CHAPTER

BLUE NOTES
46 S
L
Interim Financial Reporting
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 reporting means the preparation and presentation of financial information for a period of less than
one year.

Integral View Independent View

Annual operating expenses are estimated and then No estimations of allocations are made for interim purposes,
allocated to the interim periods based on unless such estimations or allocations are allowed for annual
forecasted revenue or sales volume. reporting.
Costs incurred which clearly benefit the entire year Annual operating expenses are recognized in the interim period
are allocated to the interim periods benefited. The in which they are incurred, irrespective of the number of interim
results of the subsequent interim period must be period benefited, unless deferral or accrual would be allowed in
adjusted to reflect prior estimation errors. the annual financial statements.
Which view on interim financial reporting is followed in practice?
Essentially, the standard adopts a mix of the integral and independent view as dictated by the nature of the cost or
revenue being reported on interim purposes.

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

PRESENTATION OF COMPARATIVE INTERIM STATEMENTS

 Statement of financial position as of the end of the current interim period and a comparative statement of
financial position as of the end of the immediately preceding year.
 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.
 Statement 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.
 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.
 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.

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BASIC PRINCIPLES
 PAS 34, paragraph 28, provides than an entity shall apply the same accounting policies in its interim
financial statements as are applied in its annual financial statements.
 Revenues from products sold or services rendered are generally recognized for interim reports on the
same basis as for the annual period.
 Cost and expenses are recognized as incurred in an interim period.
Expenses associated directly with revenue are matched against revenue in those interim periods in which the
related revenue is recognized.
Expenses not associated directly with revenue are recognized in interim periods as incurred or allocated over
the interim periods benefited.
 Under PAS 34, paragraph 21, if the 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.
 The preparation of interim financial reports usually will require a greater use of estimation than annual
financial reports.

Measurement
 Inventories - Inventories shall be measured at lower of cost or net realizable value even for interim
purposes. In net realizable value is lower than cost, a loss on inventory writedown shall be recognized
regardless of whether the writedown is temporary or permanent.
 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.
 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.
 Year-end bonuses - 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 to which the
entity has no realistic alternative but to make the payment.
A reliable estimate of the obligation can be made.
 Irregular costs - 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.
 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.
 Gains and losses - Gains or losses from disposal or property, gains or losses from discontinued
operation and other gains or losses shall not be allocated over the interim period. They 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.

Illustrative Problem
Case 1:

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176 USL Blue Notes Chapter 46 – Interim Financial Reporting

The Income Statement of Mama Ajit Company for the year ended December 31, 2010 is given below.
Sales 6, 000, 000
Cost of goods sold (2, 800, 000)
Gross income 3, 200, 000
Gain on sale of equipment 100, 000
Total income 3, 000, 000
Operating expenses (500, 000)
Casualty loss (300, 000)
Income before tax 2, 500, 000
Income tax (875, 000)
Net income 1, 625, 000

 The tax rate is 30%

 Third quarter sales were 30% of total sales
 For interim reporting purposes, a gross profit rate of 40% can be justified
 Variable operating expenses are allocated in the same proportion as sales. Fixed operating expenses are
allocated based on the expiration of time. Of the total operating expenses, 400, 000 relate to variable
expenses
 The equipment was sold on June 1, 2010
 The casualty loss occurred on September 1, 2010
What is the income before tax for the third quarter ended September 30, 2010?
Sales (30% x 6, 000, 000) 1, 800, 000
Cost of goods sold (60% x 1, 800, 000) (1, 080, 000)
Gross income 720, 000
Variable expenses (30% x 400, 000) (120, 000)
Fixed expenses (100, 000 / 4) (25, 000)
Casualty loss (300, 000)
Income before tax 275, 000
The gain on sale of equipment is reported in the second quarter, not in the third quarter, because the
equipment is sold on June 1, 2010.
Case 2
Thakthak Company had the following transactions during the quarter ended March 31, 2010.
Loss from typhoon 700, 000
Payment of fire insurance premium for calendar year 2010 100, 000
What amount should be included in the income statement for the quarter ended March 31, 2010?
Casualty loss 700, 000
Insurance expense (100, 000 / 4) 25, 000
Case 3
Dashmielle Company incurred an inventory loss from market decline of 840, 000 on June 30, 2010. What
amount of inventory loss should be recognized in Dashmielle’s quarterly income statement for the three
months ended June 30, 2010?
Inventory loss of 840, 000 (regardless whether it is temporary of permanent)
Case 4
Damielle Company has historically reported bad debts expense of 5% of sales in each quarter. For the current
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year, the entity followed the same procedure in the three quarters of the year. However, in the fourth quarter,
the entity, in consultation with its auditor, determined that the bad debts expense for the entire year should be
450, 000. Sales in each quarter of the year were as follows:
First quarter 2, 000, 000
Second quarter 1, 500, 000
Third quarter 2, 500, 000
Fourth quarter 4, 000, 000
How much bad debt expense should be recognized for the fourth quarter?

Bad debts expense for the entire year 450, 000

Bad debts expense:
First quarter (5% x 2, 000, 000) 100, 000
Second quarter (5% x 1, 500, 000) 75, 000
Third quarter (5% x 2, 500, 000) 125, 000 300, 000
Bad debts expense for fourth quarter 150, 000

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