4/22/12

University
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ofMaster
San Carlos
subtitle style
Department of Accountancy
M. M. Mancelita

INTERIM FINANCIAL REPORTING

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Interim financial reporting

 PAS 34-complete or condensed financial statements
for an interim period.
 the preparation and presentation of financial
information for a period less than one year.
 Monthly, quarterly or semiannually.
 PAS 34 does not mandate which entities are required
to publish interim financial reports.
 SEC and PSE require certain entities to file interim
financial statements.
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Two views
 FIRST VIEW (INTEGRAL VIEW)- each
interim period is an integral part of the
annual accounting period.

 SECOND VIEW (INDEPENDENT VIEW)-

each interim period is a basic accounting
period and the results of operations shall be
determined in essentially the same way as if
the interim period were an annual accounting
period.
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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

 INTEGRAL view- income tax;

commission; warranty cost based on
sales; indirect costs
 INDEPENDENT view- non accrual of cost
of a planned major periodic
maintenance or overhaul that is
expected to occur late in the year;
direct costs and revenue
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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
Condensed- each of the headings and subtotals presented in the
entity’s most recent annual financial statements is required but
there is no requirement to include grated detail unless this is
specifically required by PAS 34.
*PAS 34 allows CONDENSED or COMPLETE set of financial
statements in its interim financial report.
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Disclosure of compliance with pfrs

 PAS 34- if an entity’s interim financial
report is in compliance with PFRS, such
fact shall be disclosed. Otherwise, it
should not do so.
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Selected explanatory notes

 PAS34: it is a superfluity to provide the
same notes in the interim financial
report that appeared in the most recent
annual financial report.
 Onlyan explanation of the events and
transactions that are significant to the
understanding of the changes in
financial position and financial
performance sunce the last annual
reporting.
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Presentation of comparative interim
statements
 Statement of Financial Position
 As of the end of the current interim
period.
 Comparative as of the end of the
immediately preceding year.
HALF-YEARLY
June 30, 2010 December 31, 2009
QUARTERLY
June 30, 2010 December 31, 2009
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Presentation of comparative interim
statements
 INCOME STATEMENT
 Of the current interim period
 Cumulatively for the current financial year to date
 Comparative for the comparable current interim
period of the immediately preceding year.
 Comparative for the comparable year to date interim
period of the immediately preceding year.

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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Depreciation and amortization

 Based on assets owned during that
interim period.
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Paid vacation and holiday leave

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

The income tax for each quarter is computed as

follows:
First quarter (30% x 5,000,000) 1,500,000
Second quarter (30%x 6,000,000) 1,800,000
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Gains and losses

 Reported in the interim period realized/
incurred.
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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

Property taxes (180,000/4) 45,000

Repairs (irregular cost) 300,000
The expense for 2nd quarter 345,000
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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

Depreciation (500,000/2) 250,000

Bonuses (1,200,000/2) 600,000
Total 850,000

*regularly incurred for the whole

year, therefore, accrued for every
interim period.
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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

IRREGULAR COST- recognized when

incurred.
Reported in the period it was incurred. In
this case, the loss is incurred in the third
quarter.
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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

UNEVEN COSTS- deferred for interim

purposes only if it also appropriate to
anticipate or defer that type of cost at
the end of the financial year.

Advertising and bonuses are reported in

the interim period when incurred.~
UNEVEN COSTS
Advertising- 2,000,000
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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

Total warranty (10% x 25M) 2,500,000

Warranty recognition in the
1st quarter (5% x 10M) (500,000)
Warranty expense for 2nd quarter
2,000,000
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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

An entity shall report information about

an operating segment that meets any of
the following quantitative thresholds:
1. Segment revenue (intersegment and
external) is 10% of combined revenue
(intersegment and external) of all
operating segments.
2. The absolute amount of profit or less
of the segment is 100% or more of the
greater in absolute amount of:
illustration 4/22/12

Revenue Profit (loss) Assets

Segment A 16,000,000 1,700,000 25,000,000
Segment B 13,000,000 500,000 11,000,000
Segment C 6,000,000 (1,000,000) 3,000,000
Segment D 3,000,000 200,000 2,000,000
Segment E 2,000,000 (100,000) 4,000,000
40,000,000 1,300,000 45,000,000

Criteria 1: SEGMENT REVENUE 10%

40,000,000 x 10%= 4,000,000 THRESHOLD
Reportable segments: A, B, C

Criteria 2: SEGMENT ASSETS 10% Profit Loss

45,000,000 x 10%= 4,500,000 THRESHOLD
A 1,700,000
Reportable segments: A, B
B 500,000

Criteria 3: SEGMENT PROFIT ORC LOSS 10% 1,000,000

Total profit > Total loss
D 200,000
2,400,000 x 10%= 240,000 THRESHOLD
E 100,000
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75% OF ENTITY REVENUE
THRESHOLD
 TOTALEXTERNAL REVENUE < 75%
ENTITY EXTERNAL REVENUE
 Additional operating segments shall be
indentified as reportable segments even if
they do no meet the 10% quantitative
thresholds.
 The operating segments to be aggregated must
have similar economic characteristics and share
a majority of the five aggregation criteria:
 Nature of product or service
 Nature of production process
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Segment no longer reportable

 Still
to be reported if it is of continuing
significance.
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Segment becoming reportable

 Segment data for a prior period
presented for comparative purposes
shall be restated to reflect the newly
reportable segment even if that
segment did not satisfy any of the
quantitative thresholds in the prior
period.
Segment revenue 4/22/12

 Segment revenue= sales to external customers + intersegmental sales

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

Dil 43,000 16,000 59,000

Combined 60,000 23,000 83,000
Elimination (23,000) (23,000)

Consolidated 60,000 60,000

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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

Appropriate common expenses are allocated to segments based

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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.
examples 4/22/12

 Correy Company and its divisions are engaged solely in

manufacturing operations. The following data pertain to the
operating segments in which operations were conducted for the
year ended December 31, 2011.
Industry Revenue Profit Total assets
12/31/11
A 10,000,000 1,750,000 20,000,000
B 8,000,000 1,400,000 17,500,000
C 6,000,000 1,200,000 12,500,000
D 3,000,000 550,000 7,500,000
E 4,250,000 675,000 7,000,000
F 1,500,000 225,000 3,000,000
32,750,000 5,800,000 67,500,000

How many reportable segments does Correy have?

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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.

Therefore, reportable segments are V, W, X.

examples 4/22/12

Cash and cash equivalents 500,000

Accounts Receivable 1,500,000
Allowance for doubtful (200,000)
accounts
Loan receivable from another 1,000,000
segment
Inventory 2,000,000
Property, plant and 5,000,000
equipment
Accumulated Depreciation (1,800,000)
Intangible assets 2,500,000
Goodwill 400,000
Investment in associate 1,400,000
Corporate assets 600,000
Financial assets 700,000
Deferred tax assets 300,000
Postemployment benefits 200,000
assets

What amount of “total assets” should be

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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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RELATED PARTIES (PAS 24)

 Related party- parties are considered to
be related if one party has:
a) The ability to control the other party.
 Control- is ownership of more than half of
the voting power of an entity.
b) The ability to exercise significant
influence over the other party.
 Significant influence- power to participate
in the financial and operating policy
decision of an entity. (20% or more)
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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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RELATED PARTY DISCLOSURE

 REQUIRES disclosure of related party
relationships where control exists
irrespective of whether there have
been transactions between related
parties. –name of entity’s parent or
ultimate controlling party.
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Disclosure of related party
transactions
 Nature of the related party relationship
 Information about the transactions and
outstanding balances necessary for an
understanding of the potential effect of
the relationship on the financial
statements.
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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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Related party disclosure not required

 INTRAGROUP related party
transactions and outstanding balances
are ELIMINATED in the preparation of
consolidated financial statements of
the group.
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End 
 Next
meeting: discussion on
NONCURRENT ASSETS HELD FOR SALE
Pls. bring a photocopy of the said topic. 