In this article we will discuss about the guidelines and suggestions for improving interim reports.
Guidelines for Improving Interim Reports:
The primary purposes of interim reports are to help the users in prediction of results for the current year. Although interim reporting involves important accounting problems, its need and significance is now being felt by the investors and other users for making sound economic decisions.
Edward, Dominiak, and Hedges have proposed following criteria and guidelines for interim reporting:
1. Reports on interim period activities should be designed to materially assist important individual users or user groups to achieve major objectives related to investment and credit decisions.
2. Interim reports for general distribution should be directed towards meeting the needs of both current and prospective shareholders and important representatives of these groups.
3. Interim reports should be designed so as to reduce the amplitude of those exchange price fluctuations that result from misinformation. Misinformation is used here to include failure to communicate and partial communication.
4. Substantial disaggregation of data should be reflected in reports for interim periods. Disaggregation should emphasise disclosure of information about the nature of the events which underlie the reported data.
5. Interim reports should incorporate data developed with an emphasis on forecast-ability. Unusual events, the effect of which is material in size, should be separately disclosed in interim reports. Materiality should be based on the results of interim period activities. The accounting for and reporting of similar events in interim statements should be consistent for a given entity over time. Interim reports, should, in substance, articulate with annual reports.
6. Timeliness should be emphasised in the reporting of information about interim period activities. Financial reports should be promptly distributed by publicly owned business firms to external users at least four times during each fiscal year, and usually following the end of each of three months period.
Suggestions for Improving Interim Reports:
Backer has given the following suggestions to enhance the usefulness of interim financial reports:
1. Adopting fiscal period to operating cycle:
Accounting problems resulting from arbitrary cut-offs can be minimised by selecting a close date which coincides with a time of low activity in a company’s natural operating cycle. Businesses which experience more than one distinct seasonal cycle within a year could improve the significance of quarterly statements by reporting for seasonal cycles rather than for calendar years.
Reports for periods containing a uniform number of working days rather than for calendar months, and prorating costs on the basis of working days instead of months help to remove some erratic fluctuations in monthly and quarterly operating results.
2. Smoothing income to minimise fluctuations:
Accounting techniques for smoothing interim income include accrual of anticipated expenses which relate to the whole year rather than reporting them when they arise. For example, provision for bad debts may be accrued monthly rather than only at the end of the year.
3. Allocating annual costs to interim periods on basis of sales:
Reported profit tends to vary with sales when annual costs are allocated to interim periods on the basis of the period’s portion of total annuals sales.
To have interim period costs and profits vary with sales is advantageous to investors who are seeking to forecast annual profits because forecasts of sales can then more easily be translated into forecasts of profits. However, maximum benefits will result only where annual costs of both manufacturing and non-manufacturing functions are allocated to periods on the basis of sales.
4. To aid interpretations:
Disclosure to aid interpretations where material amounts of unusual items have been accrued or differed in accounting for interim income, disclosure of the procedures followed may help the users to interpret the results. Since investment decisions are based on future expectations rather than past performance, a view of management’s expectations by interim periods would seem to be helpful.
Interim financial reporting, undoubted, is useful to managements and shareholders (existing and potential) since economic decisions are made by the investors throughout the year and not necessarily at the end of an accounting period.
The preparation of interim reports, say quarterly or half yearly, requires the solution of some accounting problems, e.g., matching problem, inventory valuation problem, besides probably the most important issue as to extent of disclosure in interim reports.
It is now argued that interim statement should be a complete financial statement—complete profit and loss account and balance sheet. Inadequate disclosure of interim information will not achieve the objectives underlying financial reporting.
The costs involved in gathering, preparing, developing and distributing the interim information is also an important factor and may act as a restraint in the objective of providing fuller interim information.
It has to be satisfied that benefits likely to be derived from interim reports are more than the costs involved therein. If costs of disclosure are within manageable limits, business enterprise should prefer to give interim data to the shareholders, investors and other interested users.