AS 25 - Interim Financial Reporting | Advanced Accounting for CA Intermediate PDF Download

Interim Financial Reporting

Objective

The main aim of this Standard is to outline the essential content of an interim financial report and establish guidelines for the recognition and measurement in either a complete or condensed financial statement during an interim period. Timely and dependable interim financial reporting enhances the comprehension of investors, creditors, and other stakeholders regarding an enterprise's capability to generate profits and cash flows, its financial status, and liquidity.

Scope

• This Standard does not specify which businesses must present interim financial reports, the frequency of such reports, or the duration after the end of an interim period when these reports should be issued. However, if a company is obliged or chooses to prepare and present an interim financial report, it must adhere to this Standard.
• A company may be required by a governing statute or regulator to compile and present certain information at an interim date. This data might differ in format or content from what is mandated by this Standard. Nevertheless, the recognition and measurement principles outlined in this Standard should be applied to such information, unless the statute or regulator specifies otherwise.
• The requirements concerning the cash flow statement, whether complete or condensed, as outlined in this Standard are applicable when a company prepares and presents a cash flow statement for its annual financial report.

Definitions

• Interim period: Refers to a financial reporting period that is shorter than a full financial year. For instance, a quarterly financial report.
• Interim financial report: A financial report that includes either a complete set of financial statements or a condensed set of financial statements for an interim period.
• Annual financial reporting period: The standard year-long period for financial reporting activities.

Content of an Interim Financial Report

• A complete set of financial statements typically consists of a balance sheet, statement of profit and loss, cash flow statement, and notes detailing accounting policies and other relevant information.
• For interim financial reports, companies may opt for condensed financial statements due to time and cost constraints. These condensed statements offer a snapshot of financial performance without duplicating previously reported data.
• While the standard does not mandate condensed statements, it recommends them for timely updates. However, enterprises have the flexibility to present complete financial statements if desired.
• The principles of recognition and measurement outlined in the standard apply to both condensed and complete financial statements for interim periods, with the necessary disclosures as per accounting standards.

Key Components of an Interim Financial Report

• A summarized balance sheet should be included in an interim financial report.
• The interim financial report must feature a condensed statement of profit and loss.
• It should contain a brief cash flow statement.
• Selected explanatory notes are essential components of an interim financial report.

Structure and Content of Interim Financial Statements

• When a company provides a full set of financial statements in its interim report, they should align with the standards for annual financial statements.
• If condensed financial statements are presented, they must include all main headings and sub-headings from the latest annual financial statements.
• Any additional line items or notes should be added if their exclusion could lead to misinterpretation of the condensed interim financial statements.
• For enterprises that disclose basic and diluted earnings per share as per Accounting Standard (AS) 20 in annual statements, the same should be reflected in the interim report.
• When a company's annual report includes both consolidated and separate financial statements, the interim report should also encompass both, in full or condensed form.
• The provided illustration accompanying the Standard offers a sample format for condensed financial statements.

Selected Explanatory Notes

A user of a company's interim financial report typically has access to the latest annual financial report. Therefore, the notes in an interim financial report do not need to repeat insignificant updates from the most recent annual report. Instead, they should focus on explaining events and transactions that are essential for understanding the changes in the company's financial position and performance since the last annual reporting date.

An enterprise must include certain information in the notes to its interim financial statements if material and not disclosed elsewhere in the interim report:

1. Explanation that the same accounting policies are followed in the interim financial statements as in the most recent annual financial statements, or a description of any changes and their impact if policies have been altered.
2. Comments on the seasonal nature of interim operations.
3. Description and amount of unusual items affecting assets, liabilities, equity, net income, or cash flows due to their nature, size, or occurrence.
4. Details and amount of changes in estimates from prior interim periods of the current financial year or prior financial years that significantly impact the current interim period.
5. Information on debt issuances, buy-backs, repayments, and restructuring, as well as actions related to equity and potential equity shares.
6. Dividend information, both aggregate and per share, separately for equity shares and other shares.
7. Segment revenue, segment capital employed, and segment results for business or geographical segments, based on the enterprise's primary method of segment reporting.
8. Disclosure of material events occurring after the interim period that are not reflected in the financial statements for that period.
9. Effects of changes in the enterprise's composition during the interim period, such as mergers, acquisitions, disposals, restructurings, and discontinuing operations.
10. Significant changes in contingent liabilities since the last annual balance sheet date.
11. The information mentioned above should generally be reported on a financial year-to-date basis. However, the enterprise should also disclose any events or transactions crucial for understanding the current interim period.
12. Specific disclosures required by other Accounting Standards in financial statements are not necessary if an enterprise's interim financial report contains only condensed financial statements and selected explanatory notes, rather than a complete set of financial statements.
13. Interim reports should include interim financial statements for the following periods:
    • Balance sheet at the end of the current interim period and a comparative balance sheet from the end of the previous financial year.
    • Statements of profit and loss for the current interim period and cumulatively for the current financial year, along with comparative statements for the comparable interim periods of the previous financial year.
    • Cumulative cash flow statement for the current financial year, along with a comparative statement for the corresponding period of the previous financial year.
14. For companies with highly seasonal operations, providing financial information for the twelve months ending on the interim reporting date and comparative data for the previous twelve-month period can be beneficial.
15. Illustration 2 in the Standard demonstrates the required reporting periods for an enterprise reporting half-yearly and quarterly.

Materiality

• In the context of interim financial reporting, the assessment of materiality plays a crucial role in determining how to recognize, measure, classify, or disclose items. Materiality should be evaluated concerning the financial data for the interim period. It is important to note that interim financial data often relies more on estimates than annual financial data.
• The Preface to the Statements of Accounting Standards emphasizes that accounting standards are designed to apply to items that are considered material. According to the Framework for the Preparation and Presentation of Financial Statements by the Institute of Chartered Accountants of India, information is deemed material if any misstatement could impact the economic decisions made by users based on the financial information provided.
• Assessing materiality for financial reporting purposes always involves an element of judgment. To ensure the interim figures are understandable, materiality for making decisions regarding recognition and disclosure is evaluated concerning the interim period financial data. For instance, items such as unusual or extraordinary items, changes in accounting policies or estimates, and prior period items are recognized and disclosed based on their materiality in relation to the interim period data.
• The primary objective is to guarantee that an interim financial report encompasses all essential information needed to comprehend an enterprise's financial position and performance during the interim period.

Disclosure in Annual Financial Statements

• An organization may choose not to create a separate financial report for the final interim period if the annual financial statements are already presented.
• When such a situation arises, specific disclosures need to be included in the annual financial statements for that particular financial year.
• If there is a significant change in the estimate of an amount reported during the final interim period of the financial year, and no separate financial report is generated for that period, the nature and amount of that estimate alteration should be disclosed in a note within the annual financial statements for that financial year.
• According to Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies, it is necessary to disclose the nature and, if feasible, the amount of a change in an accounting estimate that has a material impact in the current period or is expected to have a material effect in subsequent periods.
• Paragraph 16(d) of this Standard mandates a similar disclosure in an interim financial report. For instance, changes in estimates during the final interim period, such as inventory write-downs, restructurings, or impairment losses reported in an earlier interim period of the financial year, should be disclosed.
• The disclosure requirements mentioned above align with AS 5 and are designed to be specific to changes in estimates only. Enterprises are not obligated to incorporate additional interim period financial information in their annual financial statements.

Recognition and Measurement

Consistency in Accounting Policies

• An organization should maintain uniform accounting policies in its interim financial statements as in its annual financial statements, except for changes made after the last annual financial report. The frequency of reporting (annual, half-yearly, or quarterly) should not impact the measurement of annual results. Interim measurements should be on a year-to-date basis.

Interim Period as Part of Financial Year

• Interim financial statements should not be seen in isolation but as part of a financial year. While year-to-date measurements may change estimates from previous interim periods in the current financial year, the principles for recognizing assets, liabilities, income, and expenses remain consistent with annual statements.

Illustration of Principles

• Loss recognition, asset definition, and income tax expenses in interim periods align with those in annual statements. Adjustments may be necessary in subsequent interim periods within the financial year based on revised estimates.

Recognition Criteria

• Recognition involves including items meeting defined elements in the balance sheet or profit and loss statement. Assets, liabilities, income, and expenses definitions are crucial for recognition in both annual and interim financial reporting.

Consistency in Recognition

• Tests for future economic benefits for assets and obligations for liabilities apply consistently at interim and annual reporting dates. Expenses and income are recognized when economic benefits change and can be reliably measured.

Timely Information in Reporting

• Enterprises reporting annually consider information available throughout the financial year, effectively adopting a year-to-date approach in their measurements.

Different Reporting Frequencies

• Enterprises reporting half-yearly or more frequently adjust income and expenses on a year-to-date basis for each interim period, reflecting changes in estimates. Prior interim period reports are not retrospectively adjusted, but significant estimate changes are disclosed.

Revenues Received Seasonally or Occasionally

Revenue received at irregular intervals within a financial year should not be predicted or postponed during interim reporting if such actions would not be suitable at the end of the financial year.

Examples of such revenue include dividend income, royalties, and government grants. Furthermore, some businesses may experience fluctuating revenues during different interim periods within a financial year, such as retailers with seasonal revenue patterns. In such cases, revenues are recognized when they are earned.

Costs Incurred Unevenly During the Financial Year

Expenses that are unevenly accrued throughout a financial year should be predicted or deferred for interim reporting only if it is also appropriate to predict or defer such costs at the end of the financial year.

Applying the Recognition and Measurement Principles

Illustration 3 in the Standard demonstrates the application of the fundamental recognition and measurement principles outlined in paragraphs 27 to 38.

Use of Estimates

The methods of measurement utilized in an interim financial report should be structured to ensure the reliability of the resulting information. All significant financial information essential for understanding the financial status or performance of the business should be appropriately disclosed. While both annual and interim financial reports often rely on reasonable estimates, interim financial reports typically necessitate a greater reliance on estimation techniques than annual reports.

Illustration 4 in the Standard showcases the utilization of estimates during interim periods.

Restatement of Previously Reported Interim Periods

• When there is a change in accounting policy, except when a specific Accounting Standard dictates the transition, it must be reflected by adjusting the financial statements of prior interim periods within the current financial year.
• The main aim here is to ensure consistent application of a single accounting policy for a specific type of transactions throughout an entire financial year.
• This means that any alteration in accounting policy during the current financial year should be implemented retrospectively from the start of that financial year.

Transitional Provision

• When presenting an interim financial report in accordance with this Standard for the first time:
• Comparative statements of profit and loss for corresponding interim periods (current and year-to-date) of the immediately preceding financial year are not required.
• Comparative cash flow statements for the corresponding year-to-date period of the immediately preceding financial year are also not necessary.