J. J. Kersee Corporation is a publicly traded company and is

J. J. Kersee Corporation is a publicly traded company and is currently preparing the interim financial data that it will issue to its shareholders and the Securities Commission at the end of the first quarter of its December 31, 2011 fiscal year. Kersee’s financial accounting department has compiled the following summarized revenue and expense data for the first quarter of the year:

Sales ……………………………………      $60,000,000

Cost of goods sold …………………….   36,000,000

Variable selling expenses ……………..    2,000,000

Fixed selling expenses ………………    1,500,000

In the first quarter, the company spent $2 million for television advertisements as a lump sum payment for the entire year. As the company believes that it will receive a benefit for the entire year for this expenditure, it has included only one quarter ($500,000) in the fixed selling expenses. Also, included in inventory is an unfavourable variance due to prices of $245,000 that has been deferred as Kersee anticipates that this will reverse before the third quarter is complete. J. J.

Kersee Corporation must issue its quarterly financial statements in accordance with generally accepted accounting principles regarding interim financial reporting.

Instructions

(a) Explain whether Kersee should report its operating results for the quarter as if the quarter were an entirely separate reporting period or as if the quarter were an integral part of the annual reporting period.

(b) State how the sales, cost of goods sold, and fixed selling expenses would be reflected in Kersee Corporation’s quarterly report prepared for the first quarter of the 2011 fiscal year. Briefly justify your presentation.

(c) What financial information, as a minimum, must Kersee Corporation disclose to its shareholders in its quarterly reports?

(CMA adapted)

(a) 1.  IFRS favours the discrete view for interim reporting.  This means that Kersee should report its operating results for the quarter as if the quarter were an entirely separate reporting period.

    2.  The company’s revenue and expenses would be reported as follows on its quarterly report prepared for the first quarter of the 2011 fiscal year:

        Sales                                      $60,000,000

        Cost of goods sold (36,000,000 + 245,000)  36,245,000

        Variable selling expenses                     2,000,000

        Fixed selling expenses

           Advertising                              2,000,000

           Other ($1,500,000 – $500,000)               1,000,000

(b)     Sales and cost of goods sold receive the same treatment as if this were an annual report. Under IFRS the inventory variance cannot be deferred even though the company believes it will reverse before the third quarter.  Consequently, the inventory must be reduced and cost of goods sold increased by the amount of the price variance of $245,000.  Costs and expenses other than product costs should be charged to expense in interim periods as incurred or allocated among interim periods. Consequently, the variable selling expense and the portion of fixed selling expenses not related to the television advertising should be reported in full. With respect to the advertising costs, if the costs cannot be recognized as an asset and deferred at the year end, then this treatment is not be allowed for the interim period.  Consequently, the full advertising expense must be expensed.

(c) The financial information to be disclosed to its shareholders in its quarterly reports, as a minimum, includes:

1.   a condensed balance sheet showing comparative information for the immediately preceding fiscal year ( December 31, 2010);

2.   a statement of comprehensive income showing the current interim period and year-to-date and comparable information for the preceding year ;

3.   a statement of changes in equity showing cumulative totals to date and comparable information for the previous year;

4.   a statement of cash flows showing cumulative year to date information and comparable information for the preceding year. 

5.     basic and fully diluted earnings per share;

6.   nature and amount of any unusual items;

7.   nature and amount of any changes in estimates;

8.   disclosure that the statements comply with IFRS;

9.   a statement that the company follows the same accounting policies as at the previous fiscal year end

10.         a description of any changes in accounting principles;

11.         any subsequent events to the interim period;

12.         issuances, repurchases or repayments of debt or equity;

13.         dividends paid;

14.         information about the reportable segments;

15.         information about any changes in composition of the entity;

16.         information about any contingencies;

17.         a description of any seasonality or cyclicality of interim period        operations and

18.         other material matters not previously reported.