1. Interim Financial Reporting (IAS 34) Presented by CPA Peter Njuguna +254 722 608 618

2. Objective and Scope Objective minimum contents of interim report recognition & measurement principles Scope all interim financial reports published in accordance with IFRS

3. Why interim report Annual reporting Often supplemented with interim or quarterly reports Interim reporting Reports provide more timely information Often mandated by securities regulators, governments, and securities exchanges

4. Example: Quarterly and interim financial statements

5. Definition According to IAS 34, an interim financial report is defined as follows:... a financial report containing either a complete set of financial statements or a set of condensed financial statements for an interim period Goal of interim reporting is to provide information about new events and circumstances and other changes Not just replicate the information given in the annual financial statements

6. Interim report - minimum content Condensed statement of financial position Condensed statement of comprehensive income (SOCI) Condensed statement of changes in equity Condensed statement of cash flows Selected explanatory notes

7. 7 IAS 34 – Objective and Scope IASB encourages entities whose shares are publicly traded to provide interim information At least as of the end of the first half of the year and issue it within 60 days of this date Standard does not address how often nor how soon after the period entities should produce interim reports

8. 8 Compliance with IFRSs Choice by the entity May choose not to prepare interim financial statements at all May choose to prepare them in accordance with IFRSs if they do and they describe the financial statements to be in compliance with IFRSs, the standard applies

9. 9 IAS 34 – Content of an Interim Financial Report not prohibit including a complete set of financial statements (comply with IAS 1) Minimum requirements mandated by the standard Minimum components of an interim financial report Form and content of interim financial statements Selected explanatory notes Disclosure of compliance with IFRSs Periods for which interim financial statements are required to be presented Materiality

10. 10 Content of an Interim Financial Report Minimum components of an interim financial report Required condensed statements Statement of financial position Statement of comprehensive income -Presented as a single statement or a separate income statement plus a statement of comprehensive income Statement of changes in equity Statement of cash flows In addition, selected explanatory notes must accompany the above

11. 11 Content of an Interim Financial Report Form and content of interim financial statements If the entity presents a full set of statements Follow IAS 1 If it presents condensed statements Entity must present at a minimum the headings and subtotals that were presented in the annual statements Interim financial statements Based on consolidated statements where the most recent annual statements were prepared on a consolidated basis

12. 12 Content of an Interim Financial Report Selected explanatory notes Relevant notes unchanged from the annual report Not included Repetitive Can obscure the new and more relevant information Information is normally presented on a year-to-date basis

13. Explanatory notes, examples Accounting policies statement that they are the same as in most recent annual financial statements if changes  description and disclosure Compliance with IFRS Comments on seasonality or cyclicality Nature and amount of unusual items (IAS 8) changes in estimates

14. 14 Recognition and Measurement Same accounting policies as annual Entity is required to use the same accounting policies as in the year-end statements Encourages consistency Where there has been a subsequent change in accounting policies, the entity would use the newer policy

15. Explanatory notes Issuance, repurchases, and repayments of debt and equity securities Dividends paid separately Segment revenue & segment result for primary segment Subsequent events Changes in composition of the enterprise Changes in contingent assets & liabilities

16. Example of explanatory notes disclosures the write-down of inventories to net realisable value and the reversal of any such write-down; recognition of a loss arising from the impairment of property, plant, and equipment, intangible assets, or other assets, and the reversal of any such impairment loss; the reversal of any provisions for the costs of restructuring; acquisitions and disposals of items of property, plant, and equipment;

17. Example of explanatory notes disclosures commitments for the purchase of property, plant, and equipment; litigation settlements; corrections of prior period errors; any loan default or any breach of a loan agreement that has not been remedied on or before the end of the reporting period; and related party transactions.

18. 18 Example explanatory notes disclosures Changes in debt and equity securities (issue, repurchase, repayment) Dividends paid Segmented information including Intersegment revenues Segment profit/loss Material subsequent events Changes in contingent assets/liabilities

19. 19 Content of an Interim Financial Report Materiality Discussed in IAS 1 and 8 Although there is no specific quantitative guidance IAS 34 notes that materiality for interim statements should be assessed based on the interim period Note that interim financials statements may have additional estimates Therefore the numbers may be a bit softer

20. Materiality Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement, judged in the surrounding circumstances. Set material low to allow for more estimation

21. Material disclosures Statement that the accounting policies follows the annual report, note any change Explanatory comments about the seasonality/cyclicality of the business Any unusual items Nature and amount of changes in estimates

22. Principles for recognition and measurement Same as in annual financial statements no smoothing of income and expenses recognition of assets, liabilities, income and expenses in accordance with the Framework and applicable Standards measurement on a year-to-date basis frequency of reporting should not affect measurement of annual results

23. Application, expenses Recognition present obligation and probable outflow reliable estimate of the amount Measurement consider risks and uncertainties Examples provisions and employee benefits planned maintenance for later interim periods expenses calculated on an annual basis like bonuses, payroll tax or discount expenses

24. Application, revenues Recognition transfer of significant risks and rewards probable inflow and reliable measure Measurement consider risks and uncertainties Example seasonal, cyclical or occasional revenues revenues calculated on an annual basis

25. 25 Recognition and Measurement Revenues received seasonally, cyclically, or occasionally Recognized when they occur or are earned, notwithstanding their cyclical or seasonal nature May result in more revenues being recognized in one period than in another Reflects the underlying reality Supports the discrete approach Costs incurred unevenly during the financial year Costs are recognized when incurred Only capitalized when they meet the definition of an asset Also supports the discrete approach

26. recognition and measurement criteria Maintenance expenditure Revenues and expenses calculated on year-to-date basis seasonal, cyclical or occasional revenues Intangible assets Income taxes in interim periods Inventories

27. 27 Recognition and Measurement Use of estimates Due to necessity, more estimates need to be made in an interim period An entity needs to communicate this and must take care to ensure that the information is relevant and reliable

28. Example of estimations

29. Application, inventories Same as in annual F/S test of net realisable value recognise variances with standard cost However; Full stock-taking and valuation procedures may not be required for inventories at interim dates, although it may be done at financial year end. It may be sufficient to make estimates at interim dates based on sales margins.

30. Application, intangible assets Recognition controlled by the enterprise as result of past events expected inflow of future economic benefits cost of the asset can be measured reliably Examples development cost for a new product Costs incurred before the recognition criteria for an intangible asset are met are recognised as an expense.

31. Pensions: IAS 19 Employee Benefits requires that an entity determine the present value of defined benefit obligations and the market value of plan assets at the end of each reporting period encourages an entity to involve a professionally qualified actuary in measurement of the obligations. For interim reporting purposes, reliable measurement is often obtainable by extrapolation of the latest actuarial valuation.

32. Revaluations and fair value accounting IAS 16 Property, Plant and Equipment allows an entity to choose as its accounting policy the revaluation model IAS 40 Investment Property requires an entity to determine the fair value. rely on professionally-qualified valuers at the end of annual reporting periods, though not at the end of interim reporting periods.

33. Provisions Determination of the appropriate amount of a provision (such as a provision for warranties, environmental costs, and site restoration costs) may be complex and often costly and time-consuming. Entities sometimes engage outside experts to assist in the annual calculations. Making similar estimates at interim dates often entails updating of the prior annual provision rather than the engaging of outside experts to do a new calculation.

34. 34 Restatement of Previously Interim Periods Where there is a change in accounting policy, the comparative interim information must be restated Where it is impracticable to determine the cumulative impact, the change would be applied from the earliest date practicable

35. 35 Disclosure in Annual Financial Statements Situations may arise where estimates are changed in the last quarter or final interim period Where final interim period statements are not separately presented and where the change is significant Nature and amount of change in estimate should be disclosed in the annual statements The standard goes on to cross reference and link this to IAS 8 Requires disclosure of the nature and amount of material changes in estimates

36. Application, income taxes What rate should be used? estimated average annual effective income tax rate The provisions of IAS 12 applies at each interim reporting date change in tax rates recognition of deferred tax liabilities / assets

37. Changes in estimates If significant change in an estimate of a previous interim period in the last interim period of a financial year  disclose nature and amount of the change

38. Changes in accounting policy Should be included in interim reports if they are to be reflected in the next annual financial statements restatement of prior interim reports of the current year comparative data should be restated (IAS 8 )

39. Comparison IAS 1/IAS 34 Presentation Complete set of financial statements (IAS 1) (a) balance sheet; (b) income statement; (c) statement showing either (i) all changes in equity or (ii) changes in equity other than those arising from capital transactions with owners and distributions to owners; (d) cash flow statement; and (e) accounting policies and explanatory notes. Condensed set of financial statements (IAS 34) (a) condensed balance sheet; (b) condensed income statement; (c) condensed statement showing either (i) all changes in equity or (ii) changes in equity other than those arising from capital transactions with owners and distributions to owners; (d) condensed cash flow statement; and (e) selected explanatory notes.

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41. Borrowing costs

42. Borrowing cost Costs incurred in connection with the borrowing funds and include: interest expense calculated using the effective interest method finance charges in respect of finance leases exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs

43.  Start capitalisation when  Expenditure on qualifying asset are being incurred  Borrowing cost in relation to fund obtained from a third party are being incurred  Activities necessary to prepare the qualifying asset are on going Borrowing cost

44. Background Consider a company doing capital intensive project concept: the cost of borrowed funds content: interest, premium discount amortization, ancillary costs, the exchange differences borrowings range: including general and specialized loan borrowers

45. Borrowing Costs comprises Borrowing Costs Interest & commitment charges on Borrowings Amortisation of Discount / Premium on Borrowings Amortisation of ancillary costs relating to Borrowings Finance charges for assets acquired on Finance Lease Exchange Differences * * To the extent they are regarded as an adjustment to interest cost

46. To the extent regarded as ‘adjustment to interest cost’. The adjustment is restricted to amount of exchange loss on principal due to devaluation of currency Exchange Differences Adjustment = Interest on local currency borrowing – Interest on foreign currency borrowing

47. Qualifying Assets Definition: an asset that takes substantial period of time to get ready for intended sale or usage a rebuttable presumption of a period of 12 months is considered as a substantial period of time. Qualifying asset may be – PPE (non-acquired ready for purpose) or Intangible assets or investment property

48. Relating to a qualifying assets should be capitalised. Qualifying assets require substantial but necessary time to put in a condition ready for intended use.

49. Treatment of Borrowing Costs Borrowing Costs Directly attributable* for: acquisition construction production of Qualifying Assets Assets other than Qualifying assets Capitalised as part of asset Treated as revenue expenditure *or that could have been avoided if the expenditure on qualifying assets had not been made

50. Criteria for Capitalisation Criteria same as related asset Future Economic Benefits Reliable Measurement Note: Expenses not fulfilling the criteria to be treated as revenue expenditure

51. Borrowings Cost (Interest) Borrowings Cost Specifically for Qualifying Assets Generally but part used for Qualifying Assets Capitalise the Borrowing Costs less interest income, if any Apply actual rate of Interest Apply weighted average rate of interest

52. Excess of the Carrying amount of the Qualifying asset over recoverable Amount Actual Cost of the Asset Recoverable + Borrowing Cost Capitalisedamount of the Asset <=

53. Commencement of Capitalisation Conditions Borrowing costs are being incurred Expenditure for the acquisition construction production of a qualifying asset is being incurred Necessary activities for preparation of qualifying assets are in progress

54. Suspension of Capitalisation Criteria Capitalisation to be suspended during extended periods in which active development is hampered. Suspension not to take place in case: substantial technical & administrative work is being carried on temporary delays necessary for preparation of qualifying assets (seasonal rains etc.)

55. Cessation of Capitalisation Capitalisation should cease when substantially all the the activities necessary to prepare the qualifying asset for its intended use or sale are complete. Cessation to take place even if: routine administrative work still continues minor modifications to property as per users’ specifications is to be made Cessation to take place in part if: Construction of qualifying asset is completed in parts and a part is capable of being used separately

56. Disclosure Requirements The financial statements should disclose: 1.the accounting policy adopted for borrowing costs 2.The amount of borrowing costs capitalised

57. Disclosure Requirements Significant Accounting Policy Borrowing costs that are attributable to the acquisition of or construction of qualifying assets are capitalized as part of the cost of such assets. A qualifying asset is one that necessarily takes substantial period of time to get ready for intended use. All other borrowing costs are charged to revenue. Notes to Accounts The total borrowing cost capitalized during the year is sh. 4.13 m.

58. COP - Capitalisation of Borrowing Costs Q.Whether borrowing cost avoidable or unavoidable? A.Said to be unavoidable if expenditure on qualifying assets had been incurred and borrowing is taken, Existing borrowing exercise of judgement required. Q.Factors to be considered as to whether and to what extent general borrowings have been so used A.Information of cash inflows and outflows, close scrutiny required. Q.General borrowings made but equity specifically infused for financing qualifying assets A.No question of capitalizing borrowing cost. Q.Calculation of weighted average borrowing rate? A.Based on borrowing during period of expenditure and not borrowings made for the whole year.

59. Capitalisation of completed parts of a project Q.Capitalisation of commissioned packages when capitalization of remaining incomplete packages is pending? A.Necessary to capitalize commissioned packages. Q.Date of capitalization? A.Date on which package is ready to commence commercial production. Q.Allocation of incidental expenditure during construction? A.On appropriate basis. Q.Capitalisation of independent packages which are complete when capitalization of main packages is pending ? A.Capitalised when ready for their intended use.

60. Amortised cost financial liability Hero Ltd issued a 6% Ksh 350 millions infrastructure bond on 1 st July 2009. The bond was issued at a 15% discount and is redeemable at 102.5% on 30 th June 2013. The legal and other expenses to arrange the bond issue through private placement amounted to Ksh 22.5 million. The interest on coupon rate is repayable annually in arrears.  Determine the effective interest rate, the finance cost for each period and the amortised cost of the bond as at 30 th June each year 60

61. Computations Proceed from borrowing Nominal value 350 Less discount on issue.15*350 (52.5) Less issue cost (22.5) 275 Effective rate of interest is 13.84% i.e 21/(1.1384)1 + 21/(1.1384)2 + 21/(1.1384)3 + 21/(1.1384)4 + 358.75/(1.1384)4 = 275 61

62. Solution YearCarrying amount start Interest cost @ 13.84% Cash inflow Carrying amount end 30/6/201 0 275.0038.06 (21.00)292.06 30/6/201 1 292.0640.42 (21.00)311.48 30/6/201 2 311.4843.11(21.00)333.59 30/6/201 3 333.5946.16 (21.00)358.75 62

63. Illustration ABC Co. Ltd. undertakes significant expansion program and incurs following capital expenditure: FacilityCapex (in sh.) RemarksDate of Start Date of Completion Plant I30 mSpecific Borrowing to the extent of sh 22 m June 1, 2013 December 31, 2013 Plant II20 mSpecific Borrowing to the extent of sh 8 m June 1, 2013 November 30, 2013 Additional Information: 1.sh. 20 m, 11% p.a. secured debentures raised on July2012 redeemable in four equal installments commencing July 1, 2013 2.Loan from financial institutions amounting to sh. 30 m bearing interest at 14% p.a. obtained for construction of Plant I & II on May 1,2013 3.sh. 5 m, 14% working capital loan obtained on April 1, 2013 and repaid sh. 1 m on December 31, 2013. Contd..

64. Calculation of Weighted Average Rate of Interest Borrowing costs for the year ended on March 31, 2014 1.Secured debentures = 20,000,000 x 11% x 3 / 12= 550,000/- = 15,000,000 x 11% x 9 /12= 1,230,750/- 2.Loan from financial Institutions = 30,000,000 x 14% x 11 / 12= 3,850,000/- 3.Working Capital Loan = 5,000,000 x 14% x 9 / 12= 525,000/- = 4,000,000 x 14% x 3 / 12= 140,000/-

65. Average general borrowings Calculation of average unspecified borrowings outstanding during the year Secured debentures = 20,000,000 x 3 / 12= 5,000,000/- = 15,000,000 x 9/12= 11,250,000/- Secured working capital loan = 5,000,000 x 9 / 12= 3,750,000/- = 4,000,000 x 3 / 12=1,000,000/- Total (1+2) 21,00,000/-

66. Calculation of Weighted Average Rate of Interest Calculation of average interest on unspecified borrowings for the year 1.Secured debentures = 20,000,000 x 11% x 3 / 12= 550,000/- = 15,000,000 x 11% x 9 /12= 1,237,500/- 2.Working Capital Loan = 5,000,000 x 14% x 9 / 12= 525000/- = 4,000,000 x 14% x 3 / 12= 140,000/- TOTAL(1+2) 2,452,500/- D.Average interest rate for the year ( C / B ) = (2,452,500 / 21,000,000) * 100= 11.67%

67. Calculation of Weighted Average Rate of Interest Interest Capitalised 1.Plant I Specific borrowings: 22,000,000 X 14% X 7 /12= 1,79,6670/- General Borrowings: 8,000,000 x 11.67% x 7/12= 544,600/- 2.Plant II Specific borrowings: 8,000,000 X 14% X 6 /12= 560,000 General Borrowings: 12,000,000 x 11.67%x 6/12=700200

68. Treatment of Exchange Differences Loan Amount: USD 10,000 Rate of Interest(in U.S.A.): 8% p.a. Exchange rate as at 01.04.2013: sh. 40 per USD Exchange rate as at 31.03.2014: sh. 45 per USD Rate of Interest (in Kenya): 12% Contd..

69. Treatment of Exchange Differences Computations to be made: 1.Interest for the Period=USD10,000 x 8%x sh.45=sh.36,000 2.Increase in liability towards the principal amount = USD 10,000 x (45-40) = sh. 50,000 3.Interest if loan was raised in Kenya = USD 10,000 x 48 x 12%= sh. 57,600 4.Difference (2-1) = sh. 57,600 – sh. 36,000 = sh. 21,600

70. Treatment of Exchange Differences Treatment of Exchange Differences of sh. 50,000/- sh. 21,600/-sh. 28,400/- To be treated as borrowing cost To be capitalised to loan obligation Note: The amount of borrowing costs capitalised during a period should not exceed the amount of borrowing costs incurred during the period

71. A company has arranged for a construction loan from a US bank. The facility is expected to cost $30 million and take one year to build. The construction loan is $24 million, bears interest at 8% and borrowings commence at the first draw. Ground is broken on April 1, 2011, and construction is expected to continue until March 31, 2012. The Company uses $6 million of its cash in the first two months of construction and begins borrowing under the construction loan based on the following schedule

72. Fund drawing schedule

73. The US bank pays the draws on the loan to HDS in dollars. HDS carries its assets in pounds and the debt borrowings will be paid in pounds. HDS incurs exchange rate gains and losses as scheduled on the next slide. HDS temporarily invests the loan borrowings and receives quarterly interest as scheduled below. HDS secures permanent financing on April 1, 2012. What borrowing costs should HDS capitalize in 2011 and in the first quarter of 2012

74. Calculation of interest costs: 2011First draw: $10,000,000 x 8% x 3/12 =$200,000 Second draw:$16,000,000 x 8% x 3/12 =320,000 (Error – should be4/12) $520,000 2012 ► Third draw:$24,000,000 x 8% x 3/12 =$480,000 HDS should capitalize $485,000 ($520,000 + $90,000 exchange rate losses - $125,000 of interest income) of borrowing costs in 2011 and $475,000 ($480,000 + $20,000 exchange rate losses - $25,000 of interest income) of borrowing costs in the first quarter of 2012.

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