
Interim Financial Reporting (IAS 34)
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Presented by CPA Peter Njuguna

+254 722 608 618
Objective and Scope

Objective

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minimum contents of interim report
recognition & measurement principles
Scope

all interim financial reports published in
accordance with IFRS
Why interim report


Annual reporting Often supplemented
with interim or quarterly reports
Interim reporting


Reports provide more timely information
Often mandated by securities regulators,
governments, and securities exchanges
Example: Quarterly and interim financial statements
Actual
data
Comparative
data
Statement of financial position at
30/06/04
31/12/03
Statement of Comprehensive Income
for 6 months ending
for 3 months ending
30/06/04
30/06/04
30/06/03
30/06/03
Statement of Cash Flows
6 month ending
30/06/04
30/06/03
Statement of Changes in Equity
6 months ending
30/06/04
30/06/03
Definition

According to IAS 34, an interim financial
report is defined as follows:



. . . a financial report containing either a complete
set of financial statements or a set of condensed
financial statements for an interim period
Goal of interim reporting is to provide
information about new events and
circumstances and other changes
Not just replicate the information given in the
annual financial statements
Interim report - minimum content


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Condensed statement of financial position
Condensed statement of comprehensive
income (SOCI)
Condensed statement of changes in equity
Condensed statement of cash flows
Selected explanatory notes
IAS 34 – Objective and Scope

IASB encourages entities whose shares are
publicly traded to provide interim
information
At least as of the end of the first half of the year
and issue it within 60 days of this date
Standard does not address how often nor how soon after
the period entities should produce interim reports

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7
Compliance with IFRSs

Choice by the entity
 May choose not to prepare interim financial
statements at all
 May choose to prepare them in accordance
with IFRSs
 if they do and they describe the financial
statements to be in compliance with IFRSs,
the standard applies
8
IAS 34 – Content of an Interim Financial Report


not prohibit including a complete set of financial
statements (comply with IAS 1)
Minimum requirements mandated by the standard

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Minimum components of an interim financial report
Form and content of interim financial statements
Selected explanatory notes
Disclosure of compliance with IFRSs
Periods for which interim financial statements are
required to be presented
Materiality
9
Content of an Interim Financial Report
Minimum components of an interim financial report


Required condensed statements
• Statement of financial position
• Statement of comprehensive income
-Presented as a single statement or a separate income
statement plus a statement of comprehensive income
• Statement of changes in equity
• Statement of cash flows
In addition, selected explanatory notes must accompany the above
10
Content of an Interim Financial Report
Form and content of interim financial statements


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If the entity presents a full set of statements
 Follow IAS 1
If it presents condensed statements
 Entity must present at a minimum the headings and subtotals that
were presented in the annual statements
Interim financial statements
 Based on consolidated statements where the most recent annual
statements were prepared on a consolidated basis
11
Content of an Interim Financial Report
Selected explanatory notes


Relevant notes unchanged from the annual report
 Not included
 Repetitive
 Can obscure the new and more relevant
information
Information is normally presented on a year-to-date
basis
12
Explanatory notes, examples

Accounting policies
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statement that they are the same as in most recent
annual financial statements
if changes  description and disclosure
Compliance with IFRS
Comments on seasonality or cyclicality
Nature and amount of


unusual items (IAS 8)
changes in estimates
Recognition and Measurement
Same accounting policies as annual

Entity is required to use the same accounting policies as
in the year-end statements
 Encourages consistency
 Where there has been a subsequent change in
accounting policies, the entity would use the newer
policy
14
Explanatory notes
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Issuance, repurchases, and repayments of debt
and equity securities
Dividends paid separately
Segment revenue & segment result for primary
segment
Subsequent events
Changes in composition of the enterprise
Changes in contingent assets & liabilities
Example of explanatory notes disclosures
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the write-down of inventories to net realisable value and
the reversal of any such write-down;
recognition of a loss arising from the impairment of
property, plant, and equipment, intangible assets, or
other assets, and the reversal of any such impairment
loss;
the reversal of any provisions for the costs of
restructuring;
acquisitions and disposals of items of property, plant,
and equipment;
Example of explanatory notes disclosures
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commitments for the purchase of property, plant,
and equipment;
litigation settlements;
corrections of prior period errors;
any loan default or any breach of a loan agreement
that has not been remedied on or before the end of
the reporting period; and
related party transactions.
Example explanatory notes disclosures
• Changes in debt and equity securities (issue,
repurchase, repayment)
• Dividends paid
• Segmented information including
 Intersegment revenues
 Segment profit/loss
• Material subsequent events
• Changes in contingent assets/liabilities
18
Content of an Interim Financial Report
Materiality
 Discussed in IAS 1 and 8
 Although there is no specific quantitative guidance


IAS 34 notes that materiality for interim statements
should be assessed based on the interim period
Note that interim financials statements may have
additional estimates
 Therefore the numbers may be a bit softer
19
Materiality



Omissions or misstatements of items are material if they
could, individually or collectively, influence the economic
decisions of users taken on the basis of the financial
statements.
Materiality depends on the size and nature of the
omission or misstatement, judged in the surrounding
circumstances.
Set material low to allow for more estimation
Material disclosures
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Statement that the accounting policies follows
the annual report, note any change
Explanatory comments about the
seasonality/cyclicality of the business
Any unusual items
Nature and amount of changes in estimates
Principles for recognition and measurement

Same as in annual financial statements
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no smoothing of income and expenses

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recognition of assets, liabilities, income and
expenses in accordance with the Framework and
applicable Standards
measurement on a year-to-date basis
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frequency of reporting should not affect
measurement of annual results
Application, expenses
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Recognition
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Measurement
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present obligation and probable outflow
reliable estimate of the amount
consider risks and uncertainties
Examples
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provisions and employee benefits
planned maintenance for later interim periods
expenses calculated on an annual basis like
bonuses, payroll tax or discount expenses
Application, revenues
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Recognition
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Measurement
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transfer of significant risks and rewards
probable inflow and reliable measure
consider risks and uncertainties
Example
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seasonal, cyclical or occasional revenues
revenues calculated on an annual basis
Recognition and Measurement
Revenues received seasonally, cyclically, or occasionally

Recognized when they occur or are earned, notwithstanding their
cyclical or seasonal nature

May result in more revenues being recognized in one period than
in another
 Reflects the underlying reality

Supports the discrete approach
Costs incurred unevenly during the financial year

Costs are recognized when incurred
 Only capitalized when they meet the definition of an asset

Also supports the discrete approach
25
recognition and measurement criteria
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Maintenance expenditure
Revenues and expenses calculated on
year-to-date basis
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seasonal, cyclical or occasional revenues
Intangible assets
Income taxes in interim periods
Inventories
Recognition and Measurement
Use of estimates
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Due to necessity, more estimates need to be
made in an interim period
An entity needs to communicate this and must
take care to ensure that the information is
relevant and reliable
27
Example of estimations
Application, inventories
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Same as in annual F/S
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test of net realisable value
recognise variances with standard cost
However;

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Full stock-taking and valuation procedures may
not be required for inventories at interim dates,
although it may be done at financial year end.
It may be sufficient to make estimates at
interim dates based on sales margins.
Application, intangible assets

Recognition
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controlled by the enterprise as result of past events
expected inflow of future economic benefits
cost of the asset can be measured reliably
Examples
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development cost for a new product
Costs incurred before the recognition criteria for
an intangible asset are met are recognised as
an expense.
Pensions: IAS 19 Employee Benefits

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requires that an entity determine the present
value of defined benefit obligations and the
market value of plan assets at the end of each
reporting period
encourages an entity to involve a professionally
qualified actuary in measurement of the
obligations.
For interim reporting purposes, reliable
measurement is often obtainable by extrapolation
of the latest actuarial valuation.
Revaluations and fair value accounting
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IAS 16 Property, Plant and Equipment allows an entity to
choose as its accounting policy the revaluation model
IAS 40 Investment Property requires an entity to
determine the fair value.
rely on professionally-qualified valuers at the end of
annual reporting periods, though not at the end of
interim reporting periods.
Provisions

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Determination of the appropriate amount of a
provision (such as a provision for warranties,
environmental costs, and site restoration costs) may
be complex and often costly and time-consuming.
Entities sometimes engage outside experts to assist
in the annual calculations.
Making similar estimates at interim dates often
entails updating of the prior annual provision rather
than the engaging of outside experts to do a new
calculation.
Restatement of Previously Interim Periods


Where there is a change in accounting policy,
the comparative interim information must be
restated
Where it is impracticable to determine the
cumulative impact, the change would be
applied from the earliest date practicable
34
Disclosure in Annual Financial Statements
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Situations may arise where estimates are changed in the last quarter
or final interim period
Where final interim period statements are not separately presented
and where the change is significant

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Nature and amount of change in estimate should be disclosed in the annual
statements
The standard goes on to cross reference and link this to IAS 8

Requires disclosure of the nature and amount of material changes in estimates
35
Application, income taxes

What rate should be used?
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estimated average annual effective income
tax rate
The provisions of IAS 12 applies
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at each interim reporting date
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change in tax rates
recognition of deferred tax liabilities / assets
Changes in estimates

If significant change in an estimate of a
previous interim period in the last
interim period of a financial year
 disclose nature and amount of the
change
Changes in accounting policy

Should be included in interim reports
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if they are to be reflected in the next annual
financial statements
restatement of prior interim reports of the
current year
comparative data should be restated (IAS 8 )
Comparison IAS 1/IAS 34 Presentation
Complete set of financial statements
(IAS 1)
(a) balance sheet;
(b) income statement;
(c) statement showing either (i) all
changes in equity or (ii) changes in
equity other than those arising from
capital transactions with owners
and distributions to owners;
(d) cash flow statement; and
(e)
accounting
policies
and
explanatory notes.
Condensed set of financial
statements (IAS 34)
(a) condensed balance sheet;
(b) condensed income statement;
(c) condensed statement showing
either (i) all changes in equity or (ii)
changes in equity other than those
arising from capital transactions
with owners and distributions to
owners;
(d) condensed cash flow statement;
and
(e) selected explanatory notes.
Thank you
Interactive session
Borrowing costs
Borrowing cost



Costs incurred in connection with the borrowing
funds and include:
interest expense calculated using the effective
interest method
finance charges in respect of finance leases
exchange differences arising from foreign currency
borrowings to the extent that they are regarded as
an adjustment to interest costs
Borrowing cost




Start capitalisation when
Expenditure on qualifying asset are being
incurred
Borrowing cost in relation to fund obtained
from a third party are being incurred
Activities necessary to prepare the
qualifying asset are on going
Background

Consider a company doing capital intensive project

concept: the cost of borrowed funds

content: interest, premium discount amortization,
ancillary costs, the exchange differences

borrowings range: including general and specialized
loan borrowers
Borrowing Costs comprises
Borrowing Costs
Interest &
commitment
charges
on Borrowings
Amortisation
of ancillary costs
relating to
Borrowings
Amortisation
of Discount
/ Premium
on Borrowings
Exchange
Differences*
Finance charges
for assets
acquired on
Finance Lease
*To the extent they are regarded as an adjustment to interest cost
Exchange Differences
To the extent regarded as ‘adjustment to
interest cost’.
Adjustment =
Interest on local currency borrowing
– Interest on foreign currency borrowing
The adjustment is restricted to amount of
exchange loss on principal due to devaluation of
currency
Qualifying Assets
Definition:
• an asset
• that takes substantial period of time
• to get ready for intended sale or usage
a rebuttable presumption of a period of 12 months is
considered as a substantial period of time.
Qualifying asset may be – PPE (non-acquired ready for
purpose) or Intangible assets or investment property


Relating to a qualifying assets should be
capitalised.
Qualifying assets require substantial but
necessary time to put in a condition ready
for intended use.
Treatment of Borrowing Costs
Borrowing Costs
Directly attributable* for:
• acquisition
• construction
• production of
Qualifying Assets
Assets other than
Qualifying assets
Capitalised as part
of asset
Treated as
revenue expenditure
*or that could have been avoided if the expenditure on qualifying assets had not been made
Criteria for Capitalisation
Criteria same as related asset
 Future Economic Benefits
 Reliable Measurement
Note : Expenses not fulfilling the criteria to be
treated as revenue expenditure
Borrowings Cost (Interest)
Borrowings Cost
Specifically for
Qualifying Assets
Generally but part used
for Qualifying Assets
Apply actual
rate of Interest
Apply weighted
average rate of interest
Capitalise the Borrowing Costs
less interest income, if any
Excess of the Carrying amount of the Qualifying asset
over recoverable Amount
Actual Cost of the Asset
+ Borrowing Cost Capitalised
<=
Recoverable
amount
of the Asset
Commencement of Capitalisation
Expenditure for the
• acquisition
• construction
• production
of a qualifying asset is being incurred
Conditions
Borrowing costs are being incurred
Necessary activities for preparation
of qualifying assets are in progress
Suspension of Capitalisation
Criteria
 Capitalisation to be suspended during extended periods
in which active development is hampered.
Suspension not to take place in case:
• substantial technical & administrative work is being
carried on
• temporary delays necessary for preparation of qualifying
assets (seasonal rains etc.)
Cessation of Capitalisation
Capitalisation should cease when substantially all the the activities
necessary to prepare the qualifying asset for its intended use or
sale are complete.
Cessation to take place even if:
•
routine administrative work still continues
•
minor modifications to property as per users’ specifications is to
be made
Cessation to take place in part if:
•
Construction of qualifying asset is completed in parts and a
part is capable of being used separately
Disclosure Requirements
The financial statements should disclose:
1. the accounting policy adopted for borrowing costs
2. The amount of borrowing costs capitalised
Disclosure Requirements
Significant Accounting Policy
Borrowing costs that are attributable to the acquisition of
or construction of qualifying assets are capitalized as
part of the cost of such assets. A qualifying asset is
one that necessarily takes substantial period of time
to get ready for intended use. All other borrowing
costs are charged to revenue.
Notes to Accounts
The total borrowing cost capitalized during the year is
sh. 4.13 m.
COP - Capitalisation of Borrowing Costs
Q. Whether borrowing cost avoidable or unavoidable?
A. Said to be unavoidable if expenditure on qualifying assets had been
incurred and borrowing is taken, Existing borrowing exercise of
judgement required.
Q. Factors to be considered as to whether and to what extent general
borrowings have been so used
A. Information of cash inflows and outflows, close scrutiny required.
Q. General borrowings made but equity specifically infused for financing
qualifying assets
A. No question of capitalizing borrowing cost.
Q. Calculation of weighted average borrowing rate?
A. Based on borrowing during period of expenditure and not borrowings
made for the whole year.
Capitalisation of completed parts of a project
Q. Capitalisation of commissioned packages when capitalization of
remaining incomplete packages is pending?
A. Necessary to capitalize commissioned packages .
Q. Date of capitalization?
A. Date on which package is ready to commence commercial
production.
Q. Allocation of incidental expenditure during construction?
A. On appropriate basis.
Q. Capitalisation of independent packages which are complete
when capitalization of main packages is pending ?
A. Capitalised when ready for their intended use.
Amortised cost financial liability

Hero Ltd issued a 6% Ksh 350 millions
infrastructure bond on 1st July 2009. The bond was
issued at a 15% discount and is redeemable at
102.5% on 30th June 2013. The legal and other
expenses to arrange the bond issue through private
placement amounted to Ksh 22.5 million. The
interest on coupon rate is repayable annually in
arrears.
Determine the effective interest rate, the finance
cost for each period and the amortised cost of the
bond as at 30th June each year
60
Computations






Proceed from borrowing
Nominal value
350
Less discount on issue .15*350 (52.5)
Less issue cost
(22.5)
275
Effective rate of interest is 13.84%
i.e 21/(1.1384)1 + 21/(1.1384)2 + 21/(1.1384)3 +
21/(1.1384)4 + 358.75/(1.1384)4 = 275
61
Year
Carrying Interest
amount cost @
start
13.84%
30/6/201
0
30/6/201
1
30/6/201
2
30/6/201
3
275.00
38.06
(21.00) 292.06
292.06
40.42
(21.00) 311.48
311.48
43.11
333.59
46.16
Solution
Cash
inflow
(21.00)
Carrying
amount
end
333.59
(21.00) 358.75
62
Illustration
ABC Co. Ltd. undertakes significant expansion program and incurs following
capital expenditure:
Facility
Capex
(in sh.)
Remarks
Date
of Start
Date of
Completion
Plant I
30 m
Specific Borrowing to the
extent of sh 22 m
June 1,
2013
December 31,
2013
Plant II
20 m
Specific Borrowing to the
extent of sh 8 m
June 1,
2013
November 30,
2013
Additional Information:
1.
sh. 20 m , 11% p.a. secured debentures raised on July2012 redeemable
in four equal installments commencing July 1, 2013
2.
Loan from financial institutions amounting to sh. 30 m bearing interest at
14% p.a. obtained for construction of Plant I & II on May 1,2013
3.
sh. 5 m, 14% working capital loan obtained on April 1, 2013 and repaid
sh. 1 m on December 31, 2013.
Contd..
Calculation of Weighted Average Rate of Interest
Borrowing costs for the year ended on March 31, 2014
1. Secured debentures
= 20,000,000 x 11% x 3 / 12 = 550,000/= 15,000,000 x 11% x 9 /12 = 1,230,750/2. Loan from financial Institutions
= 30,000,000 x 14% x 11 / 12
= 3,850,000/-
3. Working Capital Loan
= 5,000,000 x 14% x 9 / 12
= 525,000/-
= 4,000,000 x 14% x 3 / 12
= 140,000/-
Average general borrowings








Calculation of average unspecified borrowings outstanding during
the year
Secured debentures
= 20,000,000 x 3 / 12
= 5,000,000/= 15,000,000 x 9/12
= 11,250,000/Secured working capital loan
= 5,000,000 x 9 / 12
= 3,750,000/= 4,000,000 x 3 / 12
=1,000,000/Total (1+2)
21,00,000/-
Calculation of Weighted Average Rate of Interest
Calculation of average interest on unspecified borrowings for the year
1. Secured debentures
= 20,000,000 x 11% x 3 / 12
= 550,000/-
= 15,000,000 x 11% x 9 /12
= 1,237,500/-
2. Working Capital Loan
= 5,000,000 x 14% x 9 / 12
= 525000/-
= 4,000,000 x 14% x 3 / 12
= 140,000/-
TOTAL (1+2)
2,452,500/-
D. Average interest rate for the year ( C / B )
= (2,452,500 / 21,000,000) * 100
= 11.67%
Calculation of Weighted Average Rate of Interest
Interest Capitalised
1. Plant I
Specific borrowings: 22,000,000 X 14% X 7 /12= 1,79,6670/-
General Borrowings: 8,000,000 x 11.67% x 7/12= 544,600/2. Plant II
Specific borrowings: 8,000,000 X 14% X 6 /12 = 560,000
General Borrowings: 12,000,000 x 11.67%x 6/12=700200
Treatment of Exchange Differences
Loan Amount
: USD 10,000
Rate of Interest (in U.S.A.) : 8% p.a.
Exchange rate as at 01.04.2013: sh. 40 per USD
Exchange rate as at 31.03.2014: sh. 45 per USD
Rate of Interest (in Kenya) : 12%
Contd..
Treatment of Exchange Differences
Computations to be made:
1. Interest for the Period=USD10,000 x 8%x sh.45=sh.36,000
2. Increase in liability towards the principal amount
= USD 10,000 x (45-40) = sh. 50,000
3. Interest if loan was raised in Kenya
= USD 10,000 x 48 x 12%= sh. 57,600
4. Difference (2-1) = sh. 57,600 – sh. 36,000 = sh. 21,600
Treatment of Exchange Differences
Treatment of Exchange Differences of sh. 50,000/-
sh. 21,600/-
To be treated
as borrowing cost
sh. 28,400/-
To be capitalised
to loan obligation
Note: The amount of borrowing costs capitalised during a period should
not exceed the amount of borrowing costs incurred during the period


A company has arranged for a construction loan from a US
bank. The facility is expected to cost $30 million and take
one year to build. The construction loan is $24 million,
bears interest at 8% and borrowings commence at the first
draw.
Ground is broken on April 1, 2011, and construction is
expected to continue until March 31, 2012. The Company
uses $6 million of its cash in the first two months of
construction and begins borrowing under the construction
loan based on the following schedule
Fund drawing schedule



The US bank pays the draws on the loan to HDS in
dollars. HDS carries its assets in pounds and the debt
borrowings will be paid in pounds. HDS incurs exchange
rate gains and losses as scheduled on the next slide.
HDS temporarily invests the loan borrowings and
receives quarterly interest as scheduled below. HDS
secures permanent financing on April 1, 2012.
What borrowing costs should HDS capitalize in 2011 and
in the first quarter of 2012
Calculation of interest costs:
2011First draw: $10,000,000 x 8% x 3/12 =$200,000
Second draw:$16,000,000 x 8% x 3/12 =320,000 (Error – should be4/12)
$520,000
2012
►
Third draw:
$24,000,000 x 8% x 3/12 =$480,000
HDS should capitalize $485,000 ($520,000 + $90,000 exchange rate losses $125,000 of interest income) of borrowing costs in 2011 and $475,000 ($480,000 +
$20,000 exchange rate losses - $25,000 of interest income) of borrowing costs in the
first quarter of 2012.
Thank you
Interactive session