CHAPTER 19 PAS 34 INTERIM FINANCIAL REPORTING TECHNICAL KNOWLEDGE. To know the basic principles of interim financial reporting. To identify the components of an interim financial report: To be able to prepare and ) € Present comparative interim financial statements, a 884 Scan ned with CamScannerINTERIM FINANCIAL REPORTING Interim financial reporting means the preparation and presentation of financial statements for a period of less than one year. . PAS 34 prescribes the minimum content of an interim financial report and the principles for recognition and measurement in complete or condensed financial statements for an interim period. Interim financial reports may be presented monthly, quarterly or semiannually. ‘ Quarterly interim reports are the most common However, publicly traded entities are encouraged to provide jnterim financial reports at least semiannually and such reports are to be made available not later tha 60 days after the end of interim period. . Frequency of interim reporting, 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. Philippine jurisdiction The Securities and Exchange Commission and Philippine Stock Exchange 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. Entities that provide interim financial reports in conformity with Philippine Financial Reporting Standards shall conform to the recognition, measurement and disclosure requirements Set out in the standard. 885 Scanned with CamScannerfan interim financial report interim finang; vovides that an 1 ‘ial 8, Pre minimum, the following Components o: PAS 84, paragraph report shall include, at components: i ition Condensed statement of financial post a ; ive income b. Condensed statement of comprehensive Inc c. Condensed statement of changes in equity d. Condensed statement of cash flows e. Selected explanatory notes Paragraph 8A provides that an entity can present items of profit or loss in a separate condensed income statement, 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 the interim financial report. "Condensed" means that each of the headings 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.» Disclosure of compliance with PFRS . PAS 34, paragraph 19, provides that if an entity's interim financial report is in compliance with Philippine. Financial Reporting Standards, such fact shall be disclosed. An entity shall not describ complying with PFRS unl requirements of each ap Reporting Standard. an interim financial report a8 ess it complies with all of the Plicable Philippine Financial 886 Scanned with CamScannerselected explanatory notes ne selected explanatory not, A p an explanation of significa es are designed to provide nt events and tr i isi U t t ransact since the last annual financial statements Ee pAS 34 assumes that financial statement to the entity's most recent annual ae Bee aceeee Asa result, the standard reiterates that it is a superfluity to provide the same notes in the interim financial report that appeared in the most recent annual 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 a loss from the impairment of property, plant and equipment and intangible assets and the reversal of such an impairment loss c. The reversal of any provision for 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 Changes in the economic circumstances that affect fair value of financial assets and financial liabilities i. Any debt default or any breach of a debt covenant that has not been corrected subsequently i. Related party transactions k. Changes in the classification of financial assets 1. Contingent liabilities and contingent assets 887 Scanned with CamScannerPresentation of comparati ve interim statements 1. Statement of financial position a. Statement of financial position at the end of curren, interim period Comparative statement of financial position at the end of preceding year. 2. Income statement a. b. c. da. Income statement for the current interim period Income statement cumulatively for the current financial year to date Comparative income statement for the comparable interim period of the preceding year . Comparative income statement cumulatively for the comparable financial year to date of the preceding year 3. Statement of comprehensive income a. Statement of comprehensive income for the current interim period : Statement of comprehensive income cumulatively for the current financial year to date Comparative statement of comprehensive income for the comparable interim period of the preceding year Comparative statement of comprehensive income cumulatively for the comparable financial year to date of the preceding year : 4. Statement of changes inequity ~~ a. Statement of changes in equity cuniulatively for the current financial year to date . Comparative statement of changes in equity for the comparable financial year to date of the preceding yea" 5. Statement of cash flows a. b. Statement of cash flo Zi ws cl i nt financial year to date» utlatively for the cure Comparative statement of le - cai rable financial year to date of the sible the compal 388 Scanned with CamScanner *filustration ~ Half-yearly jf an entity publishes interim financial reports half-yearly, the following comparative financial n dune 30, 2020: statements are presented fi , 2020: statement of financial position: On June 30, 2020 Statement of comprehensive income: 6 months ending June 30, 2020 Statement of cash flows: ‘ 6 months ending June 30, 2020 Statement of changes in equity: 6 months ending ‘June 30, 2020 Another illustration — Quarterly December 31, 2019 June 30, 2019 June 30, 2019 Tune 30, 2019 If an entity publishes interim financial reports quarterly, the following comparative financial statements are included in the quarterly interim financial report on June 30, 2020: Statement of financial position: On Tune 30, 2020 Statement of comprehensive income: 3months ending June 30, 2020 6 months ending dune 30, 2020 Statement of cash flows: 7 6 months ending Tune 30, 2020 Statement of changes in equity: 6 months ending June 30, 2020 389 December 31, 2019 June 30, 2019 June 30, 2019 June 30, 2019 June 30, 2019 Scanned with CamScannerBasic principles 1, PAS 84, paragraph 28, provides that-an entity shall apply the same accounting policies ane annial inane statements as are applied in al statements. However, the frequency of an entity's a ting whether annual, ‘half-yearly or quarterly shall not affect the measurement of the annual results. Therefore, measurements for interim reporting purposes shall be made on a year to date basis. Revenues from products sold or services. rendered are generally recognized for interim reports on the same basis as for the annual period. Costs 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. Paragraph 21 provides that if the business is highly seasonal, in addition to the current interim period financial statements, the entity is encouraged to disclose financial information: a. For the latest 12 months b. Comparative information for tl i 12-month period the Beat somata Paragraph 41 provides that financial reports general); estimation than annual fin; t the preparation of interim Y requires a greater use of fancial reports. 890 Scanned with CamScannerInventories paragraph 25 of Appendix B of PA; 7 : : fe measured for interim fin S 34 provides that inventories , ancial 1 i principles as at financial year-end, al reporting by the same 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 estimat i ito1 ed using the gross profit method or retail inventory method. a Full inventory and 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. PAS 34, paragraph 17, requires disclosure of the writedown of inventories to net realizable value and the reversal of 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 cost of disposal at interim dates. . 391 Scanned with CamScanneri enue Seasonal, cyclical or occasional rev Seasonal, cyclical or occasional reventy eanuanet be anticipated or deferred as of an interim a of the eeition or deferral would not be appropriate at entity's reporting period. government grants Thus, dividend revenue, royalties ends whan tiey Goan shall be recognized in the interim perio 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 entity until it is legally declared. Uneven costs s 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 the financial year. . For example, a provision for warranty is recognized at interim date because the entity has no realistic alternative but to make a transfer of economic benefits as a result of an event that has created a legal or constructive obligation. However, the cost of a 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 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. Year-end bonuses The nature of year-end bonuses y; earned simply by continued empl period. Some bonuses are ear ned b, ly, quarterly or annual measure of performs 8 month Some bonuses may be pur Fae tt y based on years of historical gecaaaretionary, contractual oF ‘ 392 Scanned with CamScannerRecognition of bonus A bonus is anticipated for interim Purposes if and only if: The bonus is a legal obligation or ice would make a. igatior a 1 or past practice woul: Fe ation fc i i has no realistic alternative but to mie ep ne pb. Areliable estimate of the obligation can be made. Irregular costs Certain costs are expected to be incurred irregularly during the financial year, such as charitable contribution and employee training cost. ‘ 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. Depreciation and amortization 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. Paid vacation and holiday leave Paid vacation and holiday leave shail be accrued for interim purposes because these are enforceable as legal commitments. Gain and loss Gain or loss from disposal of property, gain or loss from discontinued operation and other gain or loss shall not be allocated over the interim periods. The gain is reported in the interim period when realized and the loss is reported in the interim period when incurred. 393 Scanned with CamScannerIncome tax pense shall reflect the same Interim period income tat & tax accounting applicable to general principles of income annual reporting. t : i AS 34 states that the interim Paragraph 12 of Appendix B of P. poe ot asinig the annus period income tax expense is a 5 effective income tax rate applied to the pretax income of the interim period. Illustration An entity has the following income before tax and annual effective tax rate for the first three quarters of the current year: . Income before tax Tax rate First quarter 5,000,000 30% Second quarter 6,000,000 ‘30% Third quarter _8,000,000 25% Total income 19,000,001 Computation of income tax for each quarter First quarter (30% x 5,000,000) 1,500,000 Second quarter (30% x 6,000,000) 1,800,000 Total income tax for first two quarters 3,300,000 Cumulative income tax for three quarters (25% x 19,00 i 000,000) 4,750,000 Income tax for first two quarters 300, (3,300,000) ‘Third quarter — income tax expense 1,450,000 a 394 Scanned with CamScannerDifference in financial reporting year and tax year If the financial reporting year and the j 3 the income t: i Paragraph 17 Cf Appendix Bof PAS 34 states that Yoo insotas tax exper se ‘or interim periods of that financial year is meas ing separate effective tax rates for each of the tax years applied to the portion i F each of those tax years. of pretax income earned in Simply stated, the effective tax rate of a particular tax year is applied to the pretax income of the interim period in the same tax year. Illustration . An entity's financial reporting year ends June 30 and it reports quarterly. This means that the financial reporting is from July 1 of one year to June 30 of next year. The tax year ends December 31. “ The entity reported the following income before tax for the financial year from July 1, 2019 to June 30, 2020: First quarter July —«‘1, 2019 to September 30, 2019 1,000,000 Second quarter October 1,2019to December 31, 2019 2,000,000 Third quarter January 1, 2020 to March 81, 2020 2,500,000 Fourth quarter April _1, 2020 to June 30, 2020 4,000,000 The effective income tax rate is 30% for 2019 and 25% for 2020. The income tax expense for each quarter of the financial reporting year is computed as follows: First quarter (30% x 1,000,000) Second quarter (30% x 2,000,000) Third quarter (25% x 2,600,000) Fourth quarter (25% x 4,000,000) ‘Total income tax expense 395 Scanned with CamScannerChange in accounting policy PAS 34, paragraph 43, provides that a change a aceountin policy shall be reflected by restating the Malecrrtee statements of prior interim periods of the current year an e comparable interim periods of the prior financial year. The objective of this requirement is to ensure that a single accounting policy is applied to a particular class of transactions throughout the entire financial year. To allow differing accounting policies for the same class of transactions within a single financial year would result in interim allocation difficulties, obscured operating results, and complicated analysis and understandability of interim information. : Scanned with CamScannerPROBLEMS CPA Adapted) actions during the first Problem 19-1 (AI Farr Company had the following trans: quarter: een Loss from typhoon : can 700, Payment of fire insurance premium for calendar year. . 10,000 What total amount of expenses should be included in the income statement for the first quarter? a. 800,000 b. 725,000 c. 200,000 d. 0 Problem 19-2 (AICPA Adapted) Harper Company incurred an inventory loss from market decline of P840,000 on June 30. . What amount of the inventory loss should be recognized in the quarterly income statement for the three months ended June 30? a. 210,000 b. 280,000 c. 420,000 d. 840,000 Problem 19-8 (AICPA Adapted) On June 30, Mill Company incurred a P1,000,000 n , i ,000, et loss ao isons lorie bacineeg segment. Also, on "June 80, the entity pai ),000 for propert; ; : current calendar year. Caceres oaseseed irl What total amount should be included i inati of the net income or loss for the neguit the determinate, ended June 30? Sea a. 1,400,000 b, 1,200,000 ce. 900,000 d. 700,000 . 898 Scanned with CamScannerproblem 19-4 (IFRS) Mount Company operates in the'travel industry aud incurs costs unevenly throughout the year. Advertising costs of 2,000,000 were incurred on March 1 paid at year-end based on sales. » and staff bonuses are Staff bonuses are expected to year. Of that sum, P3,000,0 ending March 81. be around P20,000,000 for the 00 would relate to the period What total amount of expenses should be included in the quarterly financial report ending March 31? 7,000,000 5,500,000 - 5,000,000 _ a . 3,500,000 peop Problem 19-5 (IFRS) Davao Company prepares quarterly interim financial reports. The entity sells electrical goods and normally 5% of customers claim on their warranty. The warranty expense in the first quarter 'was calculated at 5% of sales to date which amounted to. P10,000,000. However, in the second quarter, a design fault was found and warranty claims were expected to be 10% for the whole year. Sales for the second quarter amounted to P15,000,000. What amount of warranty expense should be charged in the interim income statement for the second quarter? & 2,000,000 b. 1,250,000 © 1,500,000 a. 750,000 399 Scanned with CamScannerProblem 19-6 (AICPA Adapted) Bailar Company, a calendar-year ee sported the following income before income tax and e ed ive tax rate fo, the first three quarters of the current year: Income before tax Effective tax rate First quarter 6,000,000 : bees Second quarter 7,000,000 a Third quarter 8,000,000 What is the income tax expense for the third quarter? 5,250,000 1,350,000 2,400,000 2,000,000 aerp Problem 19-7 (IFRS). Sigma Company has a financial reporting year that begins July 1, 2019 and ends on June 30, 2020. The tax year ends every December 31. The entity reported the following quarterly income for financial reporting: First quarter 1,000,000 Second quarter : : 300,000 Third quarter ; ~ 3'500,000 Fourth quarter 4,000,000 The annual effective tax rate is 30% for 2019 and 25% for 2020. y What is the.total income tax expense fo June 30,2020? ~ es r the year ended 2,375,000 2,700,000 2,250,000 ' ‘ . 1,165,000 Bere 400 E 4 Scanned with CamScannerproblem 19-8 Multiple choice (IFRS) 3, Interim financial reports shall be published a. Once a year at any time duri b. Within a month of the half ye, c. Ona quarterly basis, d. Whenever the entity wishes, ig the year. ar-end, wp . If an entity does not prepare interim financial reports a. The year-end financial st; comply with IFRS. statements are deemed not to b. The year-end financial statements' i i IFRS ie not alferted: ents' compliance with c. The year-end financial statements ‘shall .not be acceptable under local jurisdiction: 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 condensed statement of financial position and an income statement. d. A condensed statement of financial position, income statement and statement of cash flows. ~ 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 Which basic financial statements are Prepared eae minimum for interim financial reporting? ‘ . financial position and income statement b. Set i financial position, income statement and comprehensive income c statement of © Hinancial position, statement of comprehensive income and statement of cash flows d. Statement of financial position, atatemant of comprehensive income, statement of cash flows and statement of changes 17 equity 401 Scanned with CamScanner6. There is a presumptio a ~ 10. n that anyone reading interjn, financial reports shall a. b. c. a. i i cial Ri Fl Understand all International Financial Reporting Standards. ; Have access to the records of the entity. ort Have access to the most recent annual * port. Not make decisions based on the report. Which statement in relation to an interim report is true? a. b. c a. ‘An interim financial report must consist of a complete set'of financial statements. An interim financial report must condensed set of financial statements. . An interim financial report may consist of a condensed set or complete set of financial statements. All of these statements are true. ° consist of a Publicly traded entities are encouraged to provide interim financial reports a. b. c d. a. b. c. d. At least at the end of the half year and within 60 days of the.end of the interim period. Within a month of the half year-end. On a quarterly basis. Whenever the entity wishes. . Which statement is true regarding interim reporting? Interim reports are required on a quarterly basis. Interim reports are not required. Interim reports require the preparation of only an income statement and a statement of financial position. All of these statements are true. When the’ business is highl: standard suggest? Bhiy seasonal, what does the a. b. ae |. No additional dig Additional note about the se: d | asonal nature Disclosure of financial information for the latest and comparative 12-month period i ne interim report nth period in addition to the Additional disclosure in the accounting policy note closure : 42/0" Scanned with CamScannerProblem 19-9 Multiple choice (AICPA Adapted) 1. Interim financial statements are usually presented on a Monthly basis . Quarterly basis Semiannual basis Nine-month basis Bese 2. For interim reporting, inte: an inventory loss from a market decline in the second q ie 7 uarter shall be recognized In the fourth quarter Proportionately over the last quarters Proportionately in each of the four quarters In the second quarter . aor p # For external reporting, it is appropriate to use estimated gross profit rate to determine the cost of goods sold for Interim reporting Year-end reporting © Interim reporting and year-end reporting __ Neither interim reporting nor year-end reporting Boop For interim: financial reporting, an expropriation gain occurring in the second quarter shall be » Recognized ratably over the last three quarters Recognized ratably over all four quarters Recognized in the second quarter Disclosed in the second quarter peop a Advertising costs incurred shall be deferred to provide an appropriate expense in each period for Interim reporting Year-end reporting Interim reporting and } . Neither interim reporting nor ‘ d year-end reporting ‘ year-end reporting pe oP 403 ‘ Scanned with CamScanner6. x ~ 10. Due to a decline in market price in fhe, senor uarter, an entity incurred an inventory. eal te the ond ries expected to return to prev! ous secline Nad not reverse :. At the end of the year, A Na When chould ‘the loss be reported in the interim income statement? thi d fourth quarters a. Ratably over the second, third an b. Ratably over the third and fourth quarters c. In the second quarter d. In the fourth quarter How is income tax expense for the third quarter interim period computed? . a. The annual rate multiplied by the third quarter income b. The estimated tax for the first three quarters based on an annual rate less a similar estimate for the first two quarters : . c. The rate applicablé during the third quarter multiplied by three d. Cumulative income tax for three quarters . 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 . Which statement about interim reporting is true? a. All entities that issue an annual report must issue interim financial report. b. A complete set of financial statements must be presented for an interim period. c. The same accounting principles used for the annual report should be employed for interi d. All of these statements are true, SE POPE Entities should disclose all of swing in interim financial report, except the following in interi a. Basic and diluted earnings b. Change in accounting pokes Py c. Events after the end of reporti iod d. Seasonal revenue, cost or expences om 404 . Scanned with CamScanner