Interim Financial Reporting: Advantages and Disadvantages

Raghvendra Sonker

07 Jul, 2022

Interim Financial Reporting is a detailed financial report prepared by a company for measuring and evaluating the firm’s progress on a less than annual basis, such as monthly, quarterly, and half-yearly financial reports. It provides an overview to businesses, shareholders, investors, and other users to understand the firm’s capacity to generate profits, determine cash flows, and the company’s liquidity position and financial standings.

Interim Financial Reporting helps make investment decisions based on the disclosed financial information of the company. These decisions are made throughout the year rather than at the end of the financial year. 

Objective of Interim Financial Reporting

Annual Earning                                                          

A company’s annual earnings projection can be based on quarterly, half-yearly financial reports. The proposed share price can be based on the estimated annual earnings.  

Future Projections

The projection made under the interim reports over the year can help make more realistic and achievable goals in Annual Financial Reporting.

Internal Management Performance

The periodic internal control report can ensure the optimum performance of the management and keeps a check on daily business operations.

Supplement Annual Report

The financial information reported under the interim financial reports throughout the year can improve the quality of annual financial reports.  

Components of Interim Financial Statements

Indian Accounting Standard^[1] (IAS 1) defines a complete set of financial statements that include the following components:

Statement of Financial Position

 A balance sheet, cash flow and profit/loss statements are critical to financial reporting. An accurate balance sheet summarises the company’s assets, liabilities, details of shareholders, etc. This can also develop appropriate strategies after assessing the company’s strengths and weaknesses.

Statement of Profit/Loss

A profit & Loss statement is also referred to as an Income statement. The information provided can help demonstrate the firm’s return on investment, risk absorption, and operational capabilities of a company. It helps understand the company’s profitability around the year and presents them in a condensed form.

Cash flows Determinations

The statement of cash flows is a piece of financial information to understand a company’s solvency position. The information related to the constant movement of cash from revenue the expenses can be made available under the head of cash flow statements. The statement tells the status of funds in account and can convert the short-term investments into cash if the need arises. 

Accounting Policy and Standard

In respect of maintaining transparency and full disclosure, a number of standards are followed for preparing either Interim Financial Statements or Annual Financial Statement.

Advantages of Interim Financial Reporting:

• It represents the financial standing of a company that includes multiple financial statements.
• It discloses the necessary financial information to the company’s stakeholders in due time for making investment decisions.
• It helps determine the company’s current performance; investors can make further evaluations based on that performance.
• Systematic and periodic review of the books of accounts
• Interim Financial Reporting enhances a company’s market position before the current and potential investors.
• To detect fraud and errors in the financial statements at the initial stage and prevent further errors in subsequent financial statements.
• To give oversight of the business activities and functions to the shareholders.
• It strengthens internal control in the operations and management.
• To maintain the best accounting measures throughout the year.
• Interim dividends can be declared and released to the shareholders through periodic/ interim financial statements. It builds trust among the shareholders and investors.
• Big businesses can stay on track with their long-term strategy for future growth.
• Maintenance of KYC and AML Compliance.

Disadvantages of Interim Financial Reporting

• The results and projections made on the monthly and quarterly financial data in interim financial reports can become less accurate and precise due non-availability of complete financial information.  
• The issues about determining inventory quantity, valuation of inventories, and changes made in inventory may become less accurate due to changing demand and supply ratios as per market conditions around the year.
• The tendency of mismatch in figures of sales, revenue, and expenses incurred in the interim financial reporting can be seen often, as business operation of any can’t be uniform during the whole year and due to uncertain events.
• The financial disclosures made under the Annual Accounting Statement are detailed and elaborated thoroughly; this is not same in case of interim financial reporting.
• Interim Financial Statements may neglect the estimates for Non-Performing Assets write-offs, accrued expenses, yearly management bonuses or income taxes.
• Unlike Annual Financial Reporting, Interim Financial Reporting is usually unaudited and presented in condensed form.
• The functions and quality of the Financial Reporting can’t be compared with annual disclosures.

Conclusion

The primary objective of Interim Financial Reporting is to provide a periodic financial assessment of a company’s performance. An Interim Financial Statements provide an overview of the business’s financial health before the end of the annual reporting time.

Read our Article: What is Financial Reporting Services?