Interim

Financial Reporting

Intermediate Accounting 3
Definition
- 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.
Definition
- Interim financial reports may be presented monthly,
quarterly or semi-annually. Quarterly interim reports
are the most common.

- However, publicly traded entities are encouraged to

provide interim financial reports at least semi-annually
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.

- The Securities and Exchange Commission (SEC) and

Philippine Stock Exchange (PSE), however, require
certain entities to file interim financial statements.
Philippine Jurisdiction
- The SEC and PSE 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 requires entities covered by the Rules
on Commercial Papers and Financing Act to file
quarterly financial reports within 45 days after each
quarter-end.
Philippine Jurisdiction
- Entities that provide interim financial 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. The integral view is that each interim period is an
integral part of the annual accounting period.

2. The independent or discrete view is that 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
allocated to the interim periods based on forecasted
revenue or sales volume
- 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
Integral View
- 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
- Each interim period is considered a discrete or
separate accounting period with status equal to a fiscal
year
- 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
Independent View
- Annual operating expenses are recognized in the
interim period in which they are incurred, irrespective
of the number of interim periods benefited, unless
deferrals 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 is followed in practice?
- PAS 34 on interim financial reporting does not
mention about the two views. Essentially, 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.
Which view is followed in practice?
- Another example of the independent view is the non-
accrual 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.
Which view is followed in practice?
- At this point, it is safe to say that there is no pure
integral view nor pure independent view. A mix of the
two views would be necessary as dictated by the
nature of the cost or revenue being reported for
interim purposes.
- Many believe that the distinction between the
integral view and the independent view is arbitrary
and meaningless.
Which view is followed in practice?
- These theoreticians note that direct costs 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.
Component of an
Interim Financial Reporting
- An interim financial report shall include, at a
minimum, the following components:
a. Condensed statement of financial position
b. Condensed statement of comprehensive income
c. Condensed statement of changes in equity
d. Condensed statement of cash flows
e. Selected explanatory notes
Component of an
Interim Financial Reporting
- An entity can present items of profit or loss in a
separate condensed income statement.

- 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.
Component of an
Interim Financial Reporting
- PAS 34 allows an entity to publish a set of
condensed financial statements or complete set of
financial statements in its interim financial report.
- 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.
Disclosure of Compliance
with PRFS
- If an entity’s interim financial report is in
compliance with PFRS, such fact shall be disclosed.

- An entity shall not describe an interim financial

report as complying with PFRS unless it complies
with all of the requirements of each applicable PFRS.
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 statements 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.
Selected Explanatory Notes
- Examples of disclosures required in a condensed
interim financial report include:
a. Write-down of inventories to net realizable value
and the reversal of such a write-down
b. Recognition of a loss from the impairment of
property, plant and equipment, intangible assets, other
assets and the reversal of such an impairment loss
c. The reversal of any provisions for the costs of
restructuring
Selected Explanatory Notes
e. Commitments for the purchase of property, plant
and equipment
f. Litigation settlements
g. Corrections of prior periods 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
a. Statement of financial position at the end of the
current interim period and a comparative statement of
financial position at the end of the immediately
preceding year.

b. Income statements of the current interim period and

cumulatively for the current financial year to date,
with comparative income statements for the
comparable interim periods (current and year to date)
of the immediately preceding year.
Presentation of Comparative
Interim Statements
c. Statements of comprehensive income of the current
interim period and cumulatively for the current
financial year to date, with comparative statements of
comprehensive income for the comparable interim
periods (current and year to date) of the immediately
preceding year.
Presentation of Comparative
Interim Statements
d. Statement of changes in equity cumulatively for the
current financial year to date, with comparative
statement for the comparable year to date period of the
immediately preceding year.

e. Statement of cash flows cumulatively for the current

financial year to date, with a comparative statement
for the comparable year to date period of the
immediately preceding year.
Presentation of Comparative
Interim Statements
Basic Principles
1. An entity shall apply the same accounting policies
in its interim financial statements as are applied in its
annual financial statements. However, the frequency
of an entity’s reporting whether annual, half-yearly or
quarterly shall not affect the measurement of its
annual results. Therefore, measurements for interim
reporting purposes shall be made on a year to date
basis.
2. Revenues from products sold or services rendered
are generally recognized for interim reports on the
same basis as for the annual period.
Basic Principles
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.
Basic Principles
4. If business is seasonal, the entity is encouraged to
disclose financial information for the latest 12 months
and comparative information for the prior 12-month
period, in addition to the interim period financial
statements.

5. The preparation of interim financial reports

generally will require a greater use of estimation than
annual financial reports.
Inventories
- Inventories are measured for interim financial
reporting by the same principles as at financial year-
end.

- 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.
Inventories
- Full inventory and valuation procedures are not
required for inventories at interim date.

- Accordingly, if the net realizable value is lower than

cost, a loss on inventory write-down shall be
recognized regardless of whether the write-down is
temporary or non-temporary.
Inventories
- PAS 34 requires disclosure of the write-down of
inventories to net realizable value and the reversal of
such write-down in a latter interim period.

- The net realizable value of inventories is determined

by reference to selling prices and related cost to
complete and dispose at interim dates.
Seasonal, Cyclical or
Occasional Revenue
- Seasonal, cyclical or occasional revenue shall not be
anticipated or deferred as of an interim date if
anticipation or deferred 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 entity’s
financial year 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.
- 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.
Uneven Costs
- However, 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 because it is not appropriate to defer such
cost at year-end.
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 annual measure of performance.
Some bonuses may be purely discretionary,
contractual or based on years of historical precedent.
Recognition of Bonus
- A bonus is anticipated for interim purposes if and
only if:
a. 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
b. A reliable 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 employee training cost.

- Such costs are generally discretionary and 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.

- Asset acquisitions or dispositions planned for 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.

- The interim period income tax expense is accrued

using the annual effective income tax rate applied to
the pretax income of the interim period
Difference in Financial Reporting
Year and Tax Year
- If the financial reporting year and the income tax
year differ, 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.

- The effective tax rate of a particular tax year is

applied to the pretax income of the interim period in
the same tax year.
Gains and Losses
- Gains and 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 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 entire financial year.
Change in Accounting Policy
- To allow differing accounting policies for the same
class of transactions within a single financial year
would result in interim allocation difficulties,
obscured operating results, and complicated analysis
and understandability of interim information.