CHAPTER 10

INTERIM FINANCIAl REPORTING

QUESTION 10-1
What is “interim financial reporting”?

ANSWER 10-1
Interim financial reporting means the preparation and presentation of financial information for a period of less than one year.

Interim financial reports may be presented monthly, quarterly or semiannually.

But quarterly interim reports are the most common although publicly traded entities are encouraged to provide interim financial
reports semiannually and such reports are to be made available not later than 60 days after the end of the interim period.

QUESTION 10-2
It is required to prepare interim financial statements?

ANSWER 10-2
PAS 34 does not mandate which entities are required to publish interim financial reports, how frequently, or how soon after the end
of an interim period.

The Securities and Exchange Commission and Philippine Stock Exchange, however, require certain entities to file interim financial
statements.

For example, the Sec and PSC require entities covered by the reportorial requirements of Revised Securities Act to file quarterly
interim financial reports within 45 days after the end of each of the first three quarters.

The SEC also requires entities covered by the Rules on Commercial Papers and Financing Act to file quarterly financial reports within
45 days after each quarter end.

QUESTION 10-3
What are the two views on interim financial reporting?

ANSWER 10-3
1. The first view is that each interim period is an integral part of the annual accounting period. This is known as the “integral
view”.
2. The second view is that each interim period is a basic accounting period and the results of operations shall be determined
in essentially the same way as if interim period were annual accounting period. This is known as the “independent view” or
“discrete view”.

QUESTION 10-4
Explain fully the “integral view” of interim financial reporting.

ANSWER 10-4
Under the integral view, annual operating expenses are estimated and then allocated to the interim periods based on forecasted
revenue or sales volume.

In other words, costs incurred which clearly benefit the entire year are allocated to the interim periods based on forecasted revenue
or sales volume.

When this approach is followed, the results of subsequent interim periods must be adjusted to reflect prior estimation errors.

Proponents of the integral view argue that the estimation and allocation are necessary to avoid creating misleading fluctuations in
interim period income.
Using the integral interview would result to interim income which would be more indicative of the annual income and thus useful in
predicting future operations and making informed decisions.

QUESTION 10-5
Explain fully the “independent view” of interim financial reporting.

ANSWER 10-5
Under the independent view, each interim period is considered a discrete or separate accounting period with status equal to a fiscal
year.

Thus, no estimations or allocations are made for interim purposes, unless such estimations or allocations are allowed for annual
reporting. The same expense recognition rules shall apply asunder annual reporting and no special interim accruals or deferrals are
permitted.

In other words, annual operating expenses are recognized in the interim period in which they are incurred, irrespective of the
number of interim periods benefited, unless deferral or accrual would be allowed in the annual financial statements.

Proponents of the independent view argue that the smoothing of interim results through estimation and allocation of annual
operating expenses may have undesirable effects.

For example, a significant drop in an earnings trend during the year may be obscured.

QUESTION 10-6
Which view on interim financial reporting is followed in practice?

ANSWER 10-6
PAS 34 on interim financial reporting does not mention about the integral view and the independent view. Essentially, the standard
adopts a mix of the integral and independent views.

A clear example of the independent view is the accrual or deferral for interim purposes of costs that are incurred unevenly during
the year only when it is also appropriate to accrue or defer such costs at the end of the year.

Another example of the independent view is the nonaccrual of cost of a planned major periodic maintenance or overhaul that is
expected to occur late in the year.

However, the method of accounting for income taxes is consistent with the integral view. The recognition of commission and
warranty cost based on sales is also an application of the integral approach.

At this point, it is safe to say that there is no pure integral view nor pure independent view. A mix of the two views will be necessary
as dictated by the nature of the cost or revenue being reported for interim purposes.

Many believe that the distinction between the integral view and the independent view as arbitrary and meaningless.

These theoreticians note that direct costs and revenue are best accounted for as incurred and earned which equates an
independent view.

Indirect costs are more likely to require an allocation process which is suggestive of the integral view.

QUESTION 10-7
What are the components of an interim financial report?

ANSWER 10-7
An interim financial report shall be include, as a minimum, the following components:
a. Condensed statement of financial position
b. Condensed income statement
c. Condensed statement of comprehensive income
d. Condensed statement of changes in equity
e. Condensed statement of cash flows
 f. Selected explanatory notes
Nothing in the standard is intended to prohibit or discourage an entity from publishing a complete set of financial statements, rather
than condensed financial statements and selected explanatory notes.

In other words, PAS 34 allows an entity to publish a set of condensed financial statements or complete set of financial statements in
its interim financial report.

“Condensed” means that each of the heading and subtotals presented in the entity’s most recent annual financial statements is
required but there is no requirement to include greater detail unless this is specifically required by PAS 34.

QUESTION 10-8
Explain disclosure of compliance of interim financial reports with PFRS.

ANSWER 10-8
If an entity’s interim financial report is in compliance with Philippine Financial Reporting Standards, that fact shall be disclosed.

An entity shall not describe an interim financial report5 as complying with PFRS unless it complies with all the of the requirements of
applicable Philippine Financial Reporting Standards.

QUESTION 10-9
Give examples of selected explanatory notes

ANSWER 10-9
The selected explanatory notes are designed to provide an explanation of significant events and transactions arising since the last
annual financial statements.

PAS 34 assumes that the financial statement users have an access to the entity’s most recent annual report. As a result, the standard
reiterates that it is a superfluity to provide the same notes in the interim financial report.

Examples of disclosures required in a condensed interim financial report include:

a. Writedown of inventories to net realizable value and the reversal of such a writedown.
b. Recognition of loss from the impairment of property, plant and equipment, intangible assets, other assets and the reversal
of such an impairment loss.
c. The reversal of any provisions for the costs of restructuring.
d. Acquisitions and disposal of items of property, plant and equipment.
e. Commitments for the purchase of property, plant and equipment.
f. Litigation settlements
g. Corrections of prior period errors in previously reported financial data.
h. Any debt shall or any breach of a debt covenant
i. That has not been corrected subsequently.
j. Related party transactions

QUESTION 10-10
Explain the presentation of comparative interim financial statement.

ANSWER 10-10
a. Statement of financial position as of the end of the current interim period and a comparative statement of financial position
as of the end of the immediately preceding year.
b. Income statements of the current interim period and cumulatively for the current financial year to date, with comparatives
income statements for the comparable interim periods (current and year to date) of the immediately preceding year.
c. Statement of comprehensive income of the current interim period and cumulatively for the current financial year to date,
with comparative statements of comprehensive income for the comparable interim periods (current and year to date) of
the immediately preceding year.
d. Statement of changes in equity cumulatively for the current financial year to date, with comparative statement for the
comparable year to date period of the immediately preceding year.
e. Statement of cash flows cumulatively for the current financial year to date, with a comparative statement for the
comparable year to date period of the immediately preceding year.
QUESTION 10-11
What are the basic principles of interim financial reporting?

ANSWER 10-11
1. An entity shall apply the same accounting policies in its interim financial statements as are applied in its annual financial
statements.
2. Revenues from products sold or services rendered are generally recognized for interim reports on the same basis as for the
annual period.
3. Cost and expenses are recognized as incurred in an interim period.
a. Expenses associated directly with revenue are matched against revenue in those interim periods in which the related
revenue is recognized.
b. Expenses not associated directly with revenue are recognized in interim periods as incurred or allocated over the
interim periods benefited.

Thus, costs incurred such as major repairs, year-end bonuses, insurance, property taxes and depreciation are allocated
over the interim periods benefited.
4. If the business is seasonal, the standard encourages the entity to disclose financial information for the latest 12 months
ending on a given interim date, and comparative information for the prior 12-month period, in addition to the interim
period financial statements.
5. The preparation of interim financial reports generally will require a greater use of estimation than the annual financial
reports.

QUESTION 10-12
Explain the measurement of inventories for the interim financial reporting.

ANSWER 10-12
Paragraph 25 of Appendix 2 of PAS 34 provides that inventories are measured for interim financial reporting by the same principles
as at financial year-end.

This simply means that inventories shall be measured at the lower of cost or net realizable value even for interim purposes.

The cost of the inventory may be estimated using the gross profit method or retail inventory method. Full inventory and the
valuation and the valuation procedures are not required for inventories at interim date.

Accordingly, if the net realizable value is lower than cost, a loss on inventory writedown shall be recognized regardless of whether
the writedown is temporary or nontemporary.

This approach is in accordance with PAS 34, paragraph 7, which requires disclosure of the writedown of inventories to net realizable
value and the reversal on such writedown in a later interim period.

The net realizable value of inventories is determined by reference to selling prices and related cost to complete and dispose at
interim dates.

QUESTION 10-13
Explain the treatment of seasonal, cyclical of occasional revenue for interim financial reporting.

ANSWER 10-13
Seasonal, cyclical or occasional revenue shall not be anticipated or deferred as of an interim date of anticipation or deferral would
not be appropriate at the end of the entity’s financial year.

Thus, dividend revenue, royalties and government grants shall be recognized in the interim period when they occur.

For example, dividend revenue is not recognized until declared because even when highly predictable based on past experience, the
dividend is not an obligation of the paying corporation until it is legally declared.

QUESTION 10-14
Explain the treatment of uneven costs for interim financial reporting.
ANSWERB 10-14

Costs that are incurred unevenly during an entity’s financial year shall be anticipated or deferred for interim purposes only if it is
also appropriate to anticipate or defer that type of cost at the end of financial year.

For instance, a provision for a warranty is recognized at interim date because the entity has no realistic alternative to make a
transfer of economic benefits as a result of an event that has created a legal or constructive obligation.

Expenditure for advertising is not deferred but recognized as expense in the interim period it is incurred because it is not
appropriate to defer such cost at year-end.

QUESTION 10-15
Explain the treatment of the year-end bonuses for interim financial reporting.

ANSWER 10-15
The nature of the year-end bonuses varies widely period. Some are earned simply by continued employment during a time period.

Some bonuses are earned based on a monthly, quarterly or annual measure of performance.

Some bonuses may be purely discretionary, contractual or based on years of historical precedent.

A bonus is anticipated for interim purposes if and only if:

a. The bonus is legal obligation or past practice would make the bonus a constructive obligation for which the entity has no
realistic alternative but to make the payment.
b. A reliable estimate of the obligation can be made.

QUESTION 10-16
Explain the treatment of irregular costs for interim financial reporting.

ANSWER 10-16
Certain costs are expected to be incurred irregularly during the financial year, such as charitable contribution and employee training
costs.

Such costs are generally discretionary and even though they are planned shall not be anticipated as of an interim date simply
because the costs have not yet been incurred.

QUESTION 10-17
Explain the treatment of the following for the interim financial reporting:
a. Depreciation and amortization
b. Paid vacation and holiday leave
c. Income tax
d. Gains and losses

ANSWER 10-17
1. Depreciation and amortization for an interim period shall be based only on assets owned during that interim period.
Asset acquisitions or dispositions planned for later in the financial year shall not be taken into account.
2. Paid vacation and holiday leave shall be accrued for interim purposes because there are enforceable as legal commitments.
3. Interim period income tax expense should reflect the same general principles of income tax accounting applicable to annual
reporting.
4. Gains or losses from disposal of property, gains and losses from discontinued operation and other gains or losses shall not
be allocated over the interim periods.
The gains shall be reported in the interim period in which they are realized and the losses are reported in the interim period
in which they are incurred.
QUESTION 10-18 MULTIPLE CHOICE (PAS 34)
1. Which statement is correct concerning interim financial reporting?

I. PAS 34 mandates which entities are required to publish interim financial reports, how frequently, or how soon
after the end of an interim period.
II. Entities that provide interim financial reports in conformity with generally accepted accounting principles shall
conform to the recognition measurement and disclosure principles set out in the standard.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

2. The Securities and Exchange Commission and Philippine Stock Exchange require entities covered by the reportorial
requirements of the Revised Securities Act to file

a. Quarterly interim financial reports within 45 days after the end of each of the first three quarters.
b. Quarterly interim financial reports within 30 days after the end of each of the first three quarters.
c. Semiannual interim financial reports within 45 days after the end of the first six months.
d. Semiannual interim financial reports within 30 days after the end of the first six months.

3. Interim financial report means a financial report containing

I. A complete set of financial statements
II. A set of condensed financial statements

a. I only
b. II only
c. Either I or II
d. Neither I nor II

4. An interim financial report shall include, as a minimum, all of the following components, except

a. Condensed statement of financial position and statement of comprehensive income

b. Condensed statement of cash flows
c. Condensed statement of changes in equity
d. Accounting policies and explanatory notes

5. Publicly traded entities are encouraged to provide interim financial reports

a. At least at the end of the half year and within 60 days of the end of the interim period.
b. Within a month of the half year-end.
c. On a quarterly basis
d. Whenever the entity wishes

6. Which is incorrect concerning presentation of comparative interim financial statements?

a. Statement of financial position as of the end of the current interim period and comparative statement of the current
interim period and comparative statement of financial position as of the end of the immediately preceding fiscal year.
b. Income statements for the current interim period and cumulatively for the current financial year to date with
comparative income statement for the immediately preceding year.
c. Statement of changes in equity cumulatively for the current financial year to date with comparative statement for the
immediately preceding year.
d. Statement cash flows cumulatively for the current financial year to date with comparative statement for the
comparable year to date period of the immediately preceding year.
 7. The entity’s financial year ends December 31 and the entity presents financial statements in its quarterly interim financial
report on September 30, 2010. Which is an incorrect presentation of the comparative interim financial statements?

a. Statement of financial position at September 30, 2010

Statement of financial position at December 31, 2009
b. Income statement for nine months ending September 30,2010
Income statement for 9 months ending September 30, 2009
Income statement for three months ending September, 2009
c. Statement of cash flows for nine months ending September 30, 201
Statement of cash flows for year ending December 31, 2009
d. Statement of changes in equity for nine months ending September 30, 2010
Statement of changes in equity for nine months ending September 30, 2009

8. Which statement is incorrect concerning interim financial reporting?

a. To save time and cost, entities often use estimates to measure inventories at interim dates to a greater extent than at
annual reporting dates.
b. Depreciation and amortization for an interim period shall be based only on assets owned during the interim period.
c. The cost of planned major periodic maintenance or overhaul that is expected to occur late in the year is not anticipated
for interim purposes, unless an event has caused the entity to have legal or constructive obligation
d. Charitable contribution, employee training costs and other costs that are expected to be incurred irregularly during the
financial year shall be accrued at the end of interim reporting period.

9. A bonus is anticipated for interim purposes when

I. 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 make the payment.
II. A reliable estimate of the obligation can be made.

a. Both I and II
b. Neither I nor II
c. Either I or II
d. I only

10. Which statement is correct concerning interim financial reporting?

I. An entity shall apply the same accounting policies in its interim financial statements as are applied in its annual
financial statements.
II. If an entity’s interim financial report is in compliance with PFRS, that fact shall be disclosed.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

ANSWER 10-18
1. B 6. B
2. A 7. C
3. C 8. D
4. D 9. A
5. A 10. C

QUESTION 10-19 MULTIPLE CHOICE (IFRS)

1. Under PAS 34, interim financial reports shall be published

a. Once a year at any time in that year

b. Within one month of the half year-end
c. On a quarterly basis
d. Whenever the entity wishes
 2. If an entity does not prepare interim financial reports

a. The year-end financial statements are deemed not to comply with PFRS
b. The year-end financial statements’ compliance with PFRS is not affected.
c. The year-end financial statements will not be acceptable under local legislation
d. Interim financial reports shall be included in the year-end financial statements.

3. Interim financial reports shall include as a minimum

a. A complete set of financial statements.

b. A condensed set of financial statements and selected notes
c. A statement of financial position an income statement only
d. A condensed statement of financial position, income statement and statement of cash flows only.

4. PAS 34 states a presumption that anyone reading interim financial reports shall

a. Understand all Philippine Financial Reporting Standards.

b. Have access to the records of the entity.
c. Have access to the most recent annual report.
d. Not make decisions based on the report.

5. An entity owns a number of farms that harvest produce seasonally. Approximately 80% of the entity’s sales are in the
period. August to October. Because the entity’s business is seasonal, PAS 34 suggests

a. Additional notes be written in the interim reports about seasonal nature of the business.
b. Disclosure of financial information for the latest and comparative 12-month period in addition to the interim
report.
c. Additional disclosure in the accounting policy note.
d. No additional disclosure.

ANSWER 10-19
1. D
2. B
3. B
4. C
5. B

QUESTION 10-20 MULTIPLE CHOICE (IFRS)

1. Which of the following is not true regarding interim financial reporting?

a. Decline inventory shall be deferred to future interim periods.

b. Use of the gross margin method for computing cost of goods sold must be disclosed
c. Costs and expenses not directly associated with interim revenue must be allocated to interim periods on a reasonable
basis.
d. Gains and losses that arise in an interim period shall be recognized in the interim period in which they arise if they
would not normally be deferred at year-end.

2. Which of the following statements in relation to an interim financial report is true?

I. An interim financial report may consist of a complete set of financial statements.
II. An interim financial report may consist of a condensed set of financial statements.

a. I only
b. II only
c. Both I and II
d. Neither I nor II
 3. Which of the following statements in relation to interim financial reporting is true?
I. It is necessary to count inventories in full at the end of each interim period.
II. The net realizable value of inventories is determined by reference to selling prices at the interim date.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

4. An entity is preparing interim financial statements for the six months ended June 30,2010. In the interim financial
statements for the six months ended June 30, 2010, a statement of financial position at June 30, 201 and a statement of
comprehensive income for the six months ended June 30, 201 shall be presented. In addition all of the following shall be
presented, except

a. Statement of financial position at June 30, 2009

b. Statement of financial position at December 31, 2009
c. Statement of comprehensive income for the half year ended June 30, 2009
d. Statement of cash flows for the half year ended June 30, 2009

5. An entity is preparing its financial statements for the first half of its financial year ending June 30, 201.

One class of inventory has a cost per unit of P500 and a net realizable value at June 30, 201 of P480 per unit. The business is
seasonal and the net realizable value at December 31, 201 is expected to be P550.

The entity’s budget for the year scheduled a major refurbishment project from April to June 2010. For legal reasons, the
contract for the refurbishment was not signed until July 15, 2010, on which date the work was started.

Which of the following statements is true?

I. The inventory shall be carried at its cost per unit of P500 on June 30, 2010.
II. The cost of the major refurbishment project shall be accrued on June 30, 2010.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

ANSWER 10-20
1. A
2. C
3. B
4. A
5. D

QUESTION 10-41MULTIPLE CHOICE (AICPA ADPATED)

1. Interim financial statements are usually presented on a

a. Monthly basis
b. Quarterly basis
c. Semiannual basis
d. Nine-month basis

2. For interim financial reporting, an inventory loss from a market decline in the second quarter shall be recognized as a loss

a. In the fourth quarter

b. Proportionately in each of the second, third and fourth quarters
c. Proportionately in each of the first, second, third and fourth quarters
d. In the second quarter
3. If annual major reports made in the first quarter and paid for in the second quarter clearly benefit the entire year, when
should the repairs be expensed?

a. An allocated portion in each of the last three quarters

b. An allocated portion in each quarter of the year
c. In full in the first quarter
d. In full in the second quarter

4. For external reporting purposes, it is appropriate to use estimated gross profit rate to determine the cost of goods sold for
I. Interim reporting
II. Year-end reporting

a. I only
b. II only
c. Both I and II
d. Neither I nor II

5. For interim financial reporting, an expropriation gain occurring in the second quarter shall be

a. Recognized ratably over the last three quarters

b. Recognized ratably over all four quarters with the first quarter being restated
c. Recognized in the second quarter
d. Disclosed by footnote in the second quarter

6. Advertising costs incurred shall be deferred to provide an appropriate expense in each period for
I. Interim reporting
II. Year-end reporting

a. I only
b. II only
c. Both I and II
d. Neither I nor II

7. An inventory loss from a market price decline occurred in the first quarter. However, in the third quarter the inventory had
a market price recovery that exceeded the market decline that occurred in the first quarter. For interim financial reporting,
the peso amount of net inventory should

a. Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount
of the market price recovery.
b. Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount
of decrease in the first quarter.
c. Not be affected in the first quarter and increase in the third quarter by the amount of the market price recovery that
exceeded the amount of the market price decline.
d. Not be affected in either the first quarter or the third quarter.

8. Due to a decline in market price in the second quarter, an entity incurred an inventory loss. The market price is expected to
return to previous levels by the end of the year at the end of the year, the decline had not reversed. When should the loss
be reported in the entity’s interim income statement?

a. Ratably over the second, third and fourth quarters

b. Ratably over the third and fourth quarters
c. In the second quarter only
d. In the fourth quarter only

9. How is income tax expense for the third quarter interim period computed?

a. The annual rate multiplied by the third quarter pretax earnings.

b. The estimated tax for the first three quarters based on annual rate less a similar estimate for the first two quarters.
 c. The rate applicable during the third quarter multiplied by four times the third quarter pretax earnings.
d. One-half of the difference between total estimated annual income tax expense and the income tax for the first two
quarters.

10. Conceptually, interim financial statements can be described as emphasizing

a. Timeliness over reliability

b. Reliability over relevance
c. Relevance over comparability
d. Comparability over neutrality

ANSWER 10-21
1. B 6. D
2. D 7. B
3. B 8. C
4. A 9. B
5. C 10. A