Roger CPA Review Team
The CPA Review Lesson of the Month for March features Roger Philipp, CPA discussing “Interim Financial Reporting” from his FAR course. You’ve heard of an annual financial report or statement. But, did you know that most companies that issue annual financial statements also issue interim reports on a quarterly basis as well? In these reports, timeliness is emphasized over reliability. Follow along with Roger in this brief excerpt from his online FAR course that describes interim financial reporting.
Interim Financial Reporting
Companies that issue annual financial statements typically issue interim reports on a quarterly basis as well. In general, the application of generally accepted accounting principles to a report covering three months will be no different than for a report covering one year, since an interim period is an integral part of the overall year. Timeliness is emphasized over reliability. As a result (ASC 270):
Revenues are recognized in each quarter as earned and realized (for example, estimates must be made each quarter when applying the percentage-of-completion method of construction accounting to determine the profit in each period).
Expenses are matched to each quarter (for example, a property tax bill covering an entire year must be allocated equally to the four quarters).
Accounting Changes made in an interim period are to be reported by retrospective application in accordance with FASB 154.
For example, assume a client received an annual rental payment of $300 from a client on 1/2/X1 and paid a $100 property tax bill covering all of calendar year 20×1 on 3/15/X1. The effects of these items on the interim reports in the 20×1 are:
| Quarter | 1st | 2nd | 3rd | 4th |
| Rent Income | 75 | 75 | 75 | 75 |
| Property Tax | (25) | (25) | (25) | (25) |
One item that may need special consideration is the provision for income taxes. When preparing an annual report, the company already knows its taxable income for the year and can compute its income tax provision with full knowledge of the applicable tax rates and available tax credits.
When computing income taxes at an interim date, however, the company must make an estimate of the effective annual tax rate that it believes will be applicable for that entire year. This should take into account estimates of total taxable income for the year and any tax planning strategies the company plans to adopt during the year.
The estimate of the effective annual tax rate should be updated at each interim date, and the provision for income taxes in later quarters will be based on the current estimated rate applied to cumulative income reduced by provisions reported in early periods.
For example, if a client has income of $100 in the first quarter of 20×1 and expects the effective annual tax rate for all of 20×1 to be 25%, then the provision for income taxes in the first quarter will be $100 x 25% = $25. If the client has an additional $150 of income in the second quarter, and revises their estimate of the effective annual tax rate for all of 20×1 to 30%, then the provision for income taxes in the second quarter will be calculated as follows:
| Income in 2nd quarter of 20X1 | 150 |
| Income in 1st quarter of 20X1 | 100 |
| Income for 6 months ended 6/30/X1 | 250 |
| Expected effective annual tax rate | 30% |
| Income taxes for 6 month period | 75 |
| Less: amount reported in 1st quarter | (25) |
| Income tax provision in 2nd quarter | 50 |
To Summarize:
Property taxes, bonuses, depreciation allocate to all quarters
Inventory losses in that quarter
Major expenses – in that quarter, unless benefit future quarters then allocate.
Discontinued operations in that quarter
Extraordinary gain/loss in that quarter
Income tax expense is estimated each quarter using the rate expected for the entire year.