4.1.1 Relevance of other standards in condensed financial statements

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.

4.2.1 Location of the specified disclosures in an interim financial report

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.

4.3.1 Inventory write-down and reversals

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)].

4.3.2 Impairment

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)].

4.3.3 Reversal of impairment

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)].

4.3.4 Acquisitions and disposals of property, plant and equipment

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)].

4.3.5 Capital commitments

In a brief descriptive note, Deutsche Lufthansa AG discloses its commitments for capital expenditure. [IAS 34.15B(e)].

4.3.6 Litigation settlements

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)].

4.3.7 Changes in circumstances affecting fair values

In its interim report for 2019, Yorkshire Building Society describes the effect of volatility in financial markets during the period. [IAS 34.15B(h)].

4.3.8 Default or breach of loan covenants not remedied before the end of interim period

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.

4.3.9 Related party transactions

In Extract 41.10 below, Deutsche Bank Aktiengesellschaft discloses related party transactions. [IAS 34.15B(j)].

4.3.10 Transfers between different levels of fair value hierarchy

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).

4.3.11 Contingent liabilities

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)].

4.3.12 Accounting policies and methods of computation

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.

4.3.13 Seasonality or cyclicality of operations

Extract 41.14 below shows how Ardagh Group S.A. discloses the effects of seasonality in its interim report. [IAS 34.16A(b)].

4.3.14 Amounts that are unusual because of their nature, size or incidence

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.

4.3.15 Issues, repurchases and repayments of debt and equity securities

Extract 41.16 below illustrates the disclosure of material changes in borrowings. [IAS 34.16A(e)].

4.3.16 Dividends paid for each class of share

In the Extract below, Nestlé S.A. discloses dividends paid during the interim period. [IAS 34.16A(f)].

4.3.17 Events after the interim reporting date

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].

4.3.18 Changes in the composition of the entity

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.

8.1.1 Measurement on a year-to-date basis

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:

• inventory write-downs, impairments, or provisions for restructurings are recognised and measured on the same basis as at a year-end. Except for reversal of impairment losses recognised on goodwill (see 9.2 below), later changes in the original estimate are recognised in the subsequent interim period, either by recognising additional accruals or reversals of the previously recognised amount; [IAS 34.30(a)]
• costs that do not meet the definition of an asset at the end of an interim period are not deferred in the statement of financial position, either to await information on whether such costs meets the definition of an asset, or to smooth earnings over interim periods within a year. [IAS 34.30(b)]. For example, costs incurred in acquiring an intangible asset before the recognition criteria under IAS 38 – Intangible Assets – are met are expensed. Only those costs incurred after the recognition criteria are met can be recognised as an asset; there is no reinstatement as an asset in a later period of costs previously expensed because the recognition criteria were not met at that time; [IAS 38.71] and
• income tax expense is ‘recognised in each interim period based on the best estimate of the weighted-average annual income tax rate expected for the full financial year. Amounts accrued for income tax expense in one interim period may have to be adjusted in a subsequent interim period of that financial year if the estimate of the annual income tax rate changes’. [IAS 34.30(c)].

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.

8.1.2 New accounting pronouncements and other changes in accounting policies

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]

1. restating the financial statements of prior interim periods of the current year and the comparable interim periods of any prior financial years that will be restated in the annual financial statements under IAS 8; or
2. when it is impracticable to determine the cumulative effect at the beginning of the year of applying a new accounting policy to all prior periods, adjusting the financial statements of prior interim periods of the current year and comparable interim periods of prior years to apply the new accounting policy prospectively from the earliest date practicable.

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).

8.1.3 Voluntary changes in presentation

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].

8.2.1 Revenues received seasonally, cyclically, or occasionally

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].

8.2.2 Costs incurred unevenly during the year

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]

• the costs relate directly to the contract or to an anticipated contract that can be specifically identified;
• the costs are expected to generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) performance obligations in the future; and
• the costs are expected to be recovered.

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.

9.1.1 Depreciation and amortisation

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.

9.1.2 Impairment of assets

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).

9.1.3 Recognition of intangible assets

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].

9.1.4 Capitalisation of borrowing costs

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].

9.3.1 Employer payroll taxes and insurance contributions

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].

9.3.2 Year-end bonuses

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]

1. the entity has a present legal or constructive obligation to make such payments as a result of past events; and
2. a reliable estimate of the obligation can be made.

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.

9.3.3 Pensions

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:

• Estimated change in DBO (%) = [Change in the discount rate (basis points) × duration of the pension obligation (in years)] / 100

(Note: Basis points = 0.01%)

As with all approximations, the appropriateness in the circumstances should be considered.

9.3.4 Vacations, holidays, and other short-term paid absences

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].

9.4.1 Inventories

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].

9.4.2 Contractual or anticipated purchase price changes

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].

9.4.3 Interim period manufacturing cost variances

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].

9.5.1 Measuring interim income tax expense

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]

• estimates the average annual effective income tax rate for each taxing jurisdiction separately and apply it individually to the interim period pre-tax income of each jurisdiction; and
• applies different income tax rates to each individual category of interim period pre-tax income.

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.

9.5.2 Changes in the effective tax rate during the year

9.5.3 Difference in financial year and tax year

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.

9.5.4 Tax loss and tax credit carrybacks and carryforwards

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.

9.5.5 Tax credits

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.

9.6.1 Foreign currency translation gains and losses

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].

9.6.2 Interim financial reporting in hyperinflationary economies

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).

9.7.1 Provisions

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].

9.7.2 Other planned but irregularly occurring costs

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.

9.7.3 Major planned periodic maintenance or overhaul

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.

9.7.4 Variable lease payments

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].

9.7.5 Levies charged by public authorities

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:

These requirements illustrate what is meant by the concept of the ‘year-to-date’ basis in IAS 34 and discussed at 8 above.

11.1.1 Condensed financial statements in the year of incorporation or when an entity converts from its local GAAP to IFRS

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:

• since it is not possible to make a statement that the same accounting policies and methods of computation have been applied, [IAS 34.16A(a)], the entity should disclose all those accounting policies and methods of computation in the same level of detail as it would in a set of annual financial statements. When the entity issues interim reports on a quarterly basis, the first quarter interim report should provide the abovementioned details; subsequent quarterly reports could refer to the details included in the first quarter report;
• similarly, the disclosure of the nature and amount of changes in estimates of amounts reported in prior periods will have to go into more detail than just the changes normally required to be disclosed; [IAS 34.16A(d)]
• mere disclosure of transfers between levels of the fair value hierarchy used in measuring the fair value of financial instruments, [IAS 34.15B(k)], would not be meaningful unless put in the context of how those fair values are determined (e.g. methods used, any assumptions applied) and providing a detailed classification of all such financial instrument measurements using fair value hierarchy, based on the significance of the inputs used;
• rather than disclosing changes in the basis of segmentation or in the basis of measurement of segment profit and loss, [IAS 34.16A(g)(v)], a full description will be necessary, as will the disclosure of segment assets and liabilities, [IAS 34.16A(g)(iv)], where such information is required to be disclosed in the annual financial statements; [IAS 34.16A(g)]
• more extensive disclosure than simply the changes since the last report date will be required for contingent liabilities and contingent assets; [IAS 34.15B(m)] and
• in the absence of a complete set of annual financial statements complying with IFRS, the entity should include each of the headings and subtotals in the condensed financial statements that it would expect to include in its first financial statements prepared under IFRS.

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.