chapter 17 interim period reporting. focus of chapter 17 conceptual issues current reporting...
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CHAPTER 17
INTERIM PERIOD REPORTING
FOCUS OF CHAPTER 17
• 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 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.
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
underapplied overhead 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 reporting practices 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.
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: Liquidation of LIFO
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
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.
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 estimated effective tax rate
changes:– Include the cumulative effect in the
current 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
ALL prior 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 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 View Integral 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 #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 View Integral 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 3/3/06, 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. Defer whether or not expected to be absorbed by Y/E.
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. Defer whether or not expected to be absorbed
by Y/E.
End of Chapter 17
Time to Clear Things Up—Any Questions?