Interim

Financial
Reporting
– Interim financial reporting- means the preparation and presentation of financial
statements for a period of less than one year.

– PAS 34 prescribes the minimum content of an interim financial report and the principles
for recognition and measurement in complete or condensed financial statements for an
interim period.

– Interim financial reports -may be presented monthly, quarterly or semiannually.

Quarterly interim reports are the most common.

However, publicly traded entities are encourage to provide interim financial reports at least
semiannually and such reports are to be made available not later than 60 days after the end
of interim period.
Frequency of interim reporting

– PAS 34 does not mandate which entities are required

to publish interim financial reports, how frequently,
or how soon after the end of an interim period.
Philippine jurisdiction
– The Securities and Exchange Commission and Philippine Stock Exchange
require entities covered by the reportorial requirements of Revised
Securities Act to file quarterly interim financial reports within 45 days after
the end of each of the first three quarters.
– The SEC also require entities covered by the Rules on Commercial Papers
and Financing Act to file quarterly financial reports within 45 days after
each quarterly-end.
– Entities that provide interim finacial reports in conformity with Philippine
Financial Reporting Standards shall conform to the recognition,
measurement and disclosure requirements set out in the standard.
Two views on interim financial reporting

1. Integral view
2. Independent view
 Integral view
– 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.
– In other words, costs incurred which clearly benefit the entire year are allocated to the
interim periods benefited.
– When this approach is followed, the results of subsequent interim periods must be adjusted
to reflect prior estimation errors.
– Proponents of the integral view argue that the estimation and allocation are necessary to
avoid creating misleading fluctuations in interim period income.
– Using the integral view would result to interim income which would be more indicative of
the annual income and thus useful in predicting future operations and making informed
decisions.
 Independent view
– The independent view is that each interim period is considered a discrete or separate
accounting period with 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.
– The same expense recognition rules shall apply as under annual reporting and no special
interim accruals or deferrals are permitted.
– In other words, annual operating 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 financial statements.
– Proponents of the independent view argue that the smoothing of interim results through
estimation and allocation of annual operating expenses may have undesirable effects.
 Which view on interim financial reporting is
followed in practice?
– PAS 34 on interim financial reporting does not mention about the two views.
– The standard adopts a mix of the integral and independent views.
– A clear example of the independent view is the accrual or deferral for interim purposes of
costs that are incurred unevenly during the year only when it is also appropriate to accrue
or defer such costs at the end of the year.
– Another example of the independent view is the nonaccrual of cost of a planned major
periodic maintenance or overhaul that is expected to occur late in the year.
– However, the method of accounting for income tax is consistent with the integral view.
– The recognition of commission and warranty cost based on sales is also an application of
the integral view.
– The direct cost and revenue are best accounted for as
incurred and earned which equates an independent view.
– Indirect costs are more likely to require an allocation
process which is suggestive of the integral view.
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 the financial position
b. Condensed statement comprehensive income
c. Condensed statement of changes in equity
d. Condensed statement of cash flows
e. Selected explanatory notes
– Paragraph 8A provides that an entity can present items of
profit or loss in a separate condensed income statement.
– Nothing in the standard is intended to prohibit an entity
from publishing a complete set of financial statements,
rather than condensed financial statements and selected
explanatory notes.
– In other words, PAS 34 allows an entity to publish a set of
condesed financial statements or complete set of financial
statements in the interim financial report.
Meaning of Condensed

– "Condensed" means that each of the headings and subtotals presented in the
entity's most recent annual financial statements is required but there is no
requirement to include greater detail unless this is specifically required.

Disclosures of compliances with PFRS

PAS 34, paragraph 19, provides that if an entity's interim financial report is in
compliance with Philippine Financial Reporting Standards, such fact shall be
disclosed.
 Selected explanatory notes
– The selected explanatory notes are designed to provide an
explanation of significant events and transactions arising since the
last annual financial statements.
– PAS 34 assumes that financial statement users have an access to the
entity's most recent annual report.
– As a result, the standard reiterates that it is a superfluity to provide
the same notes in the interim financial report that appeared in the
most recent annual financial report.
Examples of disclosures required in a condensed interim financial report include:
a. Writedown of inventories to net realizable value and the reversal of such a writedown
b. Recognition of a loss from the impairment of property, plant and equipment and
intangible assets and the reversal of such impairment loss
c. The reversal of any provisions for the costs 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. 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
Presentation of Comparative
Interim Statements
1. Statement of financial position

a. Statement of financial position at the end of current interim

period
b. Comparative statement of financial position at the end of
preceding year.
2. Income statement

a. Income statement for the current interim period

b. Income statement cumulatively for the current financial year to date
c. Comparative income statement for the comparable interim period of the
preceding year
d. Comparative income statement cumulatively for the comparable financial
year to date of the preceding year
3. Statement of comprehensive income

a. Statement of comprehensive income for the current interim period

b. Statement of comprehensive income cumulatively for the current financial
year to date
c. Comparative statement of comprehensive income for the comparable
interim period of the preceding year
d. Comparative statement of comprehensive income cumulatively for the
comparable financial year to date of the preceding year
4.Statement of changes in equity

a. Statement of changes in equity cumulatively for the current

financial year to date
b. Comparative statement of changes in equity for the comparable
financial year to date of the preceding year
5. Statement of cash flows

a. Statement of cash flows cumulatively for the current financial

year to date
b. Comparative statement of cash flows for the comparable financial
year to date of the preceding year
Illustration- Half-yearly

– If an entity publishes jnterim financial reports half-yearly, the following comparative

financial statements are presented on June 30, 2018:

Statement of financial position:

On June 30, 2018 December 31, 2017
Statement of comprehensive income:
6 months ending June 30, 2018 June 30, 2017
Statement of cash flows:
6 months ending June 30, 2018 June 30, 2017
Statement of changes in equity:
6 months ending June 30, 2018 June 30, 2017
Another Illustration- Quarterly

If an entity publishes interim financial reports quarterly, the following comparative financial
statements are included in the quarterly interim financial report on June 30, 2018:
Statement of financial position:
On June 30, 2018 December 31, 2017
Statement of comprehensive income:
3 months ending June 30, 2018 June 30,2017
6 months endinh June 30, 2018 June 30, 2017
Statement of cash flows:
6 months ending June 30, 2018 June 30, 2017
Statement of changes in equity:
6 months ending June 30, 2018 June 30, 2017
Basic principles

1. 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.
However, the frequency of an entity's reporting whether annual, half-yearly
or quarterly shall not affect the measurement of the annual results.
Therefore, measurements for interim reportinh purposes shall be made on a
year to date basis.
 Basic principles
2. Revenues from products sold or services rendered are generally recognized for interim
reports on thensame basis as for the annual period.
3. Costs and expenses are recognized as incurred in an interim period.
a. Expenses associated directly with revenue are matched against revenue in those interim
periods in which the related revenue is recognized.
b. Expenses not associated directly with revenue are recognized in interim periods as
incurred or allocated over the interim periods benefited.
4. PAS 34, paragraph 21, provides that if the business is seasonal, in addition to the current
interim period financial statements, the entity is encouraged to disclose financial
information:
a. For the latest 12 months
b. Comparative information for the prior comparable 12-month period
 Inventories
Paragraph 25 of Appendix B of PAS 34 provides that inventories are measured for interim
financial reporting by the same principles as at financial year-end.
This simply means that inventories shall be measured at the lower of cost or net
realizable value even for interim purposes.
The cost of the inventory may be estimated using the gross profit method or retail
inventory method.
Accordingly, if the net realizable value is lower than cost, a loss on inventory writedown
shall be recognized regardless of whether the writedown is temporary or non temporary.
PAS 34, paragraph 17, requires disclosure of the writedown of inventories to net realizable
value and the reversal of such writedown on the later interim period
The net realizable value of inventories is determined by reference to selling prices and
related cost to complete and dispose at interim date.
Seasonal, cyclical or occasional revenue

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.
For example, dividend revenue is not recognized until declared because
even when highly predictable based on past experience, the dividend is
not an obligation of the entity until it is legally declared.
 Uneven costs
Costs that are incurred unevenly during an enity’s financial year shall be anticipated or deferred forc interim
purposes only if it is also appropriate to anticipate or defer that type of cost at the end of the financial year.
For example, a provision of 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 constructed
obligation.

Year-end bonuses
The nature of year-end bonuses varies widely. Some are earned simply by continued employment during a time
period. Some bonuses are earned based on a monthly, quarterly or annula measure of performance. Some
bonuses may be purely discretionary, contractual or base on years of historical precedent.

Recognition of bonus
A bonus is anticipated for interim purposes if and only if:
a. The bonus is leagal obligation or past practice would make the bonus a constructive obligation for which the
entity has no realistic alternative but to make the payment.
b. A realistic estimate of the obligation can be made.
Irregular costs

Certain costs are expected to be incurred irregularly during the financial year, such as
charitable contribution and rmployee training cost.

Such cost are generally discretionary amd even though they are planned shall not be
anticipated as of an interim date simply because the costs have not yet been incurred.

Depreciation and amortization

Depreciation and amortization for an interim period shall be based only on assets owned
during that interim period.
Assets acquisitions or dispositions planne dfor later in the financial year shall not be taken
into account.
Paid vacation and holiday leave

Paid vacation and holiday leave shall be accrued for interim purposes because these are
enforceable as legal commitments.

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 income tax expense
is accrued using the annual effective income tax rate applied to the pretas 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 2013:
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% × 5,000,000) 1,500,000

Second quarter (30% × 6,000,000) 1,800,000
Total income tax for first two quarters 3,300,000

Cumulative income tax for

three quarters (25% × 19,000,000) 4,750,000
Income tax for first two quarters (3,300,000)
Third quarter—income tax expense 1,450,000
Difference in financial reporting year and tax year

If the financial reporting year and the income tax year differ,
Paragraph 17 pf appendix B of PAS 34 states the income tax expense
for interim periods of that financial year is measured using separate
effective tax rates for each of the tax years applied to the portion of
pretax income earned in each of those tax years.

Simply stated, the effective tax rate of a particular tax year is applied
to the pretax income of the interim period in the same tax year.
Illustration
An entity’s financial reporting year ends June 30 and it reports quarterly. This means that
the financial reporting is from July 1 of one year to June 30 of next year. The tax year ends
December 31.
The income before tax for the financial year from July 1, 2014 to June 30, 2015 is as follows:

First quarter July 1, 2014 to September 30, 2014 1,000,000

Second quarter October 1, 2014 to December 31, 2014 2,000,000
Third quarter January 1, 2015 to March 31, 2015 2,500,000
Fourth quarter April 1, 2015 to June 30, 2015 4,000,000

The effective tax rate is 30% for 2014 and 35% for 2015. The income tax expense for each
quarter of the financial reporting year is computed as follows:
First quarter (30% × 1,000,000) 300,000
Second quarter (30% × 2,000,000) 600,000
Third quarter (30% × 2,500,000) 875,000
Fourth quarter (30% × 4,000,000) 1,400,000
Total Income tax expense 3,175,000
Interim reporting of contingencies
An entity is sued over an alleged violation of a patent in one of its products. The entity settles the litigation in the forth quarter of
the current year.
Under the settlement terms, the entity must retroactively pay a 5% royalty on all sales of the product including prior years to
which the patent applies.
Sales for the product were as follows:
First quarter 1,500,000
Second quarter 800,000
Third quarter 1,200,000
Fourth quarter 2,500,000
Cumulative sales in prior years 8,000,000
The entity cannot restate the previously issued quarterly financial results to include the royalty expense
Instead, the entity shall report the royalty expense for the current year and prior years in the fourth quarter.
Royalty expense related to slaes for current year
(5% × 6,000,000) 300,000
Royalty expense related to sales of prior years
(5% × 8,000,000) 400,000
Total royalty expense 700,000

The total amount of P 700,000 must be reported as royalty expense in the fourth quarter of the current year.

Gains and losses

Gains or losses from disposal of property, gains or losses from discontinued operation and other gains or losses
shall not be allocated over the interim periods.

The gains shall be reported in the interim period in which they are realized and the losses are reported in the
interim period in which they are incurred.
Change in accounting policy
A change in accounting policy other than one for which the transition is
specified by a new standard shall be reflected by restating the financial
statements of prior interim periods of the current year and the
comparable interim periods of the current year and the comparable
interim periods of the prior financial year.
The objective of this requirement is to ensure that a single accounting
policy is applied to a particular class of transactions throughout the
financial year.
THE END...