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Home / ... / IFRS Interim Reporting for First Time Adopters

Many listed companies are currently considering the form that their first interim reports will take under IFRS. While IAS 34, "Interim Financial Reporting", is not mandatory many investors and analysts will expect companies to apply it. This raises an interesting question for EU listed companies who will adopt EU-endorsed standards. How should they approach standards that are not yet endorsed? Here, John McDonnell, IFRS Services Partner, PricewaterhouseCoopers, outlines some of the important choices companies have to make when preparing such reports.

IAS 34 gives management a range of options for interim reporting. A company can publish full primary statements (with a complete set of notes), condensed primary statements (with selected notes) or something in between the two.

An entity that publishes condensed financial information or full primary statements supported by selected notes should ensure it is also satisfying IFRS 1.

The first IFRS interim report under IFRS 1 should contain sufficient detail to enable users to understand the material adjustments to the balance sheet and profit and loss account. Some entities may need to present full consolidated financial statements if the impact of the transition to IFRS is to be understood. Others may be able to explain the change by presenting condensed information.

It is vital that the transition to IFRS is clearly explained, whatever form of presentation is chosen. Financial markets can react adversely if the impact is not understood. Investors and analysts will likely expect more information to be included in the first IFRS interim report than in future periods. ACCOUNTING POLICIES IAS 34 requires the interim report to be prepared in accordance with the accounting policies applied in the entity's most recent financial statements, except for any changes in accounting policy that are to be reflected in its next annual financial statements. The interim report is prepared using accounting policies based on existing IFRS that are to be applied at the year-end. RECOGNITION & MEASUREMENT IAS 34 requires items to be recognised and measured at interim dates in the same way as at a year-end. Entities should not make adjustments to 'smooth' the effects of seasonal revenues or uneven cost profiles, although the disclosure of seasonality is required. Events in a later interim period should not be anticipated in an earlier interim report.

This principle has some important implications. Items measured at fair value will need to be re-measured if an interim balance sheet is prepared in a similar way to a year-end balance sheet. This may be straightforward in some cases, but there may be practical problems where an entity has a defined benefit pension plan or assets measured at fair value.

Neither IAS 34 nor IAS 19, Employee Benefits, specifies how frequently the assets and liabilities of a defined benefit plan should be measured. However, IAS 19 requires an entity to determine the present value of the defined benefit obligation and the fair value of the plan assets with sufficient regularity that the amounts recognised in the financial statements do not differ materially from the amounts that would be determined at the balance sheet date.

In other words, the impact of any actuarial gains and losses since the last valuation should be immaterial. This may be the case where an entity follows the 'corridor approach' and recognises only a small proportion of actuarial gains and losses; it will be more difficult to reach such a conclusion where actuarial gains and losses are recognised immediately, as permitted by IAS 19 revised. Entities following the immediate recognition approach may need to obtain a valuation at each interim balance sheet date.

Other items measured at fair value (such as certain financial instruments and investment properties) will need to be re-measured at the interim balance sheet date. IAS 34 recognises that there will be a greater use of estimates at an interim date. Estimates might include internal valuations. However, where the methods of measuring fair value used in an interim report differ from those that would be used at a year end, the nature and effect of such differences should be disclosed.

An exception to the principle of treating an interim period as a discrete reporting period concerns taxation.

Taxation is assessed annually, so the tax expense or credit cannot be properly determined until the end of the financial year (or, if different, the tax year) when all allowances and taxable items are known. Calculating tax on the basis of the results of an interim period in isolation could result in the recognition of a tax figure that is inconsistent with entity's overall tax burden. Taxation expense should therefore be recognised in each interim period based on the best estimate of the effective tax rate expected for the full financial year. This percentage should be applied to the interim result; the tax should be recognised rateably over the year as a whole. Amounts accrued in one interim period may have to be adjusted in a subsequent interim period if the estimate of the effective annual tax rate changes. SHOULD THE INTERIM REPORT BE PREPARED IN LINE WITH IAS 34? Interim accounts should be prepared on the basis of the accounting policies that will be applied at the year end. IAS 34, Interim Financial Reporting, should be applied if a company's management elects to publish an interim financial report in accordance with IFRS (and therefore IFRS 1 because the interim report deals with the period covered by the entity's first IFRS financial statements). However, management could choose to prepare its interim report in accordance with a basis of preparation which would be described in the interim report. The decision to not comply with IAS 34 has advantages. For example, management might believe that the entity's accounting policies will change between issuing its interim report and its annual financial statements for 2005. They might also want to apply standards that are not endorsed for use in the EU but may be by the year-end. Issuing an interim report under IAS 34 and then changing accounting policies would require extensive disclosure under IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. The policies can be changed more easily if the interim report does not claim compliance with IAS 34. WHAT DOES 'BASIS OF PREPARATION' MEAN? An entity should describe in detail how the report has been prepared where the interim report does not comply with IAS 34.

This would be a 'basis of preparation' note that sets out the policies that the entity has applied. The entity can avoid the difficulties described below by using the description 'basis of preparation' rather than stating compliance with a particular accounting framework. STANDARDS ENDORSED FOR USE IN THE EU Companies listed in the EU are required to comply with accounting standards endorsed for use in the EU.

The endorsement of IAS 39 in November 2004 with two carve-outs has created a divergence between 'accounting standards endorsed for use in the EU' and IFRS. Other standards issued by the IASB or interpretations issued by IFRIC may also create divergences. The endorsement process may also cause a divergence due to different transition dates.

How should an interim report be described? The options are to describe the accounting framework as 'IAS 34' or 'accounting standards endorsed for use in the EU'. There are potential pitfalls with both of these approaches.

An interim report described as 'complying with IAS 34' must comply with all of the requirements of IAS 34; the accounting policies should be those to be applied in the next annual financial statements based on existing standards. The description 'accounting standards endorsed for use in the EU' presents its own problems since only those accounting standards actually endorsed could be used. The options available to an EU first-time adopter in 2005 are shown in Figure 1.

Listed companies may want to prepare their 2005 interims according to a 'basis of preparation' for the reasons mentioned above. This approach gives entities the flexibility to revisit accounting policies for the year-end. It also allows for the possibility that new standards may be endorsed by the EU or issued by the IASB/IFRIC without having to provide the detailed IAS 8 disclosures if changes are made to policies in the annual financial statements.

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