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What is risk free rate? How will you calculate it for Afghanistan?

In theory, the risk-free rate is the minimum return an investor expects for “delaying his consumption”. The investor will not accept any additional risk unless the potential rate of return is greater than the risk-free rate. Usually the government bond rate is used as the Risk free Rate. This raises several questions – which government, and what tenure? What if the government defaults? For instance, Greece has defaulted on its debt in the past.
To solve these, we need to follow a few rules
1. You can only use a developed country government bond rate that has a very strong economy and virtually no risk of default. This leaves us with very few options – US, UK, Germany, Japan etc.
Usually the US Government 10 Year Treasury Bond Rate should be used for most calculations. This is true even if the company is from India. Because from the perspective of a global investor, Indian Government bonds are not risk free.
2. You will choose the lowest available rate. The Italian Government Bond rate is higher than German Government Bond Rate since Italy is a weaker economy. So, even for an Italian Company, you will use the German Bond rate, even though both are denominated in Euros.
3. You will convert the risk free rate to the reporting currency. An Indian Company will be reporting in INR. So you can’t directly use the US Treasury Risk free rate. You need to adjust it for relative inflation in India vs US. The formula would be – Rf (INR) = Rf (USD) x Inflation (India)/ Inflation (US)

What is the difference between ROI vs ROE vs ROCE.

ROI compares the profits of an investment compared to the cost of the investment to determine gains.


ROCE looks at earnings before interest and taxes (EBIT) compared to capital employed to determine how efficiently a firm uses capital to generate earnings.


Return on equity (ROE) is a measure of financial performance calculated by dividing Profit after Tax by shareholders’ fund.

ROI is from investor’s perspective. If I invest in a share at ₹100 in 2019 and it becomes ₹110 in 2020 then my ROI is 10%. ROI can also mean the return from a project. The IRR of a project can be taken as the ROI from the project. However if the company had raised ₹50 only and earned ₹10 on that then its ROCE becomes 20%
ROI measures how good an investment is
ROCE measures how well the company utilises its capital employed
Along with this you need to know the formulae

Difference between ROCE and ROE is that the former measures the return for equity shareholders, the latter measures return for capital employed as a whole (i.e. including debt)
For a debt free company, ROCE and ROE are the same.

ROE and ROCE are the ONLY calculations in Financial Management where you have to use book values of equity and debt and not market value. This is because book value of equity shows how much equity was initially raised plus any retained earnings – and this is the money actually deployed by equity shareholders, first by contributing capital then by reinvesting the income on that capital. Similarly book value of debt shows the amount initially raised along with accrued interest

What are the audit risk components?

Audit risk means the risk that the auditor might give an inappropriate audit opinion that Financial Statements are free from material misstatements when in fact the financial statements are materially misstated.
Audit risk is a function of the risks of material misstatement and detection risk.
Risk of material misstatement may be defined as the risk that the financial statements are materially misstated prior to audit.
ROMM consists of two components- Inherent risk and Control risk.
Audit Risk = Risk of Material Misstatement x Detection Risk
Also, ROMM = Inherent Risk x Control Risk
Hence, Audit Risk = Inherent Risk x Control Risk x Detection Risk

Inherent risk is ‘the susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.’

Control risk is ‘the risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.’

Detection risk is defined as ‘the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.’

Scooter Ind AS 115

Q. We are setting up a factory of scooters, the scooters in this factory are sold for ₹1 lakh. A Maintenance Contract for five years is also given for ₹50,000. If the maintenance is paid at the time of purchase of scooters, a sum total of ₹120,000 is charged from the customer. How to recognize revenue?
A. As per IND AS 115, the transaction price i.e. ₹1,20,000 will be divided in the proportion of relative standalone prices.
₹120,000 will be divided in proportion of
100,000: 50,000
Price of scooter = 80,000
Price of general maintenance = 40,000


SCOOTER – ₹80,000 for the scooter will be recognised immediately
MAINTENANCE – ₹40,000 will be recognised proportionately over the period of 5 years.

Is too much goodwill a bad thing?

It means that the company has acquired other entities for a consideration higher than Fair Market Value of Net Assets. Goodwill does not measure synergy, it measures how much I overpaid. So I will have to go into the specifics to know whether my Goodwill is justified. Goodwill ends up being impaired very frequently so that causes a loss. Usually, all other things being equal, too much Goodwill is a cause of concern since it’s a fictional asset created only for accounting purposes
Usually Goodwill is much more prone to impairment than say a building or machinery. So if I have 2 companies who are exactly same in all other aspects, but one holds building and the other goodwill, I’ll prefer the one with building. Goodwill reflects how well or how poorly you negotiated an acquisition. If you negotiated well, you will get lower goodwill. If you negotiated poorly you’ll get a lot of Goodwill. One might say – the same about buildings – if you pay more you get a higher value on your Balance Sheet. The difference is that buildings are usually purchased at or close to their Fair Value. The same is not true for entire companies

What is the 5 step model of recognizing Revenue as per IND AS 115?

This is one of the most commonly asked questions of all time, and irrespective of domain. It is as important as the “Tell me something about yourself question”. You must use all technical terms prescribed here and answer in the correct order
1. Identify the contract with the customer- • A contract is an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied by an entity’s customary business practices. • For a contract to exist the following five criteria must be met: The parties to the contract have approved the contract The entity can identify each party’s rights The entity can identify the payment terms The contract has commercial substance It is probable the entity will collect the amount to which it expects to be entitled.

2. Identify the performance obligations- • A performance obligation is the promise to transfer to the customer a good or service (or bundle of goods or services) that is distinct. • Distinct goods and services should be accounted for as separate units of account. • Entities need to determine if a good or service (or bundle of goods or services) is “capable of being distinct” and “distinct in the context of the contract.” • A series of substantially the same goods or services for which control transfers over time and that have the same pattern of transfer is accounted for as a single performance obligation.

3. Determine the transaction price- • Transaction price is the amount the entity expects to be entitled to in exchange for
transferring promised goods or services to the customer. • The transaction price may
include fixed amounts, variable amounts, or both. • To determine the transaction price, entities shall consider the effects of the following: Variable consideration The constraint on estimates of variable consideration Significant financing components Noncash consideration payable to the customer.

4. Allocate the transaction price- • The transaction price (from step 3) is allocated to each performance obligation
identified (from step 2). • Depending on the specific circumstances, one of the following approaches would be used to allocate the transaction price to the performance obligations: On the basis of each performance obligation’s stand-alone selling price Allocation of a discount or variability to a specific performance obligation (or a bundle of specific performance obligations) if certain criteria are met.

5. Recognize revenue when (or as) performance obligations are satisfied- • Requires consideration of the following: Recognition of revenue when (or as) control of the good or service is passed to the customer (at a point in time or over time) Overtime: Specific criteria needed to be met for satisfying performance obligations and recognizing revenue over time o If recognizing revenue over time, a measure of progress should be used to determine the pattern of when to recognize revenue Point in time: If revenue is not recognized over time, it is recognized at a point in time. There are indicators of when performance obligations are satisfied and revenue recognized for performance obligations satisfied at a point in time.

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