Page 3 - 32. ANALYSIS OF FS

Solution

Ongoing through the queries raised by the Managing Director Mr. Y, the financial controller Mr. X explained
the notes and reasons for their disclosures as follows:

a. Related parties are generally characterised by the presence of control or influence between the two

parties.Ind AS 24 ‘Related Party Disclosures’ identifies related parties as, inter alia, key management
personnel and companies controlled by key management personnel. On this basis, PQR Ltd. is a related party
of ABC Ltd.
The transaction is required to be disclosed in the financial statements of ABC Ltd. since Mr. Y is Key
Management personnel of ABC Ltd. Also at the same time, it owns 100% shares of PQR Ltd. ie. he controls
PQR Ltd. This implies that PQR Ltd. is a related party of ABC Ltd.

Where transactions occur with related parties, Ind AS 24 requires that details of the transactions are
disclosed in a note to the financial statements. This is required even if the transactions are carried out on
an arm’s length basis.
Transactions with related parties are material by their nature, so the fact that the transaction may be
numerically insignificant to ABC Ltd. does not affect the need for disclosure.

b. The accounting treatment of the majority of tangible non-current assets is governed by Ind AS 16 ‘Property,
Plant and Equipment’. Ind AS 16 states that the accounting treatment of PPE is determined on a class by
class basis. For this purpose, property and plant would be regarded as separate classes. Ind AS 16 requires
that PPE is measured using either the cost model or the revaluation model. This model is applied on a class
by class basis and must be applied consistently within a class. Ind AS 16 states that when the revaluation
model applies, surpluses are recorded in other comprehensive income, unless they are cancelling out a deficit

which has previously been reported in profit or loss, in which case it is reported in profit or loss. Where the
revaluation results in a deficit, then such deficits are reported in profit or loss, unless they are cancelling out
a surplus which has previously been reported in other comprehensive income, in which case they are reported
in other comprehensive income.

According to Ind AS 16, all assets having a finite useful life should be depreciated over that life. Where
property is concerned, the only depreciable element of the property is the buildings element, since land
normally has an indefinite life. The estimated useful life of a building tends to be much longer than for
plant. These two reasons together explain why the depreciation charge of a property as a percentage of its
carrying amount tends to be much lower than for plant.
Properties which are held for investment purposes are not accounted for under Ind AS 16, but under Ind AS

40 ‘Investment Property’. As per Ind AS 40, investment properties should be accounted for under a cost
model. ABC Ltd. had applied the cost model and thus our investment properties are treated differently from
the owner occupied property which is annually to fair value.
c. As per Ind AS 38 ‘Intangible Assets’, the treatment of expenditure on intangible items depends on how it
arose. Internal expenditure on intangible items incurred during research phase cannot be recognised as an

asset. Once it can be demonstrated that a development project is likely to be technically feasible,
commercially viable, overall profitable and can be adequately resourced, then future expenditure on the project
can be recognised as an intangible asset. The difference in the treatment of expenditure upto 30th
September, 2017 and expenditure after that date is due to the recognition phase ie. research or development
phase.

32.2