Interim Financial Reporting

Interim Financial Reporting

Interim financial reporting means the preparation and presentation of financial

statements for a period of less than one year.
PAS 34 prescribes the minimum content of an interim financial report.

Interim financial reports may be presented monthly, quarterly or semiannually.

Quarterly interim reports are the most common.
Publicly traded entities are encouraged to provide interim financial reports at least
semiannually
and are be made available not later than 60 days after the end of interim period.

Frequency of interim reporting

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.

Philippine jurisdiction
The Securities and Exchange Commission and Philippine Stock Exchange require
entities
covered by the reportorial requirements of Revised Securities Act to file quarterly
interim reports within 45 days after the end 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.

Two views on interim financial reporting

 1. Integral view

The integral view is that each interim period is an integral part of the annual accounting
period.
Annual operating expenses are estimated and then allocated to the interim periods based on
forecasted revenue or sales volume.
Costs incurred which clearly benefit the entire year are allocated to the interim periods
benefited.

2. Independent view
The independent view is that each interim period is considered a discrete or
separate accounting period with status equal to a fiscal year.
No estimations or allocations are made for interim purposes, unless such
estimations or allocations are allowed for annual reporting.
Annual reporting expenses are recognized in the interim period when incurred.

*Essentially, the standard adopts a mix of the integral and independent views.

Components of an interim financial report

PAS 34, paragraph 8, provides that an interim financial report shall include, at a
minimum, the following components:

a. Condensed statement of financial position

b. ​ Condensed statement of comprehensive income

c. Condensed statement of changes in equity

 d. ​ Condensed statement of cash flows

e. Selected explanatory notes

An entity can present items of profit or loss in a separate condensed income

statement.

PAS 34 allows an entity to publish a set of condensed financial statements or

complete set of financial statements in the interim financial report.

“Condensed” – means that 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

greater detail unless this is specifically required.

Disclosure of compliance with PFRS

PAS 34, paragraph 19, provides that if an entity’s interim financial report is in
compliance with Philippine Financial Reporting Standards, such fact shall be
disclosed.
An entity shall not describe an interim financial report as complying with PFRS unless
it complies with all of the requirements of each applicable Philippine Financial
Reporting Standard.

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

b. ​ Recognition of a loss from the impairment of property, plant and

equipment and intangible assets and the reversal of such an
impairment loss

c. ​ The reversal of any provisions for the costs of restructuring

d. ​ Acquisitions and disposal of items of property, plant and equipment

e. Commitments for the purchase of property, plant and equipment

f. Litigation settlements

g. Corrections of prior period errors in previously reported financial data

h. ​ Any debt default or any breach of a debt covenant that has
not been corrected subsequently

i. Related party transactions

j. Changes in economic circumstances that affect fair value of financial

asset and financial liability

k. ​ Change in the classification of financial asset

l. Contingent liabilities and contingent assets

Presentation of comparative statements

1. Statement of financial position

a. ​ At the end of current interim period

b. Comparative SFP at the end of preceding year.

2. Income statement

a. For the current interim period

b. ​ Cumulatively for the current financial year to date

c. Comparative income statement for the comparable interim period of the preceding year

d. Comparative income statement cumulatively for the comparable financial

year to date of the preceding year

3. Statement of comprehensive income

a. ​ For the current interim period

b. ​ Cumulatively for the current financial year to date

c. Comparative SCI for the comparable interim period of the preceding year

d. Comparative SCI cumulatively for the comparable financial year to date of

the preceding year

4. Statement of changes in equity

a. Cumulatively for the current financial year to date

b. ​ Comparative SCE for the comparable financial year to date of the preceding
year

5. Statement of cash flows

a. ​ Cumulatively for the current financial year to date

b. ​ Comparative SCF for the comparable financial year to date of the preceding
year

Illustration – Half- yearly

 If an entity publishes interim financial reports half- yearly, the following comparative
financial statements are presented on June 30, 2021:

Statement of financial position:

On ​June 30, 2021 ​ December 31, 2020
Statement of comprehensive income:

6 months ending June 30, 2021 June 30, 2020

Statement of cash flows:

6 months ending June 30,2021 June 30, 2020

Statement of changes in
equity:

6 months ending June 30, 2021 June 30,2020

Another illustration – Quarterly

If an entity publishes interim financial reports quarterly, the following comparative

financial statements are included in the quarterly interim financial report on June 30,
2021:

Statement of financial position:

On ​June 30, 2021 ​ December 31, 2020

Statement of comprehensive income:

3 months ending June 30, 2021 June 30, 2020

 6 months ending June 30, 2021 June 30, 2020

Statement of cash flows:

6 months ending June 30, 2021 June 30, 2020

Statement of changes in
equity:

6 months ending June 30, 2021 June 30, 2020

Basic principles of interim reporting

1. PAS 34, paragraph 28, provides that an entity shall apply the same accounting policies
in the interim financial statements as are applied in the annual financial statements.
Measurements for interim reporting purposes shall be made on a year to date basis.
2. Revenues from products sold or services rendered are generally recognized for interim
reports on the same basis as for the annual period.
3. Costs 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. PAS 34, paragraph 21, provides that if the business is seasonal, in addition to the current
interim period financial statements, the entity is encouraged to disclose financial information:

a. For the latest 12 months

b. ​ Comparative information for the prior comparable 12- month period

5. Paragraph 41 provides that the preparation of interim financial reports generally requires
a greater use of estimation than annual financial reports.
Inventories

Paragraph 25 of Appendix B of PAS 34 provides that inventories are measured for

interim financial reporting by the same principles as at financial year- end.
Inventories shall be measured at the lower of cost or net realizable value even for
interim purposes.

Cost may be estimated using the gross profit method or retail inventory method.

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.
PAS 34, paragraph 17, requires disclosure of the writedown of inventories to net
realizable value and the reversal of such writedown in a later interim period.
Net realizable value is determined by reference to selling prices related cost to
complete and dispose at interim dates.

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.
Dividend revenue, royalties and government grants shall be recognized in the interim
period
when they occur.

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.
Expenditure for advertising is not a deferred but recognized as expense in the interim
period
 when incurred because it is not appropriate to defer such cost at year- end.

Year – end bonuses

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.

Recognition of bonus
A bonus is anticipated for interim purposes if and only if:
a. ​ 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.

b. ​ A reliable estimate of the obligation can be made.

Irregular cost
Certain costs are expected to be incurred irregularly such as charitable contribution
and employee
training cost. Such costs are generally discretionary and even though planned shall not
be anticipated.

Depreciation and amortization

Shall be based only on assets owned during that interim period.

Asset acquisitions or dispositions planned shall not be taken into account.

Paid vacation and holiday leave
Shall be accrued for interim purposes because these are enforceable as legal
commitments.

Gain and loss

Gain and loss from disposal of property, gain or loss from discontinued operation and
other gain
or loss shall not be allocated over the interim period. The gain is reported when
realized and the loss is reported when incurred.

Income tax
Period income tax expense is accrued using the annual effective income tax rate
applied to the pretax income of the interim period. (Paragraph 12 of Appendix B of PAS
34)

Difference in financial reporting year and

tax year

The income tax expense for interim periods of that financial year is measured using
separate

effective tax rates for each of the tax years applied to the portion of pretax income
earned in each of those tax years. (Paragraph 17 of Appendix B of PAS 34)
The effective tax rate of a particular tax year is applied to the pretax income of the
interim period in the same tax year.
Change in accounting policy

Restating the financial statements of prior interim periods of the current year and the
comparable interim periods of the prior financial year.
To ensure that a single accounting policy is applied to a particular class of transactions
throughout the entire financial year.
To allow differing accounting policies for the same class of transactions within a single
financial
year would result in “interim allocation difficulties, obscured operating results, and
complicated analysis and understandability of interim information”.