Chapter-05

Interim Reporting (IAS-34)

1. Definition of Interim Report
Any report that a publicly-traded company distributes to shareholders on a monthly,
quarterly, and semi-annual basis. The report contains information on the company's
financial state, such as operational income and net profit, for the period covered in the
report. Unlike annual reports, interim reports are not usually audited.

APB Opinion No. 28 says it is an integral part of the annual report.

• As an integral part of the annual report
– Basically follow annual reporting procedures
May make some modifications to allow more frequent reporting
• Integral to the annual report
– Quarterly taxes are a portion of the annual taxes, probably use average
effective rate
• Separate reports
– Each quarter bears its own taxes, probably use marginal tax rate

2. Nature Interim Report

Interim financial reports provide more timely, but less complete, information than annual
financial reports.

3. Guidelines for Preparing Interim Statements

At a minimum (per IAS 34 0r APB Opinion No. 28), publicly traded companies should
report:

1 a Sales or gross revenues

b Provision for income taxes
c Extraordinary items net of income taxes
d Cumulative-effect-type changes in
accounting principles
e net income

2 Basic and diluted earnings per share

3 Seasonal revenue, costs, or expenses
4 Significant changes in estimates of income
tax expense
5 Disposal of a segment of a business and extraordinary and unusual items
6 Contingent items
7 Changes in accounting principles and estimates
8 Significant changes in financial position
Product Cost Modifications
• Use gross profit method to estimate inventory and cost of sales
• For LIFO inventories, may assume that liquidation of layers are temporary, with
replacement of layers before year end
• Lower of cost or market for inventories may consider expected year end outcomes
• Standard costing variances may be deferred if expected to be absorbed by year
end

Other Expense Modifications

• Annual expenses may be allocated

• Advertising expenses may be deferred to later interim periods if clearly applies
– Only in the same fiscal year
• Income taxes from continuing operations
– Use an estimated effective annual tax rate
• Income taxes on unusual, infrequent and other items
– Calculate separately and include in the interim period containing that item

Segment Disclosures in Interim Reporting

 Revenue from external customers

 Inter segment revenues
 A measure of segment profit or loss
 Total assets for which there has been a material change since the last annual
report
 A description of any differences in the basis of segmentation or measurement of
segment profit or loss since the last annual report
 A reconciliation between segment and total profits

SEC Interim Financial Disclosures

 Part I – Financial Information

 Item 1 – Consolidated Balance Sheet
 Consolidated Statement of Income
 Consolidated Statement of Cash Flows
 Notes to Consolidated Financial Statements
 Item 2 – Management’s Discussion of Financial Condition and Results of
Operations.

 Companies present comparative balance sheets as of the end of the current quarter
and at the prior year-end.
 Comparative income statements are presented for the current quarter and the same
quarter of the prior year plus the current year-to-date and the prior year-to-date.
 Problems of Interim Reporting
Several inherent difficulties complicate interim reporting. Such as-
 The revenues of same companies fluctuate widely from one interim period to
the next because of seasonal factors, while in other companies heavy fixed
costs incurred in one interim period may benefit other interim periods.
 The cost and expenses related to a full year’s activities are incurred at regular
intervals during the year and need to be allocated to products in process or to
other interim periods to avoid distortion of interim financial results.
 Because of the limited time available to develop interim information, many
cost and expenses must be estimated for interim reports.

Problem -1 (Interim Reporting)

J.K. Corporation is a publicly traded company, is preparing the interim financial data
which it will issue to its shareholders and the SEC at the end of the 1 st quarter of the
2011-12 fiscal year. J.K. Corporation’s financial accounting department has compiled the
following summarized revenue and expense data for the 1st quarter of the year:
Taka
Sales 60,000,000
Cost of Goods Sold 36,000,000
Variable Selling Expenses 2,000,000
Fixed Selling Expenses 3,000,000

Included in the fixed selling expense was the lum sum payment of Tk. 2,000,000 for
television and advertisement for the current year.
Instructions:
a) J.K. Corporation must issue its quarterly financial statements in accordance with
GAAP regarding interim reporting.
i. Explain whether J.K. Corporation should report its operating results for
the quarter as if quarter were a separate reporting period and of itself or as
if the quarter were an integral part of the annual reporting period.
ii. State how the sales, cost of goods sold, and fixed selling expenses would
be reflected in J.K. Corporation’s quarterly report prepared for the 1st
quarter of the 2011-12 fiscal year. Briefly justify your presentation.
b) What financial information, as a minimum, must J.K. Corporation disclose to its
stockholders in its quarterly reports?

Solution: 1
a)
1. The company should report its quarterly results as if each interim period is an
integral part of the annual period.
 2. The company’s revenue and expenses would be reported as follows on its quarterly
report prepared for the first quarter of the 2014–2015 fiscal year:
Sales revenue ..................................................................... Tk.60, 000,000
Cost of goods sold .................................................................... 36,000,000
Variable selling expenses ........................................................... 1,000,000
Fixed selling expenses
Advertising (Tk.2, 000,000 ÷ 4)............................................ 500,000
Other (Tk.3, 000,000 – Tk.2, 000,000) .............................. 1,000,000
Sales revenue and cost of goods sold receive the same treatment as if this were
an annual report. Costs and expenses other than product costs should be charged
to expense in interim periods as incurred or allocated among interim periods.
Consequently, the variable selling expense and the portion of fixed selling
expenses not related to the television advertising should be reported in full.
One-fourth of the television advertising is reported as an expense in the first
quarter, assuming TV advertising is constant throughout the year. These costs
can be deferred within the fiscal period if the benefits of the expenditure
clearly extend beyond the interim period in which the expenditure is made.
(b) The financial information to be disclosed to its stockholders in its quarterly reports
as a minimum includes:
1. Sales revenue or gross revenues, provision for income taxes, extraordinary
items and net income.
2. Basic and diluted earnings per share.
3. Seasonal revenue, costs or expenses.
4. Significant changes in estimates or provisions for income taxes.
5. Disposal of a component of a business and extraordinary, unusual, or
infrequently occurring items.
6. Contingent items.
7. Changes in accounting principles or estimates.
8. Significant changes in financial position.

Problem-2 (Interim Reporting)

Chris Inc. Has accumulated information for its second quarter income statement for 2012:

Sales Tk. 8,50,000

Cost of goods sold 4,20,000
Operating expenses 2,30,000
Additional Information:
1. First quarter income before taxes was Tk. 1,00,000, and the estimated effective
annual tax rate was 40%. At the end of the second quarter, expected annual
income is Tk. 6,00,000, and a dividend exclusion of Tk. 30,000 and a business tax
credit of Tk. 15,000 are anticipated. The combined state tax rate is 50%.
2. The Tk. 4,20,000 cost of goods sold is determined by the LIFO method and
includes 7,500 units from the base layer at a cost of Tk.12 per unit. However, you
 have determined that these units are expected to be replaced at a cost of Tk. 26
per unit.
3. The operating expenses of Tk. 2,30,000 include a Tk. 60,000 factory management
cost incurred in April. You have determined that the second quarter will receive
about 25% of the benefits from these projects with the remainder benefiting the
third and fourth quarters.

Required:
i. Calculate the expected annual effective tax rate at the end of the second quarter
for Chris Inc.
ii. Prepare an Income Statement for the second quarter of 2012.

Solution:

i) Calculation of effective Annual tax rate at the end of the second quarter:

Particulars Taka
Income from continuing operation 6,00,000
Less: Dividend exclusion (30,000)
Estimated annual taxable income 5,70,000
Combined tax rate 0.50
Estimated annual taxes before credit 2,85,000
Less: Business Tax credit (15,000)
Estimated income taxes for the year 2,70,000

2,70,000 x 100
Estimated effective annual tax = = 45%
6,00,000
ii)
Chris Inc.
Income Statement
For the months ended June 30, 2012

Particulars Taka
Sales 8,50,000
Less: Cost of goods sold (5,25,000)
Gross Profit 3,25,000
Operating expenses [(2,30,000 – 60,000)
+25% of Tk. 60,000, i.e.; 15,000] (1,85,000)
Income before taxes 1,40,000
Less: Income taxes 68,000
Net income after taxes 72,000
Workings:
1. Calculation of cost of goods sold:
Taka
Cost of goods sold given 4,20,000
Add: FIFO inventory liquidation
 [75,000 x (26-12)] 1,05,000
Adjusted cost of goods sold 5,25,000

2. Calculation of income taxes:

Taka
Income before taxes for the 1st quarter 1,00,000
Income before taxes for the 2nd quarter 1,40,000
Total income before taxes up to 2nd quarter 2,40,000

Taka
Total taxes payable up to 2nd quarter
[2,40,000 x 45%] 1,08,000
Income taxes for the 1st quarter
[1,00,000 x 40%] 40,000
Income taxes for the 2nd quarter 68,000

Problem-3 (Interim Reporting)

Seagull Corporation is preparing its interim financial Statements for the third quarter of
Calendar 2016. The following trial balance is available for the third quarter:

Debit Credit
Accounts Title
(Tk.) (Tk.)
Cash 98,000
Accounts Receivable 2,85,000
Inventory 7,50,000
Fixed Assets 6,00,000
Accounts Payable 3,00,000
Common Stock 50,000
Retained Earnings 80,000
Sales 44,00,000
Administrative Expenses 3,12,000
Cost of Goods Sold 26,50,000
Loss on sale of Securities sold on July 30 75,000
Annual equipment overhaul costs paid on August 1 60,000
Totals 48,30,000 48,30,000

Additional Information:
At the end of the year, Seagull distributes annual employee bonuses and charitable
donations that are estimated at Tk. 50,000 and 6,000 respectively. The cost of goods sold
includes the liquidation of a 50,000 base layer in inventory that Seagull will restore in the
third quarter at a cost of Tk. 90,000. Effective corporate tax rate for 2016 is 32%.

Required:

Prepare Seagull’s Interim Income Statement for the third quarter of Calendar 2016.
Solution:
Seagull Corporation
Interim Income Statement
For the Calendar Quarter Ended on August 30, 2016
Particulars Taka Taka
Sales Revenue 44,00,000
Less: Cost of Goods sold 26,90,000
Gross Profit 17,10,000
Less: Operating Expenses:
Selling and general administrative expense 3,12,000
Loss on securities 75,000
Bonus expense [50,000/4] 12,500
Charitable contribution expenses [6,000/4] 1,500
Miscellaneous expenses [60,000/4] 15,000
Total operating expenses 4,16,000
Income before expenses 12,94,000
Income tax expenses [12,94,000 X 32%] 4,14,000
Net Income after taxes 8,79,920

Workings:

1. Calculation of cost of goods sold:

Taka
Cost of goods sold (given) 26,50,000
Add: Inventory liquidation
[90,000 – 50,000] 40,000
Adjusted cost of goods sold 26,90,000

Problem: 4

Rail corporation is preparing its interim financial statements for the third quarter of
calendar 2017. The following information was gathered for the third quarter:

1. Credit sales for the quarter Tk. 20,00,000

2. Cash sales for the quarter 5,00,000
3. Inventories, July 1 (FIFO cost method) 2,50,000
4. Cash purchases of inventory during the quarter 4,00,000
5. Inventory purchases made on account for the quarter 6,50,000
6. Estimated cost of goods sold ratio 45%
7. Selling and general administrative expenses paid 1,11,000
8. Effective corporate tax rate 28%
9. Loss on sale of securities sold on June 30, 2017 75,000
10. Annual insurance premiums paid on the August 1 84,000
(The anniversary date of the policy)
Additional information:
At the end of the year, Rail accrues its annual pension and depreciation expenses which
amount to Tk. 40,000 and Tk. 62,000, respectively.
Instruction:
Prepare Rail’s Interim Income Statement for the third quarter of Calendar 2017.

Rail Corporation
Interim Income Statement
For the Calendar Quarter Ended on August 30, 2016
Particulars Taka Taka
Sales Revenue:
Credit 20,00,000
Cash 5,00,000 25,00,000
Less: Cost of Goods sold 11,25,000
Gross Profit 13,75,000
Less: Operating Expenses:
Selling and general administrative expense 1,11,000
Insurance expenses [(84,000/12) x 2 14,000
Depreciation expense [62,000/4] 15,500
Estimated pension expenses [40,000/4] 10,000
Total operating expenses 1,50,500
Income before expenses 12,24,500
Income tax expenses [12,24,500 X 28%] 3,42,860
Net Income after taxes 8,81,640

Workings:

1. Calculation of Cost of goods sold:

Taka
Sales 25,00,000
Ratio 45%
Cost of goods sold 11,25,000

Problem - 05

Curlew Corporation has several accounting issues with respect to its interim financial
statements for the 1st quarter of calendar 2020. For each of the independent situations
given below, state whether or not the method proposed by Curlew is acceptable. Justify
each answer with appropriate reasoning:
1. Curlew will not perform a physical inventory at the end of the calendar quarter. It
intends to estimate the cost of sales by using the gross profit inventory method.
2. Curlew grants volume discounts to its customers based upon their total annual
purchases. The discounts are calculated on a sliding scale ranging 1% to 8%. The
amount of discount applied will progressively increase for a customer as the
cumulative purchase total for the customer increases during the year. Curlew will
 use the average rate of discounts earned for each customer in the prior year as
expected discount rate for the current year.
3. At the beginning of the current quarter, Curlew incurred a large loss on the sale of
some of its marketable securities. It intends to distribute the loss evenly to each of
the four calendar quarters.
4. Historically, Curlew incurs significant advertising costs during the 4 th quarter of
the calendar year, but has minimal advertising costs in the other interim quarters.
It intends to deduct 1/4th of the yearly estimated cost on its interim income
statement.

Solution:

1. The use of gross profit method for estimating ending inventory and cost of sales is
an acceptable accounting procedure to use in the preparation of interim financial
statements. It is permitted under IAS 34.
2. The use of reasonable estimate based upon the experience of prior periods is an
acceptable accounting procedure for allocating annual expenses to interim
periods. An integral approach is permitted but not required under IAS 34.
3. Since the entire loss has been realized in the 1 st quarter, Curlew has no justifiable
basis for allocating the loss to the other quarters. It must show the entire loss in
the 1st quarter. The discrete approach is required under IAS 34.
4. It is an acceptable accounting procedure to allocate some seasonal costs to other
accounting periods on a reasonable basis. An integral approach is permitted but
not required under IAS 34.

Problem - 06:

Stilt Corporation estimates its income by calendar quarter as follows for 2020:

2020
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
(Total)
Estimated
Tk. 30,000 Tk.40,000 Tk.40,000 Tk.50,000 Tk.1,60,000
Income

Income tax rates applicable to Stilt:

From: Tk. 0 to Tk. 50,000 15%

From: Tk. 50,001 to Tk. 75,000 25%
Over: Tk. 75,000 35%
Required:
Determine Stilt’s effective tax rate.
Solution:
Income tax on estimated Income:

First Quarter (Tk. 30,000 x 15%) 4,500

Second Quarter (Tk. 20,000 x 15%) + (Tk. 20,000 x 25%) 8,000
Third Quarter (Tk. 5,000 x 25%) + (Tk. 35,000 x 35%) 13,500
Fourth Quarter (Tk. 50,000 x 35%) 17,500
Total Estimated Taxes 43,500

Effective Tax Rate = [(Total estimated taxes/ Total estimated income) x 100]
= [(Tk. 43,500/1, 60,000) x 100] = 27.19%
Problem - 07:

Avocet Corporation is preparing its 1 st quarterly interim report. It is subject to a corporate

income tax rate of 20% on the 1st Tk. 50,000 of taxable income and 35% on taxable
income above Tk. 50,000. Its estimated pretax accounting income for 2020, by quarter,
is:
2020
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
(Total)
Estimated
Tk. 75,000 Tk.1,65,000 Tk.1,43,000 Tk.1,20,000 Tk.5,03,000
Income

Avocet expects to earn and receive operating income for the year and does not
contemplate any changes in accounting procedures or principles that would affect its
pretax accounting income.

Required:
a) Determine Avocet’s estimated effective tax rate for 2020.
b) Prepare a schedule to show avocet’s estimated net income for each quarter of
2020.

Solution:
Requirement-(a)
Income tax on estimated Income:

First Quarter (Tk. 50,000 x 20%) + (Tk. 25,000 x 35%) 17,750

Second Quarter (Tk. 1, 65,000 x 35%) 57,750
Third Quarter (Tk. 1, 43,000 x 35%) 50,050
Fourth Quarter (Tk. 1,20,000 x 35%) 42,000
Total Estimated Taxes 1,68,550

Effective Tax Rate = [(Total estimated taxes/ Total estimated income) x 100]
= [(Tk. 1, 68,550/5, 03,000) x 100] = 33.51%

Requirement-(b)
 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total (Tk.)
(2020)
Year-to-Date 75,000 2,40,000 3,83,000 5,03,000 5,03,000
Income
Quarterly Income 75,000 1,65,000 1,43,000 1,20,000
Income Tax (25,132) (55,290) (47,918) (40,211) (1,68,551)
(33.509%)
Estimated Net Income 49,868 1,09,710 95,082 79,789 3,34,449