Chapter 23

INTERIM REPORTING

1 Business Context
Financial information is used by interested parties to assess an entity’s financial performance
and position, its ability to generate future cash flows and its liquidity. The better the quality of
the information available and the more frequently it is made available, the more informed are
the decisions investors can make leading to greater market efficiency. Good quality interim
accounting information may assist timely feedback on analysts’ predictions of profits for the
current year to date.

While other standards address the quality of information in the annual report, IAS 34 Interim
financial reporting deals with interim reporting and ensures that this information is relevant
and reliable.

2 Chapter Objectives
This chapter deals with the preparation of interim reports under IAS 34. The standard does
not require the preparation of interim financial statements; it merely deals with the information
that should be presented if such a statement is prepared. National regulators often require the
preparation of interim statements where an entity’s equity or debt is publicly traded. IAS 34
specifies the minimum content that should be included in an interim report that is described as
conforming to international standards, and sets out principles on recognition and
measurement.

On completion of this chapter you should be able to:

demonstrate a knowledge of the objectives, scope and terminology of IAS 34;

understand the key items contained within interim financial reports and the form of
those reports;

determine the current and comparative interim reporting periods required by IAS 34;

apply recognition and measurement criteria to interim financial reports;

demonstrate an understanding of the types of estimates that are permitted in interim

financial reports; and

apply IAS 34 knowledge and understanding in particular circumstances through basic

calculations.

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3 Objectives, Scope and Definitions of IAS 34
The objectives of IAS 34 are to prescribe:

the minimum content to be included in a set of interim financial reports; and

the recognition and measurement principles for an interim period.

An interim financial report is defined as being a financial report containing either a complete
set of financial statements (as described in IAS 1 Presentation of financial statements) or a
set of condensed financial statements (as described in IAS 34) for an interim period.
[IAS 34.4]

An 'interim period' is any financial reporting period which is shorter than a full financial year.
[IAS 34.4]

IAS 34 does not set out which entities should be required to publish interim financial reports,
nor how frequently interim reports should be produced (thus while half-yearly or quarterly
interim reports are usual, any period of less than a year can be used) nor how soon after the
end of an interim period interim reports should be produced. However, the IASB encourages
publicly traded entities to prepare interim financial information in accordance with IAS 34. It
also encourages the preparation of interim reports at least at the end of the first half of a
financial year, with this information being presented within 60 days of end of this period.

However, where governments, or other regulators, require entities to publish interim financial
reports, then IAS 34 determines the nature and minimum content that should be included in
them.

4 Contents and Form

4.1 Contents
An interim financial report should, as a minimum, include: [IAS 34.8]

a condensed statement of financial position;

a condensed statement of comprehensive income presented as either:

– a condensed single statement; or

– a condensed separate income statement and a condensed statement of

comprehensive income;

a condensed statement of changes in equity;

a condensed statement of cash flows; and

selected explanatory notes.

4.2 Form
An entity may choose to publish a complete set of financial statements for an interim period.
Where a complete set of financial statements is prepared, it should be in accordance with IAS
1 rather than IAS 34 even if it is for an interim period. However, it is more likely that an entity
will choose to publish condensed information in its interim financial statements, as it is less
onerous to prepare. [IAS 34.9]

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'Condensed' means that each of the headings and sub-totals 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 IAS 34. Generally there is no requirement to
update detailed notes presented in the last full financial statements, because a user will have
access to this previously published information. However, an entity should provide additional
line items and headings if their omission would be misleading to users of the interim
information. [IAS 34.10]

IAS 34 requires an entity to present both basic and fully diluted earnings per share (EPS)
figures, calculated for the interim period. [IAS 34.11]

4.3 Selected explanatory notes

As mentioned above, relatively insignificant updates to the information presented in the notes
in the most recent full financial statements are not required in an interim report. A user of the
financial statements will have the last set of financial statements and a comparison of these
with the condensed reports presented in the interim statement should provide enough
information to ensure that an informed decision about the current financial position of the
entity can be made. However, some information is essential to the understanding of the
interim report, and therefore IAS 34 does require that it is presented in the notes in the interim
report. This information should normally be prepared on a year-to-date basis (i.e. by treating
the interim period as distinct in its own right rather than as part of a longer period). Other
information should be presented if the omission of such information would affect the economic
decisions of users of the information.

Information presented and measured during an interim period is based on the facts for that
interim period. The overriding goal is for a user of the interim report to understand the
information that is presented within it on a stand alone basis.

The use of estimates is inherent in the preparation of all financial information, including that
contained in an interim report. Where an estimate made in an interim period changes
significantly in the following interim period, but no separate financial information has been
presented for the following interim period, an entity should explain this change in the full
financial statements. This additional disclosure is only required where the change is
significant, for example where the original assessment of a fall in the value of an asset has
changed due to the outcome of an event that happened in the remaining part of the financial
year. [IAS 34.26]

The explanatory information required to be presented in the notes to the interim financial
statements is set out below. [IAS 34.16]

In preparing an interim report an entity should apply the same accounting policies and
methods of computation that were followed and used for the preparation of its most
recent annual financial statements. This provides consistency of measurement and
presentation and assists comparability. An entity is required to disclose this fact
clearly in the interim report. Where it has been necessary to adopt a different policy or
method, for example following the publication of a new international standard, this
should be fully explained, providing a description of the nature and effect of the
change. Where an entity has changed its accounting policy during an interim period, it
should restate comparative interim period results in line with IAS 8 Accounting
policies, changes in accounting estimates and errors. [IAS 34.43]

Many businesses are seasonal in nature or go through cycles; for example, a retail
outlet selling ice-cream will make the majority of its sales during the summer months.
An interim period which only covers the winter months is likely to be very different to
one covering the summer months for such an entity. Information should therefore be
disclosed to explain this difference. In seasonal businesses an entity is encouraged to
present additional comparative information as well as that set out in Section 5 below.
[IAS 34.21]

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 An entity should disclose items that are unusual in nature, size or incidence in the
current period, and changes in estimates of amounts reported in the prior period
which impact the current interim period in a way that might affect the economic
decisions made by a user of the interim report.

Where an entity is required by IFRS 8 Operating segments to present segmental

information in its annual financial statements, it should report the segmental profit or
loss in its interim report. Information in respect of revenues from external customers
and inter-segment revenues should be provided if such revenues are included in the
segment profit or loss reviewed internally. Total assets should be disclosed if there
have been any significant changes since the last annual financial statements. Any
changes in the segmentation within the entity since the last annual financial
statement should be explained along with a reconciliation of the total reportable
segments’ profit and loss to the entity’s profit or loss before taxation.

An entity is required to disclose information on significant events that have occurred

after the end of the interim period in the same way as it does in its full financial
statements.

An entity should include information on the effect of any changes in composition of

the entity during the interim period. Such changes might include, for example, the
acquisition or disposal of a significant subsidiary, a discontinued operation being
identified or the restructuring of the entity’s main businesses.

Additional information is also required in relation to changes in the capital structure of

the entity; this might be through a share issue or the repayment of debt. Information
in relation to an entity’s contingent liabilities or contingent assets should be updated
for changes since the end of the last reporting period, and any dividends paid during
the period should be disclosed.

If an entity’s interim financial reports have been prepared to comply with IAS 34, this fact
should be disclosed. [IAS 34.19]

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5 Reporting Periods
Interim reports should include interim financial statements (condensed or complete) for
periods as follows: [IAS 34.20]

Statement Current interim period Comparative

Statement of financial At end of the current interim At end of the immediately
position period preceding financial year

Statement of For: For the comparable interim

comprehensive income the current interim period; periods:
and same interim period;
and
cumulatively for year-to-
date (where the interim cumulatively for year-
period is not on a year-to- to-date of the
date basis) immediately preceding
financial year

Statement of changes in Cumulatively for year-to-date Year-to-date of the

equity immediately preceding
financial year

Statement of cash flows Cumulatively for year-to-date Year-to-date of the

immediately preceding
financial year

Illustration 1

An entity has a 31 March financial year end, and is about to present its half-yearly interim
financial statements for the six months to 30 September 2007.

The relevant dates for which each interim financial statement needs to be prepared for the
current period and for the comparative period(s) are:

Statement Current interim period Comparative

Statement of financial 30 September 2007 31 March 2007
position: as at

Statement of
comprehensive income: 30 September 2007 30 September 2006
6 months ending
Statement of changes in
equity:
6 months ending 30 September 2007 30 September 2006
Statement of cash flows:
6 months ending 30 September 2007 30 September 2006

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6 Recognition and Measurement
There are two possible approaches to recognition and measurement in interim financial
statements:

the discrete approach: where each interim period stands alone as an independent
reporting period; or

the integral approach: where each interim period is seen as part of the larger
accounting year to which it belongs, where revenues and costs would be recognised
as a proportion of the annual totals.

In most circumstances IAS 34 requires the discrete approach, i.e. year-to-date basis. As a
result, the entity should apply the same accounting policies in its interim financial statements
as in its annual financial statements, making measurements for the interim period on a year-
to-date basis. This basis may result in a different measurement being used in the full financial
statements compared with that for the interim period, as a result of events that occur following
the interim period. [IAS 34.28]

Illustration 2

An entity’s accounting year ends on 31 December 2008, and it is currently preparing interim
financial statements for the half year to 30 June 2008.

The price of its products tends to vary. At 30 June 2008, it has inventories of 100,000 units, at
a cost per unit of CU1.40. The net realisable value of the inventories is CU1.20 per unit at 30
June 2008. The expected net realisable value of the inventories at 31 December 2008 is
CU1.55 per unit.

The value of the inventories in the interim financial statements at 30 June 2008 is the lower of
cost and NRV at 30 June 2008. This is:

100,000 x CU1.20 = CU120,000

The net realisable value at 31 December 2008 is only relevant to the financial statements for
the full year.

Revenues that are received, or costs that are incurred, only at certain points in time within a
financial year should not be spread over the full year by anticipating or deferring them; instead
they should be recognised as they become receivable or are incurred. As an example, if it is
appropriate to accrue a government grant throughout the year, then a consistent treatment
should be followed during the interim period. [IAS 34.37, 34.39]

Illustration 3

An entity’s accounting year ends on 31 December each year and it is currently preparing
interim financial statements for the half year to 30 June 2008. It has a contractual agreement
with its staff that it will pay them an annual bonus equal to 10% of their annual salary if the
full year’s output exceeds 1 million units. Budgeted output is 1.4 million units and the entity
has achieved budgeted output during the first six months of the year. Annual salaries are
estimated to be CU100 million, with the cost in the first half year to 30 June being CU45
million.

It is probable that the bonus will be paid, given that the actual output already achieved in the
year is in line with budgeted figures, which exceed the required level of output. So a bonus
of CU4.5 million should be recognised in the interim financial statements at 30 June 2008.

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Although a year-to-date approach is generally applied for the preparation of interim reports,
IAS 34 requires that income tax should be accrued based on the entity’s best estimate of
what the weighted average annual tax rate will be. However, the taxable profit is that for the
interim financial reporting period only (i.e. it is not a proportion of the annual profit).

Illustration 4

An entity’s accounting year ends on 31 December 2008, and it is currently preparing interim
financial statements for the half year to 30 June 2008.

Its profit before tax for the 6 month period to 30 June 2008 is CU6 million. The business is
seasonal and the profit before tax for the six months to 31 December 2008 is almost certain
to be CU10 million. Income tax is calculated as 25% of reported annual profit before tax if it
does not exceed CU10 million. If annual profit before tax exceeds CU10 million the tax rate
on the whole amount is 30%.

The taxation charge in the interim financial statements is based upon the weighted average
rate for the year. In this case the entity’s tax rate for the year is expected to be 30%. The
taxation charge in the interim financial statements will be CU1.8 million.

6.1 Impairment in the interim period

Following a potential conflict between IAS 34 and IAS 36 Impairment of assets, IFRIC issued
some interpretation guidance in the form of IFRIC 10 Interim financial reporting and
impairment in July 2006. The guidance sets out that where certain impairment losses have
been recognised in an interim period, no reversal is permitted in subsequent interim financial
statements or the full annual financial statements. The impairment losses in question are
those in respect of goodwill or an investment in either an equity instrument or a financial asset
carried at cost.

The confusion arose because, while IAS 36 and IAS 39 are clear that impairments of goodwill
and these investments should not be reversed in a subsequent reporting period, IAS 34
states that measurement for interim reporting purposes is made on a year-to-date basis. IAS
34 also states that the frequency of an entity’s reporting should not affect measurements
made in its annual financial statements. Applying IAS 34 in isolation might therefore have led
to an impairment which existed at an interim period, but subsequently reversed at the year
end, being reversed in the full annual financial statements.

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7 Use of Estimates
The preparation of both annual and interim financial reports relies on the use of estimates in
measuring assets and liabilities. The measurement procedures in any period should be
designed to ensure that the resulting estimates are reliable. It is often the case that the
preparation of an interim financial report will require a greater use of estimation methods than
the preparation of the annual financial reports. [IAS 34.41]

IAS 34 sets out a number of examples where different estimation methods are used in the
interim period compared with an entity’s financial year-end, for example:

Inventories: At the year-end it is best practice to perform a full inventory count to

ensure that the level of inventories recorded in the financial statements is accurate.
However, such a procedure is not necessarily required at the interim reporting date.

Contingencies: While contingencies should be disclosed in interim reports, it is not

always necessary to obtain formal reports from experts (on such matters as litigation
and technical claims) in order to verify the amount of such contingencies at the
interim date.

Provisions: The inclusion in the financial statements of certain provisions, such as

those for warranties or environmental damage, may require the use of experts. Whilst
experts may be engaged to assist with the full year-end estimates, at the interim
period it may be appropriate instead to update the information that was provided at
the previous year end.

8 Chapter Review
The key issues covered in this chapter deal with recognition, measurement and disclosure in
interim financial statements. IAS 34 does not require the preparation of interim financial
statements, but it does specify the minimum content of such reports where they are prepared
and the principles to be applied within them.

This chapter has covered:

the objectives, scope and terminology of IAS 34;

the form and content of interim financial reports;

interim reporting periods;

recognition and measurement criteria in interim financial reports; and

the calculation of estimates in interim financial reports.

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