for Accounting Professionals

IAS 34 Interim financial reporting

2011

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IAS 34 Interim financial reporting

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Robin Joyce

Professor of the Chair of

International Banking and Finance

Financial University

under the Government of the Russian Federation

Visiting Professor of the Siberian Academy of Finance and Banking Moscow, Russia 2011 Updated

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IAS 34 Interim financial reporting

CONTENTS

Introduction 3

Definitions 5

IAS 34 for Banks 5

Content of an Interim Financial Report 5

Disclosure of Compliance with IAS 34 11

Disclosure in Annual Financial Statements 13

Recognition and Measurement 14

Restatement of Previously Reported Interim Periods 16

Examples of applying the recognition and measurement principles 16

Examples of the use of estimates 23

Multiple choice questions 25

Answers to multiple choice questions 29

Note: Material from the following PricewaterhouseCoopers publications has been used in this workbook:

Applying IFRS, IFRS News, Accounting Solutions

Introduction

Aim

The aim of this workbook is to assist the individual in understanding Interim Financial Reporting according to IAS 34.

An interim financial report is a financial report that contains either a complete, or condensed, set of financial statements, for a period shorter than a full financial year.

IAS 34 does not mandate which undertakings should publish interim financial reports, how frequently, or how soon after the end of an interim period. Those matters should be decided by national governments, securities regulators, stock exchanges, and accountancy bodies.

IAS 34 applies if a company publishes an interim financial report in accordance with IFRS.

IAS 34:

(i)  defines the minimum content of an interim financial report; and

(ii) identifies the recognition and measurement principles that should be applied in an interim financial report.

The interim notes include primarily an explanation of the events, and changes, that are significant to an understanding of the changes in financial position, and performance, since the last annual reporting date.

Virtually none of the notes to the annual financial statements are repeated, nor updated in the interim report.

An undertaking should apply the same accounting policies in its interim financial report as are applied in its annual financial statements, except for policy changes made after the most recent annual statements, which are to be reflected in the next annual statements.

EXAMPLE-change of accounting policy during the year

In your financial statements in 2XX6, you accounted for property, using the cost method. You decide that for 2XX7, you will revalue your property. This change of policy should be reflected in your interim reports for 2XX7.

Measurements for interim reporting purposes are made on a year-to-date basis.

EXAMPLE-year-to-date basis

You produce quarterly interim reports. In your second and third reports, you report cumulative (year-to-date) results, and provide notes on these figures, rather than just the results for that quarter.

Income tax expense for an interim period is based on an estimated average annual effective income tax rate, consistent with the annual assessment of taxes.

EXAMPLE-income tax rates

You have 2 income tax rates. For the first $250.000, the rate is 20%. Above that it is 40% for all profits, including the first $250.000.

Your profit for the interim period is $200.000. You will make $1m profit in the whole year. In your interim report, you use 40% as your tax rate.

Materiality should be considered on a year-to-date basis, not just the interim period. It should not be based on forecasted annual data.

EXAMPLE-materiality based on interim results

The bankruptcy of a key client has reduced your interim profit by 30%. The impact on the whole year will be minimal, as this interim period has little influence on the year as a whole. (This is due to your business being seasonal.) The bankruptcy is material in relation to the interim result, and should be fully disclosed in the interim report.

Objective

The objective of IAS 34 is to prescribe the minimum content of an interim financial report, and to prescribe the principles for recognition, and measurement, in complete (or condensed) financial statements for an interim period.

Timely and reliable interim financial reporting improves the ability of investors, creditors, and others to understand an undertaking’s capacity to generate earnings, and cash flows, and its financial condition and liquidity.

Scope

Publicly-traded undertakings should provide interim financial reports that conform to IAS 34. Specifically, they are encouraged:

(i) to provide interim financial reports at least as of the end of the first half of their financial year; and

(ii) to make their interim financial reports available not later than 60 days after the end of the interim period.

If an undertaking’s interim financial report is described as complying with IFRS, it must comply with all of the requirements of IAS 34.

Definitions

Interim period is a financial reporting period shorter than a financial year.

Interim financial report means a financial report containing either a complete set of financial statements, or a set of condensed financial statements, for an interim period.

IAS 34 for Banks

The publication of interim reports enables banks to update interested parties on their progress since the previous annual financial statements. IAS 34 provides no specific guidance on how much IFRS 7 information relating to risk management is required.

Banks can choose between an update of the annual financial statements, or to provide a comprehensive analysis of similar detail to that provided in the annual financial statements.

In the economic climate of 2007-8, confidence in the international banking system has been low. Interim reports provide an opportunity to provide comprehensive details of the risk management systems to enhance confidence in the bank, rather than just a short update.

Confidence in a bank and its risk management provides a lower cost of funds in contrast to those banks about which less is known, or which have chosen not to update interested parties since the previous annual financial statements.

In reviewing interim reports of clients, analysts should recall that interim reports are rarely audited. Therefore, reliance on the information is less than can be placed on annual financial statements.

Content of an Interim Financial Report

IAS 1 defines a complete set of financial statements as including the following components:

((i) a statement of financial position as at the end of the period;

(ii) a statement of comprehensive income for the period;

(iii) a statement of changes in equity for the period;

(iv) a statement of cash flows for the period;

(v) notes, comprising a summary of significant accounting policies and other explanatory information; and

(vi) a statement of financial position as at the beginning of the earliest comparative period when an undertaking 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.

(Note: an audit report is not required, though is generally provided.)

An undertaking may provide less information at interim dates as compared with its annual statements.

An undertaking may publish a complete set of financial statements in its interim financial report, rather than condensed statements and selected explanatory notes. It may publish more than the minimum line items, or selected explanatory notes, as set out in IAS 34.

Minimum Components of an Interim Financial Report

Minimum content of an interim financial report is a:

- condensed balance sheet (statement of financial position),

- condensed income statement of comprehensive income,

presented as either:

(i) a condensed single statement; or

(ii) a condensed separate income statement and a

condensed statement of comprehensive income;,

-  condensed cash flow statement,

- condensed statement showing changes in equity 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; and

-  selected explanatory notes.

Form and Content of Interim Financial Statements

A complete set of financial statements presented in an interim financial report, should conform to the requirements of IAS 1 for a complete set of financial statements.

Condensed statements should include, at a minimum, each of the headings and subtotals that were included in its most recent annual statements, and the selected explanatory notes as required by IAS 34.

Additional line items, or notes, should be included if their omission would make the condensed interim statements misleading.

Basic, and diluted, earnings per share should be presented on the face of an income statement, complete or condensed, for an interim period when the undertaking is within the scope of IAS 33 Earnings per Share.

IAS 1 provides guidance on major headings and subtotals.

Changes in equity arising from capital transactions with owners, and distributions to owners, may be shown either on the face of the statement of changes in equity, or in the notes.

An undertaking follows the same format in its interim statement showing changes in equity as it did in its most recent annual statement.

EXAMPLE-transactions with owners

In your annual statement, you used the notes to detail dividends and new share issues, rather than on the face of the changes in equity statement. You will use the same format for the interim reports.

An interim report is prepared on a consolidated basis, if the undertaking’s most recent annual statements were consolidated statements. The inclusion of the parent’s separate statements in the interim report is optional.

EXAMPLE- Impact of timing of interims
Undertaking A has a 65% subsidiary, undertaking B. A and B will prepare its first
annual IFRS financial statements for the year ending 31 December 2005.
The transition date for each undertaking is therefore 1 January 2004.
Undertakings A and B both have shares that are publicly traded, but they are listed on different stock exchanges. Undertaking A’s regulator requires half-yearly interim information to be published, whereas undertaking B’s regulator requires quarterly interim information to be published.
Undertaking B will therefore publish IFRS financial statements before its parent.
Both regulators require the interim information to be published in accordance with IFRS.
Does this trigger the requirement of IFRS 1, First-time Adoption, which requires a parent that becomes a first-time adopter later than its subsidiary to measure the assets and liabilities of the subsidiary at the same carrying amounts as in the subsidiary’s financial statements?
No. A subsidiary publishing interim results before its parent does not cause the requirement of IFRS 1 to be triggered. The requirement is applicable only if the transition date of the subsidiary is earlier than the transition date of the parent.
Undertakings A and B have the same transition date, so undertaking A is not required to use the same carrying amounts for B’s assets and liabilities as are recognised
in B’s own IFRS financial statements.

Selected Explanatory Notes

It is unnecessary to provide relatively-insignificant updates to the information that was reported in the most recent annual report.

EXAMPLE- relatively-insignificant updates

Your annual statements provided a full description of your pension plan. Labour turnover has been higher than planned since then, but your advisers have said that there is no need to reconsider contribution levels until later. This information should not be included in the interim report, unless pensions generally, or your plan specifically, are of current concern to the users.

At an interim date, an explanation of events and transactions which are significant to the changes in financial position, and performance, since the last annual report is more useful.

EXAMPLE- IFRS 7 and interim reporting
Undertaking B is applying IFRS 7, Financial Instruments: Disclosures, for the first time from 1 January 2007.
Management is preparing its condensed interim financial report for the period ending 30 June 2007 in accordance with IAS 34. Should B apply IFRS 7 in the interim financial statements for the period ending 30 June 2007?
IFRS 7 is a disclosure standard rather than a measurement standard. IAS 34 requires the interim report to be prepared using the same policies as will be
used for the next annual financial statements, and that any changes to the policies are explained in the notes.
Adopting IFRS 7 will not affect the amounts reported in the primary statements and will not cause a change to the interim reporting where a condensed interim report is presented.
However, IAS 34 requires that an explanation of events and transactions is given where an understanding of these is significant to understanding the current interim period.
When identifying the disclosures necessary to explain such an event or transaction, consideration should be given to the IFRS 7 disclosures that might be required for that event or transaction in the annual financial statements.
However, an undertaking that includes a complete set of financial statements in its interim report, rather than condensed financial information, should present all of the disclosures required by IFRS 7, including full comparative information.

An undertaking should include the following information, as a minimum, in the notes to its interim statements, if material and if not disclosed elsewhere: