IAS 34 Interim Financial Reporting

IAS 34 prescribes how to prepare interim financial statements under IFRS, but sets no requirements as to which entities should prepare them and how often. It is usually the requirement of local legislation for listed entities to prepare interim financial statements on a quarterly or semi-annually basis. Interim period is understood as financial reporting period shorter than full financial year.

The purpose of interim financial statements is to provide an update on the latest annual financial statements. IAS 34 requires only condensed financial statements to be presented along with selected explanatory notes. Such financial statements are considerably shorter that full annual financial statements. However, local legislation in certain countries may require listed entities to publish full financial statements also for interim periods. Obviously, IAS 34 does not prohibit preparation of full set of financial statements for interim period.

Interim financial report should include all primary financial statements (so called ‘faces’), but in a condensed form (IAS 34.8). ‘Condensed’ means that only headings and subtotals used in last annual financial statements are required (IAS 34.10), but it could be also argued that if nothing was included except heading and subtotal, the interim financial statements could be misleading. Some entities present the same line items that are included in year-end financial statements, other combine the less significant into one.

It is assumed that users of interim report will have access to the most recent annual financial report of the entity, therefore an interim report should focus on events and transactions that occurred during interim period (IAS 34.15-15A). Paragraph IAS 34.15B provides a non-exhaustive list of examples of transactions and events that, if significant, should be disclosed if occurred.

In addition, paragraph IAS 34.16A provides a list of items that should be included in interim financial report (interim report as per IAS 34 includes interim financial statements and other documents). The same paragraph allows entities to provide cross-references to other documents (such as management commentary) is available to users of the financial statements on the same terms as the interim financial statements and at the same time. Such cross-referencing as a means of meeting the IFRS disclosure requirements is not allowed for annual financial statements.

Paragraphs IAS 34.20-22 specify which periods need to be presented in interim report, as illustrated below:

Note: you can scroll the table horizontally if it doesn’t fit your screen

 Entities reporting half-yearlyEntities reporting quarterly
Statement of
financial position
At 30 June 20X1/
At 31 December 20X0
At 30 June 20X1/
At 31 December 20X0
Statement of
comprehensive income
6 monts ended 30 June 20X1/
30 June 20X0
6 monts ended 30 June 20X1/
30 June 20X0

3 months ended 30 June 20X1/
30 June 20X0
Statement of
cash flows
6 monts ended 30 June 20X1/
30 June 20X0
6 monts ended 30 June 20X1/
30 June 20X0
Statement of
changes in equity
6 monts ended 30 June 20X1/
30 June 20X0
6 monts ended 30 June 20X1/
30 June 20X0

Information presented in explanatory notes for interim period is required to be presented on a financial year-to-date basis only, even for entities reporting quarterly (IAS 34.16A). Comparative information is not required in explanatory notes.

When an entity makes a retrospective restatement or reclassification of previous periods, IAS 34 does not require to present a ‘third column’ in the statement of financial position, as is required in annual financial statements under IAS 1.10f.

The discussion on materiality on a separate page covers interim financial statements as well.

The same accounting policies should be applied to interim and annual financial statements. This of course does not concern changes in accounting polices made and applied under IAS 8, which will also affect annual financial reports (IAS 34.28-36). IAS 34 states that the frequency of reporting should not affect annual results, therefore all measurements at the end of each interim period are made on a year-to-date basis. In particular, this means that recognition of income, expense, assets or liabilities  should not be deferred or anticipated merely because of preparation of financial statements for an interim period. There are, however, instances where IAS 34 allows to take into account full year’s perspective in interim financial statements, this is discussed in sections on specific matters below.

IAS 34 implies that it is acceptable for estimates made for interim periods to be not as precise and detailed as for annual financial statements (IAS 34.41-42). See paragraphs IAS 34.C1-C9 for examples of application.

There is no requirement to test assets for impairment at each interim period closing, assessment of impairment indicators will be sufficient (IAS 34.B35-B36). The lower the headroom from last annual impairment tests, the more careful such an assessment should be.

There used to be a heated debate on whether the impairment of goodwill recognised during an interim period could be reversed in annual financial statements for the same year. On one hand, IAS 36 forbids any reversals of impairment of goodwill, on the other hand, IAS 34 states that the frequency of reporting should not affect annual results. As a result of this debate, IFRIC 10 was issued which explicitly prohibits reversal of impairment losses of goodwill recognised during interim periods.

Deferring costs as assets in an interim statement of financial position in the hope that the recognition criteria for internally generated intangible assets set out in IAS 38 will be met later in the financial year is not allowed (IAS 34.B8).

In most countries, employer payroll taxes and insurance contributions are paid up to a certain level of annual remuneration for each employee. Therefore, such payments get lower when the calendar year-end approaches, as high-earners exceed the predetermined amount of remuneration for a year. Paragraph IAS 34.B1 requires to estimate average annual effective payroll tax or contribution rate and apply it to interim period. Application of this requirement results in an expense recognised for an interim period  being lower that the payments made by the company. Therefore, part of the payments will be recognised as an asset and expensed later during the year.

I personally have not seen this requirement to be followed in practice, i.e. companies expense all the payments as they are made.

Recognition of liabilities and expenses for accumulating paid absences carried forward in interim financial statements is based on the same criteria as for annual financial statements (IAS 34.B10). This has the consequence that entities reporting interim financial statements just before peak vacation/holiday season have to recognise higher liabilities even if employees are expected to use all their annual leave during the rest of the year.

IAS 34.B9 states that entities don’t have to prepare actuarial valuations at each interim date. Service and interest costs are recognised as determined by latest available valuation. Entities need to adjust it for ‘significant market fluctuations’, in practice this often means updating the discount rate. If there are any one-offs such as plan amendments, curtailments and settlements – they should be recognised in interim financial statements. For material one-offs events, additional actuarial valuation may be required.

All contractual volume rebates and other discounts should be anticipated during an interim period, both in revenue and expenses, provided that it is probable that they have been earned or will take effect (IAS 34.B23). Note that this approach cannot be applied to rebates and discounts that are discretionary, i.e. not firmly written in a contract and unambiguously enforceable.

See the discussion in section on levies in IAS 37.

IAS 34.30c states that income tax expense is recognised in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year. Application guidance is given in paragraphs IAS 34.B12-B22. For jurisdictions with progressive tax rate, an expected weighted average annual income tax rate is applied to actual results for an interim period. Where tax credits apply to specific items, e.g. to capital expenditures on new technologies, they are also applied to qualifying items recognised during interim period. Similarly, utilisation of tax loss carried forward is recognised during interim period if a company generates taxable income for that period.

Entities with highly seasonal businesses cannot anticipate or defer revenues/expenses at interim date, unless it would be appropriate at year-end based on other IFRS (IAS 34.37-39). Paragraph IAS 34.21 encourages, but not requires, such entities to present additional financial information for the twelve months up to the end of the interim period and comparative information for the prior twelve-month period. This is rarely seen in practice.

In any case, explanatory comments about the seasonality or cyclicality of interim operations are required under IAS 34.16A(b).

IAS 8.31 requires disclosure about IFRS that were issued but are not yet effective. This disclosure is not specifically required by IAS 34, but if there are developments with a material impact on a company, relevant disclosure should be given based on general IAS 34 requirements. Such developments could relate to e.g. issuance of a new IFRS that will materially impact the company, or finalisation of an assessment of the impact that initial application of the IFRS is expected to have on the company’s financial statements.

 


© 2018-2019 Marek Muc

Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). The information provided on this website does not constitute professional advice and should not be used as a substitute for consultation with a certified accountant.