QUESTION 2 Illustration 2 ABC Limited manufactures automobile parts.

QUESTION 2 Illustration 2 ABC Limited manufactures automobile parts. ABC Limited has shown a net profit of $ 20,00,000 for the third quarter of 2018. Following adjustments are made while computing the net profit: i) Bad debts of $1,00,000 incurred during the quarter. 50% of which have been deferred to the next quarter. ii) Extraordinary loss of $ 3,00,000 incurred during the quarter has been fully recognized in this quarter. iii) Additional depreciation of $ 4,50,000 resulting from the change in the method of depreciation. 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.

SOLUTION:

The calculation is also correct and takes into account the deferred bad debts and incorrect deferral of administrative expenses. The corrected net profit for the third quarter of 2018 would be $14,50,000 as calculated by you.

EXPLANATORY SOULTION

In the instant case, the quarterly net profit has not been correctly stated.

As per IAS 34, Interim Financial Reporting, the quarterly net profit should be adjusted and restated as follows:

Bad debts of $1,00,000 have been incurred during current quarter. Out of this, the company has deferred 50% (i.e.) $ 50,000 to the next quarter. This treatment is not correct as the expenses incurred during an interim reporting period should be recognized in the same period unless conditions mentioned in paragraph 39 of IAS 34 are fulfilled. Accordingly, $ 50,000 should be deducted from $ 20,00,000.

The treatment of extra-ordinary loss of $ 3,00,000 being recognized in the same quarter is correct.

Recognizing additional depreciation of $ 4,50,000 in the same quarter is correct and is in tune with IAS 34.

As per IAS 34 the income and expense should be recognized when they are earned and incurred respectively. As per para 39 of IAS 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 $ 14,50,000 ($ 20,00,000 - $ 5,00,000 - $ 50,000).

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