Interim Financial Statements IAS 34

Transcription

1 Interim Financial Statements IAS 34 Presented by: CPA Sporta Fred (PhD. Fellow) Thursday 4 th April, Credibility. Professionalism. Accountability

2 Determine components of interim financial statements Identify minimum explanatory notes required. Determine how to recognize and measure items in interim financial statements. 2

3 To prescribe the minimum content of an interim financial report. To prescribe the principles for recognition and measurement in complete or condensed financial statements for an interim period. Goal of interim reporting is to provide information about new events and circumstances and other changes 3

4 Annual reporting Often supplemented with interim or quarterly reports; Interim reports provide more timely & reliable information that; Improves the ability of Stakeholders to understand an entity s capacity to generate earnings and cash flows and its financial condition and liquidity. Enables investors to analyze the actual performances and also to revise their projections. Interim financial reports provide price-sensitive data to investors. 4

5 The FASB s (USA) Discussion Memorandum has found the following five possible objectives and uses for interim reporting: 1. To estimate annual earnings. 2. To make projections. 3. To identify turning points. 4. To evaluate management performance. 5. To supplement the annual report. 5

6 Helps increase the economic performance of the entity. Either by reducing unnecessary time costs (waste) or by increasing communication and transparency with third parties (creditors, customers), proper management can act early to counteract negative effects on entity s activity or to prevent any commercial or production failures. Provides information that will assist users in making economic decisions. Provides specific information about the financial position, performance and changes in financial position of an enterprise. 6

7 Provides useful information to a wide range of users because of influencing elements: - The economic resources controlling the enterprise; - The company's financial structure; - Liquidity and solvency; - The company's capacity to adapt to changes in the operating environment. 7

8 The International Accounting Standards Committee encourages publicly traded entities to provide interim financial reports that conform to the recognition, measurement, and disclosure principles set out in this Standard. Specifically, publicly traded entities are encouraged: (a) To provide interim financial reports at least as of the end of the first half of their financial year; and (b) To make their interim financial reports available not later than 60 days after the end of the interim period. 8

9 Often mandated by securities regulators, governments, and securities exchanges Standard does not address how often nor how soon after the period entities should produce interim reports. Lack of preparation of interim F.S does not prevent the entity s annual F.S from conforming to IFRSs if they otherwise do so. 9

10 Interim period -Financial reporting period shorter than a full financial year. Interim financial report - Financial report containing either; A complete set of financial statements (as described in IAS 1) or A set of condensed financial statements (as described in this Standard) for an interim period. 10

11 (a) A condensed statement of financial position; (b) A condensed statement of profit or loss and other comprehensive income; (i) A condensed single statement; or (ii) A condensed separate income statement and a condensed statement of comprehensive income; (c) A condensed statement of changes in equity ; (d) Condensed statement of cash flows; and (e) Selected explanatory notes. 11

12 Interim Financial Statement Condensed statement of profit or loss Condensed statement of changes in Equity Condensed statement of financial position Condensed statement of financial position Condensed Cash flow statement Selected Explanatory Notes to the financial statements 12

13 Complete set of financial statements should conform to the requirements applicable to annual financial statements. Condensed set of financial statements should at minimum have each headings or subheadings that were included in the latest annual financial statements. 13

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15 An entity shall include in its interim financial report; An explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the end of the last annual reporting period. Information disclosed shall update the relevant information presented in the most recent annual financial report. 15

16 (a) The write-down of inventories to net realizable value and the reversal of such a write-down; (b) Recognition of a loss from the impairment of financial assets, property, plant and equipment, intangible assets, or other assets and its reversals; (c) The reversal of any provisions for the costs of restructuring; (d) Acquisitions and disposals of items of property, plant and equipment; 16

17 (e) Commitments for the purchase of property, plant and equipment; (f) Litigation settlements; (g) Corrections of prior period errors; (h) Changes in the business or economic circumstances that affect the fair value of the entity s financial assets and liabilities, (i) Any loan default or breach of a loan agreement that has not been remedied on or before the end of the reporting period; and 17

18 (j) related party transactions.; (k) Transfers between levels of the fair value hierarchy used in measuring the fair value of financial instruments; (l) Changes in the classification of financial assets as a result of a change in the purpose or use of those assets; and (m) Changes in contingent liabilities or contingent assets. 18

19 Changes in accounting policies Explanation of any seasonality or cyclicality of interim operations Unusual items affecting assets, liabilities, equity, net income or cash flows Changes in estimates Issues, repurchases and repayment of debt and equity securities Dividends paid 19

20 Particular segment information (where IFRS 8 Operating Segments applies to the entity) Events after the end of the reporting period Changes in the composition of the entity, such as business combinations, obtaining or losing control of subsidiaries, restructurings and discontinued operations Disclosures about the fair value of financial instruments 20

21 Disclosure If an entity s interim financial report is in compliance with IAS 34. An interim financial report shall not be described as complying with Standards unless it complies with all of the requirements of International Financial Reporting Standards. 21

22 Disclosures that would substantially duplicate the annual disclosures, such as significant accounting policies are not required. Interim footnotes on items with insignificant changes Where there is a change in accounting policy has not occurred, 22

23 Depreciation and amortisation charges acquisitions or disposals planned for later in the financial year. [IAS 34.B24] IAS 34 paragraph 23 requires that materiality, for the purpose of preparing the interim financial report, and not in relation to the annual results. 23

24 Actual data Comparative data Statement of financial position as at 30/06/17 31/12/16 Statement of Profit or Loss for 6 months ending 30/06/17 30/06/16 for 3 months ending 30/06/17 30/06/16 Statement of Changes in Equity 6 month ending for 3 months ending 30/06/17 30/06/16 Statement of Cash Flows for 6 months ending 30/06/17 30/06/16 for 3 months ending 24

25 In deciding how to recognize, measure, classify, or disclose an item for interim financial reporting Purposes, materiality shall be assessed in relation to the interim period financial data. In making Assessments of materiality, it shall be recognised that interim measurements may rely on estimates to a greater extent than measurements of annual financial data. 25

26 Discussed in IAS 1 and 8 Although there is no specific quantitative guidance IAS 34 notes that materiality for interim statements should be assessed based on the interim period Note that interim financial statements may have additional estimates Therefore the numbers may be a bit softer 26

27 Same as in annual financial statements no smoothing of income and expenses recognition of assets, liabilities, income and expenses in accordance with the Framework and applicable Standards measurement on a year-to-date basis frequency of reporting should not affect measurement of annual results 27

28 Application, expenses Recognition present obligation and probable outflow reliable estimate of the amount Measurement consider risks and uncertainties Examples provisions and employee benefits planned maintenance for later interim periods expenses calculated on an annual basis like bonuses, payroll tax or discount expenses 28

29 Application, Revenues Recognition transfer of significant risks and rewards probable inflow and reliable measure Measurement consider risks and uncertainties Example seasonal, cyclical or occasional revenues revenues calculated on an annual basis 29

30 Revenues received seasonally, cyclically, or occasionally Recognized when they occur or are earned, notwithstanding their cyclical or seasonal nature May result in more revenues being recognized in one period than in another Reflects the underlying reality Supports the discrete approach Costs incurred unevenly during the financial year Costs are recognized when incurred Only capitalized when they meet the definition of an asset 30

31 1.Depreciation-is based on the asset in use during the period. 2.Impairment loss is done at the end of Interim Period (IP). If the impairment loss estimates changes in the subsequent period, the original estimate is changed. No retrospective adjustment is required. 3.R&D The determination of capitalising development cost has to be done at the end of each IP. 31

32 4.Inventories at the end of each IP, there is a need to determine value of inventories (use estimates). 5.Tax Expense The tax expense is the best estimate of the weighted average annual income tax rate expected for the full financial year. If tax rate changes, the income tax for subsequent period is adjusted. In Kenya the tax rate is flat rate no adjustment. 32

33 An entity reports quarterly. In the first quarter of the financial year, the entity introduces new models of its products that will be sold throughout the year. At that time, it incurs a substantial cost for running a major advertising campaign (completed by the end of that quarter) that will benefit sales throughout the year. Is it appropriate to spread the advertising cost over the period in which benefits are expected or is the entire cost an expense of the first quarter? 33

34 The entire cost is recognised in profit or loss in the first quarter. Explanatory note disclosure may be required. IAS 38.69(c) requires that all expenditure on advertising and promotional activities should be recognised as an expense when incurred. A cost that does not meet the definition of an asset at the end of an interim period is not deferred, either to await future information as to whether it has met the definition of an asset or to smooth earnings over interim periods within a financial year. 34

35 A manufacturer s shipments of finished products are highly seasonal (shares of annual sales are respectively 20 per cent, 5 per cent, 10 per cent, and 65 per cent for the four quarters of the financial year). Manufacturing takes place more evenly throughout the year. The entity incurs substantial fixed costs, including fixed costs relating to manufacturing, selling and general administration, and wishes to allocate all of its fixed costs to the four quarters based on each quarter s share of estimated annual sales volume. Discuss on its reporting. 35

36 Such an allocation is not acceptable under IAS The fixed costs should be split between manufacturing fixed costs and non-manufacturing fixed costs.(ias 2) Manufacturing takes place evenly the entity will recognise cost of goods sold expense only when sales are made and, therefore, it will achieve its objective of allocating fixed manufacturing costs to the four quarters based on sales volume. 36

37 An entity reports quarterly. In the first quarter of each financial year, the entity introduces new models of its products that will be sold throughout the year. At that time, it incurs a substantial cost for retooling its production line to manufacture the new models. Is it appropriate to spread the tooling cost over the benefit period (all four quarters of the year), or is the entire cost an expense of the first quarter? 37

38 It is appropriate to spread these costs provided that they meet the recognition criteria in IAS 16.7 PPE. Those criteria require that an item of property, plant and equipment be recognised as an asset if, and only if: it is probable that future economic benefits associated with the item will flow to the entity; and the cost of the item can be measured reliably. Assuming that the tooling costs meet these criteria, the costs would be capitalised and amortised over the model year, regardless of the entity s interim reporting policy. 38

39 As at 31 st March 2017, ABC ltd estimated that the net realizable value of its inventories were Kshs 100,000. The cost of these inventories were shs 110,000. It is estimated that by the end of Dec 2017, its net realizable value will go up to shs 115,000. For 3rd quarter Interim reports: In this case, even if the company estimated the NRV of the inventories to rise above its cost at year end, the company is required to WRITE DOWN the value of the inventory to its NRV & recognize loss in its 3rd Quarter interim Financial statements. 39

40 A statement that the same accounting policies as those followed in the latest annual financial statements or If changes then a description of the nature and effect of the change; Explanatory comments about seasonality of interim operation; 40

41 The nature and unusual amount of item affecting assets, liabilities, equity, net income, or cash flows because of their nature, size or incidence; Nature and amount of changes in estimates of amounts reported in prior interim periods of current financial year or changes in estimates in prior financial years if those changes have a material effect in current interim period. 41

42 Issuances, buy-backs, repayments and restructuring of debt, equity and potential equity shares; Dividend, aggregate or per share, seperately for equity and others; Segment revenue, segment capital employed and segment result for the enterprise s primary segment; 42

43 Effect of changes in composition of enterprise during the interim period, such as amalgamations, acquisition or disposal of subsidiaries and long term investments, restructuring and discontinuing operations; Material changes in contingent liabilities since last annual balance sheet date. 43

44 Complete set of financial statements (IAS 1) Annual financial statements cover a time period longer than what is required to allow timely reporting to creditors and investors of a company. Annual financial statements are generally audited and in that case, they should be clearly labeled as audited Condensed set of financial statements (IAS 34) Interim financial statements, on cover a period of less than one year (like a month or a quarter), have been developed to give a timelier source of information. However, interim financial statements are generally unaudited and should be labeled as unaudited thus avoiding misleading the statement users. 44

45 Complete set of financial statements (IAS 1) (a) SFP; (b) Statement of P or L; (c) Statement showing either (i) all changes in equity or (ii) changes in equity other than those arising from capital transactions with owners and distributions to owners; (d) cash flow statement; and (e) accounting policies and explanatory notes. Condensed set of financial statements (IAS 34) (a) Condensed SFP; (b) Condensed Statement of P or L; (c) Condensed statement showing either (i) all changes in equity or (ii) changes in equity other than those arising from capital transactions with owners and distributions to owners; (d) condensed cash flow statement; and (e) selected explanatory notes. 45

46 Disclose the nature and amount of a significant change in estimates in a note to the annual financial statements for that financial year, especially where a separate financial report is not published for that final Interim period, 46

47 Estimates and judgements are required for determining results of operations for any period, even a whole year. 47

48 1. Inventory Problems: Inventory has three types of problems: determination of inventory quantity, valuation of inventories, and adjustments of valuation. 2. Matching Problem: Business operations are not similar and uniform throughout the year. 3. Extent of Disclosure Problem: There is a problem of deciding the quantity of disclosure in interim financial reports. 48

49 4.Conceptual Issues:Interim reporting restricts the quality of accounting measurements. 5.Seasonal nature of operations in many industries can cause wide fluctuations in revenues and expenses. 49

50 Short time period -Reduction of reporting period, increases errors in estimation and allocation; Difficulty on allocation of annual operating costs for accurate information; Variations of tax rates and in interest rates complicates determination of the interim profit tax;(incase of changes) Matching problem; Effects of seasonal variations markets in turn may reduce the reliability and comparability of financial statements. Assistant PhD Claudia Elena,PhD Lucia MOROŞAN DANILĂ University of Suceava, eastern europe romania 50

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52 THANK YOU