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21 CHAPTER 21

INTERIM PERIOD REPORTING

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21FOCUS OF CHAPTER 21

Conceptual Issues Current Reporting Standards:

The Requirements of APBO 28 Involvement of Certified Public

Accountants in Interim Period Reporting

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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

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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.

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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.

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21End of Chapter 21

Time to Clear Things Up--Any Questions?