2.2.1 Issuers required to comply with the Disclosure Guidance and Transparency Rules (DTR)

Issuers of securities that are required to publish half-yearly financial reports in accordance with the Disclosure Guidance and Transparency Rules (DTR) must include a responsibility statement in the report. In accordance with paragraph 4.2.10.R of the DTR, a person making the responsibility statement will satisfy the requirement to confirm that the condensed set of financial statements gives a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer (or the undertakings included in the consolidation as a whole) by including a statement that the condensed set of financial statements has been prepared in accordance with either:

• IAS 34; or
• for UK issuers not using EU-adopted IFRS, FRS 104 issued by the FRC. [FRS 104 Appendix IV.3].

The application of FRS 104 is conditional upon the person making the responsibility statement having reasonable grounds to be satisfied that the condensed set of financial statements prepared under FRS 104 is not misleading. [FRS 104 Appendix IV.4].

In accordance with the DTR, an issuer that is required to prepare consolidated accounts must prepare the condensed set of financial statements in accordance with IAS 34 and the requirements set out in FRS 104 do not apply to these issuers. [FRS 104 Appendix IV.5]. An issuer that is not required to prepare consolidated accounts must, as a minimum, apply the content and preparation requirements set out in paragraph 4.2.5.R of the DTR. The content and preparation requirements of FRS 104 are consistent with those set out in the DTR, although they are more prescriptive and detailed. [FRS 104 Appendix IV.6].

2.2.2 Unlisted entities and entities not subject to the DTR

While not in the scope of the DTR, unlisted entities or entities with securities admitted to trading on an exchange not subject to the DTR may prepare and present interim financial statements. In those circumstances, there may be no requirement to follow a particular standard on interim financial reporting. However, we would expect that where annual financial statements are prepared under either FRS 101 or FRS 102 that the interim financial statements would be prepared under FRS 104.

4.1.1 Relevance of other standards in condensed financial statements

Whilst FRS 102 specifies disclosures required in a complete set of financial statements, if an entity's interim financial report includes only condensed financial statements as described in FRS 104, 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, FRS 102 provides guidance on the appropriate disclosures for many of these items. [FRS 104.15C]. For example, in meeting the requirements of (g) at 4.1 above to disclose the impact of corrections of prior period errors, the requirements of Section 10 would be relevant (see Chapter 9 at 3.7.3).

4.2.1 Location of the specified disclosures in an interim financial report

FRS 104 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’. [FRS 104 Appendix I]. 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 4.1 and 4.2 above in the interim financial statements themselves, 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. [FRS 104.15B, 16A].

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. [FRS 104.29].

The principles for recognition and the definitions of assets, liabilities, income and expenses for interim periods are the same as in the annual financial statements. [FRS 104.29, 31]. Therefore, for assets, the same tests of future economic benefits apply at interim dates as at year-end. Costs that, by their nature, do 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. [FRS 104.32]. 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. [FRS 104.33].

FRS 104 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. 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; [FRS 104.30(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 it meets the definition of an asset, or to smooth earnings over interim periods within a year. [FRS 104.30(b)]. For example, costs incurred in acquiring an intangible asset before the recognition criteria in FRS 102 are met are expensed under Section 18 – Intangible Assets other than Goodwill. 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; [FRS 102.18.17] 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, using the tax rates and laws that have been enacted or substantively enacted at the end of an interim reporting period. 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’. [FRS 104.30(c)].

8.1.2 New accounting pronouncements and other changes in accounting policies

As noted at 8.1 above, 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. [FRS 104.28].

FRS 104 requires that a change in accounting policy, other than where the transition rules are specified by FRS 102, should be reflected by: [FRS 104.43]

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 Section 10 – Accounting Policies, Estimates and Errors – of FRS 102; 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 the beginning of the current year. [FRS 104.44]. 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. Disclosures regarding the restatement can be presented on the face of the financial statements or disclosed in the notes to the financial statements.

8.1.3 Change in going concern assumption

Another situation in which an entity applies different accounting policies in its interim financial statements as compared to its most recent annual financial statements is when the going concern assumption is no longer appropriate.

Although FRS 104 does not specifically address the issue of going concern, the general requirements of Section 3 of FRS 102 apply to both a complete set and to condensed interim financial statements. Section 3 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. [FRS 102.3.8]. The going concern assessment is discussed in more detail in Chapter 6 at 9.3.

Under Section 3, the going concern assessment is made based on all available information about the future, which at a minimum is twelve months from the date when the financial statements are authorised for issue. [FRS 102.3.8]. Therefore, with respect to interim reporting under FRS 104, the minimum period for management's assessment is also at least twelve months from the date when the interim report is authorised for issue; it is not limited, for example, to one year from the authorisation date of the most recent annual 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. 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. [FRS 102.3.9].

8.1.4 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 FRS 104 to include in a set of condensed financial statements the same headings and sub-totals as the most recent annual financial statements, [FRS 104.10], and to apply the same accounting policies as the most recent or the next annual financial report, [FRS 104.28], and the requirements of Section 3 of FRS 102 as they will relate to those next annual financial statements. Section 3 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 FRS 102, or another applicable FRS. [FRS 102.3.11].

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. [FRS 104.43(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. [FRS 102.3.12].

8.2.1 Revenues received seasonally, cyclically or occasionally

FRS 104 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. [FRS 104.37]. Examples of such revenues include dividend revenue, royalties, government grants, and seasonal revenues of retailers; such revenues are recognised when they occur. [FRS 104.38].

FRS 104 also requires an entity to explain the seasonality or cyclicality of its business and the effect on interim reporting. [FRS 104.16A(b)]. If businesses are highly seasonal, FRS 104 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 6 above). [FRS 104.21].

8.2.2 Costs incurred unevenly during the year

FRS 104 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, [FRS 104.39], which is based on the principle that assets and liabilities are recognised and measured using the same criteria as at the year-end. [FRS 104.29, 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.

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 section of FRS 102 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 Section 13 – Inventories. Any variances and unallocated overheads are expensed. [FRS 102.13.9].

The implications are unclear for professional service companies that recognise revenue under Section 23 – Revenue – using the percentage of completion method. On one hand, Section 23 includes the same guidance on the percentage of completion method for both construction contracts and service provision, [FRS 102.23.21], implying that both types of entity can defer costs and the related variances at the end of an interim reporting period. On the other hand, service providers might also follow the guidance in Section 13 which gives guidance for the cost of inventories of a service provider, and which results in expensing such costs and variances at the end of the reporting period. [FRS 102.13.14]. However, these are issues that an entity would also face at the end of an annual reporting period. What is clear is that an entity should not diverge from these requirements 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. [FRS 104 Appendix II.26].

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 Sections 17 and 18, 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 15 at 3.5.6.C and Chapter 16 at 3.4.3.B). 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. Therefore, an entity cannot apply a straight-line method of depreciation (amortisation) in its annual financial statements, while allocating the depreciation (amortisation) charge to interim periods using a ‘unit of production’ based approach.

9.1.2 Impairment of assets

Section 27 – Impairment of Assets – of FRS 102 requires an entity to recognise an impairment loss if the recoverable amount of an asset declines below its carrying amount. [FRS 104 Appendix II.37]. An entity should apply the same impairment testing, recognition, and reversal criteria at an interim date as it would at year-end. [FRS 104 Appendix II.38].

However, FRS 104 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. [FRS 104 Appendix II.38]. Nevertheless, an entity is not exempt 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.

9.1.3 Recognition of intangible assets

An entity should apply the same definitions and recognition criteria for intangible assets, as set out in Section 18 of FRS 102, in an interim period as in an annual period. Therefore, costs incurred before the recognition criteria are met should be recognised as an expense. [FRS 104 Appendix II.10]. Expenditures on intangibles that are initially expensed cannot be reinstated and recognised as part of the cost of an intangible asset subsequently (e.g. in a later interim period). [FRS 102.18.17]. 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. [FRS 104 Appendix II.10].

9.2.1 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 is an 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. [FRS 104 Appendix II.3].

9.2.2 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. [FRS 104 Appendix II.7]. A bonus is recognised for interim reporting if, and only if: [FRS 104 Appendix II.8]

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. [FRS 102.21.6]. Section 28 of FRS 102 gives guidance on accounting for profit sharing and bonus plans (see Chapter 25 at 3.3).

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 34.6 below.

9.2.3 Pensions

Section 28 requires an entity to determine the present value of defined benefit obligations and the fair value of plan assets at the end of the reporting period. While Section 28 does not require an entity to involve a professionally qualified actuary in the measurement of the obligations, nor to undertake a comprehensive annual actuarial valuation, we expect that in practice most entities will do so.

For interim reporting purposes, the defined benefit obligation can often be reliably measured by extrapolation of the latest actuarial valuation adjusted for changes in employee demographics such as number of employees and salary levels. [FRS 104 Appendix II.42].

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) then entities may wish to consider whether they should obtain 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.

Market values of plan assets as at the interim reporting date should be available without recourse to an actuary and in normal circumstances, companies will not necessarily go through the full process of measuring pension liabilities at interim reporting dates, but rather will look to establish a process to assess the impact of any changes in underlying parameters (e.g. through extrapolation). As with all estimates, the appropriateness in the circumstances should be considered.

9.2.4 Vacations, holidays and other short-term paid absences

Section 28 distinguishes between accumulating and non-accumulating paid absences. [FRS 102.28.6-7]. 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. Section 28 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 25 at 3.3). FRS 104 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. [FRS 104 Appendix II.12].

9.3.1 Inventories

The recognition and measurement principles of Section 13 are applied in the same way for interim financial reporting as for annual reporting purposes. At the end of any financial reporting period an entity would determine inventory quantities, costs and net realisable values. However, FRS 104 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. [FRS 104 Appendix II.27].

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 11 at 3.4.2. [FRS 104 Appendix II.28].

9.3.2 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 FRS 102. [FRS 104 Appendix II.25].

9.3.3 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. [FRS 104 Appendix II.30]. See 8.2.2 above for a discussion on this topic as it applies to costs incurred by service providers.

9.4.1 Measuring interim income tax expense

FRS 104 states that income tax expense should be accrued using the tax rate applicable to expected total annual earnings, by applying the estimated weighted-average annual effective income tax rate to pre-tax income for the interim period. [FRS 104 Appendix II.14]. However, 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 the integral 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 FRS 104, that the same recognition and measurement principles apply in interim financial reports as in annual financial statements. [FRS 104 Appendix II.15].

In estimating the weighted-average annual income tax rate, an entity should consider the progressive tax rate structure expected for 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. [FRS 104 Appendix II.15]. This situation is illustrated in Example 34.7 below which is based on the example in paragraph 17 of Appendix II to FRS 104.

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 34.8 below which is based on the example in paragraph 18 of Appendix II to FRS 104.

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: [FRS 104 Appendix II.16]

• estimates the average annual effective income tax rate for each taxing jurisdiction separately and applies 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 34.8 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. [FRS 104 Appendix II.16].

By performing a separate analysis for each jurisdiction, the entity determines an interim tax expense of £977,000, 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 over £9,000 lies within the range for a reasonable approximation is a matter of judgement.

9.4.2 Changes in the effective tax rate during the year

9.4.3 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. [FRS 104 Appendix II.19]. 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.

9.4.4 Tax loss and tax credit carrybacks and carryforwards

FRS 104 repeats the requirement in Section 29 of FRS 102 that for carryforwards of unused tax losses, a deferred tax asset should be recognised to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits. [FRS 104 Appendix II.23]. In assessing whether future taxable profit is available, the criteria in Section 29 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.

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 FRS 104 means that the benefits of a tax loss carryback are recognised in the interim period in which the related tax loss occurs, [FRS 104 Appendix II.22], and are not included in the assessment of the estimated average annual tax rate, as shown in Example 34.8 above. This approach is consistent with Section 29 of FRS 102 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. [FRS 102.29.4]. Therefore, a corresponding reduction of tax expense or increase of tax income is also recognised. [FRS 104 Appendix II.22].

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 34.12 above. However, 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 FRS 104 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 34.14 below.

Approach 1 is consistent with the requirements of Section 29 as it results in recognising the full expected deferred tax asset as soon as it becomes ‘probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits’. [FRS 102.29.7]. However, given that FRS 104 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.

9.4.5 Tax credits

FRS 104 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 usually granted and calculated on an annual basis under tax laws and regulations and therefore are 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. [FRS 104 Appendix II.21].

9.5.1 Foreign currency translation gains and losses

An entity measures foreign currency translation gains and losses for interim financial reporting using the same principles that Section 30 – Foreign Currency Translation – of FRS 102 requires at year-end (see Chapter 27). [FRS 104 Appendix II.31]. 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). [FRS 104 Appendix II.32]. When Section 30 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. [FRS 104 Appendix II.33].

9.5.2 Interim financial reporting in hyperinflationary economies

Interim financial reports in hyperinflationary economies are prepared using the same principles as at year-end. [FRS 104 Appendix II.34]. Section 31 – Hyperinflation – of FRS 102 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 profit or loss. In addition, comparative financial data reported for prior periods should be restated to the current measuring unit (see Chapter 28). [FRS 104 Appendix II.35]. As shown in Examples 34.2 and 34.3 above, FRS 104 requires an interim report to contain many components, which are all restated to the current measuring unit at every interim reporting date.

The measuring unit used is 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. [FRS 104 Appendix II.36].

While it is highly unlikely for a UK company to have the functional currency of a hyperinflationary economy, a UK based group may prepare consolidated financial statements under FRS 102 with a subsidiary that operates in, and has a functional currency of, a country subject to hyperinflation.

9.6.1 Provisions

FRS 104 requires an entity to apply the same criteria for recognising and measuring a provision at an interim date as it would at year-end. [FRS 104 Appendix II.6]. 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. [FRS 104 Appendix II.5]. FRS 104 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. [FRS 104 Appendix II.6].

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. [FRS 104 Appendix II.5]. However, an entity applying IFRIC 1 – Changes in Existing Decommissioning, Restoration and Similar Liabilities – under the hierarchy in Section 10 (see Chapter 15 at 3.4.3) might instead need to adjust the carrying amount of the corresponding asset rather than recognise a gain or loss.

9.6.2 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. [FRS 104 Appendix II.13].

As discussed at 8.2.2 above, FRS 104 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. [FRS 104.39]. 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.

9.6.3 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. [FRS 104 Appendix II.4]. 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.

9.6.4 Contingent lease payments

Contingent lease payments can create legal or constructive obligations that are recognised as liabilities. If a lease includes contingent 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. [FRS 104 Appendix II.9].

9.6.5 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. As there is no specific guidance on accounting for such provisions under FRS 102, entities may, under the hierarchy set out in Section 10, refer to the guidance in IFRIC 21 – Levies – in formulating an appropriate accounting policy for these obligations.