Interim Reporting
· Discrete approach
o Believes that the companies should treat each interim period as a separate accounting period each quarter is its own FS o Companies would follow the principles for deferral and accruals reports each period stands on its own à book adjustments at the end of each period à treat as if it was year end o Accounting transactions should be reported as they occur and expense recognition should not change with the period of time covered
o All other costs and expenses (other than product costs. period cost)
o Charged to income as incurred or allocated based on § An estimate of time expired (think depreciation for time expired) § Benefit received or § Activity associated with the period o If not readily identified with activities or benefits should be charged when incurred o Arbitrary assignment of costs should not be made o Gains and losses that would not be deferred at year end should not be deferred at interim periods
What is Interim reporting?
o Financial statements are presented to provide information concerning financial status and progress for time periods or less than one year o Normal time period is a quarter of a year o Prepared for most recent interim period, as well as on a cumulative or year-to-date basis (you will include 1 qt in 2qt reporting) o May consist of statements of financial position, income and cash flows o SEC requires public companies to file 10-Q o Reviewed: inquiries, analytical procedure, financial ratios, not audited
Objective of reporting segmented information
- To provide information about the different types of business activities in which an enterprise engages and find the different economic environments in which it operates. - Meeting this objective will help users: § Better understand the enterprise's performance § Better assess its prospects for future net cash flows § Make more informed judgments about the enterprise as a whole
Reporting for diversified companies
- investors and investment analysts want income statement, balance sheet and cash flow information on the individual segments that compose the total income figure
Why do companies make year-end adjustments?
Companies often do not know with great certainty amounts of certain expenses.
Advertising (interim period reporting)
How are they expensing those costs à in the same period or over the four periods § Companies should defer in an interim period costs such as advertising if the benefits extend beyond that period § Otherwise the company should expense those costs as incurred § Determination can be difficult to assume what period it will be benefited § Advertising accounting varies
§ Advertising and other
o General guideline are that companies should defer in an interim period costs such as advertising if the benefits extend beyond that period, o Otherwise, the company should expense those costs as incurred o The guidelines are vague in this area, accounting for advertising varies widely. o Ex: some companies in the food industry, such as Nabisco and Pillsbury charged advertising costs as a percentage of sales and adjusted to actual at year end whereas general foods and Kellogg's expensed these costs as incurred. o Same problem relates to items such as social security taxes, research and development costs and major repair § Ex: an officer makes a lot of money and pays the maximum social security tax allowed in period 3 à do you expensed the entire amount in period 3 or do you expense it over the entire year b/c SS tax is for the entire year.
What are the minimum disclosures in the interim period?
o Gross revenues, provision for income taxes, extraordinary items (including related income tax effects) and net income o Basic and diluted earnings per share data o Seasonal revenue, costs, or expenses o Significant changes and estimates or provisions for income taxes o Disposal of a segment of a business or infrequently occurring items o Contingent items o Changes in accounting principles or estimates o Significant changes in financial position
o Minimum disclosures in interim reports
o Gross revenues, provision for income taxes, extraordinary items (including related income tax effects) and net income o Basic and diluted earnings per share data o Seasonal revenue, costs, or expenses o Significant changes and estimates or provisions for income taxes o Disposal of a segment of a business or infrequently occurring items o Contingent items o Changes in accounting principles or estimates o Significant changes in financial position
· Integral approach
o Internal report is an integral part of the annual report and that deferrals and accruals should take into consideration what will happen for the entire year à don't book deferral and accruals b/c it's not a period that stands on its own à wait until the end of the year to book deferrals o Companies should assign estimated expenses to parts of a year on the basis of sales volume or some other activity base.
Integral approach
o Internal report is an integral part of the annual report and that deferrals and accruals should take into consideration what will happen for the entire year àdon't book deferral and accruals b/c it's not a period that stands on its own àwait until the end of the year to book deferrals o Companies should assign estimated expenses to parts of a year on the basis of sales volume or some other activity base. § Companies should use the same accounting principles for interim reports that they use for annual reports.
· Problems with interim reporting
o Not a complete year o Seasonal nature à operations in many industries can cause wide fluctuation in revenues and expenses
what is the income tax approach?
o The profession uses the annualized approach o This requires that "at the end of each interim period the company should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year o The rate so determined should be used in providing for income taxes on income for the quarter
1. The absolute amount of its profits or loss is 10% or more of the greater., in absolute amount of
a. the combined operating profit of all operating segments that did not incur a loss or b. the combined loss of all operating segments that did report a loss · you are looking at the profit and loss and determining which one is greater · choose the number that is greater (between the profit and loss) compare each to 10% the overall profit for all the segments
o Regarding disclosure companies should report that following interim data at a minimum.
§ Sales or gross revenues, provision for income taxes, and net income § Basic and diluted earnings per share where appropriate § Seasonal revenue, cost, or expenses § Significant changes in estimate or provisions for income taxes § Disposal of component of a business and unusual or infrequently occurring items § Contingent items § Changes in accounting principles or estimates Significant changes in financial position
o Which accounting method?
§ Short period to determine interim results · Some accountants hold that each interim period should stand alone (discrete view) as a basic accounting period (qt is view like and annual period) · Other accountants view each period as essentially an integral part of the annual period o Should take into consideration the whole year. Allocate expense
o Periodicity principle
§ States the life of a company is broken down into artificial periods § Four periods
Interim reporting (facts)
§ The Board concluded that "each interim period should be viewed as an integral part of an annual period § Financial statements for each interim period should be based on accounting practices used for annual statements. § Revenue à should be recognized on same basis as used for the full year o % of completion method § Costs associated with revenue should be similarly treated for the interim purposes (labor material) § Same method
Income tax (interim period reporting)
§ Use your annual effective tax rate for the year § You estimate you effective tax rate each quarter Tax rate is progressive more income = more tax and higher rate
§ Changes in estimate (during interim periods)
· Accounted for in the interim period when changes is made. · No restatement of prior (previous) interim reports · Effect on earnings disclosed for current and subsequent interim periods
How should companies account for § Inventory shrinkage until year end?
· Companies should estimate these costs and allocate them to interim periods as best as they can. · Companies use a variety of allocation techniques to accomplish this objective
Reporting methods for interim periods
· Discrete approach · Integral approach § Companies should use the same accounting principles for interim reports that they use for annual reports.
Segmented results must equal or exceed 75% of the combined sales to unaffiliated customers for the entire company
· External customers · Ex: you have 3 segments and combined their revenue àthe revenue must equal 75% from outsider sales (external customers) · You have to report enough segregated data to exceed 75% · You will keep adding segments until you exceed the 75% threshold
Basic Principles
· GAAP requires that the general purpose financial statements include selected information o a single basis of segmentation. · A company can meet the segmented reporting objective by providing financial statements segmented based on how the company's operations are managed (management approach) · If management thinks its important (viewing separately) then it should be disclosed
Segmented information reported
· General information about operating segments · Segment profit and loss related information · Segment assets · Reconciliations (total to the whole company) ex segment Might use LIFO and the company is using FIFO so you have to reconcile LIFO to FIFO · Information about products and services and geographic areas Major customers
FASB decided that 10 is a reasonable upper limit for the number segments that a company must disclose
· If you have one segment in the division and that segment represents more than 90% · There's no need to do segment reporting because that segment is good enough · All the other segments are less than 10% and 90% meet the 75% test · Playing segment reporting recording at 15 mins for example
Quantitative materiality test
· Must satisfy one to determine whether the segment is significant enough to warrant actual disclosure includes the 10% test 1. The revenue is 10% or more of the combined revenue of all the company's operating segments 1. The absolute amount of its profits or loss is 10% or more of the greater., in absolute amount of . it the identifiable assets are 10% or more of the combined assets of all operating segments
what are 2 Interim Reporting Exceptions
1. Companies may use the gross profit method for interim inventory pricing. But they must disclose the method and adjustments to reconcile with annual inventory. 2. When a company liquidates LIFO inventories at an interim date and expects to replace them by year end, cost of goods sold should include the expected cost of replacing the liquidated LIFO base, rather than give effect to the interim liquidation.
what are the other 2 Interim Reporting Exceptions
3. Companies should not defer inventory market declines beyond the interim period unless they are temporary and no loss is expected for the fiscal year. à use lower of cost of market to value inventory à ex: cost = $10 market = $8 à you will have to report inventory at $8. So this means if at the end of the quarter you expect the market price to go up and you think at the end of the year it will recover. don't adjust. There is no reason to right it up and then right it down at the end of the year. 4. Companies ordinarily should defer planned variances under a standard cost system: such variances are expected to be absorbed by year end.
Inventory loss from market
declines expected to recover before year end need not be recognized. LC or NRV
Standard cost for determining inventory
determining inventory and product cost should be based on the procedures used for the fiscal year
What are some expenses that are subject to year-end adjustment
§ Bad debts (JLR make estimates based on out insurance policy and spread over the year and at year end she adjust to actual) § Executive bonuses § Pension costs and § Inventory shrinkage until year end
o Acceptable alternatives for inventory costing:
§ COGS can be estimated using gross profit rate (method used to estimate inventory for COGS) (disclose and reconcile at year end) § Liquidated LIFO base should ne charged at replacement cost if expected to be replaced by year end. Not needed. Useless work à don't account for it if you will not replacing it. If you are replacing it then you should account for it. (intermediate acting ch 9)
Accounting changes in interim periods
§ Changes in estimate · Accounted for in the interim period when changes is made. · No restatement of prior (previous) interim reports · Effect on earnings disclosed for current and subsequent interim periods
Period costs
§ Companies often change to the interim period, as incurred, costs and expenses other than product costs (often referred to as period cost) o Companies may allocate these costs among interim periods on the basis of an estimated of time expired, benefit received, or activity associated with periods. Ex: you have four quarters assume you have bonus for the CEOs and it was incurred in the second period à are you going to expense the entire bonus in the second period or allocate it over the four periods.
General rules
§ Companies should use the same accounting principles for the interim reports and for the annual reports. § Recognize revenue in interim periods on the same basis as they are for annual periods. § Ex if you use percentage of completion method as the basis for recognizing revenue on annual basis, then it should use the percentage of completion method for the interim period as well.
Seasonality
§ Occurs when most of the company sales occur in one short period of the year while certain costs are fairly evenly spread throughout the year. § Ex: natural gas industries has heavy sales in winter months § You still have expenses all year long but your revenue occurs in certain period How/when you recognize your expenses à fixed cost are effected (rent, etc)
1. The revenue is 10% or more of the combined revenue of all the company's operating segments
§ Revenue could be internal (sell to another division within the company) or external (external customers) § Include both external and internal sales
· Example: Spur Company's actual earnings for the first two quarters of 2008 and its estimate during each quarter of its annual earnings are : o Actual first quarter earnings $400,000 o Actual second quarter earnings $10,000 o First quarter estimate of annual earnings $1,350,000 o Second quarter estimate of annual earnings $1,420,000 o Income tax rate 42% · The company estimated its permanent difference between accounting income and taxable income for 2008 as: o Environmental violation penalties $25,000 o Dividend income exclusion $180,000
· Solution: o First quarter estimate of annual earnings $1,350,000 o + Environmental violation penalties $25,000. Not deductible o - Dividend income exclusion ($180,000) o = estimated taxable income $1,195,000 o X Income tax rate 42% o Estimated taxes $501,900 (divide by below #) o / Find effective rate (divide) 1,350,000 o = effective rate 37.2% o Actual first quarter earnings $400,000 o X effective rate 37.2% o = taxes $148,800 First Qtr JE income tax expense 148,888 income tax payable 148,888
Interim reports
· States that the company can be broken down into periods · 1st qt, 2nd qt, 3rd qt 4qt · End of every quarter we have to report a financial statement for the full year · Break down the life of the company into artificial periods · SEC states publicly traded companies report on quarterly basis (4 quarter a year) · Every quarter you have to issue a 10Q · For the full year reporting you have to issue a 10K (publicly traded companies)
3. it the identifiable assets are 10% or more of the combined assets of all operating segments
· has to meet only one of the following 3 tests
