CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingMedium
A company reports its financial results quarterly. For interim financial reporting, how should an anticipated year-end bonus to employees be recognized if the bonus amount can be reasonably estimated?
- AExpensed entirely in the fourth quarter when the bonus is typically paid.
- BAccrued ratably over the interim periods within the fiscal year.
- CDisclosed in the notes to the financial statements but not recognized until paid.
- DExpensed in the first quarter, as it relates to the entire year's performance.
Show answer & explanationAnswer & explanation
Correct answer: B. Accrued ratably over the interim periods within the fiscal year.
Interim financial reporting generally follows the principle that each interim period should be viewed as an integral part of an annual period. Therefore, expenses that benefit multiple interim periods, such as an anticipated year-end bonus that can be reasonably estimated, should be allocated to those periods. This means accruing the bonus ratably across the quarters.
Why the other options are wrong
- A. Expensing entirely in the fourth quarter would distort the income of earlier interim periods, violating the integral view.
- C. If the amount can be reasonably estimated, it should be recognized, not merely disclosed, to provide more relevant information.
- D. Expensing in the first quarter would distort the income of all subsequent quarters.
Interim Reporting - Integral View
The integral view of interim financial reporting considers each interim period as an integral part of the annual period, requiring allocation of expenses that benefit multiple periods.
- Aims to smooth income over the year.
- Revenues are recognized as earned.
- Expenses associated with revenue are matched.
- Expenses not associated with specific revenues are allocated if they benefit multiple periods.
Memory trick: Annual view, spread the due.