Accounting for Assets and Liabilities Short Answer Type Questions

Question 1.
Write a short note on investment property IAS 40 with an example.
Answer:
1. Investment Property applies to the accounting for property (land and/or buildings) held to earn rentals or for capital appreciation (or both).

2. Investment properties are initially measured at cost and, with some exceptions. May be subsequently measured using a cost model or fair value model, with changes in the fair value under the fair value model being recognised in profit or loss.

Example:
An entity owns a building that it rents out to independent third parties under operating leases in return for rental payments. The entity provides cleaning, security and maintenance services for the lessees of the building.

If the services provided by the entity are insignificant to the arrangement as a whole, then the property is investment property. In most cases cleaning, security and maintenance services will be insignificant and hence the building would be classified as investment property.

Question 2.
Explain the Recognition and Measurement of Investment property IAS 40.
Answer:
Recognition: Investment property is recognised as an asset when it is probable that the future economic benefits that are associated with the property will flow to the enterprise, and the cost of the property can be reliably measured.

Measurement: Initial measurement Investment property is initiaily measured at cost, Including transaction costs. Cost does not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy. Subsequent measurement An entity can choose between the fair value and the cost model. The accounting policy choice must be applied to all investment property.

Question 3.
Explain the various model of Investment properties IAS 40.
Answer:
1. Fair Value Model:
Investment property is remeasured at fair value, which is the amount for which the property couid be exchanged between knowledgeable, willing parties in an arm’s length transaction. Gains or losses arising from changes in the fair value of investment property must be included in net profit or loss for the period in which it arises.

Fair value should reflect the actual market state and circumstances as of the balance sheet date. The best evidence of fair value is normally given by current prices on an active market for similar property in the same location and condition and subject to similar lease and other contracts. In the absence of such information, the entity may consider current prices for properties of a different nature or subject to different conditions, recent prices on less active markets with adjustments to reflect changes in economic conditions, and dis¬counted cash flow projections based on reliable estimates of future cash flows.

There is a rebuttable presumption that the entity will be able to determine the fair value of an investment property reliably on a continuing basis.
→ If an entity determines that the fair value of an investment property under construction is not reliably determinable but expects the fair value of the property to be reliably determinable when construction is complete, it measures that investment property under construction at cost until either its fair value becomes reliably determinable or construction is completed.

→ If an entity determines that the fair value of an investment property (other than an investment property under construction) is not reliably determinable on a continuing basis, the entity shall measure that investment property using the cost model in IAS 16. The residual value of the investment property shall be assumed to be zero. The entity shall apply IAS 16 until disposal of the investment property.

2. Cost Model:
After initial recognition, investment property is accounted for in accordance with the cost model as set out in IAS 16 Property, Plant and Equipment – cost less accumulated depreciation and less accumulated impairment losses. [IAS 40.56]

  • Transfers to or from investment property classification
  • Transfers to, or from, investment property should only be made when there is a change in use, evidenced by one or more of the following:

Commencement of owner-occupation (transfer from investment property to owner-occupied property).
Commencement of development with a view to sale (transfer from investment property to inventories).
End of owner-occupation (transfer from owner-occupied property to investment property).
Commencement of an operating lease to another party.

Question 4.
Explain the concept of Government Grants.
Answer:
An entity should not recognise Government grants (including non-monetary grants at fair value) until it has reasonable assurance that:

  • The entity will comply with any conditions attached to the grant.
  • The entity will actually receive the grant.

Even if the grant has been received, this does not prove that the conditions attached to it have been or will be fulfilled. It makes no difference in the treatment of the grant whether it is received in cash or given as a reduction in a liability to government, i.e. the manner of receipt is irrelevant. Any related contingency should be recognized under IAS 37 provisions, contingent liabilities and contingent assets, once the grant has been recognized.

In the case of a forgivable loan from government, it should be treated in the same way as a government grant when it is reasonably assured that the entity will meet the relevant terms for forgiveness.

Question 5.
Explain the scope of Government grants as covered by IAS 20.
Answer:
The treatment of Government grants is covered by IAS 20 Accounting for government grants and disclosure of Government assistance. Assistance by government. In the form of transfers of resources to an entity. In return for past or future compliance with certain conditions relating to the operating activities of the entity. Exclude forms of government assistance which cannot reasonably have a value placed on them and which cannot be distinguished from the normal trading transactions of the entity.

IAS 20 does not cover the following situations:

  • Accounting for Government grants in financial statements reflecting the effects of changing prices.
  • Government assistance given in the form of ‘tax breaks’.
  • Government acting as part-owner of the entity.

Question 6.
Explain the Accounting treatment of Government Grants.
Answer:
(i) IAS 20 requires grants to be recognized as income over the relevant periods to match them with related costs which they have been received to compensate. This should be done on a systematic basis. Grants should not, therefore, be credited directly to equity.

(ii) It would be against the accruals assumption to credit grants to income on a receipts basis, so a systematic basis of‘matching must be used. A receipts basis would only be acceptable if no other basis was available.

(iii) It will usually be easy to identify the cist related to a government grant, and thereby the period (s) in which the grant should be recognized as income, i.e when the cost are incurred. Where grants are received in relation to a depreciating asset, the grant will be recognized over the periods in which the assets is depreciated and in the same proportions.

Question 7.
Explain the various types of Government Grants.
Answer:
1. Grants related to Income: A grant receivable as compensation for costs, either:

  • Already incurred.
  • For immediate financial support, with no future related costs. Recognise as income in the period in which it is receivable.

A grant relating to income may be presented in one of two ways:

  • Separately as ‘other income’.
  • Deducted from the related expense.

Grants are recognised when both:

  • There is reasonable assurance the entity will comply with the conditions attached to the grant.
  • The grant will be received.

2. Grants related to Assets:
A grant relating to assets may be presented in one of two ways:

  • As deferred income (and released to profit or loss when related expenditure impacts profit or loss)
  • By deducting the grant from the asset’s carrying amount.

Question 8.
Explain the scope of borrowing cost.
Answer:
1. An entity shall apply this Standard in accounting for borrowing costs.

2. The Standard does not deal with the actual or imputed cost of equity, including preferred capital not classified as a liability.

3. An entity is not required to apply the Standard to borrowing costs directly attributable to the acquisition, construction or production of: (a) A qualifying asset measured at fair value, for example, a biological asset or (b) Inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis.

Question 9.
Briefly explain the scope, recognition criteria and disclosure requirements of provisions and contingent liabilities as per Ind AS-37.
Answer:
Scope: This standard should be applied in accounting for provisions and contingent liabilities and dealing with contingent assets except.

Recognition – Provision: A provision should be recognised when –

  • An enterprise has a present obligation as a result of a past event.
  • It is probable that outflow of resources embodying economic benefits will be required to settle the obligation; and
  • A reliable estimate can be made of amount of the obligation.

If these conditions are not met no provision should be recognised.

Recognition – Contingent liabilities:
A contingent liability is disclosed unless the possibility of an outflow of resources embodying economic benefits is remove. Where an enterprise is jointly and severally liable for an obligation, the part of the obligation that is enterprise to be met by other parties is treated as a contingent liability.

Disclosure requirement: For each class of provision an enterprise should disclose –

  • The carrying amount at the beginning and end of the period.
  • Additional provision made in the period including increases to existing provisions.
  • Amounts used (i.e. incurred and charged against the provision) during the period; and
    Unused amounts reversed during the period.

Question 10.
Explain the recognition, Commencement of Capitalisation and Diselosure of Borrowing costs IAS 23.
Answer:
Recognition:
(a) Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are required to be capitalised as part of the cost of that asset.

(b) Other borrowing costs are recognised as an expense when incurred.

(c) If funds are borrowed specifically, the amount of borrowing costs eligible for capitalisation are the actual borrowing costs incurred on that borrowing less any investment income on the temporary investment of any excess borrowings not yet used.

(d) If funds are borrowed generally, the amount of borrowing costs eligible for capitalisation are determined by applying a capitalisation rate (weighted average of borrowing costs applicable to the general borrowings) to the expenditures on that asset of The amount of the borrowing costs capitalised during the period cannot exceed the amount of borrowing costs incurred during the period.

Commencement of Capitalisation:
An entity shall begin capitalising borrowing costs as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalisation is the date when the entity first meets all of the following conditions:

  • It incurs expenditures for the asset.
  • It incurs borrowing costs.
  • It undertakes activities that are necessary to prepare the asset for its intended use or sale.

Disclosure:
An entity shall disclose:

  • The amount of borrowing costs capitalised during the period.
  • The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.

Question 11.
Mention the list of close members of the family as per Ind AS-24.
Answer:
Close members of the family as per AS-24:
Close member of the family of a person are those family members who may be expected to influence or be influenced by, that person in their dealings with the entity include:

  • That person’s children, spouse or domestic partner, brother, sister, father and mother.
  • Children of that person’s spouse or domestic partner.
  • Dependents of that person or that person’s spouse or domestic partner.

Question 12.
Write note on construction contracts of Ind AS – 11.
Answer:
This Statement deals with accounting for construction contracts in the financial statements of enterprises undertaking such contracts. The Statement also applies to enterprises undertaking construction activities of the type dealt with in this Statement not as contractors but on their own account as a venture of a commercial nature where the enterprise has entered into agreements for sale.

The feature which a construction contract dealt with in this statement is the fact that the -date at which the contract is secured and the date when the contract activity is completed fall into different accounting periods. The specific duration of the contract performance is not used as a distinguishing feature of a construction contract. Accounting for such contracts is essentially a process of measuring the results of relatively long-term events and allocating those results to relatively short-term accounting periods.

For the purposes of this Statement, a construction contract is a contract for the construction of an asset or of a combination of assets which together constitute a single project.

Examples of activity covered by such contracts include the construction of bridges, dams, ships, buildings and complex pieces of equipment. Contracts for the provision of services come within the scope of this Statement to the extent that they are directly related to a contract for the construction of an asset.

Examples of such service contracts are contracts for the services of project managers and architects and for technical engineering services related to the construction of an asset.

Question 13.
Explain the scope of Share based payments based on IFRS 2.
Answer:
IFRS 2 does not apply to:
(a) Transactions in which the entity acquires goods as part of the net assets acquired in a business combination to which IFRS 3 Business Combinations applies.

(b) Share-based payment transactions in which the entity receives or acquires goods or services under a contract within the scope of IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement.

(c) Transactions with an employee in his/her capacity as a holder of equity instruments.
IFRS 2 also applies to transfers by shareholders to parties that have transferred goods or services to the entity. This would include transfers of equity instruments of the entity or fellow subsidiaries by the entity’s parent entity to parties that have provided goods and services

Question 14.
Explain the provision of Recognition based on IAS 37.
Answer:
A provision should be recognised as a liability in the balance sheet and as an expense in the economic outturn account when:

  • An entity has a present obligation (legal or constructive) as a result of a past event.
  • A reliable estimate can be made of the amount of the obligation.
  • It is probable that an economic outflow of economic resources embodying economic benefits or service potential will be required to settle the obligation.

Question 15.
Discuss the Treatment of Contingent Liabilities.
Answer:
Contingent liabilities should not be recognized in financial statements but they should be disclosed. The required disclosures are:

  • A brief description of the nature of the contingent liability.
  • An estimate of its financial effect.
  • An indication of the uncertainties that exist.
  • The possibility of any reimbursement.