Identifying 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.