Accountancy Tuition Centre (International Holdings) Ltd 2008 3501
Overview Objective To set out the principles that entities should follow in drafting interim financial reports.
INTRODUCTION Objective Scope Definitions
CONTENT OF AN INTERIM FINANCIAL REPORT
Minimum components Consolidation Condensed statement of financial position Condensed statement of comprehensive income Condensed statement of cash flows Changes in equity Selected explanatory notes
RECOGNITION AND MEAUREMENT
IFRIC 10
General principles Tax charge Use of estimates Application examples Issue Consensus SESSION 35 IAS 34 INTERIM FINANCIAL REPORTING Accountancy Tuition Centre (International Holdings) Ltd 2008 3502 1 Introduction 1.1 Objective Timely and reliable interim financial reporting improves the ability of users to understand an entitys capacity to generate earnings and cash flows and its financial condition and liquidity.
Commentary The interim financial report is intended to provide an update on the latest complete set of annual financial statements. It focuses on new activities, events, and circumstances and does not duplicate information previously reported. IAS 34 prescribes: the minimum content of an interim financial report; and the principles for recognition and measurement in complete or condensed financial statements for an interim period.
Commentary In the interest of timeliness and cost considerations and to avoid repetition of information previously reported, an entity may be required to or may elect to provide less information at interim dates as compared with its annual financial statements. 1.2 Scope 1.2.1 Entities covered IAS 34 applies if an entity is required or elects to publish an interim financial report in accordance with IFRS. IAS 34 does not specify: which entities should be required to publish interim financial reports; the frequency of publication; nor how soon after the end of an interim period the report should be published. Entities may be required to publish interim financial information by: governments; securities regulators; stock exchanges; and accountancy bodies.
Commentary IASB strongly encourages governments, securities regulators, stock exchanges, international bodies and accountancy bodies to require companies whose debt or equity securities are publicly traded to provide interim financial reports that conform to the recognition and measurement criteria in IAS 34. SESSION 35 IAS 34 INTERIM FINANCIAL REPORTING Accountancy Tuition Centre (International Holdings) Ltd 2008 3503 If an entitys interim financial report is described as complying with IFRS, it must comply with all of the requirements of IAS 34. This fact must be disclosed. Illustration 1
Note 1 Basis of Accounting
UBS AGs (UBS) consolidated financial statements (Financial Statements) are prepared in accordance with International Financial Reporting Standards (IFRS) and stated in Swiss francs (CHF). These Financial Statements are presented in accordance with IAS 34 Interim Financial Reporting. In preparing the interim Financial Statements, the same accounting principles and methods of computation are applied as in the Financial Statements on 31 December 2006 and for the year then ended except for the changes set out below. The interim Financial Statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been made. These interim Financial Statements should be read in conjunction with the audited Financial Statements included in the UBS Financial Report 2006. Third Quarter Financial Report 2007
1.2.2 Disclosures encouraged IAS 34 encourages publicly traded entities to provide interim financial reports that conform to the recognition, measurement, and disclosure principles set out in the standard. Specifically, publicly traded entities are encouraged: to provide interim financial reports at least as of the end of the first half of their financial year; and to make their interim financial reports available not later than 60 days after the end of the interim period. 1.3 Definitions Interim period is a financial reporting period shorter than a full financial year. Interim financial report means a financial report containing either a complete set of financial statements (as described in IAS 1) or a set of condensed financial statements (as described in IAS 34) for an interim period. SESSION 35 IAS 34 INTERIM FINANCIAL REPORTING Accountancy Tuition Centre (International Holdings) Ltd 2008 3504 2 Content of an interim financial report 2.1 Minimum components Interim financial reports should include (at a minimum): a condensed statement of financial position ; a condensed statement of comprehensive income presented as either: a condensed single statement; or a condensed separate income statement and a condensed statement of comprehensive income; a condensed statement of cash flows; a condensed statement of changes in equity; selected explanatory notes.
Commentary Although other IFRSs specify disclosures that should be made in financial statements, these disclosures are not required in an interim financial report that includes only condensed financial statements and selected explanatory notes. If a complete set, they must comply with all relevant IFRSs. 2.2 Consolidation An interim financial report is prepared on a consolidated basis if the entitys most recent annual financial statements were consolidated statements.
Commentary The parents separate financial statements are not consistent or comparable with the consolidated statements in the most recent annual financial report. If an entitys annual financial report included the parents separate financial statements in addition to consolidated financial statements, IAS 34 neither requires nor prohibits the inclusion of the parents separate statements in the entitys interim financial report. 2.3 Condensed statement of financial position A statement of financial position should include each of the major components of: assets; liabilities; and equity, that were presented in its most recent annual statement of financial position. SESSION 35 IAS 34 INTERIM FINANCIAL REPORTING Accountancy Tuition Centre (International Holdings) Ltd 2008 3505
Illustration 2
CONDENSED BALANCE SHEET
Reviewed 28 Feb 2007 R million Unaudited 28 Feb 2006 R million Assets Non-current assets 1 370 1 310 Property, plant and equipment 529 427 Goodwill 347 353 Intangible assets 313 351 Investments and loans 111 110 Interest in associate company 23 17 Interest in joint venture 8 8 Deferred taxation 39 44 Current assets 9 180 7 954 Inventories 1 304 1 078 Trade and other receivables (note 4) 6 763 5 954 Financial assets 1 Taxation 35 1 Bank balances and cash 1 077 921 Total assets 10 550 9 264 Equity and liabilities Equity and reserves Share capital and premium 2 072 2 057 Treasury shares (11) (33) Non-distributable and other reserves 216 172 Retained earnings 3 505 2 747 Shareholders for dividend 438 406 Shareholders equity 6 220 5 349 Non-current liabilities 1 687 1 528 Interest bearing long term liabilities 848 742 Non-interest bearing long term liability 63 103 Deferred taxation 776 683 Current liabilities 2 643 2 387 Trade, other payables and provisions (note 6) 2 169 1 969 Interest bearing liabilities 388 256 Taxation 86 162 Total equity and liabilities 10 550 9 264
REVIEWED INTERIM RESULTS FOR THE SIX MONTHS ENDED 28 FEBRUARY 2007
SESSION 35 IAS 34 INTERIM FINANCIAL REPORTING Accountancy Tuition Centre (International Holdings) Ltd 2008 3506 2.4 Condensed statement of comprehensive income Statement of comprehensive income should include: revenue; each of the components of income and expense that were presented in the most recent annual statement of comprehensive income; and basic and diluted earnings per share. 2.5 Condensed statement of cash flows A statement of cash flows should include the three major subtotals of cash flows required by IAS 7 Statement of Cash Flows. 2.6 Changes in equity The statement of changes in equity should include each of the major components of equity that were presented in the most recent annual statement of changes in equity. 2.7 Selected explanatory notes The notes should include an explanation of events and changes 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. The following should be disclosed: a statement that the accounting policies and methods of computation followed are the same as those in the most recent annual financial statements (or a description of the nature and effect of any changes); explanation of the seasonality or cyclical nature of interim operations; the nature and amount of items affecting assets, liabilities, equity, net income, or cash flows that are unusual because of their nature, size, or incidence; dividends paid; segment information (if required by IFRS 8 Operating Segments to be disclosed in the entitys annual financial statements; significant events subsequent to the end of the interim period; the effect of the acquisition or disposal of subsidiaries during the interim period; significant changes in a contingent liability or a contingent asset since the end of the last annual reporting period; and the nature and amount of any significant re measurements of amounts reported in prior interim periods of the current financial year. SESSION 35 IAS 34 INTERIM FINANCIAL REPORTING Accountancy Tuition Centre (International Holdings) Ltd 2008 3507 Entities are encouraged to provide: a discussion of significant changes in business trends (e.g. in demand, market shares, prices, and costs); a description of significant new commitments such as for capital spending; a discussion of prospects for the full current financial year of which the interim period is a part. Illustration 3 Consolidated interim cash flow statement
Six months ended 30 June Note 2005 2004 Cash flows from operating activities Cash generated from operations x x (x) Interest paid (x) (x) Income tax paid (x) (x) Net cash used in operating activities (x) (x)
Cash flows from investing activities Acquisition of subsidiary, net of cash acquired x (x) (x) Purchases of property, plant and equipment (PPE) x (x) (x) Proceeds from sale of PPE x x x Purchases of intangible assets x (x) (x) Purchases of available-for-sale financial assets x (x) Proceeds from sale of available-for-sale financial assets x x Proceeds from sales of investments in other companies x x Purchase of short-term securities x (x) Loans granted to related parties x (x) (x) Loan repayments received from related parties x x x Interest received x x Dividends received x x Net cash generated from investing activities x x
Cash flows from financing activities Proceeds from borrowings x x Repayments of borrowings (x) (x) Dividends paid to Companys shareholders (x) (x) Dividends paid to minority interests (x) (x) Net cash (used in)/generated from financing activities (x) x
Net increase in cash and bank overdrafts x x Cash and bank overdrafts at beginning of period x x Exchange gains/(losses) on cash and bank overdrafts (x) (x) Cash and bank overdrafts at end of period x x x
SESSION 35 IAS 34 INTERIM FINANCIAL REPORTING Accountancy Tuition Centre (International Holdings) Ltd 2008 3508 3 Recognition and measurement 3.1 General principles Entities should apply the same accounting recognition and measurement principles in interim financial report as are applied in the preparation of annual financial statements.
Commentary So, for example, an entity must apply the same impairment testing criteria at an interim date as it would at the end of its financial year. Measurements for interim reporting purposes are made on a year-to-date basis, as the frequency of reporting should not affect the measurement of annual results.
Commentary See IFRIC 10 later in this session. The entity should apply the basic principles from the Framework in the recognition of assets, liabilities, income, and expenses.
Commentary Costs that, by their nature, would not qualify as assets at the end of a financial year would not qualify at interim dates either. A liability at the end of an interim reporting period must represent an existing obligation at that date, just as it must at the end of an annual reporting period. 3.2 Tax charge Income tax expense should be accrued using the tax rate that would be applicable to expected total annual earnings (the estimated average annual effective income tax rate applied to the pre tax income of the interim period). 3.3 Use of estimates The measurement procedures should be designed to ensure that information is reliable and relevant to an understanding of the financial position or performance of an entity. Preparation of interim financial reports generally will require a greater use of estimation methods than annual financial reports.
Commentary The Framework recognises the need for trade-offs. Some degree of reliability may have to be sacrificed to enhance relevance or timeliness. Timeliness is particularly important for interim financial information, which often is published more promptly than annual financial information. To increase timeliness or reduce cost, it may be necessary to accept a lesser degree of reliability. SESSION 35 IAS 34 INTERIM FINANCIAL REPORTING Accountancy Tuition Centre (International Holdings) Ltd 2008 3509 3.4 Application examples 3.4.1 Inventories Full stocktaking and valuation procedures may not be required for inventories at interim dates. Alternative methods might include: estimates based on sales margins; using representative samples. 3.4.2 Provisions Determination of provisions (e.g. for environmental costs) may be complex, costly and time consuming. An entity might engage outside experts to assist in the calculations for the end of the reporting period. Estimates at interim dates may entail a simple updating of the prior annual provision. 3.4.3 Revaluations An entity may rely on professionally qualified valuers at the end of annual reporting periods though not at the end of interim reporting periods. 4 IFRIC 10 Interim Financial Reporting and Impairment
Commentary This Interpretation considers the interaction between the recognition of impairment losses and the requirement to use year-to-date measures in interim financial statements. 4.1 Issue Should impairment losses on goodwill (also investments in equity instruments and financial assets carried at cost) recognised in an interim period be reversed if a smaller loss (or no loss) would have been recognised, had an impairment assessment been made only at the end of a subsequent reporting period?
Commentary The reversal of such losses in annual financial statements is prohibited by IAS 36 (and IAS 39). SESSION 35 IAS 34 INTERIM FINANCIAL REPORTING Accountancy Tuition Centre (International Holdings) Ltd 2008 3510 4.2 Consensus Such impairment losses recognised in a previous interim period must not be reversed.
Commentary IFRICs prohibition gives precedence to the specific requirements of IAS 36 and IAS 39 over the more general principle in IAS 34. This conclusion must not be extended by analogy to other areas of potential conflict between IAS 34 and other standards.
Focus You should now be able to: discuss the International pronouncement on interim financial reporting; recognise the content and format of interim financial statements (IAS 34).