39 - Article Ship Registratin Letter7855555fr Compiler 2.0 - Ca Final New - by Ca Ravi Agarwal

COMPILER 2.
0 FOR CA FINAL (NEW SYLLABUS) – PAPER 1- FINANCIAL REPORTING

- BY CA. RAVI AGARWAL
UNIT 2: INDIAN ACCOUNTING STANDARD 34: INTERIM

FINANCIAL REPORTING
Questions from STUDY MATERIAL
Illustrations
1. Company A has reported ` 60,000 as pre tax profit in first quarter and expects a loss of ` 15,000 each in
the subsequent quarter` It has a corporate tax slab of 20 percent on the first ` 20,000 of annual earnings and
40 per cent on all additional earnings. Calculate the amount of tax to be shown in each quarter.
Answer:
Amount of income tax expense reported in each quarter would be as below:
2. ABC Ltd. presents interim financial report quarterly. On 1.4.20X1, ABC Ltd. has carried forward loss of `
600 lakhs for income-tax purpose for which deferred tax asset has not been recognized. ABC Ltd. earns ` 900
lakhs in each quarter ending on 30.6.20X1, 30.9.20X1, 31.12.20X1 and 31.3.20X2 excluding the carried
forward loss. Income-tax rate is expected to be 40%. Calculate the amount of tax expense to be reported in
each quarter.
Answer:
36
Amount of income tax expense reported in each quarter would be as below:
The estimated payment of the annual tax on earnings for the current year:
` 3,000* x 40 / 100 = ` 1,200 lakhs.
*(3,600 lakhs - ` 600 lakhs) = ` 3,000 lakhs
Average annual effective tax rate = (1,200 / 3,600) × 100 = 33.33%
Tax expense to be shown in each quarter = 900 x 33.33% = ` 300 lakhs
3. Innovative Corporation Private Limited (or “ICPL”) is dealing in seasonal product and the sales pattern of
the product, quarter wise is as under during the financial year 20X1-20X2:
36
JOIN THE MENTORING PROGRAM BY CA RAVI AGARWAL TO CRACK YOUR CA EXAMS IN ONE ATTEMPT
8334866117, https://www.caraviagarwal.com,https://t.me/CARAVIAGARWAL
https://youtube.com/c/MissionCAwithCARaviAgarwal
COMPILER 2.0 FOR CA FINAL (NEW SYLLABUS) – PAPER 1- FINANCIAL REPORTING
Answer:
Result of the first quarter ending 30 June
37
Note- As per Ind AS 34, the income and expense should be recognized when they are earned and incurred
respectively. Seasonal incomes will be recognized when they occur. Therefore, the argument of ICPL is not
correct considering the principles of Ind AS 34.
37
4. Fixed production overheads for the financial year is ` 10,000. Normal expected production for the year,
after considering planned maintenance and normal breakdown, also considering the future demand of the
product is 2,000 MT. It is considered that there are no quarterly / seasonal variations. Therefore, the normal
expected production for each quarter is 500 MT and the fixed production overheads for the quarter are `
2,500.
Actual production achieved Quantity (In MT)
First quarter 400
Second quarter 600
Third quarter 500
Fourth quarter 400
Total 1,900
Presuming that there are no quarterly / seasonal variation, calculate the allocation of fixed production
overheads for all the four quarters as per Ind AS 34 read with Ind AS 2.
Answer:
If it is considered that there is no quarterly / seasonal variation, therefore normal expected production for
each quarter is 500 MT and fixed production overheads for the quarter are ` 2,500 .
Fixed production overhead to be allocated per unit of production in every quarter will be ` 5 per
MT (Fixed overheads / Normal production).
38
38
The cumulative result of all the quarters would also result in unallocated overheads of ` 500, thus, meeting the
requirements of Ind AS 34 that the quarterly results should not affect the measurement of the annual results.
5. ABC Limited manufactures automobile parts. ABC Limited has shown a net profit of ` 20,00,000
for the third quarter of 20X1.
Following adjustments are made while computing the net profit:
(i) Bad debts of ` 1,00,000 incurred during the quarter. 50% of the bad debts have been
deferred to the next quarter.
(ii) Additional depreciation of ` 4,50,000 resulting from the change in the method of depreciation.
(iii) Exceptional loss of ` 28,000 incurred during the third quarter. 50% of exceptional loss have been
deferred to next quarter.
(iv) ` 5,00,000 expenditure on account of administrative expenses pertaining to the third quarter is deferred
on the argument that the fourth quarter will have more sales; therefore fourth quarter should be debited
by higher expenditure. The expenditures are uniform throughout all quarters.
Ascertain the correct net profit to be shown in the Interim Financial Report of third quarter to be
presented to the Board of Directors
Answers:
In the instant case, the quarterly net profit has not been correctly stated. As per Ind AS 34, Interim Financial
Reporting, the quarterly net profit should be adjusted and restated as follows:
(i) The treatment of bad debts is not correct as the expenses incurred during an inter imreporting period 39
should be recognized in the same period. Accordingly, ` 50,000 should be deducted from ` 20,00,000.
(ii) Recognizing additional depreciation of ` 4,50,000 in the same quarter is correct and is in tune with Ind AS
34.
(iii) Treatment of exceptional loss is not as per the principles of Ind AS 34, as the entire amount of ` 28,000
incurred during the third quarter should be recognized in the same quarter. Hence ` 14,000 which was
39
deferred should be deducted from the profits of third quarter only.
(iv) As per Ind AS 34 the income and expense should be recognized when they are earned and incurred
respectively. As per para 39 of Ind AS 34, the costs should be anticipated or deferred only when:
(i) it is appropriate to anticipate or defer that type of cost at the end of the financial year,
and
(ii) costs are incurred unevenly during the financial year of an enterprise.
Therefore, the treatment done relating to deferment of ` 5,00,000 is not correct as

expenditures are uniform throughout all quarters. Thus considering the above, the correct net profits to be
shown in Interim Financial Report of the third quarter shall be ` 14,36,000 (` 20,00,000 -` 50,000 - ` 14,000 - `
5,00,000).
Questions
1. Company A expects to earn Rs. 15,000 pre-tax profit each quarter and has a corporate tax slab of 20
percent on the first Rs. 20,000 of annual earnings and 40 per cent on all additional earnings. Actual earnings
match expectations. Calculate the amount of income tax to be shown in each quarter.
Answer:
The following table shows the amount of income tax expense that is reported in each quarter:
2. Narayan Ltd. provides you the following information and asks you to calculate the tax expense for each
quarter, assuming that there is no difference between the estimated taxable income and the estimated
accounting income:
Estimated Gross Annual Income 33,00,000
(inclusive of Estimated Capital Gains of Rs. 8,00,000)
40
Estimated Income of Quarter I is Rs. 7,00,000, Quarter II is Rs. 8,00,000, Quarter III (including Estimated
Capital Gains of Rs. 8,00,000) is Rs. 12,00,000 and Quarter IV is Rs. 6,00,000.
Tax Rates:
On Capital Gains 12%
On Other Income: First Rs. 5,00,000 30%
Balance Income 40%
Answer:
As per para 29 of AS 25 ‘Interim Financial Reporting’, income tax expense is recognized in
each interim period based on the best estimate of the weighted average annual income tax rate expected for
the full financial year. If different income tax rates apply to different categories of income (such as capital
40
gains or income earned in particular industries) to the extent practicable, a separate rate is applied to each
individual category of interim period pre-tax income.
Tax expense to be recognized in each of the quarterly reports
3. 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 or not? If not, then calculate the tax expense for each quarter as well as for the year as
per Ind AS 34.
[ALSO ASKED IN RTP - NOV 2019]
Answer:
41
As illustrated in para 30 (c) of Ind AS 34 ‘Interim financial reporting’, income tax expense is recognized 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: 41
4. Due to decline in market price in second quarter, Happy India Ltd. incurred an inventory loss. The Market
price is expected to return to previous levels by the end of the year. At the end of year, the decline had not
reversed. When should the loss be reported in interim statement of profit and loss of Happy India Ltd.?
Answer: Loss should be recognized in the second quarter of the year.
PAST EXAMINATION, MTPs, RTPs QUESTIONS

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.
[NOV 2018 - 5 MARKS]

Answer:
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
42
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.
42
(iv) The treatment of extra-ordinary loss of Rs. 1,36,000 being recognized in the same quarter is correct.
Thus considering the above, the correct net profits to be shown in Interim Financial Report of the
third quarter shall be Rs. 15,00,000 - Rs. 1,23,000 - Rs. 4,50,000 = Rs. 9,27,000.
2. What is Integrated Reporting and what are its salient features?

[MTP - MARCH 2019 - 5 MARKS]
Answer:
Integrated reporting is a concept that has been created to better articulate the broader range of measures
that contribute to long-term value and the role organizations play in society. Integrated Reporting is
enhancing the way organizations think, plan and report the story of their business. Central to this is the
proposition that value is increasingly shaped by factors additional to financial performance, such as reliance
on the environment, social reputation, human capital skills and others.
This value creation concept is the backbone of integrated reporting and is the direction for the future of
corporate reporting. In addition to financial capital, integrated reporting examines five additional capitals that
should guide an organization’s decision-making and long-term success — its value creation in the broadest
sense. An integrated report is a concise communication about how an organization’s:
• Strategy
• Governance
• Performance And
• Prospects
In the context of its external environment leads to the creation of value over:
• Short
• Medium And
• Long term
It’s a portal by which the organization communicates a holistic view of:

• Its Current position
• Where it’s going and
• How it intends to get there
The report enables readers to make an assessment of the organization’s ability to create value in the future,
43
with value creation referring to the value created for both the organization and for others.
Salient features of Integrated Reporting Framework
Principle Based Approach
The International Framework (the Framework) takes a principles-based approach. This Framework identifies
information to be included in an integrated report for use in assessing an organization’s ability to create value;
43
it does not set benchmarks for such things as the quality of an organization’s strategy or the level of its
performance. It intent to strike an appropriate balance between flexibility and prescription that recognizes the
wide variation in individual circumstances of different organizations while enabling a sufficient degree of
comparability across organizations to meet relevant information needs.
Targets the Private Sector or Profit Making Companies

This Framework is written primarily in the context of private sector, for-profit companies of any size but it can
also be applied, adapted as necessary, by public sector and not-for-profit organizations.
Identifiable Communication
An integrated report may be prepared in response to existing compliance requirements, and may be either a
standalone report or be included as a distinguishable, prominent and accessible part of another report or
communication. It should include, transitionally on a comply or explain basis, a statement by those charged
with governance accepting responsibility for the report. An integrated report is intended to be more than a
summary of information in other communications (e.g., financial statements, a sustainability report, analyst
calls, or on a website); rather, it makes explicit the connectivity of information to communicate how value is
created over time.
Financial and Non-financial Items

The primary purpose of an integrated report is to explain to providers of financial capital how an organization
creates value over time. It, therefore, contains relevant information, both financial and other.
Value Creation
Value created by an organization over time manifests itself in increases, decreases or transformations of the
capitals caused by the organization’s business activities and outputs. That value has two interrelated aspects –
value created for:
• The organization itself, which enables financial returns to the providers of financial capital
• Others (i.e., stakeholders and society at large)
3. A company normally produced 1,00,000 units of a high precision equipment each year over past
several years. In the current year, due to lack of demand and competition, it produced only 50,000
units. Further information is as follows:
Material = ` 200 per unit;
Labour = ` 100 per unit;
Variable manufacturing overhead = ` 100 per unit;
44
Fixed factory production overhead =` 1,00,00,000;
Fixed factory selling overhead = ` 50,00,000;
Variable factory selling overhead = ` 150 per unit.
Calculate the value of inventory per unit in accordance with Ind AS 2. What will be the treatment of fixed
manufacturing overhead? (RTP- NOV 2020)
ANSWER:
A company normally produced 1,00,000 units of a high precision equipment each year over past
several years. In the current year, due to lack of demand and competition, it produced only 50,000
units. Further information is as follows:
Material = ` 200 per unit;
44
Labour = ` 100 per unit;

Variable manufacturing overhead = ` 100 per unit;
Fixed factory production overhead =` 1,00,00,000;
Fixed factory selling overhead = ` 50,00,000;
Variable factory selling overhead = ` 150 per unit.
Calculate the value of inventory per unit in accordance with Ind AS 2. What will be the treatment of fixed
manufacturing overhead?
ANSWER:
Calculation of Inventory value per unit as per Ind AS 2:
Fixed overheads are absorbed based on normally capacity level, i.e.; 1,00,000 units, rather than on the basis
of actual production, i.e.; 50,000 units. Therefore, fixed manufacturing overhead on 50,000 units, will be
absorbed as inventory value. The remaining fixed manufacturing overhead ` 50,00,000 (1,00,00,000 -
50,00,000) will be charged to P&L.
Note: Selling costs are excluded from the cost of inventories and recognised as expense in the period in which they are
incurred.
45
45

39 - Article Ship Registratin Letter7855555fr Compiler 2.0 - Ca Final New - by Ca Ravi Agarwal

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

39 - Article Ship Registratin Letter7855555fr Compiler 2.0 - Ca Final New - by Ca Ravi Agarwal

Uploaded by

Copyright:

Available Formats

COMPILER 2.

0 FOR CA FINAL (NEW SYLLABUS) – PAPER 1- FINANCIAL REPORTING

UNIT 2: INDIAN ACCOUNTING STANDARD 34: INTERIM

deferred should be deducted from the profits of third quarter only.

Therefore, the treatment done relating to deferment of ` 5,00,000 is not correct as

Tax expense to be recognized in each of the quarterly reports

PAST EXAMINATION, MTPs, RTPs QUESTIONS

[NOV 2018 - 5 MARKS]

2. What is Integrated Reporting and what are its salient features?

It’s a portal by which the organization communicates a holistic view of:

Salient features of Integrated Reporting Framework

Principle Based Approach

Targets the Private Sector or Profit Making Companies

Financial and Non-financial Items

Labour = ` 100 per unit;

You might also like