- 1 L 23 Interim Financial Reporting | 4 Learning Outcomes After reading this chapter, you should be able to: (a) understand and define interim period and interim financial report; (b) identify the minimum content of an interim financial report; (Q) prepare and present interim financial statements with comparatives; (d) enumerate the note disclosure requirements; (e) apply the correct accounting policies and measurement bases for interim financial reports; and (8 acquire proficiency and accuracy in answering theoretical questions and solving problems relating to interim financial reporting. ‘Interim Period > Financial reporting period shorter than a full financial year (most typically a quarter or half-year). + Interim Financial Report > A financial report that contains either a complete or condensed set of financial statements for an interim period. ‘Minimum Content of an Interim Financial Report > acondensed balance sheet (statement of financial position); > > either (a) a condensed statement of comprehensive income or (b) a condensed statement of comprehensive income and a condensed income statement; > acondensed statement of changes in equity; > acondensed statement of cash flows; and > selected explanatory notes. ‘> Periods Covered by the Interim Financial Statements > balance sheet (statement of financial position) as of the end of the current interim period and a comparative balance sheet as of the end of the immediately preceding financial year. > statement of comprehensive income (and income statement, if presented) for the current interim period and cumulatively for the current financial year toChapter 23 Interim Financial Reporting > » date, with comparative statements for the comparable interim periods (current and year-to-date) of the immediately preceding financial year. statement of changes in equity cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial 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 financial year. Sample Interim Reporting Period for the Third Quarter of 2021: Financial Report 2021 2020 Condensed |. As of September 30,2021 | As of December 31, 2020 Statement of Financial Position Condensed For the Quarter Ended For the Quarter Ended Statement of September 30,2021 September 30, 2020 Comprehensive A Income For the Nine-Month Period | For the Nine-Month Period Ended September 30, 2021 | Ended September 30, 2020 Condensed As of September 30, 2021 ‘As of December 31, 2020 Statement of Changes in Equity Condensed As of September 30, 2021 As of December 31, 2020 Statement of Cash Flows + Note Disclosures The explanatory notes required are designed to provide an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the last annual reporting date. PAS 34 states a presumption that anyone who reads an entity's interim rere will also have access to its most recent annual report. Consequently, PAS avoids repeating annual disclosures in interim condensed reports. Examples of Specific Disclosure Requirements of PAS 34 litigation settlements acquisitions and disposals of property, plant and equipment write-down of inventories unremedied loan defaults and breaches of loan agreements reversal of provision for the costs of restructuring commitments for the purchase of property, plant and equipment 594Chapter 23 Interim Financial Reporting. deri Fina changes in contingent liabilities and contingent assets. correction of prior period errors changes in business or economic circumstances affecting the fair value of financial assets and liabilities «transfers between levels of the ‘fair value hierarchy’ or changes in the classification of financial assets Events after the reporting period «Dividends paid © Changes in estimates Changes in accounting policies Seasonality or cyclicality of interim operations 4 Accounting policies > ‘The same accounting policies should be applied for interim reporting as are applied in the entity's annual financial statements, except for accounting policy changes made after the date of the most recent annual financial statements that, are to be reflected in the next annual financial statements. Akey provision of PAS 34 is that an entity should use the same accounting policy throughout a single financial year. Ifa decision is made to change a policy mid year, the change is implemented retrospectively, and previously reported interim data is restated. ‘+ Measurement > Measurements for interim reporting purposes should be made on ayear-to-date basis, so that the frequency of the entity's reporting does not affect the measurement of its annual results. Important measurement points: * Revenues that are received seasonally, cyclically or occasionally within a financial year should notbe anticipated or deferred as of the interim date, if anticipation or deferral would not be appropriate at the end of the financial year. * Costs that are incurred unevenly during a financial year should be anticipated or deferred for interim reporting purposes if, and only if, it is also appropriate to anticipate or defer that type of cost at the end of the financial year. ‘© Income tax expense should be recognized based on the best estimate of the weighted average annual effective income tax rate expected for the full financial year. 595Chapter 23 Interim Financial Reporting 10. ‘TRUE OR FALSE QUESTIONS PAS 34 does not detail which entities should publish interim financial reports, how frequently they should be published, or how soon they should be published after the end of the interim period. The International Accounting Standards Board (IASB) requires publicly traded entities to provide interim financial reports at least at the end of the half year, and such reports are to be made available not later than 60 days after the end of the interim period. If an entity issues a complete set of financial statements in the interim report, those financial statements should comply with PAS 1 Presentation of Financial Statements instead of PAS 34 Interim Financial Reporting. If the entity's most recent annual financial statements are prepared’on a consolidated basis, the interim financial report should be prepared on the same basis. Measurements for interim reporting purposes should be made on a “year-to- date” basis, so that the frequency of the entity's reporting should not affect the measurement of its annual results. The same accounting policies should be applied for interim reporting as are applied in the entity's annual financial statements. Interim financial reports are financial statements covering periods of at least one year. Even if annual financial statements are prepared in accordance with PFRS, the reporting entity is free to present interim financial statements on bases other than PFRS, as long as they are not misrepresented as being PFRS compliant. PAS 34 advanced the notion that materiality for interim reporting purposes may differ from that defined in the context of an annual period. PAS 34 requires disclosure of earnings per share (EPS) (both basic EPS and diluted EPS) on the face of the interim statement of comprehensive income for covered entities under PAS 33 Earnings per Share. 596Chapter 23 Interim Financial Reporting FINANCIAL ACCOUNTING THEORY QUESTIONS What is the concept that supports the issuance of interim reports? a. Relevance b. Materiality c. Consistency d. Faithful Representation Under PAS 34, interim financial reports should be published Once a year at any time in that year. Within a month of the half-year-end. Ona quarterly basis. Whenever the entity wishes. poop The interim financial report is intended to a, provide an update on the latest complete set of annual’ financial statements. b. correct error discovered subsequent to the release of the financial statements. provide additional information not disclosed previously in the annual financial statements. d. provide information that are requested by the investors in relation to a planned initial public offering, Advertising costs may be accrued or deferred to provide an appropriate expense in each period for fv iran F ead fined a Yes No b. Yes Yes c No No d. No Yes Ifan entity does not prepare interim financial reports, then a. the year-end financial statements are deemed not to comply with PFRS. b. the year-end financial statements’ compliance with PERS is not affected. c. the year-end financial statements will not be acceptable under local legislation. d. interim financial reports should be included in the year-end financial ‘Statements. For interim reporting, the income tax expense for the sécond quarter should be computed by using a. statutory tax rate for the year. b. _ effective tax rate expected to be applicable for the second quarter. c. effective tax rate expected for the full year as estimated at the end of the - first quarter. d. effective tax rate expected for the full year as estimated at the end of second quarter. 597Chapter 23 Interim Financial Reporting 7. 10. 11. 12. Which of the following is usually not disclosed in the selected explanatory notes for an interim financial report? : a. Nature of entity's operations. b. Events after the interim period. . Accounting policies and methods. d. Seasonality or cyclicality of interim operations. Under PAS 34, the preparation of interim reports generally will require no use of estimation methods. lesser use of estimation methods than annual financial reports. greater use of estimation methods than annual financial reports. the same amount of estimation methods with annual financial reports. aoe In interim reporting, which of the following should be accounted for ona time proportion basis? Depreciation Cost of sales Productivity bonus Decline in the net realizable value of inventory items Bose Which of the following describes requirements regarding interim financial statements? a. _ Interim financial statements are required. b. If interim financial statements are presented, four basic financial statements are required. c, Interim financial statements must be presented with the most recent annual statements. d. If interim financial statements are presented, at least a statement of financial position and a statement of comprehensive income are required. An entity owns a number of farms that harvest produce seasonally. Approximately 80% of the entity’s sales are in the period August to October. Because the entity’s business is seasonal, PAS 34 suggests a. additional notes be written in the interim reports about the seasonal nature of the business. b. disclosure of financial information for the latest and comparative 12- month period in addition to the interim report. ¢. additional disclosure in the accounting policy note. d. noadditional disclosure. An entity is preparing half-yearly financial information in line with PAS 34. The period to be covered by the financial statements is the six months to June 30, 2021. Anew PFRS has been published that is effective for periods beginning on or after January 1,2021. The entity must adopt the PFRS a. _ inthe financial statements for the year to December 31, 2021, only. b. _ inits interim financial statements to June 30, 2021, only. ¢. _ inits interim financial statements to June 30, 2021, and its annual financial statements to December 31, 2021. d. at its own discretion. 59813. 4 15. Chapter 23 Interim Financial Reportin Interim financial reports should include as a minimum. a. _acomplete set of financial statements complying with PAS 1. b. _acondensed set of financial statements and selected notes. ¢. balance sheet and income statement only. 4 aa condensed balance sheet, income statement, and cash flow statement only. PAS 34 states a presumption that anyone reading interim financial reports will a. _ understand all International Financial Reporting Standards. b. have access to the records of the entity. ¢._ have access to the most recent annual report. @,__ not make decisions based on the report. Conceptually, interim financial statements can be described as emphasizing a. comparability over neutrality. b. reliability over understandability. c. relevance over comparability. d. timeliness over reliability. 599Chapter 23 Interim Financial Reporting PRACTICAL FINANCIAL ACCOUNTING A. _ Gerrard Capashen Corporation reported the following information relevant to its | quarterly reporting: Sales 1% quarter P 1,000,000 P 700,000 2m quarter 850,000 2 | 3-4 quarter 720,000 504,000 | 42 quarter 1,180,000 2 | Total P_ 3,750,000 P 2,662,500 * Gerrard conducts inventory count twice a year: (1) at the end of the second quarter; and (2) at the end of the year. * Normal gross profit rate is at 30% while the actual gross profit at the end of the 24 quarter and end of the year are 32% and 29%, respectively. Atthe end of the 2"¢ quarter, due to peculiar market conditions, there is an NRV adjustment to certain inventory required in the amount of P9,000. i Gerrard expects that this market anomaly will be corrected by year-end, which indeed does occur in late December. * Gerrard-suffers a decline of P6,S00 in the market value of its inventory during the 3 quarter, however, the value of the inventory increased to P7,500 in the 4 quarter. * Gerrard suffers a clearly temporary decline of P1,000 in the market value ofa specific part of its inventory in the 1* quarter, which it recovers in the ; 2°4 quarter. (1) How much is the gross profit on sales to be reported by Gerrard in the 1* quarter of 2021? i a. 299,000 | b. P300,000 i c. P301,000 ' d. 310,000 * (2) How much is the cost of sales for the 24 quarter based on actual physical count? a. P558,000 b. P595,000 ¢. P1,258,000 d. P1,295,000 { (3) How much is the gross profit on sales to be reported by Gerrard in the 2"4 | quarter of 2021? | a. 284,000 j b. P285,000 c — P292,000 d. 293,000 600Chapter 23 Interim Financial Reporting (4) How much is the gross profit on sales for the 4 quarter of 20217 a. 279,500 b. P284,000 cc. P288,500 d. 296,000 Radiant Archangel Company operates in the travel industry and incurs costs unevenly through the financial year. Advertising costs of P2 million were incurred on March 1, 2021, and staff bonuses are paid at year-end based on sales, Staff bonuses are expected to be around P20 million for the year; of that sum, P3 million would relate to the period ending March 31, 2021. (5) What costs should be included in the entity's quarterly financial report to March 31, 2021? Advertising costs ‘Staffbonuses a. 2,000,000 5,000,000 bP 500,000 5,000,000 cc. — P2,000,000 3,000,000 dP 500,000 3,000,000 Crovax Enterprise prepares quarterly interim financial reports in accordance with PAS 34. Crovax sells electrical goods, and normally 5% of customers claim on their warranty. The provision in the first quarter was calculated as 5% of sales, to date, which was P10 million. However, in the second quarter, a design fault was found and warranty claims were expected to be 10% for the whole of the year. Sales in the second quarter were P15 million. (8) What would be the provision charged in the second quarter's interim financial statements? a P750,000 b. P1,250,000 c — P1,500,000 d. 2,000,000 Ertai Corp.'s P190,000 net income for the quarter ended September 30, 2021, included the following after-tax items: * AP120,000 gain on disposal of machinery, realized on April 30, 2021, was allocated equally to the second, third, and fourth quarters of 2021. ‘* A P32,000 cumulative-effect loss resulting from a change in inventory valuation method was recognized on August 2, 2021. In addition, Ertai paid P96,000 on February 1, 2021, for 2021 calendar-year Property taxes. Of this amount, P24,000 was allocated to the third quarter of 2021, 601Chapter 23 Interim Financial Reporting (7) For the quarter ended September 30, 2021, Ertai should report net income of a. P182,000 b. P206,000 c. P222,000 d. —P230,000 Serra Angel Corp. has estimated that total depreciation expense for the year ending December 31, 2021 will amount to P30,000, and that 2021 yearend bonuses to employees will total P60,000. (8) In Serra Angel's interim income statement for the six months ended June 30, 2021, what is the total amount of expense relating to these two items that should be reported? a PO b. P15,000 c. P45,000 d. 90,000 Barrin Company, a calendar-year corporation, has the following income before income tax provision and estimated effective annual income tax rates for the first three months of 2021: Net profitbeforetax Effective tax rate January P200,000 35% February P150,000 35% March P300,000 40% (9) How much income tax provision should be recognized in January 2021? a. P80,000 b. P74,000 c. P70,000 da PO (10) Barrin’s income tax provision in its interim income statement for the month ended March 31, 2021 should be a. P105,000 b. P120,000 © P137,500 d. P240,500 Urza Corporation reported the following relevant to its quarterly reporting for the year 2021: « Mishra Enterprise placed firm orders to Urza for the year 2021 that will result to the following amount of sales: 1* quarter P 1,500,000 24 quarter 2,000,000 3'4 quarter 750,000 4% quarter 1,650,000 602nro inate Re Chapter 23 Interim Financial Reportinj ‘A 5% rebate is provided if Mishra buys at least P5,000,000 of goods each year. In 2020, Mishra's purchases amounted to P5,600,000 and is again expected to exceed the P5,000,000 threshold in 2021. In January 2021, Urza paid P240,000 of participation fee to a trade show that will occur in the 3° quarter. On May 30, 2021, Urza contracted Ground Up Events and paid P640,000 in advance for a series of social media promotions that will run through the 34 and 4t quarters. On April 1, 2021, the City Government of Muntinlupa’s assessment for real property tax for the next 12 months amounted to P320,000. Urza incurs annual machine repair costs of P60,000 on February 1, 2021. In December 2020, the Board of Directors announced the entitlement of managerial employees of P1,200,000 if Urza's sales for 2021 will reach 40,000,000, prior to any sales rebates, with bonus dropping by P100,000 for every million dollars of sales not achieved. On January 1, 2022, Urza's bookkeeper reported the following 2021 sales and cost of goods sold details: Sales Cost of Sales 1s quarter P 10,000,000 P 5,000,000 24 quarter 8,500,000 4,300,000 3r¢ quarter 7,200,000 3,500,000 4% quarter 11,800,000 6,700,000 (11) How much sales discounts/ rebates will be granted to Mishra for the 1* quarter of 2021? a. PO db. P3,750 c._ P7,500 d. P8250 (12) How much net income should be reported for the 1 quarter of 2021? @. 4,677,500 b. 4,692,500 cc. 4,700,000 4. P4,992,500 (13) How much net income should be reported for the 2"4 quarter of 2021? @. 3,780,000 b. P3,840,000 c. — P3,850,000 d. — P3,865,000 603t } Chapter 23 Interim Financial Reporting come should be reported for the 3” quarter of 2021? (14) How much net int 2,825,250 b. P2,829,000 c — P2,909,000 d P3,000,000 5) How much net income should be reported for the 4 quarter of 2021? Ga. a. P4,474,500 b. P4,459,500 c P4,497,750 ad P4,500,000 604