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?