UNIT 3: PAS 34 - INTERIM FINANCIAL REPORTING

Introduction Unit Learning Objective

IAS 34 Interim Financial

Reporting applies when an By the end of this unit, you should be
entity prepares an interim able to repare an Interim Financial
financial report, without Report in good form by applying the
mandating when an entity basic and core concepts of PAS 34 –
should prepare such a report. Interim Financial Reporting.
Permitting less information to
be reported than in annual financial statements (on the basis of providing
an update to those financial statements), the standard outlines the
recognition, measurement and disclosure requirements for interim
reports.

Interim financial reporting is the preparation and presentation of

financial statements for a period of less than one year.

Timing

This unit is expected to consume six study hours – four hours for
reading and comprehension, and two hours for answering the
assessments.

Getting Started!

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.

Publicly traded entities are ENCOURAGED to provide interim

financial reports at least semiannually. Such reports are to be made
available no later than 60 days after the end of the interim period. The
standard specifies the content of an interim financial report; however, it
does not mandate which entities are required to publish interim financial
reports, how frequently, or how soon after the end of an interim period.
Such matters will be decided by national governments, securities
regulators, stock exchanges, and accountancy bodies.

Under the Philippine jurisdiction, the Securities and Exchange

Commission and the Philippine Stock exchange REQUIRES entities
covered by the reportorial requirements of the Revised Security Act to
file quarterly interim financial reports within 45 days after the end of each
of the first three quarters.

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3.1 MINIMUM COMPONENTS OF AN INTERIM FINANCIAL
REPORT

i. Condensed statement of financial position;

ii. Condensed statement of comprehensive income;
iii. Condensed statement of changes in equity;
iv. Condensed statement of cash flows;
v. Selected explanatory notes.

A condensed financial report refers to report where each of the

headings and subtotals presented in the entity’s most recent annual
financial statements is required but there is not requirement to included
greater detail unless this is specifically required.

The explanatory notes required are designed to provide an

explanation of events and transactions that are significant to an
understanding of the changes in financial position and performance of the
entity since the last annual reporting date. IAS 34 states a presumption
that anyone who reads an entity's interim report will also have access
to its most recent annual report. Consequently, IAS 34 avoids repeating
annual disclosures in interim condensed reports.

Refer to APPENDIX C for specific disclosures provided by the PAS 34.

However, 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 grants an entity the option to publish A SET

OF CONDENSED FINANCIAL STATEMENTS or A COMPLETE SET OF
FINANCIAL STATEMENTS in its interim financial report.

3.2 RECOGNITION AND MEASUREMENT OF REVENUES AND

EXPENSES FOR INTERIM REPORTING

This report may be issued semi-annually (6 months), quarterly (3

months), monthly (1 month).

An enterprise should apply the same accounting policies in its

interim financial statements as are applied in its annual financial
statements.

Year-to-date measurements may involve changes in estimates of

amounts reported in prior interim periods of the current financial year.

But the principles for recognizing asset, liabilities, income, and

expenses for interim periods are the same as in annual financial
statements.

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 REVENUES

Revenue from SALE OF PRODUCTS and from SERVICES

RENDERED (ex. Sales) – on the same basis as for annual reporting
(recognized as earned during the interim period)

Revenues received seasonally, cyclically, or occasionally (ex.

dividend revenue, royalty revenue and government grants) – not
anticipated or deferred if anticipation or deferral would not be appropriate
at the end of enterprise’s financial year

Revenues from long-term construction-type contracts

accounted for under the percentage-of-completion method (discussed
further in higher Accounting subject) – recognized in the interim periods
on the same basis as followed for the full year.

 Losses from these contracts – recognized in full during the

interim period in which the existence of the losses becomes
evident

COSTS AND EXPENSES

Costs and Expenses Associated Directly with PRODUCTS SOLD

and SERVICES RENDERED (ex. Cost of Goods Sold) – similar with annual
reporting

Companies that use a PERIODIC INVENTORY SYSTEM may adopt

the GROSS PROFIT METHOD (Sales – COS = GP) or any estimation
methods to determine the COST OF GOODS SOLD.

Losses from inventory write-downs, restructurings, or

impairments (discussed further in higher Accounting subject) in an
interim period - similar with annual reporting
 if the estimate changes in the subsequent interim period in
the same financial year, an additional amount is recognized
or a reversal is made in the current interim period

Costs and Expenses other than product costs (ex. Depreciation,

Advertising, Property Taxes, Warranty, and the expenses below)–
charged as incurred or allocated among interim periods based on an
estimate of time expired, benefit received or activity associated with the
periods

Major Planned Periodic Maintenance or Overhaul or Other

Seasonal Expenditure that is expected to occur late in the year –
anticipated, and thus recognized, for interim reporting purposes only if an
event has caused the enterprise to have a legal or constructive obligation

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 Year-end Bonuses - anticipated, and thus recognized if and only if
the bonus is a legal obligation/constructive obligation and a reliable
estimate of the obligation can be made

Pensions (discussed further in higher Accounting subject) –

calculated on a year-to-date basis using the actuarially determined
pension cost rate the end of the prior financial year, adjusted for significant
market fluctuations since that time and for significant curtailments,
settlements, or other significant one-time events

Other Planned but Irregularly Occurring Costs (ex. charitable

contributions and employee training costs) (discussed further in
higher Accounting subject) – since these are just discretionary, they are
recognized in the interim period that they are actually incurred

Interim Income Tax Expense (discussed further in higher

Accounting subject) – accrued using the tax rate that would be applicable
to expected total annual earnings
 calculated by applying to an interim period’s pre-tax profit
the tax rate that would be applicable to expected total
annual earnings

Foreign Currency Translation Gains and Losses (discussed

further in higher Accounting subject)– recognized as income or as
expenses in the interim period in which they arise
 future changes in foreign exchanges rates are not
anticipated
 foreign currency translation adjustments are not deferred
at an interim date even if expected to reverse before the end
of the financial year

Contractual or Anticipated Purchase Price Changes (discussed

further in higher Accounting subject)– Volume rebates or discounts and
other contractual changes in prices of raw materials, labor or other
purchased goods and services are anticipated in interim periods if it is
probable that they have been carried or will take effect.
 Contractual Rebates and Discounts – anticipated
 Discretionary Rebates and Discounts – not anticipated

Interim Period Manufacturing Cost Variance (discussed further

in higher Accounting subject) – recognized in income at interim reporting
dates to the same extent that those variances are recognized in income at
financial year-end
 Deferral of variances that are expected to be absorbed by
year-end is not appropriate because it could result in
reporting inventory at the interim ate at more or less than
its portion of the actual cost of manufacture.

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Illustrations:

1. On March 31, 2017, the end of the first quarter, Christian, Inc.
estimated that its year-end bonus to executives would be
P300,000 for 2017. The actual obligation paid for 2016 was
P250,000. The estimate for 2017 is subject to year-end
adjustment. What amount of expense, if any, should be reflected
in Christian’s quarterly statement of comprehensive income for
the three months ended March 31, 2017?

300,000 x ¼ = 75,000

2. An entity prepares quarterly interim financial reports in

accordance with IAS 34. The entity sells goods that are subject
to warranty. The company made a provision for warranty in the
first quarter of the year 2017 at 5% sales, as the company in the
past experienced a 5% claim on warranty based on sales.
However, in the second quarter, a modification in the design of
the product resulted to a design fault and the company expected
the warranty claims to increase to 10% for the whole year 2017.
Sales in the first and second quarters were P10 million and P15
million, respectively.

(25,000,000 X 10%) – (10,000,000 X 5%) = 2,000,000

3. X Corp. incurs costs unevenly throughout the financial year.

Staff bonuses are paid at year-end based on sales. Staff
bonuses are expected to be around P30 million for the year,
based on sales of P300 million. Total sales for the quarter
ending March 31, 2017 were P90 million. What cost should be
included for the quarter ended March 31, 2017

P30M/P300M = *10%

*10% x P90M = P9M

4. New Company has calculated that 2017 year-end bonuses to

employees will total P1,500,000. In New Company’s interim
statement of comprehensive income for the six months ended
June 30, 2017, what is the total amount of expense should be
reported?
(1,500,000 x ½) = 750,000

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 5. In January 2017, Victor, Inc. paid property taxes on its factory
building for the calendar year 2017 in the amount of P240,000.
In the first week of April 2017, Victor made advertising
campaign and paid P600,000. These advertisements are
expected to benefit operations for the remainder of the
calendar year. How should these expenses be reflected in
Victor’s quarterly interim financial reports?

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

a. P60,000 P260,000 P260,000 P260,000
b. P60,000 P660,000 P60,000 P60,000
c. P240,000 P600,000 P0 P0
d. P210,000 P210,000 P210,000 P210,000

b. 240,000/4 = 60,000; 600,000 + 60,000 = 660,000

6. During the second quarter of 2017, Square Company sold a

piece of equipment at a loss of P60,000. What portion of the
loss should Square report on its statements of comprehensive
income for the second quarter of P2017?
Entire amount of P60,000 loss is recognized
in the quarter incurred.

7. An entity’s reporting year ends on December 31, and it is

currently preparing interim financial statements for the six
months ending June 30, 2017. The price of its product tends to
vary. At June 30, 2017, it has inventories of 100,000 units, at a
cost per unit of P14. The net realizable value of these
inventories at December 31, 2017 is P15.50 per unit.

At what amount should these inventories be presented in the

interim statement of financial position at June 30, 2017?
100,000 x 12 = 1,200,000, which is lower than the cost of
P1,400,000

8. New Company has calculated that total depreciation expense

for the year ending December 31, 2017 will amount to
P600,000, and that 2017 year-end bonuses to employees will
total P1,500,000.

In New Company’s interim statement of comprehensive

income for the six months ended June 30, 2017, what is the
total amount of expense relating to these two items should be
reported?

(600,000 x ½) + (1,500,000 x ½) = 1,050,000

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 9. X Corporation incurs costs unevenly throughout the financial
year. Advertising costs of P2million were incurred of February
28, 2017 and staff bonuses are paid at year-end based on sales.
Staff bonuses are expected to be around P30 million for the
year, based on sales of P300 million for the year, based on
sales of P300 million. Total sales for the quarter ending March
31, 2017 were P70 million. What costs should be included for
the quarter ended March 31, 2017?

P2M advertising and P7M staff bonuses

3.3 TWO VIEWS ON INTERIM FINANCIAL REPORTING

INTEGRAL VIEW

Each interim period is an integral part of the annual accounting

period.

Annual operating expenses are estimated and then allocated to

the interim periods based on forecasted revenue or sales volume. Costs
incurred that clearly benefit the entire year are allocated to the interim
periods benefited.

INDEPENDENT VIEW

Each interim period is treated as a basic accounting period. The

results of operations shall be determined in essentially the same way as if
the interim period were an annual accounting period.

Each interim period is considered a discrete or separate accounting

period with a 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. Annual operating expenses
are recognized in the interim period they are incurred, irrespective of the
number of interim periods benefited, unless deferral or accrual would be
allowed in the annual financial statements.

PHILIPPINE SETTING

PAS 34 on interim financial reporting does not mention the two

views. Essentially, the standard adopts a mix of integral and
independent views.

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Additional illustrations:

DEPRECIATION AND BONUS

Kit Co. has an estimated depreciation expense for the year

December 31, 2019 amounting to ₱120,000 and that year-end bonuses to
employees will total ₱500,000. In the interim income statement for six
months ended June 30, 2019, what total amount of these expenses should
be reported?

Answer: ₱ 310,000
Supporting computation:

₱ 60,000 - Depreciation (120,000 x 6/12)

₱ 250,000 - Bonuses (500,000 x 6/12)

This is an application of the integral approach wherein expenses are

estimated and then allocated to the interim periods. This is applied only to
items which are allowed to be estimated and allocated for annual reporting.

INVENTORY

Raymund Co. incurred an inventory loss from market decline of

₱840,000 on June 30, 2019. This is expected to reverse in the next
semester. What amount of the inventory loss should be recognized in the
quarterly income statement for the three months ended June 30, 2019?

Answer: ₱ 840,000

PAS 34 provides that inventories are measured for interim financial

reporting by the same principles as at financial year-end. Losses on inventory
write-downs are recognized regardless of whether the write-down is
temporary (expected to be reversed) or non-temporary.

This is an application of the independent approach. No allocation is

allowed.

PROPERTY TAXES AND REPAIRS

Kevin Co. paid property taxes of ₱180,000 on a factory building for

calendar year 2019. On April 1, 2019, the entity made ₱300,000 in
unanticipated ordinary repairs to plant equipment. What total amount
these expenses should be included in the quarterly income statement ending
June 30, 2019?

Answer: ₱ 345,000
Supporting computation:

₱ 45,000 - Property taxes (180,000 x 3/12)

An application of the integral approach. Property taxes benefit an

entire year, hence, allocation of the entire property tax paid is proper.

₱ 300,000 - Unanticipated repairs (Full recognition)

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 An application of the independent approach. Seasonal, cyclical,
occasional, or irregular costs such as an unanticipated repair shall not be
anticipated nor allocated.

Note that the interim period covered is from April to June only.

INCOME TAXES

Abet Corp., a calendar-year entity, has the following income before

tax provision and effective annual tax rate for the first three quarters of the
current year 2020:

EFFECTIVE
INCOME BEFORE TAX
TAX RATE
1ST QUARTER ₱ 6,000,000.00 30%
2ND QUARTER ₱ 7,000,000.00 30%
3RD QUARTER ₱ 7,500,000.00 32%

How much is the tax expense for the third each quarter?
Answers:
₱ 1,800,000 - First Quarter
(₱ 6,000,000 x 30%)

____________________________________________________________________________________

₱ 2,100,000 - Second Quarter

₱ 3,900,000 - Cumulative income tax for the 1st and 2nd quarter
(P13,000,000 x 30%)
(₱ 1800,000) - Income tax paid for the 1st quarter

____________________________________________________________________________________

₱ 2,660,000 - Third Quarter

₱ 6,560,000 - Cumulative income tax for the three quarters
(P20,500,000 x 32%)
(₱ 1,800,000) - Income tax paid for the 1st quarter
(₱ 2,100,000) - Income tax paid for the 2nd quarter

PAS 34 provides that income tax expense is accrued using the annual
effective income tax rate applied to the pretax income of the interim period.
The cumulative approach is used in income tax problems.

Refer to APPENDIX B for an example of an Interim Financial Report.

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 Unit Summary

IAS 34 on Interim Financial reporting sets out the basic concepts in

the preparation and presentation of interim financial reports, such reports
covering a period of less than one accounting year. IAS 34 grants an option
to the reporting entity to present a set of condensed financial statements
or a complete set of financial statements as done in annual reporting.
Moreover, the Philippine standard on interim financial reporting adheres
to the mixed concept of both the integral approach and the independent
approach in the preparation and presentation of interim financial reports.

APPENDIX B

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APPENDIX C

Examples of events and transactions for which disclosures are required if

they are significant [IAS 34.15A-15B]

• write-down of inventories
• recognition or reversal of an impairment loss
• reversal of provision for the costs of restructuring
• acquisitions and disposals of property, plant and equipment
• commitments for the purchase of property, plant and equipment
• litigation settlements
• corrections of prior period errors
• changes in business or economic circumstances affecting the fair
value of financial assets and liabilities
• unremedied loan defaults and breaches of loan agreements
• transfers between levels of the 'fair value hierarchy' or changes in
the classification of financial assets
• changes in contingent liabilities and contingent assets.

Examples of other disclosures required [IAS 34.16A]

• changes in accounting policies explanation of any seasonality or

cyclicality of interim operations
• unusual items affecting assets, liabilities, equity, net income or cash
flows
• changes in estimates
• issues, repurchases and repayment of debt and equity securities
• dividends paid
• particular segment information (where IFRS 8 Operating Segments
applies to the entity)
• events after the end of the reporting period
• changes in the composition of the entity, such as business
combinations, obtaining or losing control of subsidiaries,
restructurings and discontinued operations
• disclosures about the fair value of financial instruments

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