(AS- 25)
INTERIM FINANCIAL REPORTING (IFR)
25.1 What is Interim Financial Reporting (IFR)
Interim financial reporting is the reporting for periods of less than a year generally for a
period of 3 months. As per clause-41 of listing agreement the companies are required to
publish the financial results on a quarterly basis.
As per this Standard - Interim Financial Report means a financial report containing either
a complete set of financial statement or set of condensed financial statement for an
interim period. Interim period is a period of reporting shorter than full financial year.
25.2 What are financial statements
A complete set of financial statements normally includes
Balance Sheet
Statement of Profit and Loss Account
Cash flow Statement
Notes to Accounts and Accounting Policies.
25.3 Need
In general the basic objective of Interim Financial Reporting (IFR) is to provide frequent
and timely assessment of enterprise performance. However interim reporting has inherent
limitation, which is not the case of annual accounts as the reporting period is shortened,
the effect of errors in estimations and allocation are magnified. The proper allocation of
operation expenses is a significant concern. The main problems are: -
Proper allocation of operating expenses.
Some operating expenses may be incurred in one interim period and yet benefit
the full year operation. For example, advertising expenses, repair and
maintenance expenses.
Seasonal fluctuation – for some enterprises revenue may be seasonal or cyclical
and therefore concentrated in certain interim period.
Year-end events. For example, Bonus, Incentive based on annual sales target.
Determination of appropriate amount of provision - pension, gratuity, litigation,
contingencies etc.
Income tax expenses – one interim period may have profit and next interim
period may have losses.
25.4 Objective
The objective of this standard is to prescribe the minimum content of interim financial
report (IFR) and to prescribe the principles for recognition and measurement in a
complete or condensed financial statement for an interim period. As the reporting period
is shortened, the effect of errors in estimations and allocation
25.5 Principles of recognition and measurements
As the objective of this Accounting Standard is to prescribe the principle of recognition
and measurement of income, expenses, assets and liabilities in a complete or condensed
financial statements i.e. Balance Sheet, Profit & Loss Account, Cash flow Statements and
Accounting Notes & Policies, there may be two distinctive principles/views of
recognition and measurement of income and expenses in interim financial reporting:
Integral View
Discrete View
25.5.1 Integral View
An approach to measuring interim period income by viewing each interim period as an
integral part of the annual (Financial) period. Expenses are recognized in proportion to
revenues earned through the use of special accruals and deferrals.
25.5.2 Discrete view
An approach to measuring interim period income by viewing each interim period
separately.
AS-25 resolves the debate by prescribing the discrete view in general. As per the standard
- Income and expenses should be recognized/ measured on year to date basis for interim
reporting.
Year to date basis means financial reporting for the period, which begins on the first day
of the fiscal year ends on given interim date.
Example - X Ltd. prepare the financial report for the first quarter of financial year
2002.2003 i.e. 1st April 2002 to 30th June 2002 for interim financial reporting purpose.
Year to date basis means 1st April 2002 to 30th June 2002 of it prepare IFR for second
quarter i.e. 1st July 2002 to 30th September 2002. Year to date basis means 1st April 2002
to 30th September and so on.
However, there is slight deviation in recognizing the Income Tax Expenses, Which is not
based on discrete view as explained above.
As per the standard the income tax expenses is recognized in each interim period on the
best estimate of the Weighted Average Annual Effective Income Tax Rate expected for
the full financial year.
25.6 What is estimated annual effecting tax rate
An expected annual tax rate which reflects estimates of annual earnings tax rate, tax
credits etc.
Interim period income tax expenses is accrued using the tax rate that would be applicable
to expected total annual earnings, that is, the estimated average annual effective income
tax rate applied to the pre-tax income of the interim period.
25.7 Accounting Policies
An enterprise should apply the same accounting policies in the interim financial
statements as are applied in the annual financial statements.
25.8 Minimum Components of Interim Financial Report
An interim financial report should contain at least the following components:
Condensed Balance Sheet
Condensed Profit & Loss Account
Condensed Cash Flow Statement
Selected Explanatory Notes
Reporting interim financial statements in condensed manner has been prescribed on cost
consideration and for timely release of the information. However an enterprise may
release complete financial statements.
25.9 Form and contents of interim financial statements
An interim financial report can contain either a complete set of financial statements or a
set of condensed financial statements.
25.9.1 Complete financial statements
If an enterprise opts to prepare and presents a complete set of financial statements in the
interim financial reporting. It should be prepared in the same format and as per the
contents and requirements of annual financial statements.
25.9.2 Condensed financial statements
A condensed interim financial reporting should contain the following minimum
information:
Headings and sub totals that were included. In the most recent annual financial
statements
Selected Explanatory Notes
Additional items or notes if there missing makes the interim financial reporting
misleading
Basic and diluted earning per share for the interim period as per AS-20 (not to be
annualized) (on the face of Profit & Loss Statements)
The format of condensed financial statements is given in Annexure.
25.9.3 Selection of explanatory notes
Criteria adopted for selection of explanatory notes to be included in interim financial
reporting is updating the financial information, it is assumed the users of interim
financial report are having access to the most recent annual financial statements therefore
notes to interim financial report should provide information on financial year to date
basis. However it is necessary to disclose any events or transactions, which are material
for understanding the interim financial reporting.
25.10 Minimum disclosure of notes: Following Minimum disclosure of notes and explanatory
statements should be made: -
A statement that the same accounting policies are followed in the Interim
financial statements as these followed in the most recent annual financial
statements or, if these policies have been changed, a description of the nature and
effect of the change.
Description about the seasonal or cyclical effect on interim financial year
Unusual factors that affected assets, liabilities, equity, net income, and cash flow.
Effect of change in estimates
Change in debt and equity through issuance, repurchase and repayments,
Details of dividend payment,
Segment revenue, segment result for business segment or geographical segment,
whichever is the primary basis of the reporting entity
Material event that occurred after the end of interim period,
Effect of changes in composition of the enterprise during interim period – change
in composition include business combination, acquisition, restructuring, disposal
of subsidiaries etc.
Material changes in contingent liabilities since the last Balance Sheet date.
25.11 Materiality
Materiality is one of the most fundamental concepts underlying financial report.
Therefore, para 21 of the standard provides that in deciding how to recognize, measure,
classify or disclose an item for interim financial reporting purposes, materiality should be
assessed in relation to the interim period financial data.
Information is material if its misstatement that is omission or error could influence the
economic decisions of users taken on the basis of the financial information.
The overriding objective is to ensure that an interim financial report includes all
information that is relevant to understanding an enterprise’s financial position and
performance during the interim period.
25.12 Seasonal/occasional Revenue
As explained earlier the discrete view is taken for measurement and recognizing the
revenue therefore such revenue are recognized when they occur. Examples include
dividends, royalties and government grants. Additionally, some enterprises consistently
earn more revenues in certain interim periods of a financial year than in other interim
periods, e.g. seasonal revenues of retailers. Such revenues are recognized when they
occur.
25.13 Change in Estimates
Amounts of income and expenditure reported in the current interim period will reflect
any change in estimates of amounts reported in prior interim period of the financial year.
The amount reported in prior interim period is not retrospectively adjusted, however any
significant change in estimates be disclosed.
25.14 Change in accounting policy
If there is change in accounting policy within the current financial year the effect of
change in accounting policy be applied retrospectively and therefore prior interim periods
financial statements should be re-stated to include the effect of change. However the
restatement does not apply to a change in accounting policy where any other accounting
standard specifies transition.
25.15 Cost incurred unevenly during the financial year
Costs that are incurred unevenly during an enterprise’s financial year should be
anticipated or deferred for interim reporting purposes if, and only if, it is also appropriate
to anticipate or defer that type of cost at the end of the financial year.
25.16 Major planned periodic maintenance or overhaul
The cost of major periodic maintenance or overhaul or other seasonal expenditure that is
expected to occur late in the year is not anticipated for interim reporting purposes unless
an event has caused the enterprise to have a present obligation. The mere intention or
necessity to incur expenditure related to the future is not sufficient to give rise to an
obligation.
25.17 Depreciation and amortization
Depreciation and amortization for an interim period is based only on assets owned during
that interim period. It does not take into account asset acquisitions or disposals planned
for later in the financial year.
ANNEXURE
Illustrative Format of Condensed Financial Statements for an enterprise other than a bank
(A) Condensed Balance Sheet
Figure at the end of the Figure at the end of the
current interim period previous accounting year
I. Sources of Funds
1. Capital
2. Reserve & Surplus
3. Minority interest (in case of
consolidated financial statements)
4. Loan Funds:
a) Secured loans
b) Unsecured loans
Total
II. Application of funds
1. Fixed assets
a) Tangible fixed assets
b) Intangible fixed assets
2. Investments
3. Current assets, loans and advances
a) Inventories
b) Sundry debtors
c) Cash & bank balances
d) Loans and advances
e) Others
Less: Current liabilities and provisions
a) Liabilities
b) Provisions
Net Current assets
4. Miscellaneous expenditure to the
extent not written off or adjusted
5. Profit & Loss Account
Total
(B) Condensed Statements of Profit and Loss
Three Corresponding Year-to-date Year-to-date
months three months of figures for figures for
ended the previous current the previous
accounting year period year
1. Turnover
2. Other Income
Total
3. Changes in inventories of finished
goods and work in progress
4. Cost of Raw material and
consumables used
5. Salaries, wages and other staff costs
6. Other expenses
7. Interest
8. Depreciation and amortization
Total
9. Profit or loss from ordinary activities
before tax
10. Extraordinary items
11. Profit or loss before tax
12. Tax expenses
13. Profit or loss after tax
14. Minority Interests (in case of
consolidated financial statements)
15. Net Profit or loss for the period
Earnings Per share
1. Basic Earnings Per Share
2. Diluted Earnings Per Share
(C) Condensed Cash Flow Statement
Year-to-date figures Year-to-date figures
for the current period for the previous year
1. Cash flows from operating activities
2. Cash flows from investing activities
3. Cash flows from financing activities
4. Net increase/(decrease) in cash and cash equivalents
5. Cash and cash equivalents at beginning of period
6.Cash and cash equivalents at end of period
(D) Selected Explanatory Notes
This part should contain selected explanatory notes as required by paragraph 16 of this
Standard (refer point 8(c) above).
Illustrative Format of Condensed Financial Statement for a Bank
(A) Condensed Balance Sheet
Figures at the end of the Figures at the end of the
current interim period previous accounting year
I. Capital and Liabilities
1. Capital
2. Reserve & surplus
3. Minority interest (in case of consolidated
Financial statements)
4. Deposits
5. Borrowings
6. Other liabilities and Provisions
Total
II. Assets
1. Cash and balances with Reserve Bank of
India
2. Balances with banks and money at call
and Short notice
3. Investments
4. Advances
5. Fixed assets
(a) Tangible fixed assets
(b) Intangible fixed assets
6. Other Assets
Total
(B) Condensed Statement of Profit and Loss
Three Corresponding Year-to-date Year-to-date
month three months of figures for figures for
ended the previous current the previous
accounting year period year
1. Interest earned
a) Interest/discount on advances/ bill
b) Interest on investments
c) Interest on balances with Reserve bank
of India and other banks funds
d) Others
2. Other Income
Total Income
1. Interest expended
2. Operating expenses
a) Payments to and provisions for
employees
b) Other Operating expenses
3. Total expenses (excluding provisions
and contingencies)
4. Operating profit (profit before provision
and contingencies)
5. Provisions and Contingencies
6. Profit or loss from ordinary activities
before tax
7. Extraordinary items
8. Profit or loss before tax
9. Tax expenses
10. Profit or loss after tax
11.Minority Interest (in case of
consolidated financial Statements)
12. Net profit or loss for the Period
Earnings Per share
1.Basic Earnings Per share
2. Diluted Earnings Per Share
(C) Condensed Cash Flow Statement
Year-to-date Year-to-date
figures for the figures for
current period the previous
year
1. Cash flows from operating activities
2. Cash flows from investing activities
3. Cash flows from financing activities
4. Net increase/(decrease) in cash and cash equivalents
5. Cash and cash equivalents at beginning of period
6. Cash and cash equivalents at end of period
(D) Selected Explanatory Notes
This part should contain selected explanatory notes as required by paragraph 16 of this
Standard (refer point 25.8).
ILLUSTRATIONS
Q 1. On 1st April 2001, Builders Associates entered into a Rs. 5,00,000 fixed price contract to
construct a factory building for manufacturing company. Builder Account for this contract under
the percentage of completion and estimated costs at completion at the end of each quarter for
financial year 2001-2002.
Qtr. I Qtr. II Qtr.III
Cumulative costs incurred to date 150000 360000 405000
Estimated cost yet to be incurred at quarter end 300000 40000 ----
Progressing billing made during quarter 100000 370000 30000
Collections of billings 75000 300000 125000
What amount builder as Income should report on “Construction Contract” in its quarterly income
statement based on the above information.
Solution Income Statement
(Percentage of completion method)
Qtr. I Qtr. II Qtr.III Total
Contract revenue earned 166667* 283333** 50000*** 500000
Cost of revenues earned (150000) (210000) (45000) (405000)
Gross Profit 16667 73333 5000 95000
Working Note - * 150000/450000 x 500000 = Rs. 166667
** 360000/400000 x 500000 – 166667 = Rs. 283333
*** 405000/405000 x 500000 – 166667- 283333 = Rs. 50000.
Notes – 1) The revenue and the cost has been calculated as per discrete view revenue and
expenses recognition (refer point 25.4-2)
2) Change in estimate of total cost incurred in each quarter has not been given retrospective effect
as per the discrete view of income and expense recognition because there is no change in
accounting policy.
Q 2. Induga Corporation is dealing in seasonal product sales pattern of the product, quarter wise
is as under:
Ist Qtr. IInd Qtr. IIIrd Qtr. IVth Qtr.
Ending 30 June ending 30 Sept. ending 31st Dec. ending 31 March
15% 15% 50% 25%
For the first quarter ending on 30 June 2002 Induga Ltd gives you the following information:
Sales 50 Crores
Salary and Other Exps 30 Crores
Advertisement Exps (routine) 2 crores
Administrative and selling Exps 8 crores
Induga Ltd. while preparing interim financial report for first quarter wants to defer Rs. 16 crores
expenditure to third quarter on the argument that third quarter is having more sales therefore third
quarter should be debited by more expenditure. Considering the seasonal nature of business and
the expenditure are uniform throughout the all quarters.
Calculate the result of first quarter as per AS-25 and comment on the company view.
Solution: Result of the first quarter ending 30th June
(Rs in crores)
1. Turn over 50
2. Other Income Nil
Total 50
Less: Changes in inventories Nil
Salaries and other cost 30
Administrative and selling Exps 10
(8+2)
Total 40
Profit 10
Note - As per the AS –25 the income and expense should be recognized when they are earned and
incurred respectively. Seasonal incomes will be recognized when they occur. Therefore the
argument of the Induga Corporation is not as per AS-25
Q-3. NDA Ltd. presents interim financial report (IFR) quarterly, earns Rs. 600 lakhs pre-tax
profit in the first quarter ending 30.06.2003 but expect to incur losses of Rs. 200 lakhs in each of
the three remaining quarters. Which will result zero income during the financial year effective
income tax rate is expected to be 35%. Calculate the income tax expense to be reported in each
quarter as per AS-25.
Solution:
I Qtr Tax expense to be reported 600x35%= Rs. 210 lakhs
II Qtr Tax expense to be reported 200x35%= Rs. (-) 70 lakhs
III Qtr Tax expense to be reported 200x35%= Rs. (-) 70 lakhs
IV Qtr Tax expense to be reported 200x35%= Rs. (-) 70 lakhs
Annual Tax expense Nil
Q-4. INDUGA Ltd accounting year ends on 30th September 2004 and reports quarterly. However
for the purpose of tax year-end on 31st March every year. For the Accounting year beginning on
01.10.2003 and ends on 30.09.2004, the quarterly income is as under: -
Qtr ending 31.12.2003 Rs. 400 lakhs
Qtr ending 31.03.2004 Rs. 400 lakhs
Qtr ending 30.06.2004 Rs. 400 lakhs
Qtr ending 30.09.2004 Rs. 400 lakhs
Total Rs. 1,600 lakhs
Average actual tax rate for the financial year ending on 31.03.2004 is 30% and for financial year
ending 31.03.2005 is 40%. Calculate tax expense for each quarter.
Solution:
Tax expense for quarter ending on
31.12.2003 Rs. 120 lakhs (400x30%)
31.03.2004 Rs. 120 lakhs (400x30%)
30.06.2004 Rs. 160 lakhs (400x40%)
30.09.2004 Rs. 160 lakhs (400x40%)
Q-5. NDA Ltd presents interim financial report quarterly on 01.04.2003. NDA Ltd has carried
forward loss of Rs. 400 lakhs for income tax purpose for which deferred tax asset has not been
recognized. The NDA Ltd earns Rs. 500 lakhs in each for quarter ending on 30.06.2003,
30.09.2003, 31.12.2003 and 31.03.2004 excluding the loss carried forward. Income tax rate is
expected to be 40%. Calculate the amount of tax expense to be reported in each quarter.
Solution:
The estimated payment of the annual tax on Rs. 2,000 lakhs earnings for the current year.
(2,000 lakhs – Rs. 400 lakhs) = Rs. 1,600 lakhs
Rs. 1,600x40/100 = Rs. 640 lakhs.
Average annual effective tax rate = (640/2000) x100 = 32%
Tax expense to be shown each quarter will be 500x32/100 = Rs. 160 lakhs
PROBLEMS:
Q 1: AD Softex India Ltd has Rs. 95,000 net income for the quarter ended 31st Dec. 2001,
including the following items-
Rs. 60,000 extra-ordinary gain received on July 30,2001, was allocated equally to the
second, third and fourth quarter of financial year 2001-2002.
Rs. 16,000 cumulative effect loss resulting from change in method of inventory valuation
method was recognized on Nov 2, 2001. Out of this loss Rs. 10,000 relates to the
previous quarters.
Calculate the profit as per AS-25 for the quarter ended 31st December 2001of AD Softex India
Ltd.
[Ans: Rs. 85,000, result of the previous quarter will be restated.]
Q.2: Due to decline in market price in second quarter, Petal Impex Ltd. incurred an inventory
loss. The Market price is expected to return to previous levels by the end of the year. At
the end year, the decline had not reversed. When should the loss be reported in interim
profit and loss account of Petal Impex Ltd? [Ans: in second quarter]
Q.3: ACS India Ltd has Rs. 200,000 net income for the quarter ended September 30,2001,
including the following:
a) Rs 50,000 extra ordinary loss occurred on April 30, 2001, was allocated equally to each
quarter for financial year 2001-02
b) Rs. 30,000 cumulative excess deprecation for the quarter ended 30th September 2001
due to change in depreciation method from straight line to diminishing method. Only Rs
5000 excess depreciation related to this quarter.
c) Provision for bad and doubtful debts Rs 20000. Out of this Rs 15,000 provision relates
to first quarter due to wrong estimate in first quarter.
Calculate the income for the period ended 30th September 2001
[Ans: (a) Income of quarter ended on 30.09.2001 - Rs. 237500
(b) Excess depreciation of previous quarter of Rs. 25,000 result of previous quarter
will be restated
(c) It is change in estimate to be accounted in for the quarter-ended 30.09.2001.]
