revenues are recognised when they occur. [IAS 34.38].
3100 Chapter 37
IAS 34 also requires an entity to explain the seasonality or cyclicality of its business and
the effect on interim reporting (see 4.3.14 above). [IAS 34.16A(b)]. If businesses are highly
seasonal, IAS 34 encourages reporting of additional information for the twelve months
up to the end of the interim period and comparatives for the prior twelve-month period
(see 5 above). [IAS 34.21].
8.2.2
Costs incurred unevenly during the year
IAS 34 prohibits the recognition or deferral of costs for interim reporting purposes if
recognition or deferral of that type of cost is inappropriate at year-end, [IAS 34.39], which
is based on the principle that assets and liabilities are recognised and measured using
the same criteria as at year-end. [IAS 34.29, 31]. This principle prevents smoothing of costs
in seasonal businesses. Furthermore, the recognition of assets or liabilities at the interim
date would not be appropriate if they would not qualify for recognition at the end of an
annual reporting period. [IAS 34. 32].
For direct costs, this approach has limited consequences, as the timing of recognising
these costs and the related revenues is usually similar. However, for indirect costs, the
consequences may be greater, depending on which standard an entity follows.
For example, manufacturing entities that use fixed production overhead absorption
rates recognise an asset in respect of attributable overheads based on the normal
capacity of the production facilities in accordance with IAS 2 – Inventories. Any
variances and unallocated overheads are expensed. [IAS 2.13]. Entities applying IFRS 15
can only capitalise allocations of costs incurred in fulfilling a contract with a customer
that are not within the scope of another standard which meet all the following criteria:
[IFRS 15.95]
• the costs relate directly to the contract or to an anticipated contract that can be
specifically identified;
• the costs are expected to generate or enhance resources of the entity that will be
used in satisfying (or in continuing to satisfy) performance obligations in the future;
and
• the costs are expected to be recovered.
If these criteria are not met at the reporting date, the costs are expensed.
The circumstances in which IFRS 15 allows an asset to be recognised in relation to costs
incurred to fulfil a contract are discussed in Chapter 28 at 10.3. What is clear is that an
entity should not diverge from these requirements for recognising an expense or an
asset just because information is being prepared for an interim period.
9
EXAMPLES OF THE RECOGNITION AND MEASUREMENT
PRINCIPLES
Part B of the illustrative examples accompanying the standard provides several
examples that illustrate the recognition and measurement principles in interim financial
statements. [IAS 34.40]. In addition, IFRIC 10 – Interim Financial Reporting and
Impairment – addresses the reversal of certain impairment losses in the interim periods.
These examples are discussed below.
Interim financial reporting 3101
9.1
Property, plant and equipment and intangible assets
9.1.1
Depreciation and amortisation
Depreciation and amortisation for an interim period is based only on assets owned
during that interim period and does not consider asset acquisitions or disposals planned
for later in the year. [IAS 34.B24].
An entity applying a straight-line method of depreciation (amortisation) does not
allocate the depreciation (amortisation) charge between interim periods based on the
level of activity. However, under IAS 16 and IAS 38 an entity may use a ‘unit of
production’ method of depreciation, which results in a charge based on the expected
use or output (see Chapter 18 at 5.6.2). An entity can only apply this method if it most
closely reflects the expected pattern of consumption of the future economic benefits
embodied in the asset. The chosen method should be applied consistently from
period to period unless there is a change in the expected pattern of consumption of
those future economic benefits. [IAS 16.62, IAS 38.98]. Therefore, an entity cannot apply
a straight-line method of depreciation in its annual financial statements, while
allocating the depreciation charge to interim periods using a ‘unit of production’
based approach.
9.1.2
Impairment of assets
IAS 36 – Impairment of Assets – requires an entity to recognise an impairment loss if
the recoverable amount of an asset declines below its carrying amount. [IAS 34.B35]. An
entity should apply the same impairment testing, recognition, and reversal criteria at an
interim date as it would at year-end. [IAS 34.B36].
However, IAS 34 states that an entity is not required to perform a detailed impairment
calculation at the end of each interim period. Rather, an entity should perform a review
for indications of significant impairment since the most recent year-end to determine
whether such a calculation is needed. [IAS 34.B36]. Nevertheless, the standard does not
exempt an entity from performing impairment tests at the end of its interim periods.
For example, an entity that recognised an impairment charge in the immediately
preceding year, may find that it needs to update its impairment calculations at the end
of subsequent interim periods because impairment indicators remain. IFRIC 10 does
not allow reversal of impairment loss recognised on goodwill in a previous interim
period (see 9.2 below).
9.1.3
Recognition of intangible assets
An entity should apply the same IAS 38 definitions and recognition criteria for
intangible assets in an interim period as in an annual period. Therefore, costs incurred
before the recognition criteria are met should be recognised as an expense. [IAS 34.B8].
Expenditures on intangibles that are initially expensed under IAS 38 cannot be
reinstated and recognised as part of the cost of an intangible asset subsequently (e.g. in
a later interim period). [IAS 38.71]. Furthermore, ‘deferring’ costs as assets in an interim
period in the hope that the recognition criteria will be met later in the year is not
permitted. Only costs incurred after the specific point in time at which the criteria are
met should be recognised as part of the cost of an intangible asset. [IAS 34.B8].
3102 Chapter 37
9.1.4
Capitalisation of borrowing costs
An entity that recognises finance expenses in the cost of a qualifying asset under IAS 23
– Borrowing Costs – should determine the amount to be capitalised from the actual
finance cost during the period (when funds are specifically borrowed) [IAS 23.12] or, when
the asset is funded out of general borrowings, by applying a capitalisation rate equal to
the weighted-average of the finance costs attributable to actual borrowings outstanding
during the period [IAS 23.14] (see Chapter 21 at 5.2 and 5.3). For interim financial
reporting, measurement should be made on a year-to-date basis, [IAS 34.28], regardless of
how often the entity issues interim reports during a year. For example, an entity that
<
br /> issues quarterly interim reports would have to revise its estimated capitalisation rate in
successive quarters during the same year for changes in actual year-to-date borrowings
and finance costs. As required in IAS 34, the cumulative effect of changes in the
estimated capitalisation rate should be recognised in the current quarter and not
retrospectively. [IAS 34.36].
9.2
Reversal of impairment losses recognised in a previous interim
period (IFRIC 10)
The two requirements in IAS 34, to apply the same accounting policies in interim
financial reports as are applied for the annual financial statements, and to use year-to-
date measurements for interim reporting purposes, do not sit easily together when
considering the reversal of certain impairments that IFRS does not allow to be reversed
in a subsequent period. For example, IAS 36 prohibits the reversal in a subsequent
period of an impairment loss recognised for goodwill. [IAS 36.124].
As discussed at 9.1.2 above, the requirement to use the same accounting policies means
that an entity should apply the same impairment testing, recognition, and reversal
criteria at the end of an interim period as it would at year-end. [IAS 34.B36].
However, the use of year-to-date measurements implies that the calculation of
impairments as at interim reporting dates in the same annual reporting period should
be based on conditions as at the end of each interim period and determined
independently of assessments at earlier interim dates. Applying this requirement of
IAS 34 would lead to reversals of previously reported impairments if conditions change
and justify a higher carrying value for the related asset.
IFRIC 10 addresses the interaction between the requirements of IAS 34 and the
recognition of impairment losses on goodwill in IAS 36, and the effect of that interaction
on subsequent interim and annual financial statements. [IFRIC 10.2].
Whilst it may be unlikely for the conditions causing an impairment of goodwill at an
interim date to reverse before year-end, IFRIC 10 states that the specific requirements
of IAS 36 take precedence over the more general statement in IAS 34. [IFRIC 10.BC9]. As
such, IFRIC 10 prohibits the reversal of an impairment loss recognised in a previous
interim period in respect of goodwill. [IFRIC 10.8].
Thus, in the albeit unlikely event that the conditions giving rise to an impairment do
reverse in successive interim periods, there can be situations where two entities facing
an identical set of circumstances, yet with different frequency of interim reporting,
could end up reporting different annual results.
Interim financial reporting 3103
IFRIC 10 should not be applied by analogy to derive a general principle that the specific
requirements of a standard take precedence over the year-to-date approach in IAS 34.
[IFRIC 10.9].
9.3 Employee
benefits
9.3.1
Employer payroll taxes and insurance contributions
If employer payroll taxes or contributions to government-sponsored insurance funds
are assessed on an annual basis, the employer’s related expense should be recognised
in interim periods using an estimated average annual effective rate, even if it does not
reflect the timing of payments. A common example contained in Appendix B to IAS 34
is employer payroll tax or insurance contribution subject to a certain maximum level of
earnings per employee. Higher income employees would reach the maximum income
before year-end, and the employer would make no further payments for the remainder
of the year. [IAS 34.B1].
9.3.2 Year-end
bonuses
The nature of year-end bonuses varies widely. Some bonus schemes only require
continued employment whereas others require certain performance criteria to be
attained on a monthly, quarterly, or annual basis. Payment of bonuses may be purely
discretionary, contractual or based on years of historical precedent. [IAS 34.B5]. A bonus
is recognised for interim reporting only if: [IAS 34.B6]
(a) the entity has a present legal or constructive obligation to make such payments as
a result of past events; and
(b) a reliable estimate of the obligation can be made.
A present obligation exists only when an entity has no realistic alternative but to make
the payments. [IAS 19.19]. IAS 19 gives guidance on accounting for profit sharing and
bonus plans (see Chapter 31 at 12.3).
In recognising a bonus at an interim reporting date, an entity should consider the facts
and circumstances under which the bonus is payable, and determine an accounting policy
that recognises an expense reflecting the obligation on the basis of the services received
to date. Several possible accounting policies are illustrated in Example 37.9 below.
Example 37.9: Measuring interim bonus expense
An entity pays an annual performance bonus if earnings exceed £10 million, under which 5% of any earnings
in excess over £10 million will be paid up to a maximum of £500,000. Earnings for the six months ended
30 June 2019 are £7 million, and the entity expects earnings for the full year ended 31 December 2019 to be
£16 million.
The following table shows various accounting policies and the expense recognised thereunder in the interim
financial statements for the six months ended 30 June 2019.
Expense (£)
Method 1 – constructive obligation exists when earnings target is met
Nil
Method 2 – assume earnings for remainder of year will be same
200,000
Method 3 – proportionate recognition based on full-year estimate
131,250
Method 4 – one-half recognition based on full-year estimate
150,000
3104 Chapter 37
Method 1 is generally not appropriate, as this method attributes the entire bonus to the latter portion of the
year, whereas employees provided services during the first six months to towards earning the bonus.
Likewise, Method 2 is generally not appropriate, as the expense of £200,000 [(£14 million – £10 million) ×
5%] assumes that the employees will continue to provide services in the latter half of the year to achieve the
bonus target, but does not attribute any services to that period.
In contrast to Methods 1 and 2, Method 3 illustrates an accounting policy whereby an estimate is made of the
full-year expense and attributed to the period based on the proportion of that bonus for which employees
have provided services at 30 June 2019. The amount recognised is calculated as (£7 million ÷ £16 million)
× [5% × (£16 million – £10 million)].
Similar to Method 3, Method 4 also takes the approach of recognising an expense based on the full year
estimate, but allocates that full-year estimate equally to each period (which is similar to the approach used
for share-based payment transactions). The amount recognised is calculated as [50% × 5% × (£16 million –
£10 million)].
In addition to Methods 3 and 4, which might be appropriate, depending on the facts and circumstances, an
entity might determine another basis on which to recognise bonus that considers both the constructive
obligation that exists as of 30 June 2019, and the services performed to date, which is also appropriate.
&nbs
p; 9.3.3 Pensions
Pension costs for an interim period are calculated on a year-to-date basis using the
actuarially determined pension cost rate at the end of the prior year, adjusted for
significant market fluctuations and for significant one-off events, such as plan
amendments, curtailments and settlements. [IAS 34.B9].
In the absence of such significant market fluctuations and one-off events, the estimate
of the actuarial liabilities is rolled forward in the scheme based on assumptions as at the
beginning of the year and adjusted for significant changes in the membership of the
scheme. If there are significant changes to pension arrangements during the interim
period (such as changes resulting from a material business combination or from a major
redundancy programme) consideration should be given to obtaining a new actuarial
valuation of scheme liabilities. Similarly, if there are significant market fluctuations,
such as those arising from changes in corporate bond markets, the validity of the
assumptions in the last actuarial estimate, such as the discount rate applied to scheme
liabilities, should be reviewed and revised as appropriate. Since the revised version of
IAS 19 became effective on 1 January 2013, entities are required to recognise the full
defined benefit obligation as liability. With this approach it is more likely than under
the previous corridor approach that changes in market conditions may have a
significant effect on the pension liability.
In Extract 37.30 Bayer discloses changes in the discount rates used for pension
obligations. In normal circumstances, companies would not necessarily go through the
full process of measuring pension liabilities at interim reporting dates, but rather would
look to establish a process to assess the impact of any changes in underlying parameters
(e.g. through extrapolation). If, for example, the discount rate estimated based on
circumstances prevalent at the half-year interim reporting date has changed, the
following ‘rule of thumb’ may help assess the impact on the pension obligation:
• Estimated change in DBO (%) = [Change in the discount rate (basis points) ×
duration of the pension obligation (in years)] / 100
(Note: Basis points = 0.01%)
Interim financial reporting 3105
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 614
