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IAS 34 Interim Financial Reporting

Learn the key accounting principles to be applied when preparing an interim financial report.

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IAS 34 Interim Financial Reporting

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An interim financial report is a complete or condensed set of financial statements for a period shorter than a financial year. IAS 34 does not specify which entities must publish an interim financial report. That is generally a matter for laws and government regulations. IAS 34 applies if an entity using IFRS Standards in its annual financial statements publishes an interim financial report that asserts compliance with IFRS Standards.

IAS 34 prescribes the minimum content of such an interim financial report. It also specifies the accounting recognition and measurement principles applicable to an interim financial report.

The minimum content is a set of condensed financial statements for the current period and comparative prior period information, ie statement of financial position, statement of comprehensive income, statement of cash flows, statement of changes in equity, and selected explanatory notes. In some cases, a statement of financial position at the beginning of the prior period is also required. Generally, information available in the entity’s most recent annual report is not repeated or updated in the interim report. The interim report deals with changes since the end of the last annual reporting period.

The same accounting policies are applied in the interim report as in the most recent annual report, or special disclosures are required if an accounting policy is changed. Assets and liabilities are recognised and measured for interim reporting on the basis of information available on a year-to-date basis. While measurements in both annual financial statements and interim financial reports are often based on reasonable estimates, the preparation of interim financial reports will generally require a greater use of estimation methods than annual financial statements.

Standard history

In April 2001 the International Accounting Standards Board adopted IAS 34 Interim Financial Reporting , which had originally been issued by the International Accounting Standards Committee in 2000. IAS 34 that was issued in 2000 replaced the original version that was published in February 1998.

Other Standards have made minor consequential amendments to IAS 34. They include Improvements to IFRSs (issued May 2010), IFRS 13 Fair Value Measurement (issued May 2011), Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) (issued June 2011), Annual Improvements to IFRSs 2009–2011 Cycle (issued May 2012), Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (issued October 2012), IFRS 15 Revenue from Contracts with Customers (issued May 2014), Annual Improvements to IFRSs 2012–2014 Cycle (issued September 2014), Disclosure Initiative (Amendments to IAS 1) (issued December 2014), IFRS 16 Leases (issued January 2016), IFRS 17 Insurance Contracts (issued May 2017), Amendments to References to the Conceptual Framework in IFRS Standards (issued March 2018) and Definition of Material (Amendments to IAS 1 and IAS 8) (issued October 2018) and Disclosure of Accounting Policies (issued February 2021).

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Applicability of the Offsetting Amendments to IFRS 7 to Condensed Interim Financial Statements (Amendments to IFRS 7)

Disclosure of Information 'Elsewhere in the Interim Financial Report' (Amendments to IAS 34)

Improvements to IFRS 8 Operating Segments

Interim Financial Reporting and Segment Information for Total Assets and Liabilities (Amendments to IAS 34)

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IFRIC 10 Interim Financial Reporting and Impairment

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A Complete Guide on - How to Prepare Interim Financial Reports

Ayushi Somani

Investors, shareholders, and the general public expect companies to disclose their financial reports for the clarity of the company’s standing in the market. This clarification helps the Investors understand how their money is being used, the shareholders understand if their investment in the company has growth or not, and the general public can make a well aware decision of investing in the company.

The best way of providing investors and the general public with an up-to-date financial report of a company is through an interim financial report or statement. As the name suggests, it refers to the financial report of a company covering a timespan of less than a year. The report is filed before the annual financial reporting cycle. The reports are filed for a duration of last six or five months, or whatever as per your preference.

Interim reports come in handy when you want to let the investors, analysts, and shareholders know about your company’s financial performance within a specific period of time. These reports are commonly filed by companies to also highlight the material changes to the general public.

As simple as it sounds, some complex features can easily confuse you. This is why acquiring a thorough knowledge of the subject is necessary. Here is a complete guide that can help you understand the Interim Financial Statement and its various characteristics in detail. It will also deliver useful insights on the importance and benefits of filing an Interim Financial Report and the process of filing it.

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About Interim Financial Statements

Difference between interim financial statements and annual financial statements, standards to be included in the interim financial report, why do you need to file an interim financial statement, the most important part of interim reports: profit and loss statement, are interim financial reports audited, how to file or make an interim financial report, difference between ifrs and us gaap standards, frequently asked questions, key takeaways.

The financial statements that are filed by a company for a period of less than a year, are referred to as interim financial statements or reports. The primary objective of filing an interim financial statement is to provide an insight into your company’s financial performance and material changes to shareholders and analysts. These statements are most often issued by publicly-held companies and are not audited.

IAS 34 applies if a company or organization publishes an interim financial report that follows all the standards necessary for IFRS Standards. These statements can be issued in any period prior to the financial year. Just like any other official statement, certain rules and standards need to be maintained while filing an interim statement. As suggested by the International Accounting Standards Board, the following aspects should be clearly mentioned in an interim financial statement:

  • Statements indicating the firm or issuing entity’s financial position
  • Condensed statement of profit and loss
  • Alterations in equity with explanatory notes

An interim financial report is very beneficial as it provides a timely view of a company’s operations and financial aspects. With an interim financial report, you don’t have to wait for an entire year for accessing this information. Also, the year-end financial reports take months to access even after they have been released. Another major benefit of releasing these reports is the shareholders, public, and analysts are informed about major company changes like bankruptcy, the resignation of directors, and an alteration in the fiscal year.

A good example of such a report is a quarterly financial statement as it is issued before year-end within a period of 3 months.  It is a concise report of unaudited financial statements, which include income reports, balance sheets , cash flow reports, etc. Quarterly statements are filed within a few weeks after the quarter period has ended.

When looked from an analytic perception, Interim and annual financial statements are fairly the same with similar aspects like income reports, balance sheets, and cash flow statements. However, there are a few differences that are vividly noticed between the two. The most obvious is the coverage period, which is a complete year for the annual financial reports and less than a year for the Interim statements. An interim report also should not necessarily have some disclosures that are required in an annual one. Interim reports can be shorter than the Annual reports. Other differences are noticed in the following areas:

The annual statement should consist of a statement of financial position, profit and loss report, equity changes report, cash flow statements, and notes of financial statements.

The Interim financial statement should have a condensed statement of the company’s financial position, a condensed statement of profit and loss , cash flows , and selected notes.

Auditor Opinion

Positive assurance for the Annual Financial Statements and negative assurance for the Interim Financial Statements.

Purpose of Issuance

An annual report gives the complete and transparent information of a company’s financial position, cash flow, and financial performance. This entire information helps in knowing the results of the management's ranks and the resources they utilize.

An interim report provides information on a company’s performance and position before the year-end so the investors, creditors, and public are aware of the filing entity’s ability or capacity to generate cash flow and revenue. It also assists in knowing about the company’s financial liquidity.

Interim statements are not audited because of the short time frame. Given the time-taking process of auditing, only annual financial reports are audited as they are released at the year-end.

The government of India has no law on mandatory filing of interim financial reports. the IFRS or International Financial Reporting Standards do not make it mandatory for firms to file an interim financial report, many companies do that either by choice or because of the local regulations.

Companies aiming to file an interim financial statement should submit it in a ‘condensed’ format. In this case, the simplified presentation and disclosure requirements of IAS 34 apply. The following standards need to be included in an Interim financial report:

  • Condensed statement for the financial position : This should contain information till the end of the current interim period and at the completion of the immediately next financial year.
  • Condensed statement of profit or loss : This condensed statement requires all the profit and loss information of the current interim period and for the year to date.
  • Condensed statement of equity changes : Should be filed for the ongoing year to date and also for the interim period of the next financial year, which will be considered for comparison.
  • Condensed statement of cash flows : The statement should include details like the sources of cash flows, and other information for the current year to date and the next financial year.
  • Self-explanatory notes : For condensed financial statements, headings and sub-totals should be necessarily included along with self-explanatory notes.

The government of India or the law of the country in no sense makes it mandatory to file an interim financial statement. But it is regarded as a healthy practice and in some areas, even the local laws may make these reports a necessity at times in certain cases. A primary benefit of filing an interim financial report is you can find great insights into how your company is performing before the year-end. Following are the major advantages of interim statements:

Protection From Future Troubles: When you file an interim financial statement of your company, you gather lots of details like the cash flow, revenue, equity changes, etc. This helps in analyzing your company's performance and also detecting troubles if any. Since these statements are filed before the end of a fiscal year, you would have enough time to strategize your business and recover losses or financial issues that have occurred. So, Interim Financial Reports can actually safeguard you from future financial troubles.

Thorough Bookkeeping: Filing an interim financial statement requires a multitude of information, which you can utilize for further growth. You have all the information in one place and this can assist you in keeping a record of every minute financial detail. You will have the crucial information at your disposal whenever you require it.

Easy Loans: The best part of filing an interim financial report is you can get assistance in getting quick bank loans. With the previous fiscal year long gone, you may be asked about your company’s fresh financial records. An interim report can provide proof that you are not in debt and that the company is capable enough to  afford a business loan. An interim statement will portray a positive image of your company in front of the bank.

Higher Chances of Closing a Deal: Clients often prefer a detailed overview of your company’s financial performance before closing a deal. A yearly report may not easily convince them if the previous year is long gone. So, you need something fresh to present to them. This is where the Interim Financial Statements can make your day. These fresh details will increase your chances of getting the deal and impressing your client.

Effective Future Planning: With an overview of your company’s financial condition to date, you will have an opportunity of mending and fix points where you could have done better. This will help you plan the future course of action with more precision.

Reports have also revealed that firms and companies that provided appropriate and timely interim financial reports were able to obtain covid relief funding. Your chances of attaining such opportunities go up when you have all the details of the company’s financial information and tax returns.

A man in front of a screen with a red arrow

The most important and commonly used part of an interim financial statement is the profit and loss part and the balance sheet. With a piece of clear information on your company’s profit and cash flow, you will have an idea of how it's performing. Keeping a close eye on expenses will assist you in finding out new ways of earning more money to cover those expenses.

If you wait for an annual financial statement, then you can easily miss out on many opportunities. Sometimes companies fail to track their records of losses and enter into huge debts. A regular review of your income can assist you in avoiding such circumstances.

A balance sheet is a summary of what your business owns and owes during a specific time duration. Despite getting an annual one, you can gather a balance sheet for an interim period to get a fair idea of your debts, loans, and revenue.

Keeping a close eye on these two aspects and reviewing them regularly can help you pick out the negative and positive alterations occurring in your company. You will have a more vivid idea of aspects like the total equity, expenses, retained earnings , working capital, cash flow, etc. Generating these reports at least quarterly can provide you with deep insights and benefit your business in ways you can’t even imagine. Having a crystal clear sight of every minute financial detail of your company will yield positive results.

To answer this question that comes out of curiosity for a lot of people, no, Interim Financial Reports are not audited as they have not been made mandatory by the IFRS or GAAP. These reports are released by the companies for their own information and to keep the public, investors, and analysts informed about the company’s financial performance and condition.

However, companies can still hire an outside auditor to review their interim financial reports. The accounting practices in interim reports must be the same as adopted for the annual reports.

interim financial reporting problem solving

Big firms can effortlessly hire financial analysts and other professionals for making an interim financial report. But a small company may save that budget and prefer utilizing the same money somewhere else. The process of preparing a financial statement may seem daunting and complex. However, companies, especially the start-ups and mid-sized ones can do the task all on their own by using any accounting software of your choice. There are many accounting softwares that you can utilize for this purpose. Here are the processes you can adopt for making an interim financial statement:

Insert the Expenses

All the expenses of your company including the debit and credits , bills, EMIs, etc should be clearly entered and all these bank feeds should be up-to-date. These dates will be entered into the ‘accounts payable’ field of the accounting software. You should also remember that the issuing date for a specific bill should be added and not the current date. Numbers can be confusing, which is why you need to be careful with them.

Enter all the Sales

Some individuals consider deposits as sales income, which is wrong. For this step, you will be needing the Daily Report, which is also known as the Z-tape feature of accounting software. It is an option available that helps in correctly entering the sales in the software. If you have enables the ‘pay later’ scheme in your business then the open invoices should also be mentioned in the receivable section of the accounting software you are using.

It is crucial to check all the accounts in your balance sheets so there is no room for error. From credit accounts to lines of credit cards, everything needs to be apt. This will enable you to detect missing or duplicate transactions, which if left unnoticed can error your interim financial statement.

Other Additions

Comparative statements of the previous year should be added to the Interim Financial Report. Aspects like profit & loss, balance sheet, etc of the preceding fiscal year should be added.

By following the above-mentioned points and using an accounting software of your choice, you can easily prepare an Interim Financial Report. Since you will be showing this report to investors, analysts, and other key shareholders, everything should be clear and accurate.

Though a company is not obligated to file an interim financial report, some areas may still require you to do so because of the local laws. While issuing any kind of financial statement, certain regulations need to be followed. IFRS and GAAP standards can be different in some aspects and you need to be aware of them, especially the companies reporting for dual filers and those opting for conversion. Here are the major differences between IFRS and GAAP standards:

  • The US GAAP offers some leniency on cost allocation to interim periods based on the expired time estimation, benefits, and other factors linked to the interim period. IFRS standards, on the other hand, do not provide any leniency here. The costs can be deferred at the interim reporting date only if the same can be done at the annual reporting date. There are also certain GAAP rules for property taxes that may not comply with the IFRS standards.
  • Under IAS 34 of IFRS standards, if any losses have occurred due to variation in costs, they should be mentioned in the interim period of their occurrence. The company should not wait to include them in the annual fiscal year report. However, the US GAAP standard allows such losses to be deferred because interim financial statements are a crucial part of the annual reports.
  • The IFRS standards ensure that companies account for alterations in tax laws enacted during an interim period. It advises the companies to do so either by mentioning the change in its occurrence of the interim period or by adjusting the estimated annual effective tax rate. But the US GAAP expects companies to recognize the tax changes in the interim period statement only.
  • Companies with exposure to numerous tax countries and distinct taxable income categories should file individual effective tax rates for each jurisdiction and income category under IFRS Standards. If utilizing more particular rates might result in a realistic approximation of the effect, a weighted-average rate across jurisdictions is utilized. The US GAAP is slightly different here, it allocates the projected annual income tax expense or benefit to interim periods using a single overall estimated annual effective tax rate.

Are Interim Financial Statements Audited?

Interim Financial Reports are not a necessity. Neither US GAAP nor IFRS has made filing an interim report a mandatory affair. So, these statements are not audited. However, if a company wants they can always hire a professional analyst or accountant for auditing them.

Should Interim Financial Statements be Prepared in a Summarized Format?

Interim financial reports are usually a brief representation of a company’s financial performance within a particular time period before the fiscal year ends. There are no specific standards that need to be followed while preparing these reports. This is why they are not as lengthy as the annual financial reports.

How can I prepare an Interim Financial Report?

Most small and mid-sized companies choose to do this using accounting software. With the emergence of technology and AI, these softwares can make the job pretty easy. All you need to do is enter the necessary details and check if all the values, dates, and amounts are accurate.

What Should I add to an Interim Financial Report?

As per the standards, an interim financial report should consist of information like cash flow, profit and loss, selected explanatory notes, and a balance sheet. All of these components should be in a condensed format. These are the minimum requirements, if you wish you can add more details that you believe the analysts and shareholders should be aware of.

Which IFRS Standard Deals With the Interim Financial Report Filing?

The IAS 34 of IFRS standards deals with the filing of an interim financial report. Though the organization has not laid strict standards for the preparation of an interim report, some suggestions have been made by them. You can find them in this guide above.

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This guide is designed to provide in-depth information on interim financial reports. If a company wants to make the public, analysts, and shareholders aware of its financial performance before the year-end, it can do so by filing an Interim Financial Report. There is no cap on the time duration for an interim report and a quarterly report is the most common example of an interim financial statement.

The report should at minimum consist of condensed statements of cash flow, selected explanatory notes, a balance sheet, and profit and loss information. These reports are not audited as they have not been made mandatory either by IFRS or by US GAAP.

Making an Interim Financial Report can benefit you in many ways. It keeps you updated on your company’s financial condition. If there have been any losses during the interim period, you can still earn revenue and cover the damages by the year-end. It also helps the shareholders and analysts understand your company’s growth. These reports are most useful when you wish to impress your client through the company’s most recent financial achievements.

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Home » Blog » Guide to Ind AS 34 | Interim Financial Reporting (IFR)

Guide to Ind AS 34 | Interim Financial Reporting (IFR)

  • Blog | Account & Audit |
  • 17 Min Read
  • Last Updated on 14 June, 2023

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interim financial reporting problem solving

Table of Contents

  • Interim Financial Reporting (IFR)
  • Need and Objective
  • What are financial statements?
  • Principles of recognition and measurements
  • Annual effecting tax rate
  • Accounting Policies
  • Minimum Components of Interim Financial Report
  • Form and contents of interim financial statements
  • Minimum disclosure of notes
  • Significant events and transactions
  • Materiality
  • Examples of applying the recognition and measurement principles
  • Restatement of previously reported interim periods
  • Interim Financial Reporting and Impairment

1. Interim Financial Reporting (IFR)

Interim financial reporting is the reporting for periods of shorter than a full financial year, generally for a period of three months or quarterly results. The companies are required to publish the financial results on a quarterly basis.

As per this Standard, Interim Financial Report means a financial report containing either a complete set of financial statement or set of condensed financial statement for an interim period. Interim period is a period of reporting shorter than a full financial year.

Taxmann.com | Practice | Accounting

2. Need and Objective

Timely and reliable interim financial reporting improves the ability of users to understand an entity’s capacity to generate earnings and cash flows and its financial condition and liquidity.

In general the basic objective of Interim Financial Reporting (IFR) is to provide frequent and timely assessment of entity’s performance. However interim reporting has inherent limitation, which is not the case of annual accounts as the reporting period is shortened, the effect of errors in estimations and allocation are magnified. The proper allocation of operation expenses is a significant concern. The main problems are:

  • Proper allocation of operating expenses.
  • Some operating expenses may be incurred in one interim period and yet benefit the full year operation. For example, advertising expenses, repair and maintenance expenses.
  • Seasonal fluctuation – for some entities revenue may be seasonal or cyclical and therefore concentrated in certain interim period.
  • Year-end events. For example-Bonus, Incentive based on annual sales target.
  • Determination of appropriate amount of provision – pension, gratuity, litigation, contingencies etc.
  • Income-tax expenses – one interim period may have profit and next interim period may have losses.

The objective of this standard is to prescribe the minimum content of Interim Financial Report (IFR) and to prescribe the principles for recognition and measurement in a complete or condensed financial statement for an interim period.

This Standard does not mandate which entities should be required to publish interim financial reports, how frequently, or how soon after the end of an interim period. However, governments, securities regulators, stock exchanges, and accountancy bodies often require entities whose debt or equity securities are publicly traded to publish interim financial reports. This Standard applies if an entity is required or elects to publish an interim financial report in accordance with Indian Accounting Standards.

4. What are Financial Statements?

Ind AS-1 defines a complete set of financial statements:

  • a balance sheet as at the end of the period;
  • a statement of profit and loss for the period;
  • a statement for change in equity for the period;
  • a statement of cash flows for the period;
  • notes, comprising a summary of significant accounting policies and other explanatory information; and
  • a balance sheet as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements.

Taxmann's Audit of Financial Statements

5. Principles of Recognition and Measurements

As the objective of this Standard is to prescribe the principle for recognition and measurement of income, expenses, assets and liabilities in a complete or condensed financial statements i.e.  Balance Sheet, Statement of profit and loss, Statement of Cash flow and Accounting Notes and Policies, there may be two distinctive principles/views of recognition and measurement of income and expenses in interim financial reporting:

  • Integral View
  • Discrete View

5.1 Integral View

This approach treats the interim period as a component/part of the full year. Under this approach, items are allocated to interim periods based on estimates of the total amount for the full year. Costs and expenses are accrued or deferred between interim periods to ‘smooth’ the results across the year. In practice a full ‘integral’ approach would involve creating a separate series of accounting standards for interim financial reporting to formalize the criteria to be used for estimating the full year out-turn, dealing with uncertainty and other issues.

5.2 Discrete View

An approach to view the interim period in essentially the same manner as a full year, figures are calculated and accruals and estimates made in exactly the same manner as would be the case at the year end.

Ind AS-34 resolves the debate by prescribing the discrete view in general. As per the Standard, income and expenses should be recognized/measured on year to date basis for interim reporting. Year to date basis means financial reporting for the period, which begins on the first day of the fiscal and year ends on given interim date.

Ind AS-34 requires that an entity apply the same accounting policies in its interim financial statements as in its annual statements may seem to suggest that interim period measurements are made as if each interim period stands alone as an independent reporting period. However, by providing that the frequency of an entity’s reporting shall not affect the measurement of its annual results, Year-to-date measurements may involve changes in estimates of amounts reported in prior interim periods of the current financial year. But the principles for recognizing assets, liabilities, income, and expenses for interim periods are the same as in annual financial statements.

For example, X Ltd. prepares the financial report for the first quarter of financial year 2015-2016 i.e. 1st April, 2015 to 30th June, 2015 for interim financial reporting purpose. Year to date basis means 1st April, 2015 to 30th June, 2015. If it prepare IFR for second quarter i.e.,  1st July, 2015 to 30th September, 2015. Year to date basis means 1st April, 2015 to 30th September 2015 and so on.

Exception to discrete view – However, there is a deviation in recognizing the Income-tax expenses, which is not based on discrete view as explained above.

As per the standard the income-tax expenses is recognized in each interim period on the best estimate of the Weighted Average Annual Effective Income-tax Rate  expected for the full financial year.

This is consistent with the basic concept that the same accounting recognition and measurement principles shall be applied in an interim financial report as are applied in annual financial statements. Income taxes are assessed on an annual basis.

6. Annual Effecting Tax Rate

An expected annual tax rate which reflects estimates of annual earnings tax rate, tax credits etc. Interim period income-tax expense is accrued using the tax rate that would be applicable to expected total annual earnings, that is, the estimated average annual effective income-tax rate applied to the pre-tax income of the interim period.

Guide To Indian Accounting Standards (Ind AS)

6.1 Measuring interim income tax expense

Interim period income tax expense is accrued using the tax rate that would be applicable to expected total annual earnings, that is, the estimated average annual effective income tax rate applied to the pre-tax income of the interim period.

Example 1:  An entity reporting quarterly expects to earn ` 10,000 pre-tax each quarter and operates in a jurisdiction with a tax rate of 20% on the first ` 20,000 of annual earnings and 30% on all additional earnings. Actual earnings match expectations. The following table shows the amount of income-tax expense that is reported in each quarter:

Total income for the full year = 10000 × 4 = ` 40,000

Total tax payable for the full year: 20% on ` 20,000 = ` 4,000 and 30% on ` 20,000 = ` 6,000;

Total tax ` 10,000; Annual effective tax rate = 10,000/40,000×100 = 25%

Therefore, tax for each quarter = ` 10,000×25% = ` 2,500 per quarter

Example 2: An entity reports quarterly, earns ` 15,000 pre-tax profit in the 1st quarter but expects to incur losses of ` 5,000 in each of the 3 remaining quarters (thus having zero income for the year), and operates in a jurisdiction in which its estimated average annual income-tax rate is expected to be 20%. The following table shows the amount of income-tax expense that is reported in each quarter:

Effective tax rate in this case will be 20% only and will be applied to each quarter.

6.2 Difference in financial reporting year and tax year

If the financial reporting year and the income-tax year differ, income-tax expense for the interim periods 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.

Example 3:  An entity’s financial reporting year ends 30 th  June and it reports quarterly. Its taxable year ends 31st December. For the financial year that begins 1 July, Year 1 and ends 30th June, Year 2, the entity earns ` 10,000 pre-tax each quarter. The estimated average annual income-tax rate is 30% in Year 1 and 40% in Year 2.

6.3 Tax credits

Some tax jurisdictions give taxpayers credits against the tax payable based on amounts of capital expenditures, exports, research and development expenditures, or other bases. Anticipated tax benefits of this type for the full year are generally reflected in computing the estimated annual effective income-tax rate, because those credits are granted and calculated on an annual basis under most tax laws and regulations.

On the other hand, tax benefits that relate to a one-time event are recognized in computing income tax expense in that interim period, in the same way that special tax rates applicable to particular categories of income are not blended into a single effective annual tax rate. Moreover, in some jurisdictions tax benefits or credits, including those related to capital expenditures and levels of exports, while reported on the income-tax return, are more similar to a government grant and are recognized in the interim period in which they arise.

6.4 Tax loss and tax credit carry backs and carry forwards

The benefits of a tax loss carry back are reflected in the interim period in which the related tax loss occurs. Ind AS-12 provides that ‘the benefit relating to a tax loss that can be carried back to recover current tax of a previous period shall be recognized as an asset’. A corresponding reduction of tax expense or increase of tax income is also recognized.

Ind AS-12 provides that ‘a deferred tax asset shall be recognized for the carry forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized’. Ind AS-12 provides criteria for assessing the probability of taxable profit against which the unused tax losses and credits can be utilized. Those criteria are applied at the end of each interim period and, if they are met, the effect of the tax loss carry forward is reflected in the computation of the estimated average annual effective income tax rate.

Example 4: An entity that reports quarterly has an operating loss carry forward of ` 10,000 for income-tax purposes at the start of the current financial year for which a deferred tax asset has not been recognized. The entity earns ` 10,000 in the 1st quarter of the current year and expects to earn ` 10,000 in each of the 3 remaining quarters. Excluding the carry forward, the estimated average annual income tax rate is expected to be 40%. Tax expense is as follows:

Total taxable income for the full year: ` (10,000×4) – 10,000 (carry forwards loss) = ` 30,000.

Tax on ` 30,000@40% = ` 12,000

Estimated annual effecting tax rate = 12000/40000 × 100 = 30%

Tax expense each quarter = ` 1000@30% = ` 3,000

7. Accounting Policies

An entity should apply the same accounting policies in the interim financial statements as are applied in the annual financial statements.

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8. Minimum Components of Interim Financial Report

An interim financial report shall include, at a minimum, the following components:

  • a condensed balance sheet;
  • a condensed statement of profit and loss;
  • a condensed statement of change in equity
  • a condensed statement of cash flows; and
  • selected explanatory notes.

9. Form and Contents of Interim Financial Statements

An interim financial report can contain either a complete set of financial statements or a set of condensed financial statements.

9.1 Complete financial statements

If an entity opts to prepare and presents a complete set of financial statements in the interim financial reporting. It should be prepared in the same format and as per the contents and requirements of annual financial statements.

9.2 Condensed financial statements

A condensed interim financial reporting should contain the following minimum information:

  • Headings and sub-totals that was included. In the most recent annual financial statements
  • Selected Explanatory Notes
  • Additional items or notes if there omission makes the interim financial reporting misleading
  • Basic and diluted earning per share for the interim period as per Ind AS-33 (not to be annualized) (on the face Statement of profit and loss)

9.3 Selection of explanatory notes

Criteria adopted for selection of explanatory notes to be included in interim financial report is updating the financial information, it is assumed that the users of interim financial report are having access to the most recent annual financial statements therefore notes to interim financial report should provide information on financial year to date basis. However it is necessary to disclose any events or transactions, which are material for understanding the interim financial reporting.

9.4 The reporting entity

If the reporting entity’s most recent annual financial statements were prepared on a consolidated basis, then the interim report should be prepared on the same basis. To publish an interim report that dealt only with the reporting entity and not with its subsidiaries would not be consistent or comparable with the most recent annual financial statements. If the most recent consolidated financial statements included the parent entity’s financial statements then the interim financial report may, but is not required, to do so.

10. Minimum Disclosure of Notes

Following minimum disclosure of notes and explanatory statements should be made:

  • A statement that the same accounting policies are followed in the Interim financial statements as these followed in the most recent annual financial statements or, if these policies have been changed, a description of the nature and effect of the change.
  • Description about the seasonal or cyclical effect on interim financial year.
  • Unusual factors that affected assets, liabilities, equity, net income, and cash flow.
  • Effect of change in estimates.
  • Change in debt and equity through issuance, repurchase and repayments.
  • Details of dividend payment.
  • Segment revenue, segment result for business segment or geographical segment, whichever is the primary basis of the reporting entity.
  • Effect of changes in composition of the entity during interim period, change in composition includes business combination, acquisition, restructuring, disposal of subsidiaries etc.

11. Significant Events and Transactions

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 in relation to those events and transactions shall update the relevant information presented in the most recent annual financial report.

The following is a list of events and transactions for which disclosures would be required if they are significant: the list is not exhaustive.

  • the write-down of inventories to net realizable value and the reversal of such a write-down
  • recognition of a loss from the impairment of financial assets, contract assets, property, plant and equipment, intangible assets, or other assets, and the reversal of such an impairment loss;
  • the reversal of any provisions for the costs of restructuring;
  • acquisitions and disposals of items of property, plant and equipment;
  • commitments for the purchase of property, plant and equipment;
  • litigation settlements;
  • corrections of prior period errors;
  • changes in the business or economic circumstances that affect the fair value of the entity’s financial assets
  • and financial liabilities, whether those assets or liabilities are recognized at fair value or amortized cost;
  • any loan default or breach of a loan agreement that has not been remedied on or before the end of the reporting period; and
  • related party transactions;
  • transfers between levels of the fair value hierarchy used in measuring the fair value of financial instruments;
  • changes in the classification of financial assets as a result of a change in the purpose or use of those assets; and
  • changes in contingent liabilities or contingent assets.

12. Materiality

Materiality is one of the most fundamental concepts underlying financial report; therefore Standard provides that in deciding how to recognize measure, classify or disclose an item for interim financial reporting purposes, materiality should be assessed in relation to the interim period financial data.

Ind AS 1 defines material information and requires separate disclosures of material items.

The overriding objective is to ensure that an interim financial report includes all information that is relevant to understanding an entity’s financial position and performance during the interim period.

13. Examples of Applying the Recognition and Measurement Principles

  • Seasonal/Occasional Revenue – As explained earlier the discrete view is taken for measurement and recognizing the revenues therefore such revenue are recognized when they occur. Revenues that are received seasonally, cyclically, or occasionally within a financial year shall not be anticipated or deferred as of an interim date if anticipation or deferral would not be appropriate at the end of the entity’s financial year . Examples include dividends, royalties and Government grants. Additionally, some entities consistently earn more revenues in certain interim periods of a financial year than in other interim periods, e.g. seasonal revenues of retailers. Such revenues are recognized when they occur.
  • Cost incurred unevenly during the financial year – Costs that are incurred unevenly during an entity’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.
  • Changes in Estimate – Amounts of income and expenditure reported in the current interim period will reflect any change in estimates of amounts reported in prior interim period of the financial year. The amount reported in prior interim period is not retrospectively adjusted; however any significant change in estimates may be disclosed.
  • Foreign currency translation gains and losses – An entity measures foreign currency translation gains and losses for interim financial reporting by the same principles as at financial year end in accordance with the principles as stipulated in Ind AS-21 “The effects of Changes in Foreign Exchange Rates.”
  • Major planned periodic maintenance or overhaul – The cost of major periodic maintenance or overhaul or other seasonal expenditure that is expected to occur late in the year is not anticipated for interim reporting purposes unless an event has caused the entity 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.
  • Intangible assets – An entity applies the definition and recognition criteria for an intangible asset in the same way in an interim period as in an annual period. An entity should not ‘defer’ costs as assets in an interim balance sheet in the hope that the recognition criteria will be met later in the financial year.
  • Contractual or anticipated purchase price changes – An entity anticipates volume rebates or discounts and other contractual changes in the prices of goods and services in interim periods if it is probable that they will take effect. However, it does not anticipate discretionary rebates and discounts because the resulting liability would not satisfy the conditions of recognition.
  • Inventories – An entity measures inventories for interim financial reporting by the same principles as at the financial year-end. However, to save expense and time, entity often use estimates to measure inventories at interim dates to a greater extent than at annual reporting dates.
  • Net realizable value of inventories – An entity determines the net realizable value of inventories by reference to selling prices and related costs to complete and sell the inventories. It reverses a write-down to net realizable value in a subsequent interim period only it as it would be appropriate to do so at the end of the financial year.
  • Impairment of assets  – An entity applies the same impairment tests, recognition, and reversal criteria at an interim date as it would at the end of its financial year. That does not mean an entity must necessarily make a detailed impairment calculation at the end of each interim period. Rather, an entity will review for indications of significant impairment since the end of the most recent financial year to determine whether such a calculation is needed.
  • Depreciation and amortization – Depreciation and amortization for an interim period is based only on assets owned during that interim period. It does not take into account asset acquisitions or disposals planned for later in the financial year.
  • Pension, Gratuity and other defined benefit schemes – An entity should estimate provisions in respect of gratuity and other defined benefit schemes for an interim period on a year-to-date basis by using the actuarially determined rates at the end of the prior financial year. This should be adjusted for significant market fluctuations since that time and significant curtailment, settlements, or other significant one-time events.
  • Year-end bonuses  – An entity anticipates a bonus for interim reporting purposes only if, ( a ) the bonus in 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 payments; and ( b ) a reliable estimate of the obligation can be made.
  • Provisions  – An entity applies the same criteria of recognizing and measuring a provision at an interim date as it would at the end of the financial year. The facts subsisting at the balance sheet date determine whether there exists a present obligation that meets the definition and recognition criteria of a liability. The amount of the obligation is adjusted upward or downward, with a corresponding loss or gain recognized in profit or loss, if the entity’s best estimate of the amount of the obligation changes.
  • S hort-term employee benefits: Vacations, holidays – The employee benefits payable within 12 months from the end of the interim reporting period are considered to be short-term. The principles for recognizing assets, liabilities, income and expenses for interim periods are the same as in annual financial statements. However, the frequency of reporting should not affect the measurement of annual result.
  • Contingent lease payments – Contingent lease payments can be an example of a legal or constructive obligation that is recognized as a liability. If a lease provides for contingent payments based on the lessee achieving a certain level of annual sales, an obligation can arise in the interim periods of the financial year before the required annual level of sales has been achieved, if that required level of sales is expected to be achieved and the entity, therefore, has no realistic alternative but to make the future lease payment.

Following is the illustrative example to understand the periods for which interim financial statements are required to be presented.

Scenario ( a ) Entity publishes interim financial reports half-yearly

The entity’s financial year ends 31 March (Financial year). The entity will present the following financial statements (condensed or complete) in its half-yearly interim financial report as of 30 September 20X2:

Scenario ( b ) Entity publishes interim financial reports quarterly

The entity’s financial year ends 31 March (Financial year). The entity will present the following financial statements (condensed or complete) in its quarterly interim financial report as of 30 September 20X2:

Taxmann's Illustrated Guide to Indian Accounting Standards (Ind AS)

14. Restatement of Previously Reported Interim Periods

Change in accounting policy – If there is change in accounting policy within the current financial year the effect of change in accounting policy is applied retrospectively by:

  • restating the financial statements of prior interim periods of the current financial year and the comparable interim periods of any prior financial years that will be restated in the annual financial statements in accordance with Ind AS-8; or
  • when it is impracticable to determine the cumulative effect at the beginning of the financial year of applying a new accounting policy to all prior periods, adjusting the financial statements of prior interim periods of the current financial year, and comparable interim periods of prior financial years to apply the new accounting policy prospectively from the earliest date practicable.

15. Interim Financial Reporting and Impairment

An entity is required to assess goodwill for impairment at the end of each reporting period, to assess investments in equity instruments and in financial assets carried at cost for impairment at the end of each reporting period and, if required, to recognize an impairment loss at that date in accordance with Ind AS-36 and Ind AS-109. However, at the end of a subsequent reporting period, conditions may have so changed that the impairment loss would have been reduced or avoided had the impairment assessment been made only at that date. Appendix to Ind AS-34 provides guidance on whether such impairment losses should ever be reversed.

An entity shall not reverse an impairment loss recognized in a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost.

An entity shall not extend this accounting principle by analogy to other areas of potential conflict between Ind AS-34 and other Indian Accounting Standards.

Example 5:   AK Ltd. with a 31st December year end prepared interim financial statements for the 1st half of the year. At 31st December 2018, it has goodwill with a carrying amount of ` 1,000. At 30th June 2019, the cash generating units (CGU) to which the goodwill had been allocated at the date of the acquisition became loss-making and AK Ltd. reviewed the assets of the CGU for impairment. This resulted in the goodwill being written down to ` 200, with the impairment of ` 800 recognized in the income statement. During the 2nd half of the year, the CGUs became profitable once again and, had no impairment been recognized, would have supported a goodwill carrying amount of ` 1,000. Despite this, AK Ltd. is not permitted to reverse the impairment and the goodwill will have a carrying amount of ` 200 in its annual financial statements for the year ended 31st December 2019.

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

interim financial reporting problem solving

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Wiley GAAP 2015: Interpretation and Application of Generally Accepted Accounting Principles 2015 by Joanne M. Flood

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Chapter 12 ASC 270 INTERIM REPORTING

Perspective and issues.

    Overview

DEFINITIONS OF TERMS

CONCEPTS, RULES, AND EXAMPLES

    Differentiation between Public and Nonpublic Companies

PART I—REQUIREMENTS APPLICABLE TO ALL REPORTING ENTITIES

    Revenues

    Product Costs and Direct Costs

    Other Costs and Expenses

    Income Taxes

    Fair Value of Financial Instruments

    Discontinued Operations and Extraordinary Items

    Contingencies

    Seasonality

    Accounting Changes

PART II—REQUIREMENTS APPLICABLE TO PUBLIC REPORTING ENTITES

    Quarterly Reporting to the SEC

    Other Sources

ASC 270, Interim Reporting, contains one subtopic:

  • Accounting and disclosure issues for reporting on periods less than one year and
  • Minimum disclosure requirements for interim reporting for publicly traded companies.

The term “interim reporting” refers to financial reporting for periods of less than a year. GAAP does not mandate interim reporting. However, in the United States the Securities and Exchange Commission (SEC) requires public companies to file quarterly summarized interim financial data on its Form 10-Q. The level of detail of the information required in those interim reports is substantially less than is specified under GAAP for annual financial statements.

Objective. The objective of interim reporting is to provide current information regarding enterprise performance to existing and prospective investors, ...

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The Pros & Cons of Interim Reporting

The Securities and Exchange Commission requires certain public companies to publish quarterly financial statements to give investors insight into midyear performance. Though interim reporting generally is not required for private companies, stakeholders in smaller entities can benefit even more than those of public companies from this type of information. But it also is important to understand the potential shortcomings.

Interim financial statements cover periods of less than a year. They show how a company is doing each month or quarter.

If you think of annual financial statements as report cards for a business, interim reports would be like progress reports that may forewarn of troubles ahead or reassure you that everything is going well. A lender or investor might request interim financial statements if a company:

  • Has implemented a turnaround plan to avert bankruptcy
  • Has previously reported a major impairment loss
  • Is in an industry that is experiencing a downturn
  • Is seeking new investors or applying for a loan

These reports may provide peace of mind. Or they might signal impending financial turmoil due to, say, the loss of a major customer, significant uncollectible accounts receivable, or pilfered inventory.

Early detection of such problems is critical for smaller businesses. While large public companies can often recover from a bad quarter or year, waiting until year end to discover these issues can be disastrous to a smaller business.

Interim reports also have certain drawbacks and limitations. Unlike annual financial statements, interim financial statements are usually unaudited and condensed. So, when reviewing interim reports, revisiting last year’s complete annual financial statements may be helpful. Also check that accounting practices are consistent between the interim and year-end financial statements.

Specifically, interim numbers may omit estimates for bad-debt write-offs, accrued expenses, prepaid items, management bonuses or income taxes. And sometimes tedious bookkeeping procedures, such as physical inventory counts, updating depreciation schedules and composing detailed footnote disclosures, are not completed until year end. Instead, interim account balances often reflect last year’s amounts or may be based on historic gross margins.

For seasonal businesses, there are operating peaks and troughs, so you cannot multiply quarterly profits by four to reliably predict year end performance. Instead, you may need to benchmark current year-to-date numbers against last year’s monthly (or quarterly) results.

For more information

If interim statements reveal irregularities, you should consider digging deeper to find out what is happening. Our accounting and auditing professionals can help you address unresolved issues and determine an appropriate course of action.

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