The following statement is an excerpt from a document on interim financial reporting:
Interim financial information is essential to provide investors and others with timely information about the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period.
In general, the results for each interim period should be based on the accounting principles and practices used by an enterprise in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year. The Board has concluded, however, that certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period.
Instructions
Listed below are six independent cases on how accounting facts might be reported on an individual company's interim financial reports. For each case, state whether the method that is proposed for interim reporting would be acceptable under IFRS for interim financial data. Support each answer with a brief explanation.
(a) King Limited takes a physical inventory at year end for annual financial statement purposes. Inventory and cost of sales reported in the interim quarterly statements are based on estimated gross profit rates because a physical inventory would require a stoppage of operations. The company does have reliable perpetual inventory records.
(b) Florence Limited is planning to report one fourth of its pension expense each quarter. In the current period the company had a significant settlement and has also prorated this cost over the remaining months to the end of the fiscal year.
(c) Lopez Corp. wrote inventory down to reflect lower of cost or market in the first quarter. At year end, the market exceeds the original acquisition cost of this inventory. Consequently, management plans to write the inventory back up to its original cost as a year-end adjustment.
(d) Witt Corp. realized a large gain on the sale of investments at the beginning of the second quarter. The company wants to report one third of the gain in each of the remaining quarters.
(e) Marble Limited has estimated its annual audit fee. It plans to prorate this expense equally over all four quarters.
(f) McNeil Inc. was reasonably certain that it would have an employee strike in the third quarter. As a result, it shipped heavily during the second quarter but plans to defer the recognition of the sales in excess of the normal sales volume.
The deferred sales will be recognized as sales in the third quarter when the strike is in progress. McNeil management thinks this better represents normal second- and third-quarter operations.
(g) At the end of the second quarter Solace Inc. had reported an impairment loss on its goodwill related to the real estate division. At year end, this goodwill value has now increased to the amount it was prior to the write-down and the company plans to reverse this goodwill impairment loss since it is still all in the current year.
(h) Regent Corp. has a bonus plan whereby the employees will earn a bonus of 10% of the company's net income if the price of the company's share reaches a target price by the fiscal year end, which is December 31, 2011. It is now June 30, 2011, and the share price has been reached. Consequently, the company has accrued 10% of the reported net earnings for the interim period.