International Financial Reporting Standards_guide.pdf

404 Chapter 36 Interim Financial Reporting (IAS 34)
B. Revenues that are received seasonally, cyclically, or occasionally within a financial year
should not be anticipated or deferred because of an interim report. This would not be
appropriate at the end of the entity’s financial year.
C. Costs that are incurred unevenly during an entity’s financial year should be anticipated
or deferred for interim reporting purposes only if it is also appropriate at the end of the
financial year.
EXPLANATION
Table 36.2 illustrates the practical application of the above-mentioned recognition and measurement
principles.
TABLE 36.2 Principles and Application of IAS 34
Principles and issues
Practical application
A. Same accounting policies as for annual financial statements
A devaluation in the functional currency against other
currencies occurred just before the end of the first quarter of
the year. This necessitated the recognition of foreign
exchange losses on the restatement of unhedged liabilities,
which are repayable in foreign currencies.
Indications are that the functional currency will regain its
position against the other currencies by the end of the
second quarter of the year. Management is reluctant to
recognize these losses as expenses in the interim financial
report and wants to defer recognition, based on the
expectation of the functional currency. Management hopes
that the losses will be neutralized by the end of the next
quarter and wants to smooth the earnings rather than
recognize losses in one quarter and profits in the next.
In the interim financial statements, these losses are
recognized as expenses in the first quarter in accordance with
IAS 21.
The losses are recognized as expenses on a year-to-date
basis to achieve the objective of applying the same
accounting policies for both the interim and annual financial
statements.
Principles and issues
Practical application
B. Deferral of revenues
An ice cream manufacturing corporation recently had its
shares listed on the local stock exchange. Management is
worried about publishing the first quarter’s interim results
because the entity normally earns most of its profits in the
third and fourth quarters (during the summer months).
Statistics show that the revenue pattern is more or less as
follows:
First quarter = 10 percent of total annual revenue
Second quarter = 15 percent of total annual revenue
Third quarter = 40 percent of total annual revenue
Fourth quarter = 35 percent of total annual revenue
It is a phenomenon in the business world that some entities
consistently earn more revenues in certain interim periods of
a financial year than in other interim periods, for example,
seasonal revenues of retailers.
IAS 34 requires that such revenues are recognized when they
occur, because anticipation or deferral would not be
appropriate at the Statement of Financial Position date.
Revenue of $254,000 is therefore reported in the first
quarter.
During the first quarter of the current year, total revenue
amounted to $254,000. However, management plans to
report one-fourth of the projected annual revenue in its
interim financial report, calculated as follows:
$254,000 ÷ 0.10 × 1/4 = $635,000