Interim Financial Reporting

Definition
- 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 and the principles for recognition and
measurement in complete or condensed financial statements for an interim period.
- Interim financial reports may be presented monthly, quarterly or semi-annually. Quarterly interim reports are the most
common.
- However, publicly traded entities are encouraged to provide interim financial reports at least semi-annually and such
reports are to 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.
- The Securities and Exchange Commission (SEC) and Philippine Stock Exchange (PSE), however, require certain entities
to file interim financial statements.

Philippine Jurisdiction
- The SEC and PSE 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.
- Entities that provide interim financial reports in conformity with Philippine Financial Reporting Standards shall conform
to the recognition, measurement and disclosure requirements set out in the standard.

Two Views on Interim Financial Reporting

1. The integral view is that each interim period is an integral part of the annual accounting period.
2. The independent or discrete 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 the interim period were an annual accounting period.

Integral View
- 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
- When this approach is followed, the results of subsequent interim periods must be adjusted to reflect prior estimation
- 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 view 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

Independent View
- 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
- The same expense recognition rules shall apply as under annual reporting and no special interim accruals or deferrals are
permitted
- Annual operating expenses are recognized in the interim period in which they are incurred, irrespective of the number of
interim periods benefited, unless deferrals or accrual would be allowed in the annual financial statements
- Proponents of the independent view argue that the smoothing of interim results through estimation and allocation of
annual operating expenses may have undesirable effects

Which view on interim financial reporting is followed in practice?

- PAS 34 on interim financial reporting does not mention about the two views. 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 non-accrual 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 tax is consistent with the integral view. The recognition of commission
and warranty cost based on sales is also an application of the integral view.
- 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
would 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 is 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.

Components of an Interim Financial Report

- 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.
- 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.
- PAS 34 allows an entity to publish a set of condensed financial statements or complete set of financial statements in its
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

- If an entity’s interim financial report is in compliance with PFRS, 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 PFRS.

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 financial statements 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 that
appeared in the most recent annual financial report.
- Examples of disclosures required in a condensed interim financial report include:
a. Write-down of inventories to net realizable value and the reversal of such a write-down
b. Recognition of a loss from the impairment of property, plant and equipment, intangible assets, other 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 periods 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

Presentation of Comparative Interim Statements

a. Statement of financial position at the end of the current interim period and a comparative statement of financial position
at the end of the immediately preceding year.
b. Income statements of the current interim period and cumulatively for the current financial year to date, with
comparative income statements for the comparable interim periods (current and year to date) of the immediately
preceding year.
c. Statements 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.
d. 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.
e. 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.

If an entity publishes interim financial reports half-yearly, the following

comparative financial statements are presented on June 30, 2020:
Statement of Financial Position (On): June 30, 2020 December 31, 2019
Income Statement (6 months ending): June 30, 2020 June 30, 2019
Statement of Cash Flows (6 months ending): June 30, 2020 June 30, 2019
Statement of Changes in Equity (6 months ending): June 30, 2020 June 30, 2019

Basic Principles
1. An entity shall apply the same accounting policies in its interim financial statements as are applied in its annual
financial statements. However, the frequency of an entity’s reporting whether annual, half-yearly or quarterly shall not
affect the measurement of its annual results. Therefore, 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. If business is seasonal, the entity is encouraged to disclose financial information for the latest 12 months and
comparative information for the prior 12-month period, in addition to the interim period financial statements.
5. The preparation of interim financial reports generally will require a greater use of estimation than annual financial
reports.

Inventories
- 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.
- The cost of the inventory may be estimated using the gross profit method or retail inventory method.
- Full inventory and valuation procedures are not required for inventories at interim date.
- Accordingly, if the net realizable value is lower than cost, a loss on inventory write-down shall be recognized regardless
of whether the write-down is temporary or non-temporary.
- PAS 34 requires disclosure of the write-down of inventories to net realizable value and the reversal of such write-down
in a latter 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.

Seasonal, Cyclical or Occasional Revenue

- Seasonal, cyclical or occasional revenue shall not be anticipated or deferred as of an interim date if anticipation or
deferred would not be appropriate at the end of the entity’s reporting period.
- 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 entity until it is legally declared.

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.
- For example, a provision for warranty is recognized at interim date because the entity has no realistic alternative but to
make a transfer of economic benefits as a result of an event that has created a legal or constructive obligation.
- However, the cost of a 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 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.

Year-End Bonuses
- The nature of year-end bonuses varies widely. 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 Costs
- Certain costs are expected to be incurred irregularly during the financial year, such as charitable contribution and
employee training cost.
- 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.

Depreciation and Amortization

- 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

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

Income Tax
- Interim period income tax expense shall reflect the same general principles of income tax accounting applicable to
annual reporting.
- The interim period income tax expense is accrued using the annual effective income tax rate applied to the pretax
income of the interim period

Difference in Financial Reporting Year and Tax Year

- If the financial reporting year and the income tax year differ, 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.
- The effective tax rate of a particular tax year is applied to the pretax income of the interim period in the same tax year.

Gains and Losses

- Gains and losses from disposal of property, gains or 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.

Change in Accounting Policy

- A change in accounting policy other than one for which the transition is specified by a new standard shall be reflected by
restating the financial statements of prior interim periods of the current year and the comparable interim periods of the
prior financial year.
- The objective of this requirement is 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.