Reportable segments FOREIGN EXCHANGE

Chapter 23 – Interim Reporting Page 335 Although a year-to-date approach is generally applied for the preparation of interim reports, IAS 34 requires that income tax should be accrued based on the entity’s best estimate of what the weighted average annual tax rate will be. However, the taxable profit is that for the interim financial reporting period only i.e. it is not a proportion of the annual profit. Illustration 4 An entity’s accounting year ends on 31 December 2008, and it is currently preparing interim financial statements for the half year to 30 June 2008. Its profit before tax for the 6 month period to 30 June 2008 is CU6 million. The business is seasonal and the profit before tax for the six months to 31 December 2008 is almost certain to be CU10 million. Income tax is calculated as 25 of reported annual profit before tax if it does not exceed CU10 million. If annual profit before tax exceeds CU10 million the tax rate on the whole amount is 30. The taxation charge in the interim financial statements is based upon the weighted average rate for the year. In this case the entity’s tax rate for the year is expected to be 30. The taxation charge in the interim financial statements will be CU1.8 million.

6.1 Impairment in the interim period

Following a potential conflict between IAS 34 and IAS 36 Impairment of assets, IFRIC issued some interpretation guidance in the form of IFRIC 10 Interim financial reporting and impairment in July 2006. The guidance sets out that where certain impairment losses have been recognised in an interim period, no reversal is permitted in subsequent interim financial statements or the full annual financial statements. The impairment losses in question are those in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost. The confusion arose because, while IAS 36 and IAS 39 are clear that impairments of goodwill and these investments should not be reversed in a subsequent reporting period, IAS 34 states that measurement for interim reporting purposes is made on a year-to-date basis. IAS 34 also states that the frequency of an entity’s reporting should not affect measurements made in its annual financial statements. Applying IAS 34 in isolation might therefore have led to an impairment which existed at an interim period, but subsequently reversed at the year end, being reversed in the full annual financial statements. Chapter 23 – Interim Reporting Page 336 7 Use of Estimates The preparation of both annual and interim financial reports relies on the use of estimates in measuring assets and liabilities. The measurement procedures in any period should be designed to ensure that the resulting estimates are reliable. It is often the case that the preparation of an interim financial report will require a greater use of estimation methods than the preparation of the annual financial reports. [IAS 34.41] IAS 34 sets out a number of examples where different estimation methods are used in the interim period compared with an entity’s financial year-end, for example:  Inventories: At the year-end it is best practice to perform a full inventory count to ensure that the level of inventories recorded in the financial statements is accurate. However, such a procedure is not necessarily required at the interim reporting date.  Contingencies: While contingencies should be disclosed in interim reports, it is not always necessary to obtain formal reports from experts on such matters as litigation and technical claims in order to verify the amount of such contingencies at the interim date.  Provisions: The inclusion in the financial statements of certain provisions, such as those for warranties or environmental damage, may require the use of experts. Whilst experts may be engaged to assist with the full year-end estimates, at the interim period it may be appropriate instead to update the information that was provided at the previous year end. 8 Chapter Review The key issues covered in this chapter deal with recognition, measurement and disclosure in interim financial statements. IAS 34 does not require the preparation of interim financial statements, but it does specify the minimum content of such reports where they are prepared and the principles to be applied within them. This chapter has covered:  the objectives, scope and terminology of IAS 34;  the form and content of interim financial reports;  interim reporting periods;  recognition and measurement criteria in interim financial reports; and  the calculation of estimates in interim financial reports.