Arish Ltd.'s financial statements have several errors and misstatements. The term loan from the bank includes interest accrued and due of INR 555 million, which should be separated from the loan amount. The reserve for foreseeable loss is created against a service contract due within 6 months, but the contract details are not provided. The trade receivables include an amount considered doubtful, but the provision for doubtful debts is only INR 5 million.
To correct these errors, the balance sheet and statement of profit and loss should be revised. The term loan from the bank should be separated into the loan amount and the interest accrued and due. The reserve for foreseeable loss should be disclosed with more details about the service contract. The provision for doubtful debts should be increased to a reasonable amount.
The corrected balance sheet and statement of profit and loss are as follows:
Balance Sheet:
Equity and liabilities:
- Share capital: INR 1,000 million
- Reserves and surplus: INR 2,000 million
- Non-current liabilities:
- Long-term borrowings: INR 5,000 million
- Interest accrued and due: INR 555 million
- Current liabilities:
- Trade payables: INR 300 million
- Short-term provisions: INR 250 million
- Other current liabilities: INR 150 million
Assets:
- Non-current assets:
- Fixed assets: INR 5,655 million
- Deferred tax assets: INR 500 million
- Current assets:
- Inventories: INR 1,000 million
- Trade receivables: INR 1,100 million
- Cash and bank balances: INR 1,200 million
Statement of Profit and Loss:
Revenue from operations: INR 5,500 million
Expenses:
- Employee benefit expense: INR 1,200 million
- Operating costs: INR 2,200 million
- Depreciation: INR 999 million
Profit before tax: INR 1,101 million
Tax expense: INR 150 million
Profit after tax: INR 951 million
Regarding the disclosures required in the Combined/Carved-out Financial Statements, the Guidance Note on Combined and Carved-out Financial Statements requires the following disclosures:
A description of the combined or carved-out entity
The basis of preparation of the financial statements
The accounting policies used
The methods used to allocate costs and revenues
The nature and amount of any significant transactions between the combined or carved-out entity and other entities
* The amount of any profit or loss attributed to the owners of the combined or carved-out entity
In the case of A Limited, the government grant should be calculated as the difference between the market rate of interest and the interest rate on the loan. The journal entry to record the government grant is:
Debit: Loan account (INR 1,00,00,000)
Credit: Government grant (INR 43,39,658)
Credit: Interest expense (INR 5,00,000)
The government grant will be realized over the period of the loan. The grant will be recognized in the statement of profit or loss as a reduction in the interest expense.
Regarding the fair value of the asset, the fair value is the price that would be received in an orderly transaction between market participants at the measurement date. In this case, the asset is sold in two different active markets at different prices. The fair value of the asset should be determined based on the price in the most advantageous market, which is Market B with a net amount of INR 22.
Alternatively, regarding the computation of the deferred tax liability, the deferred tax liability should be computed as the difference between the carrying value of the investment in GK Ltd. and its tax base. The tax base of the investment is the cost of the investment, which is INR 45 crores. The carrying value of the investment is INR 75 crores. The deferred tax liability is computed as follows:
Deferred tax liability = (Carrying value - Tax base) x Tax rate
= (75 - 45) x 20%
= 30 x 20%
= INR 6 crores
The charge to the statement of profit for the deferred tax liability is INR 6 crores.
