CPA AFR: INTERIM FINANCIAL STATEMENTS-IAS 34
Objective of IAS 34
The objectives of the interim financial statements are;
- To set the minimum content of an interim financial report
- To set the rules for recognition and measurement in condensed and complete financial statements for an interim period
Interim period: a financial reporting period shorter than a full financial year (most typically a quarter or half-year).
Interim financial report: a financial report that contains either a complete or condensed set of financial statements for an interim period.
Scope of Interim Financial Statements
- IAS 34 does not authorize the entities which are required to publish interim financial reports, how frequent and how soon after the end of the interim period.
- However some of the entities which are required to publish interim financial reports are; the government, securities regulators, stock exchanges, and accountancy bodies
- Reliable interim reports improve the ability of the investors, creditors and others to understand an entity’s capacity to generate earnings and cash flows
Matters Left to Local Regulators
IAS 34 specifies the content of an interim financial report that is described as conforming to International Financial Reporting Standards. However, IAS 34 does not mandate:
- which entities should publish interim financial reports,
- how frequently, or
- how soon after the end of an interim period.
Such matters will be decided by national governments, securities regulators, stock exchanges, and accountancy bodies.
However, the Standard encourages publicly-traded entities to provide interim financial reports that conform to the recognition, measurement, and disclosure principles set out in IAS 34, at least as of the end of the first half of their financial year, such reports to be made available not later than 60 days after the end of the interim period. [IAS 34.1]
Minimum Content of an Interim Financial Report
The minimum components specified for an interim financial report are:
- a condensed balance sheet (statement of financial position)
- either (a) a condensed statement of comprehensive income or (b) a condensed statement of comprehensive income and a condensed income statement
- a condensed statement of changes in equity
- a condensed statement of cash flows
- selected explanatory notes
If a complete set of financial statements is published in the interim report, those financial statements should be in full compliance with IFRSs.
If the financial statements are condensed, they should include, at a minimum, each of the headings and sub-totals included in the most recent annual financial statements and the explanatory notes required by IAS 34. Additional line-items or notes should be included if their omission would make the interim financial information misleading.
If the annual financial statements were consolidated (group) statements, the interim statements should be group statements as well.
The periods to be covered by the interim financial statements are as follows:
- balance sheet (statement of financial position) as of the end of the current interim period and a comparative balance sheet as of the end of the immediately preceding financial year
- statement of comprehensive income (and income statement, if presented) for the current interim period and cumulatively for the current financial year to date, with comparative statements for the comparable interim periods (current and year-to-date) of the immediately preceding financial year
- statement of changes in equity cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year
- statement of cash flows cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year
If the company’s business is highly seasonal, IAS 34 encourages disclosure of financial information for the latest 12 months, and comparative information for the prior 12-month period, in addition to the interim period financial statements.
The explanatory notes required are designed to provide 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 last annual reporting date. IAS 34 states a presumption that anyone who reads an entity’s interim report will also have access to its most recent annual report. Consequently, IAS 34 avoids repeating annual disclosures in interim condensed reports.
Examples of Note Disclosures in Interim Condensed Reports
- accounting policy changes
- seasonality or cyclicality of operations
- unusual and significant items
- changes in estimates
- issuances, repurchases, and repayments of debt and equity securities
- dividends paid
- a few items of segment information (for those entities required by IFRS 8 to report segment information annually)
- significant events after the end of the interim period
- business combinations
- long-term investments
- restructurings and reversals of restructuring provisions
- discontinued operations
- changes in contingent liabilities and contingent assets
- corrections of prior period errors
- write-down of inventory to net realisable value
- impairment loss on property, plant, and equipment; intangibles; or other assets, and reversal of such impairment loss
- litigation settlements
- any debt default or any breach of a debt covenant that has not been corrected subsequently
- related party transactions
- acquisitions and disposals of property, plant, and equipment
- commitments to purchase property, plant, and equipment.
The same accounting policies should be applied for interim reporting as are applied in the entity’s annual financial statements, except for accounting policy changes made after the date of the most recent annual financial statements that are to be reflected in the next annual financial statements.
A key provision of IAS 34 is that an entity should use the same accounting policy throughout a single financial year. If a decision is made to change a policy mid-year, the change is implemented retrospectively, and previously reported interim data is restated.
Measurements for interim reporting purposes should be made on a year-to-date basis, so that the frequency of the entity’s reporting does not affect the measurement of its annual results.
Several important measurement points:
- Revenues that are received seasonally, cyclically or occasionally within a financial year should not be anticipated or deferred as of the interim date, if anticipation or deferral would not be appropriate at the end of the financial year.
- Costs that are incurred unevenly during a 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.
- Income tax expense should be recognised based on the best estimate of the weighted average annual effective income tax rate expected for the full financial year.
An appendix to IAS 34 provides guidance for applying the basic recognition and measurement principles at interim dates to various types of asset, liability, income, and expense.
In deciding how to recognise, measure, classify, or disclose an item for interim financial reporting purposes, materiality is to be assessed in relation to the interim period financial data, not forecasted annual data.
Disclosure in Annual Financial Statements
If an estimate of an amount reported in an interim period is changed significantly during the financial interim period in the financial year but a separate financial report is not published for that period, the nature and amount of that change must be disclosed in the notes to the annual financial statements.