adjustments are removed, the effective tax rate for the half year ended 30 June 2015 was 20.7%, compared with
19.1% for the half year ended 30 June 2014.
This difference largely arises as, in the half year ended 30 June 2015, the Group has both tax due in jurisdictions
where the statutory tax rate is higher than the UK as well as non-UK losses arising in other jurisdictions for which
no benefit is recognised. For the half year ended 30 June 2014, the Group was able to offset losses previously
unrecognised against tax due in non UK jurisdictions which reduced the effective tax rate.
9.6
Foreign currency translation
9.6.1
Foreign currency translation gains and losses
An entity measures foreign currency translation gains and losses for interim financial
reporting using the same principles that IAS 21 – The Effects of Changes in Foreign
Exchange Rates – requires at year-end (see Chapter 15). [IAS 34.B29]. An entity should use
the actual average and closing foreign exchange rates for the interim period (i.e. it may
not anticipate changes in foreign exchange rates for the remainder of the current year
in translating at an interim date). [IAS 34.B30]. Where IAS 21 requires translation
adjustments to be recognised as income or expense in the period in which they arise,
the same approach should be used in the interim report. An entity should not defer
some foreign currency translation adjustments at an interim date, even if it expects the
adjustment to reverse before year-end. [IAS 34.B31].
9.6.2
Interim financial reporting in hyperinflationary economies
Interim financial reports in hyperinflationary economies are prepared using the same
principles as at year-end. [IAS 34.B32]. IAS 29 – Financial Reporting in Hyperinflationary
Economies – requires that the financial statements of an entity that reports in the
currency of a hyperinflationary economy be stated in terms of the measuring unit
current at the end of the reporting period, and the gain or loss on the net monetary
position be included in net income. In addition, comparative financial data reported for
prior periods should be restated to the current measuring unit (see Chapter 16).
[IAS 34.B33]. As shown in Examples 37.3 and 37.4 above, IAS 34 requires an interim report
to contain many components, which are all restated at every interim reporting date.
The measuring unit used is the same as that as of the end of the interim period, with the
resulting gain or loss on the net monetary position included in that period’s net income.
An entity may not annualise the recognition of gains or losses, nor may it estimate an
annual inflation rate in preparing an interim financial report in a hyperinflationary
economy. [IAS 34.B34].
3116 Chapter 37
IAS 29 applies from the beginning of the reporting period in which an entity identifies the
existence of hyperinflation in the country in whose currency it reports. [IAS 29.4]. Accordingly,
for interim reporting purposes, IAS 29 should be applied from the beginning of the interim
period in which the hyperinflation is identified. The Interpretations Committee has clarified
that adoption of IAS 29 should be fully retrospective, by applying its requirements as if the
economy had always been hyperinflationary (see Chapter 16 at 9). [IFRIC 7.3].
It is less obvious though, as to how a parent, which does not operate in a
hyperinflationary economy, should account for the restatement of a subsidiary that
operates in an economy that becomes hyperinflationary in the current reporting period
when incorporating it within its consolidated financial statements.
This issue has been clarified by paragraph 42(b) of IAS 21 which specifically prohibits
restatement of comparative figures when the reporting currency is not hyperinflationary.
This means that when the financial statements of a hyperinflationary subsidiary are
translated into the non-hyperinflationary reporting currency of the parent, the comparative
amounts are not adjusted.
Notwithstanding the above, some argue that in interim period reports of the subsequent
year, the parent should adjust its comparative information for the corresponding
interim periods which are part of the (first) full financial year affected by hyperinflation.
This is because comparative interim information had been part of the full year financial
statements, which were adjusted for hyperinflation.
In our view, the parent is allowed, but not required, to adjust the comparative interim
information that relates to the first full financial year affected by hyperinflation, as
illustrated in the example below:
Example 37.18: Accounting by the parent when a hyperinflationary subsidiary
first applies IAS 29
A parent with 31 December year-end owns a subsidiary, whose functional currency is considered
hyperinflationary from 31 July 2018 onwards. In preparing its interim consolidated financial statements for
the quarter ended 31 March 2019, the parent consolidates this subsidiary in both the current and comparative
interim periods.
In our view the parent is allowed, but not required, to adjust the comparative interim information (for the
quarter ended 31 March 2018) in its 31 March 2019 interim financial report.
Whilst IAS 34 and IAS 29 are silent on the matter, a consequence of this approach
suggests that when an economy stops being hyperinflationary, the entity should stop
applying the requirements of IAS 29 during that interim period. However, in practice,
it is difficult to determine when an economy stops being hyperinflationary. The
characteristics indicating restored confidence in an economy (such as the population
ceasing to store wealth in a more stable foreign currency) change gradually as sufficient
time elapses to indicate that the three-year cumulative inflation rate is likely to stay
below 100%. When the exit from hyperinflation can reasonably be identified, an entity
should stop applying IAS 29 in that interim period. Prior interim periods should not be
restated; instead, the entity should treat the amounts expressed in the measuring unit
current as at the end of the previous reporting period as the basis for the carrying
amounts in its subsequent interim reports, [IAS 29.38], (see Chapter 16 at 10.2).
Interim financial reporting 3117
9.7 Provisions,
contingencies and accruals for other costs
9.7.1 Provisions
IAS 34 requires an entity to apply the same criteria for recognising and measuring a provision
at an interim date as it would at year-end. [IAS 34.B4]. Hence, an entity should recognise a
provision when it has no realistic alternative but to transfer economic benefits because of an
event that has created a legal or constructive obligation. [IAS 34.B3]. The standard emphasises
that the existence or non-existence of an obligation to transfer benefits is a question of fact,
and does not depend on the length of the reporting period. [IAS 34.B4].
The obligation is adjusted upward or downward at each interim reporting date, if the
entity’s best estimate of the amount of the obligation changes. The standard states that
any corresponding loss or gain should normally be recognised in profit or loss. [IAS 34.B3].
However, an entity applying IFRIC 1 – Changes in Existin
g Decommissioning,
Restoration and Similar Liabilities – might instead need to adjust the carrying amount
of the corresponding asset rather than recognise a gain or loss. [IFRIC 1.4-6].
9.7.2
Other planned but irregularly occurring costs
Many entities budget for costs that they expect to incur irregularly during the year, such
as advertising campaigns, employee training and charitable contributions. Even though
these costs are planned and expected to recur annually, they tend to be discretionary
in nature. Therefore, it is generally not appropriate to recognise an obligation at the end
of an interim financial reporting period for such costs that are not yet incurred, as they
do not meet the definition of a liability. [IAS 34.B11].
As discussed at 8.2.2 above, IAS 34 prohibits the recognition or deferral of costs
incurred unevenly throughout the year at the interim date if recognition or deferral
would be inappropriate at year-end. [IAS 34.39]. Accordingly, such costs should be
recognised as they are incurred and an entity should not recognise provisions or
accruals in the interim report to adjust these costs to their budgeted amount.
Extract 37.33: Coca-Cola HBC AG (interim ended June 2018)
Selected explanatory notes to the condensed consolidated interim financial statements (unaudited) [extract]
1. Basis of preparation and accounting policies [extract]
Basis of preparation [extract]
Operating results for the first half of 2018 are not indicative of the results that may be expected for the year ending
31 December 2018 because of business seasonality. Business seasonality results from higher unit sales of the Group’s
products in the warmer months of the year. The Group’s methods of accounting for fixed costs such as depreciation
and interest expense are not significantly affected by business seasonality.
9.7.3
Major planned periodic maintenance or overhaul
The cost of periodic maintenance, a planned major overhaul, or other seasonal
expenditures expected to occur after the interim reporting date should not be
recognised for interim reporting purposes unless an event before the end of the interim
period causes the entity to have a legal or constructive obligation. The mere intention
or necessity to incur expenditures in the future is not sufficient to recognise an
obligation as at the interim reporting date. [IAS 34.B2]. Similarly, an entity may not defer
3118 Chapter 37
and amortise such costs if they are incurred early in the year, but do not satisfy the
criteria for recognition as an asset as at the interim reporting date.
9.7.4 Contingent
lease
payments
Contingent lease payments can create legal or constructive obligations that are recognised
as liabilities. If a lease includes contingent payments based on achieving a certain level of
annual sales (or annual use of the asset), an obligation can arise in an interim period before
the required level of annual sales (or usage) is achieved. If the entity expects to achieve
the required level of annual sales (or usage), it should recognise a liability as it has no
realistic alternative but to make the future lease payment. [IAS 34.B7].
Where entities apply IFRS 16 the terminology used in illustrative example B7 of IAS 34
is changed from ‘contingent’ to ‘variable’ lease payments.7
9.7.5
Levies charged by public authorities
When governments or other public authorities impose levies on entities in relation to
their activities, as opposed to income taxes, it is not always clear when the liability to
pay a levy arises and a provision should be recognised. In May 2013, the Interpretations
Committee issued Interpretation 21 – Levies. The scope of the Interpretation is limited
to provisions within the scope of IAS 37 and specifically need not be applied to
emissions trading schemes. [IFRIC 21.2, 6].
The Interpretation requires that for an activity within its scope, an entity should
recognise a liability for a levy only when the activity that triggers payment, as identified
by the relevant legislation, occurs. [IFRIC 21.8]. The Interpretation states that neither a
constructive nor a present obligation arises as a result of being economically compelled
to continue operating; or from any implication of continuing operations in the future
arising from the use of the going concern assumption in the preparation of financial
statements (see Chapter 27 at 6.8). [IFRIC 21.9-10].
The Interpretation states that the same recognition principles should be applied in the
interim financial statements. Therefore, a liability for any levy expense should not be
anticipated if there is no present obligation to pay the levy at the end of the interim
reporting period. Similarly, a liability should not be deferred if a present obligation to
pay the levy exists at the end of the interim period. [IFRIC 21.31].
This is relatively simple when a levy is triggered on a specific day or when a specific
event occurs. When a levy is triggered progressively, for example as the entity generates
revenues, the levy is accrued over time. At any time in the year, the entity would have
a present obligation to pay an amount of levy that would be based on revenues
generated to that date and recognises a liability and an expense on that basis. [IFRIC 21.11].
The following examples illustrate the above principles in a number of scenarios and
demonstrate how the appropriate accounting treatment has to reflect the specific facts
and circumstances that apply in determining an entity’s obligation to pay the levy in line
with the relevant legislation.
When the legislation provides that a levy is triggered by an entity operating in a market only
at the end of the annual reporting period, no liability is recognised until the last day of the
annual reporting period. No amount is recognised before that date in anticipation of the
Interim financial reporting 3119
entity still operating in the market. This means that in the interim financial reports for that
year, no liability for the levy expense is recognised. Only if the entity reports for the last
quarter of that year would the expenditure appear in an interim report. [IFRIC 21.IE 1 Example 2].
If a levy is triggered in full as soon as the entity commences generating revenues, the
liability is recognised in full on the first day that the entity commences generating
revenue. In this case, the entity does not defer any expense and amortise this amount
over the year or otherwise allocate it to subsequent interim periods. The example
below illustrates this situation. [IFRIC 21.IE 1 Example 2].
Example 37.19: A levy is triggered in full as soon as the entity generates revenue
An entity has a calendar year end. In accordance with legislation, a levy is triggered in full as soon as the entity
generates revenue in 2019. The amount of the levy is determined by reference to revenue generated by the entity
in 2018. The entity generated revenue in 2018 and starts to generate revenue in 2019 on 3 January 2019.
In this example, the liability is recognised in full on 3 January 2019 because the obligating event, as identified
by the legislation, is the first generation of revenue in 2019. The generation of revenue in 2018 is necessary,
but not sufficient,
to create a present obligation to pay a levy. Before 3 January 2019, the entity has no
obligation. In other words, the activity that triggers the payment of the levy as identified by the legislation is
the first generation of revenue at a point in time in 2019.
The generation of revenues in 2018 is not the activity that triggers the payment of the levy. The amount of
revenue generated in 2018 only affects the measurement of the liability.
In the interim financial report, because the liability is recognised in full on 3 January 2019, the expense is
recognised in full in the first interim period of 2019. The expense should not be deferred until subsequent
interim periods and shall not be anticipated in previous interim periods.
Another situation is when a levy is triggered in full as soon as the entity generates
revenue from an activity above a certain annual threshold is illustrated in the following
example. [IFRIC 21.IE 1 Example 4].
Example 37.20: A levy is triggered in full as soon as the entity generates revenue
from a certain activity above an annual threshold, which is
reduced pro rata when the entity ceases participation in that
activity during the year
A bank has a calendar year end. In accordance with legislation, a bank levy is triggered only if the bank
generated revenue above the annual threshold of CU10 million in 2019. The amount of the levy payable is
calculated based on 0.1% of the annual threshold of CU10 million and is assessed as at 31 December every
year. i.e. Annual revenue below CU10 million attracts no levy and revenue of at least CU10 million attracts
a levy of CU10,000 (0.1% × CU10 million). However, if the bank ceases operations during the year, the
annual threshold of CU10 million will then be reduced pro rata, based on the number of days the bank was
in operation during the year and the levy payable will then be based on 0.1% of the pro-rated annual threshold.
The owners of the bank ceased operation with effect from 1 July 2019. As at 31 March 2019 and
30 June 2019, the revenue generated amounted to CU4 million and CU8 million, respectively.
In this example, the liability is recognised in the interim financial report as follows:
31 March 2019:
Nil
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 617