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PFRS 1: First Time Adoption of PFRS OBJECTIVE: To ensure that an entity’s First PFRS Financial Statements contain information that is transparent to users, comparable, makes accounting in accordance t PFRSs, and can be cost efficiency. What is a First Time Adopter? An entity is a first time adopter when for the first time such entity makes an explicit and unreserved statement that is general purpose financial statements comply with Philippine Financial Reporting Standards. First Financial Statements The first PFRS financial statements are the annual statements in which an entity adopts PFRS by an explicit and unreserved statement in compliance with PFRS. Financial statements presented by an entity in the current year would qualify as First PFRS Financial Statement under the following CONDITIONS: 1. When an entity presented its most recent previous financial statements: a. Under national GAAP inconsistent with PFRS in all respects. b. In conformity with PFRS in all respects but these statements did not contain an explicit and unreserved statement of compliance with PFRS. c. Containing an explicit statement of compliance with some but not all PFRS. d. Under national GAAP with a reconciliation of selected Figures to amounts determined under PFRS. 2. When an entity prepared financial statements in the previous period under PFRS but the financial statements were for internal use only. 3. When an entity prepared financial statements in the previous period under PFRS for consolidation purposes without preparing a complete set of financial statements. 4. When an entity did not present financial statements in the previous period. If the entity adopts PFRS for the first time in the current year, its first PFRS financial statement include the following: 1. Three (3) statements of financial position at the end of current year, at the end of prior year and at the date of transition to PFRS. 2. Two (2) statements of comprehensive income for the current year and prior year. 3. Two (2) two separate income statements for the current year and prior year 4. Two (2) statements of cash flows for the current year and prior year. 5. Two (2) statements of changes in equity for the current year and prior year. 6. Notes to financial statements including comparative information. PFRS 1 is applied only once that is, when the entity first adopts PFRSs. PFRS 1 does not apply when previous financial statements contained an explicit and unreserved statements of compliance with PFRS, even if the auditor’s report has been qualified. Also, PFRS 1 does bot apply when an entity that has been applying the PFRSs subsequently changes its accounting policy in accordance with PAS 8 or specific transitional provisions of the other standards. Date transition to PFRS The date of transition to PFRS refers to the beginning of the earliest period for which an entity presents full comparative information under PFRS in its first PFRS Financial Statements. Two factors in Transition: a. Date of adoption of PFRS b. The number of years of comparative information that an entity decides to present together with the financial statements in the year of transition Opening PFRS statement of financial position (retrospective application) In preparing the opening statement of financial position, an entity is required to: a. Recognize all assets and liabilities required by PFRS. b. Derecognize assets and liabilities not permitted by PFRS. c. Reclassify items that it recognized under previous GAAP as one type of asset, liability, or equity but a different type of asset, liability or equity but a different type of asset, liability, or equity under PFRS. d. Measure all recognized assets and liabilities in compliance with PFRS. Any adjustments required to present an opening PFRS Statement of Financial Position should be recognized in retained earnings or appropriate, in another component of equity. PFRS 2: Share-Based Payment Share-Based Compensation A share-based compensation plan is a compensation arrangement established by the entity whereby the entity’s employees shall receive equity shared in exchange for their services or the entity incurs liabilities to the employees in the amounts based on the price of its shares. And it is usually tied to a performance to motivate the recipient. Classification a. Equity Settled – the entity issues equity instruments in consideration for the services received, for example, share options. b. Cash settled – the entity incurs a liability for services received and the liability is based on the entity’s equity instruments for example share appreciation rights. Share Options Share options are granted to officers and key employees to enable them to acquire shares of the entity during a specified period upon fulfillment of certain conditions at a specified price. Measurement of Compensation The compensation resulting from share options is measured following two methods; a. Fair Value method This means that the compensation is equal to the fair value pf the share options on the date of grant. b. Intrinsic Method This means that the compensation is equal to the intrinsic value of the share options. Paragraph 24 of PFRS 2 provides that the intrinsic value method can be used only if the fair value of the share option cannot be estimated reliably. Recognition of compensation a. If the share options vest immediately, the employee is not required to complete a specified period of service before unconditionally entitled to the share options. In this case, on grant date, the entity shall recognize the compensation as expense in full immediately. b. If the share options do not vest until the employee completes a specified service period, the compensation is recognized as expense over the service period or vesting period, meaning, from the date of grant to the date on which the options can first be exercised. This is on the theory that the share options are in recognition for services rendered between the date of grant and the exercise date. Acceleration of vesting PFRS 2, paragraph 28, provides that if an entity cancels or settles a grant of share options during the vesting period, the entity shall account for the cancelation or settlement as an acceleration of vesting. a. The entity shall recognize immediately the compensation expense that otherwise would have been recognized for services received over the remainder of the vesting period. b. Any payment made to the employee on the cancelation or settlement of the grant shall be accounted for as the repurchase of equity interest, meaning, deduction from equity. In other words, if the payment exceeds the fair value of the share options, the excess shall be recognized as an expense. Share appreciation right A share appreciation right entitles the employee to a cash payment equal to the increase in the price of a given number of shares over a given period. Like a share option, a share appreciation right is viewed as compensation for services rendered. Unlike in a share option, a share appreciation right creates a liability. Measurement of compensation The compensation is based on the fair value of the liability at the reporting date and shall be remeasured at every year-end until it is finally settled. Any changes in fair value are included in profit or loss. The fair value of liability is equal to the excess of the market value of share over a predetermined price for a given number of shares over a definite vesting period. Recognition of compensation a. If the share appreciation right vests immediately, the compensation is recognized immediately. b. If the share appreciation right does not vest until the employee completes a definite vesting period, the compensation is recognized over the vesting period expense. PFRS 3: Business Combinations Business Combination occurs when one company acquires another or two or more companies merge into one. It is a transaction or other event in which an acquirer obtains control of one or more business. Transactions are referred to as ‘true mergers’ or ‘merger of equals are also business combinations under PFRS 3. Control Control is normally presumed to exist when the acquire holds more than 50% (or 51% or more) interest in the acquiree's voting rights. However, this is only a presumption because control can be obtained in some other ways, such as when: a. the acquirer has the power to appoint or remove the majority of the board of directors of the acquiree; or b. the acquirer has the power to cast the majority of votes at board meetings or equivalent bodies within the acquiree; or c. the acquirer has power over more than half of the voting rights of the acquiree because of an agreement with other investors; or d. the acquirer controls the acquiree's operating and financial policies because of a law or an agreement. An acquirer may obtain control of an acquiree in a variety of ways, for example: a. by transferring cash or other assets (including net assets that constitute a business); b. by incurring liabilities; c. by issuing equity interests; d. by providing more than one type of consideration; or e. without transferring consideration, including by contract alone. Business Business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment incom (such as dividends or interest) or generating other income from ordinary activities. Elements of a business: 1. Input – any economic resource that results to an output when one or more processes are applied to it. 2. Process – any system, standard, protocol, convention or rule that when applied to an input, creates an output. 3. Output – the result of 1 and 2 above that provides goods or services to customers, investment income or other income from ordinary activities. Identifying a business combination An entity determines whether a transaction is a business combination in relation to the definition provided under PFRS 3. If the assets acquired (and related liabilities assumed) do not constitute a business, the entity accounts for the transaction as a regular asset acquisition and not a business combination. Accordingly, the entity applies other applicable Standards. Determining the acquirer The acquirer (parent) is the entity that obtains control after the business combination. The controlled entity is the acquiree (subsidiary). Determining the acquisition date The acquisition date is the date on which the acquirer obtains control of the acquiree (e.g., the closing date). Recognizing and measuring goodwill Formula: Consideration transferred Non-controlling interest in the acquire Previously held equity interest in the acquire Total: Less: Fair value of net identifiable assets acquired Goodwill/ (Gain on a bargain purchase) xx xx xx xx (xx) xx A "gain on a bargain purchase" is recognized in profit or loss in the year of acquisition only after reassessment of the assets and liabilities assumed in the business combination. Only identifiable assets acquired are recognized. Unidentifiable assets are not recognized. Acquisition-related costs Acquisition-related costs are expensed, except costs of issuing equity and debt instruments. Acquisition-related costs do not affect the measurement of goodwill. PAS 29: Reporting in Hyperinflationary Economy Hyperinflation is a matter of judgement Hyperinflation is indicated by characteristics of the economic environment of a country which include but are not limited to the following: a. The general population prefers to keep its wealth in nonmonetary assets or in relatively stable foreign currency. Accordingly, amounts held in local currency are immediately invested in nonmonetary assets or stable foreign currency to maintain purchasing power. b. The general population regards monetary amounts not in terms of local currency but in terms of a relatively stable foreign currency. c. Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period even if the period is short. d. Interest rates, wages and prices are linked to a price index. e. The cumulative rate over 3 years is approaching or exceeds 100%. Financial Reporting in Hyperinflationary Economy The financial statements of an entity that reports in the currency of a hyperinflationary economy, whether they are based on historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the end of reporting period. Presentation of the information required under PAS 29 as a supplement to unrestated financial statements is not permitted. The restatement of financial statements of an entity that reports in the currency of a hyperinflationary economy is accomplished by means of constant peso accounting. Constant peso accounting Constant peso accounting is the restatement of conventional or historical financial statements in terms of the current purchasing power of the peso through the use of index number. Constant peso accounting also known as purchasing power or price level accounting. The traditional concept of preparing financial statements based on historical cost is known as nominal peso accounting. Monetary items Monetary items refer to cash and assets that represent a fixed amount of pesos to be received or obligations that represent a fixed amount of pesos to be paid. Nonmonetary Items Items are called nonmonetary because their peso amounts reported in the financial statements differ from the amounts that are ultimately realizable or payable. The special feature of a nonmonetary is the absence of a right to receive or an obligation to deliver a fixed or determinable amount of money. What items are Restated? Only nonmonetary items are restated when preparing constant peso financial statements. Formula for restatement 𝒊𝒏𝒅𝒆𝒙 𝒏𝒖𝒎𝒃𝒆𝒓 𝒂𝒕 𝒕𝒉𝒆 𝒆𝒏𝒅 𝒐𝒇 𝒓𝒆𝒑𝒐𝒓𝒕𝒊𝒏𝒈 𝒑𝒆𝒓𝒊𝒐𝒅 𝒙 𝒉𝒊𝒔𝒕𝒐𝒓𝒊𝒄𝒂𝒍 𝒄𝒐𝒔𝒕 𝒊𝒏𝒅𝒆𝒙 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒏 𝒂𝒄𝒒𝒖𝒊𝒔𝒊𝒕𝒊𝒐𝒏 𝒅𝒂𝒕𝒆 General Price index General Price index is constructed by Bangko Sentral ng Pilipinas. Such an index is designed to show how much time overall level of prices in the economy has changed overtime. An increase in the general price index means that the purchasing power of money has decreased, this is popularly known as inflation. While, a decrease in purchasing power of money is increased, is popularly known as deflation. PAS 32: Financial Instruments – Presentation Financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. Thus, the term “Financial Instrument” encompasses a financial asset, a financial liability and an equity instrument. Characteristics: a. There must be a contract b. There are at least two parties to the contract. c. The contract shall give rise to a financial asset of one party and financial liability or equity instrument of another party. Examples: a. Cash in the form of notes and coins – this is a financial asset of the holder or bearer and a financial liability of the issuing government. b. Cash in the forms of checks – this is a financial asset of the payee and a financial liability of the drawer or issuer. c. Cash on bank – this is a financial asset of the depositor and a financial liability of the depository bank. d. Trade accounts – this is a financial asset of the seller as accounts receivable and a financial liability of the customer or buyer as accounts payable. e. Note and loan – this is a financial asset of the lender or creditor as notes receivable or loan receivable and a financial liability of the borrower or debtor as note payable or loan payable. f. Debt security – this is a financial asset of the investor and a financial liability of the issuer. g. Equity security – this is a financial asset of the investor and an equity of the issuer. Examples of financial assets a. Cash or currency is a financial asset because it represents the medium of exchange and is therefore the basis on which all transactions are measured and recognized in financial statements. b. A deposit of cash with a bank or similar financial institution is a financial asset because it represents the contractual right of the depositor to obtain cash from the bank or to draw a check against the balance in favor of a creditor in payment of a financial liability. But a gold bullion deposited in bank is not a financial asset because although it is very precious the gold is a commodity. Financial assets representing a contractual right to receive cash in the future include: a. Trade accounts receivable b. Notes receivable c. Loans receivable d. Bonds receivable In case of exchanges of financial instruments with another entity, conditions are potentially favorable when such exchanges will result to gain or additional cash inflow to the entity. Conversely, conditions are unfavorable when such exchanges will result to loss or additional cash outflow to the entity. Nonfinancial assets a. Physical assets, such as inventory and property, and equipment b. Intangible assets, such as patent and trademark c. Prepaid expenses for which the future economic benefit is the receipt of goods or services, rather than the right to receive cash or another financial asset. d. Right of use asset or leased asset is not a financial asset because control of the underlying asset does not give rise to a present right to receive cash or another financial asset. Financial liability A financial liability is any liability that is a contractual obligation: a. To deliver cash or other financial asset to another entity. b. To exchange financial instruments with another entity under conditions that are potentially unfavorable. Nonfinancial liabilities a. Deferred revenue and warranty obligations not financial liabilities because the outflow of economic. benefits are the delivery of goods and services rather than a contractual obligation to pay cash. b. Income tax payable is not a financial liability because it is imposed by law and noncontractual. c. Constructive obligations are not financial liabilities because the obligations do not arise from contract. Equity instrument It reflects the basic accounting equation that equity equals asset minus liability. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of the liabilities. Equity instruments include ordinary share capital, preference share capital and warrants or option. When liability and when equity The issuer of a financial instrument shall classify the instrument as a financial liability or equity instrument in accordance with the substance of the contractual arrangement and the definition of a financial liability, financial asset and instrument. Further to determine whether a financial instrument is an equity instrument rather than a financial liability, the instrument is an equity instrument if the instrument includes no contractual obligation to deliver cash or another financial asset. Redeemable preference share a. A preference share that provides for mandatory redemption by the issuer for a fixed or determinable amount at a future date is a financial liability of the issuer. because the issuer has a contractual obligation to pay cash at some future time. b. A preference share that gives the holder the right to require the issuer to redeem the instrument at a particular date for a fixed or determinable amount is also a financial liability because the issuer has a contractual obligation to pay cash at some future time. Accordingly, dividends paid to holders of "mandatorily. redeemable preference share" shall be accounted for as interest expense. The mandatorily redeemable preference share shall be classified as current or noncurrent liability depending on the date of redemption. Compound financial instrument One component of the financial instrument meets the definition of a financial liability and another component of the financial instrument meets the definition of an equity instrument. Bonds payable issued with share warrants When the bonds are sold with share warrants, the bondholders are given the right to acquire shares of the issuer at a specified price at some future time. PAS 32 does not differentiate whether the equity component is detachable or nondetachable. Whether detachable or nondetachable, the warrants have a value and therefore shall be accounted for separately. Allocation of issue price The bonds are assigned an amount equal to the "market value of the bonds exwarrants", regardless of the market value of the warrants. The residual amount or remainder of the issue price shall then be allocated to the warrants. Convertible bonds An entity frequently makes its bond issue more attractive to investors by making the bonds convertible. Generally, an entity can obtain financing at a lower interest rate by issuing convertible bond. Convertible bonds give the holders the right to convert their bond holdings into share capital of the issuing entity within a specified period of time. They are conceived as compound financial instruments. Accordingly, the issuance of convertible bonds shall be accounted for as partly liability and partly equity. In other words, the issue price of the convertible bonds shall be allocated between the bonds payable and the conversion privilege. Allocation of issue price The bonds are assigned an amount equal to the market value of the bonds without the conversion privilege. The residual amount or remainder of the issue price shall then be allocated to the conversion privilege or equity component. PAS 33: Earnings per Share The earning per share figure is the amount attributable to every ordinary share outstanding during the period. Thus, the earnings per share information pertains only to ordinary share. Ordinary share is an equity instrument that is subordinate to all other classes of equity instruments. It is not necessary for preference share because there is a definite rate of return for such share. Two required presentations of earnings per share: a. Basic earnings per share b. Diluted earnings per share The presentation of earnings per share is required for a. Entities whose ordinary shares are publicly traded. b. Entities that are in process of issuing ordinary shares or potential ordinary shares in the public securities market Public entities are required to present earnings per share. While, nonpublic entities are not required to present earnings per share. Uses of earnings per share a. It is a determinant of the market price of ordinary share, thus indicating the attractiveness of the ordinary share as an investment. b. It is measure of performance of management in conducting operations. c. It is the basis of dividend policy of an Presentation An entity shall present on the face of the income statement basic and diluted earnings per share for income or loss from continuing operations. An entity that reports a discontinued operation shall disclose the basic and diluted amounts per share for the discontinued operation either on the face of the income statement or in the notes to the statements. An entity shall present basic and diluted earnings per share even if the amounts are negative, for example, basic loss per share. When an entity presents both financial statements and separate financial statements, the disclosures required by the standard need be presented only on the basis of the consolidated information. Basic earnings per share 𝐵𝑎𝑠𝑖𝑐 𝐸𝑃𝑆 = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑎𝑛𝑑𝑖𝑛𝑔 The net income is equal to the amount after deducting dividends on preference share. If the preference share is cumulative, the preference dividend for the current year only is deducted from the net income, whether such dividend is declared or not. If the preference share is noncumulative, the preference dividend for the current year is deducted from net income only if there is declaration. If there is a significant change in the ordinary share capital during the year, the weighted average number of ordinary shares outstanding during the period should be used as denominator. Dilution and antidilution Potential ordinary share is a financial instrument or other contract that may entitle the holder to ordinary shares. Dilution arises when the inclusion of the potential ordinary shares decreases the basic earnings per share or increases the basic loss per share. In this case, the potential ordinary shares are dilutive securities. On the other hand, antidilution arises when the inclusion of the potential ordinary shares increases basic earnings per share or decreases basic loss per share. In this case, the potential ordinary shares are considered as antidilutive and therefore ignored in computing diluted earnings per share. Diluted earnings per share The computation of the diluted earnings per share is based on the assumption that additional ordinary shares are issued as a result of conversion of convertible securities and exercise of share options. Convertible bond payable The computation of diluted earnings per share assumes that the bond payable is converted into ordinary share. Accordingly, adjustments shall be made both to net income and to the number of ordinary shares outstanding. The net income is adjusted by adding back the interest expense on the bond payable, net of tax. The number of ordinary shares outstanding is increased by the number of ordinary shares that would have been issued upon conversion of the bond payable. Convertible preference share If there is a convertible preference share, the computation of diluted earnings per share also assumes that the preference share is converted into ordinary share. Accordingly, the net income is not reduced anymore by the amount of preference dividend. The number of ordinary shares outstanding is increased by the number of ordinary shares that would have been issued upon conversion of the preference share. Options and warrants Share options are granted to employees enabling them to acquire ordinary shares of the entity at a specified price during a definite period of time. Share warrants are granted to shareholders enabling them to acquire ordinary shares of the entity at a specified price during a definite period of time. By definition, options and warrants have no cash yield but they derive their value from the right to obtain ordinary shares at a specified price that is usually lower than the prevailing market price. Treasury share method Options and warrants are included in the EPS computation through the treasury share method. However, this does not imply that the entity has entered into a transaction to purchase treasury shares. The treasury share method is used to simplify the computation of incremental ordinary shares that are assumed to be issued for no consideration as a result of options and warrants. a. The options and warrants are assumed to be exercised at the beginning of the current year or at the date they are issued during the current year. b. The proceeds from the exercise of the options and warrants are assumed to be used to acquire treasury shares at average market price. c. The number of incremental ordinary shares is equal to the option shares minus the assumed treasury shares acquired. PAS 34: 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 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 semiannually. 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 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 quarterend. 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. 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. b. c. d. Condensed Condensed Condensed Condensed statement statement statement statement of of of of financial position comprehensive income changes in equity cash flows e. Selected explanatory notes 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 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. PAS 34 assumes that financial statement 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. Presentation of comparative interim statements 1. Statement of financial position a. Statement of financial position at the end of current interim period b. Comparative statement of financial position at the end of preceding year. 2. Income statement a. Income statement for the current interim period b. Income statement 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. Statement of comprehensive income for the current interim period b. Statement of comprehensive income cumulatively for the current financial year to date c. Comparative statement of comprehensive income for the comparable interim period of the preceding year d. Comparative statement of comprehensive income cumulatively for the comparable financial year to date of the preceding year 4. Statement of changes in equity a. Statement of changes in equity cumulatively for the current financial year to date b. Comparative statement of changes in equity for the comparable financial year to date of the preceding year 5. Statement of cash flows a. Statement of cash flows cumulatively for the current financial year to date b. Comparative statement of cash flows for the comparable financial year to date of the preceding year Basic principles 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. However, the frequency of an entity's reporting whether annual, half-yearly or quarterly shall not affect the measurement of the 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. Paragraph 21 provides that if the business is highly 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 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 nontemporary. PAS 34, paragraph 17, requires disclosure of the write-down of inventories to net realizable value and the reversal of such write-down in a later interim period. The net realizable value of inventories is determined by reference to selling prices and related cost to complete and cost of disposal at interim dates. Seasonal, cyclical or occasional revenue Seasonal, cyclical or occasional revenue shall b anticipated or deferred as of an interim date if anticipation or deferral would not be appropriate at the end of t reporting period. Thus, dividend revenue, royalties and government 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 cost at the end of the financial year. However, the cost of a planned major periodic maintenance or overhaul that is expected to occur late in the year is 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 theyare 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. Gain and loss Gain or loss from disposal of property, gain or loss from discontinued operation and other gain or loss shall not be allocated over the interim periods. The gain is reported in the interim period when realized and the loss is reported in the interim period when incurred. Income tax Interim period income tax expense shall reflect the same general principles of income tax accounting applicable to annual reporting. Paragraph 12 of Appendix B of PAS 34 states that 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 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 A change in accounting policy 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.