Interim reporting is financial reporting for a period shorter than a full financial year, most often a month, a quarter or a half year. The report itself is a financial report containing either a complete set of financial statements or a set of condensed financial statements for that shorter period (IFRS Foundation, IAS 34, Definitions).
The reporting frequency itself is a separate idea from the rules that apply once you shorten the period, and the assumption that a continuous business can be cut into intervals at all is set out in periodicity.
The Starting Position Is That Nothing Changes
Under US GAAP the default is continuity with the annual statements. 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 (AICPA Accounting Principles Board Opinion No. 28, paragraph 10).
The same Opinion then says the default is not the whole answer. 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 (AICPA Accounting Principles Board Opinion No. 28, paragraph 10). Everything difficult about interim reporting lives in those modifications.
Revenue is not one of them. Revenue from products sold or services rendered is recognized as earned during an interim period on the same basis as followed for the full year, and losses projected on long-term construction-type contracts are recognized in full during the interim period in which the existence of such losses becomes evident (AICPA Accounting Principles Board Opinion No. 28, paragraph 11).
The Four Inventory Modifications
Inventory is where the Opinion permits the most departure from annual practice, and it names four situations (AICPA Accounting Principles Board Opinion No. 28, paragraph 14).
An estimated gross profit rate may be used to determine interim cost of goods sold in place of the method used at annual inventory dates. The price of that shortcut is disclosure: the company discloses the method used at the interim date and any significant adjustments that result from reconciliation with the annual physical inventory.
A LIFO base liquidation that is expected to be replaced by the end of the annual period is not given effect at the interim date. Instead the interim inventory ignores the liquidation and cost of sales for the interim period includes the expected cost of replacing the liquidated LIFO base, which keeps a temporary drawdown from releasing old low-cost layers into a quarter’s margin.
Losses from a decline in value are not deferred beyond the interim period in which the decline occurs, and a recovery inside the same fiscal year can be taken back as a gain. That subparagraph is the one the Codification has since amended, and the current wording of it, its fiscal-year boundary and the way it reads against IFRS are worked through in GAAP vs IFRS.
Standard cost variances split by whether they were planned. Purchase price variances and volume or capacity cost variances that are planned and expected to be absorbed by the end of the annual period are ordinarily deferred at interim reporting dates, while unplanned or unanticipated variances are reported at the interim date using the same procedures used at the end of a fiscal year.
Income Tax Runs Off an Estimate of the Whole Year
The interim tax provision is not the tax on the quarter. At the end of each interim period the company makes its best estimate of the effective tax rate expected to be applicable for the full fiscal year, and that rate is used in providing for income taxes on a current year-to-date basis (AICPA Accounting Principles Board Opinion No. 28, paragraph 19).
The rate is built to reflect anticipated foreign tax rates, percentage depletion, capital gains rates and other available tax planning alternatives, and it deliberately excludes one thing: no effect is included for the tax related to significant unusual items that will be separately reported or reported net of their related tax effect (AICPA Accounting Principles Board Opinion No. 28, paragraph 19). Those items are taxed on their own and kept out of the rate that spreads across the year.
Early losses get their own test. The tax effects of losses arising in the early portion of a fiscal year are recognized only when the tax benefits are expected to be realized during the year or to be recognizable as a deferred tax asset at the end of the year (AICPA Accounting Principles Board Opinion No. 28, paragraph 20). An established seasonal pattern of early losses offset by later income is evidence toward that expectation.
Seasonality Has a Disclosure of Its Own
Where revenues are subject to material seasonal variations, the Opinion asks the entity to disclose the seasonal nature of its activities and to consider supplementing its interim reports with information for twelve-month periods ended at the interim date for the current and preceding years (AICPA Accounting Principles Board Opinion No. 28, paragraph 18). The rolling twelve months is the honest comparison; the quarter alone is the misleading one.
Where IFRS Parts Company
The two frameworks agree on the arithmetic of the tax rate and disagree about deferral. An entity applies the same accounting policies in its interim financial statements as in its annual financial statements, the frequency of reporting does not affect the measurement of annual results, and to achieve that objective measurements for interim reporting purposes are made on a year-to-date basis (IFRS Foundation, IAS 34, paragraph 28).
Income tax follows the same shape as the US rule. Income tax expense is recognised in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year, and amounts accrued in one interim period may have to be adjusted in a later one if that estimate changes (IFRS Foundation, IAS 34, paragraph 30).
Then the sentence that separates them. A cost that does not meet the definition of an asset at the end of an interim period is not deferred in the statement of financial position either to await future information as to whether it has met the definition of an asset or to smooth earnings over interim periods within a financial year (IFRS Foundation, IAS 34, paragraph 30). Inventory write-downs follow the same rule: the principles for recognising and measuring them in an interim period are the same as if the entity prepared only annual financial statements, with later changes in estimate handled by accrual or reversal in the later period.
Set that against the US treatment of a planned purchase price variance, ordinarily deferred at the interim date, and against a temporary market decline expected to reverse within the year, not recognized at all. Both are deferrals across interim periods that IFRS declines to make. A client reporting under both frameworks can therefore run one set of annual numbers and two different quarters, with the whole difference reversing by year end.
Common Questions
Length of period and depth of content, not the accounting principles behind them. The interim report covers a period shorter than a full financial year and may be a condensed set of statements rather than a complete one (IFRS Foundation, IAS 34, Definitions), while the principles applied are the ones from the latest annual statements, subject to the modifications above (AICPA Accounting Principles Board Opinion No. 28, paragraph 10).
For a private client, whoever the lender, the board or the operating agreement says. For a US public company the quarterly obligation is a filing requirement rather than an accounting one, and what that filing contains, who is exempt from it and how the accompanying interim review differs from an audit are set out in Form 10-Q.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own monthly and quarterly close work through a trial task before a client engagement depends on it.
