OPERATING SEGMENT / INTERIM REPORTING / EVENTS AFTER REPORTING PERIOD

PFRS 8: OPERATING SEGMENTS

Segment reporting – disclosure of certain financial information about product/services an entity
produces and the geographical areas in which an entity operates.
Scope of PFRS 8 – applies to individual/separate FS and to consolidated FS of a group with a parent:
a) Whose debt/equity instruments are traded in public market
b) That files (or in the process) the consolidated FS with securities commission or other
regulatory organization

**A financial report containing both (separate & consolidated), segment information is required only
in the consolidated FS.

Operating segment – is a component of an entity:

1. That engages in business activities from which it may earn revenues or incur expenses
(includes intersegment transactions)
2. Whose operating results are reviewed by chief operating decision maker (CODM)
**CODM – a function; to allocate resources to the segments and assess their performance
3. For which discrete (separate) financial information is available
Identifying operating segments
 Operating segments are identified for internal management reporting purposes
Reportable segments (10% thresholds)
1. Segment revenue (internal & external) is 10% or more of total revenue of all operating
segments
2. Absolute amount of profit/loss is 10% or more of the greater in absolute amount of:
a. combined profit of all operating segments that reported a profit
b. combined loss of all operating segments that reported a loss

3. Segment assets are 10% or more of total assets of all operating segments

**Operating segments not meeting the thresholds may still be reportable if management believes
that information about the segment would be useful to stakeholders
75% threshold – at least 75% of entity external revenue is included in reportable segments; hence,
additional segments should be identified as reportable despite not meeting the 10% threshold
Aggregation of segments
1. Nature of product or service
2. Nature of production process
3. Type or class of customers
4. Marketing method or the method to distribute the product
5. The nature of the regulatory environment, for example banking, insurance or public utility

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Limit to number of reportable segments – ten is practicable
Segment no longer reportable – continue to be reported separately in the current period despite
being no longer reportable
Segment becoming reportable – prior period segment data shall be restated
Information to be disclosed for each segment
1. General information (identification factors used & types of products and services)
2. Information about profit or loss
3. Reconciliations of segment profit/loss & assets/liabilities to entity’s FS
Major customer – single external customer who represents 10% or more of total external revenue
a) Group of entities under a common control
b) Government and entities under the control of such government
Disclosure about major customer
 Total amount of revenue and identity of segment/s reporting the revenue
**entity is not required to disclose identity of the major customer or specific segment
revenues

SAMPLE PROBLEMS

1. EX Company identified the following segments for the current year:

Segment Revenue Profit Assets
B 2,500,000 350,000 10,000,000
I 2,000,000 280,000 8,750,000
T1 1,500,000 240,000 6,250,000
T2 750,000 110,000 5,750,000
E 1,000,000 115,000 2,750,000
R 500,000 105,000 1,500,000
8,250,000 1,200,000 35,000,000

What are the reportable segments? B, I, T1, T2 and E

Total Revenue (8,250,000 x 10%)= 825,000 (Reportable Segment: B, I, T1 and E)

Total Profit (1,200,000 x 10%) = 120,000 (Reportable Segment: B, I and T1)
Total Assets (35,000,000 x 10%) = 3,500,000 (Reportable Segment: B, I, T1 and T2)

2. Vowels Company had five segments for the current year. Segments A, E and O reported profit of
P40,000,000, P15,000,000 and P5,000,000 respectively. Segments U and I reported loss of
P20,000,000 and P30,000,000 respectively. What are the reportable segments based on profit or
loss? A, E, U and I
Profit Loss
A 40,000,000
E 15,000,000
O 5,000,000
U 20,000,000
I 30,000,000
Total 60,000,000 50,000,000

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Profit, higher
(60,000,000 x 10%=6,000,000)

3. Demeanor Company reported revenue of P50,000,000, including intersegment sales of

P10,000,000, expenses of P45,000,000 and net income of P5,000,000 for the current year. Expenses
included payroll costs of P15,000,000. The combined assets of all segments at year-end totaled
P75,000,000.

3.1. What is the minimum amount of sales to a major customer? 4,000,000 (External sales of
40,000,000 x 10%)
3.2. What is the minimum amount of external revenue to be disclosed by reportable segments?
30,000,000 (External sales of 40,000,000 x 75%)

4. Remedial Company and its divisions reported the following for the current year:

Sales to unaffiliated customers 10,000,000

Intersegment sales of products similar to those sold to unaffiliated customers 2,500,000
Interest earned on loans to other operating segments 1,000,000

The entity and all of its divisions are engaged solely in manufacturing operations. What is the
minimum amount of revenue of a segment to be classified as reportable segment? 1,250,000

Sales to unaffiliated customers 10,000,000

Intersegment sales of products similar to those sold to unaffiliated customers 2,500,000
Total Sales 12,500,000
X 10%
1,250,000
5. Martyr Company provided the following information for the current year:

Segment Sales Traceable expenses

Mahalkita 5,000,000 3,000,000
Kahit 4,000,000 2,500,000
Ansakitsakitna 3,000,000 1,500,000

Additional expenses are P2,000,000 indirect expenses, P1,000,000 general corporate expenses,
P500,000 interest expense and P400,000 income tax expense. The interest expense and income tax
expense are regularly reviewed by the chief operating decision maker as a measure of profit or loss.
Appropriate common expenses are allocated to segments based on the ratio of a segment’s sales
to total sales. What is the profit of Segment Kahit for the current year?

Sales 4,000,000
Traceable expenses (direct expenses) (2,500,000)
Indirect expenses (2,000,000 x 4,000,000/ 12,000,000) (666,667)
Interest expense (500,000 x 4,000,000/ 12,000,000) (166,667)
Income tax expense (400,000 x 4,000,000/ 12,000,000) (133,333)
Profit 533,333

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Interim 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 semi-annually. Quarterly interim
reports are the most common.

Interim financial report means a financial report containing either:

a. A complete set of financial statements (as described in PAS Presentation of Financial Statements);
or
b. A set of condensed financial Statements (as described in PAS 34) for an interim period.
Components of an interim financial report

PAS 34, paragraph 8, provides that an interim financial report shall include, at a minimum, the
following components:

a. Condensed statement of financial position

b. Condensed statement of comprehensive income
c. Condensed statement of changes in equity
d. Condensed statement of cash flows
e. Selected explanatory notes

Selected explanatory notes are designed to provide an explanation of significant events and
transactions arising since the last annual financial statements.

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, 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 default or any breach of a debt covenant that has not been corrected subsequently.
i. Related party transactions.

Two views on interim reporting

1. The integral view- the interim period is considered as an integral part of the annual accounting
period. Thus, annual operating expenses are estimated and then allocated to the interim periods
benefited based on forecasted annual activity levels such as sales volume. Subsequent interim
period financial statements are adjusted to reflect the effect of changes in estimates in earlier
interim periods of the same financial year.

2. Discrete view- the interim period Is considered as a discrete (stand-alone) accounting period.

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 The same expense recognition principles applied in annual reporting are used in the interim
period. No special interim accruals or deferrals are made. Annual operating expenses are
recognized in the interim period incurred regardless of whether subsequent periods are
benefited.

Basic Principles

 PAS 34, paragraph 28, provides that an entity shall apply the same accounting policies in the
interim financial statements as are applied in the annual financial statements.

 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 interim periods benefited.

Recognition and measurement principles in interim financial reports:

Transaction or Event Accounting Treatment
Write-downs of inventories to NRV or Recognized in full in the interim period.
reversal thereof (discrete view)
Recognized in full in the interim period.
Impairment loss and reversal thereof
(discrete view)
Gains and losses on changes in fair values,
Recognized in full in the interim period.
exchange rates and other market-related
(discrete view)
factors.
Recognized in full in the interim period.
Contingent rent
(discrete view)
Recognized in full in the interim period.
Dividend income
(discrete view)
Recognized in full in the interim period.
Dividend declared
(discrete view)
Allocated to the periods benefited, except when
Depreciation or amortization the units of production method is used.
(integral view)
Allocated to the periods for the full financial
Income tax expense
year (integral view)
Allocated to the periods when the entity has
Year-end bonuses/ compensated absences
obligation to pay for them. (integral view)
Accounted for prospectively in the interim
Changes in accounting estimates (e.g.,
period where the change occurs. Interim
changes in provisions, bad debts,
financial reports in previous periods are not
depreciation methods, etc.)
restated. (discrete view)

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Changes in accounting policy
Correction of prior period error
Accounted for retrospectively as at the
beginning of the earliest comparative period
presented, unless it is impracticable or a
transitional provision requires otherwise.
Accounted for retrospectively.

Seasonal, cyclical or occasional revenue shall not be anticipated or deferred as of an interim date if
anticipation or deferral would not be appropriate at the end of the entity’s reporting period.
Thus, dividend revenue, royalties and government grants shall be recognized in the interim period
when they occur.

Uneven costs are cost 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.

Irregular costs are certain costs 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.

Income tax
Interim period income tax expense shall reflect the same general principles of income tax accounting
applicable to annual reporting.

Paragraph 12 of Appendix B of PAS 34 states that the interim period of income tax expense is
accrued using the annual effective income tax rate applied to the pretax income of the interim
period.

Difference in financial reporting year and tax year

The effective tax rate of a particular tax year is applied to the pretax income of the interim period in
the same tax year.

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.

Problem 1: Recognition and measurement in interim periods

ABC Co. reports profit before tax of P1,000,000 in its 2nd quarter interim financial statements before
consideration for the following:

a. Inventory with a carrying amount of P100,000 has a net realizable value of P80,000. It is expected
that the decline in value will reverse in the 3 rd quarter.
b. An investment property measured under the cost model has a carrying amount of P250,000 but
its recoverable amount is P210,000.
c. An investment in FVPL measured at acquisition cost of P20,000 has a fair value of P25,000 as at
the end of the 2nd quarter. However, the increase in fair value is expected to be only temporary.

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d. No depreciation is recognized during the 2 nd quarter. The annual straight-line depreciation of
items of PPE is P360,000.
e. ABC Co. has a policy of providing 12 days paid vacation leaves for its employees. The vacation
leaves are vesting and accumulating. Total paid vacation leaves eligibility of employees for the full
year is P240,000. However, only P30,000 worth of paid vacation leaves have been availed of during
the quarter.
f. It was discovered that depreciation in the previous year was overstated by P9,000.

Unadjusted profit before tax 1,000,000

Write-down of inventory (100,000- 80,000) (20,000)
Impairment of asset (250,000- 210,000) (40,000)
Unrealized gain (25,000- 20,000) 5,000
Depreciation (360,000 x 1/4) (90,000)
Employee benefits (240,000 x 1/4) (60,000)
Adjusted profit before tax 795,000

Requirement: Compute for the adjusted profit for the 2nd quarter.

Problem 2: Costs incurred unevenly

ABC Co. is preparing its interim financial statements for the period ended March 31, 20x1. The
following relate to the transactions during the first quarter:

a. Total sales for the interim period was P1,000,000.

b. Cost of sales was P450,000.
c. ABC is liable for 5% commission on its sales to its sales representatives and agents. No commission
has yet been paid as of March 31, 20x1.
d. The allowance for doubtful accounts has balance of P5,000 as of January I, 20x1. The required
balance as of March 31, 20x1 is P15,000. There were no write-offs or recoveries during the period.
e. A building with historical of P1,200,000 is being depreciated over 5 years using straight-line
method.
f. ABC prepaid a one-year insurance on its assets for P40,000 on January 1, 20x1.
g. Property taxes for 20x1 amounting to P26,000 was paid in January.
h. Advertising costs of P50,000 were incurred in February on promotional activities held on
Valentine's Day.
i. Year-end staff bonuses are expected to be around P92,000. Employees become entitled to the
bonuses as they provide services to ABC during the year.
j. ABC's president is entitled to a 10% bonus on profit before bonus and taxes.
k. Loss on sale of a used equipment on March 2, 20x1 was P30,000.
l. ABC incurred P12,000 on unanticipated repairs on its factory equipment on March 16, 20x1.
m. Due to the unexpected breakdown of the factory equipment on March 16, 20x1, ABC has
planned a major periodic overhaul of its other equipment to be held annually starting on December
31, 20x1. The cost of the major planned periodic overhaul is estimated at P48,000.

n. ABC leases one of its retail stores. Monthly rentals are P5,000, however, the lease contracts
provide for a contingent rent equal to 2% of the excess of sales over P900,000.
o. ABC’s budget for 20x1 included charitable contributions of P24,000 and employee training costs of
P13,000. None of those costs were incurred as of March 31, 20x1.
p. Other operating expenses incurred during the first quarter totaled P120,000.

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Requirement: Compute for the profit or loss for the first quarter ended March 31, 20x1.

a Sales 1,000,000
b Cost of sales (450,000)
Gross income 550,000
c Commission (5% x 1,000,000) (50,000)
d Bad debts (15,000- 5,000) (10,000)
e Depreciation (1,200,000 /5) x 3/12 (60,000)
f Insurance (40,000 x 3/ 12) (10,000)
g Property tax (26,000 x 3/12) (6,500)
h Advertising costs (50,000)
i Staff bonuses (92,000 x 3/12) (23,000)
k Loss on sale (30,000)
l Repairs (12,000)
n Rent (5,000 x 3 ) + (( 1,000,000 - 900,000) x 2%) (17,000)
p Other operating expenses (120,000)
Profit before bonus to key personnel 161,500
j Bonus to key personnel (161,500 x 10%) (16,150)
Profit for the first year quarter 145,350

Problem 3
Hyper Company prepared the following income statement for the year ended December 31, 2019:

Sales 6,000,000
Cost of goods sold (2,800,000)
Gross income 3,200,000
Gain on sale of equipment 100,000
Total income 3,300,000
Operating expenses (500,000)
Casualty loss (300,000)
Income before tax 2,500,000
Income tax-30% 750,000
Net income 1,750,000
• Third quarter sales were 30% of total sales.
• For interim reporting purposes, a gross profit rate of 40% can be justified.
• Variable operating expenses are allocated in the same proportion as sales.
• Fixed operating expenses are allocated based on the expiration of time.
• Of the total operating expenses, P400,000 relate to variable expenses and P100,000 relate to fixed
expenses.
 The equipment was sold on June 1, 2019.
•The casualty loss occurred on September 1, 2019.

What amount should be reported as income before tax for the third quarter ended September 30,
2019?

Sales (30% x 6,000,000) 1,800,000

Cost of goods sold (60% x 1,800,000) (1,080,000)

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 Gross income 720,000
Variable expenses (30% x 400,000) (120,000)
Fixed expenses (100,000/4) (25,000)
Casualty loss (300,000)
Income before tax 275,000

Problem 4
On June 30, 2019, Mill Company incurred a P1,000,000 net loss from disposal of a business segment.
Also, on June 30, 2019, the entity paid P400,000 for property taxes assessed for the calendar year
2019.

What total amount should be included in the determination of the net income or loss for the six-
month interim period ended June 30, 2019?

Net loss from disposal of segment 1,000,000

Property taxes (400,000 x 6/12) 200,000
Total amount 1,200,000

Events after the reporting period

PAS 10, paragraph 3, defines events after the reporting period as those events, whether favorable or
unfavorable, that occur between the end of reporting period and the date on which the financial
statements are authorized for issue.

Events after the reporting period are also known as subsequent events.

Such events may require either adjustment or disclosure.

Types of events after the reporting period

a. Adjusting events after the reporting period are those that provide evidence of conditions that
exist at the end of reporting period.

b. Nonadjusting events after the reporting period are those that are of conditions that are arising
after the end of reporting period.
It is appropriate to adjust the financial statements for all the events that offer clarity concerning the
condition that existed at the end of the reporting period and that occur prior to the date the
financial statements are authorized for issue.

Accordingly, an entity messages the amounts recognized in the financial statements for adjusting
events that provide evidence of conditions that existed at the end of reporting period.

However, an entity does not recognize events after the reporting period that relate to conditions
that only arose after the reporting period.

The entity is required only to disclose significant non-adjusting events.

Examples of adjusting events

Examples of adjusting events after the reporting period which required the entity to adjust its

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financial statements are:

1. Settlement after the reporting period of a court case because it confirms that the entity
already had a present obligation at the end of reporting period.
2. Bankruptcy of a customer which occurs after the reporting period.
3. Sale of inventory is after the reporting period may give evidence about the net realizable
value at reporting date.
4. The determination after the reporting period of the cost of assets purchased or the proceeds
from assets sold before the end of reporting period.
5. The determination after the reporting period of the property sharing or bonus payment if
the entity has the present obligation at the end of reporting period to make such payment.
6. The discovery of fraud or errors that show the financial statements were incorrect.

Examples of non-adjusting events

1. Business combination of the reporting period.

2. Plan to discontinue and operation.
3. Major purchase and disposal of asset expropriation of major asset by government.
4. Destruction of major production plant by a fire after the reporting period.
5. Major ordinary share transaction and potential ordinary share transactions after the
reporting period.
6. Announcing or commencing the implementation of a major restructuring.
7. Abnormally large changes after the reporting period in asset prices or foreign exchange
rates.
8. Entering into significant commitment or contingent liabilities, for example, by issuing
guarantees.
9. Commencing major litigation arising solely from events that occurred after the reporting
period.
10. Change in tax rate enacted or announced after the end of reporting period that has a
significant effect on current and deferred tax asset and liability.

Financial statements authorized for issue

Financial statements are authorized for issue when the board of directors reviews the financial
statements and authorizes them issue.

In some cases, an entity is required to submit its financial statements to the shareholders for
approval after the financial statements have been issued.

In such cases, the financial statements are authorized for issue on the date of issue by the board of
directors and not on the date when shareholders approve the financial statements.

Illustration

The management of an entity completed draft of the financial statements for the year ended
December 31, 2019 on February 1, 2020.

On March 1, 2020 the board of directors review the financial statements and authorized them for
issue.

The entity announces the profit and selected financial information on March 15, 2020.

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The financial statements were made available to shareholders on April 1, 2020.

The shareholders approve the financial statements at their annual meeting on April 10, 2020.

The approved financial statements were then filed with sec on April 15, 2020.

The financial statements are authorized for issue on March 1, 2020 the date of the board
authorization for issue.

Another illustration

In some cases, the management of an entity is required to issue its financial statements to a
supervisor board made up so late in non-executive for approval.

In such cases, the financial statements are authorized for issue when the management authorizes
them for issue to the supervisory board.

For example, on March 1, 2020 the management of an entity authorized the 2019 financial
statements for issue to the supervisory board which approve the financial statements on March 15,
2020.

The financial statements were made available to shareholders on March 31, 2020 and approved by
the shareholders at their annual meeting on April 10, 2020.

The financial statements for then filed with sec on April 15, 2020.

The financial statements were authorized for issue on March 1, 2020 the date of the management
authorization for issue to the supervisory board.

Disclosure of date station for issue

PAS 10, paragraph 17, provides that an entity shall disclose the date when the financial statements
are authorized for issue and who gave the authorization.

If the entities owners or others have the power to amend the financial statements after issue, the
entity shall disclose such fact.

It is important for users to know when the financial statements are authorized for issue because the
financial statements do not reflect events after this date.

CLOSURE ACTIVITIES
Operating Segment

Problem A- Chennifer Company, an entity listed on a recognized stock exchange, reports operating
results from its North American division to its chief operating decision maker. The segment
information for the current year is as follows:
Segment’s results Combined results of all
operating segments
Revenue 3,675,000 39,250,000

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 Profit 970,000 9,600,000
Assets 1,700,000 17,500,000
Number of employees 2,500 18,500

1. Which piece of information determines for Chennifer Company that the North American division is
a reportable operating segment?

Problem B-The following information pertains to revenue earned by Chenny Company’s operating
segments for the current year:
External sales Internal sales Total revenue
Segment 5,000 3,000 8,000
Alo 8,000 4,000 12,000
Bix 4,000 - 4,000
Cee 43,000 16,000 59,000
Dil 60,000 23,000 83,000
Combined - (23,000) (23,000)
Elimination
Consolidated 60,000 - 60,000

2. In conformity with the revenue test, what is the total revenue of the reportable segments?

Problem C-Cholina Company, a publicly owned entity, is subject to the requirements of PFRS 8. In its
income statement for the year ended December 31, 2019, Cholina reported revenue of P50,000,000,
including intersegment sales of P10,000,000, and expenses of P47,000,000. Expenses include payroll
costs of P15,000,000. Cholina’s combined identifiable assets of all operating segments on December
31, 2019 totaled P40,000,000.

3. External revenue of reportable operating segment must be at least

Problem D-Chudy Ann Company has three lines of business, each of which was determined to be
reportable segment. Chudy Ann Company sales aggregated P7,500,000 in the current year, of which
Segment No. 1 contributed 40%. Traceable costs were P1,750,000 for Segment No. 1 out of a total of
P5,000,000 for the entity as a whole. For external reporting, Chudy allocates common costs of
P1,500,000 based on the ratio of a segment’s income before common costs to the total income
before common costs.

4. In its financial statements for the current year, what amount should Chudy report as profit for
Segment No. 1?

Problem E-Chasper Company does business in several different industries. The income statement for
2019 is as follows:

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 Sales 60,000,000
Cost of goods sold (28,000,000)
Gross income 32,000,000
Expenses (14,000,000)
Depreciation (4,000,000)
Income tax expense (4,000,000)
Net income 10,000,000

Chasper has two major reportable segments, X and Y. An analysis reveals that P1,000,000 of the
total depreciation expense and P2,000,000 of the expenses are related to general corporate
activities. The remaining expenses and sales are directly allocable to segment activities according to
the following percentages:
Segment Segment Other
X Y
Sales 40% 45% 15%
Cost of 35% 50% 15%
goods sold
Expenses 40% 40% 20%
Depreciation 40% 45% 15%
5. What amount should Chasper Company disclose as profit of Segment X?

Problem F- Chechomar Company has expanded rapidly and segment reporting is now required. The
entity has no intersegment sales. The following data are for the year ended December 31, 2019:

Operating Segment Operating Identifiable

segment revenue profit assets
(loss)
1 620,000 190,000 400,000
2 70,000 30,000 80,000
3 440,000 70,000 300,000
4 190,000 (30,000) 140,000
5 180,000 (25,000) 180,000
6 70,000 10,000 120,000
7 70,000 (20,000) 140,000
Others 360,000 (25,000) 140,000

 The “Others” category includes five operating segments, none of which has revenue or assets
greater than P80,000 and none with an operating profit.
 Operating Segments 1 and 2 produce very similar products and use very similar production
processes, but serve different customer types and use quite different product distribution
system. These differences are due in part to the fact that Segment 2 operates in a regulated
environment while Segment 1 does not.
 Operating Segments 6 and 7 have very similar products, product distribution systems ,
production processes but are organized as separate divisions since they serve substantially

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 different types of customers. Neither Segments 6 nor 7 operate in a regulated environment.

6. What are the reportable segments for the year ended December 31, 2019?

Interim Reporting
Problem G- Monthly Co.’s profits before tax for the 1st and 2nd quarters of 2019 were P920,000 and
P1,200,000 before any necessary adjustments for the items listed below.

a. Total unfavorable manufacturing cost variances amounted to P24,000 in the 1st quarter. Monthly
Co. expects that the manufacturing cost variances will be absorbed by year-end. There were no
work-in-process inventories as of the end of the 1st and 2nd quarters.

b. Newspaper advertisement costs of P90,000 were paid on April 1, 2019. The advertisement shall
appear in the weekly newspaper publications over the remaining months of the year.

c. Monthly Co.’s held for trading securities acquired on February 4, 2019 for P200,000 had a fair
value of P100,000 on March 31, 2019. Monthly had expected that the fair value decline was only
temporary. In fact, on June 30, 2019, the recovery exceeded the previous write-down in investment
by P20,000.

d. Research and development costs incurred during the 1 st and 2nd quarters totaled P10,000 and
P12,000, respectively. In July 2019, technical feasibility has been established and, therefore,
development costs of P5,000 and P7,000 expensed in the 1 st and 2nd quarters would have qualified
for capitalization.

e. On January 2019, Monthly Co. recognized an account receivable denominated in US dollars

amounting to $1,000. The exchange rate on that date was P40:$1. On March 31, 2019, the exchange
rate was P30:$1. Monthly Co. had expected that the change in the exchange rate was only
temporary. In fact,on June 30, 2019, the exchange rate was P45:$1. The receivable is collectible on
September 2, 2019.

f. A land with a carrying amount of P200,000 had a recoverable amount of P192,000 on March 31,
2019.

Compute for the adjusted profits before tax for the:

7.1st quarter

8. 2nd quarter

Problem H-Among the transactions of DEF Company for the first two quarters of 2019 were the

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following:

a. DEF recognized a P100,000 write-down in its inventory during the first quarter. DEF had expected
that the write-down will reverse in the second quarter, and in fact, in the second quarter, the
recovery is P100,000.

b. DEF provides warranty for its sales. In the first quarter, DEF estimated a 5% warranty obligation on
its first quarter sale of P1,000,000. In the second quarter, a change in accounting estimate was
made. It was estimated that the cost of warranty should be 10% of total sales. The second quarter
sales amounted to P1,200,000.

c. DEF has been estimating its bad debt expense as 2% of credit sales. However, in the second
quarter, a change was made to the percentage of ending receivable. Under this method, the
required balance of the allowance for doubtful accounts as of June 30, 2019 is computed at P30,000.
The allowance has a balance of P5,000 at the beginning of the year. Total write-offs during the first
six months of 2019 amounted to P12,000; recoveries totaled P3,000. Credit sales for the 1 st and 2nd
quarters amounted to P1,000,000 and P2,000,000, respectively.

What are the effects of the transactions listed above on profit or loss before tax in the first and
second quarter interim financial statements of DEF?

9. first quarter

10. second quarter

SYNTHESIS / GENERALIZATION
Segment reporting – disclosure of certain financial information about product/services an entity
produces and the geographical areas in which an entity operates.
Identifying operating segments
 Operating segments are identified for internal management reporting purposes
Reportable segments (10% thresholds)
1. Segment revenue (internal & external) is 10% or more of total revenue of all operating
segments
2. Absolute amount of profit/loss is 10% or more of the greater in absolute amount of:
a. combined profit of all operating segments that reported a profit
b. combined loss of all operating segments that reported a loss

3. Segment assets are 10% or more of total assets of all operating segments

**Operating segments not meeting the thresholds may still be reportable if management believes
that information about the segment would be useful to stakeholders
75% threshold – at least 75% of entity external revenue is included in reportable segments; hence,
additional segments should be identified as reportable despite not meeting the 10% threshold
Aggregation of segments
1. Nature of product or service

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2. Nature of production process
3. Type or class of customers
4. Marketing method or the method to distribute the product
5. The nature of the regulatory environment, for example banking, insurance or public utility

Interim 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 semi-annually. Quarterly interim
reports are the most common.

Two views on interim reporting

1. The integral view- the interim period is considered as an integral part of the annual accounting
period. Thus, annual operating expenses are estimated and then allocated to the interim periods
benefited based on forecasted annual activity levels such as sales volume. Subsequent interim
period financial statements are adjusted to reflect the effect of changes in estimates in earlier
interim periods of the same financial year.

2. Discrete view- the interim period Is considered as a discrete (stand-alone) accounting period.
The same expense recognition principles applied in annual reporting are used in the interim
period. No special interim accruals or deferrals are made. Annual operating expenses are
recognized in the interim period incurred regardless of whether subsequent periods are
benefited.

Events after the reporting period

PAS 10, paragraph 3, defines events after the reporting period as those events, whether favorable or
unfavorable, that occur between the end of reporting period and the date on which the financial
statements are authorized for issue.

Events after the reporting period are also known as subsequent events.

Such events may require either adjustment or disclosure.

Types of events after the reporting period

a. Adjusting events after the reporting period are those that provide evidence of conditions that
exist at the end of reporting period.

b. Nonadjusting events after the reporting period are those that are of conditions that are arising
after the end of reporting period.

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