Copyright © 2015 McGraw-Hill Education. All rights reserved.

Chapter 5

Income Measurement and Profitability

Analysis

PowerPoint Authors:Susan Coomer Galbreath, PhD., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, PhD., CPA, CIACynthia J. Rooney, PhD., CPA

Realization Principle

Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination

of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s

ongoing major or central operations.

Record revenue when:

The earnings process is complete or

virtually complete.

There is reasonable certainty as to the

collectability of the asset to be received (usually

cash).

AND

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SEC Staff Accounting Bulletin No. 101 and 104

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Additional criteria for judging whether or not the realization principle is satisfied:

1. Persuasive evidence of an arrangement exists.2. Delivery has occurred or services have been

performed.3. The seller’s price to the buyer is fixed or

determinable.4. Collectability is reasonably assured.

In addition to these four criteria, the SABs also answer a number of revenue recognition questions

relating to each of the criteria.

Realization Principle

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Revenue recognition is often tied to delivery of the product from the seller to the buyer.

Production

Percentage of completion

method

Revenue recognition

prior to delivery

Delivery

Point of delivery &completed contract

method

At delivery

Cash Collection

Installment& cost

recovery methods

After delivery

U.S. GAAP vs. IFRSRevenue recognition criteria for U.S.

GAAP and IFRS include:

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Earnings process is complete or virtually complete.

Reasonable certainty as to the collectibility of the asset to be received.

Revenue and costs can be measured reliably.

Probability that economic benefits will flow to the seller.

Risk and rewards are transferred to buyer, and seller does not manage or control the goods.

Stage of completion can be measured reliably.

Concept Check √

According to the realization principle, revenue should be recorded when the earnings process is judged to be complete or virtually complete and:A. there is reasonable certainty as to the collectibility of the asset

(usually cash) to be received. B. the asset (usually cash) has been received.C. the customer has provided the asset (usually cash) or a note in lieu of

payment. D. there is absolute certainly as to the collectability of the asset (usually

cash) to be received.

The realization principle requires both that the earnings process is virtually complete and that collectibility of the asset is reasonably certain.

Revenue Recognition at DeliveryLO5-2

Recognize Revenue

When the product or service has been delivered to the customer and cash has been received or a

receivable has been generated that has

reasonable assurance of collectability.

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Is the Seller a Principal or Agent?

PrincipalHas primary responsibility for delivering product or service and is vulnerable to risks associated with delivery and collection.

AgentDoes not have primary

responsibility for delivering product or service but acts as a

facilitator that earns a commission

Recognizes as revenue the gross (total) amount

received from a customer.

Recognizes as revenue the net commission it

receives for facilitating the sale.

Concept Check √

Fitness Stratagem offers biometric testing for $1,250. They also have a list of independent personal trainers who pay a 10% fee when clients are referred to them. Fitness Stratagem (1) performed three biometric tests and (2) received a commission from pairing one client to a personal trainer who earned $300 by providing a training session. Fitness Stratagem is operating as a(n):A. PrincipalB. AgentC. NeitherD. Both

Fitness Stratagem is principal for the biometric testing.

Fitness Stratagem acts as agent between clients and personal trainers.

Concept Check √

Recall that Fitness Stratagem offers biometric testing for $1,250. They also have a list of independent personal trainers who pay a 10% fee when clients are referred to them. Fitness Stratagem (1) performed three biometric tests and (2) received a commission from pairing one client to a personal trainer who earned $300 by providing a training session. Fitness Stratagem’s Income Statement would reflect the following for these transactions: A. $4,050 revenueB. $3,780 revenueC. $3,750 revenueD. $1,280 revenue

$1,250 x 3 = $3,750 for biometric testing$300 x 10% = $30 for fitness trainer fee Total = $3,750 + $30 = $3,780.

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1. Installment Sales Method2. Cost Recovery Method

Revenue Recognition after DeliveryRecognizing revenue at delivery of the product or service assumes we are able to make reasonable estimates of amounts due from customers that potentially might be uncollectible and amounts not collectible due to customers returning the products they purchased.

At times, however, uncertainties are so severe that they could cause a delay in recognizing revenue from a sale of a product or service.

On November 1, 2016, the Belmont Corporation, a real estate developer, sold a tract of land for $800,000. The sales agreement requires the customer to make four equal annual payments of $200,000 plus interest on each November 1, beginning November 1, 2016. The land cost $560,000 to develop. The company’s fiscal year ends on December 31.

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Installment Sales Method

Amount Allocated to:Date Cash Collected Cost (70%) Gross Profit (30%)

Nov. 1, 2016 $200,000 $140,000 $60,000Nov. 1, 2017 $200,000 $140,000 $60,000Nov. 1, 2018 $200,000 $140,000 $60,000Nov. 1, 2019 $200,000 $140,000 $60,000TOTALS $800,000 $560,000 $240,000

Gross Profit $240,000 ÷ $800,000

= 30%

Installment Sales Method LO5-3

Make Installment Sale:November 1, 2016Installment receivables……………………………….....$800,000 Inventory………………………………………………. $560,000 Deferred gross profit…………………………………. $240,000To record installment sale.

Collect Cash:November 1, 2016Cash…………………...……………………………….....$200,000 Installment Receivables…………………………….. $200,000To record cash from installment sale.

During 2016, Belmont Corporation collected $200,000 on its installment sales

Deferred gross profit…………………...…………………$60,000 Realized gross profit………………………………….. $60,000To recognize gross profit from installment sale.

This entry records the realized gross profit by adjusting the deferred gross profit account.

Cost Recovery MethodOn November 1, 2016, the Belmont Corporation, a real estate developer, sold a tract of land for $800,000. The sales agreement requires the customer to make four equal annual payments of $200,000 plus interest on each November 1, beginning November 1, 2016. The land cost $560,000 to develop. The company’s fiscal year ends on December 31.

Nov. 1, 2016 $200,000 $200,000Nov. 1, 2017 $200,000 $200,000Nov. 1, 2018 $200,000 $160,000 $40,000Nov. 1, 2019 $200,000 $ 0 $200,000

TOTALS $800,000 $560,000 $240,000

Date Cash Cost Gross Profit Collected Recovery Recognized

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Cost Recovery MethodMake Installment Sale:November 1, 2016Installment receivables……………………………….....$800,000 Inventory………………………………………………. $560,000 Deferred gross profit…………………………………. $240,000To record installment sale.Collect Cash:November 1, 2016, 2017, 2018, and 2019Cash…………………...……………………………….....$200,000 Installment Receivables…………………………….. $200,000To record cash from installment sale.November 1, 2016 and 2017No entry for gross profit.November 1, 2018Deferred gross profit…………………...……………….. $40,000 Realized gross profit………………………………… $40,000To recognize gross profit from installment sale.November 1, 2019Deferred gross profit…………………...………………..$200,000 Realized gross profit…………………………………

$200,000To recognize gross profit from installment sale.

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Concept Check √

On September 15, 2016, Bridger Company sold a tract of land to Great Divide Construction for $1,000,000. Great Divide agreed to pay $250,000 annual installments for 4 years beginning on September 30, 2016. Land development cost Bridger Company $775,000. Using the installment sales method, what is the gross profit percentage?A. 77.5%B. 10.29%C. 29%D. 22.5%

$1,000,000 – $775,000 = $225,000$225,000 ÷ $1,000,000 = 22.5%

To record the installment sale. Installment Receivables…….....$1,000,000 Land inventory (or other cash costs) $775,000 Deferred gross profit……............... $225,000

Concept Check √

When the 2016 installment is paid by Great Divide Construction, Bridger Company’s 2016 gross profit will be increased by: A. $62,500B. $193,750C. $56,250D. $1,000,000

Cash Collected x Gross Profit Percentage $250,000 x 22.5% = $56,250

To record cash collection from installment sale. Cash ....... ... ... ............................... $250,000 Installment receivables............... $250,000 To recognize gross profit from installment sale.Deferred gross profit .........................$56,250 Realized gross profit .................... $56,250

Right of ReturnIn most situations, even though the right to return merchandise exists, revenues and expenses can be

appropriately recognized at point of delivery.

Estimate the returns

Reduce bothsales and cost of

goods sold

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Concept Check √

Based on past experience, a company can usually estimate the returns that will result for a given volume of sales. These estimates are used to reduce:A. sales and cost of goods sold in anticipation of returnsB. accounts receivable and cost of goods sold in anticipation of returnsC. sales revenue in anticipation of returnsD. none of the above

Because the return of merchandise can negate the benefits of having made a sale, the seller must meet specific criteria before revenue is recognized in situations when the right of return exists. The most critical of these criteria is that the seller must be able to make reliable estimates of future returns.

Consignment Sales

Sometimes a company arranges for another company to sell its product under consignment.

Because the consignor retains the risks and rewards of ownership of the product, and title does not pass to the consignee, the consignor does not record a sale

until the consignee sells the goods and title passes to the eventual customer.

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Revenue Recognition Prior to Delivery

Long-termContracts

CompletedContract Method

Percentage-of Completion

Method

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Completed Contract and Percentage-of-Completion Methods ComparedAt the beginning of 2016, the Harding Construction Company received a contract to build an office building for $5 million. The project is estimated to take three years to complete. According to the contract, Harding will bill the buyer in installments over the construction period according to a prearranged schedule. Information related to the contract is as follows:

Construction costs incurred during the year $1,500,000 $1,000,000 $1,600,000Construction costs incurred in prior years - $1,500,000 $2,500,000Cumulative construction costs $1,500,000 $2,500,000 $4,100,000Estimated costs to complete at end of year $2,250,000 $1,500,000 -Total estimated and actual construction costs $3,750,000 $4,000,000 $4,100,000Billings made during the year $1,200,000 $2,000,000 $1,800,000Cash Collections during year $1,000,000 $1,400,000 $2,600,000

2016 2017 2018

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Gross Profit Recognition—General Approach2016 2017 2018

Completed ContractConstruction in progress (gross profit) $900,000Cost of construction $4,100,000 Revenue from long-term contracts $5,000,000To record gross profit.Percentage-of-CompletionConstruction in progress (gross profit) $500,000 $125,000 $275,000Cost of construction $1,500,000 $1,000,000 $1,600,000 Revenue from long-term contracts $2,000,000 $1,125,000 $1,875,000 To record gross profit.

In both methods the same amounts of revenue, cost,

and gross profit are recognized.

In both methods we add gross profit to the

construction-in-progress asset.

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Accounting for the Cost of Constructionand Accounts ReceivableWith both the completed contract and percentage-of-completion methods, all costs of construction are recorded in an asset account called construction in progress.

Construction in progress $1,500,000 $1,000,000 $1,600,000 Cash, materials, etc. $1,500,000 $1,000,000 $1,600,000To record construction costs.Accounts receivable $1,200,000 $2,000,000 $1,800,000 Billings on construction contract $1,200,000 $2,000,000 $1,800,000 To record construction costs. Cash $1,000,000 $1,400,000 $2,600,000 Accounts Receivable $1,000,000 $1,400,000 $2,600,000To record cash collections.

2016 2017 2018

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Gross Profit Recognition—General ApproachThe same journal entry is recorded to close out the billings on construction contract and construction in progress accounts under the completed contract and percentage-of-completion methods.

2016 2017 2018Billings on construction contract $5,000,000 Construction in progress $5,000,000To close accounts.

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Timing of Gross Profit RecognitionUnder the Completed Contract Method

Under the completed contract method, all revenues and expenses related to the project are recognized when the contract is completed.

Completed ContractConstruction in Progress

Billings on Construction Contract

2016 construction costs $1,500,000 $1,200,000 2016 billingsEnd balance, 2016 $1,500,000 $2,000,000 2017 billings2017 construction costs $1,000,000 $1,800,000 2018 billingsEnd balance, 2017 $2,500,000 $5,000,000 Balance, before closing2018 construction costs $1,600,000 2018 gross profit $900,000Balance before closing $5,000,000

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Timing of Gross Profit Recognition Underthe Percentage-of-Completion MethodUnder the percentage-of-completion method, profit is recognized over the life of the project as the project is completed.

We determine the amount of gross profit recognized in each period using the following logic:

gross profitrecognized this period

total estimated gross profit

percentage completedto date

gross profitrecognized in prior periods

= x —( )

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Percentage-of-completion MethodAllocation of Gross Profit

Contract price (A) $5,000,000 $5,000,000 $5,000,000Construction costs Construction costs incurred during the year $1,500,000 $1,000,000 $1,600,000 Construction costs incurred in prior years $1,500,000 $2,500,000 Cumulative construction costs $1,500,000 $2,500,000 $4,100,000 Estimated remaining costs to complete $2,250,000 $1,500,000 Total costs (estimated + actual) (B) $3,750,000 $4,000,000 $4,100,000Total gross profit (A-B) $1,250,000 $1,000,000 $900,000 Multiplied by: X X XPercentage-of-completion: Actual costs to $1,500,000 $2,500,000 $4,100,000date divided by the estimated total project cost $3,750,000 $4,000,000 $4,100,000 = 40% = 62.5% = 100% Equals:Gross profit earned to date $500,000 $625,000 $900,000 Less:Gross profit recognized in prior periods ($500,000) $625,000) Equals:Gross profit recognized currently $500,000 $125,000 $275,000

2016 2017 2018

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2016Revenue recognized ($5,000,000 x 40%) $2,000,000 Cost of construction ($1,500,000)Gross profit $500,0002017Revenue recognized to date ($5,000,000 x 62.5%) $3,125,000 Less: revenue recognized in 2016 $2,000,000Revenue recognized $1,125,000 Cost of construction ($1,000,000)Gross profit $125,000

2018Revenue recognized to date ($5,000,000 x 100%) $5,000,000 Less: revenue recognized in 2016 and 2017 $3,125,000Revenue recognized $1,875,000 Cost of construction ($1,600,000)Gross profit $275,000

Percentage-of-Completion MethodAllocation of Gross ProfitThe income statement for each year will report the appropriate revenue and cost of construction amounts.

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Percentage-of-Completion MethodAllocation of Gross ProfitNotice that the gross profit recognized in each period is added to the construction in progress account.

Percentage of CompletionConstruction in Progress

Billings on Construction Contract

2016 construction costs $1,500,000 $1,200,000 2016 billings2016 gross profit $500,000 $2,000,000 2017 billingsEnding balance, 2016 $2,000,000 $1,800,000 2018 billings2017 construction costs $1,000,0002017 gross profit $125,000 $5,000,000 Balance, Ending balance, 2017 $3,125,000 before closing2018 construction costs $1,600,0002018 gross profit $275,000Balance, before closing $5,000,000

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Concept Check √

Robertson Construction entered into a contract to construct a tunnel for a fixed price of $12,000,000. Robertson recognizes revenue using the percentage-of-completion method. Here are some facts:

Estimated Additional Cost incurred Cost to Complete

2016 $ 3,000,000 $6,000,0002017 5,000,000 2,000,0002018 2,500,000 0

What is Robertson’s percentage completion in 2016?A. 25%B. 33.33%C. 37.5%D. 100%

$3M ÷ ($3M + $6M) = 33.33% (or 1/3) complete.

Concept Check √

Robertson Construction entered into a contract to construct a tunnel for a fixed price of $12,000,000. Robertson recognizes revenue using the percentage-of-completion method. Here are some facts:

Estimated Additional Cost incurred Cost to Complete

2016 $3,000,000 $6,000,0002017 5,000,000 2,000,0002018 2,500,000 0

How much revenue would Robertson recognize in 2016?A. $4,000,000B. $5,000,000C. $6,000,000D. $12,000,000

$3M ÷ ($3M + $6M) = 33.33% (or 1/3) complete.$12M x 1/3 = $4M revenue recognized in 2016.

Concept Check √

Robertson Construction entered into a contract to construct a tunnel for a fixed price of $12,000,000. Robertson recognizes revenue using the percentage-of-completion method. Here are some facts:

Estimated Additional Cost incurred Cost to Complete

2016 $3,000,000 $6,000,0002017 5,000,000 2,000,0002018 2,500,000 0

What is Robertson’s percentage completion in 2017?A. 50%B. 66.67%C. 80%D. 88.89%

($3M + $5M) ÷ ($3M + $5M + $2M) = 80% complete.

Concept Check √

Robertson Construction entered into a contract to construct a tunnel for a fixed price of $12,000,000. Robertson recognizes revenue using the percentage-of-completion method. Here are some facts:

Estimated Additional Cost incurred Cost to Complete

2016 $3,000,000 $6,000,0002017 5,000,000 2,000,0002018 2,500,000 0

How much revenue would Robertson recognize in 2017?A. $5,000,000B. $5,600,000C. $8,000,000D. $9,600,000

($3M + $5M) ÷ ($3M + $5M + $2M) = 80% complete.$12M x 80% = $9.6M = total revenue to date.$9.6M − $4M = $5.6M = revenue recognized in 2017

Concept Check √

Robertson Construction entered into a contract to construct a tunnel for a fixed price of $12,000,000. Robertson recognizes revenue using the percentage-of-completion method. Here are some facts:

Estimated Additional Cost incurred Cost to Complete

2016 $3,000,000 $6,000,0002017 5,000,000 2,000,0002018 2,500,000 0

How much revenue would Robertson recognize in 2018?A. $0B. $2,000,000C. $2,400,000D. $12,000,000

100% complete.$12M x 100% = $12M = total revenue to date.$12M – ($4M + $5.6M) = $2.4M = revenue recognized

in 2018

Income RecognitionThe same total amount of profit or loss is recognized under both the completed contract and the percentage-of-completion methods, but the timing of recognition differs.

Percentage-of-Completion Completed Contract

Gross profit recognized:

2016 $500,0002017 $125,0002018 $275,000 $900,000

Total gross profit $900,000 $900,000

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Balance Sheet RecognitionBillings on construction contract are subtracted from construction in progress to determine balance sheet presentation.

CIP > Billings

Billings > CIP

Asset

Liability

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Balance Sheet RecognitionThe balance in the construction in progress account differs between methods because of the earlier gross profit recognition that occurs under the percentage-of-completion method.

Percentage-of-Completion:Current Assets: Accounts receivable $200,000 $800,000 Costs and profit ($2,000,000) in excess of billings ($1,200,000) $800,000Current liabilities: Billings ($3,200,000) in excess of costs and profit ($3,125,000) $75,000

Completed Contract:Current Assets: Accounts receivable $200,000 $800,000 Costs ($1,500,000) in excess of billings ($1,200,000) $300,000Current liabilities: Billings ($3,200,000) in excess of costs ($2,500,000) $700,000

Balance Sheet(End of Year)

2016 2017

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Long-term Contract Losses

Periodic Loss for Profitable Projects

Loss Projected for Entire Project

Determine periodic loss and record loss as a

credit to the construction in

progress account

Estimated loss is fully recognized in the first period the loss is anticipated

and is recorded by a credit to

construction in progress account

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U.S. GAAP vs. IFRS

There are similarities and differences between IRFS and U.S. GAAP when considering revenue

recognition for long-term contruction contracts.

Requires percentage-of-completion when reliable estimates can be made.

Requires completed contract method when reliable estimates can’t be made.

Requires percentage-of-completion when reliable estimates can be made.

Requires cost recovery method when reliable estimates can’t be made.

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U.S. GAAP vs. IFRSNotice that revenue recognition occurs earlier under the cost recovery method than under the completed contract method, but gross profit recognition occurs at the end of the contract for both methods.

2016 2017 2018

Completed ContractConstruction in progress (gross profit) $900,000Cost of construction $4,100,000 Revenue from long-term contracts $5,000,000To record gross profit.Cost RecoveryConstruction in progress (gross profit) $900,000Cost of construction $1,500,000 $1,000,000 $1,600,000 Revenue from long-term contracts $1,500,000 $1,000,000 $2,500,000 To record gross profit.

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Software and Other Multiple Deliverable Arrangements

If a sale includes multiple elements (software, future upgrades, post

contract customer support, etc.), the revenue should be allocated to the

various elements based on “vendor-specific objective evidence” (VSOE) of fair values of the individual elements.

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Software and Other Multiple Deliverable Arrangements

The FASB’s Emerging Issues Task Force (EITF) issued guidance to broaden the application of this basic perspective to other

arrangements that involve “multiple deliverables,” such as sales of appliances with maintenance contracts, cellular phone

contracts that come with a “free phone,” and even painting services that include sales of paint as well as labor.

Sellers offering other multiple-deliverable contracts now are allowed to estimate selling prices when they lack VSOE from stand-alone sales

prices. Using estimated selling prices allows earlier revenue recognition than would be allowed if sellers had to have VSOE in order

to recognize revenue.

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Concept Check √

Graham Software sells their software package for $60,000, which includes a year of free technical support. Without technical support, the software package sells for $55,000. A year of technical support sells for $11,000. How much revenue is recognized when software is delivered?A. $66,000B. $60,000C. $55,000D. $50,000

Vendor Specific Objective Evidence:Calculated as a percentage of the value before package discount

$55,000 ÷ $66,000 = 5/6Software is 5/6 of Fair Value$60,000 x 5/6 = $50,000

U.S. GAAP vs. IFRS

IFRS contains very little guidance about multiple-deliverable arrangements.

Revenue should be allocated to the various elements based on “vendor-specific objective evidence” (VSOE) of fair values of the individual elements.

May be necessary to apply the recognition criteria to the separately identifiable components of a single transaction.

Allocation of total revenue to individual components is based on fair value, with no requirements to focus on VSOE.

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Franchise Sales

Initial Franchise Fees

Continuing Franchise Fees

Generally are recognized at a

point in time when the

earnings process is virtually complete.

Recognized over time as the services

are performed.

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U.S. GAAP vs. IFRS

The FASB and IASB have jointly issued a new revenue recognition standard.

Has over 200 revenue-related standards that sometimes contradict each other.

Has two primary standards that also sometimes contradict each other and that don’t offer guidance in some important areas (like multiple deliverables).

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Activity Ratios

Whenever a ratio divides an income balance by a balance sheet balance, the average for the year is

used in the denominator.

Activity Ratios

Asset Turnover Ratio Net Sales ÷ Average Total AssetsReceivables Turnover Ratio Net Sales ÷ Average Accounts ReceivableAverage Collection Period 365 ÷ Receivables Turnover RatioInventory Turnover Ratio Cost of Goods Sold ÷ Average InventoryAverage Days in Inventory 365 ÷ Inventory Turnover Ratio

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Profitability Ratios

Return on Equity Key ComponentsProfitability

ActivityFinancial Leverage

Profitability RatiosProfit Margin on Sales Net Income ÷ Net Sales

Return on Assets Net Income ÷ Average Total Assets

Return on Shareholders’ Equity Net Income ÷ Average Shareholders’ Equity

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DuPont FrameworkThe DuPont framework helps identify how profitability, activity, and financial leverage trade off to determine return to shareholders:Return on equity = Profit margin x Asset turnover x Equity multiplier

Net incomeAvg. total

equity

Net incomeTotal sales

Total salesAvg. total

assets

Avg. total assetsAvg. total

equityx= x

Because profit margin and asset turnover combine to equal return on assets, the DuPont framework can also be written as: Return on equity = Return on assets x Equity multiplier

Net incomeAvg. total

equity

Net incomeAvg. total

assets

Avg. total assetsAvg. total

equity= x

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Concept Check √

Match these activity ratios with their descriptions

A. Receivables turnover ratio D. Average Collection Period

B. Inventory turnover ratio E. Average Days in Inventory

C. Asset turnover ratio

Answer Description

365 ÷ Inventory Turnover Ratio

Net Sales ÷ Average Accounts Receivable

Net Sales ÷ Average Total Assets

365 ÷ Receivables Turnover Ratio

Cost of Goods Sold ÷ Average Inventory

Company’s efficiency in collecting receivables Average age of accounts receivable

How long it normally takes to sell inventory

How quickly inventory is sold.

How company utilizes its assets to generate revenue

E

A

C

D

B

Concept Check √

Match these profitability ratios with their descriptions

A. Profit margin on sales ratio C. Return on assets ratio

B. Return on shareholders’ equity

Answer Description

Net income ÷ Net Sales

Net income ÷ Average Total Assets

Net income ÷ Average Shareholders’ Equity

A

B

C

Profit generated by each dollar of sales Profit generated by each dollar of assets

Profit generated by each dollar of equity

Appendix 5: Interim ReportingIssued for periods of less than a year, typically as

quarterly financial statements.

Serves to enhance the timeliness of financial

information.

Fundamental debate centers on the choice

between the discrete and integral part approaches.

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Interim Reporting

Reporting Revenues and Expenses

With only a few exceptions, the same accounting principles applicable to

annual reporting are used for interim reporting.

Reporting Unusual Items

Discontinued operations are reported entirely within the interim period in

which they occur.

Earnings Per ShareQuarterly EPS calculations follow the

same procedures as annual calculations.

Reporting Accounting Changes

Accounting changes made in an interim period are reported by

retrospectively applying the changes to prior financial statements.

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U.S. GAAP vs. IFRSIAS No. 34 requires that a company apply the same

accounting policies in its interim financial statements as it applies in its annual financial

statements.

Costs for repairs, property taxes, and advertising that do not meet the definition of an asset at the end of an interim period are accrued or deferred and then charged to each of the periods they benefit.

Costs for repairs, property taxes, and advertising that do not meet the definition of an asset at the end of an interim period are expensed entirely in the period in which they occur.

This difference would tend to make an interim period income more volatile.

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Appendix 5: Interim Reporting

Minimum Disclosures1. Sales, income taxes, and net income2. Earnings per share3. Seasonal revenues, costs, and expenses4. Significant changes in estimates for income taxes5. Discontinued operations, extraordinary items, and

unusual or infrequent items6. Contingencies7. Changes in accounting principles or estimates8. Information about fair value of financial instruments

and the methods and assumptions used to estimate fair values

9. Significant changes in financial position

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End of Chapter 5