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

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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

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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

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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

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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

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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

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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

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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.

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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

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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

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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

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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.

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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

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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.

 

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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

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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

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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