is not a committed one. In some circumstances, if a binding commitment has been made for a restructuring arrangement (say, with reference to a lendor) cost savings can be considered; v) include; vi) include; vii) exclude; viii) exclude; and ix) include.

(Edited extracts from First Lessons on Accounting Standards. Book courtesy: Snow White Publications Pvt. Ltd. www.swpindia.com)

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