Module 2 evaluating the performance of operational

Operating Segments segments, the chief operating decision maker

ACCOUNTING STANDARD REFERENCES may be the entity’s chief executive officer or a
PFRS 8 – Operating segment group of executive directors.

Module Outline: IDENTIFYING OPERATING SEGMENTS

1. Core Principle of Segment Reporting
2. Nature of Operating Segment
 The management approach shall be used in identifying operating
segments
3. Identifying Operating Segments
 Operating segments are identified based on the entity’s
4. Determining Reportable Segments components that are regarded relevant for internal
5. Entity-wide Disclosures. reporting
 A component of entity that sells primarily or exclusively
CORE PRINCIPLE OF SEGMENT REPORTING to other operating segments is included in the definition
of an operating segment if the entity is operated in this
 A company must disclose information for the users of manner.
financial statements must be able to analyze the nature and
financial effects or implications of the business operations Note: The main idea is that reporting segment information is seen
that the company engages in, as well as the economic through the eyes of management and users would like to see the business
environment in which it operates through the eyes of the chief operating decision maker.
o In other words, segment reporting is the
disclosure of financial information regarding a DETERMINING REPORTABLE SEGMENTS
company’s products and services, as well as the
geographical locations in which it operates.  An entity shall report information about an operating
segment that meets any of the following quantitative
Note: Such disclosure allows investors and users to better assess and analyze thresholds:
the economic activities of the company, resulting to a better knowledge of the o The segment revenue, including both
company’s overall performance sales to external customers, and
intersegment sales or transfers, is 10% or
Scope of PFRS 8 more of the combined revenues, internal
and external of all operating segments.
 PFRS 8 applies to an entity’s separate or individual o The absolute amount of profit or loss of
financial statements as well as a group’s consolidated the segment is 10% or more of the greater
financial statements with a parent: in absolute amount of
o Whose debt or equity securities are traded in a public  Combined profit of all operating
market segments that reported a profit.
o That has filed or is in the process of filing  Combined loss of all operating
consolidated financial statements with SEC to segments that reported a loss.
issue any type of instruments in a public market  The assets of the segment are 10% or more of the combined
assets of all operating segments.
Note: if a financial report contains both the parent’s consolidated financial
statements and the parent’s separate financial statements, segment information Note: If management believes that information about the segment would be
is required only in the consolidated financial statements. relevant to financial statement users, operating segments that do not meet any
of the quantitative thresholds may be considered reportable and separately
NATURE OF OPERATING SEGMENT disclosed on a voluntary basis.

 An operating segment is a component of an entity:

ILLUSTRATION 2.1
o That engages in business activities from
which it may generate revenue and incur Revenue, profit or loss and assets for each operating segment of Funny Boy
expenses, including revenues and expenses Company are as follows:
relating to transactions with other component of
the same entity.
o Whose operating results are reviewed on a Revenue Profit / (Loss) Assets
regular basis by the entity’s chief operating Segment G1 17,000,000.00 1,600,000.00 26,000,000.00
decision maker to make resource allocation Segment G2 14,000,000.00 600,000.00 12,000,000.00
decision and assess the segment’s performance. Segment G3 7,000,000.00 (900,000.00) 4,000,000.00
o And for which discrete financial information is Segment G4 4,000,000.00 300,000.00 3,000,000.00
available. Segment G5 3,000,000.00 (100,000.00) 5,000,000.00
Note 45,000,000.00 1,500,000.00 50,000,000.00

 An operating segment can be regarded of as a distinct

component of an entity that is engaged in revenue- PROBLEM 1: Determine the reportable segments based on revenue
generating and expense-incurring business activities.
Answer 1
 The term “chief operating decision maker” refers to a function
rather than a specific title for a manager.  G1, G2, and G3 are reportable segments based on
o This function is responsible for “allocating revenues because each of these segments has at least
resources to the segments and evaluating their 4,500,000 in revenue, which is 10% of the total revenue of
performance” P45,000,000
o Depending on who inside the firm is o Because the revenue of D and E is less than
responsible for allocating resources and 10% of the total revenue, they are not
reportable segments
PROBLEM 2: Determine the reportable segments based on assets five aggregation criteria cited above and have
similar economic features.
Answer 2:

 G1, G2 and G5 are reportable segments based on Limit to the Number of Segments
segment assets since their assets amount at least
P5,000,000, or 10% of the overall segment assets of  Practical limit is 10
P50,000,000
o G3 and G4 are not reportable segments because Segment no longer reportable
their assets are less than 10% of the total
segment assets.  If the management believes that an operating segment that
was identified as a reportable segment in the previous
PROBLEM 3: Determine the reportable segments based on profit or loss period is still important information regarding the segment
must be reported separately in the current period, even if it
Answer 3: no longer fulfills any of the 10% quantitative reportability
standard.
 The application of 10% criterion of profit or loss is
somewhat complicated because some segments have profit Segment becoming reportable
and others have losses.
o The profit must be combined, and the losses  If a reportable operating segment is identified in the
must be combined to determine which is current period based on the 10% quantitative thresholds,
greater between the two. segment data from previous periods presented for
comparative purposes must be restated to reflect the newly
PROFIT LOSS reportable segment, event if the segment did not meet any
Segment G1 1,600,000.00 of the quantitative thresholds in the prior period.
Segment G2 600,000.00 o Prior period segment information, on the other
Segment G3 900,000.00 hand, shall not be restated if the necessary
information is not accessible and the cost of
Segment G4 300,000.00 developing it would be excessive.
Segment G5 100,000.00
2,500,000.00 1,000,000.00 ENTITY -WIDE DISCLOSURES

 An entity shall disclose information about the following

 Because the total profit exceeds the total loss, P2,500,000 o Information about products and services
is used as the starting point in determining the reportable o Information about geographical areas
segment o Information about major customers.
 A reportable segment is one that has a profit or loss of
P250,000 or more (10 percent of 2,500,000) As a result,
the profit or loss criterion identifies G1, G2, G3, and G4 as Revenue from product and services
reportable segments
o All reportable segments shall be disclosed  An entity is required to disclose the revenue from external
separately while those which do not meet the customers for each product and service
criterion may be combined for reporting
purposes, but in this case, G5 is the only one
that does not meet the qualification Revenue from geographical areas

Overall Size Test -75% threshold  The following geographical information shall be disclosed by an
entity.
 If the entity external revenue of reportable segments is less o Revenue from external customers in the entity’s
than 75% of the entity’s total external revenue, additional country of domicile and in all foreign
operating segments must be identified as reportable operations in total
segments, even if they do not meet the 10% quantitative Separate disclosure of material revenue from external customers in an
threshold, until reportable segments account for at least 75% individual foreign country
of the entity’s total external revenue.
Disclosure about major customers.
Aggregation of Segments
 A major customer is an external customer who contributes 10%
 Two or more operating segments can be combined into or more of an entity’s external revenues.
a single operating segment if the segments have similar  The entity is required to disclose the following:
economic features, and the segment share a majority of the o The fact of reliance on major customers
following aggregation criteria.
o The total amount of revenue from all major customers.
o Nature of product or services
o The segment(s) reporting the revenue above.
o Nature of production process
 The entity is not required to reveal or disclose the identity
o Type of class of customers
of its major customers, or the amount of revenue reported
o Marketing or distribution method by each segment from that customer.
o The nature of regulatory environment (i.e., banking,
insurance or public utility)
Module 3
 Two or more operating segments may be combined or
aggregated into one reportable segment to achieve the 75% Accounting Changes and Correction of Errors
threshold.
o However, the operating segments that will ACCOUNTING STANDARD REFERENCES
be aggregated must share a majority of the
 IAS 8- Accounting Policies, Changes in Accounting Estimates and Errors  The period of change if the change
affects that period only
Module Outline
 The period of change and future periods
if the change affects both.
1. Categories of Accounting Changes
2. Change in Accounting Estimate  A change in accounting estimate shall not be
3. Change in Accounting Policy accounted for by restating amounts reported in prior
4. Absence of Accounting Standard period financial statements.
5. Introduction to Errors
6. Definition of Prior Period Errors CHANGE IN ACCOUNTING POLICY
7. Treatment of Prior Period Errors
8. Types of Errors  This occurs when an entity adopts a generally
accepted accounting principles that is not the same as
CATEGORIES OF ACCOUNTING CHANGES the one it previously used.

1. Changes in Accounting Estimate NOTE

2. Changes in Accounting Policy o Accounting policies are the concepts, foundations,
conventions, rules and practices that a company uses to
CATEGORIES IN ACCOUNTING ESTIMATE
prepare financial statements
 A change in accounting estimate is an adjustment to
o The company shall select and apply the same accounting
an assets or liability’s carrying amount, or the
policies each period in order to achieve comparability of
amount of the asset’s periodic consumption, that
financials statements.
derives from the assessment of the assets or
liability’s current state and expected future benefit
and obligation
 Only when the following conditions are met should a change
Note: in accounting policy be implemented or made
o An accounting standard or an interpretation of the
o If the circumstances on which the estimate was based change, or if standard requires it
new information or subsequent development becomes available, o The adjustment will result in more
the estimate may need to be revised.
accurate and timely information about
o A change in accounting estimate is not a correction of an error. the entity’s financial position, financial
performance and cash flows.
Examples of Change in Accounting Policy
Examples of Accounting Estimate  Change in inventory costing method
o Doubtful Accounts
 Initial adoption of policy to carry assets at
revalued amount
o Depreciation methods
 Change form cost model to fair value model
o Warranty Costs in measuring investment property
 Change in measurement basis.
Reporting a Change in Accounting Estimate
o The impact of a change in accounting  Change to a new accounting policy resulting
from the requirement of a new accounting
estimate shall be recognized currently and standard
prospectively by including it in profit or
loss of: Application of a Change in Accounting Policy

Application of a Change

in Accounting

Change Required by
Voluntary
the Standard
Change

No transitional With Transitional

provisions
The change shall be The change shall be
applied retrospectively applied retrospectively The change shall be
applied in accordance
with the transitional
provision
 Retrospective Application in an entity’s financial statements for one or more
periods caused by a failure to use or misuse of
 Retrospective application means applying a new reliable data that:
accounting policy to events and transactions ad if o Was made available when financial statements for
that policy had always been applied these periods were authorized for issue.
 Any adjustment resulting from change in accounting o Could have been reasonably expected to
policy shall be reported as an adjustment to the have been received and considered in the
opening balance of retained earnings. preparation and presentation of those
o The amount of adjustment of retained financial statements.
earnings is determined as of the
beginning of the year of change Note : Mathematical errors, errors in implementing accounting standards, oversight
o If comparative information is presented, of misinterpretations of facts, and fraud are all examples of prior period errors.
the financial statements of the prior
period presented shall be restated to TREATMENT OF PRIOR PERIOD ERRORS
conform with the new accounting policy
 Retrospective application is not necessary if it is
 Material prior period errors shall be corrected
retrospectively in the first set of financial statements
impracticable to determine the cumulative effect of
authorized for issue when they are discovered.
the change
 If comparative statements are presented, a prior
period error shall be corrected through
NOTE retrospective statement, which means the prior year
statements must be restated to correct the error.
o When it is impracticable to apply a new accounting policy  The adjustment of the beginning balance of retained
retrospectively, the entity shall apply the new policy prospectively earnings of the earliest period shown is the correction
from the earliest period practicable
of a prior period error.
o Sometimes if is difficult to distinguish a change in accounting
estimate and a change in accounting policy, in such case, the
TYPES OF ERRORS
change is treated as a change in accounting estimate, with
appropriate disclosures.
Statement of Financial Position Errors

ABSENCE OF ACCOUNTING STANDARD  Only the statement of financial position or real

accounts are affected by statement of financial
 In the absence of an accounting standard that position errors which are defined as the improper
specifically applies to a transaction or event, classification of an asset, liability, or capital account.
management shall use judgement in selecting and o In this scenario, all that is required is an entry to
applying an accounting policy that results in relevant
reclassify the account balances.
and reliable information
o For example, if erroneously, the credited
 Hierarchy of guidance: account was accounts payable instead of
o Requirements of current standards dealing with notes payable, the reclassifying entry
similar matters. would include debit of accounts payable
o Definitions, recognition criteria and and credit notes payable.
measurement concepts for elements of
financial statements laid out in the
Conceptual Framework and Financial Income Statement Errors
Reporting
o Most recent pronouncements of other  Income statement errors only affect the income
standard-setting bodies that use a statement or nominal account, i.e., incorrect revenue
similar Conceptual Framework, other and expense account classification
accounting literature and accepted
industry practices.
o As a result, a reclassifying entry is only required if
INTRODUCTION TO ERRORS the error is discovered the same year it was made.
o Otherwise, if the nominal accounts for the
 Errors in the financial statements can occur in the current year are accurately presented, no
areas of recognition, measurement, presentation, reclassifying entry is required if the error
and disclosure is detected in a subsequent year.
 Prior to the issuance of financial statements, any  During 2021, for example,
potential current period errors detected in that period the entity incorrectly debited
are corrected. purchases instead of office
 Material Errors, on the other hand, are often not supplies.
detected until a subsequent period, and prior period  The reclassifying entry is debit
errors are corrected in a comparative information office supplies ad credit
given in the financial statements for the subsequent purchases if the issue is
period. identified in 2021
 If the issue is detected in 2022,
there is no need to reclassify
DEFINITION OF PRIOR PEROID ERRORS because the office supply and
purchases accounts were
 Prior period errors are omissions and misstatements closed in 2021.
 Problem:
Mixed Errors
if the books for 2022 have not been closed, what is the entry on
 If the result is a misstatement of net income, these December 31, 2022, to correct the error?
errors affect both the statement of financial position Answer:
and the income statement Inventory, January 1, 2022 70,
 For example, if rent payable is overlooked, here are the Retained Earnings
possible effects
o Rent expenses understated (income statement Because the ending inventory of 2021 was
error) understated, resulting in an understatement of net
o Liability understated (statement of financial income, the inventory account is debited and the
position error) retained earnings account is credited.
o Net Income overstated (income statement error)  No entry is required if the books for 2022 have been
o Retained Earnings overstated (statement of closed because the 2021 error is automatically
financial position error) corrected or counterbalanced in 2022.
COUNTER-BALANCING ERRORS ILLUSTRATION 3.3

A purchase worth 80,000 made inf 2021 was not recorded by the
 Counterbalancing errors are errors that are Odette Company. The same was recorded in 2022. On December
automatically counterbalanced or corrected in the 31, 2021, the physical inventory was correctly stated.
next accounting period if they are not detected.
o To put it another way, these errors will be Problem
offset or corrected over two periods or
they will correct themselves. If the books for 2022 have not been closed, what is the entry to correct
 Effects of counterbalancing errors: the error on December 31, 2022
o The statement of financial position at the end of Retained Earnings 80,00
the second year or period is correct.
Purchases
o The income statements for two successive years or
periods are incorrect.
o The statement of financial position at the end of  The net income for 2021 is overstated, as a result, the retained
the first year or period is incorrect. earnings account is debited
 The transactions is for 2021 and is recorded in 2022,
Note: the following are commonly included in the list of counterbalancing accordingly, the purchase account is credited,
errors. resulting in an overstatement of 2022 purchases.
o In 2021, the purchases account is
 Inventory, including purchases and sales. understated, whereas in 2022, the
 Prepaid expense purchases account is overstated. As a
 Deferred income result, the balance each other out
 Accrued income  Because the 2021 error is corrected or counter
 Accrued expense. balanced in 2022, no entry is required if the books for
2022 have been closed.

ILLUSTRATION 3.1 ILLUSTRATION 3.4

The physical count was overstated by P70,000 on December 31, 2021 On December 31, 2021, the recorded 100,000 in purchases in
transit for which it had no ownership. The same items were
Problem: included in the inventory on December 31, 2021.

If the books for 2022 have not been closed, what is the entry on Problem
December 31, 2022, to correct the error?
If the books for 2022 have not been closed, what are the entries to correct
the error on December 31, 2022
Answer: Answer:
Retained Earnings Purchases 100,0
Inventory, January 1, 2022
Retained Earnings

 Because the net income for 2021 was overstated, the retained
earnings account has been debited. Retained Earning 100
Inventory, Jan 1, 2022
 Since the ending inventory on December 31, 2021 was
overstated, the inventory account is credited
o As a result, if the beginning inventory of  The purchases account is debited in the first entry
2022 is overstated, the cost of goods sols since the purchase is for 2022 and was entered
will be overstated, resulting in a net incorrectly in 2021.
income understatement.  Because the net income for 2021 was understated due
 No entry is required if the books for 2022 have to overstated purchases, the retained earnings
been closed because the error in 2021 is account was credited.
automatically corrected or counterbalance in 2022.  The ending inventory of 2021 was overstated, this
resulted in an overstatement of net income, the
ILLUSTRATION 3.2 retained earnings account is debited and the
inventory account is credited in the second entry.
The physical count was understated by 70,000 on December 31, 2021
  In fact, the error has no effect on net income or retained  No entry is required if the books of 2022 have
earnings. been closed because the 2021 error is corrected
 No entry is required if the books for 2022 have been or counterbalanced in 2022
closed because the 2021 error is automatically  The sales account for 2021, was overstated, while the
corrected or counterbalanced in 2022. sales account for 2022 was understated, and thus they
 The 2021 purchases is overstated, while the 2022 counterbalance each other
purchases account is understated. As a result, they  On December 31, 2021, the understated ending
balance each other out inventory becomes the beginning inventory in 2022,
 On December 31, 2021, the inventory was overstated, as a result, the effect on net income is equal.
resulting in an overstatement of net income
 Inventory of January 1, 2022 was similarly ILLUSTRATION 3.7
overstated, resulting in an overstatement of cost of
goods sold and an understatement of net income. On January 1, 2021, the Gustavo Company paid P120,000 for a
two-year insurance policy. An expense was debited upon payment
ILLUSTRATION 3. 5 and no adjustment was made on December 31, 2021 for the
prepaid insurance.
In 2021, the Aerox Company failed to record sales amounting to
P90,000, the same was reported in 2022. On December 31, 202x, the Problem
physical inventory was correctly reported.
If the books for 2022 have not been closed, what is the entry to correct
Problem the error on December 31, 2022

If the books of 2022 have not been closed, what is the entry to correct the Answer
error on December 31, 2022?
Prepaid Insurance 60,00
Answer
Retained Earnings
Sales
Retained Earnings  Prepaid Insurance, which is classified as an asset was
debited since the entire P120,000 was previously
 The sales account is debited since it relates to 2021 expensed, when it should have only been P60,000.
but was reported in 2022, resulting in an As a result, the balance should be an asset on
overstatement of 2022 revenues. December 31, 2021, before becoming an expense on
 Because the net income for 2021 is understated, the retained December 31, 2022
earnings account is credited.  The net income for 2021 was understated due to

No entry is required if the books for 2022 have been overstatement of expense, therefore, retained
earnings account was credited
closed because the 2021 error is automatically
corrected or counterbalance in 2022. o Due to an overstatement of insurance
expense in 2021, net income was
 The 2021 sales account was understated, whereas the 2022
understated, whereas net income in 2022
sales account was overstated
was overstated due to an understatement
 As a result, they balance each other out of insurance policy.
ILLUSTRATION 3.6
 If the books for 2022 have been closed, no entry is necessary
because the error is counterbalanced.
On December 31, 2021, the NMax Company recorded P100,000
in sales in transit for which the customer had not title. The goods ILLUSTRATION 3.8
cost P80,000 and was not included in the inventory as of
December 31, 2021 On December 31, 2021, Terry Company failed to record accrued rent
expense of P40,000
Problem
Problem:
If the books for 2022 have not been closed, what are the entries to correct
the error on December 31, 2022 If the books for 2022 have not been closed, what is the entry to correct
the error on December 31, 2022?
Answer:
Retained Earnings Answer
Sales
Retained Earnings 40,00
Inventory, Jan 1, 2022 Rent Expense
Retained Earnings
 The net income for 2021 was overstated, the retained earnings
 The retained earnings is debited in the first entry because the account has been debited
2021 net income is overstated  The rent expense is credited because the accrual for
 The sales account is credited because the sale 2021 was paid in 2022 and inappropriately debited to
transaction belongs to 2022 and was inappropriately rent expense, leading to an overstatement in the rent
recorded in 2021. expense for 2022
 The 2021 net income was overstated due to
o Accordingly, the net income for 2021 was
overstated due to an understatement of
understatement of 2021 ending inventory, as a
rent expense, whereas the net income for
result, the inventory account is debited and the
2022 was understated due to an
retained profits accounts is credited on the second overstatement of rent expense.
entry
 
If the book for 2022 has been closes, no entry is o The income statement for the period in
required because the 2021 error is automatically which the errors occur is incorrect, but the
corrected or counterbalanced in 2022. income statement for the following period
ILLUSTRATION 3.9 is unaffected.
o Until the error is corrected, the statement
The Kamilo Company received P150,000 in rent for two years on of financial position for the year of error
January 1, 2021. The same amount was credited to rent income, and subsequent statements of financial
and no adjustments were made of December 31, 2021 position are incorrect

Problem: NOTE : The best example of a non-counterbalancing error is the misstatement of

depreciation
If the books for 2022 have not been closed, what is the entry to correct
the error on December 31, 2022?
ILLUSTRATION 3.11
Answer
On January 1, 2021 Arlu Company paid P1,000,000 equipment
with a 5-year useful life, but this amount was charged to repair
Retained Earnings
and maintenance account.
Rent Income
Problem:
 The retained earnings account was debited because the net If the books for 2022 have not been closed, what ate the journal entries to
income for 2021 was overstated correct the error on December 31, 2022?
 Rent income is credited because unearned income on Answer:
December 2021 becomes income in 2022.
Equipment 1,000
 If the books for 2021 have been closed, no entry is
required because the 2021 error was automatically Retained Earnings
corrected or counterbalances in 2022. The rent
income for 2021 was overstated, while the rent Depreciation 200,
income for 2022 was understated. As a result, they Retained Earnings 200,
balance each other out. Accumulated Depreciation

ILLUSTRATION 3.10
 In the first entry, the debited equipment account
On December 31, 2021, Jim Company failed to record accrued interest pertains to an asset that should have been recognized
receivables of P60,000 at the time of its purchase. On the other hand, the
credited retained earnings accounts pertain to the
Problem correction of its balance due to its understatement
because of the debited repairs and maintenance
If the books for 2022 have not been closed, what is the entry to correct account
the error on December 31, 2022? o In the second entry, the depreciation
pertains to the depreciation expense for
Answer 2022 and the debited retained earnings
account refers to the correction of its
Interest Income balance as a result of the failure to record
Rent Expense deprecation expense in 2021. Meanwhile,
the credited accumulated depreciation
shows the total depreciation for the said
 The interest income is debited because the interest equipment
accrual for 2021 was received in 2022 and credited to
interest income, resulting to an overstatement in the
interest income for 2022. If the books for 2022 have been closed, the entries to correct on
December 31, 2022 are
 The 2021 income was understated, therefore, retained
earnings account is credited.
 If the books for 2022 have been closed, no entry is Equipment 1,000
required because the 2021 error was automatically Retained Earnings
corrected or counterbalanced in 2022. The interest
income for 2021 was understated, while the interest Retained Earnings 400,
income for 2022 was overstated. As a result, they Accumulated Depreciation
balance each other out.

Module 4
NONCOUNTER-BALANCING ERRORS
Interim Financial Reporting
 Non-counterbalancing errors are errors that are not
automatically counterbalanced or corrected in the ACCOUNTING STANDARD REFERENCE(S):
next accounting period if they are not detected.
o In other words, if one year’s net income is IAS 34 – Interim Financial Reporting
understated or overstated, the net income
of the following year is unaffected.
Module Outline:
 Effects of non-counterbalancing errors
1. Nature of Interim Financial Reporting
 2. Views of Interim Financial Reporting as for annual reporting apply, and no
special interim accruals or deferrals are
3. Comparative Information
permitted.
4. Basic Principles of Interim Financial Reporting  In other words, unless
deferral or accrual is
NATURE OF INTERIM FINANCIAL REPORTING.
permitted in the annual
financial statements, annual
 The preparation and presentation of financial statements for
operating expenses are
a period of less than one year.
recognized in the interim
 Interim financial reports may be issued monthly, quarterly, period in which they are
or semi-annually incurred, regardless of the
 The most prevalent interim reports are quarterly number of interim periods
interim reports or financial reports that are issued benefited.
every three months. Note:
o However, publicly traded companies o PAS 34, which governs interim financial reporting, does not
are encouraged to provide interim mention which of the two views is required to be used.
financial reports at least twice a year o The standard essentially adopts a hybrid of the integral and
or semi-annually. independent viewpoints.
Note:
o PAS 34 does not specify which entitles are required to COMPONENTS OF AN INTERIM FINANCIAL REPORT
publish interim financial reporting, how often they must
be published, or how soon after the end of the  PAS 34 requires that an interim financial report must
intermediate period they must be published. include at least the following
o The Securities and Exchange Commission (SEC) and the o Condensed statement of financial position
Philippine Stock Exchange (PSE) mandate companies
covered by the Revised Securities Act to file quarterly
o Condensed statement of comprehensive income
interim financial reports within 45 days of the end of o Condensed statement of changes in equity
each of the first three quarters. o Condensed statement of cash flows
o The SEC also requires entities covered by the Rules on o Selected explanatory notes.
Commercial Papers and Financing Act to file quarterly
financial reports within 45 days after the end of each
Note:
quarter.
o Entities that submit interim financial reports in o An entity may present profit or loss items in a separate condensed
accordance with financial reporting standards must income statement
adhere to the standard’s recognition, measurement, and o Nothing in the standard is intended to prevent or discourage a
disclosure criteria. company from publishing a complete set of financial statements
rather than condensed financial statements and selected
DIFFERENT VIEWS OF INTERIM FINANCIAL REPORTING.
explanatory notes.
 Integral View o In other words, PAS 34 allows a company to publish a set of
condensed financial statements or a complete set of financial
o Each interim period is an integra part of the statements in its interim financial report.
annual accounting period.
o Annual operating expenses are Disclosure of compliance with PFRS
forecasted and then allocated to
interim periods based on forecasted
revenue or sales volume in the integral
 If an entity’s interim financial report follows
view. Philippine Financial Reporting Standards, the
fact must be disclosed.
 To put it another way, costs
incurred that obviously  An entity may not describe an interim
benefit the entire year are financial report as compliant with PFRS unless
assigned to be interim it meets all the requirements of each applicable
periods benefited. standard.
o To avoid causing misleading Selected explanatory notes
fluctuations in interim period income,
estimation and allocation are required.  The selected explanatory notes are intended to
o Using the integral approach would explain significant events and transactions that
result in interim income that is more have occurred since the last annual financial
representative of annual income, statements
making it beneficial for forecasting
future operations and making informed
 PAS 34, presupposes that user of financial
decisions. statements have access to be most recent annual
report of the entity.
 Independent View
o As a result, the standard emphasizes
that including the same notes in the
o Each interim period is considered a interim financial report as in the most
discrete or separate accounting period recent annual financial report is
with status equal to a fiscal year. unnecessary.
 As a result, unless such
estimations or allocation
are allowed for yearly PRESENTATION OF COMPARATIVE INTERIM FINANCIAL
reporting, no estimates or REPORTS
allocations are made for
interim purposes. Components of Financial Statements Presen
o The same expenses recognition rules
 Statement of Financial Position incurred
o In the interim periods in which the
related revenue is recorded expenses
associated directly with revenue are
match against revenue.
o Expenses that are not directly related
Statement of Comprehensive Income (Including income statement) to the revenue are recognized as
incurred or allocated across the interim
periods benefited in interim periods.
 If the business is seasonal, the entity is
encouraged to provide financial information in
addition to the current interim period of financial
statements
o For the lates 12 months.
o Comparative information for the prior
comparable 12-months period.
 In general, the preparation of interim financial
reports necessitates more estimation than the
Statement of Changes in Equity preparation of annual financial reports.

Inventories.

 Inventories are measured for interim financial

reporting using the same principles as at the end
Statement of Cash Flows of the financial year.
o Simply said, inventory must be valued
at the lower of cost or net realizable
value, even if only for interim
purposes.
 For inventories at interim date, full inventory and valuation
procedures are not required.
ILLUSTRATION 4.1  A loss on inventory write down shall be reported if the net
realizable value is less than cost
Assume an entity publishes interim financial reports semi-
annually. The following comparative interim reports are
 The disclosure of the write down of inventories to
net realizable value and the reversal of such write
presented on June 30, 2022:
down in a later interim period is required.
Report
Note: Selling prices and accompanying cost to complete and
dispose at interim dates are used to establish the net realizable
Statement of Financial Position as of
value of inventory.
Statement of Comprehensive Income for the 6 months ending
Statement of Cash Flows for the 6 months ending
Statements of changes in equity for the 6 months ending
Seasonal, Cyclical or Occasional Revenue

ILLUSTRATION 4.2
 Seasonal, cyclical, or occasional revenue should
not be anticipated or deferred as of an interim date
Assume an entity publishes interim financial reports if such expectation or deferral would be
quarterly. The following comparative interim reports are inappropriate at the end of entity’s reporting
presented on June 30, 2022: period.
Uneven Costs
Report
 Costs incurred unevenly throughout an entity’s
Statement of Financial Position as of fiscal year must be anticipated or deferred for
Statement of Comprehensive Income interim purposes only if it is also reasonable to
For the 3 months ending anticipate or defer that type of cost at the end of
For the 6 months ending the fiscal year.
Statement of Cash Flows for the 6 months ending
Statements of changes in equity for the 6 months ending Year-end Bonuses

BASIC PRINCIPLES OF INTERIN FINANCIAL REPORTING

 A bonus is expected for interim purposes if and only if the
following conditions are met
 An entity shall use the same accounting policies o The bonus is a legal obligation, or
in the interim financial statements as it does in its historical practice would imply that the
annual financials statements. bonus is a constructive obligation for
which the company has no reasonable
 Revenues from the sale of goods or services alternative but to pay
rendered are normally recognized in interim
o It is possible to make a reliable estimate of the
reports on the same basis as in annual reports.
obligation.
 In an interim period, cost and expenses are recognized as
 two quarters?
Paid vacation and holiday leave
Problem 2:
 Paid vacation and holiday leave must be accrued for interim How much is
purposes since they are legally binding
the income

Depreciation and amortization tax expense

for the third

 Depreciation and amortization for an interim
period shall be calculated solely on assets owned quarter?
during that interim period.
 Asset acquisitions or dispositions planned for later in the Answer 1:
fiscal year will not be considered.
First Quarter (32% x P6,000,000)
Second Quarter (32% x P7,000,000)
Gain and losses Total Income of the First two Quarters

 Gains and losses from the disposal of property,

discontinued operation and other gains or losses
are not allocated during the interim periods. Answer 2:
 The gain is reported in the interim period when
realized and the loss is reported in the interim Cumulative Income Tax for Three Quarters (28% x 21,000,0
period when incurred. Income tax for First Two Quarters
Third Quarter- income tax expense
Difference in financial reporting year and Tax Year
Income tax
 If the financial reporting year and the income tax
 Income taxes expense for interim periods must year differ, income tax expense for interim
adhere to the same general principles of periods of that financial year is calculated using
income tax accounting that apply to annual separate effective tax rates for each of the tax
reporting years applied to the portion of pretax income
 The interim period income tax expense is accrued earned in each of those tax years.
using the annual effective income tax rate applied o Simply put, the effective tax rate of
to the interim period’s pretax income. given tax year is applied to the pretax
income during that same tax year’s
interim period.
ILLUSTRATION 4.3
Change in Accounting Policy
For the first three quarters of the current year, and entity had
the following income before taxes and yearly effective tax rate:  A change in accounting policy that is not
prescribed by a new standard must be recognized
INCOME BEFORE by restating the financial statements of preceding
First Quarter 6,000,000.00 interim periods of the current financial year and
Second Quarter 7,000,000.00 comparable interim periods of the previous
financial year.
Third Quarter 8,000,000.00
 The objectives of this requirement is to ensure that
TOTAL INCOME 21,000,000.00
a single accounting policy is applied to a specific
type of transaction for the duration of the financial
year.
Problem 1:
o Allowing different accounting policies
How much is for the same class of transactions
within the same financial year would
the total cause “interim allocation difficulties,
obscured operating results, and
income tax complicated analysis and
understandability of interim
for the first information”