COLLEGE OF COMMERCE

BACHELOR OF SCIENCE IN ACCOUNTANCY

MODULE 6 PACKET
AE 17 - INTERMEDIATE ACCOUNTING 3
ACCOUNTING CHANGES and INTERIM FINANCIAL REPORTING

Welcome to Module 6
In this module, we will discuss the nature and the categories of accounting change. You are also
expected to understand and differentiate the concept of change in accounting policy and accounting
estimate. During the discussion, you will be required to actively participate by giving examples of
transactions that would give rise to accounting change and how these will be recognized and presented
in the applicable financial statements.

We will also be expanding our understanding on the requirements for the financial statements specifically
the preparation of interim financial statements. This will cover an appraisal of your knowledge and
understanding on the application of the principles of periodicity, consistency, comparability and materiality
specifically in the preparation of interim financial statements. You are required to differentiate the
requirements in the preparation of annual financial statements as those of the interim financial
statements.

When you see this symbol that is shown across this printed discussion, this represents an important
point for discussion or appreciation/appraisal to be rendered by the student and to be validated by the
teacher. At the end of this module, you will be answering multiple choice questions and straight
problems focusing on the application of accounting changes to different events and transactions as well
as the preparation of interim financial statements.

CONSULTATION HOURS:
Virtual time: During your class schedule (either Monday or Tuesday)
Phone or Messenger: Every Friday from 8am to 11am and 1pm to 4pm

LEARNING OUTCOMES:
By the end of this module, the students will be able to:
1. Define interim financial reporting
2. Recognize the basic principles of interim financial statements
3. Enumerate the components of interim financial statements
4. Identify the categories of accounting change.
5. Differentiate the change in accounting policy and accounting estimate
6. Recognize and report the accounting changes in the related financial statements.
7. Identify the required disclosures in interim financial statements
8. Prepare and interim financial statements.

ASSESSMENT PLAN:
1. Graded recitation through interactive participation in a question and answer format during discussion
2. Problem solving games (points awarded to the first 5 students who can submit the correct answer
and solution)
3. Individual Submission and discussion of home-learning tasks through research online

2020-2021 Module Packets for AE 15 and ELEC 1 (Intermediate Accounting) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines Page 1 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

4. Summative examinations in multiple choice question format

LEARNING PLAN/SCHEDULE OF ACTIVITIES

STRATEGIES/DESCRIPTION/TOPICS/ TIME TO
ACTIVITIES
COURSE CONTENT COMPLETE
A. Assigned Reading 1. Read the definition and be able to differentiate 2.0 hours
 Read the major categories of accounting changes.
1. Categories of 2. Be able to discuss your understanding of the
accounting change transactions that will be categorized as change
2. Differentiate the in accounting policy and accounting estimate.
change in 3. Illustrate the accounting treatment for the
accounting estimate transactions that qualify as change in
and change in accounting policy and/or accounting estimate.
accounting policy 4. Explain the differences between the full
3. Basic principles in presentation and interim presentation of
interim financial financial statements.
reporting 5. Discuss illustrate the disclosure requirements
4. Guidelines and for interim financial statements.
procedures in
preparing interim
financial statements
B. Lecture discussion 1. Discuss your understanding of the transactions 1.5 hour
1. Read Chapter 8 of IA3 relating to change in accounting policy and
2. Watch Video change in accounting estimate.
3. Interactive participation 2. Illustrate the adjustments required in application 0.5hour
thru Q&A of accounting changes.
4. Graded recitation 3. Analyze the impact on the financial statements 1.0 hour
of the accounting changes i.e. prospective and
retrospective or retroactive application.
4. Discuss the basic principles, guidelines and 1.0 hour
procedures in the preparation of interim
financial statements.
5. Differentiate the disclosure requirements for full 1.0 hour
presentation and interim presentation of
financial statements.
6. Illustrate the presentation of interim financial
1.0 hour
statements.
C. Synthesize the main points 1. Teacher summarizes the main points 1.5 hours
 Graded recitation discussed.
2. Students will be required to recite by sharing 1.5 hours
their understanding/learnings specifically
pointing out the important aspects that have

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 2 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

just been discussed regarding the accounting

changes and interim financial statements.
3. This will validate the achievement of learning
outcomes.
D. Assignment 1. Prepare adjustments required for a change in 1.0 hour
accounting policy and change in accounting
estimate
2. Prepare an interim financial statement. 1.0 hour
3. Answer all questions and solve all problems
from the textbook.
E. Summative Quiz 1. Take multiple question quiz for (to be 1.0 hour
announced)

REFERENCES

1. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Conceptual framework and accounting
standards. 2019 edition. Manila : GIC Enterprises & Co., Inc. FIL 657.0218 V173c 2019
2. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume one.
2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 1
3. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume two.
2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 2
4. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume three.
2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 3
5. Cabrera, M. E. B. & Cabrera, G. A. B. (2019). Financial accounting and reporting
fundamentals. 2019-2020 edition. FIL 657.48 C117f 2019
6. Millan, Zeus Vernon B. Intermediate Financial Accounting III. Baguio City: Bandolin
Enterprise 2016

COURSE CONTENT DISCUSSION

6.1 ACCOUNTING CHANGES

 What is an accounting change?
 An accounting change is a modification in the principle(s) and/or method(s) of an entity because
of the uncertainties in the activities that will have an impact in the reported profits or other
financial aspects of a business.
 An accounting change may require discussion in the notes accompanying the financial
statements so that the users of the statements can ascertain the extent to which an
accounting change triggered a variation in the financial statements.

 What are the categories of accounting change?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 3 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

a. Change in accounting estimate

b. Change in accounting policy

A. CHANGE IN ACCOUNTING ESTIMATE

 What is a change in accounting estimate?
 PAS 8 paragraph 5 defines a change in accounting estimate as an adjustment of the carrying
amount of an asset or a liability or the amount of the periodic consumption of an asset that
results from the assessment of the present status in relation to the expected future benefit and
obligation associated with the asset and liability.
 What does the PAS mean?
o That the change in accounting estimate is a normal recurring correction or
adjustment of an asset or liability which is the natural result of the use of an
estimate.
 Is an estimate allowed in accounting for business transactions?
 The use of reasonable estimate is an essential part of the preparation of financial
statements and does not undermine their reliability.
 Why is estimation important in the preparation of financial statements?
 As a result of the uncertainties in business activities, many items in the financial
statements cannot be measured with precision but can only be estimated which involves
judgment based on the latest available and reliable information.
 When is an estimate applicable in accounting change?
 Change in accounting estimate usually happens when the basis from which the estimate
was referenced to, results in new information, more experience or subsequent
developments.
 What are the circumstances that differentiate a change in accounting estimate or accounting
policy?
 By its very nature, the revision of the estimate does not relate to prior periods and is
not a correction of an error.
 A change in measurement basis is a change in accounting policy and not a change in
accounting estimate. 
 What is the general rule if an accounting change cannot be distinguished as either a change
in accounting estimate or accounting policy?
 The change is to be treated as a change in accounting estimate, with proper
disclosure.
 What are the examples of transactions when a change in accounting estimate is required?
a. Doubtful accounts
b. Inventory obsolescence
c. Useful life, residual value and expected pattern of consumption of benefit of  depreciable
asset
d. Warranty cost
e. Fair value of financial assets and financial liabilities
 When is the change in estimate recognized for accounting and financial reporting purposes?
a. The effect of a change in accounting estimate shall be recognized currently and
prospectively by indicating it in the income or loss of:
1. The period of change if the change affects that period only.
2. The period of change and further periods (subsequently) if the change affects both.

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 4 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

b. To the extent that a change in accounting estimate gives rise to changes in assets and
liabilities, or relates to item of equity, it shall be recognized by adjusting the carrying
amount of the related asset, liability or equity in the period of change.
c. A change in an accounting estimate shall not be accounted for by restating amounts
reported in financial statements of prior periods.
 Which applicable period(s) should the change in accounting estimate be reported?
 Changes in accounting estimates are to be handled currently and prospectively, if
necessary.
 What is meant by a prospective recognition?
 Prospective recognition of the effect of a change in accounting estimate means that the
change is applied to transactions, other events and conditions from the date of change
in estimate.

Illustration

A depreciable asset costing P500,000 is estimated to have a life of 5 years. At the beginning
of the third year, the original life is changed to 8 years.  Thus, the asset has a remaining life of
6 years.

 The procedure is not to record past depreciation. Instead, the carrying amount

of P300,000 (P500,000 minus P200,000 depreciation for 2 years) is now allocated over 6
(8 new life years minus 2 expired years) years or a subsequent annual depreciation of 
P50,000.

 The entry to record the annual depreciation starting on the third year is:

 Depreciation 50,000
Accumulated depreciation 50,000

 How is the change in depreciation method treated and recorded?

 A change in depreciation method is accounted for as a change in accounting estimate.

Illustration
An entity decided to change from the sum of years’ digit method to the straight line method of
depreciation on January 1, 2019.

The asset originally has a cost of P1,000,000, acquired on January 1, 2017 and is estimated
to have a four-year life.

 Cost -  January 1,  2017 1,000,000

 Accumulated depreciation:
2017 (4 / 10 x  1,000,000) 400,000
2018 (3 / 10 x  1,000,000) 300,000 700,000
 Carrying amount -  January 1, 2019 300,000

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 5 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

 The procedure is simply to allocate the carrying amount of P300,000 over the remaining
life of two (2) years using the new depreciation method which is the straight line.
accordingly, the depreciation for 2019 is recorded as follows:

Depreciation (300,000 / 2 remaining years) 150,000

Accumulated depreciation 150,000

B. CHANGE IN ACCOUNTING POLICY

 What are accounting policies?
 A change in accounting policy arises when an entity adopts a generally accepted accounting
principle which is different from the one previously used by the entity.

 What is the nature of a change in accounting policy?

 A change in accounting policy arises when an entity adopts a generally accepted accounting
principle which is different from the one previously used by the entity.
 Why are accounting policies important?
 Accounting policies are essential for a proper understanding of the information contained
in the financial statements.
 What is the general standard requirement for entities specifically relating to accounting
policies?
 An entity is required to outline all significant accounting policies applied in preparing
financial statements including possible alternative treatments if any.
 What are the basic principles in the conceptual framework that are applicable in the
recognition of change in accounting policies?
 The entity shall select and apply the same accounting policies each period following the
principle of consistency in order to achieve comparability of financial statements.
 What is the benefit of entities in following these basic conceptual framework principles?
 Entities will be able identify trends in the financial position, performance, and cash flows of
the entity and enable users of financial statements to make an informed decision.
 How can consistency be applied if a change in accounting policy is necessary?
 While the accounting policies must be consistently applied for similar transactions and
events, a change in accounting policy shall be made only when:
a. Required by an accounting standard or an interpretation of the standard.
b. The change will result in more relevant and faithfully represented information about
the financial position, performance and cash flows of the entity.
 What are the examples of change in accounting policy?
a. Change in the method of inventory pricing from the FIFO to weighted average method.
b. Change in the method of accounting for long-term construction contract from cost recovery
method to percentage of completion method.
c. The initial adoption of policy to carry assets at revalued amount is a change in accounting
policy to be dealt with as a revaluation In accordance with PAS 16.
d. Change from cost method to fair value model in measuring investment property.
e. Change to a new policy resulting from the requirement of a new PFRS.

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 6 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

 What are NOT considered as changes in accounting policy?

a. The application of an accounting policy for events or transactions that differ in substance
from previously occurring events or transactions.
b. The application of a new accounting policy for events or transactions which did not occur
previously or that were immaterial.
 How should a change in accounting policy be reported?
a. A change in accounting policy required by a standard or an interpretation shall be applied
in accordance with the transitional provisions therein.
b. if the standard for interpretation contains no transitional provisions  or  if an accounting
policy is changed voluntarily, the change shall be applied retrospectively or
retroactively.
 What is retrospective application?
 Retrospective application means applying a new accounting policy to transactions, other
events and conditions as if that policy had always been applied (even prior to the
current reporting period).
 How is retrospective application be undertaken?
 PAS 8 Paragraph 22 provides that an entity shall adjust the opening balance of each
affected component of equity for the earliest prior period presented and the
comparative amounts disclosed for each prior period presented as if the new policy
had always been applied.
 What specific component of the equity should be adjusted?
 Retrospective application means that any resulting adjustment from the change in
accounting policy shall be reported as an adjustment to the opening balance of
RETAINED EARNINGS.
o The amount of the adjustment is determined as of the beginning of the year of
change.
 Is the adjustment limited only to retained earnings?
 No specifically when another standard requires that the adjustment must be made on
another component of equity not necessarily retained earnings.

 How should the opening balances be presented?

 If comparative information is presented, the financial statements of the prior period
presented shall be restated to conform with the new accounting policy.
o The impact of the new policy on the retained earnings prior to the earliest period
presented shall be adjusted against the opening balance of retained earnings.

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 7 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

Illustration
An entity has used the FIFO method of inventory valuation since it began operations in
2018. The entity decided to change to the weighted average method for determining
inventory cost at the beginning of 2019.

FIFO Weighted Average

December 31, 2018 1,000,000 750,000
December 31, 2019 1,500,000 1,200,000

FIFO inventory -   January 1, 2019 1,000,000

Weighted average inventory - January 1, 2019 750,000
Decrease in beginning inventory 250,000

Adjustment of the decrease in beginning inventory

Retained earnings 250,000
Inventory - January 1 250,000

 The computation of the cost of goods sold for 2019 would then show beginning
inventory at P750,000 and ending inventory  at P1,200,000 to conform with the
weighted-average method.
 The statement of changes in equity for the year ended December 31, 2019
would show the effect of the change of P250,000 net of tax as a deduction from
the beginning balance of retained earnings.

 What is the limitation of retrospective application?

 Retrospective application of a change in accounting policy is not required if it is
impracticable to determine the cumulative effect of the change.
 What does impracticable mean?
o Impracticable application of the requirement of a standard is when the entity
cannot apply it after making every effort to do so.
 What are the instances when applying a change in accounting policy for a particular period
becomes impracticable?
a. The effects of the retrospective application are not determinable.
b. The retrospective application requires assumptions about what management‘s
intentions would have been at that time.
c. The retrospective application requires significant estimate, and it is impossible to
distinguish objectively information about the estimate that:
1. Provides evidence of circumstances that existed at that time, and
2. Would have been available at that time

 What is prospective application?

 Prospective application means that the new accounting policy is applied to events and
transactions occurring after the date at which the policy is changed.
 What is the general guideline for the prospective application?
 When it is impracticable for an entity to apply a new accounting policy retrospectively
because it cannot determine the cumulative effect of applying the policy to all prior

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 8 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

periods, the entity shall apply the new policy prospectively from the earliest period
practicable.
o If the adjustment on the opening balance of retained earnings cannot be
reasonably determined, the change in accounting policy shall be applied
prospectively.
o In this case, no adjustments in the prior periods will be made either to the opening
balance of retained earnings or other component of equity because existing
balances are not recalculated.

 What is the nature of a change in reporting entity?

 A change in reporting entity is a change whereby entities change their nature and report their
operations in such a way that the financial statements are in effect those of a different
reporting entity.
 What is an example for this kind of change?
 Changing the specific subsidiaries comprising the group of entities for which consolidated
financial statements are presented.
 What is the treatment for a change in reporting entity?
 A change in reporting entity is actually a change in accounting policy and therefore shall be
treated retrospectively or retroactively to disclose what the statements would have
looked like if the current entity had been in existence in the prior years.
 This means that the financial statements of all prior periods presented shall be
restated to show financial information for the new reporting entity.
 What happens if there are no accounting standards that apply to a specific transaction or
event wherein an entity needs to design, select and adopt an accounting policy for?
 PAS 8 Paragraph 10 provides that in the absence of an accounting standard that
specifically applies to a transaction or event, management shall use judgment in selecting
and applying an accounting policy that results in information that is relevant to the
economic decision-making needs of users and faithfully represented.

 Are there guidelines in selecting an accounting policy where there is an absence of an

accounting standard that can be referenced to?
 Paragraphs 11 and 12 specify the following hierarchy of guidance in which management
may use when selecting accounting policies in such circumstances:
a. Requirements of current standards dealing with similar matters.
b. Definition, recognition criteria and measurement concepts for assets, liability, income
and expenses in the conceptual framework for financial reporting.
c. Most recent pronouncements of other standard-setting bodies that use a similar
conceptual framework, other accounting literature and accepted industry practices.

 What is the nature of prior period errors?

 Prior period errors are omissions and misstatements in the financial statements for one or
more periods arising from a failure to use or misuse of reliable information that:
a. Was available when financial statements for those periods were authorized for issue.
b. Could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 9 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

 When do errors happen?

 Errors may occur as a result of:
a. mathematical mistakes,
b. mistakes in applying accounting policies,
c. misinterpretations of facts,
d. fraud or oversight.
 What is the accounting treatment for prior period errors?
 Prior period errors shall be corrected retrospectively by adjusting the opening
balances of retained earnings and affected assets and liabilities.
 How will prior period errors be accounted for and presented in the financial statements?
 If comparative statements are prepared, the financial statements of the prior period shall
be restated so as to reflect the retroactive application of the prior period errors as a
retrospective restatement.
 What does retrospective restatement mean?
 It means correcting the recognition, measurement and disclosure of amounts of elements
of financial statements as if a prior period error had never occurred.
 How is retrospective restatement done?
a. If the error occurred before the earliest prior period presented, the opening balances of
assets, liabilities and equity for the earliest prior period presented shall be restated.
b. When it is impracticable to determine the cumulative effect at the beginning of the current
period of an error on all prior periods, the entity shall restate the comparative information
to correct the error respectively from the earliest date practicable.
 What elements of the financial statements should be adjusted as a result of prior period
errors?
 The net income, its components, retained earnings and other affected balances for the
prior period presented shall be adjusted accordingly.
 What are the requirements for disclosure of prior period errors?
a. The nature of the prior period error.
b. The amount of correction for each prior period presented:
1. For each financial statement line item affected.
2. For basic and diluted earnings per share.
c. The amount of correction at the beginning of the earliest prior period presented.
d. If retrospective restatement is impracticable for a particular prior, the circumstances that
led to the existence of that condition and a description of how and from when the error has
been corrected.

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 10 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

Illustration 
During 2020, an entity discovered that certain goods that had been sold during 2019 were
incorrectly included in December 31, 2019 inventory in the amount of P300,000.

The accounting records for 2020 before adjustment revealed sales of P5,000,000 and cost of
goods sold of P3,000,000.

The adjustment on December 31, 2020 to correct the prior period is:

Retained earnings 300,000

Inventory, January 1 (for cost of goods sold) 300,000

 Accordingly, the partial income statement for 2020 would appear as:

Prior Period Error Should Be

 Sales 5,000,000 5,000,000
 Cost of goods sold (3,000,000 -  300,000) 3,000,000 2,700,000
 Gross income 2,000,000 2,300,000

6.2 INTERIM FINANCIAL REPORTING

 What is interim financial reporting?

 Interim financial reporting means the preparation and presentation of financial statements for a
period of less than one year.
 What should be the points to remember by the entities which are preparing interim financial
reports?
a. PAS 34 prescribes the minimum content required of an interim financial report and the
principles for recognition and measurement in complete or condensed financial statements
for an interim period.
b. PAS 34 Paragraph 19 provides that an entity shall disclose that the interim financial report
is in compliance with all of the requirements of each applicable PFRS, otherwise, include
in the explanatory notes any requirement that has not been complied with.
 Is there any accounting standard that specifies the requirement for the preparation of interim
financial reporting?
 PAS 34 does not mandate which entities are required to publish interim financial reports,
how frequently or how soon after the end of an interim period.
 Are entities under the Philippine jurisdiction required to prepare and file or submit interim
financial reports?
 The Securities and Exchange Commission and Philippine Stock Exchange require entities
covered by the reportorial requirements of revised securities act to file quarterly interim
financial reports within 45 days after the end of each of the first three quarters.
 The SEC also requires entities covered by the rules on commercial papers and financing
act to file quarterly financial reports within 45 days after each quarter end.
 What is the frequency in the preparation of interim financial reports?
 Preparation and presentation may be monthly, quarterly or semi-annually.
 Quarterly interim reports are the most common.

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 11 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

 When are publicly traded entities under the Philippine jurisdiction required to submit interim
financial reports?
 Publicly traded entities are encouraged to provide interim financial reports at least
semi-annually and such reports are to be made available not later than 60 days after the
end of the interim period.
 What is the general requirement of the standard for entities required to provide interim
financial reports?
 Entities that provide interim financial reports in conformity with PFRS shall conform to the
recognition, measurement and disclosure requirements set out in the standard.
 What are the two views in accounting in regard to the preparation of interim financial
reporting?
a. The integral view is that each interim period is an integral part of the annual accounting
period.
 Under the integral view, annual operating expenses are estimated and then allocated
to the interim periods based on forecasted revenue or sales volume.
 What are the accounting implications of the integral view?
1. Costs incurred which clearly benefit the entire year are allocated to the interim
periods benefited.
o Estimation and allocation are necessary to avoid creating misleading
fluctuations in interim period income.
2. Interim income would be more indicative of the annual income and thus useful in
predicting future operations and making informed decisions.

b. The independent view is that each interim period is considered a discrete or separate
accounting period with status equal to a fiscal year.
 What are the accounting implications of the independent view?
1. No estimations or allocations are made for interim purposes, unless such
estimations or allocations are allowed for annual reporting.
2. The same expense recognition rules shall apply as under annual reporting and no
special interim accruals or deferrals are permitted.
3. Annual operating expenses are recognized in the interim period when incurred,
irrespective of the number of interim periods benefited, unless deferral or accrual
would be allowed in the annual financial statements.
 Is there a preferred view followed in practice?
 PAS 34 on interim financial reporting does not mention about the two views therefore the
standard adopts a mix of the integral and independent views.

 What are the components of an interim financial report at a minimum?

 PAS 34 Paragraph 8 provides that an interim financial report shall include, at a minimum, the
following components:
a. Condensed statement of financial position
b. Condensed statement of comprehensive income
c. Condensed statement of changes in equity
d. Condensed statement of cash flows
e. Selected explanatory notes

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 12 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

 What does “condensed” mean?

 That each of the headings and subtotals presented in the entity’s most recent annual
financial statements is required but there is no requirement to include more details than
what is required unless this is a specifically required.
 Can entities opt to prepare a complete set of financial statements for interim periods?
 The above requirements are just the minimum therefore entities are not prohibited nor are
they discouraged to prepare and release a complete set of financial statements.

 What should be included in the explanatory notes accompanying the interim financial
statements?
 The selected explanatory notes are designed to provide an explanation of significant events
and transactions arising since the last annual financial statements.
 Are entities strictly required to include the same number of notes in the interim financial report
similar with the annual financial statements?
 The standard reiterates that it is unnecessary to provide the same number of notes that
appeared in the most recent annual financial report but rather include only those significant
events that were incurred or that have occurred between the last annual financial
statements and the date when the interim financial reports shall be prepared.

 What are examples of disclosures required in a condensed interim financial report?

a. Writedown of inventories to net realizable value and the  reversal of such a writedown
b. Recognition of a loss from the impairment of property, plant and intangible assets and the
reversal of such an impairment loss
c. The reversal of any provisions for the cost of restructuring
d. Acquisition and disposal of items of property, plant and equipment
e. Commitments for the purchase of property, plant and equipment
f. Litigation settlements
g. Correction of prior period errors in previously reported financial data
h. Any debt default or any breach of a debt covenant that has not been corrected
subsequently
i. Related party transactions
j. Changes in economic circumstances that affect fair value a financial asset and financial
liability
k. Change in the classification of financial asset
l. Contingent liabilities and contingent assets

 How should the interim financial reports be presented?

 The interim financial reports shall be presented in a comparative format as follows:
a. Statement of financial position
1. Statement of financial position at the end of current interim period
2. Comparative statement of financial position at the end of the preceding year
b. Income statement
1. Income statement for the current interim period
2. Income statement cumulatively for the current financial year to date
3. Comparative income statement for the comparable interim period of the preceding
year

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 13 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

4. Comparative income statement cumulatively for the comparable financial year to date
of the preceding year
c. Statement of comprehensive income
1. statement of comprehensive income for the current interim period
2. statement  of comprehensive income  cumulatively for the current financial year to date
3. Comparative statement of comprehensive income  for the comparable interim period of
the preceding year
4. Comparative statement of comprehensive income cumulatively for the comparable
financial year to date of the preceding year
d. Statement of changes in equity
1. Statement of changes in equity cumulatively for the current financial year  to date
2. Comparative statement of changes in equity for the comparable financial year to date
of the preceding year
e. Statement of cash flows
1. Statement of cash flows cumulatively for the current financial year to date
2. Comparative statement of cash flows for the comparable financial year to date of the
preceding year

Illustration – Half Yearly

If an entity publishes interim financial reports half yearly, the following comparative financial
statements are presented on June 30, 2020 

Statement of financial position:

  On June 30, 2020 December 31, 2019

Statement of comprehensive income:

6 months ending June 30, 2020 June 30, 2019

Statement of cash flows:

6 months ending June 30, 2020 June 30, 2019

Statement of changes in equity:

6 months ending June 30, 2020 June 30, 2019

Another illustration - Quarterly

If an entity publishes interim financial reports quarterly, the following comparative financial
statement are included in the quarterly interim financial report on June 30, 2020:

Statement of financial position:

  On June 30, 2020 December 31, 2019

Statement of comprehensive income:

3 months ending June 30, 2020 June 30, 2019
6 months ending June 30, 2020 June 30, 2019

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 14 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

Statement of cash flows:

6 months ending June 30, 2020 June 30, 2019

Statement of changes in equity:

6 months ending June 30, 2020 June 30, 2019

 What are the basic principles of interim reporting?

a. PAS 34 Paragraph 28 provides that an entity shall apply the same accounting policies in the
interim financial statements as are applied in the annual financial statements.
 However, the entity's  reporting whether annual, semi-annual or quarterly shall not affect
the measurement of the annual results
 Therefore, measurements for interim reporting purposes shall be made on a year-to-date
basis
b. Revenues from products sold and for services rendered are generally recognized for interim
reports on the same basis as for the annual period.
c. Costs and expenses are recognized as incurred in an interim period.
1. Expenses associated directly with revenue are matched against revenue in those
interim periods in which the related revenue is recognized.
2. Expenses not associated directly with revenue are recognized in interim periods as
incurred or allocated over the interim periods benefited.
d. PAS 34  paragraph 21 provides that if the business is seasonal, in addition to the current
interim period financial statements, the entity is encouraged to disclose financial information:
1. For the latest 12 months
2. Comparative information for the prior comparable 12-month period
e. Paragraph 41 provides that the preparation of interim financial reports generally requires a
greater use of estimation than annual financial reports.

 How should inventories be recognized, measured and presented in the interim financial
reports?
 Paragraph 25 Appendix B of PAS 34 provides that inventories are measured for interim
financial reporting purposes by the same principles as at financial year end.
 What is the inventory measurement as per PAS?
 Inventories shall be measured at the lower of cost or net realizable value even for interim
purposes.
 How is the net realizable value determined?
 The net realizable value of inventories is determined by reference to selling prices and
related costs to complete and disposed at interim dates.
 How should the difference of the lower of cost or net realizable value be accounted for?
 If the net realizable value is lower than cost, a loss on inventory writedown shall be
recognized regardless of whether the writedown is temporary or non-temporary.
 PAS 34 Paragraph 17 requires disclosure of the writedown of inventories to net realizable
value and the reversal of such writedown in a later interim period.
 Can we use estimate to determine the cost of inventory?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 15 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

 Yes, inventories may be estimated using the gross profit method or retail inventory
method.
 Are we required to do the regular inventory and valuation procedures for interim financial
reporting?
 Full inventory and valuation procedures are not required for inventories at interim date.

 How should seasonal, cyclical or occasional revenues be reported at interim financial

reporting periods?
 Seasonal, cyclical or occasional revenue shall not be anticipated or deferred as of an interim
reporting date if anticipation or deferral would not be appropriate at the end of the entity’s
reporting period.
 What are examples of seasonal, cyclical or occasional revenues and their recognition?
 Dividend revenue, royalties and government grants shall be recognized in the interim
period when they occur.
o Dividend revenue is not recognized until declared because even when highly
predictable based on past experience, the dividend is not an obligation of the entity
until it is legally declared.

 What is the treatment for uneven costs?

 Costs that are incurred unevenly during an entity's financial year shall be anticipated or
deferred for interim purposes only if it is also appropriate to anticipate or defer that type of cost
at the end of the financial year.
 What are examples in the recognition of uneven costs?
 For example, a provision for warranty is recognized at interim date because the entity has
no realistic alternative but to make a transfer of economic benefits as a result of an event
that has created a legal or constructive obligation.
 The cost of a planned major periodic maintenance or overhaul that is expected to occur
late in the year is not anticipated for interim purposes unless an event has caused the
entity to have a legal or constructive obligation.
 Expenditure for advertising is not deferred but recognized as expense in the interim period
it is incurred but it is not appropriate to defer such costs at year end.

 How should year-end bonuses be treated for interim financial reporting?

 How is a year-end bonus earned?
 By continued employment during a time period.
 Based on a monthly, quarterly or annual measure of performance
 May be purely discretionary, contractual or based on years of historical precedent

 How is year-end bonus recognized for interim financial reporting purposes?

 A bonus is anticipated for interim purposes if and only if:
a. The bonus is a legal obligation or past practice would make the bonus a constructive
obligation for which the entity has no realistic alternative but to make the payment.
b. A reliable estimate of the obligation can be made.

 What are irregular costs?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 16 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

 Irregular costs are costs and expenses that are not recurring and discretionary in nature
meaning these arise only when a requirement has been planned and/or expected.
 What are examples of irregular costs?
 Charitable contribution and employee training cost
 What is the treatment for irregular costs for interim financial reporting purposes?
 These shall not be anticipated as of an interim date simply because the costs have not yet
been incurred.

 How will depreciation and amortization be treated in interim financial reporting?

 Depreciation and amortization for an interim period shall be based only on assets owned
during that interim period.
 Asset acquisitions or dispositions planned for later in the financial year shall not be taken
into account.

 How will paid vacation and holiday leave be treated for interim financial reporting
purposes?
 Paid vacation and holiday leave shall be accrued for interim purposes because these are
enforceable as legal commitments.

 What is the treatment of gain and loss in interim financial reports?

 Gain or loss from disposal of property, gain or loss from discontinued operations and other
gain or loss shall not be allocated over the interim periods.
 The gain is reported in the interim period when realized and the loss is reported in the
interim period when incurred.

 How will income tax expense be presented in the interim financial reporting period?
 Interim period income tax expense shall reflect the same general principles of income tax
accounting applicable to annual reporting.
 Paragraph 12 of appendix B of PAS 34 states that the interim period income tax expense is
accrued using the annual effective income tax rate applied to the pre-tax income of the interim
period.

Illustration 
An entity has the following income before tax and annual effective tax rate for the first three
quarters of the current year:

First quarter 5,000,000 30%

Second quarter 6,000,000 30%
Third quarter 8,000,000 25%
Total income 19,000,000

The income tax for each quarter is computed as follows:

First quarter (30% x  5,000,000) 1,500,000

Second quarter (30% x  6,000,000) 1,800,000
Total income tax for first two quarters 3,300,000

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 17 of 18
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

Cumulative income tax for three quarters  (25% x  19,000,000)   4,750,000

Income tax for the first two quarters (3,300,000)
Third quarter - income tax expense 1,450,000

 What happens if the financial reporting year differs from the tax year?
 If the financial reporting year and the income tax year differ, paragraph 17 of Appendix
B of PAS 34 states that the income tax expense for interim periods of that financial year is
measured using separate effective tax rates for each of the taxes applied to the portion of
pre-tax income earned in each year of those tax years.
 In short, the effective tax rate of a particular tax year is applied to the pre-tax
income of the interim period in the same tax year.

Illustration
An entity's financial reporting year ends June 30 and it reports quarterly. This means that the
financial reporting is from July 1 of 1 year to June 30 of next year. The tax year ends
December 31.

 The income before tax for the financial year from July 1, 2019 to June 30, 2020 is as follows:

 First quarter July   1, 2019 to September  30, 2019 1,000,000

 Second quarter October 1, 2019 to December   31, 2019 2,000,000
 Third quarter January 1, 2020 to March          31, 2020 2,500,000
 Fourth quarter April      1, 2020 to June          30, 2020 4,000,000

The effective income tax rate is 30% for 2019 and 25% for 2020. The income tax expense for
each quarter of the financial reporting year is computed as follows:

 First quarter (30% x  1,000,000) 300,000

 Second quarter (30% x  2,000,000) 600,000
 Third quarter (25% x  2,500,000) 625,000
 Fourth quarter (25% x  4,000,000) 1,000,000
 Income tax expense 2,525,000

 How is the change in accounting policy applied to interim financial reporting?

 A change in accounting policy other than one for which the transition is specified by a new
standard shall be reflected by restating the financial statements of prior interim periods
of the current year and the comparable interim periods of the prior financial year.
 The objective of this requirement is to ensure that a single accounting policy is applied to a
particular class of transactions throughout the entire financial year.
 To allow differing accounting policies for the same class of transactions within a single
financial year would result in “interim allocation of difficulties obscured operating results,
and complicated analysis and understandability of interim information”.

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 18 of 18