Interim Report Meaning
An Interim Report is a financial statement reported by a firm for a period less than one year. They are used to convey the financial performance of the company on a semiannually, quarterly or even monthly basis. Although regulators prescribe an annual reporting of data, it helps in establishing a better and transparent communication with the investors by providing an updated information between annual reporting periods. They are normally reviewed by a company’s internal auditors rather than going for a complete statutory audit which would be impractical and time-consuming considering the frequency with which these reports are published.
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 time periods providing evidence about the firm’s performance at different intervals during the accounting period. Let’s see an Interim Reporting example:
- Public listed companies come up with quarterly financial numbers,
- Real estate firms come up with their numbers on Project basis as and when these projects are completed.
An Interim financial Report implicitly provides important analytical information.
Consider the following financials of a Major IT company.
Even though the operating profit has risen on year on year basis, there has been a drop in the quarterly numbers. This 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 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 shareholders. Providing a current information will always keep a firm in the good books of the investors making the allocation of capital investment easy leading to a 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 procedures
- To supplement the annual report
Advantages of Interim Reporting
- Interim Reports helps in establishing a better connect with the investors.
- Interim Reports is very helpful for big conglomerates 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 report.
- It helps in the implementation of a comprehensive internal control procedure which further makes accounting policies robust.
- Declaration of interim dividend is possible when financial statements are reported for small periods incentivizing the shareholders to hold on to their investments.
Challenges/Limitations of Interim Reporting
- Although interim announcements reduce the reporting period, it increases the impact of errors in estimations leading to a concern in reporting of accurate information.
- There are various operating expenses that 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.
- Impact of seasonality and economic cycles is felt more in interim statements and are almost nullified in the Annual report. They are also more prone to management manipulation by presenting strong quarterly growth in the early and ending quarters. This affects the consistency and comparability of interim 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 statements compared to an annual report.
- The absence of a regulatory framework for disclosure practices in these leads to the 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 sheet
- The condensed Cash flow statement
- 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 shares.
- 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. In fact, it is a subset of annual reporting that provides all major financial data like Revenues, Income, expenditure, losses etc. for a particular period of time. It is not mandatory for a firm 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 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:-