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Interim Financial Reporting: Click To Edit Master Subtitle Style
Interim Financial Reporting: Click To Edit Master Subtitle Style
University
Click to edit
ofMaster
San Carlos
subtitle style
Department of Accountancy
M. M. Mancelita
Two views
FIRST VIEW (INTEGRAL VIEW)- each
interim period is an integral part of the
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.
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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.
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
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Which is which?
MIX of both views
HALF-YEARLY
6 months ending June 30, 2010 June 30,2009
QUARTERLY
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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
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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.
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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.
Revenue recognition- same as annual
Costand expenses- recognized as
incurred in an interim period
Expenses associated directly with
revenue- matched against revenue
(matching principle)
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BASIC PRINCIPLES
Businessis 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.
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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
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Seasonal, cyclical or occasional
revenue
ShallNOT 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.
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Uneven costs
Shallbe 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
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Year-end bonuses
Thenature 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.
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Irregular costs
Examples:charitable contribution and
employee training cost
ShallNOT 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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Income tax
Shallreflect 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.
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Iilustration
An entity has the following income before tax and
annual effective tax rate for the first three quarters of
2011: Income Tax
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
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
Example 2
VimCompany 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
Example 3
OnJuly 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
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
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
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.
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.
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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.
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.
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Reportable segments
Timmy Company’s
Segment
operating segments
Sales to
for the year ended December 31,
Intersegment Total revenue
2011: unaffiliated sales
customers
Alo 5,000 3,000 8,000
Bix 8,000 4,000 12,000
Cee 4,000 4,000
ANSWER
Total Revenue
Bix 12,000
Dil 59,000
Revenue of reportable segments 71,000
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Segment expenses
SEGMENT EXPENSES= TRACEABLE EXPENSES + ALLOCATED
EXPENSES
SegmentSales Traceabl
e
expense
s
X 1,000,00 600,000
0
Y 800,000 500,000
Additional
Z expenses:
600,000 350,000
Indirect segment expenses 360,000
2,400,0
General admin, expenses 1,450,0
240,000
00 00
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
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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.
Deferredtax assets, postemployment
benefit assets, financial instruments,
and rights arising under insurance
contracts ARE NOT REQUIRED TO BE
DISCLOSED.
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SEGMENT LIABILITIES
Liabilitiesthat 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.
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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.
Profit (Loss)
V 3,400,000
W 1,000,000
X (2,000,000)
Y 400,000
Z (200,000)
2,600,000
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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.
ANSWER
Cash and cash equivalents 500,000
Accounts Receivable 1,500,000
Allowance for doubtful accounts
(200,000)
Loanreceivable from another segment
1,000,000
Inventory2,000,000
Property,
plant and
equipment5,000,000
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RELATED PARTIES
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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.
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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.
Examples: Purchase and sale of
goods, property and other asset,
leases, guarantee and collateral, etc.
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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
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End
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