Institute of Chartered Financial Analysts of India (ICFAI) University 2009 C.A Chartered Accountant Final Financial reporting revision test of - Question Paper

Interest on SIDBI loan    102

Interest on IFCI loan    40    360

Excise duty and other charges    888

Assuming that these other /miscellaneous charges will be deducted for arriving at the value added, the excise duty will be calculated as follows:-

Let Excise Duties be denoted by - E

Then, other charges = 888 - E

Excise duty are X0th of value added

Hence E = /_0th [12,480 - {7,384+ 350+218 + 40+E + (888 - E)}]

= X)th [12,480 - 8,880]

= X0th^x 3,600= 360

Other/miscellaneous charge 888 - 360 = Rs.528 The above solution has been given accordingly.

Alternatively, if other/miscellaneous charges are considered as application of value added (i.e., not deducted for deriving the value added), calculation of Excise Duties (E) will be as follows:

E = X_0th [12,480 - (7,384 + 350 + 218+40+E)]

E =X0th x (4,488- E)

11E = 4,488 E = Rs.408

And thus other/miscellaneous charges will be Rs.888 - 408 = Rs.480

Gross Value added in this case will be Rs. 4,080 + 110 (Other income) = Rs.4,190

And accordingly, application part will be prepared after taking other/miscellaneous charges.

11.    Market Value Added (MVA) is the difference between the current market value of a firm and the capital contributed by investors. If MVA is positive, the firm has added value. If it is negative the firm has destroyed value.

To find out whether management has created or destroyed value since its inception, the firm's MVA can be used:

MVA = Market Value of Capital - Capital employed

This calculation shows the difference between the market value of a company and the capital contributed by investors (both bondholders and shareholders). In other words, it is the sum of all capital claims held against the company plus the market value of debt and equity.

Calculated as:

The higher the MVA, the better. A high MVA indicates the company has created substantial wealth for the shareholders. A negative MVA means that the value of the actions and investments of management is less than the value of the capital contributed to the company by the capital markets, meaning wealth or value has been destroyed.

The aim of the company should be to maximize MVA. The aim should not be to maximize the value of the firm, since this can be easily accomplished by investing ever-increasing amounts of capital.

12.    (a) Although human beings are considered as the prime mover for achieving

productivity, and are placed above technology, equipment and money, the conventional accounting practice does not assign significance to the human resources. Human resources are not recognized in balance sheet as there are no measurement criteria for recognition of human resources. Human resource accounting is at developing stage and no accounting principles have been established for valuation of human assets. Costs incurred on human resources are recognised as expenses in profit and loss account. Leading public sector units like

OIL, BHEL, NTPC and SAIL etc. have started reporting human resources in their annual reports as additional information.

(b) Jaggi and Lau suggested a model for valuation of human resources. According to them, proper valuation of human resources is not possible unless the contributions of individuals as a group are taken into consideration. A group refers to homogeneous employees whether working in the same department or division of the organization or not. An individual's expected service tenure in an organization is difficult to predict, but on a group basis, it is relatively easy to estimate the percentage of people in a group likely to leave the organization in future. This model attempts to calculate the present value of all existing employees in each rank. Such present value is measured with the help of the following steps:

(i)    Ascertain the number of employees in each rank.

(ii)    Estimate the probability that an employee will be in his rank within the organization on terminated/promoted in the next period. This probability will be estimated for a specified time-period.

(iii)    Ascertain the economic value of an employee in a specified rank during each time period.

(iv)    The present value of existing employees in each rank is obtained by multiplying the above three factors and applying an appropriate discount rate.

Jaggi and Lau tried to simplify the process of measuring the value of human resources by considering a group of employees as basis of valuation. But in the process they ignored the exceptional qualities of certain skilled employees. The performance of a group may be seriously affected in the event of exit of a single individual.

Merit

Jaggi and Lau model approached the valuation of human resources on the basis of grouping of employees. Under this method, calculations get simplified and the chances of errors get reduced.

Demerit

This model ignores individual skills of the employees. The varied skills of the employees is not recognized in the valuation process under Jaggi and Lau model.

13. (a) The Guidance note on "Accounting for Investments in Financial Statements of Mutual Funds provides that Investments should be marked to market on balance sheet date with provision for depreciation, if any, in the value of investments debited to revenue account. The provision so created should be shown as a deduction from the value of investments in the Balance Sheet. The Guidance notes further states that the depreciation or appreciation should be worked out on individual basis or by category of investment but not on an overall basis. Keeping in view prudence' as a factor for preparation of financial statements and correct disclosure of the amount of depreciation on investments, the Guidance Note states that the gross value of depreciation on investments should be reflected in the revenue account rather than the same being netted off with the appreciation in the value of other investments. Thus the claim of Amigo Mutual Fund Ltd. is not correct.

(b) Mutual funds sell their shares to public and redeem them at current net Assets Value (NAV) which is calculated as under:-

Total market value of all Mutual Fund holdings - All Mutual Fund liabilities

Unit size

The net asset value of a mutual fund scheme is basically the per unit market value of all the assets of the scheme. Simply stated, NAV is the value of the assets of each unit of the scheme, or even simpler value of one unit of the scheme. Thus, if the NAV is more than the face value (Rs. 10), it means your money has appreciated and vice versa. NAV also includes dividends, interest accruals and reduction of liabilities and expenses, besides market value of investments. NAV is the value of net assets under a mutual fund scheme. The NAV per unit is NAV of the scheme divided by number of units outstanding. NAV of a scheme keeps on changing with change in market value of portfolio under the scheme.

14. (i) Quoted current investments for each category shall be valued at cost or market value, whichever is lower. For this purpose, the investments in each category shall be considered scrip-wise and the cost and market value aggregated for all investments in each category. If the aggregate market value for the category is less than the aggregate cost for that category, the net depreciation shall be provided for or charged to the profit and loss account. If the aggregate market value for the category exceeds the aggregate cost for the category, the net appreciation shall be ignored. Therefore, depreciation of a particular item of investments can be adjusted within the same category of investments.

(ii) Value of Investments as on 31.3.2009

Type of Investment    Valuation Principle    Value

Rs. in lakhs

Equity Shares (Aggregated) Lower of cost or market Value    406.50

Mutual Funds    NAV (Market value, assumed)    54.00

Government securities Cost    135.00

595.50

As per para 14 of AS 13 "Accounting for Investments, the carrying amount for current investments is the lower of cost and market price. Sometimes, the concern of an enterprise may be with the value of a category of related current investments and not with each individual investment, and accordingly, the investments may be computed at the lower of cost and market value computed category wise.

15.    (a) SEBI may appoint one or more persons as inspecting authority to undertake

inspection of the books of account, other records and documents of the stock brokers for any of the following purposes:

(a)    to ensure that the books of the account and other books are being maintained in the manner required;

(b)    that the provisions of the Act, rules, regulations and the provisions of the Securities Contract (Regulation) Act, and the rules made thereunder are being complied with;

(c)    to investigate into the complaints received from investors, other stock brokers, sub-brokers or any other person on any matter having a bearing on the activities of the stock brokers; and

(d)    to investigate suo motu, in the interest of securities business or investors' interest into the affaris of the stock-brokers.

(b) A merchant banker is an organisation that acts as an intermediary between the issuers and the ultimate purchasers of securities in the primary security market. In addition to managing an issue for a client, the services offered by a merchant banker includes underwriting and providing advice on complex financings arrangements, mergers and acquisitions, and at times direct equity investments in corporations. In exercise of the powers conferred vide Section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board, with the previous approval of the Central Government made the SEBI (Merchant Bankers) Regulations, 1992 which specify various requirements. These regulations specify the norms which SEBI takes into account for considering the grant of a certificate of registration and its renewal.

Every merchant banker shall keep and maintain the following books of account, records and documents as per regulation 14 :

(a)    a copy of balance sheet as at the end of the each accounting period;

(b)    a copy of profit and loss account for that period;

(c)    a copy of the auditor's report on the accounts for that period;

(d)    a statement of financial position.

16.    (a) The following are the objectives of financial reporting:

(i)    To provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.

(ii)    To provide information to help investors, creditors, and others to assess the amount, timing and uncertainly of prospective net cash inflows to the related enterprise.

(iii)    To provide information about the economic resources of an enterprise, the

claims to those resources (obligations of the enterprise to transfer resources to other entities and owners' equity), and the effects of transactions, events and circumstances that change resources and claims to those resources.

(iv)    To provide information about an enterprise's financial performance during a period.

(v)    To give information about an enterprise's performance provided by measures of earnings and its components.

(vi)    To provide information about how an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its capital transactions, including cash dividends and other distributions of enterprise's resources to owners, and about other factors that may affect an enterprise's liquidity or solvency.

(vii)    To provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it.

(viii)    To provide information that is useful to managers and directors in making decisions in the interest of owners.

(b) The audit of financial statements is a legal requirement. The audit provides an external and objective check on the measurement and disclosure aspects of corporate financial reporting. An auditor is appointed by the shareholders, but effectually his appointment is subject to will of management or promoter group. Nevertheless, the auditor is supposed to be independent of management and to serve the shareholders and other users of financial statements. Although, Management is responsible for the preparation of financial statement including the notes, the auditor through the auditor's report states whether financial statements presents fairly, in all material respects the financial position, the results of operations and the cash flows for the accounting period. The auditor is responsible for seeing that the financial statements issued conform with generally accepted accounting principles. Thus, the auditor must agree that accounting policies adopted by the management is appropriate and all estimates are reasonable. Any departure from generally accepted accounting principles (including non-compliance with the measurement and disclosure requirements of the accounting standards) would results in a qualified opinion. Auditor's report is an important accompaniment of financial statements. Because of boilerplate nature of these reports, there is tendency to skip over them while analyzing financial statements. However, such failure to give attention to the auditor's report may cause the user to miss significant information.

18. Current Cost Profit and Loss Account of Nidhi Ltd. For the year ended 31.3.2009

Rs.    Rs.

Trading profit before interest and tax under historical cost system

Gross profit less (Operating expenditure + Depreciation)

Rs. 9,00,000 less (Rs. 3,60,000 + Rs.1,20,000)    4,20,000

18,000

37,998

13,500 69,498

Current cost operating profit Less: Interest on loan

Gearing adjustment Current cost profit before tax Less: Provision for tax Current cost profit after tax Less: Dividend

Retained current cost profit for the year

19. (i) An enterprise should include the following information relating to a discontinuing

operation in its financial statements beginning with the financial statements for the

period in which the initial disclosure event (as defined in paragraph 15) occurs:

(a)    a description of the discontinuing operation(s);

(b)    the business or geographical segment(s) in which it is reported as per AS 17, Segment Reporting;

(c)    the date and nature of the initial disclosure event;

(d)    the date or period in which the discontinuance is expected to be completed if known or determinable;

(e)    the carrying amounts, as of the balance sheet date, of the total assets to be disposed of and the total liabilities to be settled;

(f)    the amounts of revenue and expenses in respect of the ordinary activities attributable to the discontinuing operation during the current financial reporting period;

(g)    the amount of pre-tax profit or loss from ordinary activities attributable to the discontinuing operation during the current financial reporting period, and the income tax expense related thereto; and

(h)    the amounts of net cash flows attributable to the operating, investing, and financing activities of the discontinuing operation during the current financial reporting period.

(ii)    Joint ventures take many different forms and structures. This Statement identifies three broad types - jointly controlled operations, jointly controlled assets and jointly controlled entities - which are commonly described as, and meet the definition of, joint ventures. The following characteristics are common to all joint ventures:

(a)    two or more venturers are bound by a contractual arrangement; and

(b)    the contractual arrangement establishes joint control.

A venturer should disclose the aggregate amount of the following contingent liabilities, unless the probability of loss is remote, separately from the amount of other contingent liabilities:

(a)    any contingent liabilities that the venturer has incurred in relation to its interests in joint ventures and its share in each of the contingent liabilities which have been incurred jointly with other venturers;

(b)    its share of the contingent liabilities of the joint ventures themselves for which it is contingently liable; and

(c)    those contingent liabilities that arise because the venturer is contingently liable for the liabilities of the other venturers of a joint venture.

A venturer should disclose the aggregate amount of the following commitments in respect of its interests in joint ventures separately from other commitments:

(a)    any capital commitments of the venturer in relation to its interests in joint ventures and its share in the capital commitments that have been incurred jointly with other venturers; and

(b)    its share of the capital commitments of the joint ventures themselves.

A venturer should disclose a list of all joint ventures and description of interests in significant joint ventures. In respect of jointly controlled entities, the venturer should also disclose the proportion of ownership interest, name and country of incorporation or residence.

A venturer should disclose, in its separate financial statements, the aggregate amounts of each of the assets, liabilities, income and expenses related to its interests in the jointly controlled entities.

(iii)    An enterprise should assess at each balance sheet date whether there is any indication that an asset may be impaired. If any such indication exists, the enterprise should estimate the recoverable amount of the asset.

In assessing whether there is any indication that an asset may be impaired, an enterprise should consider, as a minimum, the following indications:

External sources of information

(a)    during the period, an asset's market value has declined significantly more than would be expected as a result of the passage of time or normal use;

(b)    significant changes with an adverse effect on the enterprise have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the enterprise operates or in the market to which an asset is dedicated;

(c)    market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset's value in use and decrease the asset's recoverable amount materially;

(d)    the carrying amount of the net assets of the reporting enterprise is more than its market capitalisation;

Internal sources of information

(e)    evidence is available of obsolescence or physical damage of an asset;

(f)    significant changes with an adverse effect on the enterprise have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include plans to discontinue or restructure the operation to which an asset belongs or to dispose of an asset before the previously expected date; and

(g)    evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.

(iv)    When a contract covers a number of assets, the construction of each asset should be treated as a separate construction contract when:

(a)    separate proposals have been submitted for each asset;

(b)    each asset has been subject to separate negotiation and the contractor and customer have been able to accept or reject that part of the contract relating to each asset; and

(c)    the costs and revenues of each asset can be identified.

A group of contracts, whether with a single customer or with several customers, should be treated as a single construction contract when:

(a)    the group of contracts is negotiated as a single package;

(b)    the contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit margin; and

(c)    the contracts are performed concurrently or in a continuous sequence.

(v)    Beta Ltd. is a small and medium sized enterprise (SME) company as per Companies (AS) Rules, 2006. The following relaxations and exemptions are available.

1.    AS 3 "Cash Flow Statements is not mandatory.

2.    AS 17 "Segment Reporting is not mandatory.

3.    SMEs are exempt from some paragraphs of AS 19 "Leases.

4.    SMEs are exempt from disclosures of diluted EPS (both including and excluding extraordinary items).

5.    SMEs are allowed to measure the value in use' on the basis of reasonable estimate thereof instead of computing the value in use by present value technique under AS 28 "Impairment of Assets.

6.    SMEs are exempt from disclosure requirements of paragraphs 66 and 67of AS 29 "Provisions , Contingent Liabilities and Contingent Assets.

7.    SMEs are exempt from certain requirements of AS 15 "Employee Benefits.

8.    Accounting Standards 21, 23, 27 are not applicable to SMEs.

If Beta is not a company, it will be treated as a level III enterprise instead of level II enterprise; Beta Ltd. will be exempt from requirements of AS 18 "Related Party Disclosures and AS 24 "Discontinuing Operations.

(vi) Enterprises which are not Level I enterprises but fall in any one or more of the following categories are classified as Level II enterprises:

(i)    All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 40 lakhs but does not exceed Rs. 50 crores. Turnover does not include other income'.

(ii)    All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 1 crore but not in excess of Rs. 10 crores at any time during the accounting period.

(iii)    Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

20. (i) NACAS: Under Section 210 A of the Companies Act 1956, the Central Government, by notification, has constituted a committee to advise the Central Government on the formulation of accounting policies and accounting standards for adoption by companies or class of companies specified under the Act. Based on the recommendations of NACAS, the Central Government has notified AS 1 to AS 7 and AS 9 to AS 29 in Dec. 2006 in the form of Companies (Accounting Standards) Rules, 2006.

(ii) The objective of AS 28 Impairment of Assets' is to prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and this Statement requires the enterprise to recognize an impairment loss. This standard should be applied in accounting for the impairment of all assets, other than (i) inventories (AS

2, Valuation of Inventories); (ii) assets arising from construction contracts (AS 7,

Accounting for Construction Contracts); (iii) financial assets, including investments that are included in the scope of AS 13, Accounting for Investments; and (iv) deferred tax assets (AS 22, Accounting for Taxes on Income). AS 28 does not apply to inventories, assets arising from construction contracts, deferred tax assets or investments because other accounting standards applicable to these assets already contain specific requirements for recognizing and measuring the impairment related to these assets.

(iii)    According to para 44 of AS 20, If the number of equity or potential equity shares outstanding increases as a result of a bonus issue or share split or decreases as a result of a reverse share split (consolidation of shares), the calculation of basic and diluted earnings per share should be adjusted for all the periods presented. If these changes occur after the balance sheet date but before the date on which the financial statements are approved by the board of directors, the per share calculations for those financial statements and any prior period financial statements presented should be based on the new number of shares. When per share calculations reflect such changes in the number of shares, that fact should be disclosed.

(iv)    Para 87, 88 and 89 of AS 26 states that an intangible asset should be derecognised (eliminated from the balance sheet) on disposal or when no future economic benefits are expected from its use and subsequent disposal.

Gains or losses arising from the retirement or disposal of an intangible asset should be determined as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the statement of profit and loss.

An intangible asset that is retired from active use and held for disposal is carried at its carrying amount at the date when the asset is retired from active use. At least at each financial year end, an enterprise tests the asset for impairment under Accounting Standard on Impairment of Assets, and recognises any impairment loss accordingly.

(v)    Servicing asset is a contract to service financial assets under which the estimated future revenues from contractually specified servicing fees, late charges and other related revenues are expected to more than adequately compensate the servicer (who may be the originator) for performing the services. A servicing contract can be either undertaken together with selling or securitizing the financial assets being serviced or purchased or assumed separately.

21. (i) As per AS 9 "Revenue recognition, revenue recognition is mainly concerned with the timing of recognition of revenue in statement of profit and loss of an enterprise. The amount of revenue arising on a transaction is usually determined by the agreement between the parties involved in the transaction. When uncertainties exist regarding the determination of the amount, or its associated costs, these uncertainties may influence the timing of revenue recognition.

In the case of the Jewellery Business the company is selling for cash and returns are negligible. Hence, revenue can be recognized on sales. On the other hand, in Apparels Industry, the dealers have a right to return the unsold goods within one month of the end of the season. In this case, the company is bearing the risk of sales return and therefore, the company should not recognize the revenue to the extent of 25% of its sales. The company may disclose suitable revenue recognition policy in its financial statements separately for both Jewellery and Apparels business.

(ii)    The present case falls under the category of defined benefit scheme under Para 49 of AS 15 (Revised) "Employee Benefits. The said para encompasses cases where payment promised to be made to an employee at or near retirement presents significant difficulties in the determination of periodic charge to the statement of profit and loss. The contention of the Company that the settlement allowance will be accounted for on claim basis is not correct even if company's obligation under the scheme is uncertain and requires estimation. In estimating the obligation, assumptions may need to be made regarding future conditions and events, which are largely outside the company's control. Thus,

(1)    Settlement allowance payable by the company is a defined retirement benefit, covered by AS I5 (Revised).

(2)    A provision should be made every year in the accounts for the accruing liability on account of settlement allowance. The amount of provision should be calculated according to actuarial valuation.

(3)    Where, however, the amount of provision so determined is not material, the company can follow some other method of accounting for settlement allowances.

(iii)    As per provisions of Para 91(b) of AS 28 "Impairment of Assets, impairment loss is not to be recognized for a given asset if its cash generating unit (CGU) is not impaired. In the given question, the related cash generating unit which is group of asset to which the damaged machine belongs is not impaired; and the recoverable amount is more than the carrying amount of group of assets. Hence there is no need to provide for impairment loss on the damaged sachet filling machine.

(iv)    As per para 32 of AS 13 on Accounting for Investments', any investment of long term period is shown at cost. Hence, the investment in Gold and Silver (purchased on 1^st April 2005) shall continue to be shown at cost i.e., Rs.2,00,000 and Rs.1,50,000 respectively as their value have increased.

Also as per AS 13, for investment in shares - if the investment is for short-term period then the loss of Rs.3,00,000 is to be charged to profit & loss account for the year ended 31^st March, 2008. If investment is of long term period then it will continue to be shown at cost in the Balance Sheet of the company. However, provision for diminution shall be made to recognize a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually.

22. (i) Para 10 of AS 16 Borrowing Costs' states "To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings. The capitalisation rate should be the weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. Hence, in the above case, treatment of accountant of Krishna Ltd. is incorrect. The amount of borrowing costs capitalized for the financial year 2008-09 should be calculated as follows:

Actual interest for 2008-09 (11% of Rs.150 crores)    Rs.16.50 crores

Less: Income on temporary investment from specific borrowings Rs. 3.50 crores

Borrowing costs to be capitalized during year 2008-09    Rs.13.00 crores

(ii)    Omega Limited.

(iii)    As per para 35 of AS 7 "Construction Contracts, when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately. Therefore, The foreseeable loss of Rs.3 crores (Rs. 53 crores less Rs. 50 crores) should be recognised as an expense immediately in the year ended 31^st march, 2008. The amount of loss is determined irrespective of

(i)    Whether or not work has commenced on the contract;

(ii)    Stage of completion of contract activity; or

(iii)    The amount of profits expected to arise on other contracts which are not treated as a single construction contract in accordance with para 8 of AS 7.

(iv)    (a) Since the company is not appealing against the addition of Rs. 0.66 crore the

same should be provided for in its accounts for the year ended on 31^st March, 2008. The amount paid under protest can be kept under the heading Loans & Advances' and disclosed along with the contingent liability of Rs.2.10 crore.

(b) The arrears for the period from June, 2007 to March, 2008 are required to be provided for in the accounts of the company for the year ended on 31^st March, 2008.

23. (i) Computation of earnings per share

Net profit for the year 2007-08

Weighted average number of shares outstanding during year 2007-08

Basic earnings per share

Number of shares under option

Number of shares that would have been issued at fair value:

*The earnings have not been increased as the total number of shares has been increased only by the number of shares (40,000) deemed for the purpose of the computation to have been issued for no consideration.

(ii)    (a) As per AS 18, associates and joint ventures of the reporting enterprise are related

parties. Since A Ltd. holds more than 20% of the voting power in B Ltd. by virtue of this it has substantial interest and significant influence in B Ltd. Therefore B Ltd. is an associate and is related party to A Ltd.

(b)    An associate of an associate is not a related party. Only in the case of a holding company a subsidiary of a subsidiary (sub-subsidiary) also becomes a related party.

(c)    C Ltd. and D Ltd. are co-associates. Co-subsidiaries become related parties because of common control. In the case of this common control is missing and therefore they are not related parties.

(iii)    According to AS 12 states "where the Government grants are of the nature of promoters' contribution, i.e., they are given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay (for example, central investment subsidy scheme) and no repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve which can be neither distributed as dividend nor considered as deferred income.

Therefore, in the given case the subsidy is given with reference to the total investment in the unit located in the backward area by way of promoter's contribution, the amount should be treated as capital reserve and not income.

(iv) As per AS 29, Contingent liability should be disclosed in financial statements if following conditions are satisfied:-

   There should be present obligation arising out of past event but not recognized as provision.

   It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.

   The possibility of an outflow of resources embodying economic benefits is not remote.

   The amount of the obligation cannot be measured with sufficient reliability to be recognized as provision.

In this case, the probability of winning of first 10 cases is 60% and for remaining, five cases 50%. In other words, the probability of losing is 40% or 50% respectively. As per the AS-29, we make a provision if the loss is probable. As the loss does not appear to be probable and the possibility of an outflow of resources embodying economic benefits is not remote rather there is reasonable possibility of loss, therefore disclosure by way of note should be made. For the purpose of the disclosure of contingent liability by way of note amount may be calculated as under:

Expected loss in first ten cases    = Rs.90,000 x 0.3 + Rs.1,60,000 x 0.1

Rs.43,000 x 10 Rs.4,30,000

Expected loss in remaining five cases = Rs.60,000 x 0.3 + Rs.95,000 x 0.2

Rs.37,000 x 5 Rs.1,85,000

Rs.4,30,000 + Rs.1,85,000= Rs.6,15,000

24. Cash Flow Statement for the year ended December 31, 2008

Cash Flows from Operating Activities (direct method)