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CA Intermediate · Advanced Accounting · AS 25 Interim Financial Reporting

Kaveri Engineering Ltd expects annual profit before tax of ₹5,00,00,000 for the year. After allowing for tax incentives, its best estimate of total annual tax expense is ₹1,20,00,000, although the statutory rate is 30%. Profit before tax for the first quarter is ₹80,00,000. As per AS 25, the tax expense to be recognised in the first-quarter interim report is:

The first-quarter tax expense is ₹19,20,000. AS 25 applies the estimated weighted average annual effective tax rate to interim profit. That rate is ₹1.2 crore divided by ₹5 crore, or 24%, and 24% of ₹80 lakh gives ₹19.2 lakh, not the 30% statutory figure.

  1. A₹24,00,000
  2. B₹30,00,000
  3. C₹19,20,000Correct
  4. D₹16,00,000

Explanation

AS 25 requires tax expense in each interim period to be based on the best estimate of the weighted average annual income tax rate for the full year. Rate = 1,20,00,000 / 5,00,00,000 = 24%. Tax for Q1 = 24% × 80,00,000 = ₹19,20,000. Using the 30% statutory rate gives ₹24,00,000, which ignores the incentives; ₹16,00,000 results from dividing by a wrong base of ₹6 crore.

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