Financial Accounting and Reporting GUIDELINES FOR CASE STUDIES Objectives of the case assignment: The main objectives for the inclusion of case assignments in the financial reporting courses are: 1. To involve students in group research, analysis and decision-making. 2. To introduce problems that do not have definitive answers -- that is, there may be several alternatives, but no one right answer. 3. To familiarize students with accounting pronouncements, databases, and other resource materials. 4. To improve student skills to identify, interpret and apply authoritative accounting literature and to identify prevalent accounting practices on a given accounting issue. Assignment: Students are to form groups of no more than three members each, analyze the case, research FASB Codification and other relevant print and web resources applicable to the case and submit a written analyses addressing requirements at the end of the case. Written analyses should be approximately 5-7 pages, double spaced (not including exhibits, pro-forma financial statements, electronic search results, bibliography, etc.) with 1-inch margins on all sides and 12-point font. Bibliography and Exhibits (Not included in the page limit) must be included. Please see attached sheet titled SAMPLE BIBLIOGRAPHY to know the appropriate form for the presentation of bibliography. The bibliography must be presented in alphabetical order. You do not need to frame your answers in an overall framework (like the ones commonly followed for management or business strategy cases) such as introduction, problem definition, alternatives, analysis, and recommendations. Instead, just answer the requirements provided to you. While division of work among group members is understandable for a project like this, please note that it is a group project where you learn from multiple perspectives and viewpoints. Moreover, answer to the requirement assigned to you by the group might depend on, or be an extension of the answer to, another requirement assigned to a different group member. It is advisable to have a meeting of the entire group at least a week before the submission deadline where everyone presents his/her tentative answers to the group, understands the answers developed by other members of the group and incorporates them in his/her answers as needed. Also, please note that you are submitting one wholesome, integrated write-up for the entire group. Make sure that it reads and appears like a coherent group document. While you are welcome to discuss the case with other members of your group, discussions with members of other groups are NOT encouraged. You can do outside research of materials available on the case, and bring it in your write-ups, but it is not required. Grading Criteria: Analyses will be graded on the following: 1. Identification of relevant issues. 2. Identification and analysis of alternatives. Correctness of numbers derived and appropriateness of rati.

1. Financial Accounting and Reporting
GUIDELINES FOR CASE STUDIES
Objectives of the case assignment:
The main objectives for the inclusion of case assignments in the
financial reporting courses are:
1.
To involve students in group research, analysis and decision-
making.
2.
To introduce problems that do not have definitive answers --
that is, there may be several alternatives, but no one right
answer.
3.
To familiarize students with accounting pronouncements,
databases, and other resource materials.
4.
To improve student skills to identify, interpret and apply
authoritative accounting literature and to identify prevalent
accounting practices on a given accounting issue.
Assignment:
Students are to form groups of no more than three members
each, analyze the case, research FASB Codification and other
relevant print and web resources applicable to the case and

2. submit a written analyses addressing requirements at the end of
the case.
Written analyses should be approximately 5-7 pages, double
spaced (not including exhibits, pro-forma financial statements,
electronic search results, bibliography, etc.) with 1-inch
margins on all sides and 12-point font. Bibliography and
Exhibits (Not included in the page limit) must be included.
Please see attached sheet titled SAMPLE BIBLIOGRAPHY to
know the appropriate form for the presentation of bibliography.
The bibliography must be presented in alphabetical order.
You do not need to frame your answers in an overall framework
(like the ones commonly followed for management or business
strategy cases) such as introduction, problem definition,
alternatives, analysis, and recommendations. Instead, just
answer the requirements provided to you.
While division of work among group members is understandable
for a project like this, please note that it is a group project
where you learn from multiple perspectives and viewpoints.
Moreover, answer to the requirement assigned to you by the
group might depend on, or be an extension of the answer to,
another requirement assigned to a different group member. It is
advisable to have a meeting of the entire group at least a week
before the submission deadline where everyone presents his/her
tentative answers to the group, understands the answers
developed by other members of the group and incorporates them
in his/her answers as needed. Also, please note that you are
submitting one wholesome, integrated write-up for the entire
group. Make sure that it reads and appears like a coherent
group document.
While you are welcome to discuss the case with other members
of your group, discussions with members of other groups are
NOT encouraged. You can do outside research of materials
available on the case, and bring it in your write-ups, but it is
not required.

3. Grading Criteria: Analyses will be graded on the following:
1.
Identification of relevant issues.
2.
Identification and analysis of alternatives. Correctness of
numbers derived and appropriateness of rationale provided.
3.
Inclusion of specific recommendations and rationale behind
them.
4.
Quality and depth of research. Appropriate paraphrasing and
citations are required (i.e., FASB ASC 450-10-05-55)
5.
Quality of writing (grammar, spelling, punctuation, sentence
structure, etc.).
Cases versus homework problems:
Cases are not like homework problems. There is not a right
answer or a wrong answer, only well thought-out and poorly
thought-out answers. Another significant difference between
case and homework problems is that homework problems are
usually specifically related to the chapter material; cases, on the
other hand, may have issues in them that are not related to the
chapter material. A final difference is the significantly longer
time you will spend preparing for a case. Given that each of the
three students in a group has 15% of the course grade attached
to the case assignment, the case assignment carries an

4. equivalent of 45% of the entire semester’s grade for one
student. It is an important assignment with important learning
objectives. Accordingly, it requires significant time and effort.
Please plan ahead of time!
FASB Codification
To support your positions on issues raised in the case, you will
need to research the Financial Accounting Standards Board ASC
(Accounting Standards Codification). ASC is the single source
of authoritative nongovernmental U.S. generally accepted
accounting principles (US GAAP). The structure used in ASC
is topic (e.g., leases), subtopic (e.g., Operating Leases), section
(e.g., Disclosure), and subsection (e.g., Lessors).
Our institution has secured a professional subscription to FASB
ASC which allows sophisticated search options and full access
to materials. Students and faculty can access ASC through a
link on the library’s web site (click on databases and then on
FASB codification). If you like, you can review FASB’s
Learning Guide for Codification by accessing this link on the
FASB web site.
If you know the name and number of the accounting
pronouncement before the FASB Codification project, you can
also use the “cross-reference” feature available on the
Codification site to obtain the corresponding Codification
reference. For instance, if you want to know the Codification
references for FAS 34 on Interest Capitalization, from the
“cross reference” bar, select FAS as Standard type, 34 as
standard numbers and click ‘generate report’.
Researching FASB Accounting Standards Codification
(excerpts from FASB web site)
The Codification provides an entirely new method for
performing research that was not possible with previous
standards. In effect, the Codification has already completed a
portion of research through its topical organization and
grouping of the content by nature. Therefore, to take full

5. advantage of the system, users should adopt the research model
that leverages the Codification structure and reduces the amount
of research time.
Below are some high level steps to best leverage the
Codification:
1. Determine your topic of interest and the nature of the issue –
Based on our research, over 90% of users know their topic of
interest before they begin their research. The nature of your
issue (such as measurement, disclosure, and so forth) lets you
access just that nature of content.
2. Topic of interest is known –Browse, or jump (with GoTo), to
the Topic and identify the most relevant Subtopic. Access the
Section that relates to the nature of your issue. Once in the
Section, expand the table of contents within that Section to help
isolate your area of interest. In some cases, you may know the
Topic, but may want to view a specific Section for the entire
Topic. For example, you may want to review all disclosure
requirements for the Receivables Topic. In that case, use the
Join Sections feature.
3. Broad research where a specific topic is not known – Start by
browsing the Areas in the left navigation to get some
perspective. After you identify a Topic, follow the approach in
the preceding steps. While it may sound like more steps, topical
browsing reduces the time otherwise spent using text searches
and multiple refinements of search expressions.
4. Narrow research related to unique terms or phrases –
Determine whether you are searching for independent word(s)
or an exact phrase. If searching for a phrase, use the Advanced
Search feature. After receiving your search results, use the
"narrow by" features provided on the Search Results page(s) or
refine accordingly.

6. Referencing FASB Codification in case write-ups
Provided below is an example of how FASB Codification can be
referenced in the case write-ups. Please note that this is just an
illustrative example from another case on another issue.
Alternative ways are acceptable and welcome.
Discuss whether or not management’s proposals to recognize (i)
the estimated non-redemption of the restricted gift cards issued
during the special Thanksgiving promotion and (ii) the
estimated gift card ‘breakage’ would comply with GAAP.
Management’s proposal to recognize the remaining amount of
unredeemed gift cards ($2,000,000) as 2008 sales violates
GAAP. MVS does not have prior experience of running a
special promotion like this and therefore non-redemption cannot
be reliably estimated. Students can analogize this situation to
FASB ASC paragraph 605-50-25-4 which states that “if the
amount of future refunds cannot be reasonably and reliably
estimated, a liability shall be recognized for the maximum
potential amount of the refund”. Among the factors that might
impair a company’s ability to make a reasonable and reliable
estimate per FASB ASC paragraph 605-50-25-4 is the absence
of historical experience with similar types of sales incentive
programs with similar products. Only when these gift cards
expire after six months, MVS can recognize in 2009 the balance
outstanding in the unredeemed gift cards as other income.
Determining the applicable GAAP for financial reporting of
estimated gift card ‘breakage’ can be tricky. Researching FASB
Codification yields no results because authoritative guidance on
the issue is not available. There are numerous situations in
which authoritative guidance is unavailable because of resource
constraints on the accounting standard-setters. Unless the issue
is pervasive, and accounting practices divergent, standard-

7. setters are unlikely to address it. Even in the cases where the
issue is addressed, a significant time gap generally exists before
a final standard is issued given the deliberative processes
followed in accounting standard-setting. Meanwhile, as stated
in FASB ASC paragraph 105-10-05-2: “If the guidance for a
transaction or event is not specified within a source of
authoritative GAAP for that entity, an entity shall first consider
accounting principles for similar transactions or events within a
source of authoritative GAAP for that entity and then consider
non-authoritative guidance from other sources.”
Literature Search other than FASB Accounting Standards
Codification
Definitive accounting standard is not available on each issue in
FASB Codification. Where necessary, you must supplement the
FASB Codification research with additional research on
Conceptual Framework, International Financial Reporting
Standards, International Financial Reporting Interpretation
Committee (IFRIC) pronouncements, journal articles, SEC
materials not included in FASB Codification, etc. Preferably,
you should not quote from any introductory, intermediate, or
advanced accounting text because they typically do not
constitute authoritative guidance. Similarly, newspaper articles
and internet sources such as Wikipedia are not considered
authoritative sources.
Students can use other databases also for research purposes.
One commonly used database (available on Bentley Library’s
website) is Accounting Research Manager. It contains
accounting, auditing, governmental, internal controls and SEC
information as well as primary source data and it indexes
accounting and auditing standards as well. However, please
note that not all information in that database constitutes
authoritative support. In addition to authoritative standards, the
database also includes interpretive and proposal-stage
information, which is not authoritative.

8. Researching IFRS (International Financial Reporting Standards)
Please note that IFRS comprise of all the accounting
pronouncements issued by IASB (International Accounting
Standards Board) and its predecessor, IASC (International
Accounting Standards Committee). As such, they include all of
the following pronouncements:
· IFRS (International Financial Reporting Standards), IFRS for
SMEs (Small and Medium Enterprises) and IFRIC (International
Financial Reporting Interpretations Committee) issued by IASB
· IAS (International Accounting Standards) and SIC (Standards
Interpretations Committee) issued by IASC.
Users can log onto the IASB web site (www.ifrs.org) to obtain
free access to the versions of IFRSs (including interpretations)
and the application guidance that is an integral part of those
standards. Free registration is required.
However, unlike FASB Codification, there is no simple way to
research IFRSs on the IASB web site. It might be more
efficient to do a Google search (using the topic of interest as the
search term) to obtain the exact reference of the
pronouncement, and then get the text of the pronouncement
from the IASB web site. For accessing the authoritative IASB
literature on the illustrative examples, implementation
guidance, and bases for conclusions that accompany, but are not
part of, the standards the user needs to have a paid subscription
to eIFRS. At Bentley, you can obtain all these documents by
accessing the CCH database titled ‘Accounting Research
Manager’ on the library web site. In addition to IASB’s, it
includes literature from AICPA, FASB, SEC and PCAOB as
well.
Oftentimes, the web sites of international accounting firms have
useful commentaries and illustrative guidance available free of

9. charge on their web sites (IASplus.com, for instance).
Although not authoritative, such guidance on accounting issues
is easy to understand especially because of the illustrations
provided.
Writing help is available
If you experience difficulty in writing a quality paper, make an
appointment with a consultant in The English Writing Center.
Misspelled words will not be viewed favorably. A poorly
written paper will be severely penalized. No late papers will be
accepted for any reason. It will be assumed that all members of
the group contributed equally to the analysis unless the
members indicate otherwise.
Academic Honesty Policy
You can discuss this case study with other members of your
group, but each group is responsible for completing its own
write-up. Collaborating with other groups on case study write-
ups would be considered a violation of academic honesty system
at Bentley.
SAMPLEBIBLIOGRAPHY
Bromwich, M., R. Macve, and S. Sunder. 2008. Conceptual
framework: Revisiting the basics—A comment on Hicks and the
concept of “income” in the conceptual framework. Paper
presented at American Accounting Association Annual Meeting,
Session 6.1, Anaheim, CA, August 5.
Coopers & Lybrand. 1988. Accounting for Income Taxes:
Focusing in on FASB Statement 96. Coopers and Lybrand.
FASB Accounting Standards Codification. 360-20-55-6.
Methods of Accounting for Real Estate Sales when Criteria for
Full Accrual Method Are Not Met.
___________. FASB Accounting Standards Codification. 605-
10-S99-1. Revenue recognition.
Gujarathi, Mahendra, and R.E. Hoskin. 1992. Evidence of
Earnings Management by the Early Adopters of SFAS 96.

10. Accounting Horizons (December): 18-31.
International Accounting Standards Board (IASB). 2004. IFRS
No 5: Non-Current Assets Held for Sale andDiscontinued
Operations. Available at:
http://www.iasb.org/NR/rdonlyres/27621086-6D5D-4BD5-
8C7C-F3B0788D9EFF/0/IFRS5.pdf
Securities and Exchange Commission. 2007. Chairman’s
address to the SEC Roundtable on International Financial
Reporting Standards. Available at:
http://www.sec.gov/news/speech/2007/spch030607cc.htm.
Case for Spring 2019:
Adoption of Ind AS 115 by Prestige Products
Submission deadline:
April 23, 2019. Please deposit an electronic copy (one per
group) in the assignments tab on Bb and submit one printed
copy (per group) to the instructor at the beginning of the class
of April 23, 2019.
7
1
Adoption of Ind AS 115 by Prestige Projects: Smooth or
Serendipitous?1
Sunder was unsure if the April 11, 2018 meeting of the audit
committee of Prestige Projects
Limited (hereafter, Prestige, or the Company) went well. The
main agenda item for the meeting
was to finalize the appointment of new external auditors.
Although its current auditors Omega
and Company (hereafter, Omega) had served Prestige well for

11. the past ten years, auditor rotation
became necessary per a new rule of the Companies Act, 2013.
Section 139(2) of the Act required
all public and designated private companies in India to change
their audit firms after two
consecutive terms of five years each.
Prestige started the process to replace Omega with the
formation of a task force consisting of
Sunder, the CFO of Prestige, Manoj, the controller, and Jayant,
the head of its internal audit. The
task force met several times to develop a robust and fair process
for selecting the new auditors.
It did not consider Gamma and Company since the firm was
already doing the internal audit work
for Prestige. The choice thus boiled down to the remaining two
of the Big 4 accounting firms,
Sigma and Company (hereafter, Sigma), and Epsilon and
Company (hereafter, Epsilon), both of
whom submitted competitive proposals.
The task force reviewed the proposals of Sigma and Epsilon,
their partner team, industry
expertise, audit approach and technological sophistication. It
recommended to the audit
committee that Sigma be appointed as the external auditors for
an initial five-year term. In the
meeting of April 11, 2018, a Sigma partner made a presentation
and answered questions from
the committee. At the conclusion of the meeting, the committee
endorsed the recommendation
of the task force and forwarded it to Prestige’s board of
directors for its approval.
After the Board meeting, the following conversation ensued
between Balakrishnan (chair, audit

12. committee) and Sunder (CFO):
Sunder: I am a bit concerned about a comment the Sigma
partner made to me. He
suggested that down the line, Prestige might need to consider a
change in the
revenue recognition policy.
Balakrishnan: Anything wrong with our existing policy? Or,
does Sigma know something that
we don’t? I am concerned that a change in our revenue
recognition policy may
have a significant effect on our income.
1 This case is developed by Professors Samir K. Barua and
Mahendra R. Gujarathi for the purpose of class discussion.
It is based on a real-world situation. The names of the auditing
firms, company and characters in the case are
disguised as are the company’s financial statement numbers.
Please do not quote without authors’ permission.
2
Sunder: Nothing wrong with our existing revenue recognition
policy. We recognize
revenues using the percentage of completion method,
determined on the basis of

13. contract milestones achieved during the year for which clients
are billed. If
anything, our policy is more conservative than our industry
peers. As for the
effect on income, we will know only when we run the numbers.
Balakrishnan: Our previous auditors [Omega] were OK with our
existing policy, weren’t they?
Sunder: Yes. They were comfortable with our revenue
recognition policy and our use of
the CTC [Costs-to-completion] method for recording contract
execution expenses.
In their opinion, both complied with the accounting standard for
Construction
Contracts, Ind AS 11.2
Balakrishnan: If I remember correctly, Ind AS 11 does not use
the term CTC, right?
Sunder: Right. Ind AS 11 does not mention CTC, but our
income does get affected by CTC.
Let me explain how we calculate CTC. It consists of (a)
cumulative costs incurred
on a project, and (b) estimated future costs to complete the
project. By
subtracting CTC from the total contract price, we compute the
CTC margin
[absolute amount] and CTC margin percentage [CTC margin as
a percentage of
total contract price] for each contract at the end of an
accounting period.

14. Balakrishnan: Please remind me how CTC impacts income. Is it
because CTC determines the
contract execution expenses in our income statement?
Sunder: Yeah, CTC determines our contract execution expenses.
Let me explain. We first
calculate the cumulative “costs deemed to be incurred” (i.e.,
deemed costs),
using the CTC margin percentage. For example, if the
cumulative billings on a
2 Ind AS stands for Indian Accounting Standards that are
converged with the International Financial Reporting
Standards (IFRS). Prestige adopted Ind AS 11 from the
required date of April 1, 2016. Ind AS 11 is almost identical to
International Accounting Standards (IAS) #11 (Construction
contracts). A copy of the Ind AS 11 can be accessed at:
http://www.mca21.gov.in/Ministry/pdf/20IndAS11_2016.pdf.
Recently, the IASB and FASB jointly released a new standard
on revenue recognition, IFRS 15, and ASU 2014-9,
respectively. At that time, the IASB withdrew IAS 11 and
replaced it by IFRS 15, the generic revenue recognition
standard. IFRS 15 (International standard), ASU 2014-09 (U.S.
standard) and Ind AS 11 (Indian standard) are nearly
identical.
https://www.taxmann.com/blogpost/2000001636/indian-
accounting-standards.aspx
https://www.taxmann.com/bookstore/professional/international-

15. financial-reporting-standards-ifrs-set-in-three-parts.aspx
http://www.mca21.gov.in/Ministry/pdf/20IndAS11_2016.pdf
3
project are ₹280, and the CTC margin is 10% (i.e., ₹28), the
cumulative costs
deemed to be incurred would be ₹252 (₹280 - ₹28).3
Balakrishnan: I get it. And for the current year, the contract
execution expenses would simply
be the difference between the cumulative deemed costs and the
contract
execution expenses recognized, if any, in the prior years, right?
Sunder: Absolutely.
Balakrishnan: But the actual costs can be different from the
deemed costs. How is the
difference treated for financial reporting?
Sunder: Actual costs and deemed costs are rarely the same. If
the actual costs are higher
than the deemed costs, we debit contracts-in-progress for the
excess of actual
costs over the deemed costs, and include the excess in
inventory. For instance, if
the actual costs in the example I just mentioned were ₹270, we
record contracts-
in-progress of ₹18 (₹270 - ₹252) and include them as inventory.

16. If the actual
costs are lower than the deemed costs, we record a provision for
contractual
expenses for the excess of deemed costs over the actual costs.
As an example, if
the actual costs incurred were ₹250, we record a provision for
contractual
expenses of ₹2 (₹252 - ₹250).4
Balakrishnan: I don’t see any problem with this. What I don’t
understand is how the same
policy is acceptable to one auditing firm but not to the other?
And they both are
members of the Big 4! I suggest that we schedule a meeting of
the audit
committee with Sigma.
The next day, Sunder called Sigma’s engagement partner on
Prestige. He asked about the
partner’s reservation about Prestige’s revenue recognition
policy. Sunder learned that the
reservation came from the firm’s subject matter expert, a senior
partner at Sigma’s headquarters.
During the client acceptance protocol at the firm, the senior
partner had familiarized himself with
the Company and its business (Exhibit 1). He had also reviewed
Prestige’s most recent annual
report (2017-18), and examined its financial statements (Exhibit
2) and select footnotes (Exhibit
3 ₹ is Indian currency. The average exchange rate in 2018 was
$1 = ₹70.

17. 4 If a project is likely to result in a loss, the entire loss would
be recognized cumulatively at the end of the year. A
part of that loss would be the estimated future loss which will
be debited, with an equivalent credit to the provision
for future losses.
4
3).5 Sunder and the engagement partner agreed that a meeting
with the audit committee would
be scheduled next week and it will be the senior partner of
Sigma (firm’s subject matter expert)
who would attend the meeting to answer questions from the
committee. The following
conversation took place in the audit committee meeting:
Sunder: Thank you everyone for agreeing to meet at such short
notice. Mr. Chair, would
you like to begin?
Balakrishnan: Sure. Am I understanding it correctly that Sigma
disagrees with our existing
method of revenue recognition. Are you concerned that it is
output based?
Sigma Partner: Not exactly. When the outcome of a contract
can be estimated reliably, Ind AS 11
requires the use of percentage of completion (POC) for revenue

18. recognition. The
POC can be measured either using the output method or the
input method.
Prestige currently records revenues when clients are billed upon
completion of
milestones specified in the contract. It is a variant of the output
method. While
this method does not violate the provisions of Ind AS 11, it
ignores the work
completed between two milestones. It is thus a conservative
assessment of
revenue for a period.
Sunder: But isn’t being conservative good?
Sigma Partner: I am not sure. In its quest to be conservative,
Prestige’s financial statements
might fail to portray a true and fair picture of its financial
position and
performance. The work done between the milestones usually
converts into
billings and cash collection. Therefore, it should be recognized
as revenue.
Balakrishnan: Do you have any other reservations about our
accounting policy?
Sigma Partner: We have some concerns about what Prestige
includes in its inventory. Contracts-
in-Progress [CIP], for instance. We don’t think it qualifies for
inclusion in
‘inventory’. Non-conformance with the industry practice is also

19. an issue Prestige
needs to address. We have several clients in the construction
industry and almost
every one records actual costs, not deemed costs, as contract
execution
expenses.
5 Prestige’s fiscal year starts on April 1, and ends on March 31
of the following year. Thus, its fiscal year 2017-18
began on April 1, 2017 and ended on March 31, 2018.
5
Sunder: What’s wrong with being different? As a private
company, we don’t face as many
pressures from the market, and we can afford to be
conservative.
Sigma Partner: That is OK, but your accounting is not easy to
understand. Just because Prestige
has incurred more costs than it should have (i.e., its actual costs
exceed the
deemed costs), the excess doesn’t become ‘inventory’.
Similarly, when the actual
costs of a project are lower than the deemed costs, Prestige
debits contract
execution expenses and credits provision for contractual
expenses. Auditing
these cost provisions could be tricky. I do not see the future

20. cost incurrence
being contractual. Contract costs keep changing and without
the supporting
documentation, the provisions will be difficult to audit.
Sunder: So, what would be an alternative?
Sigma Partner: Prestige could record a reduction in revenues,
instead of an increase in expenses.
Revenues in the construction industry are oftentimes uncertain
due to a variety
of factors, including contract modifications and approval
thereof by the clients.
Either way, the effect on the bottom line would be the same.
Sunder: But wait a minute. It will hit our top line, wouldn’t it?
That will be a difficult
proposition for me to sell to my boss [Prestige’s CEO] and to
our business unit
heads.
Sigma Partner: I hear you, but recording expenses and a related
provision would not constitute
sound accounting, and neither would including in inventory the
excess of actual
costs over the deemed costs.
Balakrishnan: But our previous auditors - Omega - had no issues
with our approach.

21. Sigma Partner: That is surprising. What did they have to say?
Sunder: They agreed that we incur costs specific to a project
and in almost all cases those
costs are recoverable from the clients. Our history of cash
collections supports
this assertion. As such, these costs are no different from the
Work-in-Progress in
a manufacturing context. Omega was fine with our reporting
them as inventory
on the balance sheet.
6
Sigma Partner: I understand what you are saying. But the
position of our firm on this issue is
different. Contracts-in-progress, as determined by Prestige,
includes the value of
work done, but not billed. It cannot be considered inventory.
Sunder: OK, if not Contracts-in-progress inventory, what should
we record it as?
Sigma Partner: Other current assets, maybe.
Sunder: But recording them as other current assets would put
our working capital

22. finances in jeopardy. Most banks provide working capital
financing only against
‘qualified’ current assets such as inventory and debtors [trade
receivables]. Also,
won’t we need to adjust our books to effect the change?
Sigma Partner: Yes, per the existing accounting standards, the
change will require a retrospective
application.
Sunder: I will ask Swati, the head of our corporate finance team
[Head, CF] regarding our
loan agreements and the potential effect of this change on our
bank borrowing.
But do you realize how much work it would be for my team to
restate prior years’
financials?
Sigma Partner: I understand. But at Sigma, we insist on our
clients’ accounting being sound and
their financial statements being representationally faithful. In
the current
environment, we don’t want to be on the wrong side of an
accounting issue. But
wait a minute … I have another thought.
Sunder: What is it? ANYTHING else you suggest has to be
better than the verdict you
seem to be issuing so far.

23. Sigma Partner: As you perhaps know, India has recently adopted
a new revenue recognition
standard [Ind AS 115].6 Maybe you can change your
accounting policy from that
date. It will allow you to make a one-time adjustment in your
books by choosing
6 A copy of the Ind AS 115 is available at:
http://mca.gov.in/Ministry/pdf/INDAS115.pdf . It is almost
identical to the
new revenue recognition standard jointly issued by IASB (IFRS
15) and FASB (Accounting Standards Update 2014-09).
http://mca.gov.in/Ministry/pdf/INDAS115.pdf
7
‘modified retrospective’ application rather than full
retrospective application.7
And I would strongly recommend you to move to the cost
(input-based) method
to determine the percentage of completion. That would also be
in line with the
industry.
Balakrishnan: Thank you for your inputs and insights. I think
we are clear about the choices we

24. have. We will take a call after further reflection.
Sunder’s restlessness continued throughout the day. Late in the
evening, he reached home, still
not convinced of the Sigma’s position on the issue. He worried
about its implications and decided
to bring the matter to the attention of Prestige’s audit committee
in its next meeting. To prepare
for that discussion, he called Prestige’s Controller Manoj
(Controller), and the Company’s Head of
Corporate Finance, Swati (Head, Corporate Finance) to his
office. He debriefed them about the
suggestions of the Sigma partner. Below are the excerpts from
that meeting:
Sunder: Guys, what do you think? Feel free to disagree but I
think Sigma does not
understand the disaster this is going to spell for Prestige.
Swati, am I right that
this will put our bank financing in jeopardy?
Head, CF: Absolutely. For working capital, most of the lead
bankers on our projects have a
policy of lending only against (a) inventory not financed by
creditors [i.e.,
inventory minus creditors] and (b) debtors [trade receivables].
The banks loan
funds against these two assets after subtracting the specified
margins, 25% for
inventories and 20% for debtors, for example. If the amount
due to creditors (i.e.
inventory financed by creditors) exceeds the amount of

25. inventory, it results in a
reduction of drawing power otherwise available [i.e., from other
sources] to us
from the banks.
Sunder: What about unbilled revenues and other current assets
on our balance sheet?
Head, CF: So far, they have been reluctant but I must admit that
lately, they have been
providing some funding against these two assets, albeit very
limited.
7 ASU 2014-09 does not use the terms ‘modified retrospective’
and ‘full retrospective’ but allows both these
treatments, i.e. a company can record the transition effect (a)
retrospectively with the cumulative effect recognized
at the date of initial application, or (b) retrospectively to each
prior reporting period presented.
8
Sunder: Manoj, accounting-wise, should we do what Sigma is
suggesting? And how much
time will it take? I don’t want to skimp on the help our
operations people need
from us, just to take care of the compliance issues.

26. Controller: Retrospective applications are always headaches and
huge time-sinks. Thankfully,
Sigma has suggested a way out for us. We can transition to Ind
AS 115, and start
measuring the percentage of completion by the costs incurred.
Our policy would
be consistent with our competitors. With conformance to the
industry practice, I
won’t have to explain every time why we are different.
Sunder: Adoption of Ind AS 115 is mandatory for us from April
1, 2018. Manoj, how would
the accounting mechanics work with what you are suggesting?
Controller: The accounting would be simple. We will compute
POC by dividing the
cumulative costs incurred on a project by the total of (a) costs
incurred to date
and (b) future estimated costs. If POC at the end of the year is
30%, cumulatively
we will recognize 30% each of revenues, expenses and profits.
Subtracting their
respective amounts recognized in the prior periods, we can
derive the amounts
for the current year. Of course, if a project is likely to result in
a loss, the entire
loss would be recognized cumulatively at the end of the year. A
part of that loss
would be the estimated future loss which will be debited, with a
corresponding
credit to provision for future losses.

27. Sunder: Wait a minute … now our revenues for the period might
not match our billings,
right?
Controller: Yes. If our billings are higher than the revenue
recognized, we will record
‘advance billings’ for the difference. On the contrary, if our
billings are lower than
the revenue recognized, we will record ‘unbilled revenues’ on
our books. That
would be pretty straightforward.
Head, CF: Straightforward alright, but are my bankers going to
loan me additional money
against unbilled revenues? Heck, no! The banks go strictly by
the lending
agreements, which define the financial statement terms very
rigidly. We could be
losing financing of several hundred crores if this happens.8
And raising that much
8 1 crore = 10 million.
9
money from alternative sources could be expensive, especially
in the current

28. market conditions.
Sunder: Swati, I understand your being upset. Let us hear other
arguments Manoj might
have for making the change. Manoj?
Controller: Sir, first and foremost, our new auditors will be off
our back. Secondly, it is a
simpler method. No wonder most companies in our industry
follow it. We should
also change our method of computing POC. Using the inputs-
based [cost-based]
method will better reflect our efforts and accomplishments.
And, if our POCs turn
out to be higher, we don’t have to wait to get our bonuses until
the clients are
billed and revenues are recorded.
Head, CF: That raises an alarm for me. I don’t want our
operations people to lose sight of
billings and collections. That can happen under the new
method.
Sunder: You’re right. I also wonder whether this will
incentivize our operations people to
deploy materials to the project sites ahead of the times required.
But we can
address such issues by strengthening our systems of internal
controls and
performance evaluation. Manoj, can you calculate the effect of

29. transition to Ind
AS 115 and using the new basis of computing POC? Do we
need any information
that we currently don’t have in our system?
Controller: We have the needed information, I am sure. But it
might be too much to digest if
I collate the data for each of our 100+ contracts currently in the
works.
Sunder: I understand. Maybe you should include the contracts
where the differences
between the existing policy and the proposed policy will likely
be large.
Controller: I can do that, Sir.
Sunder: And, more than the journal entry to record the effects
of transition, please
provide us information on the major income statement items
[revenues,
expenses and profits under the existing and the proposed
policy], as well as the
balance sheet items. The balance sheet items will include
contracts-in-progress
and provisions under the existing policy, and unbilled revenues
and advance
billings under the new policy. And Swati, can you please talk
to our lead bankers
one more time to explore whether they can lend us against
unbilled revenues?

30. 10
Head (CF): I will be happy to do that but frankly, I am not very
hopeful. I don’t see why they
would be willing to go against the CMA [Credit Monitoring
Arrangement] norms.9
Sunder: Give it a shot. We have nothing to lose. Try to
convince them that it is largely a
change in the labels, which should not affect their funding. For
the AA-rated
company that we are, I think they will make some concessions.
Head (CF): Sure sir, I will follow up with two of our lead
bankers next week and get back to
you.
Sunder: That would be good. Thank you both. Let us meet in
the later part of next week
to bring to conclusion the issues we discussed today. I am sure
that audit
committee chair [Balakrishnan] would like to be informed about
the financial
statement effects of adopting Ind AS 115. He also would like to
know possible
avenues to bridge the funding gap that may arise if our bankers
refuse to oblige.

31. Later Developments
Swati, Head of Corporate Finance, had conversations with two
of Prestige’s bankers both of
whom confirmed that they would continue with the existing
policy of lending against inventory
and debtors (trade receivables). However, they do not consider
unbilled revenues as a ‘qualified’
asset for lending purposes and therefore were reluctant to loan
funds against ‘unbilled revenues’
or ‘other current assets’. Nevertheless, she was told that in
recognition of Prestige’s high credit
rating (AA) and excellent repayment history, the bankers will
continue to lend a limited amount
against unbilled revenues. A ceiling of 10% of the total current
assets minus inventories and
debtors (trade receivables) will be put to lend against unbilled
revenues. In other words, if the
unbilled revenues are ₹200, total current assets are ₹650,
inventories are ₹100, and debtors are
₹50, the qualifying current assets would be ₹500 (₹650 – ₹100 –
₹50). The ceiling for funding
against unbilled revenues would be 10% of ₹500, i.e., ₹50.
Furthermore, the banks will apply a
higher margin (30%) and loan only ₹35 to Prestige (₹50 X (1 –
30%)) against unbilled revenues.
The lending norms and margins for funding inventory and
debtors (trade receivables) would
continue as before.
9 Credit Monitoring Arrangement is the data required to be
provided by a company to its bank for getting a loan and

32. for renewing or enhancing the existing loan. It is monitored by
the Reserve Bank of India.
11
Manoj, Prestige’s Controller, shared the data on major projects
for the purpose of ascertaining
the transition effect of Ind AS 115 (Exhibit 4). He classified
Prestige’s projects into three groups:
Category A (profitable contracts where Prestige has recorded
provision for contractual expenses),
Category B (profitable contracts where Prestige has recorded
contracts-in-progress inventory),
and Category C (onerous contracts, where Prestige would likely
make a loss and has recorded a
provision for future losses).
Requirements
Please note that Ind AS 115, IFRS 15, and ASU 2014-09 are
nearly identical accounting standards
on revenue recognition. Unless specifically identified in a
requirement, you can cite authoritative
pronouncement from any one of these sources that you prefer.
1. (a) If Prestige was a public company headquartered in the
U.S., would its revenue

33. recognition policy (described in Exhibit 3) comply with the U.S.
GAAP? Assume
that the work in process (work completed between the
milestones) is controlled
by Prestige’s clients. Cite applicable authoritative
pronouncement/s.
(b) To comply with Ind AS 115, would Prestige need to change
its existing accounting
policy? What changes, if any, would you recommend to its
accounting policy?
Why?
2. (a) Assume that Prestige decides to transition to Ind AS 115
as of April 1, 2018 and
that it also changes to the input-based (cost) method to measure
the percentage
of completion. Using data on major projects provided in Case
Exhibit 4, (a) present
journal entries for each category of contracts, under the existing
method and the
proposed method, and (b) compute the cumulative amounts of
select income
statement and balance sheet items in the table provided on the
next page.
(b) Present the journal entry to record the financial statement
effects of Prestige’s
transition to Ind AS 115. Assume an income tax rate of 35%
and that Prestige will
use the modified retrospective method.
(c) Has Prestige’s revenue and expense recognition policy for
construction contracts
indeed been conservative as claimed by its CFO? Explain.

34. 3. Using norms for short-term lending specified in the case, and
changes resulting from the
transition to the proposed accounting policy, compute the
amount of bank funding
available under the proposed accounting policy. Compute the
funding gap (i.e., funding
12
available under the existing accounting policy and the proposed
accounting policy), that
Prestige will need to address. The computation of Prestige’s
bank financing based on the
financial statements for fiscal 2017-18 is presented in Exhibit 5.
4. What would be your recommendation to Prestige for
addressing the funding gap? What
are the implications of your recommendation?
5. What are some other considerations that Prestige will need to
keep in mind in its
implementation of Ind AS 115?
Format for Answer to Requirement 2(a)
Category A Category B Category C Total
Cumulative Amounts of:
Construction Revenues (a)

35. Gross Profit/(Loss): (c) = (a) – (b)
Contracts-in-progress inventory
Provision for contractual expenses
Provision for future losses
Category A Category B Category C Total
Cumulative Amounts of:
Construction Revenues (d)
Gross Profit/(Loss) (f) = (d) – (e)
Unbilled revenues
Advance billing
Provision for future losses
Existing Policy
Proposed Policy
Contract execution expenses + Estimated
future loss on contracts (b)
Contract execution expenses + Estimated
future loss on contracts (e)
13

36. Exhibit 1
Description of Prestige Projects Limited, its Businesses and
Financing
Prestige Projects Limited is one of the fastest growing
infrastructure companies in India.
Established in 1989, it belongs to one of the established, diverse
and reputed business groups in
India. Prestige is a closely-held limited company; its stock is
not publicly traded. Six other
companies in the business group have about 75% ownership in
Prestige, the remaining 25% being
held by an overseas institution. Its debt is rated AA by each
credit-rating agency.
Prestige specializes in executing large and complex industrial
and urban infrastructure projects.
Most of these projects are EPC (Engineering, Procurement and
Construction) contracts in which
Prestige is responsible for all the activities from design,
procurement, construction,
commissioning, and handing over the projects to the customers.
The Company provides turnkey
end-to-end solutions to set up power generation plants, power
transmission and distribution
systems, fully integrated rail and metro systems, commercial
buildings and airports, chemical
process plants, water and waste water management solutions,
and complete mining and metal
purification systems.
Prestige has been growing fast, with revenues increasing from
₹780 crores in 2007-08 to ₹5,916
crores (approximately, $850 million) in 2017-18. At the end of

37. 2017-18, the Company’s order
book stood at ₹7,500 crores (approximately, $1.1 billion).
The main business units of the Company consist of Industrial
Systems, Power Transmission and
Distribution, Railway Transportation, Urban infrastructure
(metros, bridges, and tunnels), and
Quality Assurance Services. The Company has subsidiaries in
South East Asia, Middle East, and
Africa but most of its projects are based in India. Engineering
excellence, supply chain expertise
and construction management are the key strengths of the
Company. It uses world-class project
management techniques to deliver projects on time, and has
uncompromising standards of
safety and sustainability.
To date, Prestige has relied almost exclusively on short-term
sources of funding to meet its
capital requirements. Compared to its industry peers, its
reliance on long-term financing has
been strikingly low. Given its high credit rating, Prestige’s
ability to raise short-term financing at
attractive interest rates has been good, and so has been its
ability to roll over the short-term
financing arrangements when they mature. The situation in
April 2018 was different, however.
At that time, the world financial markets were showing signs of
a liquidity crunch and Indian
businesses, Prestige included, were faced with the prospects of
interest rate increases.
14

38. Income Statements for the year ended March 31 2018 2017
Revenue from operations 5,916 4,070
Contract execution and other operating expenses (5,615)
(3,855)
Operating income 301 216
Interest expenses (116) (97)
Profit before tax 185 119
Income tax expenses (66) (47)
Profit for the year 119 72
Balance Sheet as at March 31 2018 2017
Non-current assets:
Property, plant and equipment 227 189
Investments 43 37
Trade receivables 119 105
Other financial assets 41 12
Deferred tax assets 124 96
Other noncurrent assets 72 52
Total non-current assets 626 491

39. Current assets:
Inventories 1,618 1,018
Trade receivables 2,528 2,199
Cash and bank balances 541 239
Unbilled revenues 861 318
Other current assets 695 513
Total current assets 6,243 4,288
Total Assets 6,869 4,779
Equity:
Equity share capital 13 13
General reserve 221 221
Retained earnings 540 433
Total equity 774 667
Non-current liabilities (employee benefits) 51 53
Current liabilities:
Secured loans 643 98
Unsecured loans 340 345
Trade payables 2,394 1,696

40. Other (Accrued interest, payables for PPE, and employee
benefits) 114 75
Income tax payable 12 1
Advances from customers 1,749 1,377
Provision for contractual expenses 793 467
Total current liabilities 6,044 4,059
Total liabilities 6,094 4,112
Total Equity and Liabilities 6,869 4,779
Exhibit 2
Prestige Projects Limited: Summarized Financial Statements (₹
Crores)
15
Exhibit 3
Prestige Projects: Select Financial Footnotes
(1) Revenue Recognition
(i) Income from Construction Contacts
Contract revenue is comprised of the initial amount of revenue
agreed in the contract, the

41. variations in contract work, claims and incentive payments.
When the outcome of a construction
contract can be measured reliably, contract revenue and contract
costs are recognized depending
on the percentage of completion at the reporting date. The
percentage of completion is
determined on the basis of contract milestones achieved during
the year for which clients are
billed. No profit is recognized till at least 10% progress is
made on the contract. In the case of
projects in which we have little or no prior experience, no profit
is recognized till a minimum of
30% progress is achieved.
The percentage of completion method is applied on a
cumulative basis. The effect of a change in
the expected outcome of a contract is accounted for as a change
in accounting estimate. Its
effect is recognized in the income statement in the year in
which the change is made and in
subsequent years.
When the outcome of a construction contract cannot be
estimated reliably, revenue is
recognized only to the extent of contract costs for which
recovery is probable. When it is
probable that the total contract cost will exceed total contract
revenue, the expected loss is
recognized in the income statement in the year in which such
probability arises.
(ii) Revenue from sale of goods is recognized on dispatch of
goods when significant risks and rewards

42. of ownership are transferred to the buyer.
(iii) Income from services rendered is recognized when the
services are rendered.
(2) Inventories (lower of cost or realizable value) (₹Crores)
March 31, 2018 March 31, 2017
Raw materials 12 7
Work-in-progress 2 3
Contracts-in-progress 1,604 1,008
1,618 1,018
16
(3) Revenue from operations (₹Crores):
FY 2017-18 FY 2016-17
Income from contracts:
Supply of contract equipment and materials 1,686 1,559
Civil and erection works 4,053 2,383
Technical fee 6 0
Income from quality inspection services 124 98
Income from sale of BWRO
(Brackish Water Reverse Osmosis) units 17 8

43. Other operating revenues 31 21
5,916 4,070
(4) Unbilled revenues
Unbilled revenue represents value of work executed but not
billed to the client on the date
of the balance sheet. Among the reasons for not billing the
client include difficulty in
collating all of the supporting documents before the end of the
financial period.
17
Exhibit 4
Financial Data on Major Projects Categories as of March 31,
2018
(Amounts in ₹crore)
Item Category A Category B Category C Total
Total contract value 21,710 19,890 2,860 44,460
Total budgeted costs 19,760 19,240 3,120 42,120

44. Cumulative billings to date 13,026 6,962 2,431 22,419
Actual costs incurred to date 10,275 8,182 2,808 21,265
Additional estimated future costs 9,485 11,058 312 20,855
18
Inventories 1,618.00
Less: Creditors (2,394.00)
(776.00)
Less: Margin, 25% (194.00)
Funding available against inventories not financed by creditors
(a) (582.00)
Debtors 2,528.00
Less: Margin, 20% (505.60)
Funding available against debtors (b) 2,022.40
Unbilled revenues 861.00
Ceiling calculations:
Total Current assets 6,243.00
Inventories and Debtors 4,146.00
Qualifying current assets 2,097.00
10% Limit 209.70
Unbilled revenues eligible for financing 209.70
Less: Margin, 30% (62.91)
Funding available against unbilled revenues (c) 146.79

45. Total funding available [(a) + (b) + (c)] 1,587.19
Exhibit 5
Bank Financing Availability - Existing Accounting Policy
(Amounts in ₹ Crores)