ANALYSIS OF FINANCIAL STATEMENTS 247
ANALYSIS OF FINANCIAL STATEMENTS
CASE STUDIES BASED ON IND AS
CASE STUDY 1
On April 1, 20X1, Pluto Ltd. has advance a loan for ` 10 lakhs to one of its employees for
an interest rate at 4% per annum (market rate 10%) which is repayable in 5 equal annual
installments along with interest at each year end. Employee is not required to give any
specific performance against this benefit.
The accountant of the company has recognised the staff loan in the balance sheet equivalent
to the amount disbursed i.e. ` 10 lakhs. The interest income for the period is recognised at
the contracted rate in the Statement of Profit and Loss by the company i.e. ` 40,000 (` 10
lakhs x 4%).
Required:
Analyse whether the above accounting treatment made by the accountant is in compliance
with the Ind AS. If not, advise the correct treatment alongwith working for the same.
SOLUTION:
Paragraph 8 of Ind AS 19 states that:
“Employee Benefits are all forms of consideration given by an entity in exchange for service
rendered by employees or for the termination of employment”.
The Accountant of Pluto Ltd. has recognised the staff loan in the balance sheet at ` 10 lakhs
being the amount disbursed and ` 40,000 as interest income for the period is recognised
at the contracted rate in the statement of profit and loss which is not correct and not in
accordance with Ind AS 19, Ind AS 32 and Ind AS 109.
Accordingly, the staff advance being a financial asset shall be initially measured at the fair
value and subsequently at the amortised cost. The interest income is calculated by using
the effective interest method. The difference between the amount lent and fair value is
charged as Employee benefit expense in statement of profit and loss.
248 ACCOUNTS
(a) Calculation of Fair Value of the Loan
Year Cash Inflow Discounting Factor (10%) Present Value
1 2,40,000 0.909 2,18,160
2 2,32,000 0.826 1,91,632
3 2,24,000 0.751 1,68,224
4 2,16,000 0.683 1,47,528
5 2,08,000 0.621 1,29,168
Total 8,54,712
Staff loan should be initially recorded at ` 8,54,712.
(b) Employee Benefit Expense
Loan Amount – Fair Value of the loan = ` 10,00,000 – ` 8,54,712 = ` 1,45,288
` 1,45,288 shall be charged as Employee Benefit expense in Statement of Profit and
Loss on SLM basis over the period.
Amortisation table:
Year Opening balance of Interest (10%) Repayment Closing balance of
Staff Advance Staff Advance
(a) (b)= (ax10%) (c) (d)= a+b-c
1 8,54,712 85,471 2,40,000 7,00,183
2 7,00,183 70,018 2,32,000 5,38,201
3 5,38201 53,820 2,24,000 3,68,021
4 3,68,021 36,802 2,16,000 1,88,823
5 1,88,823 19,177 (b.f) 2,08,000 Nil
Balance Sheet extracts showing the presentation of staff loan as at 31st March 20X2
Ind AS compliant Division II of Sch III needs to be referred for presentation requirement
in Balance Sheet on Ind AS.
ANALYSIS OF FINANCIAL STATEMENTS 249
Assets
Non-current Assets
Financial Assets
I Loan 5,38,201
Current Assets
Financial Assets
I Loans (7,00,183 - 5,38,201) 1,61,982
CASE STUDY 2
Pluto Ltd. has purchased a manufacturing plant for ` 6 lakhs on 1 April 20X1. The useful
life of the plant is 10 years. On 30th September 20X3, Pluto temporarily stops using the
manufacturing plant because demand has declined. However, the plant is maintained in a
workable condition and it will be used in future when demand picks up.
The accountant of Pluto ltd. decided to treat the plant as held for sale until the demands
picks up and accordingly measures the plant at lower of carrying amount and fair value less
cost to sell.
Also, the accountant has also stopped charging the depreciation for the rest of period
considering the plant as held for sale. The fair value less cost to sell on 30th September
20X3 and 31 March 20X4 was ` 4 lakhs and ` 3.5 lakhs respectively.
The accountant has performed the following working:
INR
Carrying amount on initial classification as held for sale 6,00,000
Less: Accumulated dep (6,00,000/ 10 Years)* 2.5 years (1,50,000)
Fair Value less cost to sell as on 31 March 20X3 4,00,000
The value will be lower of the above two 4,00,000
Balance Sheet extracts as on 31 March 20X4
Assets
Current Assets
Other Current Assets
Assets classified as held for sale 3,50,000
250 ACCOUNTS
Required:
Analyse whether the above accounting treatment made by the accountant is in compliance
with the Ind AS. If not, advise the correct treatment alongwith working for the same.
SOLUTION:
Paragraph 13 of Ind AS 105 states that:
“An entity shall not classify as held for sale a non-current asset (or disposal group) that is
to be abandoned. This is because its carrying amount will be recovered principally through
continuing use.”
Paragraph 55 of Ind AS 16 states that:
“Depreciation does not cease when the asset becomes idle or is retired from active use
unless the asset is fully depreciated.”
Going by the guidance given above,
The Accountant of Pluto Ltd. has treated the plant as held for sale and measured it at the
fair value less cost to sell. Also, the depreciation has not been charged thereon since the
date of classification as held for sale which is not correct and not in accordance with Ind
AS 105 and Ind AS 16.
Accordingly, the manufacturing plant should be treated as abandoned asset rather as held
for sale because its carrying amount will be principally recovered through continuous use.
Pluto Ltd. shall not stop charging depreciation or treat the plant as held for sale because
its carrying amount will be recovered principally through continuing use to the end of their
economic life.
The working of the same for presenting in the balance sheet is given as below:
Calculation of carrying amount as on 31 March 20X4
Purchase Price of Plant 6,00,000
Less: Accumulated depreciation (6,00,000/ 10 Years)* 3 Years (1,80,000)
4,20,000
Balance Sheet extracts as on 31 March 20X4
Assets
Non-Current Assets
Property, Plant and Equipment 4,20,000
ANALYSIS OF FINANCIAL STATEMENTS 251
CASE STUDY 3
On 5th April, 20X2, fire damaged a consignment of inventory at one of the Jupiter’s Ltd.’s
warehouse. This inventory had been manufactured prior to 31st March 20X2 costing ` 8
lakhs. The net realisable value of the inventory prior to the damage was estimated at ` 9.60
lakhs. Because of the damage caused to the consignment of inventory, the company was
required to spend an additional amount of ` 2 lakhs on repairing and re- packaging of the
inventory. The inventory was sold on 15th May, 20X2 for proceeds of ` 9 lakhs.
The accountant of Jupiter Ltd treats this event as an adjusting event and adjusted this
event of causing the damage to the inventory in its financial statement and accordingly re-
measures the inventories as follows:
INR lakhs
Cost 8.00
Net realisable value (9.6 -2) 7.60
Inventories (lower of cost and net realisable value) 7.60
Required:
Analyse whether the above accounting treatment made by the accountant in regard to
financial year ending on 31.0.20X2 is in compliance of the Ind AS. If not, advise the correct
treatment along with working for the same.
CASE STUDY 4
On April 1, 20X1, Sun Ltd. has acquired 100% shares of Earth Ltd. for ` 30 lakhs. Sun Ltd.
has 3 cash-generating units A, B and C with fair value of Rs 12 lakhs, 8 lakhs and 4 lakhs
respectively. The company recognizes goodwill of Rs 6 lakhs that relates to CGU ‘C’ only.
During the financial year 20X2-20X3, the CFO of the company has a view that there is
no requirement of any impairment testing for any CGU since their recoverable amount
is comparatively higher than the carrying amount and believes there is no indicator of
impairment.
Required:
Analyse whether the view adopted by the CFO of Sun Ltd is in compliance of the Ind AS.
If not, advise the correct treatment in accordance with relevant Ind AS
252 ACCOUNTS
SOLUTION:
The above treatment needs to be examined in the light of the provisions given in Ind AS
36: Impairment of Assets.
Para 9 of Ind AS 36
Impairment of Assets’ states that “An entity shall assess at the end of each reporting
period whether there is any indication that an asset may be impaired. If any such indication
exists, the entity shall estimate the recoverable amount of the asset.”
Further, paragraph 10(b) of Ind AS 36 states that:
“Irrespective of whether there is any indication of impairment, an entity shall also test
goodwill acquired in a business combination for impairment annually”.
Sun Ltd has not tested any CGU on account of not having any indication of impairment is
partially correct i.e. in respect of CGU A and B but not for CGU C. Hence the treatment
made by the Company is not in accordance with Ind AS 36.
Accordingly, impairment testing in respect of CGU A and B are not required since there
are no indications of impairment. However, Sun Ltd shall test CGU C irrespective of any
indication of impairment annually as the goodwill acquired on business combination is fully
allocated to CGU ‘C’.
CASE STUDY 5
Venus Ltd. is a multinational entity that owns three properties. All three properties were
purchased on April 1, 20X1. The details of purchase price and market values of the properties
are given as follows:
Particulars Property 1 Property 2 Property 3
Factory Factory Let-Out
Purchase Price 15,000 10,000 12,000
Market value 31.03.20X2 16,000 11,000 13,500
Life 10 Years 10 Years 10 Years
Subsequent Measurement Cost Model Revaluation Model Revaluation Model
Property 1 and 2 are used by Venus Ltd. as factory building whilst property 3 is let-out
to a non-related party at a market rent. The management presents all three properties in
balance sheet as ‘property, plant and equipment’.
ANALYSIS OF FINANCIAL STATEMENTS 253
The Company does not depreciate any of the properties on the basis that the fair values
are exceeding their carrying amount and recognise the difference between purchase price
and fair value in Statement of Profit and Loss.
Required:
Analyse whether the accounting policies adopted by the Venus Ltd. in relation to these
properties is in accordance of Indian Accounting Standards (Ind AS). If not, advise the
correct treatment alongwith working for the same.
SOLUTION:
The above issue needs to be examined in the umbrella of the provisions given in Ind AS 1
‘Presentation of Financial Statements’, Ind AS 16 ‘Property, Plant and Equipment’ in relation
to property ‘1’ and ‘2’ and Ind AS 40 ‘Investment Property’ in relation to property ‘3’.
As per the facts given in the question, Venus Ltd. has
(a) presented all three properties in balance sheet as ‘property, plant and equipment’;
(b) applied different accounting policies to Property ‘1’ and ‘2’;
(c) revaluation is charged in statement of profit and loss as profit; and
(d) applied revaluation model to Property ‘3’ being classified as Investment Property.
These accounting treatment is neither correct nor in accordance with provision of Ind AS
1, Ind AS 16 and Ind AS 40.
Accordingly, Venus Ltd. shall apply the same accounting policy (i.e. either revaluation or cost
model) to entire class of property being property ‘1’ and ‘2”. It also required to depreciate
these properties irrespective of that, their fair value exceeds the carrying amount. The
revaluation gain shall be recognised in other comprehensive income and accumulated in
equity under the heading of revaluation surplus.
There is no alternative of revaluation model in respect to property ‘3’ being classified
as Investment Property and only cost model is permitted for subsequent measurement.
However, Venus ltd. is required to disclose the fair value of the property in the Notes
to Accounts. Also the property ‘3’ shall be presented as separate line item as Investment
Property.
Therefore, as per the provisions of Ind AS 1, Ind AS 16 and Ind AS 40, the presentation
of these three properties in the balance sheet is as follows:
254 ACCOUNTS
Case 1:
Venus Ltd. has applied the Cost Model to an entire class of property, plant and equipment.
Balance sheet extracts as at 31st March 20X2
INR
Assets
Non-current Assets
Property, Plant and Equipment
Property ‘1’ 13,500
Property ‘2’ 9,000 22,500
Investment properties
Property ‘3’ 10,800
Case 2:
Venus Ltd. has applied the Revaluation Model to an entire class of property,
plant and equipment.
Balance sheet extracts as at 31st March 20X2
INR
Assets
Non-current Assets
Property, Plant and Equipment
Property ‘1’ 16,000
Property ‘2’ 11,000 27,000
Investment Properties
Property ‘3’ 10,800
Equity and Liabilities
Other Equity
Revaluation Reserve
Property ‘1’ 2,500
Property ‘2’ 2,000 4,500
ANALYSIS OF FINANCIAL STATEMENTS 255
The revaluation reserve should be routed through Other Comprehensive Income
(subsequently not reclassified to Profit and Loss) in Statement of Profit and Loss and Shown
as a separate column in Statement of Changes in Equity.
CASE STUDY 6
On 1st January 20X2, Sun Ltd. was notified that a customer was taking legal action against
the company in respect of a financial losses incurred by the customer. Customer alleged
that the financial losses were caused due to supply of faulty products on 30th September
20X1 by the Company. Sun Ltd. defended the case but considered, based on the progress
of the case up to 31st March 20X2, that there was a 75% probability they would have to pay
damages of ` 10 lakhs to the customer.
However, the accountant of Sun Ltd. has not recorded this transaction in its financial
statement as the case is not yet finally settled. The case was ultimately settled against the
company resulting in to payment of damages of ` ` 12 lakhs to the customer on 15th May
20X2. The financials have been authorized by the Board of Directors in its meeting held on
18th May 20X2.
Required:
Analyse whether the above accounting treatment made by the accountant is in compliance
of the Ind AS. If not, advise the correct treatment along with working for the same.
SOLUTION:
The above treatment needs to be examined in the light of the provisions given in Ind AS 37
‘Provisions, Contingent Liabilities and Contingent Assets’ and Ind AS 10 ‘Events After the
Reporting Period’.
As per given facts, the potential payment of damages to the customer is an obligation arising
out of a past event which can be reliably estimated. Therefore, following the provision of
Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ – a provision is required.
The provision should be for the best estimate of the expenditure required to settle the
obligation at 31 March 20X2 which comes to ` 7.5 lakhs (` 10 lakhs * 75%).
Further, following the principles of Ind AS 10 ‘Events After the Reporting Period’ evidence
of the settlement amount is an adjusting event. Therefore, the amount of provision created
shall be increased to ` 12 lakhs and accordingly be recognised as a current liability.
256 ACCOUNTS
CASE STUDY 7
Mercury Ltd. is an entity engaged in plantation and farming on a large scale diversified
across India. On 1st April 20X1, the company has received a government grant for ` 10 lakhs
subject to a condition that it will continue to engage in plantation of eucalyptus tree for a
coming period of five years.
The management has a reasonable assurance that the entity will comply with condition
of engaging in the plantation of eucalyptus tree for specified period of five years and
accordingly it recognises proportionate grant for ` 2 lakhs in Statement of Profit and Loss
as income following the principles laid down under Ind AS 20 Accounting for Government
Grants and Disclosure of Government Assistance.
Required:
Analyse whether the above accounting treatment made by the management is in compliance
of the Ind AS. If not, advise the correct treatment alongwith working for the same.
SOLUTION:
As per given facts, the company is engaged in plantation and farming. Hence Ind AS 41
Agriculture shall be applicable to this company.
“If a government grant related to a biological asset measured at its fair value less costs
to sell is conditional, including when a government grant requires an entity not to engage in
specified agricultural activity, an entity shall recognise the government grant in profit or
loss when, and only when, the conditions attaching to the government grant are met”.
Understanding of the given facts, The Company has recognised the proportionate grant for
Rs 2 lakhs in Statement of Profit and Loss before the conditions attaching to government
grant are met which is not correct and nor in accordance with provision of Ind AS 41
‘Agriculture’.
Accordingly, the accounting treatment of government grant received by the Mercury Ltd.
is governed by the provision of Ind AS 41 ‘Agriculture’ rather Ind AS 20 ‘Accounting for
Government Grants and Disclosure of Government Assistance’.
Government grant for ` 10 lakhs shall be recognised in profit or loss when, and only when,
the conditions attaching to the government grant are met i.e. after the expiry of specified
period of five years of continuing engagement in the plantation of eucalyptus tree.
ANALYSIS OF FINANCIAL STATEMENTS 257
Balance Sheet extracts showing the presentation of
Government Grant as on 31st March 20X2
INR
Liabilities
Non-current liabilities
Other Non-Current Liabilities
Government Grants 10,00,000
CASE STUDY 8
Mercury Ltd. has sold goods to Mars Ltd. at a consideration of ` 10 lakhs, the receipt of
which receivable in three equal installments of ` 3,33,333 over a two year period (receipts
on 1st April 20X1, 31st March 20X2 and 31st March 20X3).
The company is offering a discount of 5 % (i.e. ` 50,000) if payment is made in full at the
time of sale. The sale agreement reflects an implicit interest rate of 5.36% p.a.
The total consideration to be received from such sale is at ` 10 Lakhs and hence, the
management has recognised the revenue from sale of goods for ` 10 lakhs. Further, the
management is of the view that there is no difference in this aspect between Indian GAAP
and Ind AS.
Required:
Analyse whether the above accounting treatment made by the accountant is in compliance
of the Ind AS. If not, advise the correct treatment along with working for the same.
CASE STUDY 9
(RTP NOV 2020: Q1…………ALREADY DISCUSSED THERE)
Deepak started a new company Softbharti Pvt. Ltd. with Iktara Ltd. wherein investment of
55% is done by Iktara Ltd. and rest by Deepak. Voting powers are to be given as per the
proportionate share of capital contribution. The new company formed was the subsidiary
of Iktara ltd. with two directors, and Deepak eventually becomes one of the directors
of company. A consultant was hired and he charged ` 30,000 for the incorporation of
company and to do other necessary statuary registrations. ` 30,000 is to be charged as an
expense in the books after incorporation of company. The company, Softbharti Pvt. Ltd.
was incorporated on 1st April 20X1.
258 ACCOUNTS
The financials of Iktara Ltd. are prepared as per Ind AS.
An accountant who was hired at the time of company’s incorporation, has prepared the
draft financials of Softbharti Pvt. ltd. for the year ending 31st March, 20X2 as follows :
Statement of Profit and Loss
Particulars Amount (`)
Revenue from operations 10,00,000
Other Income 1,00,000
Total Revenue (a) 11,00,000
Expenses :
Purchase of stock in trade 5,00,000
(Increase)/Decrease in stock in trade (50,000)
Employee benefits expense 1,75,000
Depreciation 30,000
Other expenses 90,000
Total Expenses (b) 7,45,000
Profit before tax (c) = (a) – (b) 3,55,000
Current tax 1,06,500
Deferred tax 6,000
Total tax expense (d) 1,12,500
Profit for the year (e) = (c) = (d) 2,42,500
Balance Sheet
Particulars Amount (`)
EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital 1,00,000
(b) Reserves & Surplus 2,27,500
(2) Non-Current Liabilities
(a) Long Term Provisions 25,000
(b) Deferred tax liabilities 6,000
ANALYSIS OF FINANCIAL STATEMENTS 259
(3) Current Liabilities
(a) Trade Payables 11,000
(b) Other Current Liabilities 45,000
(c) Short Term Provisions 1,06,500
Total 5,21,000
ASSETS
(1) Non Current Assets
(a) Property, plant and equipment (net) 1,00,000
(b) Long-term Loans and Advances 40,000
(c) Other Non Current Assets 50,000
(2) Current Assets
(a) Current Investment 30,000
(b) Inventories 80,000
(c) Trade Receivables 55,000
(d) Cash and Bank Balances 1,15,000
(e) Other Current Assets 51,000
Total 5,21,000
Additional information of Softbharti Pvt. Ltd. :
(i) Deferred tax liability of ` 6,000 is created due to following temporary difference :
Difference in depreciation amount as per Income tax and Accounting profit
(ii) There is only one property, plant and equipment in the company, whose closing balance
as at 31st March, 20X2 is as follows:
Asset description As per Books As per Income tax
Property, plant and equipment ` 1,00,000 ` 80,000
Pre incorporation expenses are deductible on straight line basis over the period of
five years as per Income tax. However, the same are immediately expensed off in the
books.
260 ACCOUNTS
(iii) Current tax is calculated at 30% on PBT - ` 3,55,000 without doing any adjustments
related to Income tax. The correct current tax after doing necessary adjustments of
allowances / disallowances related to Income tax comes to ` 1,25,700.
(iv) After the reporting period, the directors have recommended dividend of ` 15,000
for the year ending 31st March, 20X2 which has been deducted from reserves and
surplus. Dividend payable of ` 15,000 has been grouped under other current liabilities’
alongwith other financial liabilities.
(v) There are ‘Government statuary dues’ amounting to ` 15,000 which are grouped under
‘other current liabilities’.
(vi) The capital advances amounting to ` 50,000 are grouped under ‘Other non-current
assets’.
(vii) Other current assets of ` 51,000 comprise Interest receivable from trade receivables.
(viii) Current investment of ` 30,000 is in shares of a company which was done with the
purpose of trading; current investment has been carried at cost in the financial
statements. The fair value of current investment in this case is ` 50,000 as at 31st
March, 20X2.
(ix) Actuarial gain on employee benefit measurements of ` 1,000 has been omitted in the
financials of Softbharti private limited for the year ending 31st March, 20X2.
The financial statements for financial year 20X1-20X2 have not been yet approved.
You are required to ascertain that whether the financial statements of Softbharti Pvt.
Ltd. are correctly presented as per the applicable financial reporting framework. If not,
prepare the revised financial statements of Softbharti Pvt. Ltd. after the careful analysis
of mentioned facts and information.
CASE STUDY 10
Mumbai Challengers Ltd., a listed entity, is a sports organization owning several cricket and
hockey teams. The issues below pertain to the reporting period ending 31st March 20X2.
(a) Owning to the proposed schedules of Indian Hockey League as well as Cricket Premier
Tournament, Mumbai Challengers Ltd. needs a new stadium to host the sporting events.
This stadium will form a part of the Property, Plant and Equipment of the company.
Mumbai Challengers Ltd. began the construction of the stadium on 1 December, 20X1.
The construction of the stadium was completed in 20X2-20X3. Costs directly related
to the construction amounted to ` 140 crores in December 20X1. Thereafter, ` 350
crores have been incurred per month until the end of the financial year. The company
has not taken any specific borrowings to finance the construction of the stadium,
although it has incurred finance costs on its regular overdraft during the period,
ANALYSIS OF FINANCIAL STATEMENTS 261
which were avoidable had the stadium not been constructed. Mumbai Challengers Ltd.
has calculated that the weighted average cost of the borrowings for the period 1
December 20X1 to 31st March 20X2 amounted to 15% per annum on an annualized
basis.
The company seeks advice on the treatment of borrowing costs in its financial
statements for the year ending 31st March 20X2.
(b) Mumbai Challengers Ltd. acquires and sells players’ registrations on a regular basis.
For a player to play for its team, Mumbai Challengers Ltd. must purchase registrations
for that player. These player registrations are contractual obligations between the
player and the company. The costs of acquiring player registrations include transfer
fees, league levy fees, and player agents’ fees incurred by the club.
At the end of each season, which happens to also be the reporting period end for
Mumbai Challengers Ltd., the club reviews its contracts with the players and makes
decisions as to whether they wish to sell/transfer any players’ registrations. The
company actively markets these registrations by circulating with other clubs a list of
players’ registrations and their estimated selling price. Players’ registrations are also
sold during the season, often with performance conditions attached. In some cases, it
becomes clear that a player will not play for the club again because of, for example, a
player sustaining a career threatening injury or being permanently removed from the
playing squad for any other reason. The playing registrations of certain players were
sold after the year end, for total proceeds, net of associated costs, of ` 175 crores.
These registrations had a net book value of ` 49 crores.
Mumbai Challengers Ltd. seeks your advice on the treatment of the acquisition,
extension, review and sale of players’ registrations in the circumstances outlined
above.
(c) Mumbai Challengers Ltd. measures its stadiums in accordance with the revaluation
model. An airline company has approached the directors offering ` 700 crores for
the property naming rights of all the stadiums for five years. Three directors are on
the management boards of both Mumbai Challengers Ltd. and the airline. Additionally,
statutory legislations regulate the financing of both the cricket and hockey clubs.
These regulations prevent contributions to the capital from a related party which
‘increases equity without repayment in return’. Failure to adhere to these legislations
could lead to imposition of fines and withholding of prize money.
Mumbai challengers Ltd. wants to know to take account of the naming rights in the
valuations of the stadium and the potential implications of the financial regulations
imposed by the legislations.
262 ACCOUNTS
CASE STUDY 11
(a) Neelanchal Gas Refinery Ltd. (hereinafter referred to as Neelanchal), a listed company,
is involved in the production and trading of natural gas and oil. Neelanchal jointly
owns an underground storage facility with another entity, Seemanchal Refineries
Ltd. (hereinafter referred to as Seemanchal). Both the companies are engaged in
extraction of gas from offshore gas fields, which they own and operate independently
of each other. Neelanchal owns 60% of the underground facility and Seemanchal owns
40%. Both the companies have agreed to share services and costs accordingly, with
decisions relating to the storage facility requiring unanimous agreement of the parties.
The underground facility is pressurised so that the gas is pushed out when extracted.
When the gas pressure is reduced to a certain level, the remaining gas is irrecoverable
and remains in the underground storage facility until it is decommissioned. As per the
laws inforce, the storage facility should be decommissioned at the end of its useful
life.
Neelanchal seeks your advice on the treatment of the agreement with Seemanchal as
well as the accounting for the irrecoverable gas.
(b) Neelanchal has entered into a ten-year contract with Uttaranchal Refineries Pvt. Ltd.
(hereinafter referred to as Uttaranchal) for purchase of natural gas. Neelanchal has
paid an advance to Uttaranchal equivalent to the total quantity of gas contracted for
ten years based on the forecasted price of gas. This advanced amount carries interest
at the rate of 12.5% per annum, which is settled by Uttaranchal way of supply of
extra gas. The contract requires fixed quantities of gas to be supplied each month.
Additionally, there is a price adjustment mechanism in the contract whereby the
difference between the forecasted price of gas and the prevailing market price is
settled in cash on a quarterly basis. If Uttaranchal does not deliver the gas as agreed,
Neelanchal has the right to claim compensation computed at the current market price
of the gas.
Neelanchal wants to account for the contract with Uttaranchal in accordance with Ind
AS 109 Financial Instruments and seeks your inputs in this regard.
