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CHAPTER 21. INTERIM PERIOD REPORTING. FOCUS OF CHAPTER 21. Conceptual Issues Current Reporting Standards: The Requirements of APBO 28 Involvement of Certified Public Accountants in Interim Period Reporting. Quarterly Reporting: Who Requires It?.
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CHAPTER 21 INTERIM PERIOD REPORTING
FOCUS OF CHAPTER 21 • Conceptual Issues • Current Reporting Standards: The Requirements of APBO 28 • Involvement of Certified Public Accountants in Interim Period Reporting
Quarterly Reporting: Who Requires It? • Quarterly financial reporting: • Is NOT required by any official accounting pronouncement. • Is required by: • The New York Stock Exchange. • The Securities and Exchange Commission.
Conceptual Issues: The Fundamental Issue • Should interim financial statements be prepared using the SAMEaccounting principles and practices used to prepare annual financial statements? • Three different views exist: • The Discrete View. • The Integral View. • The Combination Discrete-Integral View.
Conceptual Issues: The Discrete View • The Discrete View: • No distinction is made between interim reporting and annual reporting. • The same accounting principles and practices used for annual reporting are used for interim reporting. Thus: • No special treatment for over- or underappliedoverhead at interim dates. • No special accrual & deferral treatments.
Conceptual Issues: The Integral View • The Integral View: • A distinction is made between interim reporting and annual reporting. • The same accounting principles and practices used for annual reporting are NOT always used for interim reporting: • A special treatment for over- or underapplied overhead can be used. • Special accruals & deferrals are allowed.
APBO No. 28: A CombinationDiscrete-Integral Approach • APBO 28 requires use of annual reportingpractices withcertain exceptions. • Costs Associated with Revenues: • FOUR exceptions exist (see slides 8-11). • All Other Costs and Expenses: • An item may be given integral treatment if it clearly benefits more than one period.
APBO 28:Exceptions to Using Annual Reporting Practices • Costs Associated with Revenues: • Exception #1: Estimated gross profit rates may be used to determine COGS at interim dates. • A practicality-based exception--most entities do not take quarterly physical inventories.
APBO 28: Exceptions to Using Annual Reporting Practices • Costs Associated with Revenues: • Exception #2:LiquidationofLIFO base-period inventories that are expected to be replaced by year-end does not affect interim results. • Stated differently, COGS is to include the expected cost of replacing the liquidated LIFO base.
APBO 28:Exceptions to Using Annual Reporting Practices • Costs Associated with Revenues: • Exception #3: Declines in market prices that will probably be recovered by year-end (temporary declines) “need not” be recognized at the interim date. • An optional exception.
APBO 28:Exceptions to UsingAnnual Reporting Practices • Costs Associated with Revenues: • Exception #4: Purchase price variancesand volume or capacity variances of inventoriable costs “should ordinarily”be deferred if such variances are: • Planned, AND • Expected to be recovered by year-end.
Seasonal Revenues, Costs, and Expenses • Entities having seasonal revenue patterns: • Must disclose the seasonal nature of their business. • Should consider providing supplemental financial information for the 12-month period ended at the interim reporting date for: • The current year. • The prior year.
Interim Income Tax Provisions:Dealing With Changes in Estimates • At each interim date: • Make an estimate of the effective tax rate expected for the the full year. • Use the estimated tax rate to determine the year-to-date income taxes. • If the estimatedeffective tax rate changes: • Include the cumulative effect in thecurrent interim period. • Do NOT restate prior interim periods.
Special Items: No Special Treatment • Report the following items in the interim period in which they occur: • Disposals of segments of a business. • Extraordinary items. • Unusual items or infrequently occurring items (“first cousins” to extraordinary items). • CONTINGENT ITEMS: Accrue as usual--based on the probable and reasonably estimable criteria of FAS 5.
Changes in Accounting Principles or Practices • No Restatement of Prior Years Allowed: • The cumulative effect is always reported in the first interim period whether the change is made in: • The first interim period. • Later interim periods (MUST restate ALLprior interim periods). • Restatement of Prior Years Allowed: • Restate prior year interim reports.
SEC Requirements: Financial Statements Included in Form 10-Q • Balance Sheets Required: • As of end of the most recent interim quarter. • As of end of the preceding annual period. • Income Statements Required: • For latest interim quarter. • For year-to-date amounts. • Cash Flow Statements: • For year-to-date amounts--both the current year and the prior year.
SEC Requirements: Quarterly Financial Data • Quarterly financial data may be presented outside of the notes to the annual financial statements. • Outside auditors must REVIEW(in accordance with the AICPA’s review standards) the quarterly financial data whether the quarterly financial data are placed: • In the notes to the annual statements. • Outside of the notes.
Review Question #1 • In May 2004, Pertex incurred $60,000 of annual repairs that benefit an entire year. How much should be expensed in the second quarter under each of the following views:Discrete ViewIntegral ViewA. $20,000 $15,000 B. $60,000 $15,000 C. $60,000 $20,000 D. $15,000 $60,000 E. $20,000 $60,000
Review Question #1--With Answer • In May 2004, Pertex incurred $60,000 of annual repairs that benefit an entire year. How much should be expensed in the second quarter under each of the following views:Discrete ViewIntegral ViewA. $20,000 $15,000 B. $60,000 $15,000 C. $60,000 $20,000 D. $15,000 $60,000 E. $20,000 $60,000
Review Question #2 • At 3/3/04, Paxco had (1) underapplied factory overhead of $300,000 (that was planned) and (2) no inventory on hand. How can Paxco treat this $300,000 at 3/31/04? A. Expense in the first quarter whether or not expected to be absorbed by Y/E. B. Deferonly if expected to be absorbed by Y/E. C. Defer if not expected to be absorbed by Y/E.D. Deferwhether or not expected to be absorbed by Y/E.
Review Question #2--With Answer • At 3/3/04, Paxco had (1) underapplied factory overhead of $300,000 (that was planned) and (2) no inventory on hand. How can Paxco treat this $300,000 at 3/31/04? A. Expense in the first quarter whether or not expected to be absorbed by Y/E. B. Deferonly if expected to be absorbed by Y/E. C. Defer if not expected to be absorbed by Y/E.D. Deferwhether or not expected to be absorbed by Y/E.
End of Chapter 21 • Time to Clear Things Up--Any Questions?