One of the major issues in interim financial reporting is whether the interim period is a discrete period, or whether an interim period is an instalment of the full year. Under the first approach, an entity uses the same accounting policies and principles for annual financial statements as for interim periods. Under the second approach, the purpose of the interim report is to give investors, analysts and other users a guide to the outcome of the full year, which requires modifications to the policies and principles used in annual financial reporting. The former approach is generally referred to as the ‘discrete’ approach, and the latter as the ‘integral’ approach.
The integral approach is not clearly defined, but implies deferring or accruing items of income or expense in order to present measures of performance for that interim period that are more indicative of the expected outcome for the year as a whole. Critics say that this approach obscures the results of the interim period. Proponents say that such modifications prevent distortion; an interim period is a more artificial interval than a financial year, and that to report transactions outside of the context of the annual operating cycle for which they are incurred could potentially present a misleading picture.
In practice, the distinction between discrete and integral approaches is less clear-cut than the description above suggests. IAS 34 – Interim Financial Reporting – requires an entity to use a ‘year-to-date’ approach, [IAS 34.28], which is largely based on the requirement to report the entity's financial position as at the interim reporting date, but for which certain estimates and measurements are based on the expected financial position of the entity at year-end. However, the standard does not allow such estimates and measurements to amount to the ‘smoothing’ of results (shifting revenue and expenses between different reporting periods in order to present the impression that a business has steady earnings) For example, the estimate of tax expense for an interim period is based on actual profits earned as at the interim reporting date and not the expected tax expense for the year divided by the number of interim reporting periods, as discussed at 9.5 below.
The extent of disclosures in interim reports raises similar questions as to the purpose. If interim reporting is simply a more frequently published version of annual reporting, then the form and content of the interim report should be the same. However, if interim reporting is only an instalment of a longer period, then a reporting package that highlights changes in circumstances during an interim period makes more sense than an update of all the disclosures in an entity's annual financial statements. IAS 34 allows an entity to include either a complete set of financial statements or a condensed version in the interim report. [IAS 34.4]. While some companies present a full set of financial statements in their interim reports, predominant practice under IFRS is to present the condensed version. The differences between full and condensed interim financial statements are discussed at 3 below.
There is no requirement for entities that prepare annual financial statements in conformity with IFRS to prepare interim financial statements in accordance with IAS 34. The fact that an entity may not have provided interim financial reports at all or may have provided interim financial reports that do not comply with this standard does not prevent the entity making an explicit and unreserved statement of compliance with IFRS in respect of its annual financial statements. [IAS 34.2]. Historically, interim reporting was the prerogative of capital markets and regulators and IAS 34 leaves governments, securities regulators, stock exchanges and others to determine which entities report interim information, how often and how soon after the reporting period. [IAS 34.1]. Accordingly, adherence to local regulatory or legal requirements in interim financial reports is required.
Nevertheless, governments and regulators often refer to compliance with IAS 34 as part of their own requirements for interim financial reporting.
The standard defines an interim period as ‘a financial reporting period shorter than a full financial year.’ [IAS 34.4].
The term ‘interim financial report’ means a financial report for an interim period that contains either a complete set of financial statements (as described in IAS 1 – Presentation of Financial Statements) or a set of condensed financial statements as described in IAS 34 (see 3.2 below). [IAS 34.4].
The stated objective of the standard is ‘to prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in complete or condensed financial statements for an interim period. Timely and reliable interim financial reporting improves the ability of investors, creditors, and others to understand an entity's capacity to generate earnings and cash flows and its financial condition and liquidity.' [IAS 34 Objective].
IAS 34 does not prescribe which entities are required to publish interim financial reports, how often, or how soon after the end of an interim period. The standard notes that governments, securities regulators, stock exchanges, and accountancy bodies often require entities whose debt or equity securities are publicly traded to publish interim financial reports. Therefore, in the absence of any specific regulatory requirement (or obligation of the entity, for example, by covenant), entities are not required to publish interim financial information in a form that complies with IAS 34. Instead, IAS 34 only applies if an entity either elects or is required to publish an interim financial report in accordance with IFRS. [IAS 34.1]. Accordingly, if an entity's interim financial report states that it complies with IFRS, then the requirements of IAS 34 must be met in full. [IAS 34.3].
The decision to present interim financial reports in accordance with IFRS operates independently of the annual financial statements. Hence, entities may still prepare annual financial statements conforming to IFRS even if their interim financial statements do not comply with IAS 34. [IAS 34.2].
Nevertheless, the IASB encourages publicly traded entities to issue interim financial reports that conform to the recognition, measurement and disclosure principles set out in IAS 34. Those entities are specifically encouraged: [IAS 34.1]
However, an entity can only describe an interim financial report as complying with IFRS if it meets all of the requirements of IAS 34. [IAS 34.3]. Accordingly, an entity that applies all IFRS recognition and measurement requirements in its interim financial report, but does not include all the required disclosures in IAS 34 may not describe the interim financial report as complying with IFRS.
As shown in the Extract below, Peel Hotels Plc disclosed that its interim financial statements for the period ended 12 August 2018 were not prepared in accordance with IAS 34.
The standard does not prohibit or discourage an entity from: [IAS 34.7]
The recognition and measurement guidance in the standard, together with the note disclosures required by the standard, apply to both complete and condensed financial statements presented for an interim period. This means that a complete set of financial statements, prepared for an interim period, would include all of the disclosures required by IAS 34 as well as those required by other IFRSs. [IAS 34.7].
An entity that publishes a complete set of financial statements in its interim financial report should include the following components, as required in IAS 1: [IAS 34.5]
a statement of financial position as at the beginning of the preceding period (without a requirement for related notes) when: [IAS 1.40A-40D]
items have been reclassified,
and the effect of such retrospective application on the information presented in that statement of financial position is material.
Entities may use alternative titles for the above statements other than those stated above. For example, an entity may use the title ‘statement of comprehensive income’ instead of ‘statement of profit or loss and other comprehensive income’. [IAS 34.5]. Also an entity can refer to the ‘statement of financial position’ as ‘balance sheet’.
If an entity publishes a complete set of financial statements in its interim financial report, the form and content of those statements should conform to the requirements of IAS 1. [IAS 34.9]. These requirements are discussed in Chapter 3 at 3. In addition, the entity should disclose the information specifically required by IAS 34 for interim financial reports as well as those required by other IFRSs (particularly those discussed at 4 below). [IAS 34.7].
In the interest of timeliness, cost, and avoiding repetition of previously reported information, an entity might be required to or elect to give less information at interim dates as compared with its annual financial statements. [IAS 34.6]. The standard defines the minimum content of an interim report, as including condensed financial statements and selected notes, as follows: [IAS 34.6, 8]
IAS 34 requires entities to confirm that the same accounting policies and methods of computation are followed in the interim financial statements as compared to their most recent annual financial statements or, if those policies or methods have changed, to describe the nature and effect of the change (see 4.2 below). [IAS 34.16A(a)]. Accordingly, an entity would only depart from the presentation as applied in its most recent annual financial statements if it had determined that the format will change in its next annual financial statements.
The condensed statement of profit or loss and other comprehensive income referred to at (b) above should be presented using the same format as the entity's annual financial statements. Accordingly, if an entity presents a separate statement of profit or loss in its annual financial statements, then it should present a separate statement in the interim financial report as well. Similarly, if a combined statement of profit or loss and other comprehensive income is presented in the annual financial statements, the same format must be adopted in the interim financial report. [IAS 34.8A].
As a minimum, the condensed financial statements should include each of the headings and subtotals that were included in the entity's last annual financial statements. [IAS 34.10]. However, the condensed financial statements do not need to look exactly like the year-end financial statements. Whilst IAS 34 requires ‘headings and subtotals’ to be the same, there is no similar requirement for the ‘line items’ under those headings referred to in IAS 1. [IAS 1.54, 82].
A literal reading could mean that an entity is only required to present non-current assets, current assets, etc. on an interim statement of financial position. However, one of the purposes of an interim report is to help the users of the financial statements to understand the changes in financial position and performance of the entity since the previous annual reporting period. [IAS 34.15]. To that end, IAS 34 also requires additional line items or notes to be included if their omission makes the condensed financial statements misleading. [IAS 34.10]. In addition, the overriding goal of IAS 34 is to ensure that the interim report includes all information necessary to understand the financial position and the performance during the interim period. [IAS 34.25]. Therefore, the aggregation of information to this extent would be inconsistent with the objectives of IAS 34 and judgement is required to determine which line items provide useful information for decision-makers, and are presented, accordingly.
Inclusion of most of the line items in the annual financial statements has the benefit of providing the most information to help users of the financial statements understand the changes since the previous year-end. Nonetheless, entities may aggregate line items used in the annual financial statements, if doing so does not render the information misleading or prevent users of the financial statements from performing meaningful trend analysis. In response to a submission relating to the presentation and content of the condensed statement of cash flows, the Interpretations Committee expressed a view that a three-line condensed statement of cash flows showing only a total for each of operating, investing and financing cash flows would generally not meet the requirements of IAS 34 as set out above.1
Consideration should also be given to regulatory requirements, for example, where a regulator requires an entity to present certain line items using some form of materiality criteria (e.g. in terms of amount, percentage relative to headings, or percentage change from prior periods).
Although it is not usual for an entity to use a presentation approach in its condensed interim financial statements that is different from its annual financial statements, the following example illustrates one possible way in which an entity might choose to combine line items presented separately in the annual financial statements when preparing a condensed set of interim financial statements. However, such presentation is at the discretion of management, based on facts and circumstances, including materiality (as noted above), regulatory environment, and the overarching goal of IAS 34 to provide relevant information. [IAS 34.25]. Accordingly, other presentations may be appropriate.
The general principles for preparing annual financial statements are equally applicable to condensed interim financial statements. These principles include fair presentation, going concern, the accrual basis of accounting, materiality and aggregation, and offsetting. [IAS 1.4, 15‑35]. (See Chapter 3 at 4.1).
Furthermore, the following requirements apply irrespective of whether an entity provides complete or condensed financial statements for an interim period:
If the entity's last annual financial report included the parent's separate financial statements and consolidated financial statements, IAS 34 neither requires nor prohibits the inclusion of the parent's separate financial statements in the interim financial report. [IAS 34.14].
A management commentary is not required by IAS 34, but frequently included by entities in their interim financial reports along with the interim financial statements. In most cases the requirement for a narrative review comes from local stock market regulations and the entities should, therefore, follow the relevant guidance issued by those regulators.
IAS 34 allows information required under the standard to be presented outside the interim financial statements, i.e. in other parts of interim financial report (such as a management commentary or risk report). [IAS 34.16A]. The standard itself does not establish specific requirements for the content of a management commentary beyond what should be contained in (or cross-referred from) the interim financial statements (see 4.2.1 below).
IAS 34 combines a number of disclosure principles:
Overall, applying those disclosure principles requires the exercise of judgement by the entity regarding what information is significant and relevant. The practice of interim reporting confirms that entities take advantage of that room for judgement, both for disclosures provided in the notes to the financial statements and outside.
IAS 34 presumes that users of an entity's interim financial report also have access to its most recent annual financial report. [IAS 34.15A]. On that basis, an interim financial report should explain events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the previous annual reporting period and provide an update to the relevant information included in the financial statements of the previous year. [IAS 34.15, 15C]. The inclusion of only selected explanatory notes is consistent with the purpose of an interim financial report, to update the latest complete set of annual financial statements. Accordingly, condensed financial statements avoid duplicating previously reported information and focus on new activities, events, and circumstances. [IAS 34.6].
The standard requires disclosure of following events and transactions in interim financial reports, if they are significant: [IAS 34.15B]
The standard specifies that the above list of events and transactions is not exhaustive and the interim financial report should explain any additional events and transactions that are significant to an understanding of changes in the entity's financial position and performance. [IAS 34.15, 15B]. Therefore, when information relating to items not on the above list changes significantly, an entity should still provide disclosure in the interim financial statements in sufficient detail to explain the nature of the change and any changes in estimates. This would apply, for example, when the values of non-financial assets and liabilities that are measured at fair value change significantly.
Whilst other standards specify disclosures required in a complete set of financial statements, if an entity's interim financial report includes only condensed financial statements as described in IAS 34, then the disclosures required by those other standards are not mandatory. However, if disclosure is considered to be necessary in the context of an interim report, those other standards provide guidance on the appropriate disclosures for many of these items. [IAS 34.15C]. For example, in meeting the requirements of (g) above to disclose the impact of corrections of prior period errors, the requirements of IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors – would be relevant to consider (see Chapter 3 at 5.3).
In practice, entities exercise judgement to determine whether including the disclosures required by other standards are material to an understanding of the entity and will provide a benefit to users of the interim financial statements. [IAS 34.25]. For example, the existence of acquisitions and disposal of items of property plant and equipment does not automatically require the interim report to include a reconciliation of the carrying amount at the beginning and end of the interim period. [IAS 16.73(e)]. In many cases, a narrative disclosure would be sufficient, and in some cases, the change may be immaterial, and therefore no disclosures are required. However, in an interim period with material changes, as for instance when assets are acquired by purchase, obtained in a business combination, and transferred to a disposal unit as well as sold in the normal course of business, such a reconciliation could be judged to be an appropriate way of presenting this information in the interim financial statements.
In addition to disclosing significant events and transactions as discussed at 4.1 above, IAS 34 requires an entity to include the following information in the notes to its interim financial statements if not disclosed elsewhere in the interim financial report: [IAS 34.16A]
This information is disclosed on a financial year-to-date basis. [IAS 34.16A]. However, the requirement in item (i) above for disclosures of business combinations applies not only for those effected during the current interim period, but also to business combinations after the reporting period but before the interim financial report is authorised for issue. [IFRS 3.59(b), IFRS 3.B66]. An entity is not required to provide all of the disclosures for business combinations after the reporting period, if the accounting for the business combination is incomplete as at the date on which the financial statements are authorised for issue. In this case, the entity should state which disclosures cannot be made and the reasons why they cannot be made. [IFRS 3.B66].
IFRS 3 requires disclosures in aggregate for business combinations effected during the reporting period that are individually immaterial. [IFRS 3.B65]. However, materiality is assessed for the interim period financial data, [IAS 34.23], which implies that IAS 34 may require detailed disclosures on business combinations that are material to an interim period, even if they could be aggregated for disclosure purposes in the annual financial statements.
The list above also requires disclosure of the effect of changes in the composition of the entity arising from disposals, discontinued operations and restructurings in the interim period. [IAS 34.16A(i)].
If an entity has operations that are discontinued or disposed of during an interim period, these operations should be presented separately in the condensed interim statement of comprehensive income following the principles set out in IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations. In addition, if an entity has non-current assets or a disposal group classified as held for sale or distribution at the end of the interim reporting period, then these should be measured in accordance with the requirements of IFRS 5 and presented separately from other assets and liabilities in the condensed interim statement of financial position.
An entity contemplating a significant restructuring that will have an impact on its composition should follow the guidance in IAS 37 – Provisions, Contingent Liabilities and Contingent Assets – for the recognition of any restructuring cost, [IAS 37.71], and IAS 19 – Employee Benefits – for termination benefits. [IAS 19.165(b)]. In subsequent interim periods any significant changes to provisions will require disclosure. [IAS 34.15B(c), 16A(d)].
The inclusion of the above disclosure requirements among the items required by the standard to be given ‘in addition to disclosing significant events and transactions’, [IAS 34.16A], distinguishes them from the items listed at 4.1 above, which are disclosed to update information presented in the most recent annual financial report. [IAS 34.15]. Therefore, disclosure of the above information is required for each interim reporting period, subject only to a materiality assessment in relation to that interim report, i.e. an entity could consider it unnecessary to disclose the above information on the grounds that it is not relevant to an understanding of its financial position and performance in that specific interim period. [IAS 34.25]. In making that judgement care would need to be taken to ensure any omitted information would not make the interim financial report incomplete and therefore misleading.
IAS 34 defines an ‘interim financial report’ as ‘a financial report containing either a complete set of financial statements… or a set of condensed financial statements… for an interim period.’ [IAS 34.4]. Therefore, since an interim financial report contains the interim financial statements, it is clear that these are two different concepts. Accordingly, an entity is not required to disclose the information listed at 4.2 above in the interim financial statements themselves (but rather, might include the disclosures in the management commentary), as long as a cross-reference is provided from the financial statements to the location of the information included in another part of the interim financial report. [IAS 34.16A].
Additionally, for a cross-reference to be acceptable, the information given ‘elsewhere in the interim financial report’ needs to both satisfy the disclosure requirements in IFRSs and be available on the same terms as the interim financial statements, i.e. users should have access to the referenced material (for example, the management commentary or a risk report) on the same basis and at the same time as they have for accessing the condensed financial statements from which the reference is made.
The cross-reference should identify the specific part that includes the required disclosure to allow the reader to easily navigate within the interim financial report.
The extracts below show examples of disclosures required by IAS 34.
In the extract below, BP p.l.c. discloses write-downs of its inventories and reversals in the current and corresponding periods. [IAS 34.15B(a)].
In the Extract below, as part of its note on intangible assets, Roche Holding Ltd discloses the impairment charges on its intangible assets during the reporting period and provides a breakdown by division and further background to those impairments. [IAS 34.15B(b)].
Among the various items that have impacted its other operating income and expenses for its 2018 interim period, Renault provides the following narrative to explain the reversal of an impairment. [IAS 34.15B(b)].
In the Extract below, Sanofi gives a narrative description of its acquisitions of property, plant and equipment in the interim period, choosing also to provide an analysis by business segment. [IAS 34.15B(d)].
In a brief descriptive note, Deutsche Lufthansa AG discloses its commitments for capital expenditure. [IAS 34.15B(e)].
International Consolidated Airlines Group S.A provides details about significant litigation in its interim report. The extract below illustrates its disclosure about related settlements. [IAS 34.15B(f)].
In its interim report for 2019, Yorkshire Building Society describes the effect of volatility in financial markets during the period. [IAS 34.15B(h)].
In Extract 41.9 below, Hellenic Company for Telecommunications and Telematic Applications S.A. (Forthnet S.A.) discusses breaches of loan covenants. [IAS 34.15B(i)]. The existence of breaches or defaults that have not been remedied by the end of the reporting period will merit disclosure about management's assessment of the entity's ability to continue as a going concern. This is discussed at 4.7 below.
In Extract 41.10 below, Deutsche Bank Aktiengesellschaft discloses related party transactions. [IAS 34.15B(j)].
HSBC discloses in the extract below transfers of items between level 1 and level 2 of the fair value hierarchy. [IAS 34.15B(k)]. The disclosures in relation to transfers into and out of level 3 are included in a separate reconciliation of the movements from the opening balances to closing balances as required by paragraph 93(e) of IFRS 13 and paragraph 16A(j) of IAS 34 (see 4.5 below).
In the Extract below, Downer EDI Limited discloses changes in its contingent liabilities during the interim period in the notes to the condensed consolidated half-year financial report. [IAS 34.15B(m)].
In the Extract below, Daimler AG discloses changes to the accounting policies applied in the current interim period. [IAS 34.16A(a)]. Using the guidance in IAS 8, Daimler AG provides information for the adoption of IFRS 16 – Leases.
Extract 41.14 below shows how Ardagh Group S.A. discloses the effects of seasonality in its interim report. [IAS 34.16A(b)].
Sanofi discloses the nature and effects of unusual items in Extract 41.15 below by identifying ‘restructuring costs’ and similar items. [IAS 34.16A(c)]. The footnote provides further information on the nature of the costs. See Extract 41.19 for another example illustrating disclosures about restructuring activities.
Restructuring costs in the first half of 2018 mainly reflect (i) write-downs of industrial assets in the United States; (ii) employee-related expenses associated with headcount adjustment plans in Europe and Japan; and (iii) the costs of transferring the infectious diseases early stage R&D pipeline and research unit. Those transfer costs amount to €253 million and primarily consist of payments to Evotec over a five-year period, including an upfront payment of €60 million on finalization of the agreement in early July 2018.
Extract 41.16 below illustrates the disclosure of material changes in borrowings. [IAS 34.16A(e)].
In the Extract below, Nestlé S.A. discloses dividends paid during the interim period. [IAS 34.16A(f)].
In the Extract below, Safran reports the issuance of a bond and reaching an agreement regarding indemnity after the interim period. [IAS 34.16A(h)].
Although not an explicit requirement under IAS 34, it is useful to disclose the date on which the interim financial statements are authorised for issue as it helps the users to understand the context of any disclosure of events after the interim reporting date. [IAS 10.17].
The notion of changes in the composition of the entity is broadly defined to include acquisitions, restructurings and discontinued operations. [IAS 34.16A(i)].
In the Extract below, Nine Entertainment Co. Holdings Limited discloses change in group structure resulting from acquisitions during the interim period. The disclosure reproduced below about its merger with Fairfax is accompanied by other disclosures required by IFRS 3 for business combinations, which are not included here.
In the Extract below, Roche Holding Ltd discloses extensive information on its ongoing significant restructuring activities. In addition, comparative amounts and further break-downs of the type of costs incurred and information about the classification of depreciation, amortisation and impairment and of other costs in the income statement are provided (not reproduced here).
In the Extract below, Philips describes the impact of its significant divestments.
If an entity is required to disclose segment information in its annual financial statements, certain segment disclosures are required in its interim financial report. IFRS 8 is discussed in more detail in Chapter 36.
An entity applying IFRS 8 in its annual financial statements should include the following information in its interim financial report about its reportable segments: [IAS 34.16A(g)]
In Extract 41.22 below, Daimler AG discloses segment revenues and segment profit or loss in its interim financial report for the second quarter of 2018. Presumably, information required by (d) above is not included because it is not applicable for the periods presented. In addition, the reconciliation to group figures is also provided for the full first half of 2017 (not reproduced here).
IAS 34 requires that an entity should include the following in its interim financial report in relation to financial instruments: [IAS 34.16A(j)]
Quantitative disclosures would normally be given in a tabular format unless another format is more appropriate. [IFRS 13.99]. The entity should assess whether the disclosures are sufficient to meet the disclosure objectives of IFRS 13. This requires judgements to be made about the level of detail; how much emphasis to place on each of the various requirements; and level of aggregation or disaggregation. If necessary, additional information should be given in order to meet those objectives (see Chapter 14 at 20.1). [IFRS 13.92].
The Extract below from the half-year financial report of Nestle S.A. illustrates disclosures related to the fair value hierarchy and valuation techniques used.
If an interim financial report complies with the requirements of IAS 34, this fact should be disclosed. Furthermore, an interim financial report should not be described as complying with IFRS unless it complies with all the requirements of International Financial Reporting Standards, [IAS 34.19], a requirement similar to that found in IAS 1. [IAS 1.16]. Therefore, an entity would only provide a statement of compliance with IFRS (as opposed to IAS 34 alone) in its interim report if it prepared a complete set of interim financial statements.
When entities either choose or are required by local regulations to meet other requirements in addition to IAS 34, the statement of compliance can be more complicated. In Extract 41.24 above, BMW AG simply adds a statement confirming its compliance with the specific German Accounting Standard on interim reporting. Additional complexity can arise when the entity seeks to meet the requirements of its (IFRS-based) local GAAP as well as IFRS as issued by the IASB. Extract 41.25 below shows how the dual listed BHP Billiton plc disclosed compliance with IFRS, IFRS as endorsed by the EU, Australian Accounting Standards and the requirements of the Financial Conduct Authority in the UK.
The extract above also highlights a compliance issue for adopters of IFRS-based standards, such as entities in Australia and the European Union. Because of the time taken to secure local endorsement of IFRS issued by the IASB, an entity may not be able to state at a particular reporting date that the financial statements comply with both IFRS as issued by the IASB and IFRS as endorsed locally.
For example, when the Interpretations Committee issues an interpretation that is effective for the annual period which includes the current interim reporting period, entities may choose not to comply with IAS 34 (as issued by the IASB) in their interim financial statements rather than risk applying an interpretation in their full year financial statements that is not yet locally endorsed. Alternatively, an entity may publish interim financial information prepared under locally endorsed IFRS, for example, IFRS as adopted by the European Union. In such cases, the basis of preparation should state that IAS 34 is being applied in this context.
Although IAS 34 does not specifically address the issue of going concern, the general requirements of IAS 1 apply to both a complete set and to condensed interim financial statements. [IAS 1.4]. IAS 1 states that when preparing financial statements, management assesses an entity's ability to continue as a going concern, and that the financial statements are prepared on a going concern basis unless management either intends to liquidate the entity or cease trading, or has no realistic alternative but to do so. [IAS 1.25]. The going concern assessment is discussed in more detail in Chapter 3 at 4.1.2.
Under IAS 1, the assessment is made based on all available information about the future, which at a minimum is twelve months from the end of the reporting period. [IAS 1.26]. Therefore, with respect to interim reporting under IAS 34, the minimum period for management's assessment is also at least twelve months from the interim reporting date; it is not limited, for example, to one year from the date of the most recent annual financial statements. In fact, local stock market requirements and other regulations might set a longer minimum period over which management are required to assess entity's ability to continue as a going concern, for example to consider a minimum period of twelve months after the date of approval of the interim financial statements.
If management becomes aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to continue as a going concern, the entity should disclose those uncertainties in its interim financial statements. If the entity does not prepare financial statements on a going concern basis, it should disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern. [IAS 1.25].
Irrespective of whether an entity presents condensed or complete interim financial statements, the components of its interim reports should include information for the following periods: [IAS 34.20]
An interim report may present for each period either a single statement of ‘profit or loss and other comprehensive income’, or separate statements of ‘profit or loss’ and ‘comprehensive income’. [IAS 1.10A, IAS 34.20(b)]. The condensed statement of comprehensive income referred to at (b) above should be presented in a manner consistent with the entity's annual financial statements. Accordingly, if the entity presents a separate statement for items of profit or loss in its annual financial statements, it should present a separate condensed statement of profit or loss in the interim financial report. [IAS 34.8A].
If an entity's business is highly seasonal, then the standard encourages reporting additional financial information for the twelve months up to the end of the interim period, and comparative information for the prior twelve-month period, in addition to the financial statements for the periods set out above. [IAS 34.21].
The standard does not require an entity to present a statement of financial position as at the end of the comparable interim period. However, in practice many entities reporting under IFRS disclose this information, either on a voluntary basis, or due to local regulations. Similarly, many entities also present the income statement for the immediately preceding full year. Such presentation is allowed under IAS 34.
The examples below illustrate the periods that an entity is required to disclose under IAS 34. [IAS 34.22, Illustrative examples, part A]. An entity is encouraged to present the periods illustrated below if the business is highly seasonal.
For entities presenting condensed financial statements under IAS 34, there is no explicit requirement that comparative information be presented in the explanatory notes. Nevertheless, where an explanatory note is required by the standard (such as for inventory write-downs, impairment provisions, segment revenues etc.) or otherwise determined to be needed to provide useful information about changes in the financial position and performance of the entity since the end of the last annual reporting period, [IAS 34.15], it would be appropriate to provide information for each period presented. However, in certain cases it would be unnecessary to provide comparative information where this repeats information that was reported in the notes to the most recent annual financial statements. [IAS 34.15A]. For example, it would only be necessary to provide information about business combinations in a comparative period when there is a revision of previously disclosed fair values.
For entities presenting complete financial statements, whilst IAS 34 sets out the periods for which components of the interim report are included, it is less clear how these rules interact with IAS 1's requirement to report comparative information for all amounts in the financial statements. [IAS 1.38]. In our view, similar considerations discussed above in the case of condensed financial statements would also apply to complete set of interim financial statements.
In addition to presenting comparative information for the corresponding interim period, it is suggested that entities preparing a complete set of interim financial statements also include information for the previous full year in the case of the statement of financial position, such as the required comparative information for the current interim period and reconciliations to the previous year-end statement of financial position. In Example 41.5 above, this requirement could be achieved by reconciling movements in non-current assets during the second six months of the previous year (between 1 July 2019 and 31 December 2019).
If an entity presents complete financial statements and restates comparative information (e.g. following a change in accounting policy, correction of an error, or reclassification) and this restatement is material, then the entity should present a third statement of financial position at the beginning of the earliest comparative period in its interim financial reporting accordance with IAS 1. [IAS 1.10(f)]. No such requirement applies in the case of an entity preparing a condensed set of interim financial statements, [IAS 1.BC33], however, additional disclosures are required in the case of correction of prior period errors, [IAS 34.15B(g)], or when accounting policies are changed, [IAS 34.16A(a)], (see 4.3.12 above).
IAS 34 does not limit interim reporting to quarterly or half-yearly periods; an interim period may be any period shorter than a full year. [IAS 34.4]. Nevertheless, interim reporting for a period other than quarterly or half-yearly is not a common practice.
The requirement in IAS 34 to present a comparative statement of profit or loss and other comprehensive income ‘for the comparable interim periods (current and year-to-date) of the immediately preceding financial year’, [IAS 34.20], can give rise to diversity in practice in the case of an entity that changes its annual financial reporting date. For example, an entity changing its reporting date from 31 December to 31 March would change its half-yearly reporting date from 30 June to 30 September and therefore present its first half-yearly report after its new annual reporting date for the six month period from 1 April to 30 September. A ‘comparable’ comparative interim period in this scenario could be taken to mean the six months ended 30 September in the prior year, as illustrated in Example 41.6 below.
The entity in the example above did not show information for the half-year ended 30 June 2018 as the comparative period, notwithstanding the fact that this period would have been the reporting date for the last published half-yearly report.
Other interpretations of IAS 34 in this regard are also possible. As illustrated in the Extract below, Sirius Minerals changed its annual financial reporting period-end from March to December, which resulted in the company reporting on a shorter (nine-month) annual financial period ended 31 December 2015. For its next set of condensed interim financial statements (for the six months ended 30 June 2016), Sirius presented comparative information for the first six-months of the previous annual financial period, being the six-months ended 30 September 2015. The company have also included information for the previous annual reporting period (in this case the shortened nine-month period ended 31 December 2015), in common with many UK reporters who present comparative information for the previous annual reporting period in addition to the information required by IAS 34.
Given the lack of clarity in IAS 34 as to the meaning of ‘comparable’ in the case where the current financial year runs for a period that is different to ‘the immediately preceding financial year’, [IAS 34.20], there are arguments to support each of the interpretations illustrated in Example 41.6 and Extract 41.26 above.
In the Extract above, Sirius Minerals noted that it had considered seasonality of its operations in determining whether the information presented for a prior interim period is comparable. The implication is that had it determined that operations were seasonal, the entity might have reported a different comparative period (perhaps for the six months ended 30 June 2015). As noted at 5 above and illustrated in Example 41.3, in cases where the entity's business is highly seasonal, IAS 34 encourages the reporting of additional financial information for the twelve months up to the end of the interim period, and comparative information for the prior twelve-month period, in addition to the financial statements for the periods set out above. [IAS 34.21].
The discussion at 5.3 above demonstrates that when an entity changes its annual reporting date, the determination of comparative periods in the interim financial statements could be interpreted differently without definitive guidance in IAS 34.
Another situation where confusion may be caused by the requirement to present comparative information for ‘the comparable interim periods (current and year-to-date) of the immediately preceding financial year’, [IAS 34.20], arises when the previous annual financial statements related to a period other than twelve months. This situation is not uncommon for a newly incorporated entity, which might have either a shorter or a longer reporting period in its first financial year.
Consider an entity that has a long initial accounting period of eighteen months and that is required to prepare interim financial reports on a quarterly basis. Accordingly, it would have six ‘quarters’ in its first financial reporting period and in line with the requirements of IAS 34, the entity would present statements of profit or loss and other comprehensive income, changes in equity and cash flows for each three month period and cumulatively for the year-to-date. In the next financial year, however, the previously published year-to-date amounts would no longer be comparable. The following example illustrates this situation.
It should be noted in the above example that none of the interim financial statements issued in the entity's first (eighteen month) reporting period would contain comparative information. In particular, no comparatives would be required for the three month periods ended 30 September 2019 and 31 December 2019 because the corresponding periods in the preceding calendar year (i.e. 30 September 2019 and 31 December 2019) actually form part of the same (eighteen month) financial period and therefore comparatives from a preceding financial reporting period did not exist.
The same considerations apply when determining the comparable comparative period in the following circumstances when a newly incorporated entity's first financial year was less than twelve months.
In making judgements on recognition, measurement, classification, or disclosures in interim financial reports, the overriding goal in IAS 34 is to ensure that an interim financial report includes all information relevant to understanding an entity's financial position and performance during the interim period. [IAS 34.25]. The standard draws from IAS 1, which defines information as material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. [IAS 34.24]. However, IAS 34 does not contain quantitative guidance on materiality. IAS 34 requires materiality to be assessed based on the interim period financial data. [IAS 34.23].
Therefore, decisions on the recognition and disclosure of unusual items, changes in accounting policies or estimates, and errors are based on materiality in relation to the interim period figures to determine whether non-disclosure is misleading. [IAS 34.25].
Neither the previous year's annual financial statements nor any expectations of the financial position at the current year-end are relevant in assessing materiality for interim reporting. However, the standard acknowledges that interim measurements may rely on estimates to a greater extent than measurements of annual financial data. [IAS 34.23].
In September 2017, the IASB published IFRS Practice Statement 2 – Making Materiality Judgements (Statement 2). This is a non-mandatory statement and does not form part of IFRS. See Chapter 3 at 4.1.7 for a discussion on Statement 2.
Statement 2 includes guidance that specifically relates to materiality judgements for interim reporting. Whilst an entity considers the same materiality factors as in its annual assessment, it would also take into consideration the shorter time period and the different purpose of an interim financial report in the following respects:2
As regards purpose, the guidance suggests that entities should also have regard to the fact that an interim financial report is intended to provide an update on the latest complete set of annual financial statements. Information that is material to the interim period, but was already provided in the latest annual financial statements, does not need to be reproduced in the interim financial report, unless something new occurs or an update is needed. [IAS 34.15, 15A].3
When an entity concludes that information about estimation uncertainty is material, it needs to disclose that information. As discussed at 10 below, measurements included in interim financial reports often rely more on estimates than measurements included in the annual financial statements. [IAS 34.41]. That fact does not, in itself, make the estimated measurements material. Nevertheless, relying on estimates for interim financial data to a greater extent than for annual financial data might result in more disclosures about such uncertainties being material, and thus being provided in the interim financial report, compared with the annual financial statements.4
An estimate of an amount reported in an interim period can change significantly during the remainder of the year. An entity that does not present a separate interim financial report for its final interim period should disclose the nature and amount of significant changes in estimates in a note to the annual financial statements for that year. [IAS 34.26]. This disclosure requirement is intended to be narrow in scope, relating only to the change in estimate, and does not create a requirement to include additional interim period financial information in the annual financial statements. [IAS 34.27].
The requirement to disclose significant changes in estimates since the previous interim reporting date is consistent with IAS 8 and paragraph 16A(d) of IAS 34. These standards require disclosure of the nature and the amount of a change in estimate that has a material effect in the current reporting period or is expected to have a material effect in subsequent periods. IAS 34 cites changes in estimate in the final interim period relating to inventory write-downs, restructurings, or impairment losses recognised in an earlier interim period as examples of items that are required to be disclosed. [IAS 34.27].
The recognition and measurement requirements in IAS 34 arise mainly from the requirement to report the entity's financial position as at the interim reporting date, but also requires certain estimates and measurements to take into account the expected financial position of the entity at year-end, where those measures are determined on an annual basis (as in the case of income taxes). Many preparers misinterpret this approach as representing some form of hybrid of the discrete and integral methods to interim financial reporting. This can cause confusion in application and can lead to the accusation that IAS 34 seems internally inconsistent.
In requiring the year-to-date to be treated as a discrete period, IAS 34 prohibits the recognition or deferral of revenues and costs for interim reporting purposes unless such recognition or deferral is appropriate at year-end. As with a set of annual financial statements complying with IAS 8, IAS 34 requires changes in estimates and judgements reported in previous interim periods to be revised prospectively, whereas changes in accounting policies and errors are required to be recognised by prior period adjustment. However, IAS 34 allows looking beyond the interim reporting period, for example in estimating the tax rate to be applied on earnings for the period, when a year-to-date approach does not.
The recognition and measurement requirements of IAS 34 apply regardless of whether an entity presents a complete or condensed set of financial statements for an interim period, [IAS 34.7], and are discussed below.
The principles for recognising assets, liabilities, income and expenses for interim periods are the same as in the annual financial statements. [IAS 34.29]. Accordingly, an entity uses the same accounting policies in its interim financial statements as in its most recent annual financial statements, adjusted for accounting policy changes that will be reflected in the next annual financial statements. However, IAS 34 also states that the frequency of an entity's reporting (annual, half-yearly or quarterly) do not affect the measurement of its annual results. To achieve that objective, measurements for interim reporting purposes are on a year-to-date basis. [IAS 34.28].
Measurement on a year-to-date basis acknowledges that an interim period is a part of a full year and allows adjustments to estimates of amounts reported in prior interim periods of the current year. [IAS 34.29].
This does not override the requirement that the principles for recognition and the definitions of assets, liabilities, income, and expenses for interim periods are the same as in annual financial statements. [IAS 34.29]. Therefore, for assets, the same tests of future economic benefits apply at interim dates as at year-end. Costs that, by their nature, would not qualify as assets at year-end, do not qualify for recognition at interim dates either. Similarly, a liability at the end of an interim reporting period must represent an existing obligation at that date, just as it must at the end of an annual reporting period. [IAS 34.32]. Under IAS 34, as under the IASB's Conceptual Framework, an essential characteristic of income and expenses is that the related inflows and outflows of assets and liabilities have already occurred. If those inflows or outflows have occurred, the related income and expense are recognised; otherwise they are not recognised. [IAS 34.33].
The standard lists several circumstances that illustrate these principles:
Another example would be acquisition costs (excluding debt or share issue costs) incurred in relation to a business combination, which are required to be accounted as expenses in the periods in which the costs are incurred and the services are received. [IFRS 3.53]. Such costs would not qualify for deferral at an interim reporting date, even if the business combination to which the costs relate had not been completed until after the interim reporting date.
The year-to-date approach differs from the discrete approach in that the financial position and performance at each reporting date are evaluated not as an isolated period but as part of a cumulative period that builds up to a full year, whose results should not be influenced by interim reporting practices. Amounts reported for previous interim periods are not retrospectively adjusted, and therefore year-to-date measurements may involve changes in estimates of amounts reported in previous interim periods of the current year. As discussed at 4.2 and 7 above, IAS 34 requires disclosure of the nature and amount of material changes in previously reported estimates in the interim financial report and when separate interim financial report is not presented for the final interim period, in the full year financial statements. [IAS 34.16A(d), 26, 34‑36]. However, the principle that the results of the full year should not be influenced by interim reporting practices, has been challenged, as the IASB and Interpretations Committee have identified and tried to resolve certain conflicts between IAS 34 and other standards, as discussed at 9.2 below.
As noted above, under IAS 34, an entity uses the same accounting policies in its interim financial statements as in its most recent annual financial statements, adjusted for accounting policy changes that will be in the next annual financial statements, and to determine measurements for interim reporting purposes on a year-to-date basis. [IAS 34.28].
Unless transition rules are specified by a new standard or interpretation, IAS 34 requires a change in accounting policy to be reflected by: [IAS 34.43]
Therefore, regardless of when in a financial year an entity decides to adopt a new accounting policy, it has to be applied from no later than the beginning of the current financial year. [IAS 34.44]. For example, if an entity that reports on a quarterly basis decides in its third quarter to change an accounting policy, it must restate the information presented in earlier quarterly financial reports to reflect the new policy as if it had been applied from the start of the annual reporting period.
The only exception to the restatement of all comparative periods is when it is impracticable to determine the cumulative effect of applying a new accounting policy at the beginning of the year of application. IAS 1 states that application of a requirement is ‘impracticable’ when the entity cannot apply it after making every reasonable effort to do so. [IAS 1.7].
Disclosures regarding the restatement can be presented on the face of the financial statements or disclosed in the notes to the financial statements. If an entity prepares a complete set of interim financial statements, it should present a third statement of financial position, as appropriate. [IAS 34.5(f)]. (See 3.1 above).
One objective of the year-to-date approach is to ensure that a single accounting policy is applied to a particular class of transactions throughout a year. [IAS 34.44]. To allow accounting policy changes as of an interim date would mean applying different accounting policies to a particular class of transactions within a single year. This would make interim allocation difficult, obscure operating results, and complicate analysis and understandability of the interim period information. [IAS 34.45].
Accordingly, when preparing interim financial information, consideration is given to which new standards and interpretations are mandatory in the next (current year) annual financial statements. The entity generally adopts these standards in all interim periods during that year.
For example, IFRS 16 is mandatory for annual periods beginning on or after 1 January 2019. [IFRS 16.C1]. Therefore, an entity with a 30 September year-end would have to apply the standard in its half-yearly report for the six months ending 31 March 2020.
A change in accounting policy would require a restatement of prior comparative financial statements, except for new accounting standards that have specific application and transition requirements. [IAS 34.43]. For example, paragraph C5(b) of IFRS 16 allows an entity to apply the requirements in IFRS 16 without restating the prior comparative period (see Chapter 23 at 10.3.2).
An entity can also elect at any time during a year to apply a new standard or interpretation before it becomes mandatory through a voluntary change in accounting policy. However, IAS 1 and IAS 8 only permit an entity to change an accounting policy if the information results in information that is ‘more reliable and more relevant’ to the users of the financial statements. [IAS 8.14(b)].
After concluding that a voluntary change in accounting policy is permitted and appropriate, its effect is reflected in the first interim report the entity presents after the date on which the entity changed its policy and prior interim periods are restated. Under IAS 8, a change in accounting policy is reflected by retrospective application, with restatement of prior period financial data as far back as is practicable. However, if the cumulative amount of the adjustment relating to previous financial years is impracticable to determine, then under IAS 8, the new policy is applied prospectively from the earliest date practicable. [IAS 34.44]. Under IAS 34, an entity is not allowed to reflect the effect of such a voluntary change in accounting policy from a later date than the beginning of the current year, such as at the start of the most recent interim period in which the decision was made to change the policy. [IAS 34.44]. To allow two different accounting policies to be applied to a particular class of transactions within a single year would make interim allocations difficult, obscure operating results, and complicate analysis and understandability of the interim period information. [IAS 34.45].
One exception to this principle of retrospective adjustment of earlier interim periods is when an entity changes from the cost model to the revaluation model under IAS 16 – Property, Plant and Equipment – or IAS 38. These are not changes in accounting policy that are covered by IAS 8 in the usual manner, but instead required to be treated as a revaluation in the period. [IAS 8.17]. Therefore, the general requirements of IAS 34 do not over-ride the specific requirements of IAS 8 to treat such changes prospectively.
However, to avoid using two differing accounting policies for a particular class of assets in a single financial year, consideration should be given to changing from the cost model to the revaluation model at the beginning of the financial year. Otherwise, an entity will end up depreciating assets based on cost for some interim periods and based on the revalued amounts for later interim periods.
For an entity that prepares more than one set of interim financial statements during the year of adoption of a new standard (e.g. quarterly), it should provide information consistent with that which was disclosed in its first interim financial statements, but updated for the latest information. In some cases, the additional disclosures in a subsequent interim period only relate to the subsequent interim period as IAS 34.16A allows for cross-referencing to other documents available on the same terms. Entities should consider the views of local regulators when planning not to repeat in the current interim financial statements any disclosures already included in previous interim reports or other documents. That is because there are different views among regulators as to whether the policy and impact disclosures should be repeated in full in each set of interim financial statements issued during the year or whether cross-referencing to earlier interim financial statements or other documents outside the current interim report is acceptable. For example, in April 2018 the European Securities and Markets Authority (ESMA) published its report on the activities of accounting enforcers in 2017. In it, ESMA clarified that they expect issuers applying IFRS 15 for the first time and using a modified retrospective approach to provide the disclosures about transition required by IFRS 15.C8 in all interim periods that include the date of initial application of IFRS 15.5
In any event, if an entity becomes aware of new information about the transitional impact of the new standards as at the date of initial application in a subsequent interim period, the previously reported disclosures will have to be updated in that later interim period to reflect the new information.
Local regulators may have additional requirements. For example, foreign private issuers reporting under IFRS that are required to file interim statements may be affected by the SEC's reporting requirement to provide both the annual and interim period disclosures prescribed by the new accounting standard, to the extent not duplicative, in each interim report in the year of adoption.6
There is no explicit requirement in IAS 34 for a condensed set of financial statements to include disclosures about standards and interpretations that take effect in future annual reporting periods. However, if an entity has obtained new information about the impact of issued but not yet effective amendments of IFRS, it should consider whether to include updated information in the condensed interim financial statements. An entity that prepares a complete set of interim financial statements has not applied a new IFRS that has been issued but is not yet effective must disclose information as required in paragraph 30 of IAS 8 (see Chapter 3 at 5.1.2).
In some cases, the presentation of the interim financial statements might be changed from that used in prior interim reporting periods. However, before changing the presentation used in its interim report from that of previous periods, management should consider the interaction of the requirements of IAS 34 to include in a set of condensed financial statements the same headings and sub-totals as the most recent annual financial statements, [IAS 34.10], and to apply the same accounting policies as the most recent or the next annual financial report, [IAS 34.28], and the requirements of IAS 1 as they will relate to those next annual financial statements. IAS 1 states that an entity should retain the presentation and classification of items in the financial statements, unless it is apparent following a significant change in the nature of operations or a review of the financial statements that another presentation is more appropriate, or unless the change is required by IFRS. [IAS 1.45].
If a presentation is changed, the entity should also reclassify comparative amounts for both earlier interim periods of the current financial year and comparable periods in prior years. [IAS 34.43(a)]. In such cases, an entity should disclose the nature of the reclassifications, the amount of each item (or class of items) that is reclassified, and the reason for the reclassification. [IAS 1.41, IAS 8.29].
Some entities do not earn revenues or incur expenses evenly throughout the year, for example, agricultural businesses, holiday companies, domestic fuel suppliers, or retailers who experience peak demand at Christmas. The financial year-end is often chosen to fit their annual operating cycle, which means that an individual interim period would give little indication of annual performance and financial position.
An extreme application of the integral approach would suggest that they should predict their annual results and contrive to report half of that in the half-year interim financial statements. However, this approach does not portray the reality of their business in individual interim periods, and is, therefore, not permitted under the year-to-date approach adopted in IAS 34. [IAS 34.28].
The standard prohibits the recognition or deferral of revenues that are received seasonally, cyclically, or occasionally at an interim date, if recognition or deferral would not be appropriate at year-end. [IAS 34.37]. Examples of such revenues include dividend revenue, royalties, government grants, and seasonal revenues of retailers; such revenues are recognised when they occur. [IAS 34.38].
IAS 34 also requires an entity to explain the seasonality or cyclicality of its business and the effect on interim reporting (see 4.3.14 above). [IAS 34.16A(b)]. If businesses are highly seasonal, IAS 34 encourages reporting of additional information for the twelve months up to the end of the interim period and comparatives for the prior twelve-month period (see 5 above). [IAS 34.21].
IAS 34 prohibits the recognition or deferral of costs for interim reporting purposes if recognition or deferral of that type of cost is inappropriate at year-end, [IAS 34.39], which is based on the principle that assets and liabilities are recognised and measured using the same criteria as at year-end. [IAS 34.29, 31]. This principle prevents smoothing of costs in seasonal businesses. Furthermore, the recognition of assets or liabilities at the interim date would not be appropriate if they would not qualify for recognition at the end of an annual reporting period. [IAS 34. 32].
For direct costs, this approach has limited consequences, as the timing of recognising these costs and the related revenues is usually similar. However, for indirect costs, the consequences may be greater, depending on which standard an entity follows.
For example, manufacturing entities that use fixed production overhead absorption rates recognise an asset in respect of attributable overheads based on the normal capacity of the production facilities in accordance with IAS 2 – Inventories. Any variances and unallocated overheads are expensed. [IAS 2.13]. Entities applying IFRS 15 can only capitalise allocations of costs incurred in fulfilling a contract with a customer that are not within the scope of another standard which meet all the following criteria: [IFRS 15.95]
If these criteria are not met at the reporting date, the costs are expensed.
The circumstances in which IFRS 15 allows an asset to be recognised in relation to costs incurred to fulfil a contract are discussed in Chapter 31 at 5.2. What is clear is that an entity should not diverge from these requirements for recognising an expense or an asset just because information is being prepared for an interim period.
Part B of the illustrative examples accompanying the standard provides several examples that illustrate the recognition and measurement principles in interim financial statements. [IAS 34.40]. In addition, IFRIC 10 – Interim Financial Reporting and Impairment – addresses the reversal of impairment losses recognised on goodwill in the interim periods. These examples are discussed below.
Depreciation and amortisation for an interim period is based only on assets owned during that interim period and does not consider asset acquisitions or disposals planned for later in the year. [IAS 34.B24].
An entity applying a straight-line method of depreciation (amortisation) does not allocate the depreciation (amortisation) charge between interim periods based on the level of activity. However, under IAS 16 and IAS 38 an entity may use a ‘unit of production’ method of depreciation, which results in a charge based on the expected use or output (see Chapter 18 at 5.6.2). An entity can only apply this method if it most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The chosen method should be applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits. [IAS 16.62, IAS 38.98]. Therefore, an entity cannot apply a straight-line method of depreciation in its annual financial statements, while allocating the depreciation charge to interim periods using a ‘unit of production’ based approach.
IAS 36 – Impairment of Assets – requires an entity to recognise an impairment loss if the recoverable amount of an asset declines below its carrying amount. [IAS 34.B35]. An entity should apply the same impairment testing, recognition, and reversal criteria at an interim date as it would at year-end. [IAS 34.B36].
However, IAS 34 states that an entity is not required to perform a detailed impairment calculation at the end of each interim period. Rather, an entity should perform a review for indications of significant impairment since the most recent year-end to determine whether such a calculation is needed. [IAS 34.B36]. Nevertheless, the standard does not exempt an entity from performing impairment tests at the end of its interim periods. For example, an entity that recognised an impairment charge in the immediately preceding year, may find that it needs to update its impairment calculations at the end of subsequent interim periods because impairment indicators remain. IFRIC 10 does not allow reversal of impairment loss recognised on goodwill in a previous interim period (see 9.2 below).
An entity should apply the same IAS 38 definitions and recognition criteria for intangible assets in an interim period as in an annual period. Therefore, costs incurred before the recognition criteria are met should be recognised as an expense. [IAS 34.B8]. Expenditures on intangibles that are initially expensed under IAS 38 cannot be reinstated and recognised as part of the cost of an intangible asset subsequently (e.g. in a later interim period). [IAS 38.71]. Furthermore, ‘deferring’ costs as assets in an interim period in the hope that the recognition criteria will be met later in the year is not permitted. Only costs incurred after the specific point in time at which the criteria are met should be recognised as part of the cost of an intangible asset. [IAS 34.B8].
An entity that recognises finance expenses in the cost of a qualifying asset under IAS 23 – Borrowing Costs – should determine the amount to be capitalised from the actual finance cost during the period (when funds are specifically borrowed) [IAS 23.12] or, when the asset is funded out of general borrowings, by applying a capitalisation rate equal to the weighted-average of the finance costs attributable to actual borrowings outstanding during the period [IAS 23.14] (see Chapter 21 at 5.2 and 5.3). For interim financial reporting, measurement should be made on a year-to-date basis, [IAS 34.28], regardless of how often the entity issues interim reports during a year. For example, an entity that issues quarterly interim reports would have to revise its estimated capitalisation rate in successive quarters during the same year for changes in actual year-to-date borrowings and finance costs. As required in IAS 34, the cumulative effect of changes in the estimated capitalisation rate should be recognised in the current quarter (as a change in estimate) and not retrospectively. [IAS 34.36].
The two requirements in IAS 34, to apply the same accounting policies in interim financial reports as are applied for the annual financial statements, and to use year-to-date measurements for interim reporting purposes, do not sit easily together when considering the reversal of certain impairments that IFRS does not allow to be reversed in a subsequent period. For example, IAS 36 prohibits the reversal in a subsequent period of an impairment loss recognised for goodwill. [IAS 36.124].
As discussed at 9.1.2 above, the requirement to use the same accounting policies means that an entity should apply the same impairment testing, recognition, and reversal criteria at the end of an interim period as it would at year-end. [IAS 34.B36].
However, the use of year-to-date measurements implies that the calculation of impairments as at interim reporting dates in the same annual reporting period should be based on conditions as at the end of each interim period and determined independently of assessments at earlier interim dates. Applying this requirement of IAS 34 would lead to reversals of previously reported impairments if conditions change and justify a higher carrying value for the related asset.
IFRIC 10 addresses the interaction between the requirements of IAS 34 and the recognition of impairment losses on goodwill in IAS 36, and the effect of that interaction on subsequent interim and annual financial statements. [IFRIC 10.2].
Whilst it may be unlikely for the conditions causing an impairment of goodwill at an interim date to reverse before year-end, IFRIC 10 states that the specific requirements of IAS 36 take precedence over the more general statement in IAS 34. [IFRIC 10.BC9]. As such, IFRIC 10 prohibits the reversal of an impairment loss recognised in a previous interim period in respect of goodwill. [IFRIC 10.8].
Thus, in the albeit unlikely event that the conditions giving rise to an impairment do reverse in successive interim periods, there can be situations where two entities facing an identical set of circumstances, yet with different frequency of interim reporting, could end up reporting different annual results.
IFRIC 10 should not be applied by analogy to derive a general principle that the specific requirements of a standard take precedence over the year-to-date approach in IAS 34. [IFRIC 10.9].
If employer payroll taxes or contributions to government sponsored insurance funds are assessed on an annual basis, the employer's related expense should be recognised in interim periods using an estimated average annual effective rate, even if it does not reflect the timing of payments. A common example contained in Appendix B to IAS 34 is employer payroll tax or insurance contribution subject to a certain maximum level of earnings per employee. Higher income employees would reach the maximum income before year-end, and the employer would make no further payments for the remainder of the year. [IAS 34.B1].
The nature of year-end bonuses varies widely. Some bonus schemes only require continued employment whereas others require certain performance criteria to be attained on a monthly, quarterly, or annual basis. Payment of bonuses may be purely discretionary, contractual or based on years of historical precedent. [IAS 34.B5]. A bonus is recognised for interim reporting only if: [IAS 34.B6]
A present obligation exists only when an entity has no realistic alternative but to make the payments. [IAS 19.19]. IAS 19 gives guidance on accounting for profit sharing and bonus plans (see Chapter 35 at 12.3).
In recognising a bonus at an interim reporting date, an entity should consider the facts and circumstances under which the bonus is payable, and determine an accounting policy that recognises an expense reflecting the obligation on the basis of the services received to date. Several possible accounting policies are illustrated in Example 41.9 below.
Pension costs for an interim period are calculated on a year-to-date basis using the actuarially determined pension cost rate at the end of the prior year, adjusted for significant market fluctuations and for significant one-off events, such as plan amendments, curtailments and settlements. [IAS 34.B9].
In the absence of such significant market fluctuations and one-off events, the estimate of the actuarial liabilities is rolled forward in the scheme based on assumptions as at the beginning of the year and adjusted for significant changes in the membership of the scheme. If there are significant changes to pension arrangements during the interim period (such as changes resulting from a material business combination or from a major redundancy programme) consideration should be given to obtaining a new actuarial valuation of scheme liabilities. Similarly, if there are significant market fluctuations, such as those arising from changes in corporate bond markets, the validity of the assumptions in the last actuarial estimate, such as the discount rate applied to scheme liabilities, should be reviewed and revised as appropriate.
In Extract 41.27 below International Consolidated Airlines Group S.A. discloses changes in the discount rates used for pension obligations. In normal circumstances, companies would not necessarily go through the full process of measuring pension liabilities at interim reporting dates, but rather would look to establish a process to assess the impact of any changes in underlying parameters (e.g. through extrapolation). If, for example, the discount rate estimated based on circumstances prevalent at the half-year interim reporting date has changed, the following ‘rule of thumb’ may help assess the impact on the pension obligation:
(Note: Basis points = 0.01%)
As with all approximations, the appropriateness in the circumstances should be considered.
IAS 19 distinguishes between accumulating and non-accumulating paid absences. [IAS 19.13]. Accumulating paid absences are those that are carried forward and can be used in future periods if the current period's entitlement is not used in full. IAS 19 requires an entity to measure the expected cost of and obligation for accumulating paid absences at the amount the entity expects to pay as a result of the unused entitlement that has accumulated at the end of the reporting period (see Chapter 35 at 12.2.1). IAS 34 requires the same principle to be applied at the end of interim reporting periods. Conversely, an entity should not recognise an expense or liability for non-accumulating paid absences at the end of an interim reporting period, just as it would not recognise any at the end of an annual reporting period. [IAS 34.B10].
The recognition and measurement principles of IAS 2 are applied in the same way for interim financial reporting as for annual reporting purposes. At the end of a financial reporting period an entity would determine inventory quantities, costs, and net realisable values. However, IAS 34 does comment that to save cost and time, entities often use estimates to measure inventories at interim dates to a greater extent than at annual reporting dates. [IAS 34.B25].
Net realisable values are determined using selling prices and costs to complete and dispose at the end of the interim period. A write-down should be reversed in a subsequent interim period only if it would be appropriate to do so at year-end (see Chapter 22 at 3.3). [IAS 34.B26].
Both the payer and the recipient of volume rebates, or discounts and other contractual changes in the prices of raw materials, labour, or other purchased goods and services should anticipate these items in interim periods if it is probable that these have been earned or will take effect. However, discretionary rebates and discounts should not be recognised because the resulting asset or liability would not meet the recognition criteria in the IASB's Conceptual Framework. [IAS 34.B23].
Price, efficiency, spending, and volume variances of a manufacturing entity should be recognised in profit or loss at interim reporting dates to the same extent that those variances are recognised at year-end. It is not appropriate to defer variances expected to be absorbed by year-end, which could result in reporting inventory at the interim date at more or less than its actual cost. [IAS 34.B28].
Taxation is one of the most difficult areas of interim financial reporting, primarily because IAS 34 does not clearly distinguish between current income tax and deferred tax, referring only to ‘income tax expense’. This causes tension between the approach for determining the expense and the asset or liability in the statement of financial position. In addition, the standard's provisions combine terminology, suggesting an integral approach with guidance requiring a year-to-date basis to be applied. The integral method appears to be the basis used in determining the effective income tax rate for the whole year, but that rate is applied to year-to-date profit in the interim financial statements. In addition, under a year-to-date basis, the estimated rate is based on tax rates and laws that are enacted or substantively enacted by the end of the interim period. Changes in legislation expected to occur before the end of the current year are not recognised in preparing the interim financial report. The assets and liabilities in the statement of financial position, at least for deferred taxes, are derived solely from a year-to-date approach, but sometimes the requirements of the standard are unclear, as discussed below.
IAS 34 states that income tax expense should be accrued using the ‘best estimate of the weighted average annual income tax rate expected for the full financial year’ and applying that rate to actual pre-tax income for the interim period. [IAS 34.30(c), B12]. Whilst the standard also describes this rate as ‘the tax rate that would be applicable to expected total annual earnings’, [IAS 34.B12], this is not the same as estimating the total tax expense for the year and allocating a proportion of that to the interim period (even though it might sometimes appear that way), as demonstrated in the discussion below.
Because taxes are assessed on an annual basis, using this approach to determine the annual effective income tax rate and applying it to year-to-date actual earnings is consistent with the basic concept in IAS 34, that the same recognition and measurement principles apply in interim financial reports as in annual financial statements. [IAS 34.B13].
In estimating the weighted-average annual income tax rate, an entity should reflect a blend of any progressive tax rate structure expected to be applicable to the full year's earnings, including changes in income tax rates scheduled to take effect later in the year that are enacted or substantively enacted as at the end of the interim period. [IAS 34.B13]. This situation is illustrated in Example 41.10 below. [IAS 34.B15].
10,000 of tax is expected to be payable for the full year on 40,000 of pre-tax income (20,000 @ 20% + 20,000 @ 30%), implying an average annual effective income tax rate of 25% (10,000 / 40,000).
In the above example, it might look as if the interim income tax expense is calculated by dividing the total expected tax expense for the year (10,000) by the number of interim reporting periods (4). However, this is only the case in this example because profits are earned evenly over each quarter. The expense is actually calculated by determining the effective annual income tax rate and multiplying that rate to year-to-date earnings, as illustrated in Example 41.11 below. [IAS 34.B16].
The above example shows how an expense is recognised in periods reporting a profit and a credit is recognised when a loss is incurred. This result is very different from allocating a proportion of the expected total income tax expense for the year, which in this case is zero.
If an entity operates in a number of tax jurisdictions, or where different income tax rates apply to different categories of income (such as capital gains or income earned in particular industries), the standard requires that to the extent practicable, an entity: [IAS 34.B14]
This means that the entity should perform the analysis illustrated in Example 41.11 above for each tax jurisdiction and arrive at an interim tax charge by applying the tax rate for each jurisdiction to actual earnings from each jurisdiction in the interim period. However, the standard recognises that, whilst desirable, such a degree of precision may not be achievable in all cases and allows using a weighted-average rate across jurisdictions or across categories of income, if such rate approximates the effect of using rates that are more specific. [IAS 34.B14].
By performing a separate analysis for each jurisdiction, the entity determines an interim tax expense of €97,000, giving an effective average tax rate of 26.2% (€97,000 ÷ €370,000). Had the entity used a weighted-average rate across jurisdictions, using the expected annual earnings, it would have determined an effective tax rate of 28.7% (€215,000 ÷ €750,000), resulting in a tax expense for the interim period of €106,190 (370,000 @ 28.7%). Whether the difference of nearly €9,000 lies within the range for a reasonable approximation is a matter of judgement.
As noted above, the estimated income tax rate applied in the interim financial report should reflect changes that are enacted or substantively enacted as at the end of the interim reporting period, but scheduled to take effect later in the year. [IAS 34.B13]. IAS 12 – Income Taxes – acknowledges that in some jurisdictions, announcements by government have substantively the same effect as enactment. [IAS 12.48]. Accordingly, an entity should determine the date on which a change in tax rate or tax law is substantively enacted based on the specific constitutional arrangements of the jurisdiction.
For example, assume that the 30% tax rate (on earnings above 20,000) in Example 41.10 was substantively enacted as at the second quarter reporting date and applicable before year-end. In that case, the estimated income tax rate for interim reporting would be the same as the estimated average annual effective income tax rate computed in that example (i.e. 25%) after considering the higher rate, even though the entity's earnings are not above the required threshold at the half-year.
If legislation is enacted only after the end of the interim reporting period but before the date of authorisation for issue of the interim financial report, its effect is disclosed as an event after the interim period that has not been reflected in the financial statements for the interim period. [IAS 34.16A(h)]. This is consistent with the requirement under IAS 10 – Events after the Reporting Period – where estimates of tax rates and related assets or liabilities are not revised in these circumstances. [IAS 10.22(h)].
IAS 34 requires an entity to re-estimate at the end of each interim reporting period the estimated average annual income tax rate on a year-to-date basis. [IAS 34.B13]. Accordingly, the amounts accrued for income tax expense in one interim period may have to be adjusted in a subsequent interim period if that estimate changes. [IAS 34.30(c)]. IAS 34 requires disclosure in interim financial statements of material changes in estimates of amounts reported in an earlier period or, in the annual financial statements, of material changes in estimates of amounts reported in the latest interim financial statements. [IAS 34.16A(d), 26].
Accordingly, just as the integral approach does not necessarily result in a constant tax charge in each interim reporting period, it also does not result in a constant effective tax rate when circumstances change. In 2018, Coca-Cola HBC AG described how its tax rate is estimated in their interim report.
† As previously reported from Example 41.10 using an effective tax rate of 25%.
The increase in the tax rate means that 12,000 of tax is expected to be payable for the full year on 40,000 of pre-tax income (20,000 @ 20% + 20,000 @ 40%), implying an average annual effective income tax rate of 30% (12,000 / 40,000). With cumulative pre-tax earnings of 30,000 as at the end of the third quarter, the estimated tax liability is 9,000, requiring a tax expense of 4,000 (9,000 – 2,500 – 2,500) to be recognised during that quarter. In the final quarter, earnings of 10,000 results in a tax charge of 3,000 using the revised effective rate of 30%.
In many jurisdictions, tax legislation is enacted that takes effect not only after the interim reporting date but also after year-end. Such circumstances are not addressed explicitly in the standard. As IAS 34 does not clearly distinguish between current income tax and deferred tax, combined with the different approaches taken in determining the expense recognised in profit or loss compared to the statement of financial position, these issues can lead to confusion in this situation.
On the one hand, the standard states that the estimated income tax rate for the interim period includes enacted or substantively enacted changes scheduled to take effect later in the year. [IAS 34.B13]. This implies that the effect of changes that do not take effect in the current year is ignored in determining the appropriate rate for current tax. On the other hand, IAS 34 also requires that the principles for recognising assets, liabilities, income, and expenses for interim periods are the same as in the annual financial statements. [IAS 34.29]. In annual financial statements, deferred tax is measured at the tax rates expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) enacted or substantively enacted by the end of the reporting period, as required by IAS 12. [IAS 12.47]. Therefore, an entity should recognise the effect on deferred tax measurement of a change applying to future periods if enacted by the end of the interim reporting period.
These two requirements seem to be mutually incompatible. IAS 34 makes sense only in the context of calculating the effective current tax rate on income earned in the period. Once a deferred tax asset or liability is recognised, it should be measured under IAS 12. Therefore, an entity should recognise an enacted change applying to future years in measuring deferred tax assets and liabilities as at the end of the interim reporting period. One way to treat the cumulative effect to date of this remeasurement is to recognise it in full, by a credit to profit or loss or to other comprehensive income, depending on the nature of the temporary difference being remeasured, in the period during which the tax legislation is enacted, in a similar way to the treatment shown in Example 41.13 above, and as illustrated in Example 41.14 below.
Alternatively, if the effective current tax rate is not distinguished from the measurement of deferred tax, it could be argued that IAS 34 allows the reduction in the deferred tax liability of 16 (300 – 284) to be included in the estimate of the effective income tax rate for the year. Approach 2 in Example 41.17 below applies this argument. In our view, because IAS 34 does not distinguish between current and deferred taxes, either approach would be acceptable provided that is applied consistently.
If an entity's financial year and the income tax year differ, the income tax expense for the interim periods of that financial year should be measured using separate weighted-average estimated effective tax rates for each of the income tax years applied to the portion of pre-tax income earned in each of those income tax years. [IAS 34.B17]. In other words, an entity should compute a weighted-average estimated effective tax rate for each income tax year, rather than for its financial year.
Appendix B to IAS 34 repeats the requirement in IAS 12 that for carryforwards of unused tax losses and tax credits, a deferred tax asset should be recognised to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised. In assessing whether future taxable profit is available, the criteria in IAS 12 are applied at the interim date. If these criteria are met as at the end of the interim period, the effect of the tax loss carryforwards is included in the estimated average annual effective income tax rate. [IAS 34.B21].
This result is consistent with the general approach for measuring income tax expense in the interim report, in that any entitlement for relief from current tax due to carried forward losses is determined on an annual basis. Accordingly, its effect is included in the estimate of the average annual income tax rate and not, for example, by allocating all of the unutilised losses against the earnings of the first quarter to give an income tax expense of zero in the first quarter and 4,000 thereafter.
In contrast, the year-to-date approach of IAS 34 means that the benefits of a tax loss carryback are recognised in the interim period in which the related tax loss occurs, [IAS 34.B20], and are not included in the assessment of the estimated average annual tax rate, as shown in Example 41.11 above. This approach is consistent with IAS 12, which requires the benefit of a tax loss that can be carried back to recover current tax already incurred in a previous period to be recognised as an asset. [IAS 12.13]. Therefore, a corresponding reduction of tax expense or increase of tax income is also recognised. [IAS 34.B20].
Where previously unrecognised tax losses are expected to be utilised in full in the current year, it seems intuitive to recognise the recovery of those carried forward losses in the estimate of the average annual tax rate, as shown in Example 41.15 above. Where the level of previously unrecognised tax losses exceeds expected taxable profits for the current year, a deferred tax asset should be recognised for the carried forward losses that are now expected to be utilised, albeit in future years.
The examples in IAS 34 do not show how such a deferred tax asset is created in the interim financial report. In our view, two approaches are acceptable, as shown in Example 41.17 below.
Approach 1 is consistent with the requirements of IAS 12 as it results in recognising the full expected deferred tax asset as soon as it becomes ‘probable that taxable profit will be available against which the deductible temporary difference can be utilised’. [IAS 12.24]. However, given that IAS 34 does not specifically address this situation, and is unclear about whether the effective tax rate reflects changes in the assessment of the recoverability of carried forward tax losses, we also believe that Approach 2 is acceptable.
IAS 34 also discusses in more detail the treatment of tax credits, which may for example be based on amounts of capital expenditures, exports, or research and development expenditures. Such benefits are often granted and calculated on an annual basis under tax laws and regulations and therefore are generally reflected in the estimated annual effective income tax rate used in the interim report. However, if tax benefits relate to a one-time event, they should be excluded from the estimate of the annual rate and deducted separately from income tax expense in that interim period, in the same way that special tax rates applicable to particular categories of income are not blended into a single effective annual tax rate. Occasionally, some tax credits are more akin to a government grant, which are recognised in the interim period in which they arise. [IAS 34.B19]. Similar considerations arise in determining the extent to which the existence of non-taxable income or non-deductible expenditure should be incorporated into the estimate of the weighted-average annual income tax rate expected for the full financial year. This requires the exercise of judgement.
In the Extract 41.29 below, Anheuser-Busch InBev NV/SA explains the reasons for an increase in the effective tax rate in the interim period and the effect of expenditure that is not deductible for tax purposes.
An entity measures foreign currency translation gains and losses for interim financial reporting using the same principles that IAS 21 – The Effects of Changes in Foreign Exchange Rates – requires at year-end (see Chapter 15). [IAS 34.B29]. An entity should use the actual average and closing foreign exchange rates for the interim period (i.e. it may not anticipate changes in foreign exchange rates for the remainder of the current year in translating at an interim date). [IAS 34.B30]. Where IAS 21 requires translation adjustments to be recognised as income or expense in the period in which they arise, the same approach should be used in the interim report. An entity should not defer some foreign currency translation adjustments at an interim date, even if it expects the adjustment to reverse before year-end. [IAS 34.B31].
Interim financial reports in hyperinflationary economies are prepared using the same principles as at year-end. [IAS 34.B32]. IAS 29 – Financial Reporting in Hyperinflationary Economies – requires that the financial statements of an entity that reports in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the end of the reporting period, and the gain or loss on the net monetary position be included in net income. In addition, comparative financial data reported for prior periods should be restated to the current measuring unit (see Chapter 16). [IAS 34.B33]. As shown in Examples 41.3 and 41.4 above, IAS 34 requires an interim report to contain many components, which are all restated at every interim reporting date.
The measuring unit used is the same as that as of the end of the interim period, with the resulting gain or loss on the net monetary position included in that period's net income. An entity may not annualise the recognition of gains or losses, nor may it estimate an annual inflation rate in preparing an interim financial report in a hyperinflationary economy. [IAS 34.B34]. See Chapter 16 at 10.1.
IAS 29 applies from the beginning of the reporting period in which an entity identifies the existence of hyperinflation in the country in whose currency it reports. [IAS 29.4]. Accordingly, for interim reporting purposes, IAS 29 should be applied from the beginning of the interim period in which the hyperinflation is identified. The Interpretations Committee has clarified that adoption of IAS 29 should be fully retrospective, by applying its requirements as if the economy had always been hyperinflationary (see Chapter 16 at 9). [IFRIC 7.3].
It is less obvious though, as to how a parent, which does not operate in a hyperinflationary economy, should account for the restatement of a subsidiary that operates in an economy that becomes hyperinflationary in the current reporting period when incorporating it within its consolidated financial statements.
This issue has been clarified by paragraph 42(b) of IAS 21 which specifically prohibits restatement of comparative figures when the reporting currency is not hyperinflationary. This means that when the financial statements of a hyperinflationary subsidiary are translated into the non-hyperinflationary reporting currency of the parent, the comparative amounts are not adjusted.
Notwithstanding the above, some argue that in interim period reports of the subsequent year, the parent should adjust its comparative information for the corresponding interim periods which are part of the (first) full financial year affected by hyperinflation. This is because comparative interim information had been part of the full year financial statements, which were adjusted for hyperinflation.
In our view, the parent is allowed, but not required, to adjust the comparative interim information that relates to the first full financial year affected by hyperinflation, as illustrated in the example below:
Whilst IAS 34 and IAS 29 are silent on the matter, a consequence of this approach suggests that when an economy stops being hyperinflationary, the entity should stop applying the requirements of IAS 29 during that interim period. However, in practice, it is difficult to determine when an economy stops being hyperinflationary. The characteristics indicating restored confidence in an economy (such as the population ceasing to store wealth in a more stable foreign currency) change gradually as sufficient time elapses to indicate that the three-year cumulative inflation rate is likely to stay below 100%. When the exit from hyperinflation can reasonably be identified, an entity should stop applying IAS 29 in that interim period. Prior interim periods should not be restated; instead, the entity should treat the amounts expressed in the measuring unit current as at the end of the previous reporting period as the basis for the carrying amounts in its subsequent interim reports, [IAS 29.38], (see Chapter 16 at 10.2).
IAS 34 requires an entity to apply the same criteria for recognising and measuring a provision at an interim date as it would at year-end. [IAS 34.B4]. Hence, an entity should recognise a provision when it has no realistic alternative but to transfer economic benefits because of an event that has created a legal or constructive obligation. [IAS 34.B3]. The standard emphasises that the existence or non-existence of an obligation to transfer benefits is a question of fact, and does not depend on the length of the reporting period. [IAS 34.B4].
The obligation is adjusted upward or downward at each interim reporting date, if the entity's best estimate of the amount of the obligation changes. The standard states that any corresponding loss or gain should normally be recognised in profit or loss. [IAS 34.B3]. However, an entity applying IFRIC 1 – Changes in Existing Decommissioning, Restoration and Similar Liabilities – might instead need to adjust the carrying amount of the corresponding asset rather than recognise a gain or loss. [IFRIC 1.4‑6].
Many entities budget for costs that they expect to incur irregularly during the year, such as advertising campaigns, employee training and charitable contributions. Even though these costs are planned and expected to recur annually, they tend to be discretionary in nature. Therefore, it is generally not appropriate to recognise an obligation at the end of an interim financial reporting period for such costs that are not yet incurred, as they do not meet the definition of a liability. [IAS 34.B11].
As discussed at 8.2.2 above, IAS 34 prohibits the recognition or deferral of costs incurred unevenly throughout the year at the interim date if recognition or deferral would be inappropriate at year-end. [IAS 34.39]. Accordingly, such costs should be recognised as they are incurred and an entity should not recognise provisions or accruals in the interim report to adjust these costs to their budgeted amount.
In Extract 41.30 below, Coco-Cola HBC AG explains the reasons certain fixed costs are not significantly affected by business seasonality.
The cost of periodic maintenance, a planned major overhaul, or other seasonal expenditures expected to occur after the interim reporting date should not be recognised for interim reporting purposes unless an event before the end of the interim period causes the entity to have a legal or constructive obligation. The mere intention or necessity to incur expenditures in the future is not sufficient to recognise an obligation as at the interim reporting date. [IAS 34.B2]. Similarly, an entity may not defer and amortise such costs if they are incurred early in the year, but do not satisfy the criteria for recognition as an asset as at the interim reporting date.
Variable lease payments can create legal or constructive obligations that are recognised as liabilities even though such amounts are not included in the lease liability in the period. If a lease includes variable payments based on achieving a certain level of annual sales (or annual use of the asset), an obligation can arise in an interim period before the required level of annual sales (or usage) is achieved. If the entity expects to achieve the required level of annual sales (or usage), it should recognise a liability as it has no realistic alternative but to make the future lease payment. [IAS 34.B7].
When governments or other public authorities impose levies on entities in relation to their activities, as opposed to income taxes, it is not always clear when the liability to pay a levy arises and a provision should be recognised. IFRIC 21 – Levies – addresses this issue. The scope of the Interpretation is limited to provisions within the scope of IAS 37 and specifically need not be applied to emissions trading schemes. [IFRIC 21.2, 6].
The Interpretation requires that for an activity within its scope, an entity should recognise a liability for a levy only when the activity that triggers payment, as identified by the relevant legislation, occurs. [IFRIC 21.8]. The Interpretation states that neither a constructive nor a present obligation arises as a result of being economically compelled to continue operating; or from any implication of continuing operations in the future arising from the use of the going concern assumption in the preparation of financial statements (see Chapter 26 at 6.8). [IFRIC 21.9‑10].
The Interpretation states that the same recognition principles should be applied in the interim financial statements. Therefore, a liability for any levy expense should not be anticipated if there is no present obligation to pay the levy at the end of the interim reporting period. Similarly, a liability should not be deferred if a present obligation to pay the levy exists at the end of the interim period. [IFRIC 21.31].
This is relatively simple when a levy is triggered on a specific day or when a specific event occurs. When a levy is triggered progressively, for example as the entity generates revenues, the levy is accrued over time. At any time in the year, the entity would have a present obligation to pay an amount of levy that would be based on revenues generated to that date and recognises a liability and an expense on that basis. [IFRIC 21.11].
The following examples illustrate the above principles in a number of scenarios and demonstrate how the appropriate accounting treatment has to reflect the specific facts and circumstances that apply in determining an entity's obligation to pay the levy in line with the relevant legislation.
When the legislation provides that a levy is triggered by an entity operating in a market only at the end of the annual reporting period, no liability is recognised until the last day of the annual reporting period. No amount is recognised before that date in anticipation of the entity still operating in the market. This means that in the interim financial reports for that year, no liability for the levy expense is recognised. Only if the entity reports for the last quarter of that year would the expenditure appear in an interim report. [IFRIC 21.IE1 Example 2].
If a levy is triggered in full as soon as the entity commences generating revenues, the liability is recognised in full on the first day that the entity commences generating revenue. In this case, the entity does not defer any expense and amortise this amount over the year or otherwise allocate it to subsequent interim periods. The example below illustrates this situation. [IFRIC 21.IE1 Example 2].
Another situation is when a levy is triggered in full as soon as the entity generates revenue from an activity above a certain annual threshold is illustrated in the following example. [IFRIC 21.IE1 Example 4].
In many countries, property taxes are levied by municipalities or other local government bodies on the owner of a property. Such taxes are relevant and may be material to entities in certain sectors (e.g. real estate). Even within a single jurisdiction, there could be several different property tax mechanisms. Generally, each property tax arrangement must be assessed on its own merits. To facilitate such assessments, we have explored some illustrative fact patterns of property tax mechanisms in the following examples:
Yet another situation arises where a levy is triggered progressively.
The impact on interim reports for the various types of levies is summarised below:
Illustrative examples | Obligating event | Recognition of liability in interim reports |
Levy triggered progressively as revenue is generated in specified period | Generation of revenue in the specified period | Recognise progressively based on revenue generated |
Levy triggered in full as soon as revenue is generated in one period, based on revenues from a previous period | First generation of revenue in subsequent period | Recognise only if first revenue generated in interim period |
Levy triggered in full if entity operates as a bank at the end of the annual reporting period | Operating as a bank at the end of the reporting period | Recognise only if interim period includes the last day of the annual reporting period specified in the legislation. Otherwise, a provision would not be permitted to be recognised in interim reports |
Levy triggered if revenues are above a minimum specified threshold (e.g. when a certain level of revenue has been achieved) | Reaching the specified minimum threshold | Recognise only where the minimum threshold has been met or exceeded during the interim period. Otherwise, a provision would not be permitted to be recognised in interim reports |
These requirements illustrate what is meant by the concept of the ‘year-to-date’ basis in IAS 34 and discussed at 8 above.
Earnings per share (EPS) in an interim period is computed in the same way as for annual periods. However, IAS 33 – Earnings per Share – does not allow diluted EPS of a prior period to be restated for subsequent changes in the assumptions used in those EPS calculations. [IAS 33.65]. This approach might be perceived as inconsistent to the year-to-date approach which should be followed for computing EPS for an interim period. For example, if an entity, reporting quarterly, computes diluted EPS in its first quarter financial statements, it cannot restate the reported diluted EPS subsequently for any changes in the assumptions used. However, following a year-to-date approach, the entity should consider the revised assumptions to compute the diluted EPS for the six months in its second quarter financial statements, which, in this case would not be the sum of its diluted EPS for first quarter and the second quarter.
IAS 34 requires that the measurement procedures followed in an interim financial report should be designed to ensure that the resulting information is reliable and that all material financial information that is relevant to an understanding of the financial position or performance of the entity is appropriately disclosed. Whilst estimation is necessary in both interim and annual financial statements, the standard recognises that preparing interim financial reports generally requires greater use of estimates than at year-end. [IAS 34.41]. Because the standard accepts a higher degree of estimation by the entity, the measurement of assets and liabilities at an interim date may involve less use of outside experts in determining amounts for items such as provisions, contingencies, pensions or non-current assets revalued at fair values. Reliable measurement of such amounts may simply involve updating the previously reported year-end position. The procedures may be less rigorous than those at year-end. The example below is based on Appendix C to IAS 34. [IAS 34.42].
Attention is given to items that are recognised at fair value. Although an entity is not required to use professionally qualified valuers at interim reporting dates, and may only update the previous year-end position, the entity is required to recognise impairments in the proper interim period.
IAS 34 does not contain any general transitional rules. Therefore, an existing IFRS reporting entity must apply the requirements of IAS 34 in full and without any transitional relief when it first chooses (or is required) to publish an interim financial report prepared under IFRS.
For example, an entity that has already published annual financial statements prepared under IFRS and either chooses (or is required) to prepare interim financial reports in compliance with IAS 34 must present all the information required by the standard for the current interim period, cumulatively for the current year-to-date, and for comparable periods (current and year-to-date) of the preceding year. [IAS 34.20]. The absence of any transitional provisions requires such entities to restate previously reported interim financial information to comply with IAS 34 and to present information relating to comparative interim periods, such as in respect of segment disclosures or in relation to asset write-downs and reversals thereof, which might not previously have been reported.
The standard defines ‘interim period’ as a financial reporting period shorter than a full financial year, [IAS 34.4], and requires the format of condensed financial statements for an interim period to include each of the headings and subtotals that were included in the entity's most recent annual financial statements. [IAS 34.10].
However, IAS 34 provides no guidance for an entity that either is required or chooses to issue interim financial statements before it has prepared a set of IFRS compliant annual financial statements. This situation might arise in the entity's first year of its existence or in the year in which the entity converts from its local GAAP to IFRS. Whilst the standard does not prohibit the entity from preparing a condensed set of interim financial statements, it does not specify how an entity would interpret the minimum disclosure requirements of IAS 34 when there are no annual financial statements to refer to.
The entity should consider making additional disclosures to recognise that a user of this first set of interim financial statements does not have the access otherwise assumed by the standard to the most recent annual financial report of the entity. Accordingly, the explanation of significant events and transactions and changes in financial position in the period should be more detailed than the update normally expected in IAS 34. [IAS 34.15]. In the absence of any specific regulatory requirements to which the entity is subject, the following are examples of additional considerations that would apply:
Entities that have converted from local GAAP to IFRS and have not yet presented IFRS annual financial statements are subject to additional requirements under IFRS 1 – First-time Adoption of International Financial Reporting Standards – when presenting interim reports in accordance with IAS 34. Such requirements are discussed in detail in Chapter 5 at 6.6.