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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.