Chapter 3: Applicability of Accounting Standards - Test 2: answer key

Question 1 · 2 marks · Chapter 3: Applicability of Accounting Standards · hard

Scenario. Rathore & Associates is a large partnership firm engaged in engineering consultancy. For FY 2024-25, its turnover was ₹240 crore and its borrowings from banks and financial institutions stood at ₹55 crore at peak during the year. For FY 2025-26, its turnover is ₹235 crore (excluding other income of ₹5 crore) and borrowings peaked at ₹48 crore. The partners seek guidance on their classification under the revised ICAI criteria effective for accounting periods commencing on or after 1 April 2024 (applicable for FY 2025-26 and May 2027 attempt) and the specific Accounting Standard exemptions available to non-corporate entities.

For FY 2025-26, what is the classification of Rathore & Associates under the ICAI's scheme for non-corporate entities applicable for May 2027?

1. It is an MSME, because turnover of ₹235 crore is below the ₹250 crore threshold for Large Entities.
2. It is a Large Entity, because borrowings of ₹55 crore during the preceding FY 2024-25 exceeded the ₹50 crore threshold. (correct answer)
3. It is an MSME, because peak borrowings in FY 2025-26 fell to ₹48 crore.
4. It is an MSME, because a partnership firm is never classified as a Large Entity.

Answer: B — It is a Large Entity, because borrowings of ₹55 crore during the preceding FY 2024-25 exceeded the ₹50 crore threshold.

Explanation. Under the revised ICAI classification for non-corporate entities (effective 1 April 2024, applicable for May 2027), an entity whose borrowings (including public deposits) exceed ₹50 crore at any time during the preceding accounting year is classified as a Large Entity. Since Rathore & Associates had borrowings of ₹55 crore in FY 2024-25, it is classified as a Large Entity for FY 2025-26.

Where it goes wrong. Students often look at the current year's borrowings (₹48 crore) rather than the preceding accounting year's threshold (FY 2024-25 peak of ₹55 crore).

Authority. ICAI Revised Scheme for Non-Corporate Entities (2021), Level I criteria

Question 2 · 2 marks · Chapter 3: Applicability of Accounting Standards · medium

As a Large Entity for FY 2025-26, which of the following Accounting Standard exemptions is available to Rathore & Associates?

1. Exemption from AS 3 Cash Flow Statements.
2. Exemption from AS 17 Segment Reporting.
3. Relaxations in AS 19 Leases for disclosure requirements.
4. No exemptions or relaxations; it must comply with all Accounting Standards in their entirety. (correct answer)

Answer: D — No exemptions or relaxations; it must comply with all Accounting Standards in their entirety.

Explanation. Large Entities (non-corporate entities that are listed/in process of listing, banks/FIs/insurance, or have turnover > ₹250 crore or borrowings > ₹50 crore in the preceding year) are not entitled to any exemptions or relaxations. They must comply with all Accounting Standards in full.

Where it goes wrong. Students frequently confuse Large Entities with MSMEs, assuming some disclosure exemptions apply automatically.

Authority. ICAI Revised Scheme for Non-Corporate Entities (2021), Level I applicability

Question 3 · 2 marks · Chapter 3: Applicability of Accounting Standards · hard

If Rathore & Associates were an MSME (assuming borrowings were within ₹50 crore), how would AS 18 Related Party Disclosures apply?

1. AS 18 would apply fully because the firm's turnover exceeds ₹50 crore. (correct answer)
2. AS 18 would be wholly exempt because all MSMEs are exempt from AS 18.
3. AS 18 would apply only if borrowings exceed ₹10 crore.
4. AS 18 would be exempt because partnership firms are never required to disclose related parties.

Answer: A — AS 18 would apply fully because the firm's turnover exceeds ₹50 crore.

Explanation. Under the ICAI scheme for non-corporate MSMEs, AS 18 is wholly exempt only for smaller MSMEs whose turnover does not exceed ₹50 crore and borrowings do not exceed ₹10 crore at any time during the preceding year. Since Rathore's turnover exceeds ₹50 crore, AS 18 applies in full.

Where it goes wrong. Believing that all MSMEs are exempt from AS 18 without checking the ₹50 crore turnover and ₹10 crore borrowing sub-limits.

Authority. ICAI Revised Scheme for Non-Corporate Entities (2021), Level II criteria

Question 4 · 2 marks · Chapter 3: Applicability of Accounting Standards · medium

Under the 1 April 2024 scheme, what relaxations in AS 19 Leases are available to an eligible MSME?

1. The entire AS 19 standard is exempt for all MSMEs.
2. Only finance leases are recognized; operating lease disclosures are wholly omitted.
3. Specific disclosure paragraphs—including paragraphs 22(c),(e),(f); 25(a),(b),(e); 37(a),(f),(g); 38; and 46(b),(d),(e)—are not applicable. (correct answer)
4. No relaxations exist for AS 19 under any category of non-corporate entity.

Answer: C — Specific disclosure paragraphs—including paragraphs 22(c),(e),(f); 25(a),(b),(e); 37(a),(f),(g); 38; and 46(b),(d),(e)—are not applicable.

Explanation. For eligible MSMEs, ICAI grants specific disclosure relaxations under AS 19: lessor and lessee disclosures regarding general descriptions of leasing arrangements, reconciliation of minimum lease payments, and certain future lease commitments (paragraphs 22(c),(e),(f); 25(a),(b),(e); 37(a),(f),(g); 38; and 46(b),(d),(e)) are not required.

Where it goes wrong. Assuming AS 19 is either completely exempt or completely mandatory without specific paragraph-level disclosure carve-outs.

Authority. AS 19 Leases; ICAI Revised Scheme for Non-Corporate Entities (2021), Level II relaxations

Question 5 · 2 marks · Chapter 3: Applicability of Accounting Standards · hard

Scenario. Verma Textiles LLP is a manufacturing LLP. For FY 2024-25, its turnover was ₹45 crore and borrowings were ₹8 crore. For FY 2025-26, its turnover is ₹42 crore and borrowings are ₹7 crore. The partners inquire about their entity classification under the 1 April 2024 ICAI two-tier scheme (Large Entities vs MSMEs) and their eligibility for exemptions from AS 18, AS 22, and AS 28.

For FY 2025-26, how is Verma Textiles LLP classified under the ICAI 1 April 2024 non-corporate classification scheme?

1. It is a Large Entity, because an LLP is treated identically to a public company.
2. It is an MSME, because its turnover does not exceed ₹250 crore and its borrowings do not exceed ₹50 crore at any time during the preceding accounting year. (correct answer)
3. It is a Large Entity, because its turnover exceeds ₹10 crore.
4. It is exempt from all Accounting Standards because its turnover is below ₹50 crore.

Answer: B — It is an MSME, because its turnover does not exceed ₹250 crore and its borrowings do not exceed ₹50 crore at any time during the preceding accounting year.

Explanation. Under the 1 April 2024 scheme, non-corporate entities that are not Large Entities (turnover ≤ ₹250 crore, borrowings ≤ ₹50 crore, unlisted, and non-financial) are classified as MSMEs. With turnover of ₹45 crore and borrowings of ₹8 crore in FY 2024-25, Verma Textiles LLP is an MSME.

Where it goes wrong. Using obsolete 2021 Level I–IV labels or confusing non-corporate MSME thresholds with corporate SMC thresholds.

Authority. ICAI Revised Scheme for Non-Corporate Entities (2021), Level III criteria

Question 6 · 2 marks · Chapter 3: Applicability of Accounting Standards · medium

For an MSME whose turnover does not exceed ₹50 crore and borrowings do not exceed ₹10 crore (such as Verma Textiles LLP), which set of Accounting Standards is wholly exempt?

1. Only AS 3 and AS 17.
2. AS 3, AS 17, AS 20, and AS 24 only.
3. AS 3, AS 17, AS 18, AS 20, AS 24, and AS 28 in their entirety. (correct answer)
4. All Accounting Standards from AS 1 to AS 29.

Answer: C — AS 3, AS 17, AS 18, AS 20, AS 24, and AS 28 in their entirety.

Explanation. For MSMEs satisfying the smaller sub-threshold (turnover ≤ ₹50 crore and borrowings ≤ ₹10 crore), full exemptions are provided for: AS 3 (Cash Flow Statements), AS 17 (Segment Reporting), AS 18 (Related Party Disclosures), AS 20 (Earnings Per Share), AS 24 (Discontinuing Operations), and AS 28 (Impairment of Assets).

Where it goes wrong. Forgetting that AS 18 and AS 28 become wholly exempt once turnover is ≤ ₹50 crore and borrowings are ≤ ₹10 crore.

Authority. ICAI Revised Scheme for Non-Corporate Entities (2021), Level III exemptions

Question 7 · 2 marks · Chapter 3: Applicability of Accounting Standards · hard

How does AS 15 Employee Benefits apply to Verma Textiles LLP as a qualifying MSME?

1. AS 15 is wholly exempt in its entirety for all non-corporate entities.
2. Verma must comply with recognition and measurement for defined benefit plans, but has relaxations from using the PUC method and detailed actuarial disclosures. (correct answer)
3. Verma is exempt from recognizing any provision for gratuity or leave encashment.
4. Verma must apply full PUC valuation and provide all 120-series disclosure requirements.

Answer: B — Verma must comply with recognition and measurement for defined benefit plans, but has relaxations from using the PUC method and detailed actuarial disclosures.

Explanation. Under the MSME relaxations for AS 15, qualifying non-corporate MSMEs are exempt from the mandatory use of the Projected Unit Credit (PUC) method and detailed actuarial disclosures (paragraphs 119–123), provided they calculate and recognize the obligation on a reasonable rational basis.

Where it goes wrong. Believing that AS 15 exemption permits ignoring employee benefit liabilities altogether rather than granting valuation and disclosure relaxations.

Authority. AS 15 Employee Benefits paras 50-116, 117-123; ICAI Revised Scheme for Non-Corporate Entities (2021), Level III relaxations

Question 8 · 2 marks · Chapter 3: Applicability of Accounting Standards · hard

Regarding AS 22 Taxes on Income, what exemption is available to non-corporate MSMEs under the 1 April 2024 scheme?

1. They are exempt from accounting for deferred tax (both DTA and DTL); they account for current tax only based on taxable income. (correct answer)
2. They are exempt from paying income tax altogether.
3. They must account for deferred tax liabilities, but are prohibited from recognizing deferred tax assets.
4. AS 22 applies without any relaxation to all entities regardless of classification.

Answer: A — They are exempt from accounting for deferred tax (both DTA and DTL); they account for current tax only based on taxable income.

Explanation. Under the 1 April 2024 non-corporate classification, all MSMEs are exempt from accounting for deferred taxes under AS 22. They account for income tax on the basis of current tax expense only, determined in accordance with the tax laws.

Where it goes wrong. Confusing corporate SMC rules (where AS 22 applies in full) with non-corporate MSME rules (where deferred tax is exempt).

Authority. AS 22 Accounting for Taxes on Income paras 4.4, 9, 20, 27-28; ICAI Revised Scheme for Non-Corporate Entities (2021), Level III relaxations

Question 9 · 2 marks · Chapter 3: Applicability of Accounting Standards · medium

Scenario. A non-corporate entity has a turnover of ₹45 crore and borrowings of ₹12 crore for the immediately preceding year. What is its classification level under the ICAI 2021 revised scheme?

A partnership firm has a turnover of ₹45 crore and bank borrowings of ₹12 crore. Under the 1 April 2024 scheme, what is its status regarding AS 18?

1. AS 18 is wholly exempt because turnover does not exceed ₹50 crore.
2. AS 18 is applicable in full because borrowings exceed the ₹10 crore sub-threshold. (correct answer)
3. AS 18 is exempt because the firm is classified as a Large Entity.
4. AS 18 is optional at the discretion of the statutory auditor.

Answer: B — AS 18 is applicable in full because borrowings exceed the ₹10 crore sub-threshold.

Explanation. For an MSME to avail full exemption from AS 18, BOTH conditions must be satisfied: turnover ≤ ₹50 crore AND borrowings ≤ ₹10 crore. Since borrowings (₹12 crore) exceed ₹10 crore, the firm does not qualify for the AS 18 exemption and must comply with AS 18.

Where it goes wrong. Looking only at the turnover condition (₹45 crore ≤ ₹50 crore) and overlooking the borrowing limit breach (₹12 crore > ₹10 crore).

Authority. ICAI Revised Scheme for Non-Corporate Entities (2021), Level II criteria

Question 10 · 2 marks · Chapter 3: Applicability of Accounting Standards · medium

Scenario. For a Level IV non-corporate entity, which AS 26 Intangible Assets paragraphs are relaxed?

Which of the following Accounting Standards is applicable in its entirety with NO exemptions or relaxations to any non-corporate MSME?

1. AS 2 Valuation of Inventories (correct answer)
2. AS 3 Cash Flow Statements
3. AS 17 Segment Reporting
4. AS 20 Earnings per Share

Answer: A — AS 2 Valuation of Inventories

Explanation. AS 2 (Valuation of Inventories) is fundamentally applicable to all entities without any exemption or relaxation. In contrast, AS 3, AS 17, and AS 20 are wholly exempt for MSMEs.

Where it goes wrong. Assuming fundamental measurement standards like AS 2 have MSME carve-outs.

Authority. AS 26 Intangible Assets paras 90(d)(iii), 90(d)(iv), 98; ICAI Revised Scheme for Non-Corporate Entities (2021), Level IV relaxations

Question 11 · 2 marks · Chapter 3: Applicability of Accounting Standards · hard

Scenario. A non-corporate entity has a turnover of ₹8 crore and borrowings of ₹2.5 crore for the immediately preceding year. What is its classification level under the ICAI 2021 revised scheme?

A non-corporate MSME has turnover of ₹8 crore and borrowings of ₹2.5 crore. Which statement regarding AS 28 Impairment of Assets is correct?

1. AS 28 applies in full including present value discounting for value in use.
2. AS 28 is wholly exempt because turnover is ≤ ₹50 crore and borrowings are ≤ ₹10 crore. (correct answer)
3. AS 28 applies, but value in use can be measured using any subjective estimate.
4. AS 28 is exempt only if the entity operates in the service sector.

Answer: B — AS 28 is wholly exempt because turnover is ≤ ₹50 crore and borrowings are ≤ ₹10 crore.

Explanation. Under the 1 April 2024 scheme, an MSME whose turnover does not exceed ₹50 crore and borrowings do not exceed ₹10 crore is wholly exempt from AS 28 (Impairment of Assets) in its entirety.

Where it goes wrong. Applying the partial relaxation (measuring value in use on reasonable estimate) when the entity actually qualifies for total exemption.

Authority. ICAI Revised Scheme for Non-Corporate Entities (2021), Level III criteria

Question 12 · 2 marks · Chapter 3: Applicability of Accounting Standards · hard

Scenario. A Level II non-corporate entity has a turnover of ₹40 crore and borrowings of ₹8 crore. Is AS 18 Related Party Disclosures applicable to it?

A non-corporate MSME has a turnover of ₹40 crore and borrowings of ₹8 crore. It enters into related-party transactions with a partner's proprietary concern. Is AS 18 disclosure mandatory?

1. Yes, because transactions with key management personnel are never exempt.
2. No, because the entity qualifies for full exemption from AS 18 as an MSME with turnover ≤ ₹50 crore and borrowings ≤ ₹10 crore. (correct answer)
3. Yes, because AS 18 is mandatory for all partnership firms regardless of turnover.
4. No, but only if approved in writing by the Registrar of Firms.

Answer: B — No, because the entity qualifies for full exemption from AS 18 as an MSME with turnover ≤ ₹50 crore and borrowings ≤ ₹10 crore.

Explanation. Because turnover (₹40 crore ≤ ₹50 crore) and borrowings (₹8 crore ≤ ₹10 crore) both remain within the prescribed sub-limits, the entity is completely exempt from the requirements of AS 18 Related Party Disclosures.

Where it goes wrong. Assuming related-party disclosure is non-negotiable for all business enterprises.

Authority. ICAI Revised Scheme for Non-Corporate Entities (2021), Level II criteria

Question 13 · 2 marks · Chapter 3: Applicability of Accounting Standards · medium

Scenario. A non-corporate entity has a turnover of ₹5 crore and borrowings of ₹1 crore. What is its classification level under the ICAI 2021 revised scheme?

Under the 1 April 2024 non-corporate classification, what is the two-consecutive-years rule regarding transitional status?

1. An entity moving from Large Entity to MSME status can avail MSME exemptions only after remaining an MSME for two consecutive years. (correct answer)
2. An entity must wait two consecutive years before complying with Large Entity standards after crossing the threshold.
3. An entity can change its status every quarter based on rolling figures.
4. The two-consecutive-years rule applies only to corporate SMCs, not non-corporate entities.

Answer: A — An entity moving from Large Entity to MSME status can avail MSME exemptions only after remaining an MSME for two consecutive years.

Explanation. An entity that was previously classified as a Large Entity and subsequently falls below the thresholds can avail exemptions and relaxations available to MSMEs only if it remains an MSME for two consecutive years. This prevents frequent fluctuations in accounting policies.

Where it goes wrong. Believing that status transitions operate immediately in both directions.

Authority. ICAI Revised Scheme for Non-Corporate Entities (2021), Level IV criteria

Question 14 · 2 marks · Chapter 3: Applicability of Accounting Standards · hard

Scenario. A Level III entity has an impairment loss on its machinery. What relaxation is available under AS 28 Impairment of Assets?

An MSME has turnover of ₹80 crore and borrowings of ₹15 crore (exceeding the ₹50 cr / ₹10 cr sub-limits, but within ₹250 cr / ₹50 cr). How does AS 28 apply?

1. AS 28 is completely exempt in its entirety.
2. AS 28 applies in full with no relaxations.
3. AS 28 applies; however, the entity may determine value in use on the basis of a reasonable estimate rather than the present value technique, and need not make detailed disclosures under paragraph 121(g). (correct answer)
4. AS 28 is replaced by AS 10 depreciation rules.

Answer: C — AS 28 applies; however, the entity may determine value in use on the basis of a reasonable estimate rather than the present value technique, and need not make detailed disclosures under paragraph 121(g).

Explanation. For MSMEs that exceed the ₹50 crore turnover or ₹10 crore borrowing sub-limits, AS 28 is not wholly exempt. Instead, a relaxation is granted: value in use may be measured on the basis of a reasonable estimate rather than the present value technique, and paragraph 121(g) disclosures are not mandatory.

Where it goes wrong. Failing to distinguish between total exemption (for smaller MSMEs) and partial measurement relaxation (for larger MSMEs).

Authority. AS 28 Impairment of Assets para 121(g); ICAI Revised Scheme for Non-Corporate Entities (2021), Level III relaxations

Question 15 · 2 marks · Chapter 3: Applicability of Accounting Standards · hard

Scenario. A Level I non-corporate entity wants to avail the AS 15 relaxation for defined benefit plans. Is it allowed?

If a non-corporate MSME avails any exemption or relaxation granted by ICAI, what disclosure must it make in its financial statements?

1. No disclosure is required because MSME status is determined objectively.
2. It must disclose by way of a note that it is an MSME and that it has availed exemptions or relaxations, specifically identifying the relevant Accounting Standards. (correct answer)
3. It must file a disclosure return with NFRA within 30 days of the balance sheet date.
4. It must state that it does not comply with GAAP.

Answer: B — It must disclose by way of a note that it is an MSME and that it has availed exemptions or relaxations, specifically identifying the relevant Accounting Standards.

Explanation. An MSME that avails any exemption or relaxation should disclose that fact by way of a note in its financial statements, explicitly stating that it is an MSME and citing the specific Accounting Standards in respect of which exemptions or relaxations have been availed.

Where it goes wrong. Thinking that claiming standard exemptions removes the obligation to disclose the availed relaxations in the notes.

Authority. ICAI Revised Scheme for Non-Corporate Entities (2021), Level I applicability