Interim Report

An interim report is a set of a company’s financial statements for a period shorter than a financial year. An interim report can be prepared monthly, or quarterly, or ad hoc, when it is required to evaluate a company’s financial performance and position at any given time.

Depending on the situation, the report can be either full or condensed.

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Who and why needs interim reports

According to the UK standard for interim financial reporting,

“Timely and reliable interim financial reporting can improve the ability of investors, creditors or others to understand an entity’s capacity to generate earnings and cash flows and its financial position and liquidity”.

Put simply, interim financial reporting helps you understand how your company is doing and address issues before they become too grave.

Generally, there are two types of situations where a company prepares an interim report:

It is required by the law of the country where the company is registered.
A company’s management team, an investor, or a lender, wants to get a picture of the company’s financial results earlier than at the end of the financial year.

Obligatory interim reports

To figure out whether a company is legally required to prepare interim reports, check the current laws and regulations of the country where the company is registered. The requirements will generally depend on the size and type of a company, applicable accounting regime, and whether a company is traded on stock exchanges.

Interim reporting initiated by the company itself

Even without legal obligations, it is a good practice to prepare interim reports in certain situations. For example, if a company is seeking new investors or lenders, it can be useful to prepare an interim report to date, to demonstrate the financial position of the company.

A lender or investor is especially likely to be interested in the interim reports in case of some complicating factors, such as:

a company previously reported a major impairment loss,
a company has recently expanded its business into new markets,
a company has implemented some measures to prevent bankruptcy,
there is a general downturn in the industry or economy.

What companies must prepare interim reports in the UK

In the UK, the Disclosure Guidance and Transparency Rules (DTRs) require listed entities to prepare a half-yearly financial report that must include a condensed set of financial statements, such as the interim financial report.

Deadline: as soon as possible, but no later than three months after the reported period ends. For example, if your financial year ends on 31 December, you need to submit a report covering January—June no later than by the end of September.

In addition, the rules for AIM companies (a sub-market of the London Stock Exchange mostly consisting of smaller companies) issued by the London Stock Exchange require them to prepare a half-yearly financial report.

Deadline: The reports also must be notified no later than three months after the end of the relevant period.

What is included in an interim report

If interim reporting is required by regulation, the list and the content of the financial reports are usually defined by the corresponding document.

For example, according to the UK AIM Rules for Companies,

The half-yearly report must include at least:

a balance sheet;
an income statement;
a cash flow statement.

The report must contain comparative figures for the corresponding six months in the preceding financial year, yet the balance sheet may contain comparative figures from the last balance sheet notified.

If a company is preparing an interim report on its own initiative, the content of the interim reports depends on its goals. For instance, if the report is prepared for potential investors, it should mainly give them a good picture of the company’s potential to generate cash flows. In this case, a company can decide to omit a balance sheet but focus on the income and cash flow statements.

Accounting standards provide great help when preparing interim reports. The standards provide guidance on how to prepare the interim report but specific markets need specific rules, like the AIM ones. In the UK, companies can use either international (IFRS), or national accounting standards adopted by the Financial Reporting Council (FRC). Both standard frameworks set the rules for the annual reporting, as well as have a separate standard for the interim reports. For some markets, standards are complemented with some additional rules (like AIM).

A company may choose to prepare interim reports as full financial statements. In this case, the content of the reports is the same as in the annual reports. If a company uses IFRS in its accounting, the content and rules for the full reporting are established by the IAS 1 ‘Presentation of financial statements’. Companies using the UK national standards should apply the FRS 102 ‘The Financial Reporting Standard’.

Alternatively, a company can decide to compile condensed financial statements. An international standard IAS 34 ‘Interim financial reporting’ sets the recognition, measurement and disclosure requirements for interim reports. In the UK national standards, these requirements are set in the FRS 104 ‘Interim Financial Reporting’. Both international and national standards permit companies to provide less information at interim dates than in their annual financial statements.

In practice, most companies use condensed interim reports. For companies that use international standards, condensed financial statements must include as a minimum:

a condensed statement of financial position (balance sheet);
a condensed statement of comprehensive income or, if presented separately, an income statement and other comprehensive income statements;
a condensed statement of cash flows;
a condensed statement of changes in equity;
selected explanatory notes.

To determine what information should be included in the interim financial statements, a company should use the following criteria:

materiality to the overall interim financial statements;
unusual or non-recurring items;
changes since previous reporting periods that have a significant effect on the interim financial statements (of the current or previous reporting financial year); and
relevant information for understanding the estimates used in the interim financial statements.

To sum up, the content of the interim report should provide an explanation of events and transactions which had a significant impact on the company’s financial position and performance since the last report.

Note that companies should use the same accounting policies in interim reporting as in the annual statements. This includes similar approaches to recognising and measuring assets, liabilities, revenues, expenses, gains, and losses.

Interim Reporting for Small Businesses

Small businesses prepare interim reports when potential investors or lenders ask them to. In addition, the company’s management can use interim reports to evaluate the current business situation and adjust their strategy.

If a company prepares interim reports regularly, it is more likely to uncover imminent financial problems. For example, a company can better estimate the consequences of the loss of a major client, or significant uncollectible accounts receivable (think of a situation when a counterparty goes bankrupt).

Early detection of potential problems is crucial for smaller businesses. While large companies have more resources to recover from a bad quarter or year, a smaller business has a higher risk of not surviving till the end of the year.

Analysing interim reports, a business owner will quicker identify activities that are eating up a lot of money but not producing profits. Or, on the positive side, a company will quicker find new profitable opportunities. Ultimately, interim reporting can help a business to avoid getting into cash problems, which is one of the major reasons for startup failures.

At the same time, compiling interim reports takes time and resources. Each small company should balance the cost and benefits wisely and make its own decision.

Summing up

Interim reports are a useful tool both for large and small businesses to determine their financial situation at a given point in time. They are useful in strategic planning as they help to make informed decisions.

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