Interim financial reporting has become an important topic in accounting. There has been considerable discussion as to the proper method of reflecting results of operations at interim dates. Accordingly, the Accounting Principles Board issued an opinion clarifying some aspects of interim financial reporting.
(a) Discuss generally how revenue should be recognized at interim dates and specifically how revenue should be recognized for industries subject to large seasonal fluctuations in revenue and for long-term contracts using the percentage-of-completion method at annual reporting dates.
(b) Discuss generally how product and period costs should be recognized at interim dates. Also discuss how inventory and cost of goods sold may be afforded special accounting treatment at interim dates.
(c) Discuss how the provision for income taxes is computed and reflected in interim financial statements.
(a) Sales and other revenues should be recognized for interim financial statement purposes in the same manner as revenues are recognized for annual reporting purposes. This means normally at the point of sale or, in the case of services, at completion of the earnings process.
In the case of industries whose sales vary greatly due to the seasonal nature of business, revenues should still be recognized as earned, but a disclosure should be made of the seasonal nature of the business in the notes.
In the case of long-term contracts recognizing earnings on the percentage-of-completion basis, the current state of completion of the contract should be estimated and revenue recognized at interim dates in the same manner as at the normal year end.
(b) For interim reporting purposes, product costs (costs directly attributable to the production of goods or services) should be matched with the product and associated revenues in the same manner as for annual reporting purposes.
Period costs (costs not directly associated with the production of a particular good or service) should be charged to earnings as incurred or allocated among interim periods based on an estimate of time expired, benefit received, or other activity associated with the particular interim period(s). Also, if a gain or loss occurs during an interim period and is a type that would not be ...
This posting discusses issues related to the proper method of reflecting results of operations at interim dates.