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University of San Carlos Click to edit Master subtitle style Department of Accountancy M. M. Mancelita
INTERIM FINANCIAL REPORTING
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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.
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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.
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Integral view
Annual operating expenses are ESTIMATED and then ALLOC ATED to the interim periods based on forecasted revenue or sales volume. results of subsequent interim periods must be adjusted to reflect prior estimation errors.
The
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Independent view
No
estimations or allocations are made for interim purposes, UNLESS such estimations or allocations are allowed for annual reporting. 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
Annual
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Which is which?
MIX
of both views
INTEGRAL
view- income tax; commission; warranty cost based on sales; indirect costs 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
INDEPENDENT
Components of an interim financial report
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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 entitys 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.
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Disclosure of compliance with pfrs
PAS
34- if an entitys interim financial report is in compliance with PFRS, such fact shall be disclosed. Otherwise, it should not do so.
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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. 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.
Only
Presentation of comparative interim statements
Statement
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of Financial Position
As of the end of the current interim period. as of the end of the immediately preceding year.
Comparative
HALF-YEARLY June 30, 2010 QUARTERLY June 30, 2010 December 31, 2009 December 31, 2009
Presentation of comparative interim statements
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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 QUARTERLY June 30, 2010 June 30,2009
Presentation of comparative interim statements
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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. June 30, 2009
HALF-YEARLY 6months ending June 30, 2010 QUARTERLY 6months ending June 30, 2010 June 30, 2009
Presentation of comparative interim statements
STATEMENT
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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.
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BASIC PRINCIPLES
Application
of the same accounting principles in its interim financial statements as are applied in its annual financial statements. recognition- same as annual and expenses- recognized as incurred in an interim period
Expenses
Revenue Cost
associated directly with revenue- matched against revenue (matching principle)
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BASIC PRINCIPLES
Business
is seasonal- (1) latest 12month FS; and (2) prior 12-month period FS, in addition to interim period FS. FS- greater use of estimation than annual FS.
Interim
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inventories
Measurement: Lower
Loss
same principles as at financial year-end. of cost or NRV*
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
Seasonal, cyclical or occasional revenue
Shall
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NOT be anticipated or deferred as of an interim date if anticipation or deferral would not be appropriate at the end of the entitys reporting period. revenue, royalties and government grants shall be recognized in the interim period when they occur.
Dividend
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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. 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
Examples: :
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Year-end bonuses
The A
nature of year-end bonuses varies widely. 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. reliable estimate of the obligation can be made.
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Irregular costs
Examples: Shall
charitable contribution and employee training cost NOT be anticipated as of an interim date even though they are planned simply because the costs have not yet been incurred.
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Depreciation and amortization
Based
on assets owned during that interim period.
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Paid vacation and holiday leave
Shall
be accrued for interim purposes because there are enforceable as legal commitments.
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Income tax
Shall
reflect the same general principles of income tax accounting applicable to annual reporting. period income tax expense is accrued using the annual effective income tax rate applied to the pretax income of the interim period.
Interim
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Iilustration
An entity has the following income before tax and annual effective tax rate for the first three quarters of Income Tax 2011: before tax rate First quarter 5,000,000 30% Second 6,000,000 30% quarter 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
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Gains and losses
Reported
in the interim period realized/
incurred.
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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?
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Answer 1
Property taxes (180,000/4) Repairs (irregular cost) The expense for 2nd quarter 45,000 300,000 345,000
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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 reported?
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Answer 2
Depreciation (500,000/2) Bonuses (1,200,000/2) Total 850,000 250,000 600,000
*regularly incurred for the whole year, therefore, accrued for every interim period.
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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?
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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.
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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.
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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
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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
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Answer 5
Total warranty (10% x 25M) Warranty recognition in the 1st quarter (5% x 10M) (500,000) Warranty expense for 2nd quarter 2,000,000 2,500,000
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Operating segment
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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. Whose operating results are regularly reviewed by the entitys chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. And for which discrete financial information is available.
b)
c)
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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. 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.
Purpose:
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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. The absolute amount of profit or less of the segment is 100% or more of the greater in absolute amount of:
2.
illustration
Segment A Segment B Segment C Segment D Segment E
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Revenue
16,000,000 13,000,000 6,000,000 3,000,000 2,000,000 40,000,000
Profit (loss) Assets
1,700,000 500,000 (1,000,000) 200,000 (100,000) 1,300,000 25,000,000 11,000,000 3,000,000 2,000,000 4,000,000 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% Profit Loss 45,000,000 x 10%= 4,500,000 THRESHOLD A 1,700,000 Reportable segments: A, B
B 500,000 1,000,000
Criteria 3: SEGMENT PROFIT OR LOSS 10% C Total profit > Total loss D 200,000 2,400,000 x 10%= 240,000 THRESHOLD
E
100,000
75% OF ENTITY REVENUE THRESHOLD
TOTAL
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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 of production process
Nature
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Segment no longer reportable
Still
to be reported if it is of continuing significance.
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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
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Segment revenue= sales to external customers + intersegmental sales
Timmy Companys operating segments for the year ended December 31, Segment Sales to Intersegment Total revenue 2011: unaffiliated sales
customers 5,000 8,000 4,000 43,000 60,000 16,000 23,000 (23,000) Alo Bix Cee Dil Combined Elimination Consolidated 60,000 3,000 4,000 8,000 12,000 4,000 59,000 83,000 (23,000) 60,000
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ANSWER
Total Revenue Bix Dil 12,000 59,000
Revenue of reportable segments 71,000
Segment expenses
SegmentSales Traceabl e expense s 1,000,00 600,000 0 800,000 500,000 350,000
360,000
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SEGMENT EXPENSES= TRACEABLE EXPENSES + ALLOCATED EXPENSES
X Y
Additional expenses: Z 600,000 Indirect segment expenses
2,400,0 General admin, expenses 00
1,450,0 240,000 00
Appropriate common expenses are allocated to segments based
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answer
Sales-Segment Z Segment Expenses: Traceable 350,000 90,000 Allocated expenses 440,000 Profit 600,000
(600,000x600,000/2,400,000) 160,000
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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. tax assets, postemployment benefit assets, financial instruments, and rights arising under insurance contracts ARE NOT REQUIRED TO BE DISCLOSED.
Deferred
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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. and other payables, accrued liabilities, customer advances, product warranty liabilities and other claims relating to provision of goods and services.
Trade
examples
Industry A B C D E F Revenue Profit
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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.
Total assets 12/31/11 20,000,000 17,500,000 12,500,000 7,500,000 7,000,000 3,000,000 67,500,000 10,000,000 8,000,000 6,000,000 3,000,000 4,250,000 1,500,000 32,750,000 1,750,000 1,400,000 1,200,000 550,000 675,000 225,000 5,800,000
How many reportable segments does Correy have?
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ANSWER
Segments A, B,C,D,E
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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.
V W X Y Z
Profit (Loss) 3,400,000 1,000,000 (2,000,000) 400,000 (200,000) 2,600,000
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ANSWER
V W 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. Profit 3,400,000 1,000,000 Loss
examples
Cash and cash equivalents Accounts Receivable Allowance for doubtful accounts 500,000 1,500,000 (200,000)
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Loan receivable from another 1,000,000 segment Inventory Property, plant and equipment Accumulated Depreciation Intangible assets Goodwill Investment in associate Corporate assets Financial assets Deferred tax assets Postemployment benefits assets 2,000,000 5,000,000 (1,800,000) 2,500,000 400,000 1,400,000 600,000 700,000 300,000 200,000
What amount of total assets should be
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ANSWER
Cash
and cash equivalents 500,000 Receivable 1,500,000 for doubtful accounts
Accounts
Allowance
(200,000)
Loan
receivable from another segment 1,000,000 plant and equipment5,000,000
Inventory2,000,000 Property,
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RELATED PARTIES
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RELATED PARTIES (PAS 24)
Related
party- parties are considered to be related if one party has: The ability to control the other party.
a)
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)
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examples
Affiliatesa)
parent and subsidiaries
Associates- investments under the equity method (20%-50%) Venturer- joint venture Key management personnel Close family members Individual who can control and exercise significant influence.
b) c) d) e)
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RELATED-PARTY TRANSACTION RELATED-PARTY
TRANSACTION- a transfer of resources or obligations between related parties, regardless of whether a price is charged. Purchase and sale of goods, property and other asset, leases, guarantee and collateral, etc.
Examples:
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RELATED PARTY DISCLOSURE
REQUIRES
disclosure of related party relationships where control exists irrespective of whether there have been transactions between related parties. name of entitys parent or ultimate controlling party.
Disclosure of related party transactions
Nature Information
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of the related party relationship
about the transactions and outstanding balances necessary for an understanding of the potential effect of the relationship on the financial statements.
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Unrelated parties
Two
entities simply because they have a director or key management personnel in common. 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. single customer, supplier, franchisor or general agent with whom an entity
Providers
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Related party disclosure not required
INTRAGROUP
related party transactions and outstanding balances are ELIMINATED in the preparation of consolidated financial statements of the group.
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End
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