Interim Report Meaning
An Interim Report are financial statements reported by a firm for a period less than one year (semiannually, quarterly or even monthly basis) and normally reviewed by a company’s internal auditorsInternal AuditorsInternal audit refers to the inspection conducted to assess and enhance the company's risk management efficacy, evaluate the different internal controls, and ensure that the company adheres to all the regulations. It helps the management and board of directors to identify and rectify the loopholes before the external audit. rather than going for a complete statutory auditStatutory AuditOne of the most common types of audits is the statutory or financial audit. Its main purpose is to gather all relevant information so that the auditor may provide an accurate and unbiased assessment of the company's financial position. which would be impractical and time-consuming considering the frequency with which these reports are published.
Although regulators prescribe an annual reporting of data, it helps in establishing better and transparent communication with the investors by providing updated information between annual reporting periods.
As per ICAI – “Timely and reliable interim financial reporting improves the ability of investors, creditors and others to understand an enterprise’s capacity, to generate earnings and cash flows, its financial condition and liquidity.”
Interim Reporting Example
Interim financial reports are declared at various periods providing evidence about the firm’s performance at different intervals during the accounting period.
- Public listed companies come up with quarterly financial numbers,
- Real estate firms come up with their numbers on a Project basis as and when these projects are completed.
They implicitly provide essential analytical information.
Consider the following financials of a Major IT company.
|Financial Performance||Fiscal Year 2018||Fiscal Year 2017||Growth||Quarter ending Dec 31 2018||Quarter ending Dec 31 2017||Growth|
|Profit after Tax||16029||14353||12%||5281||5154||2.5%|
Even though the operating profit has risen on a year on year basis, there is a drop in quarterly numbers. It suggests that Q4 was not good for the firm, even though there was a good 12% increase in the profit on an annual basis.
The information implicitly signifies the seasonality of the IT business in the Oct-Dec quarter. This info should guide the management in planning for their long-term strategic initiatives.
Objectives of Interim Reporting
The investment decisions are taken around the year. Investors don’t wait for the annual reports that are declared at the end of the fiscal year. With companies relying not only on organic but also on inorganic growth, annual data is insufficient in evaluating developments and earnings projection of the industry and the firm. In such a dynamic business environment, interim reports offer a better periodic snapshot to the shareholdersThe ShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.. Providing current information will always keep a firm in the good books of the investors, making the allocation of capital investmentCapital InvestmentCapital Investment refers to any investments made into the business with the objective of enhancing the operations. It could be long term acquisition by the business such as real estates, machinery, industries, etc. easy leading to better market liquidity, which is the primary goal of capital markets.
Following are the major objectives :
- Estimation of annual earnings based on interim financials
- Make cash flow projections.
- Identify turning points in the firm’s financial status.
- Evaluate management performance
- To formulate internal control proceduresInternal Control ProceduresInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company..
- To supplement the annual report
- It helps in establishing a better connection with the investors.
- It is beneficial for big conglomeratesBig ConglomeratesA conglomerate is a company or corporation made up of different businesses that operate in various industries or sectors, often unrelated. It holds a stake in multiple smaller companies that choose to manage their business separately to avoid the risk of being in a single market, thus, taking advantage of diversification. that are running multiple lines of business, helping them in tracking if their short-term initiatives are in line with the long-term strategy.
- Material misstatement (Error and frauds) in a financial statement can be detected and prevented at an early stage compared to an annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements..
- It helps in the implementation of a comprehensive internal control procedure, which further makes accounting policiesAccounting PoliciesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level. robust.
- Declaration of interim dividend is possible when financial statements are reported for small periods incentivizing the shareholders to hold on to their investments.
- Although interim announcements reduce the reporting period, it increases the impact of errors in estimations leading to concern in reporting accurate information.
- Various operating expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit. are incurred in one period, and the benefits are earned in the subsequent periods like advertising, repairs, and other maintenance costs. Such expenses can distort the financial status of the firm for an interim period, although in the longer term might be quite helpful.
- The impact of seasonality and economic cycles is felt more in interim statements and almost nullify in the Annual report. They are also more prone to management manipulation by presenting strong quarterly growth in the early and ending quarters. This difference affects the consistency and comparability of such reports.
- Inventory is the main element of revenue generation in any business. Periodic calculations of inventory in an interim period are repetitive, time-consuming, and error-prone. Determination of the quantity of inventory and its valuation leads to unnecessary adjustments in the interim financial statementsInterim Financial StatementsInterim financial statements are financial reports that provide detailed information on how a company performed in terms of growth, profit, and expansion. Interim statements are issued quarterly and are consolidated into yearly reports. They primarily concern publicly traded companies and are closely followed by investors..
- The absence of a regulatory framework for disclosure practices leads to confusion as to what extent these should be provided. The disclosure can differ from two companies within the same sector, which can be misleading to the shareholder.
- Interim Report creates an overemphasis on short-term results, sometimes presenting a distorted picture which can be detrimental for both investors and companies.
To avoid redundancy and reduce complexity considering the nature of interim reports, a firm may report limited information. However, it should contain at least the following components:
- Condensed Balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.
- The condensed Cash flow statementCash Flow StatementStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities.
- Condensed P &L statement
- Explanatory notes relevant to the Data reported
There are also some guidelines for explanatory notes. It should include:
- A disclosure that the same accounting policies are followed in the interim report as is being followed in annual reporting.
- Notes on the items affecting sections of financial statements like assets, liabilities, equity, Income;
- Any new issuance of stocks, buybacks, repayments, or restructuring of debt;
- Dividends for equity sharesDividends For Equity SharesDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company..
- Impact of new acquisitions or long-term investments that are incurred during the interim period.
- Any investor or regulatory complaints during the interim period;
Interim reporting is not much different from Annual reporting in terms of content but only differs in the timing of the publication. It is a subset of annual reporting that provides all significant financial data like RevenuesRevenuesRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions., Income, expenditure, losses, etc. for a particular period. A firm doesn’t need to publish it, but doing so can be very beneficial for the firm, investors, and stakeholders, leading to a better and mature economic ecosystem.
Interim Report Video
This article has been a guide to Interim Report. Here we discuss this topic in detail, including its meaning, example of interim financial reporting, objectives, advantages, challenges, and limitations. You can also take a look at some of the useful articles:-