An interim reporting is when the business produces a financial overview before completing the financial reporting cycle. These reporting periods are dependent on the discretion of the management, and these periods can be monthly, quarterly, and semi-annually depending on the discretion of management.
This type of reporting leads to improved communication between businesses and the public. Further, it helps to provide investors with updated financial and operational information, helping them in decision-making and other business aspects.
Companies normally use interim reports. Further, it can be a mandatory requirement of the Security Exchange Commission as well. For instance, it’s mandatory for public companies to issue interim reports.
In addition to this, the International Accounting Standard Board – IASB also provides guidelines regarding preparing the interim financial statement. It suggests that the business should prepare financial statements by following the same guidelines and principles as included in the annual financial statement.
Features of interim financial reporting
Following are some of the features of the interim financial statement.
Reduced requirement for the disclosures
The accounting standard assumes that an interim financial statement is used along with an annual financial statement. It means that interim financial statements should focus on updates of the figures and balances as user can read annual reports to understand the nature of the balances. Hence, there is no need to repeat information in the interim financial statement.
However, any material events and changes in the current accounting period need to be communicated. Some of the material events include the following (The list is provided by accounting standard).
- Settlement for the litigation.
- Any changes in contingent assets and liabilities of the business.
- Change of category for financial statement – the changes may be due to a change of purpose or use of the financial asset.
- Provision reversal for the reconstruction.
- Write-down of inventory in the accounting record. Further, any reversal of the inventory provision.
- Recognition of impairment loss in the accounting record. Further, any reversal of the same.
- Disposal and acquisition of the property, plant, and equipment.
- Correction of errors about the previous accounting year.
- Significant changes in the business and economic environment leading to changes in the business’s financial assets and financial liabilities.
- Any breach of the covenant by the business.
- Details of transactions with the related party.
Materiality
Recognition, measurement, classification/disclosure of the interim financial statement is dependent on the materiality. In other words, materiality is used to determine if certain financial information should be presented in the interim financial statement.
Presentation of line items in the interim financial statement
The headings and subtotals presented in the annual financial statement must be updated for the interim financial statement. Further, an entity may decide to include some additional balance in the interim report if its omissions lead to misleading financial information.
Components of interim financial statement
Typically, the components of interim financial reporting include the following,
- Statement of financial position
- Statement of comprehensive income
- Statement of cash flow
- Notes to the financial statement
It’s important to note that the components of the interim financial reports are the same as a normal financial statement—however, all the figures and facts about shorter reporting periods than a normal period of accounting.
Importance of interim reporting
Following are some of the important aspects of interim reporting.
- Any recent changes in the business are timely reported to the shareholders and other business stakeholders. So, it helps them in timely decision-making.
- Helps in meeting compliance requirements. For instance, filing of Form 8-K requires reporting of material events that were not scheduled. So, the preparation of interim financial reports helps in compliance as such information can be obtained from interim financial statement and reported to the regulator.
- During interim reporting, any material transaction/events, including bankruptcy, acquisition, Director’s resignation, and any other events, can be identified and disclosed in a timely reporting.
- An interim financial statement does not require an audit, and hence, it does not take much time to complete the task.
- An investor/creditor can request interim financial reports to understand the business’s current financial performance and financial status. For instance, this stakeholder can request interim financial statements in different cases, including applying for a new loan, an overall downturn in the economy, bankruptcy, any previously reported impairment losses, etc.
- Timely provision can be provided for the uncollectible receivables and obsolete inventory etc. So, it helps to ensure intelligent reporting regarding financial and operational perspectives.
- Critical problems of the business can be timely identified and corrective actions taken. Hence, it helps to monitor the performance of the business.
Problems with the interim financial reporting
Following are some of the issues associated with interim financial reporting.
- There are higher chances of inaccuracies and estimates in the interim financial reports. It’s because an audit is not performed for the figures and facts presented in the interim financial report. Further, narrative comments are short, and detailed breakups are not presented. Hence, limited understanding can be obtained with the use of interim financial information.
- There are higher estimates in the interim financial reporting due to the leg time relationship between sales and expenses. Further, it’s difficult to formulate accruals for general, administrative, selling, and doubtful allowance (due to the short period). In addition to this, there is no audit. So, the management can provide the limited or excess provision. Hence, leading to artificially inflated/understatement of the profit.
- Business managers find it difficult to decide the extent of the disclosure. For instance, there is often confusion if some specific movement of the figures should be disclosed in the financial statement.
- Often businesses face seasonal variations month to month. Hence, interim reports may not reflect the business performance and impair the user’s decision-making.
Special purpose financial statement
These types of financial statements are specially prepared for a limited group of users. These statements are usually prepared to report financial performance/financial status to the banks, taxation authorities, and regulators that require reports to prepare a financial statement.
Conclusion
The period of the interim report is shorter than the normal period of accounting. It’s additional information provided with the annual report to update the business’s financial and operational aspects to the stakeholders. The period to be covered in the interim reports is dependent on the discretion of management. Hence, these reports can be monthly, quarterly, and half-yearly as well.
The purpose of such reporting is to provide updated financial information to the investors. So, they can decide based on updated financial information.
The features of the interim financial report include reduced disclosures, discussion about the material events & transactions, and presentation of the same line items as given in the annual report. However, additional things can be added if their omission leads to misleading for a financial statement user.
The components of the interim reports typically include a balance sheet, income statement, cash flow statement, and the notes to the financial statement. Further, there are multiple advantages of preparing the interim report. These include increased communication between public and business, financial information in meeting compliance requirements, and timely updates of the accounting system, etc.
However, there are certain problems with the interim financial reporting; these include reliance on the management’s un-audited estimates, accruals, and provisions. The inclusion of such figures in the financial statement can lead to over/understatement of the profitability and other figures in the financial statement.
Frequently asked questions
Why is an interim report important for the business stakeholders?
The interim financial report is a way to enhance cooperation and coordination between the company and the public. This leads to an increased understanding of the business-related processes and figures.
What is the main purpose of providing interim financial reports?
The main purpose of the interim financial reports is to provide stakeholders with updated business information. So, they can decide based on the latest information.
Provide details for the accounting standard of interim financial reporting.
International accounting standard – IAS 34 provides guidance related to the preparation of the interim financial statement. It specifies the minimum content required to be disclosed in the interim statement and principles of measurement and recognition of the accounting concepts.
What’s included in the interim financial statement?
Typically, the following are the components of an interim financial statement.
- Interim balance sheet
- Interim profit and loss statement
- Interim cash flow statement
- Notes to the financial statement
Why should one not place reliance on the interim financial report?
The facts and figures included in the interim financial statement are not audited. So, interim financial reports may be subject to adjustments and changes. Hence, there may be some reliance problems with the interim financial reports.
However, half-yearly reports are reviewed, and auditors perform procedures to ensure the figures and disclosures. However, still, it’s not audited.
Do regulators/accounting standards require interim financial statements?
Accounting standards provide guidance related to the preparation of the interim financial statement. However, the following matters are left to the local regulators.
- Types of entities required to publish interim financial reports.
- The frequency of reports to be published.
- Time of publishing after the period ends.
So, major parts of the interim financial reports are dependent on the regulators. Further, it has been observed that regulators place strict compliance requirements on the companies in the finance sector and banking.
