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MODULE 6 PACKET
AE 17 - INTERMEDIATE ACCOUNTING 3
MODULE 3.2 ACCOUNTING CHANGES and INTERIM FINANCIAL REPORTING
We will also be expanding our understanding on the requirements for the financial statements specifically
the preparation of interim financial statements. This will cover an appraisal of your knowledge and
understanding on the application of the principles of periodicity, consistency, comparability and
materiality specifically in the preparation of interim financial statements. You are required to differentiate
the requirements in the preparation of annual financial statements as those of the interim financial
statements.
When you see this symbol that is shown across this printed discussion, this represents an important
point for discussion or appreciation/appraisal to be rendered by the student and to be validated by the
teacher. At the end of this module, you will be answering multiple choice questions and straight
problems focusing on the application of accounting changes to different events and transactions as well
as the preparation of interim financial statements.
CONSULTATION HOURS:
Virtual time: During your class schedule
Phone or Messenger: Mondays to Fridays (5 PM to 7 PM)
LEARNING OUTCOMES:
By the end of this module, the students will be able to:
1. Define interim financial reporting
2. Recognize the basic principles of interim financial statements
3. Enumerate the components of interim financial statements
4. Identify the categories of accounting change.
5. Differentiate the change in accounting policy and accounting estimate
6. Recognize and report the accounting changes in the related financial statements.
7. Identify the required disclosures in interim financial statements
8. Prepare and interim financial statements.
ASSESSMENT PLAN:
1. Graded recitation through interactive participation in a question and answer format during discussion
2. Problem solving games (points awarded to the first 5 students who can submit the correct answer
and solution)
3. Individual Submission and discussion of home-learning tasks through research online
STRATEGIES/DESCRIPTION/TOPICS/ TIME TO
ACTIVITIES
COURSE CONTENT COMPLETE
A. Assigned Reading 1. Read the definition and be able to differentiate 2.0 hours
Read the major categories of accounting changes.
1. Categories of 2. Be able to discuss your understanding of the
accounting change transactions that will be categorized as change
2. Differentiate the in accounting policy and accounting estimate.
change in 3. Illustrate the accounting treatment for the
accounting estimate transactions that qualify as change in
and change in accounting policy and/or accounting estimate.
accounting policy 4. Explain the differences between the full
3. Basic principles in presentation and interim presentation of
interim financial financial statements.
reporting 5. Discuss illustrate the disclosure requirements
4. Guidelines and for interim financial statements.
procedures in
preparing interim
financial statements
B. Lecture discussion 1. Discuss your understanding of the transactions 0.5 hour
1. Read Chapter 8 of IA3 relating to change in accounting policy and
2. Watch Video change in accounting estimate.
3. Interactive participation 2. Illustrate the adjustments required in application 0.5hour
thru Q&A of accounting changes.
4. Graded recitation 3. Analyze the impact on the financial statements 1.0 hour
of the accounting changes i.e. prospective and
retrospective or retroactive application.
4. Discuss the basic principles, guidelines and 1.0 hour
procedures in the preparation of interim
financial statements.
5. Differentiate the disclosure requirements for full 1.0 hour
presentation and interim presentation of
financial statements.
6. Illustrate the presentation of interim financial
1.0 hour
statements.
C. Synthesize the main points 1. Teacher summarizes the main points 1.5 hours
Graded recitation discussed.
2. Students will be required to recite by sharing 1.5 hours
their understanding/learnings specifically
pointing out the important aspects that have
PRINTED REFERENCES
1. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2022). Conceptual framework and accounting
standards. 2022 edition. Manila : GIC Enterprises & Co., Inc.
2. Cabrera, M.E.B, Ocampo, R. R. & Cabrera, G. A (2018). Conceptual framework and accounting
standards. 2018-2019 edition. Manila : GIC Enterprises & Co., Inc.
3. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2021). Financial Accounting Volume 1 2021. Manila :
GIC Enterprises & Co., Inc..
4. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2021). Financial Accounting Volume 2 2021. Manila :
GIC Enterprises & Co., Inc..
5. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2021). Financial Accounting Volume 2 2021. Manila :
GIC Enterprises & Co., Inc..
7. Millan, Z. V (2022). Intermediate Accounting 3. 2022 Edition. Baguio City: Bandolin Enterprise
2. Accounting Changes:
Mahutova, S., 2022. IAS 8 Accounting Policies, Changes in Accounting Estimates, Errors. [image]
Available at: <https://www.youtube.com/watch?v=0tMHK8QeqTU&list=PLf-
MINbacZi0Du5nHaJWKKvlFCPp7D7NL&index=7> [Accessed 16 August 2022].
b. To the extent that a change in accounting estimate gives rise to changes in assets and
liabilities, or relates to item of equity, it shall be recognized by adjusting the carrying
amount of the related asset, liability or equity in the period of change.
c. A change in an accounting estimate shall not be accounted for by restating amounts
reported in financial statements of prior periods.
❖ Which applicable period(s) should the change in accounting estimate be reported?
• Changes in accounting estimates are to be handled currently and prospectively, if
necessary.
❖ What is meant by a prospective recognition?
• Prospective recognition of the effect of a change in accounting estimate means that the
change is applied to transactions, other events and conditions from the date of change
in estimate.
Illustration
A depreciable asset costing P500,000 is estimated to have a life of 5 years. At the beginning
of the third year, the original life is changed to 8 years. Thus, the asset has a remaining life of
6 years.
• The procedure is not to record past depreciation. Instead, the carrying amount
of P300,000 (P500,000 minus P200,000 depreciation for 2 years) is now allocated over 6
(8 new life years minus 2 expired years) years or a subsequent annual depreciation
of P50,000.
• The entry to record the annual depreciation starting on the third year is:
Depreciation 50,000
Accumulated depreciation 50,000
Illustration
An entity decided to change from the sum of years’ digit method to the straight line method of
depreciation on January 1, 2019.
The asset originally has a cost of P1,000,000, acquired on January 1, 2017 and is estimated
to have a four-year life.
• The procedure is simply to allocate the carrying amount of P300,000 over the remaining
life of two (2) years using the new depreciation method which is the straight line.
accordingly, the depreciation for 2019 is recorded as follows:
Illustration
An entity has used the FIFO method of inventory valuation since it began operations in
2018. The entity decided to change to the weighted average method for determining
inventory cost at the beginning of 2019.
• The computation of the cost of goods sold for 2019 would then show beginning
inventory at P750,000 and ending inventory at P1,200,000 to conform with the
weighted-average method.
• The statement of changes in equity for the year ended December 31, 2019
would show the effect of the change of P250,000 net of tax as a deduction from
the beginning balance of retained earnings.
and applying an accounting policy that results in information that is relevant to the
economic decision-making needs of users and faithfully represented.
c. The amount of correction at the beginning of the earliest prior period presented.
d. If retrospective restatement is impracticable for a particular prior, the circumstances that
led to the existence of that condition and a description of how and from when the error has
been corrected.
Illustration
During 2020, an entity discovered that certain goods that had been sold during 2019 were
incorrectly included in December 31, 2019 inventory in the amount of P300,000.
The accounting records for 2020 before adjustment revealed sales of P5,000,000 and cost of
goods sold of P3,000,000.
The adjustment on December 31, 2020 to correct the prior period is:
Accordingly, the partial income statement for 2020 would appear as:
Sales 5,000,000
Cost of goods sold (3,000,000 - 300,000) 2,700,000
Gross income 2,300,000
•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.
❖ What is the frequency of the preparation of interim financial reports?
• Preparation and presentation may be monthly, quarterly or semi-annually.
• Quarterly interim reports are the most common.
❖ What are the two views in accounting in regard to the preparation of interim financial
reporting?
a. The integral view is that each interim period is an integral part of the annual accounting
period.
• Under the integral view, annual operating expenses are estimated and then allocated
to the interim periods based on forecasted revenue or sales volume.
• What are the accounting implications of the integral view?
1. Costs incurred which clearly benefit the entire year are allocated to the interim
periods benefited.
o Estimation and allocation are necessary to avoid creating misleading
fluctuations in interim period income.
2. Interim income would be more indicative of the annual income and thus useful in
predicting future operations and making informed decisions.
b. The independent view is that each interim period is considered a discrete or separate
accounting period with status equal to a fiscal year.
• What are the accounting implications of the independent view?
1. No estimations or allocations are made for interim purposes
2. The same expense recognition rules shall apply as under annual reporting and no
special interim accruals or deferrals are permitted.
3. Annual operating expenses are recognized in the interim period when incurred,
irrespective of the number of interim periods benefited, unless deferral or accrual
would be allowed in the annual financial statements.
❖ Is there a preferred view followed in practice?
• PAS 34 on interim financial reporting does not mention about the two views therefore the
standard adopts a mix of the integral and independent views.
What should be included in the explanatory notes accompanying the interim financial
statements?
❖ The selected explanatory notes are designed to provide an explanation of significant events
and transactions arising since the last annual financial statements.
❖ Are entities strictly required to include the same number of notes in the interim financial report
similar with the annual financial statements?
• The standard reiterates that it is unnecessary to provide the same number of notes that
appeared in the most recent annual financial report but rather include only those significant
events that were incurred or that have occurred between the last annual financial
statements and the date when the interim financial reports shall be prepared.
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 intangible assets and the
reversal of such an impairment loss
c. The reversal of any provisions for the cost of restructuring
d. Acquisition and disposal of items of property, plant and equipment
e. Commitments for the purchase of property, plant and equipment
f. Litigation settlements
g. Correction 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
j. Changes in economic circumstances that affect fair value a financial asset and financial
liability
k. Change in the classification of financial asset
l. Contingent liabilities and contingent assets
Illustration
If an entity publishes interim financial reports half yearly, the following comparative financial
statements are presented on June 30, 2020
How should inventories be recognized, measured and presented in the interim financial
reports?
❖ Paragraph 25 Appendix B of PAS 34 provides that inventories are measured for interim
financial reporting purposes by the same principles as at financial year end.
❖ What is the inventory measurement as per PAS?
• Inventories shall be measured at the lower of cost or net realizable value even for interim
purposes.
❖ How is the net realizable value determined?
• The net realizable value of inventories is determined by reference to selling prices and
related costs to complete and disposed at interim dates.
❖ How should the difference of the lower of cost or net realizable value be accounted for?
• 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 non-temporary.
• 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.
❖ Can we use estimate to determine the cost of inventory?
• Yes, inventories may be estimated using the gross profit method or retail inventory
method.
❖ Are we required to do the regular inventory and valuation procedures for interim financial
reporting?
• Full inventory and valuation procedures are not required for inventories at interim date.
• 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.
• 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 but it is not appropriate to defer such costs at year end.
How will paid vacation and holiday leave be treated for interim financial reporting
purposes?
❖ Paid vacation and holiday leave shall be accrued for interim purposes because these are
enforceable as legal commitments.
How will income tax expense be presented in the interim financial reporting period?
❖ 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 income tax expense is
accrued using the annual effective income tax rate applied to the pre-tax 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:
❖ What happens if there is a difference in financial reporting year and tax year?
• If the financial reporting year and the income tax year differ, paragraph 17 of Appendix B of
PAS 34 states that the income tax expense for interim periods of that financial year is
measured using separate effective tax rates for each of the taxes applied to the portion of
pre-tax income earned in each year of those tax years.
• In short, the effective tax rate of a particular tax year is applied to the pre-tax 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 1 year to June 30 of next year. The tax year ends
December 31.
The income before tax for the financial year from July 1, 2019 to June 30, 2020 is as follows:
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: