Interim Financial Reporting (IAS 34) Presented by CPA Peter Njuguna +254 722 608 618.
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Transcript of Interim Financial Reporting (IAS 34) Presented by CPA Peter Njuguna +254 722 608 618.
Interim Financial Reporting (IAS 34)
Presented by CPA Peter Njuguna +254 722 608 618
Objective and Scope
Objective minimum contents of interim report recognition & measurement principles
Scope all interim financial reports published
in accordance with IFRS
Why interim report
Annual reporting Often supplemented with interim or quarterly reports
Interim reporting Reports provide more timely
information Often mandated by securities
regulators, governments, and securities exchanges
Example: Quarterly and interim financial statements
Actual data
Comparative data
Statement of financial position at 30/06/04 31/12/03
Statement of Comprehensive Income for 6 months ending 30/06/04 30/06/03 for 3 months ending 30/06/04 30/06/03
Statement of Cash Flows 6 month ending 30/06/04 30/06/03
Statement of Changes in Equity 6 months ending 30/06/04 30/06/03
Definition
According to IAS 34, an interim financial report is defined as follows:
. . . a financial report containing either a complete set of financial statements or a set of condensed financial statements for an interim period
Goal of interim reporting is to provide information about new events and circumstances and other changes
Not just replicate the information given in the annual financial statements
Interim report - minimum content
Condensed statement of financial position
Condensed statement of comprehensive income (SOCI)
Condensed statement of changes in equity
Condensed statement of cash flows Selected explanatory notes
7
IAS 34 – Objective and Scope
IASB encourages entities whose shares are publicly traded to provide interim information
At least as of the end of the first half of the year and issue it within 60 days of this date
Standard does not address how often nor how soon after the period entities should produce interim reports
8
Compliance with IFRSs
Choice by the entity May choose not to prepare interim
financial statements at all May choose to prepare them in
accordance with IFRSs if they do and they describe the
financial statements to be in compliance with IFRSs, the standard applies
9
IAS 34 – Content of an Interim Financial Report
not prohibit including a complete set of financial statements (comply with IAS 1)
Minimum requirements mandated by the standard
Minimum components of an interim financial report
Form and content of interim financial statements
Selected explanatory notes Disclosure of compliance with IFRSs Periods for which interim financial statements
are required to be presented Materiality
10
Content of an Interim Financial Report
Minimum components of an interim financial report
Required condensed statements• Statement of financial position• Statement of comprehensive income
-Presented as a single statement or a separate income statement plus a statement of comprehensive income
• Statement of changes in equity• Statement of cash flows
In addition, selected explanatory notes must accompany the above
11
Content of an Interim Financial Report
Form and content of interim financial statements
If the entity presents a full set of statements Follow IAS 1
If it presents condensed statements Entity must present at a minimum the headings and
subtotals that were presented in the annual statements Interim financial statements
Based on consolidated statements where the most recent annual statements were prepared on a consolidated basis
12
Content of an Interim Financial Report
Selected explanatory notes
Relevant notes unchanged from the annual report Not included Repetitive Can obscure the new and more relevant
information
Information is normally presented on a year-to-date basis
Explanatory notes, examples
Accounting policies statement that they are the same as in most
recent annual financial statements if changes description and disclosure
Compliance with IFRS Comments on seasonality or cyclicality Nature and amount of
unusual items (IAS 8) changes in estimates
14
Recognition and Measurement
Same accounting policies as annual
Entity is required to use the same accounting policies as in the year-end statements Encourages consistency Where there has been a subsequent change in
accounting policies, the entity would use the newer policy
Explanatory notes
Issuance, repurchases, and repayments of debt and equity securities
Dividends paid separately Segment revenue & segment result for
primary segment Subsequent events Changes in composition of the enterprise Changes in contingent assets & liabilities
Example of explanatory notes disclosures
the write-down of inventories to net realisable value and the reversal of any such write-down;
recognition of a loss arising from the impairment of property, plant, and equipment, intangible assets, or other assets, and the reversal of any such impairment loss;
the reversal of any provisions for the costs of restructuring;
acquisitions and disposals of items of property, plant, and equipment;
Example of explanatory notes disclosures
commitments for the purchase of property, plant, and equipment;
litigation settlements; corrections of prior period errors; any loan default or any breach of a loan
agreement that has not been remedied on or before the end of the reporting period; and
related party transactions.
18
Example explanatory notes disclosures
• Changes in debt and equity securities (issue, repurchase, repayment)
• Dividends paid• Segmented information including
Intersegment revenues Segment profit/loss
• Material subsequent events• Changes in contingent assets/liabilities
19
Content of an Interim Financial Report
Materiality Discussed in IAS 1 and 8
Although there is no specific quantitative guidance
IAS 34 notes that materiality for interim statements should be assessed based on the interim period
Note that interim financials statements may have additional estimates Therefore the numbers may be a bit softer
Materiality
Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements.
Materiality depends on the size and nature of the omission or misstatement, judged in the surrounding circumstances.
Set material low to allow for more estimation
Material disclosures
Statement that the accounting policies follows the annual report, note any change
Explanatory comments about the seasonality/cyclicality of the business
Any unusual items Nature and amount of changes in
estimates
Principles for recognition and measurement
Same as in annual financial statements no smoothing of income and expenses
recognition of assets, liabilities, income and expenses in accordance with the Framework and applicable Standards
measurement on a year-to-date basis frequency of reporting should not affect
measurement of annual results
Application, expenses
Recognition present obligation and probable outflow reliable estimate of the amount
Measurement consider risks and uncertainties
Examples provisions and employee benefits planned maintenance for later interim
periods expenses calculated on an annual basis like
bonuses, payroll tax or discount expenses
Application, revenues
Recognition transfer of significant risks and rewards probable inflow and reliable measure
Measurement consider risks and uncertainties
Example seasonal, cyclical or occasional revenues revenues calculated on an annual basis
25
Recognition and Measurement
Revenues received seasonally, cyclically, or occasionally
Recognized when they occur or are earned, notwithstanding their cyclical or seasonal nature
May result in more revenues being recognized in one period than in another
Reflects the underlying reality Supports the discrete approachCosts incurred unevenly during the financial year Costs are recognized when incurred
Only capitalized when they meet the definition of an asset
Also supports the discrete approach
recognition and measurement criteria
Maintenance expenditure Revenues and expenses calculated
on year-to-date basis seasonal, cyclical or occasional revenues
Intangible assets Income taxes in interim periods Inventories
27
Recognition and Measurement
Use of estimates
Due to necessity, more estimates need to be made in an interim period
An entity needs to communicate this and must take care to ensure that the information is relevant and reliable
Example of estimations
Application, inventories
Same as in annual F/S test of net realisable value recognise variances with standard cost
However; Full stock-taking and valuation
procedures may not be required for inventories at interim dates, although it may be done at financial year end.
It may be sufficient to make estimates at interim dates based on sales margins.
Application, intangible assets
Recognition controlled by the enterprise as result of past
events expected inflow of future economic benefits cost of the asset can be measured reliably
Examples development cost for a new product
Costs incurred before the recognition criteria for an intangible asset are met are recognised as an expense.
Pensions: IAS 19 Employee Benefits
requires that an entity determine the present value of defined benefit obligations and the market value of plan assets at the end of each reporting period
encourages an entity to involve a professionally qualified actuary in measurement of the obligations.
For interim reporting purposes, reliable measurement is often obtainable by extrapolation of the latest actuarial valuation.
Revaluations and fair value accounting
IAS 16 Property, Plant and Equipment allows an entity to choose as its accounting policy the revaluation model
IAS 40 Investment Property requires an entity to determine the fair value.
rely on professionally-qualified valuers at the end of annual reporting periods, though not at the end of interim reporting periods.
Provisions
Determination of the appropriate amount of a provision (such as a provision for warranties, environmental costs, and site restoration costs) may be complex and often costly and time-consuming.
Entities sometimes engage outside experts to assist in the annual calculations.
Making similar estimates at interim dates often entails updating of the prior annual provision rather than the engaging of outside experts to do a new calculation.
34
Restatement of Previously Interim Periods
Where there is a change in accounting policy, the comparative interim information must be restated
Where it is impracticable to determine the cumulative impact, the change would be applied from the earliest date practicable
35
Disclosure in Annual Financial Statements
Situations may arise where estimates are changed in the last quarter or final interim period
Where final interim period statements are not separately presented and where the change is significant
Nature and amount of change in estimate should be disclosed in the annual statements
The standard goes on to cross reference and link this to IAS 8
Requires disclosure of the nature and amount of material changes in estimates
Application, income taxes
What rate should be used? estimated average annual effective
income tax rate The provisions of IAS 12 applies
at each interim reporting date change in tax rates recognition of deferred tax liabilities /
assets
Changes in estimates
If significant change in an estimate of a previous interim period in the last interim period of a financial year disclose nature and amount of the change
Changes in accounting policy
Should be included in interim reports if they are to be reflected in the next
annual financial statements restatement of prior interim reports of
the current year comparative data should be restated
(IAS 8 )
Comparison IAS 1/IAS 34 Presentation
Complete set of financial statements (IAS 1)
(a) balance sheet;(b) income statement;(c) statement showing either (i) all changes in equity or (ii) changes in equity other than those arising from capital transactions with owners and distributions to owners;(d) cash flow statement; and(e) accounting policies and explanatory notes.
Condensed set of financial statements (IAS 34)
(a) condensed balance sheet;(b) condensed income statement;(c) condensed statement showing either (i) all changes in equity or (ii) changes in equity other than those arising from capital transactions with owners and distributions to owners;(d) condensed cash flow statement; and(e) selected explanatory notes.
Thank you
Interactive session
Borrowing costs
Borrowing cost
Costs incurred in connection with the borrowing funds and include:
interest expense calculated using the effective interest method
finance charges in respect of finance leases exchange differences arising from foreign
currency borrowings to the extent that they are regarded as an adjustment to interest costs
Start capitalisation when Expenditure on qualifying asset are being incurred
Borrowing cost in relation to fund obtained from a third party are being incurred
Activities necessary to prepare the qualifying asset are on going
Borrowing cost
Background
Consider a company doing capital intensive project
concept: the cost of borrowed funds
content: interest, premium discount amortization, ancillary costs, the exchange differences
borrowings range: including general and specialized loan borrowers
Borrowing Costs comprises
Borrowing Costs
Interest & commitment
charges on Borrowings
Amortisation of Discount/ Premium
on Borrowings
Amortisation of ancillary costs
relating to Borrowings
Finance chargesfor assets
acquired on Finance Lease
Exchange
Differences*
*To the extent they are regarded as an adjustment to interest cost
To the extent regarded as ‘adjustment tointerest cost’.
The adjustment is restricted to amount of exchange loss on principal due to devaluation of currency
Exchange Differences
Adjustment = Interest on local currency borrowing – Interest on foreign currency borrowing
Qualifying Assets
Definition:• an asset• that takes substantial period of time• to get ready for intended sale or usage
a rebuttable presumption of a period of 12 months is considered as a substantial period of time.
Qualifying asset may be – PPE (non-acquired ready for purpose) or Intangible assets or investment property
Relating to a qualifying assets should be capitalised.
Qualifying assets require substantial but necessary time to put in a condition ready for intended use.
Treatment of Borrowing Costs
Borrowing Costs
Directly attributable* for: • acquisition• construction• production of
Qualifying AssetsAssets other than Qualifying assets
Capitalised as partof asset
Treated asrevenue expenditure
*or that could have been avoided if the expenditure on qualifying assets had not been made
Criteria for Capitalisation
Criteria same as related asset Future Economic Benefits Reliable Measurement
Note : Expenses not fulfilling the criteria to be treated as revenue expenditure
Borrowings Cost (Interest)
Borrowings Cost
Specifically for Qualifying Assets
Generally but part usedfor Qualifying Assets
Capitalise the Borrowing Costs less interest income, if any
Apply actual rate of Interest
Apply weightedaverage rate of interest
Excess of the Carrying amount of the Qualifying asset over recoverable Amount
Actual Cost of the Asset Recoverable + Borrowing Cost Capitalised amount
of the Asset<=
Commencement of Capitalisation
Conditions Borrowing costs are being incurred
Expenditure for the • acquisition • construction• production
of a qualifying asset is being incurred
Necessary activities for preparationof qualifying assets are in progress
Suspension of Capitalisation
Criteria
Capitalisation to be suspended during extended periods in which active development is hampered.
Suspension not to take place in case:• substantial technical & administrative work is
being carried on• temporary delays necessary for preparation of
qualifying assets (seasonal rains etc.)
Cessation of Capitalisation
Capitalisation should cease when substantially all the the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
Cessation to take place even if:• routine administrative work still continues• minor modifications to property as per users’
specifications is to be made
Cessation to take place in part if:
• Construction of qualifying asset is completed in parts and a part is capable of being used separately
Disclosure Requirements
The financial statements should disclose:
1. the accounting policy adopted for borrowing
costs
2. The amount of borrowing costs capitalised
Disclosure Requirements
Significant Accounting Policy
Borrowing costs that are attributable to the acquisition of or construction of qualifying assets are capitalized as part of the cost of such assets. A qualifying asset is one that necessarily takes substantial period of time to get ready for intended use. All other borrowing costs are charged to revenue.
Notes to Accounts
The total borrowing cost capitalized during the year is sh. 4.13 m.
COP - Capitalisation of Borrowing Costs
Q. Whether borrowing cost avoidable or unavoidable?
A. Said to be unavoidable if expenditure on qualifying assets had been incurred and borrowing is taken, Existing borrowing exercise of judgement required.
Q. Factors to be considered as to whether and to what extent general borrowings have been so used
A. Information of cash inflows and outflows, close scrutiny required.
R. General borrowings made but equity specifically infused for financing qualifying assets
S. No question of capitalizing borrowing cost.
Q. Calculation of weighted average borrowing rate?
A. Based on borrowing during period of expenditure and not borrowings made for the whole year.
Capitalisation of completed parts of a project
Q. Capitalisation of commissioned packages when capitalization of remaining incomplete packages is pending?
A. Necessary to capitalize commissioned packages .
Q. Date of capitalization?
A. Date on which package is ready to commence commercial production.
Q. Allocation of incidental expenditure during construction?
A. On appropriate basis.
Q. Capitalisation of independent packages which are complete when capitalization of main packages is pending ?
A. Capitalised when ready for their intended use.
60
Amortised cost financial liability
Hero Ltd issued a 6% Ksh 350 millions infrastructure bond on 1st July 2009. The bond was issued at a 15% discount and is redeemable at 102.5% on 30th June 2013. The legal and other expenses to arrange the bond issue through private placement amounted to Ksh 22.5 million. The interest on coupon rate is repayable annually in arrears.
Determine the effective interest rate, the finance cost for each period and the amortised cost of the bond as at 30th June each year
61
Computations Proceed from borrowing Nominal value 350 Less discount on issue .15*350 (52.5) Less issue cost (22.5) 275 Effective rate of interest is 13.84% i.e 21/(1.1384)1 + 21/(1.1384)2 + 21/(1.1384)3
+ 21/(1.1384)4 + 358.75/(1.1384)4 = 275
62
SolutionYear Carrying amount start
Interest cost @ 13.84%
Cash inflow
Carrying amount end
30/6/2010
275.00 38.06 (21.00)
292.06
30/6/2011
292.06 40.42 (21.00)
311.48
30/6/2012
311.48 43.11 (21.00) 333.59
30/6/2013
333.59 46.16 (21.00)
358.75
Illustration
ABC Co. Ltd. undertakes significant expansion program and incurs following capital expenditure:
Facility Capex (in sh.)
Remarks Date of
Start
Date of Completion
Plant I 30 m Specific Borrowing to the extent of sh 22 m
June 1, 2013
December 31, 2013
Plant II 20 m Specific Borrowing to the extent of sh 8 m
June 1, 2013
November 30, 2013
Additional Information:
1. sh. 20 m , 11% p.a. secured debentures raised on July2012 redeemable in four equal installments commencing July 1, 2013
2. Loan from financial institutions amounting to sh. 30 m bearing interest at 14% p.a. obtained for construction of Plant I & II on May 1,2013
3. sh. 5 m, 14% working capital loan obtained on April 1, 2013 and repaid sh. 1 m on December 31, 2013.Contd..
Calculation of Weighted Average Rate of Interest
Borrowing costs for the year ended on March 31, 2014
1. Secured debentures
= 20,000,000 x 11% x 3 / 12 = 550,000/-
= 15,000,000 x 11% x 9 /12 = 1,230,750/-
2. Loan from financial Institutions
= 30,000,000 x 14% x 11 / 12 = 3,850,000/-
3. Working Capital Loan
= 5,000,000 x 14% x 9 / 12 = 525,000/-
= 4,000,000 x 14% x 3 / 12 = 140,000/-
Average general borrowings
Calculation of average unspecified borrowings outstanding during the year
Secured debentures = 20,000,000 x 3 / 12 = 5,000,000/- = 15,000,000 x 9/12 = 11,250,000/- Secured working capital loan = 5,000,000 x 9 / 12 = 3,750,000/- = 4,000,000 x 3 / 12 =1,000,000/- Total (1+2) 21,00,000/-
Calculation of Weighted Average Rate of Interest
Calculation of average interest on unspecified borrowings for the year
1. Secured debentures
= 20,000,000 x 11% x 3 / 12 = 550,000/-
= 15,000,000 x 11% x 9 /12 = 1,237,500/-
2. Working Capital Loan
= 5,000,000 x 14% x 9 / 12 = 525000/-
= 4,000,000 x 14% x 3 / 12 = 140,000/-
TOTAL(1+2) 2,452,500/-
D. Average interest rate for the year ( C / B )
= (2,452,500 / 21,000,000) * 100 = 11.67%
Calculation of Weighted Average Rate of Interest
Interest Capitalised
1. Plant I
Specific borrowings: 22,000,000 X 14% X 7 /12= 1,79,6670/-
General Borrowings: 8,000,000 x 11.67% x 7/12= 544,600/-
2. Plant II
Specific borrowings: 8,000,000 X 14% X 6 /12 = 560,000
General Borrowings: 12,000,000 x 11.67%x 6/12=700200
Treatment of Exchange Differences
Loan Amount : USD 10,000
Rate of Interest (in U.S.A.) : 8% p.a.
Exchange rate as at 01.04.2013: sh. 40 per
USD
Exchange rate as at 31.03.2014: sh. 45 per
USD
Rate of Interest (in Kenya) : 12%
Contd..
Treatment of Exchange Differences
Computations to be made:
1. Interest for the Period=USD10,000 x 8%x sh.45=sh.36,000
2. Increase in liability towards the principal amount = USD 10,000 x (45-40) = sh.
50,0003. Interest if loan was raised in Kenya
= USD 10,000 x 48 x 12%= sh. 57,6004. Difference (2-1) = sh. 57,600 – sh. 36,000 = sh.
21,600
Treatment of Exchange Differences
Treatment of Exchange Differences of sh. 50,000/-
sh. 21,600/- sh. 28,400/-
To be treated as borrowing cost
To be capitalisedto loan obligation
Note: The amount of borrowing costs capitalised during a period should not exceed the amount of borrowing costs incurred during the period
A company has arranged for a construction loan from a US bank. The facility is expected to cost $30 million and take one year to build. The construction loan is $24 million, bears interest at 8% and borrowings commence at the first draw.
Ground is broken on April 1, 2011, and construction is expected to continue until March 31, 2012. The Company uses $6 million of its cash in the first two months of construction and begins borrowing under the construction loan based on the following schedule
Fund drawing schedule
The US bank pays the draws on the loan to HDS in dollars. HDS carries its assets in pounds and the debt borrowings will be paid in pounds. HDS incurs exchange rate gains and losses as scheduled on the next slide.
HDS temporarily invests the loan borrowings and receives quarterly interest as scheduled below. HDS secures permanent financing on April 1, 2012.
What borrowing costs should HDS capitalize in 2011 and in the first quarter of 2012
Calculation of interest costs:
2011First draw: $10,000,000 x 8% x 3/12 = $200,000
Second draw:$16,000,000 x 8% x 3/12 =320,000 (Error – should be4/12)
$520,0002012
► Third draw: $24,000,000 x 8% x 3/12 =$480,000
HDS should capitalize $485,000 ($520,000 + $90,000 exchange rate losses - $125,000 of interest income) of borrowing costs in 2011 and $475,000 ($480,000 + $20,000 exchange rate losses - $25,000 of interest income) of borrowing costs in the first quarter of 2012.
Thank you
Interactive session