CA Final Course Paper 1 Financial Reporting Chapter1Unit 25 Accounting Standards and Guidance Notes. CA. Aparna RamMohan

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1 CA Final Course Paper 1 Financial Reporting Chapter1Unit 25 Accounting Standards and Guidance Notes. CA. Aparna RamMohan 1 1

2 Section 1

3 To prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in a complete or condensed financial statements for an interim period. 3

4 Timely and reliable interim financial reporting improves understanding on financial condition of the enterprise Increasing complexities and organizational size have enhanced the need for and significance of the financial reporting by entities at intervals more frequently than annually Ownership different from management requires increased awareness about the financial condition 4

5 This Standard does not mandate: which enterprises should be required to present interim financial reports, how frequently, or how soon after the end of an interim period. If an enterprise is required or elects to prepare and present an interim financial report including cash flows if applicable otherwise, it should comply with this Standard. A statute governing an enterprise or a regulator may require an enterprise to prepare and present certain information at an interim date which may be different in form and/or content as required by this Standard. In such a case, the recognition and measurement principles as laid down in this Standard are applied in respect of such information, unless otherwise specified in the statute or by the regulator. 5

6 Interim period is a financial reporting period shorter than a full financial year. Interim financial report means a financial report containing either a complete set of financial statements or a set of condensed financial statements (as described in this Standard) for an interim period. During the first year of operations of an enterprise, its annual financial reporting period may be shorter than a financial year. In such a case, that shorter period is not considered as an interim period. 6

7 Section 2

8 A complete set of financial statements normally includes: (a) balance sheet; (b) statement of profit and loss; (c) cash flow statement; and (d) notes including those relating to accounting policies and other statements and explanatory material that are an integral part of the financial statements. 8

9 An enterprise could choose to either make complete reporting or could present a condensed report in accordance with AS 25 Advantages of electing to present less information at interim dates: Avoiding repetition of information previously reported timeliness cost considerations Intention of this reporting is to provide an update on the latest annual financial statements. Focuses on new activities, events, and circumstances and does not duplicate information previously reported. 9

10 condensed balance sheet; condensed statement of profit and loss; condensed cash flow statement; and selected explanatory notes. 10

11 If a complete set of FS is presented in its IFR, the form and content of those statements should conform to the requirements as applicable to annual complete set of FS. If a set of condensed FS is presented in its IFR, those condensed statements should include, at a minimum, each of the headings and sub-headings that were included in its most recent annual financial statements and the selected explanatory notes as required by this Standard. Additional line items or notes should be included if their omission would make the condensed interim financial statements misleading. If an enterprise presents basic and diluted earnings per share or consolidated FS in its annual FS, these disclosures should be made in IFR in condensed or complete manner. 11

12 12

13 Illustration 1 gives an idea of the headings and sub headings to be disclosed in an IFR Selected explanatory notes which would complete the understanding of the IFR should be given Notes specifying new activities, changes in policies etc must be mentioned Companies preparing consolidated financial statements must prepare a condensed or complete report for IFR Current interim period numbers must be in comparison with the immediately previous Balance sheet numbers and for P&L, numbers of the comparative quarter in the previous year. 13

14 It is not necessary for the notes to an interim financial report to provide relatively insignificant updates to the information that was already reported in the notes in the most recent annual financial report. At an interim date, an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the enterprise since the last annual reporting date is more useful. The disclosures required by those other Accounting Standards are not required if an enterprise's interim financial report includes only condensed financial statements and selected explanatory notes rather than a complete set of financial statements. 14

15 Description of Changes in policies and effect of the change Dividends, aggregate or per share, separately for equity shares and other shares; Subsequent material events and changes in contingent liabilities Explanatory comments about the seasonality of interim operations; Issuances, buybacks, repayments and restructuring of debt & equity shares; Effect of changes in the composition of the enterprise during the IP Nature and amount of items that are unusual and extraordinary items Nature and amount of changes in estimates Segment information 15

16 Complete Set Balance Sheet Statement of Profit & Loss Cash flow Statement Notes and other explanatory material that form an integral part of FS This conforms to requirements as applicable to annual accounts Condensed Set Condensed Balance Sheet Condensed Statement of P&L Condensed Cash flow statement Select explanatory notes in order to impart clarity This is supplemented by additional information on new activities, events or other circumstances not previously reported 16

17 Complete Set Requirements as per annual accounts will apply Condensed Set Information to be presented as per each headings, sub headings adopted in the annual accounts Presentation as per annual accounts Additional line items may be provided where omission of which would make the FS misleading Full notes to accounts will be presented Select explanatory notes will be presented 17

18 Balance sheet Statements of profit and loss Cash flow statement Seasonal business As of the end of the current interim period and a comparative balance sheet as of the end of the immediately preceding financial year; For the current interim period and cumulatively for the current financial year to date, with comparative statements of profit and loss for the comparable interim periods (current and year-to-date) of the immediately preceding financial year; cumulatively for the current financial year to date, with a comparative statement for the comparable year to-date period of the immediately preceding financial year. financial information for the twelve months ending on the interim reporting date and comparative information for the prior twelvemonth period are encouraged to consider reporting such information in addition to the information called for in the preceding paragraph. 18

19 Nature Particulars Current Period Previous Period Half yearly Reporting for Enterprise FY ended 31 March 2013 Balance Sheet As at 30 Sep Mar 2013 Profit & Loss Account 6 months ending 30 Sep Sep 2012 Cash Flow Statement 6 months ending 30 Sep Sep 2012 Quarterly Reporting for Enterprise FY ended 31 March 2013 Balance Sheet As at 30 Sep Mar 2013 Profit & Loss Account 6 months ending 30 Sep Sep 2012 Profit & Loss Account 3 months ending 30 Sep Sep 2012 Cash Flow Statement 6 months ending 30 Sep Sep

20 Revenues that are received seasonally or occasionally within a financial year should not be anticipated or deferred as of an interim date if anticipation or deferral would not be appropriate at the end of the enterprise's financial year. Examples include dividend revenue, royalties, and government grants. Additionally, some enterprises consistently earn more revenues in certain interim periods of a financial year than in other interim periods, for example, seasonal revenues of retailers. Such revenues are recognised when they occur. Costs that are incurred unevenly during an enterprise's financial year should be anticipated or deferred for interim reporting purposes if, and only if, it is also appropriate to anticipate or defer that type of cost at the end of the financial year. 20

21 Nature Particulars Current Period Previous Period Quarterly Reporting for Enterprise with seasonal business FY ended 31 Mar 13 Balance Sheet As at 30 Sep Mar 2013 Balance Sheet As at 30 Sep Sep 2012 Profit & Loss Account 6 months ending 30 Sep Sep 2012 Profit & Loss Account 3 months ending 30 Sep Sep 2012 Profit & Loss Account 12 months ending 30 Sep Sep 2012 Cash Flow Statement 6 months ending 30 Sep Sep 2012 Cash Flow Statement 12 months ending 30 Sep Sep

Information is material if its misstatement could influence the economic decisions of users taken on the basis of the financial

22 Materiality concept must be applied to recognise, measure, classify, or disclose an item for IFR purposes Materiality must be based on IFR and not annual financial data. Information is material if its misstatement could influence the economic decisions of users taken on the basis of the financial information. Materiality assessment is usually based on judgment Materiality must be considered to disclose extraordinary items, changes in accounting policies or estimates, and prior period items in relation to IP data. 22

23 Section 3

24 Enterprise can choose to combine the IFR and Annual report as at the BS for the FY end. Specific disclosure on change in estimates in the IP, the nature and amount of that change should be disclosed in the notes to the annual FS Impact of change in an accounting estimate should have material effect in the current period, or in subsequent periods. Examples include changes in estimate in the final interim period relating to inventory writedowns, restructurings, or impairment losses that were reported in an earlier interim period of the financial year. An enterprise is not required to include additional interim period financial information in its annual financial statements other than the change in estimate. 24

25 Same accounting policies in its IFS as are applied in its annual FS Exception - accounting policy changes made after the date of the most recent annual FS that are to be reflected in the next annual FSs. Measurements for interim reporting purposes should be made on a year-to-date basis. The principles for recognising assets, liabilities, income, and expenses for interim periods are the same as in annual financial statements. 25

26 Inventory Same principles as for annual FS. Changes in the estimate in a subsequent IP of that FY, the original estimate is changed in the subsequent IP either by accrual of an additional amount of loss or by reversal of the previously recognised amount; To be recognised in an IP Cost should meet the definition of an asset at the end of an IP date Should not await future information to meet the definition of an asset or to smooth earnings over interim periods within a financial year; Income tax expense Based on the best estimate of the weighted average annual income tax rate expected for the full FY. To be recognized in each IP of the FY Adjustments to tax accruals in prior IPs of same FY should be made in case of estimate tax rate change. 26

The definitions of assets, liabilities, income, and expenses are fundamental to recognition, both at annual and interim financial reporting dates.

27 The definitions of assets, liabilities, income, and expenses are fundamental to recognition, both at annual and interim financial reporting dates. Assets at interim dates should represent future economic benefits and liability must represent an existing obligation at the reporting date. Income should be a result of increase in an asset or a decrease of a liability. Expenses should result in decrease in an asset or an increase of a liability Nature and amount of any significant changes in estimates in measuring assets, liabilities, income, expenses, and cash flows reported in IFR should be disclosed in the annual IFS. The amounts reported in prior interim periods are not retrospectively adjusted. 27

28 the resulting information must be reliable all material financial information that is relevant to an understanding of the financial position or performance of the enterprise is appropriately disclosed. While measurements in both annual and interim financial reports are often based on reasonable estimates, the preparation of interim financial reports generally will require a greater 28

29 Change in accounting policy other than one for which the transition is specified by an AS should be reflected by restating the financial statements of prior interim periods of the current financial year. Objective of the preceding principle is to ensure that a single policy is applied to a particular class of transactions throughout an entire FY. Within the current FY any change in policy be applied retrospectively to the beginning of the FY. First occasion of presenting IFR the following need not be presented in respect of all the interim periods of the current financial year: comparative P&L for the comparable IP (current and year-to-date) of the immediately preceding FY; and comparative cash flow statement for the comparable year-to-date period of the immediately preceding FY. 29

30 Section 4 Test Your knowledge slides are based on past exam questions and the illustrations in the main standard

31 Question: Provisions in respect of gratuity and other defined benefit schemes for an interim period Answer: Calculation on a year-to-date basis Use of actuarially determined rates at the end of the prior financial year Adjustment for significant market fluctuations since that time Question: Cost of a major planned periodic maintenance or overhaul or other seasonal expenditure that is expected to occur Answer: Is not anticipated for interim reporting purposes unless an event has caused the enterprise to have a present obligation. The mere intention or necessity to incur expenditure related to the future is not sufficient to give rise to an obligation. 31

32 Question: A bonus is anticipated for interim reporting purposes if Answer: the bonus is a legal obligation or an obligation arising from past practice for which the enterprise has no realistic alternative but to make the payments, a reliable estimate of the obligation can be made. Question: Interim period income tax expense is accrued using the tax rate Answer: applicable to expected total annual earnings Estimated average annual effective tax rate for income tax and other applicable taxes 32

33 Question: Different financial reporting year and the income tax year Answer: tax expense for the IP of that financial reporting year is measured using separate weighted average estimated effective tax rates for each of the income tax years applied to the portion of pre-tax income earned in each of those income tax years. Question: Tax Benefits for computing tax payable: Answer: Regular tax benefits to be considered for tax computation for annual FS. Tax benefits pertaining to one time events are recognized in the same interim period. 33

34 Question: Rebates or discounts and other contractual changes in the prices of goods and services Answer: If contractual, volume based and are anticipated in interim periods, if it is probable that they will take effect. Discretionary rebates and discounts are not anticipated because the resulting liability would not satisfy the conditions of recognition, viz., that a liability must be a present obligation whose settlement is expected to result in an outflow of resources. Question: Deferred Tax recognition in respect of carry forward tax losses to the extent that Answer: Certainty that future taxable income will be available against which the deferred tax assets can be realised. For each IP above criteria met, the effect of the tax loss carryforward is reflected in the computation of the estimated average annual effective income tax rate. 34

35 Question: Period of operation from the date of set and and the FY end Answer: During the first year of operation of an enterprise, its annual financial reporting period may be shorter than a financial year In such case, shorter period is not considered as an interim period. Question: Impairment of Assets Answer: same impairment tests, recognition, and reversal criteria for IFR and annual FY. No need to make a detailed impairment calculation at the end of each interim period. Assessment of the indications of significant impairment since the end of the most recent FY will suffice 35

36 Question: ABC Ltd reports quarterly, earns INR 210 lakhs pretax profit in the first quarter but expects to incur losses of INR 70 lakhs in each of the three remaining quarters and its estimated tax rate is 30 %. Answer: It will have zero income for the year. First quarter will report INR 63 lakhs tax expense and other three quarters will report INR 21 laksh tax saved. Question: Financial YE for B Ltd is 30 Sep and it reports quarterly. Tax year ends 31 March. For the FY 12-13, it earns Rs 200 lakhs pre-tax each quarter and tax rate is 30 % in 2013 and 40 % Answer: Tax expense for Q1 (ended Dec 12) & Q2 will be INR 60lakhs each and for Q3 and Q4, INR 80 Lakhs each. For YE Sep 2013, total tax expense is INR

37 Question: Depreciation and amortisation for an interim period is based only on Answer: assets owned during that interim period. It does not take into account asset acquisitions or disposals planned for later in the financial year. Question: Net realisable value of inventories Answer: reference to selling prices and related costs to complete and sell the inventories Reversal of write-down to net realisable value in a subsequent IP as it would at the end of its FY 37

38 Question: X Ltd expects to receive dividend income of INR 100 crores on its investments in the quarter October to September It proposes to recognize INR 25 crores dividend income in interim financial statements of each quarter. Answer: Revenue should not be deferred based on anticipation and costs must be anticipated or deferred if considered appropriate. Hence, division income cannot be recognized unless its receipt is confirmed. C Ltd reports quarterly, has an operating loss carryforward of Rs 100 lakhs for income tax purposes at the start of the current FY for which a deferred tax asset has not been recognised. The enterprise earns Rs 100 lakhs in the first quarter of the current year and expects to earn Rs 100 lakhs in each of the three remaining quarters. Tax rate is 40 %. The estimated payment of the annual tax on Rs. 400 lakhs of earnings for the current year would be Rs. 120 lakhs {(Rs. 400 lakhs - Rs. 100 lakhs) x 40%}. Considering the loss carryforward, the estimated average annual effective income tax rate would be 30% {(Rs. 120 lakhs/rs. 400 lakhs) x 100}. 38

39 Determination of the appropriate amount of a provision (such as a provision for warranties, restructuring costs, gratuity, etc.) Engaging outside experts to assist similar to in annual calculations is not required Making similar estimates at interim dates often involves updating the provision made in the preceding annual FS Measurement of contingencies Annual FS may involve obtaining opinions of legal experts or other advisers through Formal reports from independent experts. Such opinions about litigation, claims, assessments, and other contingencies and uncertainties may or may not be needed at interim dates. Specialised industries: IP measurements in specialised industries might be less precise than at FY end. An example is calculation of insurance reserves by insurance companies. 39

40 Question: Accounts of Poornima Ltd show a net profit of Rs 720,000 for the third quarter of 2005 after incorporating the following: (i) Bad debts of Rs 40,000 incurred during the quarter. 50% of the bad debts have been deferred to the next quarter (ii) Extra ordinary loss of Rs 35,000 incurred during the quarter has been fully recognized in this quarter (iii) Additional depreciation of Rs 45,000 resulting from the change in the method of charge of depreciation Ascertain the correct quarterly income Answer: Correct quarterly income is INR 745,000 Net Profit INR 720,000 Add: Additional depreciation INR 45,000 Less: Bad Debts INR 20,000 Additional depreciation can be deferred Extra ordinary loss and bad debts incurred during the quarter cannot be defered and should be fully recognized in the same quarter. Hence no adjustment required. 40

41 Question: FG Ltd reports a net profit of Rs 600 lakhs for the second quarter of 2012 after considering the following: (i) 50% advertisement expenditure of INR 100 Lakhs incurred in the second quarter has been deferred to the fourth quarter (ii) A dividend of INR 30 Lakhs received during the quarter has been recognized to the extent of INR 10 Lakhs in the second quarter (iii) Additional depreciation of Rs 20 Lakhs (for the year) resulting from the change in the method of charge of depreciation has been fully charged to the second quarter. Ascertain the correct quarterly income Answer: Correct quarterly income is INR 585 Lakhs Net Profit INR 600 Lakhs Add: Additional depreciation INR 15 Lakhs Less: Excess advertisement charged INR50 Lakhs Add: Dividend INR 20 Lakhs Additional depreciation can be deferred In the absence of specific information, it has been assumed that the additional depreciation is spread equally over quarters. 41

42 Question: On June 30, 2011, K ltd incurred INR 100,000 net loss from disposal of business segment. Also, on June 30, 2011, K Ltd paid INR 40,000 for property taxes assessed for the calender year What amount of the foregoing items should be included in the determination of K Ltd net income for the six month period ended June 30, 2001? Answer: Revenues and gains should be recognized in interim reports on the same basis as used in annual reports. As at June 30, 2011, K Ltd would report the entire loss on disposal of its business segment since the loss was incurred during the IP. A cost charged to an expense in an annual period should be allocated among the IP which clearly benefit form the expense through the use of accruals and / or deferrals. Since, INR 40,000 property tax payment relates to the entire 2001 calender year, only INR 20,000 of the payment would be reported as an expense at June 30, 2011, while the remaining INR 20,000 would be reported as a prepaid expense. 42

43 Objectives of AS 25 Applicability of the Standard Understanding on what needs to be disclosed Learning the presentation in the financial statements 43

44 Abbreviation IFR IP FS BS P&L AP AS IFS Full Form Interim Financial Reporting Interim Period Financial Statements Balance Sheet Profit and Loss Account Accounting Policies Accounting Standards Interim Financial Statements 44

45 45 45

Sri Lanka Accounting Standard LKAS 34. Interim Financial Reporting

Sri Lanka Accounting Standard LKAS 34 Interim Financial Reporting CONTENTS paragraphs SRI LANKA ACCOUNTING STANDARD LKAS 34 INTERIM FINANCIAL REPORTING OBJECTIVE SCOPE 1 3 DEFINITIONS 4 CONTENT OF AN INTERIM