Understanding scope of Interim Financial Statements
April 04, 2022
Interim financial statements include records of transactions of a period that is less than one full year. Let’s understand the need and importance of interim finance services in the process.
What is an Interim statement?
An interim financial statement or an interim financial report, is a detailed report of accounting, which covers all the business activities within less than one financial year. Usually, companies generate interim reports/ statements on the basis of monthly, quarterly, semi-annually, or at any other time duration within one year.
With the help of these interim financial statements, businesses get an overview about the financial standings up to the current period before a particular financial year ends. For a small business owner, the interim reports help in determining the current cash flows and in evaluating the overall financial performance till the current period of the financial year.
Do not confuse interim statements with the annual financial statements that are prepared at the end of the year, such as an income statement, balance sheet, or cash flow statement.
Elements of Interim Statements
According to the International Accounting Standard 34(IAS 34), an Interim financial statement consists of either a complete set of financial statements as mentioned in the IAS Presentation of Financial Statements, or it should have a set of consolidated financial statements for a defined interim period. An independent auditor is free to express a negative assurance opinion on the review of interim financial information. Also, he/she can offer interim financial solutions based on the indications reflected by the interim financial statements.
Interim statement Vs Annual statement
Though the Interim financial statements consist of the same documents as the annual financial statements do, this includes the income statement, balance sheet, and statement of cash flows, yet a few differences are evident in both types of statements.
The following are the major areas of differences between interim and annual statements:
- Difference with disclosure statement - Some of the disclosures are not at all required in the interim financial statements, or these disclosures need not be detailed, rather they can be presented in a consolidated format.
- Difference on the Basis of Accounting - The basis of the accrued expenses calculation varies within the interim reporting periods. For instance, an expense can be recorded within one reporting period, or else it can be spread across multiple periods. On the comparative basis, the results and financial positions contained within interim periods may appear different and inconsistent at the time of review.
- Differences based on Seasonality - The business revenue generated by the company may get highly affected due to seasonality. Therefore, in that case, interim statements can highlight the durations of major loss and profit, which are not likely to be apparent in the annual financial statements.
- Differences based on auditing - Most of the time, Interim financial statements are not audited. Due to the cost and time factor, the audit of financial statements is conducted only at the end of the year. In case it's a publicly -held company, the financial statements are reviewed quarterly.
Need for Interim accounting
With the help of annual data, to evaluate the latest developments becomes insufficient especially in the increased scope and complexity of business. Therefore, to make or revise projections of profits and calculation of financial position to determine the investment decisions, interim reporting is required. As the economic decisions of a company are dependent on the information disclosed through financial reports of the entire year. Apart from the company, even stakeholders such as investors, creditors, government, etc. make decisions as per the interim financial reports.
Here are a few added advantages of Interim Accounting Report:
- It represents the financial position of a company that consists of its complete set of financial statements.
- Its purpose is to provide stakeholders of the company with necessary accounting information in due time to assess operational funding, investment decisions.
- It helps in determining a companies’ latest performance that can be further evaluated by investors.
- It gives a better periodic overview to the shareholders about the company.
- It helps in remaining in the good books of investors by giving detailed periodic information and builds a rapport with the investors as they get clarity on the allocation of investment.
- With the interim report, to find out an error and fraud in the financial statements becomes easy to detect and also helps in preventing any error at an early stage.
- With the help of interim reporting, an internal control in the operations can be implemented, which also supports building robust accounting policies.
- Through the interim report, the interim dividend can be declared and given to the shareholders with the help of periodic financial statements. Additionally, the shareholders and company get to have a hold on their investment.
- It also helps big conglomerates by tracking their short-term tasks which are in sync with a long-term strategy.
In comparison to the annual statement, there might be some foundational differences between the two. But the use, relevance and impact of an interim financial statement is no less. It is equally important in the decision making of the company and its shareholders. Many interim financial reporting services ensure that the above aspects are well taken care of. Also, to have an eye on the bigger picture, you must have a sharp instinct for the small tasks, that is what interim statements fulfil for a company and the ones who are related to it directly or indirectly.