Page 14 - 18. COMPILER QB - INDAS 28 _ 111

Newly added Question in Latest ICAI Module for May 22 Attempt

Q10. (ICAI Module)

On 1st April 20X1 Alpha Ltd. commenced joint construction of a property with Gama Ltd. For this purpose, an
agreement has been entered into that provides for joint operation and ownership of the property. All the

ongoing expenditure, comprising maintenance plus borrowing costs, is to be shared equally. The construction

was completed on 30th September 20X1 and utilization of the property started on 1st January 20X2 at which
time the estimated useful life of the same was estimated to be 20 years.

Total cost of the construction of the property was Rs 40 crores. Besides internal accruals, the cost was partly
funded by way of loan of Rs 10 crores taken on 1st January 20X1. The loan carries interest at an annual rate

of 10% with interest payable at the end of year on 31st December each year. The company has spent Rs
4,00,000 on the maintenance of such property.

The company has recorded the entire amount paid as investment in Joint Venture in the books of accounts.
Suggest the suitable accounting treatment of the above transaction as per applicable Ind AS.

SOLUTION:

As provided in Ind- AS 111 - Joint Arrangements - this is a joint arrangement because two or more parties
have joint control of the property under a contractual arrangement. The arrangement will be regarded as a

joint operation because Alpha Ltd. and Gama Ltd. have rights to the assets and obligations for the liabilities
of this joint arrangement. This means that the company and the other investor will each recognise 50% of the

cost of constructing the asset in property, plant and equipment.

The borrowing cost incurred on constructing the property should, under the principles of Ind AS 23 ‘Borrowing
Costs’, be included as part of the cost of the asset for the period of construction.
In this case, the relevant borrowing cost to be included is Rs 50,00,000 (Rs 10,00,00,000 x 10% x 6/12).

The total cost of the asset is Rs 40,50,00,000 (Rs 40,00,00,000 + Rs 50,00,000)

Rs 20,25,00,000 crores is included in the property, plant and equipment of Alpha Ltd. and the same amount in
the property, plant and equipment of Gama Ltd.

The depreciation charge for the year ended 31 March 20X2 will therefore be Rs 1,01,25,000 (Rs 40,50,00,000 x
1/20 x 6/12) Rs 50,62,500 will be charged in the statement of profit or loss of the company and the same

amount in the statement of profit or loss of Gama Ltd.
The other costs relating to the arrangement in the current year totaling Rs 54,00,000 (finance cost for the

second half year of Rs 50,00,000 plus maintenance costs of Rs 4,00,000) will be charged to the statement of
profit or loss of Alpha Ltd. and Gama Ltd. in equal proportions- Rs 27,00,000 each.

18. 13