Subtopic

ASC 270, Interim Reporting, contains one subtopic:

• ASC 270-10, Overall, that provides guidance on
  • Accounting and disclosure issues for reporting on periods less than one year, and
  • Minimum disclosure requirements for interim reporting for publicly traded companies.

Overview

The term “interim reporting” refers to financial reporting for periods of less than a year. GAAP does not mandate interim reporting. However, in the United States the Securities and Exchange Commission (SEC) requires public companies to file quarterly summarized interim financial data on its Form 10-Q. The level of detail of the information required in those interim reports is substantially less than is specified under GAAP for annual financial statements.

Differentiation between Public and Nonpublic Entities

The explanations and interpretations in this chapter have been divided into two sections. Part I discusses issues applicable to both public and nonpublic reporting entities (including, where applicable, not-for-profit organizations). Part II discusses issues applicable only to publicly traded companies.

The usefulness of interim reports rests on the relationship to annual reports. Therefore, ASC 270-10-45-1 states that “each interim period should be viewed primarily as an integral part of an annual period,” and the accounting should be based on the principles and practices used in the entity's annual reporting. The exception to this is if the entity has adopted a change in accounting in the interim period. Certain principles and practices may also have to be modified so that the interim reporting better relates to the annual results. The modifications are detailed in ASC 270-10-45-4 through 45-11 and are detailed in the sections below.

Revenues

Revenues are recognized as earned during an interim period using the same principles followed in annual reports (ASC 270-10-45-3). This rule applies to both product sales and service revenues. For example, product sales cutoff procedures are applied at the end of each interim period in the same manner that they are applied at year-end, and revenue from long-term construction contracts is recognized at interim dates using the same method used at year-end.

Product Costs and Direct Costs

Product costs and costs directly associated with service revenues are treated in interim reports in the same manner as in annual reports. ASC 270-10-45 provides for four integral view exceptions:

1. The gross profit method may be used to estimate cost of goods sold and ending inventory for interim periods.
2. When inventory consists of LIFO layers, and a portion of the base period layer is liquidated at an interim date, and it is expected that this inventory will be replaced by year-end, the anticipated cost of replacing the liquidated inventory is included in cost of sales of the interim period.
3. An inventory market decline reasonably expected to reverse by year-end (i.e., a decline deemed to be temporary in nature) need not be recognized in the interim period. ASC 330-10-55 states that there must be substantial evidence available to support the contention that the market value will recover before the inventory is sold, which generally limits this interim exception to seasonal price fluctuations. If an inventory loss from a market decline that is recognized in one period is followed by a market price recovery, the reversal is recognized as a gain in the subsequent interim period. Recognition of this gain in the later interim period is limited to the extent of loss previously recognized. This is in marked contrast to the lower of cost or market write-downs in annual financial statements, which are not permitted to be restored in a later period.
4. Entities using standard cost accounting systems ordinarily report purchase price, wage rate, and usage or efficiency variances in the same manner as year-end. Planned purchase price and volume variances are deferred if expected to be absorbed by year-end.

The first exception above eliminates the need for a physical inventory count at the interim date. The other three exceptions attempt to synchronize the quarterly financial statements with the annual report. For example, consider the LIFO liquidation exception. Without this exception, interim cost of goods sold could include low earlier year or base-period costs, while annual cost of goods sold would include only current year costs.

Several questions arise when using LIFO for interim reporting:

1. What is the best approach to estimate interim LIFO cost of sales?
2. As noted above, when an interim liquidation occurs that is expected to be replaced by year-end, cost of sales includes the expected cost of replacement. How is this adjustment treated on the interim statement of financial position?
3. How is an interim liquidation that is not expected to be replaced by year-end recorded?

These problems are not addressed in ASC 270. The only literature related to these problems is a 1984 American Institute of Certified Public Accounts (AICPA) Task Force LIFO Issues Paper.¹

The Issues Paper describes two acceptable approaches to measuring interim LIFO cost of sales. The first approach makes specific quarterly computations of the effect of using LIFO based on year-to-date amounts. This is accomplished by reviewing quarterly price level changes and inventory levels. The second approach projects the expected annual effect of using LIFO and then allocates the results of that projection to the individual quarters. The allocation can be made equally to each quarter or can be made in relation to certain operating criteria per quarter.

The Issues Paper also describes two acceptable approaches to treating the interim liquidation replacement on the statement of financial position. The first approach is to record the adjustment for the effect on pretax income of the replacement as a deferred credit in the current liabilities section. The second approach is to record the adjustment as a credit to an inventory valuation allowance.

When an interim LIFO liquidation occurs that is not expected to be reinstated by year-end, the effect of the liquidation is recognized in the period in which it occurs to the extent that it can be reasonably determined. A reporting entity using dollar-value LIFO may allocate the expected effect of the liquidation to the quarters affected.

Other Costs and Expenses

The integral view is evident in how current US GAAP treats costs incurred in interim periods. Most costs and expenses are recognized in interim periods as incurred. However, a cost that clearly benefits more than one interim period (e.g., annual repairs or property taxes) is allocated among the periods benefited. (ASC 270-10-45-8) The allocation is based on:

• Estimates of time expired,
• Benefit received, or
• Activity related to the specific periods.

Allocation procedures are to be consistent with those used at year-end reporting dates. However, if a cost incurred during an interim period cannot be readily associated with other interim periods, it is not arbitrarily assigned to those periods. The following parameters (ASC 270-45-10-9) are used in interim periods to account for certain types of expenses incurred in those periods:

1. Costs that benefit two or more interim periods (e.g., annual major repairs) are assigned to interim periods through the use of deferrals or accruals.
2. Quantity discounts given to customers based on annual sales volume are allocated to interim periods on the basis of sales to customers during the interim period relative to estimated annual sales.
3. Property taxes (and like costs) are deferred or accrued at a year-end date to reflect a full year's charge to operations. Charges to interim periods follow similar procedures.
4. Advertising costs are permitted to be deferred to subsequent interim periods within the same fiscal year if the costs clearly benefit those later periods. Prior to actually receiving advertising services, advertising costs may be accrued and allocated to interim periods on the basis of sales if the sales arrangement implicitly includes the advertising program. See Chapter 3 for a discussion of the specialized accounting for direct-response advertising prescribed by ASC 340-20. Those rules apply to both interim and annual reporting periods.

Costs and expenses subject to year-end determination, such as discretionary bonuses and profit-sharing contributions, are assigned to interim periods in a reasonable and consistent manner to the extent they can be reasonably estimated. (ASC 270-10-45-10)

Application of interim expense reporting principles is illustrated in the following examples.

Income Taxes

At each interim date, the reporting entity is required to make its best estimate of the effective income tax rate expected to apply to the full fiscal year. This estimate reflects expected federal, state, local, and foreign income tax rates, income tax credits, and the effects of applying income tax planning techniques. However, changes in income tax legislation are reflected in interim periods only after the enactment date of the legislation. This process is necessary to avoid distortions that would result if early interim periods reflected the entire effect of lower income tax brackets, while later periods suffered from having all income taxed at higher bracket rates. Since income taxes apply to annual income, not to interim periods on stand-alone bases, an integral approach is clearly warranted.

Fair Value of Financial Instruments

ASC 825-10-50 requires disclosures about the fair value of financial instruments in interim reporting periods, as well as in annual financial statements. Specifically, an entity should disclose the fair value of all financial instruments for which it is practicable to create such an estimate, alongside their carrying values. The format of this presentation should clarify whether these items are assets or liabilities. The entity should also disclose the methods and significant assumptions that it used to estimate the fair value of the financial instruments, as well as note any changes in these methods and assumptions from the preceding period. In interim periods, nonpublic entities are not required to disclose the level in which a fair value measurement would be categorized within the fair value hierarchy for assets and liabilities not recognized at fair value but for which disclosure of fair value is required.

Discontinued Operations and Extraordinary Items²

Extraordinary items and the effects of the disposal of a component of the entity (ASC 270-10-45-11A) are reported separately in the interim period in which they occur. The same treatment is given to other unusual or infrequently occurring events. No attempt is made to allocate the effects of these items over the entire fiscal year in which they occur.

Materiality is evaluated by relating the item to the expected annual results of operations. Thus, an item to be reported in an early interim period may be judged material but later, when estimated results for the full fiscal year are known with greater precision, be judged immaterial; the opposite pattern may also occur, with a presumed immaterial item being later found material to full-year results of operations. Either of such eventualities is inherent in the interim reporting process and would not be deemed an error requiring restatement.

Contingencies

In general, contingencies and uncertainties that exist at an interim date are accrued or disclosed in the same manner required for annual financial statements. For example, contingent liabilities that are probable and subject to reasonable estimation are to be accrued. The materiality of the contingency is evaluated in relation to the expected annual results. Disclosures regarding material contingencies and uncertainties are to be repeated in all interim and annual financial statements until they have been settled, adjudicated, transferred, or judged to be immaterial.

The following adjustments or settlements are accorded special treatment in interim reports if they relate to prior interim periods of the current fiscal year:

1. Litigation or similar claims
2. Income taxes (except for the effects of retroactive tax legislation enacted during an interim period)
3. Renegotiation proceedings associated with government contracts
4. Utility revenue under rate-making processes.

If the item is material, directly related to prior interim periods of the current fiscal year in full or in part, and becomes reasonably estimable in the current interim period, it is reported as follows:

1. The portion directly related to the current interim period is included in that period.
2. Prior interim periods are restated to reflect the portions directly related to those periods.
3. The portion directly related to prior years is recognized in the restated first interim period of the current year.

Seasonality

The operations of many businesses are subject to recurring material seasonal variations. Such businesses are required to disclose the seasonality of their activities to avoid the possibility of misleading interim reports. ASC 270-10-45-11 also recommends that such businesses present results of operations for twelve-month periods ending at the interim date of the current and preceding year.

Accounting Changes

Quarterly Reporting to the SEC

Other Sources