Company A has taken a long-term loan from Company B. In the month of December 20X1, there was a breach of material provision of the arrangement. As…

As per para 74 of Ind AS 1 “Presentation of Financial Statements”, where there is a breach of a material covenant of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, it classifies the liability as current, even if the lender agreed, after the reporting period and before the approval of the financial statements for issue, not to demand payment as a consequence of the breach. An entity classifies the liability as current because, at the end of the reporting period, it does not have the right to defer its settlement for at least twelve months after that date. In the given case, though Company B (the lender) agreed for not to demand payment after the reporting date and the financial statements were approved for issuance, on the reporting date, Company A due to breach of covenant, lost the right to defer its settlement for at least twelve months after that date. Hence, the liability should be classified as current in the financial statement as at 31st March, 20X2. OR / Alternative Solution: Recognition of assetsThe Conceptual Framework for Financial Reporting defines an asset as a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. Assets should be recognized if they meet the Conceptual Framework definition of an asset and such recognition provides users of financial statements with information that is useful i.e. with(a)relevant information; and(b)a faithful representation of the asset.(a) RelevanceInformation about assets is relevant to users of financial statements. However, recognition of a particular asset may not always provide relevant information like when:(i) it is uncertain whether an asset exists; or(ii) an asset exists, but the probability of an inflow or outflow of economic benefits is lowIt may be a combination of factors and not any single factor that determines whether recognition provides relevant information.Whether or not the asset is recognised, explanatory information about the uncertainties associated with it, may need to be provided in the financial statements.(b) Faithful representationRecognition of a particular asset is appropriate if it provides not only relevant information, but also a faithful representation of that asset and of any resulting income, expenses or changes in equity. Whether a faithful representation can be provided may be affected by the level of measurement uncertainty associated with the asset or by other factors.Faithful representation of a recognised asset involves not only recognition of that item, but also its measurement as well as presentation and disclosure of information about it.Derecognition of assetsDerecognition is the removal of all or part of a recognised asset from an entity's balance sheet.Derecognition normally occurs when that item no longer meets the definition of an asset i.e. when the entity loses control of all or part of the recognised asset.In some cases, an entity might appear to transfer an asset but derecognition of that asset is not appropriate. For example, if an entity has apparently transferred an asset but retains exposure to significant positive or negative variations in the amount of economic benefits that may be produced by the asset, this sometimes indicates that the entity might continue to control that asset. If an entity has transferred an asset to another party that holds the asset as an agent for the entity the transferor still controls the asset.