Chill-Zone Ltd. is a listed entity manufacturing Air conditioners. The company prepares its financial statements on a quarterly basis. Mr. Das, the…

(i) Recognition of Seasonal Revenue As per Ind AS 34, revenues in interim periods should be recognized when they are earned. The standard does not permit anticipation or deferral of revenues unless such treatment is appropriate at the year-end under applicable Ind AS. Further, seasonal revenues should not be smoothed over interim periods. Hence, the proposal of CFO to recognize only - 250 lakhs in Quarter 1 and defer the balance revenue to subsequent quarters to show a consistent performance trend to investors is not in accordance with Ind AS 34. The company should recognize the entire revenue of 800 lakhs in Quarter 1. (ii) Computation of Income Tax Expense Mr. Das has computed tax expense for Quarter 1 as - 10 lakhs by applying 25% on Quarter 1 profit, treating it as a standalone period. As per Ind AS 34, income tax expense for an interim period should be calculated using the estimated average annual effective tax rate applied to the year-to-date profit. Computation of AETR: Estimated annual profit = ₹ 100 lakhs Tax on first - 50 lakhs @ 25% ₹ 12.5 lakhs Tax on next - 50 lakhs @ 40% ₹ 20 lakhs Total tax = ₹ 32.5 lakhs Average tax rate = [(32.5 lakhs / ₹ 100 lakhs) x 100] = 32.5% Tax Expense for Quarter 1: Profit of Quarter 1 = ₹ 40 lakhs Tax = ₹ 40 lakhs × 32.5% = ₹ 13 lakhs Based on the above computation, it is concluded that calculation of tax expense, by the Accounts Manager, Mr. Das, of 10 lakhs for Quarter 1 is incorrect. The company should recognize - 13 lakhs as tax expense in Quarter 1. (iii) Change in Estimate (The “Restatement” Error) As per Ind AS 34 read with Ind AS 8, a change in estimate is not an error and should be accounted for prospectively. Interim financial reports are based on estimates available at the reporting date and revision of estimates does not render earlier reports to be incorrect. Hence, restatement of financial statements of Quarter 1 and Quarter 2 is not permitted. Accordingly, the revised estimate of 5% should be applied prospectively from Quarter 3 onwards and recognise the catch-up (difference between 5% and 2% already booked) as an expense in Quarter 3 itself. The impact of the change should be recognized in Quarter 3 and future periods, along with appropriate disclosure if material.