INTERIM FINANCIAL REPORTING

IAS 34

Nature of Interim Financial Reporting:

• The preparation and presentation of financial statements for a period of less than
one year.
• Interim financial reports may be issued monthly, quarterly, or semi-annually.
• The most prevalent interim reports are quarterly interim reports or financial reports
that are issued every three months.
o However, publicly traded companies are encouraged to provide interim
financial reports at least twice a year or semi-annually.
Note:
✓ PAS 34 does not specify which entities are required to publish interim financial
reports, how often they must be published, or how soon after the end of the
intermediate period they must be published.
✓ The Securities and Exchange Commission (SEC) and the Philippine Stock Exchange
(PSE) mandate companies covered by the Revised Securities Act to file quarterly
interim financial reports within 45 days of the end of each of the first three quarters.
o The SEC also requires entities covered by the Rules on Commercial Papers
and Financing Act to file quarterly financial reports within 45 days after the
end of each quarter.
✓ Entities that submit interim financial reports in accordance with financial reporting
standards must adhere to the standard's recognition, measurement, and disclosure
criteria.

Different Views on Interim Financial Reporting:

1. Integral View :
• Each interim period is an integral part of the annual accounting period.
• Annual operating expenses are forecasted and then allocated to interim
periods based on forecasted revenue or sales volume in the integral view.
o To put it another way, costs incurred that obviously benefit the entire
year are assigned to the interim periods benefited.
• To avoid causing misleading fluctuations in interim period income, estimation
and allocation are required.
• Using the integral approach would result in interim income that is more
representative of annual income, making it beneficial for forecasting future
operations and making informed decisions.

2. Independent View:
• Each interim period is considered a discrete or separate accounting period with
status equal to a fiscal year.
o As a result, unless such estimations or allocations are allowed for yearly
reporting, no estimates or allocations are made for interim purposes.
• The same expense recognition rules as for annual reporting apply, and no
special interim accruals or deferrals are permitted.
o In other words, unless deferral or accrual is permitted in the annual
financial statements, annual operating expenses are recognized in the
interim period in which they are incurred, regardless of the number of
interim periods benefited.
1|Page
Note:
✓ PAS 34, which governs interim financial reporting, does not mention which of the
two views is required to be used.
✓ The standard essentially adopts a hybrid of the integral and Independent viewpoints.

Components of an Interim Financial Report:

PAS 34 requires that an interim financial report must include at least the following:
1. Condensed statement of financial position
2. Condensed statement of comprehensive income
3. Condensed statement of changes in equity
4. Condenses statement of cash flows
5. Selected explanatory notes
Note:
✓ An entity may present profit or loss items in a separate condensed income
statement.
✓ Nothing in the standard is intended to prevent or discourage a company from
publishing a complete set of financial statements rather than condensed financial
statements and selected explanatory notes.
o In other words, PAS 34 allows a company to publish a set of condensed
financial statements or a complete set of financial statements in its interim
financial report.

Disclosure of compliance with PFRS

✓ If an entity's interim financial report follows Philippine Financial Reporting,
Standards, that fact must be disclosed.
✓ An entity may not describe an interim financial report as compliant with PFRS unless
it meets all the requirements of each applicable standard.

Selected explanatory notes

✓ The selected explanatory notes are intended to explain significant events and
transactions that have occurred since the last annual financial statements.
✓ PAS 34 presupposes that user of financial statements have access to the most recent
annual report of the entity.
o As a result, the standard emphasizes that including the same notes in the
interim financial report as in the most recent annual financial report is
unnecessary.

2|Page
Presentation of Comparative Interim Financial Reports
Components of Financial Statements Presentation of Comparative Interim
Statements
Statements 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.
Statement of Comprehensive Income a. Statement of comprehensive income
(Including income statement) 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 financial year to date
of the preceding year.
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.
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 1:
Assume an entity publishes interim financial reports semi-annually. The following
comparative Interim reports are presented on June 30, 2022:

Reports:
Statement of financial position as of June 30, 2022 December 31, 2021
Statement of comprehensive income for June 30, 2022 June 30, 2021
the 6 months ending
Statement of cash flows for the 6 months June 30, 2022 June 30, 2021
ending
Statement of changes in equity for the 6 June 30, 2022 June 30, 2021
months ending

3|Page
Illustration 2:
Assume an entity publishes interim financial reports quarterly. The following
comparative interim reports are presented on June 30, 2022:
Reports:
Statement of financial position as of June 30, 2022 December 31, 2021
Statement of comprehensive income for June 30, 2022 June 30, 2021
the 6 months ending
Statement of cash flows for the 3 months June 30, 2022 June 30, 2021
and 6 months ending
Statement of changes in equity for the 6 June 30, 2022 June 30, 2021
months ending

Basic Principles of Interim Reporting:

➢ An entity shall use the same accounting policies in the interim financial statements
as it does in its annual financial statements.
➢ Revenues from the sale of goods or services rendered are normally recognized in
interim reports on the same basis as in annual reports.
➢ In an interim period, costs and expenses are recognized as incurred.
o In the interim periods in which the related revenue is recorded, expenses
associated directly with revenue are matched against revenue.
o Expenses that are not directly related to revenue are recognized as incurred
or allocated across the interim periods benefitted in interim periods.
➢ If the business is seasonal, the entity is encouraged to provide financial information
in addition to the current interim period financial statements:
o For the latest 12 months.
o Comparative information for the prior comparable 12-month period.
➢ In general, the preparation of interim financial reports necessitates more estimation
than the preparation of annual financial reports.

Inventories
➢ Inventories are measured for interim financial reporting using the same principles
as at the end of the financial year.
o Simply said, inventory must be valued at the lower of cost or net realizable
value, even if only for interim purposes.
➢ For inventories at interim date, full inventory and valuation procedures are not
required.
➢ A loss on inventory write-down shall be reported if the net realizable value is less
than cost.
➢ The disclosure of the write-down of inventories to net realizable value and the
reversal of such write-down in a later interim period is required.

Note: Selling prices and accompanying cost to complete and dispose at interim dates are
used to establish the net realizable value of inventory.

4|Page
Seasonal, Cyclical or Occasional Revenue
➢ Seasonal, cyclical, or occasional revenue should not be anticipated or deferred as of
an interim date if such expectation or deferral would be inappropriate at the end of
the entity's reporting period.

Uneven costs
➢ Costs incurred unevenly throughout an entity's fiscal year must be anticipated or
deferred for interim purposes only if it is also reasonable to anticipate or defer that
type of cost at the end of the fiscal year.

Year-end bonuses
➢ A bonus is expected for interim purposes if and only if the following conditions are
met:
o The bonus is a legal obligation, or historical practice would imply that the
bonus is a constructive obligation for which the company has reasonable
alternative but to pay.
o It is possible to make a reliable estimate of the obligation.

Paid vacation and holiday leave

➢ Paid vacation and holiday leave must be accrued for interim purposes since they are
legally binding.

Depreciation and amortization

➢ Depreciation and amortization for an interim period shall be calculated solely on
assets owned during that interim period.
➢ Asset acquisitions or dispositions planned for later in the fiscal year will not be
considered.

Gains and losses

➢ Gains and losses from the disposal of property, discontinued operations, and other
gains or losses are not allocated during the interim periods.
➢ The gain is reported in the interim period when realized and the loss is reported in
the interim period when incurred.

Income tax
➢ Income tax expense for interim periods must adhere to the same general principles
of income tax accounting that apply to annual reporting.
➢ The interim period income tax expense is accrued using the annual effective income
tax rate applied to the interim period's pre-tax income.

5|Page
Illustration 3:
For the first three quarters of the current year, an entity had the following income
before taxes and yearly effective tax rate:

Income before tax Tax Rate

First Quarter 6,000,000 32%
Second Quarter 7,000,000 32%
Third Quarter 8,000,000 28%
Total Income 21,000,000

Problem 1: How much is the total income tax for the first two quarters?
Problem 2: How much is the income tax expense for the third quarter?

Difference in financial reporting year and tax year

➢ If the financial reporting year and the income tax year differ, income tax expense
for interim periods of that financial year is calculated using separate effective tax
rates for each of the tax years applied to the portion of pre-tax income earned in
each of those tax years.
o Simply put, the effective tax rate of a given tax year is applied to the pre-tax
income during that same tax year's interim period.

Change in accounting policy

➢ A change in accounting policy that is not prescribed by a new standard must be
recognized by restating the financial statements of preceding interim periods of the
current financial year and comparable interim periods of the previous financial year.
➢ The objective of this requirement is to ensure that a single accounting policy is
applied to a specific type of transaction for the duration of the financial year.
o Allowing different accounting policies for the same class of transactions within
the same financial year would cause "interim allocation difficulties, obscured
operating results, and complicated analysis and understandability of interim
information."

6|Page