Ind AS 34, Interim Financial Reporting, Important Questions with Solutions for CA Final FR May & Nov 2021 Exams
Question 1 –
Navya Limited manufacturer of ceramic tiles has shown a net profit of Rs.15,00,000 for the first quarter of 2018-2019. Following adjustments were made while computing the net profit:
(i) Bad debts of Rs.1,64,000 incurred during the quarter. 75% of the bad debts have been deferred for the next three quarters (25% for each quarter).
(ii) Sales promotion expenses of Rs.5,00,000 incurred in the first quarter and 90% expenses deferred to the next three quarters (30% for each quarter) on the basis that the sales in these quarters will be high in comparison to first quarter.
(iii) Additional depreciation of Rs.3,50,000 resulting from the change in the method of depreciation has been taken into consideration.
(iv) Extra-ordinary loss of Rs.1,36,000 incurred during the quarter has been fully recognized in this quarter.
Discuss the treatment required under Ind AS 34 and ascertain the correct net profit to be shown in the Interim Financial report of first quarter to be presented to the Board of Directors.
As per Ind AS 34, Interim Financial Reporting, the quarterly net profit should be adjusted and restated as follows:
(i) Bad debts of Rs.1,64,000 have been incurred during current quarter. Out of this, the company has deferred 75% i.e. Rs.1,23,000 to the next 3 quarters. This treatment is not correct as the expenses incurred during an interim reporting period should be recognised in the same period unless conditions mentioned in Ind AS 34 are fulfilled. Accordingly, Rs.1,23,000 should be deducted from the net profit of the current quarter Rs.15,00,000.
(ii) Deferment of sales promotion expenses of Rs.4,50,000 is not correct. It should be charged in the quarter in which the expenses have been incurred. Hence, it should be charged in the first quarter only.
(iii) Recognising additional depreciation of Rs.3,50,000 in the same quarter is correct and is in tune with Ind AS 34.
(iv) The treatment of extra-ordinary loss of Rs.1,36,000 being recognised in the same quarter is correct.
|Sales Promotion Expenses||Rs.4,50,000|
Question 2 –
An entity reports quarterly, earns Rs.1,50,000 pre-tax profit in the first quarter but expects to incur losses of Rs.50,000 in each of the three remaining quarters. The entity operates in a jurisdiction in which its estimated average annual income tax rate is 30%.
The management believes that since the entity has zero income for the year, its income-tax expense for the year will be zero. State whether the management’s views are correct. If not, then calculate the tax expense for each quarter as well as for the year as per Ind AS 34.
As per para 30 (c) of Ind AS 34 ‘Interim Financial Reporting’, income tax expense is recognised in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year.
Accordingly, the management’s contention that since the net income for the year will be zero no income tax expense shall be charged quarterly in the interim financial report, is not correct.
The following table shows the correct income tax expense to be reported each quarter in accordance with Ind AS 34:
|Period||Pre-tax earnings (in Rs.)||Effective tax rate||Tax expense (in Rs.)|
Question 3 –
Antarbarti Limited reported a Profit Before Tax (PBT) of Rs. 4 lakhs for the third quarter ending 30-09-2011. On enquiry you observe the following, give the treatment required under AS 25:
(i) Dividend income of Rs. 4 lakhs received during the quarter has been recognized to the extent of Rs. 1 lakh only.
(ii) 80% of sales promotion expenses Rs. 15 lakhs incurred in the third quarter has been deferred to the fourth quarter as the sales in the last quarter is high.
(iii) In the third quarter, the company changed depreciation method from WDV to SLM, which resulted in excess depreciation of Rs. 12 lakhs. The entire amount has been debited in the third quarter, though the share of the third quarter is only Rs. 3 lakhs.
(iv) Rs.2 lakhs extra-ordinary gain received in third quarter was allocated equally to the third and fourth quarter.
(v) Cumulative loss resulting from change in method of inventory valuation was recognized in the third quarter of Rs. 3 lakhs. Out of this loss Rs. 1 lakh relates to previous quarters.
(vi) Sale of investment in the first quarter resulted in a gain of Rs. 20 lakhs. The company had apportioned this equally to the four quarters.
Prepare the adjusted profit before tax for the third quarter.
As per IND AS 34 “Interim Financial Reporting”, seasonal or occasional revenue and cost within a financial year should not be deferred as of interim date untill it is appropriate to defer at the end of the enterprise’s financial year. Therefore dividend income, extra-ordinary gain, and gain on sale of investment received during 3rd quarter should be recognised in the 3rd quarter only. Similarly, sales promotion expenses incurred in the 3rd quarter should also be charged in the 3rd quarter only.
Further, as per the standard, if there is change in the accounting policy within the current financial year, then such a change should be applied retrospectively by restating the financial statements of prior interim periods of the current financial year. The change in the method of depreciation is a change in the accounting estimates and inventory valuation is a change in the accounting policy.
Therefore, the prior interim periods’ financial statements should be restated by applying the change in the method of valuation retrospectively. Accordingly, the adjusted profit before tax for the 3rd quarter will be as follows:
Statement showing Adjusted Profit Before Tax for the third quarter
|(Rs. in lakhs)|
|Profit before tax (as reported)||4|
|Add: Dividend income RRs. (4-1) lakhs||3|
|Depreciation charged in the 3rd quarter, due to change in the method, should be applied prospectively||–|
|Extra ordinary gain R Rs. (2-1) lakhs||1|
|Cumulative loss due to change in the method of inventory valuation should be applied retrospectively Rs. (3-2) lakhs||1|
|Less: Sales promotion expenses (80% of Rs. 15 lakhs)||(12)|
|Gain on sale of investment (occasional gain should not be deferred)||(5)|
|Adjusted Profit before tax for the third quarter||(8)|
Question 4 –
To comply with listing requirements and other statutory obligations Quaker Ltd. prepares interim financial reports at the end of each quarter. The company has brought forward losses of Rs. 700 lakhs under Income Tax Law, of which 90% is eligible for set off as per the recent verdict of the Court, that has attained finality. No Deferred Tax Asset has been recognized on such losses in view of the uncertainty over its eligibility for set off. The company has reported quarterly earnings of Rs. 700 lakhs and Rs. 300 lakhs respectively for the first two quarters of Financial year 2013-14 and anticipates a net earning of Rs. 800 lakhs in the coming half year ended March 2014 of which Rs. 100 lakhs will be the loss in the quarter ended Dec. 2013. The tax rate for the company is 30% with a 10% surcharge.
You are required to calculate the amount of Tax Expense to be reported for each quarter of financial year 2013-14.
Estimated tax liability on annual income
= [Income Rs.1,800 lakhs less b/f losses Rs. 630 lakhs (90% of 700)] x 33%
= 33% of Rs. 1,170 lakhs = Rs. 386.10 lakhs
As per Para 29(c) of AS 25 ‘Interim Financial Reporting’, income tax expense is recognised in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year.
Thus, estimated weighted average annual income tax rate = Rs. 386.10 lakhs divided by Rs. 1,800 lakhs = 21.45%
Tax expense to be recognised in each quarter
|Rs. in lakhs|
|Quarter I –||Rs. 700 lakhs x 21.45%||150.15|
|Quarter II –||Rs. 300 lakhs x 21.45%C||64.35|
|Quarter III –||(Rs. 100 lakhs) x 21.45%||(21.45)|
|Quarter IV –||Rs. 900 lakhs x 21.45%||193.05|