University of San Carlos

Department of Accountancy
M. M. Mancelita

INTERIM FINANCIAL REPORTING

INTERIM FINANCIAL REPORTING
 PAS 34-complete or condensed financial statements
for an interim period.
 the preparation and presentation of financial
information for a period less than one year.
 Monthly, quarterly or semiannually.
 PAS 34 does not mandate which entities are required
to publish interim financial reports.
 SEC and PSE require certain entities to file interim
financial statements.
TWO VIEWS
 FIRST VIEW (INTEGRAL VIEW)- each
interim period is an integral part of the
annual accounting period.

 SECOND VIEW (INDEPENDENT VIEW)-

each interim period is a basic accounting
period and the results of operations shall be
determined in essentially the same way as if
the interim period were an annual accounting
period.
INTEGRAL VIEW
 Annual operating expenses are
ESTIMATED and then ALLOC ATED
to the interim periods based on
forecasted revenue or sales volume.
 The results of subsequent interim
periods must be adjusted to reflect
prior estimation errors.

BACK 
INDEPENDENT VIEW
 No estimations or allocations are
made for interim purposes, UNLESS
such estimations or allocations are
allowed for annual reporting.
 Annual operation expenses are
recognized in the interim period in
which they are incurred, irrespective
of the number of interim periods
benefited, UNLESS deferral or accrual
would be allowed in the annual
WHICH IS WHICH?
 MIX of both views

 INTEGRAL view- income tax; commission;

warranty cost based on sales; indirect
costs
 INDEPENDENT view- non accrual of cost of
a planned major periodic maintenance or
overhaul that is expected to occur late in
the year; direct costs and revenue
COMPONENTS OF AN INTERIM FINANCIAL REPORT

 Condensed statement of financial position

 Condensed income statement
 Condensed statement of comprehensive income
 Condensed statement of changes in equity
 Condensed statement of cash flows
 Selected explanatory notes
Condensed- 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 grated detail unless this is
specifically required by PAS 34.
*PAS 34 allows CONDENSED or COMPLETE set of financial
statements in its interim financial report.
DISCLOSURE OF COMPLIANCE WITH PFRS
 PAS 34- if an entity’s interim financial
report is in compliance with PFRS, such
fact shall be disclosed. Otherwise, it
should not do so.
SELECTED EXPLANATORY NOTES
 PAS 34: it is a superfluity to provide the
same notes in the interim financial report
that appeared in the most recent annual
financial report.
 Only an explanation of the events and
transactions that are significant to the
understanding of the changes in financial
position and financial performance sunce
the last annual reporting.
PRESENTATION OF COMPARATIVE INTERIM STATEMENTS

 Statement of Financial Position

 As of the end of the current interim
period.
 Comparative as of the end of the
immediately preceding year.
HALF-YEARLY
June 30, 2010 December 31, 2009
QUARTERLY
June 30, 2010 December 31,
2009
PRESENTATION OF COMPARATIVE INTERIM STATEMENTS

 INCOME STATEMENT
 Of the current interim period

 Cumulatively for the current financial year to date

 Comparative for the comparable current interim period

of the immediately preceding year.

 Comparative for the comparable year to date interim

period of the immediately preceding year.

HALF-YEARLY
6 months ending June 30, 2010 June 30,2009

QUARTERLY
6 months ending June 30, 2010 June 30,2009
3 months ending June 30, 2010 June 30,2009
PRESENTATION OF COMPARATIVE INTERIM STATEMENTS

 STATEMENT OF CHANGES IN EQUITY

 Cumulatively for the current financial year to

date
 Comparative for the comparable year to date

period of the immediately preceding year.

HALF-YEARLY
6months ending June 30, 2010 June 30, 2009

QUARTERLY
6months ending June 30, 2010 June 30, 2009
PRESENTATION OF COMPARATIVE INTERIM STATEMENTS

 STATEMENT OF CHANGES IN CASH

FLOWS
 Cumulatively for the current financial year to
date
 Comparative for the comparable year to date
period of the immediately preceding year.
BASIC PRINCIPLES
 Application of the same accounting principles in its
interim financial statements as are applied in its
annual financial statements.
 Revenue recognition- same as annual
 Cost and expenses- recognized as incurred in an
interim period
 Expenses associated directly with revenue-
matched against revenue (matching principle)
 Expenses NOT associated directly with revenue-
as incurred or allocated over the interim period
benefited.
e.g. Major repairs, year-end bonuses, insurance,
property taxes and depreciation
BASIC PRINCIPLES
 Business is seasonal- (1) latest 12-
month FS; and (2) prior 12-month
period FS, in addition to interim period
FS.
 Interim FS- greater use of estimation
than annual FS.
INVENTORIES
 Measurement: same principles as at financial year-end.
 Lower of cost or NRV*
 Loss on inventory writedown shall be recognized regardless
of whether the writedown is temporary or permanent.
*selling prices and related cost to complete and dispose at
interim dates.
 Inventory valuation: gross profit method or retail
inventory method
 Full inventory and valuation procedures NOT required.
 Disclosure of inventory writedown and reversal in a
later interim period.
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.
 Dividend revenue, royalties and
government grants shall be recognized
in the interim period when they occur.
UNEVEN COSTS
 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.
 Examples: Provision for warranty is
recognized at interim date
 : 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 varies
widely.
 A bonus is anticipated for interim
purposes if and only if:
 The bonus is a legal obligation or past
practice would make the bonus a
constructive obligation for which the entity
has no realistic alternative but to make the
payment.
 A reliable estimate of the obligation can be
made.
IRREGULAR COSTS
 Examples: charitable contribution and
employee training cost
 Shall NOT be anticipated as of an
interim date even though they are
planned simply because the costs have
not yet been incurred.
DEPRECIATION AND AMORTIZATION
 Based on assets owned during that
interim period.
PAID VACATION AND HOLIDAY LEAVE
 Shall be accrued for interim purposes
because there are enforceable as legal
commitments.
INCOME TAX
 Shall reflect the same general
principles of income tax accounting
applicable to annual reporting.
 Interim period income tax expense is
accrued using the annual effective
income tax rate applied to the
pretax income of the interim
period.
IILUSTRATION
An entity has the following income before tax and annual effective tax
rate for the first three quarters of 2011:
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 19,000,000
The income tax for each quarter is computed as follows:
First quarter (30% x 5,000,000) 1,500,000
Second quarter (30%x 6,000,000) 1,800,000
Total income tax (first 2 quarters) 3,300,000

Cumulative income tax for 3 quarters (25%x 19,000,000) 4,750,000

Total income tax (first 2 quarters) (3,300,000)
Third quarter-income tax expense 1,450,000
GAINS AND LOSSES
 Reported in the interim period realized/
incurred.
EXAMPLE 1
On March 15, 2011, Rex Company paid
property taxes of P180,000 on its
factory building for calendar year 2011.
ON April 1, 2011, Rex made P300,000
in unanticipated ordinary repairs to its
plant equipment.
What total amount of these
expenses should be included in the
quarterly income statement for the
three months ended June 30,2011?
ANSWER 1

Property taxes (180,000/4) 45,000

Repairs (irregular cost) 300,000
The expense for 2nd quarter 345,000
EXAMPLE 2
 Vim Company has estimated that total
depreciation expense for the year
ended December 31, 2011 will amount
to P500,000 and that 2011 year-end
bonuses to employees will total
P1,200,000.
In the interim income statement for
the six months ended June
30,2011, what total amount of
these expenses should be
ANSWER 2

Depreciation (500,000/2) 250,000

Bonuses (1,200,000/2) 600,000
Total 850,000

*regularly incurred for the whole

year, therefore, accrued for every
interim period.
EXAMPLE 3
 On July 1, 2011 Dolor Company
incurred a casualty loss of P300,000.
The net income for full year ending
December 31, 2011, was expected to
be P5,000,000.
In the income statement for the
quarter ended September 30,
2011, what amount of casualty
loss should be reported
separately?
ANSWER 3

IRREGULAR COST- recognized when

incurred.
Reported in the period it was incurred. In
this case, the loss is incurred in the third
quarter.
EXAMPLE 4
 Mount Apucao Company operates in the travel
industry and incurs costs unevenly though the
financial year. Advertising costs of P2,000,000 were
incurred on March 1, 2011, and staff bonuses are
paid at year-end based on sales. Staff bonuses are
expected to be around P20,000,000 for the year. Of
that sum, P3,000,000 would relate to the period
ending March 31, 2011.
 What costs should be included in the entity’s
quarterly financial report ending March 31, 2011?
ANSWER 4

UNEVEN COSTS- deferred for interim

purposes only if it also appropriate to
anticipate or defer that type of cost at
the end of the financial year.

Advertising and bonuses are reported in

the interim period when incurred.~
UNEVEN COSTS
Advertising- 2,000,000
Bonuses-3,000,000
EXAMPLE 5
Davao Company prepares quarterly financial
reports. The entity sells electrical goods and
normally 5% of customers claim on their warranty.
The provision 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 would be the provision charged in the
second quarter’s interim income statement?
ANSWER 5

Total warranty (10% x 25M) 2,500,000

Warranty recognition in the
1st quarter (5% x 10M) (500,000)
Warranty expense for 2nd quarter
2,000,000
OPERATING SEGMENT
OPERATING SEGMENT
An operating segment is a component of an entity:
a) That engages in business activities from which it may earn
revenue and incur expenses, including revenue and
expenses relating to transactions with other components of
the same entity.
b) Whose operating results are regularly reviewed by the
entity’s chief operating decision maker to make decisions
about resources to be allocated to the segment and assess
its performance.
c) And for which discrete financial information is available.

*Not every part of an entity is necessarily an operating segment

or part of an operating segment. E.g. Corporate
headquarters
SEGMENT REPORTING
 PFRS 8: the disclosure of certain
financial information about products
and services an entity produces and
the geographical areas in which an
entity operates.
 Purpose: to enable investors and users
make better assessment of each
business activity leading to the
understanding of the performance of
the entity as a whole.
REPORTABLE SEGMENTS
An entity shall report information about an operating
segment that meets any of the following quantitative
thresholds:
1. Segment revenue (intersegment and external) is 10%
of combined revenue (intersegment and external) of all
operating segments.
2. The absolute amount of profit or less of the segment is
100% 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. Assets of segment are 10% or more of the combined
assets of all operating segments.
 ILLUSTRATION
Revenue Profit (loss) Assets
Segment A 16,000,000 1,700,000 25,000,000
Segment B 13,000,000 500,000 11,000,000
Segment C 6,000,000 (1,000,000) 3,000,000
Segment D 3,000,000 200,000 2,000,000
Segment E 2,000,000 (100,000) 4,000,000
40,000,000 1,300,000 45,000,000

Criteria 1: SEGMENT REVENUE 10%

40,000,000 x 10%= 4,000,000 THRESHOLD
Reportable segments: A, B, C

Criteria 2: SEGMENT ASSETS 10%

45,000,000 x 10%= 4,500,000 THRESHOLD
Reportable segments: A, B Profit Loss
A 1,700,000
Criteria 3: SEGMENT PROFIT OR LOSS 10%
B 500,000
Total profit > Total loss C 1,000,000
2,400,000 x 10%= 240,000 THRESHOLD D 200,000
Reportable segments: A, B
E 100,000
2,400,00 1,100,00
Overall reportable segments: A, B, C 0 0
75% OF ENTITY REVENUE THRESHOLD
 TOTAL EXTERNAL REVENUE < 75% ENTITY
EXTERNAL REVENUE
 Additional operating segments shall be
indentified as reportable segments even if they
do no meet the 10% quantitative thresholds.
 The operating segments to be aggregated must have
similar economic characteristics and share a majority
of the five aggregation criteria:
 Nature of product or service
 Nature of production process
 Type or class of customers
 Marketing method
 The nature of the regulatory environment.
SEGMENT NO LONGER REPORTABLE
 Still to be reported if it is of continuing
significance.
SEGMENT BECOMING REPORTABLE
 Segment data for a prior period
presented for comparative purposes
shall be restated to reflect the newly
reportable segment even if that
segment did not satisfy any of the
quantitative thresholds in the prior
period.
SEGMENT REVENUE
 Segment revenue= sales to external customers + intersegmental
sales

Timmy Company’sSales
Segment
operating
to
segments for the year ended December 31,
Intersegme Total
2011: unaffiliated nt sales revenue
customers
Alo 5,000 3,000 8,000
Bix 8,000 4,000 12,000
Cee 4,000 4,000
Dil 43,000 16,000 59,000
Combined 60,000 23,000 83,000
Elimination (23,000) (23,000)
Consolidat 60,000 60,000
ed

What total revenue should be disclosed by the reportable

segments?
ANSWER

Total Revenue
Bix 12,000
Dil 59,000
Revenue of reportable segments 71,000
SEGMENT EXPENSES
SEGMENT EXPENSES= TRACEABLE EXPENSES + ALLOCATED
EXPENSES
Segment Sales Traceabl
e
expense
s
X 1,000,000 600,000
Y 800,000 500,000
Z 600,000 350,000
Additional expenses:2,400,00 1,450,00
0 0
Indirect segment expenses 360,000
General admin, expenses 240,000

Appropriate common expenses are allocated to segments based

on the ratio of a segment’s sales to total sales. What is
Segment Z’s segment expenses?
What is Segment Z’s segment PROFIT OR LOSS?
ANSWER

Sales-Segment Z 600,000
Segment Expenses:
Traceable 350,000
Allocated expenses 90,000
440,000
(600,000x600,000/2,400,000)
Profit 160,000
SEGMENT ASSETS
 Operating assets that are employed by a
segment in its operating activities that
are either directly attributable to the
segment or can be allocated to the
segment on a reasonable basis.
 Deferred tax assets, postemployment
benefit assets, financial instruments, and
rights arising under insurance contracts
ARE NOT REQUIRED TO BE DISCLOSED.
End 
SEGMENT LIABILITIES
 Liabilities that result from the operating
activities that are either directly
attributable to the segment or can be
allocated to the segment on a
reasonable basis.
 Trade and other payables, accrued
liabilities, customer advances, product
warranty liabilities and other claims
relating to provision of goods and
services.
EXAMPLES
 Correy Company and its divisions are engaged solely in
manufacturing operations. The following data pertain to the
operating segments in which operations were conducted for
the year ended December 31, 2011.
Industry Revenue Profit Total assets
12/31/11
A 10,000,000 1,750,000 20,000,000
B 8,000,000 1,400,000 17,500,000
C 6,000,000 1,200,000 12,500,000
D 3,000,000 550,000 7,500,000
E 4,250,000 675,000 7,000,000
F 1,500,000 225,000 3,000,000
32,750,000 5,800,000 67,500,000

How many reportable segments does Correy have?

ANSWER

Segments A, B,C,D,E
EXAMPLES
 Aurora Company and its divisions are engaged solely in
manufacturing. The following data pertain to the operating
segments in which operations were conducted for the year
ended December 31, 2011.
Profit (Loss)
V 3,400,000
W 1,000,000
X (2,000,000)
Y 400,000
Z (200,000)
2,600,000

 What are the reportable segments?

ANSWER
Profit Loss
V 3,400,000
W 1,000,000
X 2,000,000
Y 400,000
Z 200,000
Total 4,800,000 2,200,000

Basis: 10% of Profit because it is higher compared to loss.

Therefore, reportable segments are V, W, X.

EXAMPLES
Cash and cash 500,000
equivalents
Accounts Receivable 1,500,000
Allowance for doubtful (200,000)
accounts
Loan receivable from 1,000,000
another segment
Inventory 2,000,000
Property, plant and 5,000,000
equipment
Accumulated Depreciation (1,800,000)
Intangible assets 2,500,000
Goodwill 400,000
Investment in associate 1,400,000
Corporate assets 600,000
Financial assets 700,000
Deferred tax assets 300,000
Postemployment benefits 200,000
assets
What amount of “total assets” should be disclosed for the
reportable segment?
ANSWER
 Cash and cash equivalents 500,000
 Accounts Receivable 1,500,000
 Allowance for doubtful accounts (200,000)

 Loan receivable from another segment 1,000,000

 Inventory2,000,000

 Property, plant and equipment5,000,000

 Accumulated Depreciation(1,800,000)
 Intangible assets2,500,000

 Goodwill400,000

 Investment in associate1,400,000

Total SEGMENT ASSETS 11,300,000

NOT INCLUDED:
 Corporate assets600,000

 Financial assets700,000

 Deferred tax assets300,000

 Postemployment benefits assets200,000

*AS provided for in this rule.

RELATED PARTIES
RELATED PARTIES (PAS 24)
 Related party- parties are considered to be
related if one party has:
a) The ability to control the other party.
 Control- is ownership of more than half of the voting
power of an entity.
b) The ability to exercise significant influence
over the other party.
 Significant influence- power to participate in the
financial and operating policy decision of an entity.
(20% or more)
c) Joint control over the entity.
EXAMPLES
 Affiliates- parent and subsidiaries
a) Associates- investments under the
equity method (20%-50%)
b) Venturer- joint venture

c) Key management personnel

d) Close family members

e) Individual who can control and

exercise significant influence.
RELATED-PARTY TRANSACTION-
 RELATED-PARTY TRANSACTION- a
transfer of resources or obligations
between related parties, regardless of
whether a price is charged.
 Examples: Purchase and sale of
goods, property and other asset,
leases, guarantee and collateral, etc.
RELATED PARTY DISCLOSURE
 REQUIRES disclosure of related party
relationships where control exists
irrespective of whether there have
been transactions between related
parties. –name of entity’s parent or
ultimate controlling party.
DISCLOSURE OF RELATED PARTY TRANSACTIONS

 Nature of the related party relationship

 Information about the transactions and
outstanding balances necessary for an
understanding of the potential effect of
the relationship on the financial
statements.
UNRELATED PARTIES
 Two entities simply because they have a director or key
management personnel in common.
 Providers of finance, trade unions, public utilities and
government agencies in the course of the normal
dealings with an entity by virtue only of those dealings.
 A single customer, supplier, franchisor or general agent
with whom an entity transacts a significant volume of
business merely by virtue of the resulting economic
dependence.
 Two venturers simply because they share joint control
over a joint venture.
RELATED PARTY DISCLOSURE NOT REQUIRED

 INTRAGROUP related party

transactions and outstanding balances
are ELIMINATED in the preparation of
consolidated financial statements of
the group.
 END 
 Next meeting: discussion on
NONCURRENT ASSETS HELD FOR SALE
Pls. bring a photocopy of the said topic.
