The
following statement is an excerpt from a document on interim financial
reporting:
Interim
financial information is essential to provide investors and others with timely
information about the progress of the enterprise. The usefulness of such information
rests on the relationship that it has to the annual results of operations.
Accordingly, the Board has concluded that each interim period should be viewed
primarily as an integral part of an annual period.
In
general, the results for each interim period should be based on the accounting
principles and practices used by an enterprise in the preparation of its latest
annual financial statements unless a change in an accounting practice or policy
has been adopted in the current year. The Board has concluded, however, that
certain accounting principles and practices followed for annual reporting
purposes may require modification at interim reporting dates so that the
reported results for the interim period may better relate to the results of operations
for the annual period.
Instructions
Listed
below are six independent cases on how accounting facts might be reported on an
individual company's interim financial reports. For each case, state whether
the method that is proposed for interim reporting would be acceptable under
IFRS for interim financial data. Support each answer with a brief explanation.
(a)
King Limited takes a physical inventory at year end for annual financial
statement purposes. Inventory and cost of sales reported in the interim
quarterly statements are based on estimated gross profit rates because a
physical inventory would require a stoppage of operations. The company does
have reliable perpetual inventory records.
(b)
Florence Limited is planning to report one fourth of its pension expense each
quarter. In the current period the company had a significant settlement and has
also prorated this cost over the remaining months to the end of the fiscal
year.
(c)
Lopez Corp. wrote inventory down to reflect lower of cost or market in the
first quarter. At year end, the market exceeds the original acquisition cost of
this inventory. Consequently, management plans to write the inventory back up
to its original cost as a year-end adjustment.
(d)
Witt Corp. realized a large gain on the sale of investments at the beginning of
the second quarter. The company wants to report one third of the gain in each
of the remaining quarters.
(e)
Marble Limited has estimated its annual audit fee. It plans to prorate this
expense equally over all four quarters.
(f)
McNeil Inc. was reasonably certain that it would have an employee strike in the
third quarter. As a result, it shipped heavily during the second quarter but
plans to defer the recognition of the sales in excess of the normal sales
volume.
The
deferred sales will be recognized as sales in the third quarter when the strike
is in progress. McNeil management thinks this better represents normal second-
and third-quarter operations.
(g)
At the end of the second quarter Solace Inc. had reported an impairment loss on
its goodwill related to the real estate division. At year end, this goodwill
value has now increased to the amount it was prior to the write-down and the
company plans to reverse this goodwill impairment loss since it is still all in
the current year.
(h)
Regent Corp. has a bonus plan whereby the employees will earn a bonus of 10% of
the company's net income if the price of the company's share reaches a target
price by the fiscal year end, which is December 31, 2011. It is now June 30,
2011, and the share price has been reached. Consequently, the company has
accrued 10% of the reported net earnings for the interim period.
(a) Acceptable.
The use of estimated gross profit rates to determine the cost of goods sold is
acceptable for interim reporting purposes as long as the method and rates
utilized are reasonable. The company should disclose the method employed and
any significant adjustments that result from reconciliations with annual
physical inventory.
(b) Not
acceptable. Even though pension costs are identifiable with a time period
rather than with the sale of a product or service, the pension expense for the
interim period is to be calculated using actuarial estimates of costs used at
the previous fiscal year end. In
addition, any one-time adjustments for significant market fluctuations,
curtailments, settlements and any other events must be included in the interim
period. Consequently, this may not represent one fourth of the expense and
adjustments would be required. (IAS 34(B9))
(c) Acceptable.
Any loss in inventory value should be reported when the decline occurs. Any
recoveries of the losses on the same inventory in later periods should be
recognized as gains (recovery of loss) in the later interim periods of the same
fiscal year. However, the gains should not exceed the previously recorded
losses.
(d) Not
acceptable. Gains on the sale of investments would not be deferred if they
occurred at year-end. Consequently, they should not be deferred to future
interim periods but should be reported in the quarter the gain was realized.
(e) Acceptable.
The annual audit fee is an expense that benefits the company’s entire year.
Companies are encouraged to make quarterly estimates of these items that
usually result in year-end adjustments. Therefore, this expense can be prorated
over the four quarters.
(f) Not acceptable. Revenue from products sold
should be recognized as earned during the interim period on the same basis as
followed for the full year. Because the company normally recognizes a sale when
shipment occurs, it should recognize the revenue in the second quarter and not
defer the revenue recognition. To do otherwise would be an inconsistent
application of company accounting policy and violate general accounting rules
for revenue recognition.
(g) Not acceptable.
Goodwill impairment losses cannot be reversed in the interim period,
which is consistent with year end treatment.
(h) Not acceptable.
A bonus that is anticipated can only be accrued in the interim period if
the bonus is a legal obligation or a constructive obligation, the company is
required to pay it, and a reasonable estimate can be made. In this case, the company will only be
legally required to pay the bonus only if the share price at December 31, 2011
is still above the target price. Since
this is not known at the end of June 30, 2011, the bonus should not be accrued.
