Page 40 - 23. COMPILER QB - IND AS 109_32

QUESTIONS FROM PAST EXAM PAPERS

Q26 (May 18 - 8 Marks)

S Limited issued redeemable preference shares to its Holding Company -H Limited. The terms of the
instrument have been summarized below. Analyse the given situation, applying the guidance in Ind AS 109
'Financial Instruments', and account for this in the books of H Limited
Nature Non-cumulative redeemable

preference shares
Repayment Redeemable after 3 years
Date of Allotment 1st April 2015

Date of Repayment 31st March 2018
Total Period 3 Years

Value of Preference Shares issued 5,00,00,000
Dividend Rate 0.0001% Per Annum
Market rate of interest 12% Per Annum
Present value factor 0.7118

SOLUTION

1. Analysis of the financial instrument issued by S Ltd. to its holding company H Ltd.
Applying the guidance in Ind AS 109, a ‘financial asset’ shall be recorded at its fair value upon initial
recognition. Fair value is normally the transaction price. However, sometimes certain types of instruments may
be exchanged at off market terms (ie, different from market terms for a similar instrument if exchanged
between market participants).

For example, a long-term loan or receivable that carries no interest while similar instruments if exchanged
between market participants carry interest, then fair value for such loan receivable will be lower from its
transaction price owing to the loss of interest that the holder bears. In such cases where part of the
consideration given or received is for something other than the financial instrument, an entity shall measure

the fair value of the financial instrument.
In the above case, since S Ltd has issued preference shares to its Holding Company– H Ltd, the relationship
between the parties indicates that the difference in transaction price and fair value is akin to investment
made by H Ltd. in its subsidiary. This can further be substantiated by the nominal rate of dividend i.e.
0.0001% mentioned in the terms of the instrument issued.

Computations on initial recognition: Rs
Transaction value of the Redeemable preference shares 5,00,00,000
Less: Present value of loan component @ 12% (5,00,00,000 x .7118) (3,55,90,000)

Investment in subsidiary 1,44,10,000

23. 39