“Suggested Solutions to Exercise” in Financial Accounting for Management by Ramachandran & Kakani

Authored by Ram Kumar Kakani, “Copyright with Tata McGraw Hill Education Private Limited, 2011”

CHAPTER 9
Accounting Standards

Note: Answers to only half the questions have been provided. It gives you an opportunity to work
on the rest problems and discuss about the relevant solutions. You are requested to complete this
chapter before attempting the questions.

EXERCISE

1. Mark True (T) or False (F) :

(a) F
(b)
(c) T
(d)
(e) T
(f)
(g) T
(h)
(i) T
(j)
(k) T
(l)
(m) T
(n)
(o) F

3. Billu Badshah Filters Limited

We deal with this case as per AS 29.

At the balance sheet date of 31 March 2010

Is it a present obligation as a result of a past obligating event?

No, there is no obligation because there is no obligating event either for the costs of fitting smoke
filters or for fines under the legislation. Hence, no provision is recognized for the cost of fitting the
smoke filters.

At the balance sheet date of 31 March 2011

Is it a present obligation as a result of a past obligating event?

No, there is still no obligation for the costs of fitting smoke filters because no obligating event has
occurred (the fitting of the filters). However, an obligation might arise to pay fines or penalties under
the legislation because the obligating event has occurred (the non-compliant operation of the factory).

Would there be an outflow of resources embodying economic benefits in settlement?

1
 “Suggested Solutions to Exercise” in Financial Accounting for Management by Ramachandran & Kakani
Authored by Ram Kumar Kakani, “Copyright with Tata McGraw Hill Education Private Limited, 2011”

Assessment of probability of incurring fines and penalties by non-compliant operation depends on the
details of the legislation and the stringency of the enforcement regime. Hence, no provision is
recognized for the costs of fitting smoke filters. However, a provision is recognized for the best
estimate of any fines and penalties that are more likely than not to be imposed.

5. Fayaz Takkar Limited

After consulting with the legal experts, if there is a certainty that the claim can be successfully resisted
by the company, no provision is required to be made in the financial statements of FayazTakkar
Limited. Otherwise a provision along with the proper disclosure is required to be made.

The second paragraph mentioned in the case and appearing in its annual report – appears to be clearly
describing the issue and also mentioning the company’s stance. Hence, the second paragraph without a
provision for the best estimate in its balance sheet would be apt.