It is critical to have a clear understanding of your business performance at any given point in time. This becomes particularly crucial when making thoughtful and strategic business decisions. Interim reporting supplements annual reporting in order to gain insight into your company’s performance throughout the year. It is important to understand what interim reporting is, who it affects, and the main benefits and shortcomings in order to determine its usefulness for you.
What is interim reporting?
Interim reports are financial reports which cover periods less than one full fiscal year. The International Accounting Standard (IAS) provides guidance on the content and principles of preparing the reports, but gives no specific time interval in which to publish them. Therefore, the frequency of these reports varies from semi-annually to quarterly to monthly. The reports are often distributed to stakeholders and investors as an update on a business’s performance. As such, mostly publicly traded companies are the ones most often utilizing this type of financial reporting. However, some private entities elect to produce interim reports to reach new investors.
What do interim financial reports include?
These reports take the form of either complete financial statements or a condensed summary of financial information. Different pieces of information are featured, including current data during a fiscal year regarding financial position, results of operations, comprehensive income, and/or cash flows. To avoid repetitiveness and redundancy, interim reports should preferably focus on new activities, events and circumstances that have occurred since the last publication of a complete financial statement. Condensed interim reports, per IAS 34 and effective for the year ending December 31, 2019, must include at a minimum:
- Statement of financial position
- Statement of profit and or loss and other comprehensive income
- Statement of cash flows
- Statement of changes in equity
- Selected explanatory notes
Additionally, interim report requirements vary significantly between jurisdictions. Entities that apply IAS 34 may also be subject to requirements put forth by law or a stock exchange. These local requirements typically involve deadlines and may require disclosure of designated information.
Please note there are a few significant differences between data presented in interim financial statements and annual financial statements.
Differences between annual and interim reporting
Unlike annual financial statements, interim reporting does not have to include the following bits of data:
Physical Inventory Counts
Physical inventory counts are often only performed once per year due to their time-consuming nature. Thus, companies calculate the inventory count presented in an interim report using alternative techniques, such as the retail inventory method.
Publicly traded companies, as well as some private entities, are required to incorporate disclosures in their annual financial reports. These footnotes and other explanatory comments clarify the stated financial data. Disclosures are designed to yield full transparency in annual reports. However, they are not required within interim reports.
An External Audit
Interim reports are unaudited. Comparatively, annual reports undergo an external audit to verify the accuracy of the provided financial information and examine the accounting practices in place. Therefore, information featured in interim reports may not be properly vetted and/or may contain errors in estimation or practice.
Certain Accruals and Other Year-End Entries
Particular entries, such as accrued payroll and depreciation, are typically determined at the end of a fiscal year. Businesses record these accruals in a variety of ways, thus driving significant variety.
What are the benefits of interim reports?
If an annual report is like a report card, interim reports are like progress reports. These reports, while admittedly less complete, can provide useful insight to investors, stockholders and business owners.
For instance, the reports are useful when a notable change in the business has occurred. An investor may request an interim statement if a company:
- Instituted a turnaround strategy to avoid bankruptcy
- Previously reported a major impairment loss
- Is part of an industry experiencing a downturn, or
- Is seeking new investors or applying for a loan.
The interpretation and reception of the reports may catalyze a variety of reactions. They provide peace of mind, especially following a period of uncertainty or major change. In other occurrences, they signal the approach of potential financial disaster. For example, the report may reveal loss of a major customer, depleted inventory or significant uncollectible accounts receivable.
Early detection of potential turmoil is vital for small business owners. Small businesses are not afforded the same luxuries as large companies who have the robustness and experience to overcome down periods or poor decisions. Thus, business owners and managers must proactively predict and plan for potential trouble. Waiting for end-of-the-year annual statements could be devastating.
Furthermore, interim financial reports provide users with more up-to-date information to consider when making important decisions or investments. Also, the reports may reveal significant information concerning trends affecting the business and/or seasonality effects, both of which annual reports could obscure.
What are the shortcomings?
Interim reporting provides frequent and timely updates of an entity’s performance at a given point in time. However, due to the condensed timeframes, limitations are inherent and the effects of errors in estimation and allocation are magnified.
When producing internal reports, companies often nix a time-consuming external audit and instead perform internal reviews. Therefore, experts recommend interim report consumers revisit the previous year’s complete annual financial statements to check for any notable changes. Also, readers should ensure the accounting practices are consistent between the interim and year-end reports.
More specifically, interim numbers may omit estimates for bad-debt write-offs, accrued expenses, prepaid items, management bonuses or income taxes. Furthermore, some bookkeeping tasks are not completed until the end of the year. Thus, companies often omit or estimate physical inventory counts, updated depreciation schedules and detailed footnote disclosures. Thus, the interim account balances often reflect the prior year’s amounts or estimations calculated based on historic gross margins.
Additionally, there are considerable operating peaks and drops throughout the year. For example, advertising expenses and major repairs or maintenance of equipment are seasonal in nature. These annual operating costs are often incurred in one single period, thus benefiting other interim reports for the year. The effects of seasonal fluctuation and temporary market conditions limit the reliability, comparability, and predictive value of interim reports.
Comparably, seasonal businesses endure considerable operating cycles. In turn, the revenue amounts fluctuate between interim reports. Thus, it is ineffective and inaccurate to multiple quarterly profits by four to reliably predict year-end performance. Instead, the reader may need to benchmark current year-to-date numbers against last year’s interim results. Both situations – seasonal businesses and seasonal operating costs – yield limited usefulness of interim reporting due to the amended time frames.
Furthermore, yearlong costs and expenses are incurred infrequently throughout the year. Therefore, these costs and expenses are allocated to products in process or other interim periods to avoid distortion of interim financial results. As a result, many costs and expenses are estimated in interim financial reports. For example, it is impractical to perform extensive reviews of individual inventory items, costs on individual long-term contracts and precise income tax calculations for each interim period. Additionally, subsequently correcting these numbers at a later time may distort the results of operations in following interim reports.
Interim financial reporting involves frequent production of key financial statements throughout the year. They are shared externally with stockholders and investors or internally for business owners. These reports, while unaudited and oftentimes relying on estimates, are a useful tool to both identify potential financial issues and make more informed business decisions. Admittedly, there are certain restrictions inherent to interim reporting as a result of their condensed timeframe. When using interim reports, they cannot always account for fluctuations in revenue, temporary market conditions, or other year-end bookkeeping activities.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.