Slide 21-1
21 CHAPTER 21
INTERIM PERIOD REPORTING
Slide 21-2
21FOCUS OF CHAPTER 21
Conceptual Issues Current Reporting Standards:
The Requirements of APBO 28 Involvement of Certified Public
Accountants in Interim Period Reporting
Slide 21-3
21 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.
Slide 21-4
21 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.
Slide 21-5
21 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.
Slide 21-6
21 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.
Slide 21-7
21 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.
Slide 21-8
21 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.
Slide 21-9
21 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.
Slide 21-10
21 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.
Slide 21-11
21 APBO 28: Exceptions to UsingAnnual Reporting Practices
Costs Associated with Revenues: Exception #4: Purchase price
variancesand volume or capacity variances of inventoriable costs “should ordinarily”be deferred if such variances are: Planned, AND Expected to be recovered by year-end.
Slide 21-12
21Seasonal 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.
Slide 21-13
21 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 thecurrent interim period.
Do NOT restate prior interim periods.
Slide 21-14
21Special 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.
Slide 21-15
21 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.
Slide 21-16
21 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.
Slide 21-17
21 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.
Slide 21-18
21Review Question #1
In May 2004, 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
Slide 21-19
21Review Question #1--With Answer
In May 2004, 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
Slide 21-20
21Review Question #2
At 3/3/04, 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 3/31/04? 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.
Slide 21-21
21Review Question #2--With Answer
At 3/3/04, 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 3/31/04? 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.
Slide 21-22
21End of Chapter 21
Time to Clear Things Up--Any Questions?