Page 4 - 22. COMPILER QB - INDAS 34

SOLUTION

Ind AS 34, Interim Financial Reporting states that an entity shall apply the same accounting recognition and

measurement principles in its interim financial statements as are applied in its annual financial statements.
Ind AS 34, Interim Financial Reporting, further states that for assets, the same tests of future economic

benefits apply at interim dates and at the end of an entity‖s financial year. Costs that, by their nature, would
not qualify as assets at financial year-end would not qualify at interim dates either. Similarly, a liability at
the end of an interim reporting period must represent an existing obligation at that date, just as it must at
the end of an annual reporting period.
An essential characteristic of income (revenue) and expenses is that the related inflows and outflows of
assets and liabilities have already taken place. If those inflows or outflows have taken place, the related

revenue and expense are recognised otherwise not. The Conceptual Framework does not allow the recognition of
items in the balance sheet which do not meet the definition of assets or liabilities.
Considering the above guidance, while preparing its interim financials, the transactions and events of the given
case should be dealt with as follows:

(i) If employer contributions to government-sponsored insurance funds are assessed on an annual basis, the
employer‖s related expense is recognised using an estimated average annual effective contribution rate in
its interim financial statements, even though a large portion of the payments have been made early in
the financial year. Accordingly, it should work out an average effective contribution rate and account for
the same accordingly, in its interim financials.
(ii) The cost of a planned overhaul expenditure that is expected to occur in later part of the year is not

anticipated for interim reporting purposes unless an event has caused the entity to have a legal or
constructive obligation. The mere intention or necessity to incur expenditure related to the future is not
sufficient to give rise to an obligation.
(iii) A bonus is anticipated for interim reporting purposes, if and only if,

(a) the bonus is a legal obligation or past practice would make the bonus a constructive obligation for
which the entity has no realistic alternative but to make the payments, and
(b) a reliable estimate of the obligation can be made. Ind AS 19, Employee Benefits provides guidance in
this regard.
A liability for bonus may arise out of legal agreement or constructive obligation because of which it
has no alternative but to pay the bonus and accordingly, needs to be accrued in the annual financial

statements.
Bonus liability is accrued in interim financial statements on the same basis as they are accrued for
annual financial statements. In the instant case, bonus liability of 10% of operating profit for the
year to date may be accrued.
In the given case, since the company has past record of declaring annual bonus every year, the same

may be accrued using a reasonable estimate (applying the principles of Ind AS 19, Employee
Benefits) while preparing its interim results.

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