Background: Naman Industries Pvt. Ltd. operates in the manufacturing sector, producing industrial machinery and consumer electronics. In the financial year ending March 31, 2024, the Board of Directors faces the challenge of disclosing accounting policies under AS 1. Some members suggest limited disclosure to maintain competitive advantage, while others push for full transparency for the sake of stakeholder trust.
The company also acquired machinery worth ₹15,00,000 from foreign suppliers. Due to exchange rate fluctuations, the final cost increased by 15%. Naman Industries also took a loan of ₹10,00,000 at 8% interest, and the CFO is uncertain whether to capitalize the borrowing costs under AS 16 (Borrowing Costs) or expense them. Additionally, the company follows the FIFO method for inventory valuation but is considering switching to the Weighted Average Cost method.
Numerical Scenario: The company borrowed ₹10,00,000 at an 8% interest rate. Due to the installation of the machinery over six months, the total borrowing cost for the period is ₹40,000. The CFO is deciding whether to capitalize or expense this cost as per AS 16.
A) To minimize tax liabilities.
B) To enhance transparency and comparability.
C) To reduce financial disclosure.
D) To comply with company law.
Answer: B) To enhance transparency and comparability.
A) No disclosure is necessary.
B) The change must be disclosed and its effect on comparability explained.
C) The company should adjust past statements.
D) The company should defer the change to the next fiscal year.
Answer: B) The change must be disclosed and its effect on comparability explained.
A) Yes, because the borrowing costs are directly attributable to the acquisition of the machinery.
B) No, borrowing costs should always be expensed.
C) Only if the costs exceed ₹50,000.
D) Only if the interest rate is fixed.
Answer: A) Yes, because the borrowing costs are directly attributable to the acquisition of the machinery.
A) Expense the entire increase.
B) Capitalize the increase as part of the asset cost.
C) Recognize it as a financial loss.
D) Adjust it against reserves.
Answer: B) Capitalize the increase as part of the asset cost.
A) The financial statements may become misleading.
B) The company could face penalties.
C) No action will be taken if the change is immaterial.
D) Stakeholders will not be affected.
Answer: A) The financial statements may become misleading.
Background: ABC Corporation is an Indian multinational engaged in exporting machinery and importing raw materials. In the financial year ending March 31, 2024, the company experienced extreme foreign exchange fluctuations that significantly affected its liabilities. As per AS 11, the company must account for these changes appropriately in its financial statements. The company also borrowed funds in foreign currency, raising questions about how to capitalize or expense borrowing costs under AS 16.
Numerical Scenario: ABC Corporation took a foreign currency loan of ₹25,00,000 at a 9% interest rate for three years. Due to exchange rate fluctuations, the liability increased by 12%. The company also received a government grant of ₹8,00,000 for R&D, with 70% of the grant utilized during the financial year.
A) Capitalize the differences on foreign currency loans.
B) Recognize the differences in the income statement.
C) Adjust the differences in equity.
D) Defer the recognition until repayment.
Answer: B) Recognize the differences in the income statement.
A) When they relate to a fixed asset.
B) When they are directly attributable to the acquisition or construction of a qualifying asset.
C) Borrowing costs should always be expensed.
D) Only for long-term projects.
Answer: B) When they are directly attributable to the acquisition or construction of a qualifying asset.
A) Recognize the entire grant as income in the same year.
B) Recognize the grant as deferred income and amortize it.
C) The grant should be recognized only when fully utilized.
D) Use it to reduce the cost of related assets.
Answer: B) Recognize the grant as deferred income and amortize it.
A) Adjust the liabilities in the income statement.
B) Defer recognition until the loan is repaid.
C) Capitalize the increase.
D) Recognize the increase in equity.
Answer: A) Adjust the liabilities in the income statement.
A) Recognize the unutilized portion as income.
B) Defer recognition until the grant is fully utilized.
C) Use it to offset future expenses.
D) Write it off as a liability.
Answer: B) Defer recognition until the grant is fully utilized.
Background: DEF Construction Ltd. is engaged in large-scale construction contracts, some of which span several years. The company needs to recognize revenue as per AS 7 (Construction Contracts) and AS 9 (Revenue Recognition). During the financial year ending March 31, 2024, DEF Construction completed 60% of a multi-year contract, with total revenue projected at ₹1,00,00,000.
Numerical Scenario: DEF Construction recognized ₹60,00,000 in revenue for the contract, based on 60% completion. However, due to unforeseen delays, the project incurred additional costs amounting to ₹15,00,000. The company also received an advance of ₹10,00,000 from another contract but has not yet started work.
A) Recognize full revenue of ₹1,00,00,000.
B) Recognize ₹60,00,000 in revenue, proportional to the contract's completion.
C) Defer revenue recognition until the contract is complete.
D) Recognize only the advance received.
Answer: B) Recognize ₹60,00,000 in revenue, proportional to the contract's completion.
A) Recognize it as revenue.
B) Treat it as a liability until the work is started.
C) Defer it until work is completed.
D) Offset it against future expenses.
Answer: B) Treat it as a liability until the work is started.
A) Capitalize the cost as part of the project.
B) Expense the cost immediately.
C) Adjust it in the next financial year.
D) Include it in the cost-to-complete estimate.
Answer: D) Include it in the cost-to-complete estimate.
A) Recognize revenue in the current period.
B) Defer revenue recognition until work is completed.
C) Recognize revenue proportionally as the project progresses.
D) Recognize revenue only upon receipt of payment.
Answer: C) Recognize revenue proportionally as the project progresses.
A) Disclose it as a receivable.
B) Recognize it as revenue.
C) Show it as a liability.
D) Ignore the advance until work starts.
Answer: C) Show it as a liability.
Background: GHI Ltd., a manufacturing company, has faced difficulties in managing inventory costs due to fluctuating raw material prices. The company uses the FIFO (First-In-First-Out) method to value its inventories but is considering switching to the Weighted Average Cost method due to the volatility in prices. This decision requires adherence to AS 2 (Valuation of Inventories) to ensure the proper recognition, measurement, and presentation of inventory costs.
Numerical Scenario: GHI Ltd. has ₹5,00,000 worth of raw materials in inventory, purchased at varying prices over the financial year. With the shift to the Weighted Average Cost method, the company calculates that the new average cost would be ₹4,80,000, slightly lower than the original cost. This change could affect the company’s financial reporting, and management must carefully consider how to implement and disclose this switch in accounting policy.
A) To determine the tax liabilities.
B) To provide consistent methods for valuing inventories.
C) To allow for flexibility in inventory valuation.
D) To minimize costs associated with inventory.
Answer: B) To provide consistent methods for valuing inventories.
A) Switch without disclosing the change.
B) Disclose the change and its financial impact.
C) Defer the change until the next financial year.
D) Apply both methods simultaneously.
Answer: B) Disclose the change and its financial impact.
A) Adjust the financial statements retroactively.
B) Include the difference in the income statement.
C) Ignore the difference if immaterial.
D) Defer recognition until next year.
Answer: B) Include the difference in the income statement.
A) The lower value should be reported as a loss.
B) The lower value should be treated as a normal adjustment.
C) Defer the reporting of the lower value.
D) No adjustment is necessary if the difference is small.
Answer: B) The lower value should be treated as a normal adjustment.
A) Adjust financial statements for prior periods.
B) Defer the change until the next fiscal year.
C) Disclose the impact and continue with the change.
D) Switch back to FIFO immediately.
Answer: C) Disclose the impact and continue with the change.
Background: JKL Ltd., a technology company, invested in constructing a new factory to expand its production capabilities. The company borrowed ₹50,00,000 at an interest rate of 10% per annum to finance the project. The construction took two years to complete, and the total borrowing cost for the period amounted to ₹10,00,000. JKL Ltd. needs to determine whether to capitalize or expense these costs as per AS 16 (Borrowing Costs).
Numerical Scenario: The construction of the factory qualifies as a "qualifying asset" under AS 16, and JKL Ltd. has incurred ₹10,00,000 in borrowing costs over the two-year period. The management is debating whether to capitalize the entire amount or expense it in the income statement.
A) An asset that generates revenue immediately.
B) An asset that takes a substantial period to get ready for use.
C) Any fixed asset.
D) An asset that can be sold for profit.
Answer: B) An asset that takes a substantial period to get ready for use.
A) Expense them in the year incurred.
B) Capitalize them as part of the cost of the qualifying asset.
C) Amortize them over 10 years.
D) Include them in the income statement as a deferred expense.
Answer: B) Capitalize them as part of the cost of the qualifying asset.
A) Continue to capitalize borrowing costs.
B) Start expensing borrowing costs.
C) Defer recognition of borrowing costs.
D) Recognize borrowing costs as revenue.
Answer: B) Start expensing borrowing costs.
A) Include them as part of fixed asset costs.
B) Disclose them separately in the notes.
C) Include them under current liabilities.
D) Include them in reserves.
Answer: B) Disclose them separately in the notes.
A) Capitalize the additional costs.
B) Expense the additional costs.
C) Defer the additional costs.
D) Include the additional costs in future periods.
Answer: A) Capitalize the additional costs.