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Interim Reporting Standards Overview for Financial Professionals

Delve into conceptual issues and reporting standards of interim financial statements per APBO No. 28. Understand the discrete, integral, and combination views, exceptions under APBO 28, and requirements for quarterly financial reporting.

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Interim Reporting Standards Overview for Financial Professionals

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  1. CHAPTER 17 INTERIM PERIOD REPORTING

  2. FOCUS OF CHAPTER 17 • Conceptual Issues • Current Reporting Standards: The Requirements of APBO 28 • Involvement of Certified Public Accountants in Interim Period Reporting

  3. 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.

  4. Conceptual Issues: The Fundamental Issue • Should interim financial statements be prepared using the SAME accounting principles and practices used to prepare annual financial statements? • Three different views exist: • The Discrete View. • The Integral View. • The Combination Discrete-Integral View.

  5. 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.

  6. 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.

  7. APBO No. 28: A CombinationDiscrete-Integral Approach • APBO 28 requires use of annual reportingpractices with certain 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.

  8. 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.

  9. 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.

  10. 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.

  11. APBO 28:Exceptions to UsingAnnual Reporting Practices • Costs Associated with Revenues: • Exception #4: Purchase price variances and volume or capacity variances of inventoriable costs “should ordinarily” be deferred if such variances are: • Planned, AND • Expected to be recovered by year-end.

  12. 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.

  13. 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 priorinterim periods.

  14. 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.

  15. 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.

  16. 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.

  17. 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.

  18. Review Question #1 • In May 2006, 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

  19. Review Question #1With Answer • In May 2006, 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 $15,000C. $60,000 $20,000 D. $15,000 $60,000 E. $20,000 $60,000

  20. Review Question #2 At 3/3/06, 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 3/31/06? 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.

  21. Review Question #2With Answer At 3/3/06, 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 3/31/06? A. Expense in the first quarter whether or not expected to be absorbed by Y/E.B. Defer only 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.

  22. End of Chapter 17 Time to Clear Things Up—Any Questions?

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