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HOMEWORK 3. INTERIM FINANCIAL REPORTINGSHORT QUESTIONS: What is “interim financial reporting”? Interim financial reporting means the preparation and presentation of financial information for a period of less than one year. Interim financial reports may be presented monthly, quarterly or semiannually...

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HOMEWORK 3. INTERIM FINANCIAL REPORTING

SHORT QUESTIONS: 1. What is “interim financial reporting”? Interim financial reporting means the preparation and presentation of financial information for a period of less than one year. Interim financial reports may be presented monthly, quarterly or semiannually. But quarterly interim reports are the most common although publicly traded entities are encouraged to provide interim financial reports semiannually and such reports are to be made available not later than 60 days after the end of the interim period.

2. Is it required to prepare interim financial statements? 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 and Philippine Stock Exchange, however, require certain entities to file interim financial statements. For example, the Sec and PSC 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.

3. What are the two views on interim financial reporting? 1.

2.

The first view is that each interim period is an integral part of the annual accounting period. This is known as the “integral view”. The second 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 interim period were annual accounting period. This is known as the “independent view” or “discrete view”.

Proponents of the independent view argue that the smoothing of interim results through estimation and allocation of annual operating expenses may have undesirable effects. For example, a significant drop in an earnings trend during the year may be obscured.

6. Which view on interim financial reporting is followed in practice? PAS 34 on interim financial reporting does not mention about the integral view and the independent view. 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. Another example of the independent view is the nonaccrual 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 taxes is consistent with the integral view. The recognition of commission and warranty cost based on sales is also an application of the integral approach. 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 will 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 as arbitrary and meaningless.

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.

7. What are the components of an interim financial report?

Under the integral view, annual operating expenses are estimated and then allocated to the interim periods based on forecasted revenue or sales volume.

An interim financial report shall be include, as a minimum, the following components: a. Condensed statement of financial position b. Condensed income statement c. Condensed statement of comprehensive income d. Condensed statement of changes in equity e. Condensed statement of cash flows f. Selected explanatory notes 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.

In other words, costs incurred which clearly benefit the entire year are allocated to the interim periods based on forecasted revenue or sales volume.

In other words, PAS 34 allows an entity to publish a set of condensed financial statements or complete set of financial statements in its interim financial report.

When this approach is followed, the results of subsequent interim periods must be adjusted to reflect prior estimation errors.

“Condensed” means that each of the heading 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 by PAS 34.

4. Explain fully the “integral view” of interim financial reporting.

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 interview 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.

5. Explain fully the “independent view” of interim financial reporting. Under the independent view, each interim period is considered a discrete or separate accounting period with status equal to a fiscal year. Thus, 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 asunder annual reporting and no special interim accruals or deferrals are permitted. In other words, annual operating 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 financial statements.

8. Explain disclosure of compliance of interim financial reports with PFRS. If an entity’s interim financial report is in compliance with Philippine Financial Reporting Standards, that fact shall be disclosed. An entity shall not describe an interim financial report5 as complying with PFRS unless it complies with all the of the requirements of applicable Philippine Financial Reporting Standards.

9. Give examples of 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 the financial statement 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. Examples of disclosures required in a condensed interim financial report include: a.

Writedown of inventories to net realizable value and the

a.

Writedown of inventories to net realizable value and the reversal of such a writedown.

b.

c. d. e. f. g. h. i. j.

Recognition of loss from the impairment of property, plant and equipment, intangible assets, other assets and the reversal of such an impairment loss. The reversal of any provisions for the costs of restructuring. Acquisitions and disposal of items of property, plant and equipment. Commitments for the purchase of property, plant and equipment. Litigation settlements Corrections of prior period errors in previously reported financial data. Any debt shall or any breach of a debt covenant That has not been corrected subsequently. Related party transactions

10. Explain the presentation of comparative interim financial statement. a.

b.

c.

d.

e.

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 comparatives 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.

11. What are the basic principles of interim financial reporting? 1.

An entity shall apply the same accounting policies in its interim financial statements as are applied in its annual financial statements. 2. Revenues from products sold or services rendered are generally recognized for interim reports on the same basis as for the annual period. 3. Cost 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.

4.

5.

Thus, costs incurred such as major repairs , year-end bonuses, insurance, property taxes and depreciation are allocated over the interim periods benefited. If the business is seasonal, the standard encourages the entity to disclose financial information for the latest 12 months ending on a given interim date, and comparative information for the prior 12-month period, in addition to the interim period financial statements. The preparation of interim financial reports generally will require a greater use of estimation than the annual financial reports.

12. Explain the measurement of inventories for the interim financial reporting. Paragraph 25 of Appendix 2 of PAS 34 provides that inventories are measured for interim financial reporting by the same principles as at financial year-end. This simply means that 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. Full inventory and the valuation and the valuation procedures are not required for inventories at interim date.

Accordingly, if the net realizable value is lower than cost, a loss on inventory writedown shall be recognized regardless of whether the writedown is temporary or nontemporary. This approach is in accordance with PAS 34, paragraph 7, which requires disclosure of the writedown of inventories to net realizable value and the reversal on such writedown in a later 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.

13. Explain the treatment of seasonal, cyclical of occasional revenue for interim financial reporting. Seasonal, cyclical or occasional revenue shall not be anticipated or deferred as of an interim date of anticipation or deferral would not be appropriate at the end of the entity’s financial year. 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 paying corporation until it is legally declared.

14. Explain the treatment of uneven costs for interim financial reporting. 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 financial year. For instance, a provision for a warranty is recognized at interim date because the entity has no realistic alternative to make a transfer of economic benefits as a result of an event that has created 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.

15. Explain the treatment of the year-end bonuses for interim financial reporting. The nature of the year-end bonuses varies widely period. 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. A bonus is anticipated for interim purposes if and only if: a. The bonus is 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.

16. Explain the treatment of irregular costs for interim financial reporting. Certain costs are expected to be incurred irregularly during the financial year, such as charitable contribution and employee training 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.

17. Explain the treatment of the following for the interim financial reporting: 1. Depreciation and amortization; 2. Paid vacation and holiday leave; 3. Income tax; and 4. Gains and losses. 1.

2.

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 shall be accrued for interim purposes because there are enforceable as legal commitments.

3.

4.

Interim period income tax expense should reflect the same general principles of income tax accounting applicable to annual reporting. Gains or losses from disposal of property, gains and 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.

HOMEWORK 3. INTERIM FINANCIAL REPORTING

MULTIPLE CHOICE. Identify the letter of the choice that best completes the statement or answers the questions. 1. Which statement is correct concerning interim financial reporting? Statement 1: PAS 34 mandates which entities are required to publish interim financial reports, how frequently, or how soon after the end of an interim period. Statement 2: Entities that provide interim financial reports in conformity with generally accepted accounting principles shall conform to the recognition measurement and disclosure principles set out in the standard. A. Statement 1 only. B. Statement 2 only. C. Both statements. D. None of the above. 2. The Securities and Exchange Commission and Philippine Stock Exchange require entities covered by the reportorial requirements of the Revised Securities Act to file A. Quarterly interim financial reports within 45 days after the end of each of the first three quarters. B. Quarterly interim financial reports within 30 days after the end of each of the first three quarters. C. Semiannual interim financial reports within 45 days after the end of the first six months. D. Semiannual interim financial reports within 30 days after the end of the first six months. 3. Interim financial report means a financial report containing Statement 1: A complete set of financial statements. Statement 2: A set of condensed financial statements A. Statement 1 only. B. Statement 2 only. C. Both statements. D. None of the above. 4. An interim financial report shall include, as a minimum, all of the following components, except A. Condensed statement of financial position and statement of comprehensive income. B. Condensed statement of cash flows. C. Condensed statement of changes in equity. D. Accounting policies and explanatory notes. 5. Publicly traded entities are encouraged to provide interim financial reports A. At least at the end of the half year and within 60 days of the end of the interim period. B. Within a month of the half year-end. C. On a quarterly basis. D. Whenever the entity wishes. 6. Which is incorrect concerning presentation of comparative interim financial statements? A. Statement of financial position as of the end of the

of the current interim period and comparative statement of financial position as of the end of the immediately preceding fiscal year. B. Income statements for the current interim period and cumulatively for the current financial year to date with comparative income statement for the immediately preceding year. C. Statement of changes in equity cumulatively for the current financial year to date with comparative statement for the immediately preceding year. D. Statement cash flows cumulatively for the current financial year to date with comparative statement for the comparable year to date period of the immediately preceding year. 7. The entity’s financial year ends December 31 and the entity presents financial statements in its quarterly interim financial report on September 30, 2019. Which is an incorrect presentation of the comparative interim financial statements? A. Statement of financial position at September 30, 2019, Statement of financial position at December 31, 2018. B. Income statement for nine months ending September 30, 2019, Income statement for 9 months ending September 30, 2018, Income statement for three months ending September 30, 2018. C. Statement of cash flows for nine months ending September 30, 2019, Statement of cash flows for year ending December 31, 2018. D. Statement of changes in equity for nine months ending September 30, 2019, Statement of changes in equity for nine months ending September 30, 2018. 8. Which statement is incorrect concerning interim financial reporting? A. To save time and cost, entities often use estimates to measure inventories at interim dates to a greater extent than at annual reporting dates. B. Depreciation and amortization for an interim period shall be based only on assets owned during the interim period. C. The cost of 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 legal or constructive obligation. D. Charitable contribution, employee training costs and other costs that are expected to be incurred irregularly during the financial year shall be accrued at the end of interim reporting period. 9. A bonus is anticipated for interim purposes when Statement 1: 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 make the payment. Statement 2: A reliable estimate of the obligation can be made. A. Statement 1 only. B. Statement 2 only. C. Both statements. D. None of the above. 10. Which statement is correct concerning interim financial reporting? Statement 1: An entity shall apply the same accounting policies in its interim financial statements...