Each financial report of an entity is evaluated on its own merits for its conformity to IFRS. The failure of an entity to present an interim financial report (or, indeed, to apply IAS 34 to its interim financial report) does not preclude its annual financial statements from being prepared in accordance with, or described as complying with, IFRS. In contrast, because interim financial statements in accordance with IAS 34 are intended to update the annual financial statements, an entity would be expected to produce annual financial statements that comply with IFRS if it was going to apply IAS 34 to its interim financial reporting.

IAS 34 requires that items of income and expenses should be recognised and measured on a basis consistent with that used in preparing the annual financial statements. No adjustments should be made for events expected to occur after the end of the interim period. The standard notes that the frequency of an entity’s interim reporting should not affect the measurement of its annual results. This is referred to as the ‘year-to-date’ principle.

Example of the application of the year-to-date principle An example of the year-to-date principle is the income statement recognition for post-employment benefits under IAS 19. The service cost and interest cost are calculated based on the assumptions and funded status as at the start of the year, unless there is a significant one-off event (like a plan amendment, settlement or curtailment) or significant market fluctuation. Income statement expense is not revised to reflect changes in assumptions and experience adjustments at interim reporting dates because if it was the results presented in annual financial statements would either vary depending on how frequently the entity reported or differ from the accumulation of the interim financial statements. Total comprehensive income would not be changed but the split between profit or loss and other comprehensive income could. An amendment to IAS 19 addressing plan amendments, curtailments and settlements became effective on or after the beginning of the first annual reporting period that begins on or after 1 January 2019. Following this amendment, the entity should measure current service cost and net interest cost for the remainder of the annual period after amendment, curtailment and settlement based on revised assumptions. This will not give rise an inconsistency between profit or loss and other comprehensive income, because the same approach will be required in the annual financial statements.

The accounting policies applied to the interim report should be consistent with those applied in the most recent annual financial statements, except for accounting policy changes made after the date of the most recent annual financial statements that are to be reflected in the next annual financial statements. This is particularly relevant with the implementation of new standards as these should be reflected in the first interim statements after the implementation date.

The accounting policies need to be stated and explained only where they differ from those previously adopted, for example on the adoption of a new or amended standard. In all other cases, the interim report should include a statement that they are prepared on the basis of the accounting policies and methods of computation followed in the most recent set of annual financial statements.

Are disclosures required regarding published standards that have not yet been adopted? IAS 34 does not specifically refer to the requirements in IAS 8 regarding the impact of standards that have not yet been adopted. However, management should consider any guidance issued by their regulator, the magnitude of the likely impact and changes in the information available since the previous year end in the determination of whether or not it would be appropriate to update disclosure. As an example, at the prior year end the financial statements might have stated that management was in the process of evaluating the impact of the change. If that evaluation has been concluded and indicates a significant impact, it might be appropriate to include that information.

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What disclosures are required in interim financial statements on the initial adoption of a new standard? When a new standard is adopted in an interim period, paragraph 16A(a) of IAS 34 should be applied. This paragraph requires a description of the nature and effect of any changes to accounting policies and methods as compared to the most recent annual financial statements. The extent of these disclosures will depend on the standard being adopted, and the relevance and impact of the standard. The disclosures are likely to vary depending on the qualitative and quantitative impact on the entity and therefore judgement will be required when determining what to disclose. Entities should bear in mind that the intention of an interim financial report is to provide an update on the last set of annual financial statements, and it should therefore focus on significant new activities, events and circumstances.

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Is it acceptable to adopt a new accounting standard in a subsequent interim period when it has not been adopted in an initial interim period? Where an entity is considering adopting a new accounting standard early (prior to the mandatory effective date) in its full year financial statements, but no decision has been taken at the interim reporting date, it would be acceptable not to adopt the new standard in the interim report. Disclosure should be given in the interim report to indicate that early adoption is being considered for the full year and that a decision will be taken in subsequent interim reporting period. The interim report should include disclosure of any known or reasonably estimable information relevant to the entity’s annual financial statements in the period of initial application.

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Can an entity voluntarily adopt a new accounting standard which has been issued in the interim period, but does not require adoption until after the year end in the subsequent interim period? An entity is not precluded from deciding in a subsequent interim period to voluntarily adopt a new standard which is published during an interim period (but does not require adoption until after the year-end). However, in the subsequent interim reports, comparative information in relation to the interim period in which the standard was not adopted would need to be restated.

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Is a third balance sheet required when there is a change in accounting policy? IAS 34 has a year-to-date approach to interim reporting and does not replicate the requirements of IAS 1 in terms of comparative information. As a consequence, it is not necessary to provide an additional balance sheet as at the beginning of the earliest comparative period presented where an entity has made a retrospective change in accounting policies and/or a retrospective reclassification.

Although interim condensed financial reports prepared in accordance with IAS 34 are not required to comply with the full requirements of IAS 1, they are required to be prepared in accordance with certain of the fundamental principles that underpin IAS 1. IAS 1 states that paragraphs IAS 1 apply to interim financial reports. They are:

• The financial statements should present fairly the entity’s financial position, financial performance and cash flows.
• The financial statements should not be described as being compliant with IFRS, unless they comply with all the requirements of IFRS.
• Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes and explanatory material.
• In extremely rare circumstances, where compliance with a requirement in an IFRS would be so misleading that it is not useful to users of the financial statements in making economic decisions, the financial statements can depart from that requirement and give significant disclosure about the departure.
• The financial statements should be prepared on the going concern basis, unless management intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so.
• The financial statements should be prepared (except for cash flow information) using the accruals basis of accounting.
• Each material class of similar items should be presented separately in the financial statements. Items of a dissimilar nature or function should be presented separately, unless they are immaterial.
• Assets and liabilities, and income and expenses, should not be offset unless required or permitted by an IFRS.

Where an entity changes its accounting policy, the guidance in IAS 34 is the same as in IAS 8, and it requires the change to be applied retrospectively (unless there are specific transitional rules in a new standard or interpretation), with the restatement of comparative information presented. In line with the guidance in IAS 8, IAS 34 allows a new accounting policy to be applied prospectively from the earliest date practicable, but no later than the beginning of a financial year, where retrospective application is impracticable. The judgement of impracticability is the same as that laid out in IAS 8.

For assets, the same tests of future economic benefits apply at interim reporting dates as at the entity’s financial reporting year end. Similarly, a liability at an interim reporting date should represent an existing obligation at that date.

Internally generated intangible assets The costs of creating an internally generated intangible asset should be capitalised from the date when the recognition criteria set out in IAS 38 are met in full. IAS 38 does not permit an entity to use hindsight to conclude retrospectively that these recognition criteria are met. Deferral of costs at the interim date, in the hope that the recognition criteria will be met by the end of the year, is not justified. Furthermore, IAS 38 specifically prohibits the reinstatement of costs (that have been expensed in an interim period) as an intangible asset in the annual financial statements.

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Levies IFRIC 21 applies to levies that are not based on taxable profit, and that are accounted for under IAS 37. The timing of recognition of the provision and the related expense will depend, in part, on the point in time at which the entity becomes obligated to pay the levy. In accordance with IAS 34, the same recognition principles are applied in the interim financial statements as are applied in the annual financial statements. Therefore, in interim financial statements, a liability to pay a levy: should not be recognised if there is no present obligation to pay the levy at the end of the interim reporting period; and should be recognised if a present obligation to pay the levy exists at the end of the interim reporting period.

In certain businesses, there is significant and recurring variation between the levels of profit in the interim period and for the year as a whole. Such seasonal businesses might prefer an approach to interim reporting where expenditure could be allocated to interim periods based on estimates of the total annual revenues and expenses. This would smooth the effect of the seasonality. However, IAS 34 requires that each interim financial report should be prepared in the same manner as the full year statements, and that no adjustments should be made for events that are expected to occur after the end of the interim period. IAS 34 clarifies that revenues should not be anticipated or deferred at an interim date if such anticipation or deferral would not be appropriate at the end of the entity’s financial year.

Similarly, expected costs should not be anticipated or deferred at an interim date if such anticipation or deferral would not be appropriate at the end of the entity’s financial year.

Expenses incurred unevenly over the year A travel operator has a September year end. The majority (75%) of the sales of holidays are in July and August, and most of these are booked in January and February. The travel operator recognises revenue when it renders service in July and August. Each year the travel operator runs a television advertising campaign in December and January, just before most holidays are booked. The operator publishes an interim financial report for the half year to 31 March. The costs of the advertising campaign will be taken to the income statement in the first half of the year, because they do not meet the definition of an asset at the end of the interim period, despite the entity recognising the majority of its revenue in the second half of the year. The entity will have a significantly different net result in each half of the year, and an explanation to that effect will be required.

Uneven costs

The principles described above regarding revenue recognition also apply to costs. Costs that are incurred unevenly during an entity’s financial year should be anticipated or deferred for interim reporting purposes if, and only if, it is also appropriate to anticipate or defer that type of cost at the end of the financial year.

A cost that does not meet the definition of an asset at the end of an interim period is not deferred in the statement of financial position at the interim reporting date either to await future information as to whether it has met the definition of an asset, or to smooth earnings over interim periods within a financial year. Thus, when preparing interim financial statements, the entity’s usual recognition and measurement practices are followed. The only costs that are capitalised are those incurred after the specific point in time at which the criteria for recognition of the particular class of asset are met. Deferral of costs as assets in an interim statement of financial position in the hope that the criteria will be met before the year end is prohibited.

Recognition in an interim financial report of cost of running major advertising campaign – example An entity reports quarterly. In the first quarter of the financial year, the entity introduces new models of its products that will be sold throughout the year. At that time, it incurs a substantial cost for running a major advertising campaign (completed by the end of that quarter) that will benefit sales throughout the year. It is not appropriate to spread the advertising cost over the period in which the benefits (in the form of revenues) are expected to arise (i.e., all four quarters of the year). The entire cost of the advertising campaign is recognised in profit or loss in the first quarter. Explanatory note disclosure may be required. IAS 38 requires that all expenditure on advertising and promotional activities should be recognised as an expense when incurred (see section 5 of chapter A9). A cost that does not meet the definition of an asset at the end of an interim period is not deferred, either to await future information as to whether it has met the definition of an asset or to smooth earnings over interim periods within a financial year.

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Recognition in an interim financial report of fixed costs of a manufacturer whose business is seasonal – example A manufacturer’s shipments of finished products are highly seasonal (shares of annual sales are respectively 20 per cent, 5 per cent, 10 per cent and 65 per cent for the four quarters of the financial year). Manufacturing takes place more evenly throughout the year. The entity incurs substantial fixed costs, including fixed costs relating to manufacturing, selling and general administration, and wishes to allocate all of its fixed costs to the four quarters based on each quarter’s share of estimated annual sales volume. Such an allocation is not acceptable under IAS 34. IAS 34 states that costs that are incurred unevenly during an entity’s financial year should be anticipated or deferred for interim reporting purposes if, and only if, it is also appropriate to anticipate or defer that type of cost at the end of the financial year. In the circumstances described, the fixed costs should be split between manufacturing fixed costs and non-manufacturing fixed costs. IAS 2 requires that the cost of manufactured inventories should include a systematic allocation of fixed production overheads (i.e., fixed manufacturing costs). Because manufacturing takes place evenly throughout the year, the entity will recognise cost of goods sold expense only when sales are made and, therefore, it will achieve its objective of allocating fixed manufacturing costs to the four quarters based on sales volume. Fixed non-manufacturing costs, however, are different. IAS 2 makes clear that administrative overheads that do not contribute to bringing inventories to their present location and condition, and selling costs (whether variable or fixed), are excluded from the cost of inventories and are recognised as expenses in the periods in which they are incurred. Therefore, the entity must recognise its fixed non-manufacturing costs in profit or loss as incurred in each of the four quarters. As required by IAS 34, explanatory comments about the seasonality or cyclicality of interim operations should be disclosed in the notes to interim financial statements. In addition, IAS 34 encourages seasonal businesses to present ‘rolling’ 12-month financial statements in addition to interim period financial statements.

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Recognition in an interim financial report of production line retooling costs incurred early in the financial year – example An entity reports quarterly. In the first quarter of each financial year, the entity introduces new models of its products that will be sold throughout the year. At that time, it incurs a substantial cost for retooling its production line to manufacture the new models. It is appropriate to recognise the retooling costs as an asset in the interim financial report at the end of the first quarter if they meet the recognition criteria in IAS 16 Property, Plant and Equipment. Those criteria require that an item of property, plant and equipment be recognised as an asset if, and only if: it is probable that future economic benefits associated with the item will flow to the entity; and the cost of the item can be measured reliably. Assuming that the expenditure on retooling costs results in an asset that can be recognised, the expenditure should be capitalised and depreciated over the model year, regardless of the entity’s interim reporting policy. To illustrate, if the entity’s financial year end is 31 December, but new products are introduced in September for a model year from 1 September to 31 August, then at 31 December some portion of the asset recognised would remain to be depreciated in the next financial year, whether or not the entity prepared any interim financial reports.

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