What are interim financial statements?

Interim financial statements are issued for a period shorter than a financial year. Businesses may issue a complete or a condensed set of financial statements. The interim financial statements address changes since the end of the last year, and the disclosure requirements may differ from the year-end report.

What's included in the interim financial statement?

Financial and accounting regulators determine the components of the interim financial statements.

The mission of the International Financial Reporting Standards (IFRS) is to create standards that bring transparency, accountability, and efficiency to financial markets. IFRS determines financial policies with the International Accounting Standards Board (IASB).

IFRS Accounting Standards (IAS) are required in over 140 jurisdictions, and IAS 34 regulates interim financial reporting. These policies impact accounting estimates, disclosure requirements, and the components of a business valuation.

U.S.-based companies must produce interim financial statements that follow Generally Accepted Accounting Principles (GAAP), and businesses that issue stock to the public must comply with Securities and Exchange Commission (SEC) accounting policies. 

The accounting industry is working to combine international and GAAP regulations to streamline financial reporting. Interim financial statements must include these components:

• Balance sheet (statement of financial position)
• Income statement (statement of profit and loss)
• Statement of cash flows
• Statement of changes in equity
• Explanatory notes to the financial statements

Each component is discussed below.

Income statement (statement of profit and loss)

The income statement is generated using this formula:

Revenue - expenses = net income (profit) 

The income statement is produced for a specific period (month, quarter, etc.), and the matching accounting principle matches revenue earned with expenses incurred to grow revenue. 

Companies that must comply with SEC requirements replace the income statement with the statement of comprehensive income. This statement reports both net income and other comprehensive income (OCI). OCI includes:

• Unrealized gains and losses on debt securities
• Unrealized gains and losses on available-for-sale securities
• Gains and losses on derivative instruments
• Gains and losses on pension and other retirement programs
• Gains and losses on foreign currency transactions

Stakeholders who analyze liquidity, solvency, and other financial performance metrics need detailed income statement data. The statement of comprehensive income includes more column headings and account descriptions to disclose accounting information.

Balance sheet (statement of financial position)

Businesses produce the interim balance sheet using this formula:

Total assets - total liabilities = equity

The balance sheet is created on a specific date, not for a particular period. Here are the components of the balance sheet:

• Assets are resources used to generate income and sales. 
• Liabilities are amounts owed to third parties (vendors, creditors). 
• Equity is the true value of the business. If the owner sells all assets for cash and uses the cash proceeds to pay off all liabilities, any cash remaining is equity.

Statement of cash flows

The statement of cash flows details the inflows and outflows of cash and cash equivalents for a specific period. Cash equivalents are securities that earn interest and are easily converted into cash, such as money market securities. The statement includes three categories:

• Cash flow from operating activities: Inflows and outflows from day-to-day operations, including customer payments, purchasing inventory, and processing payroll. Also called operating cash flow (OCF).

• Cash flow from investing activities: When the business buys or sells an asset, the cash inflow or outflow is posted as an investing activity.

• Cash flow from financing activities: Cash inflows from raising capital by issuing equity or debt, and cash outflows when investors are repaid.

The cash inflows and outflows are added to compute the net change in cash. The computation for the statement of cash flows is:

• The beginning cash balance plus or minus the net change in cash equals the ending cash balance.

Some accounting entries, such as depreciation and amortization, are non-cash transactions that do not impact cash flow.

Statement of changes in equity (statement of retained earnings)

The statement of changes in equity explains how the equity balance changed during a period. These are components of equity that will change the balance:

• Net income (net loss): Equity is increased by net income and decreased by a net loss.
• Dividend: A dividend is a payment of earnings to shareholders, and dividends reduce equity.
• Proceeds from issuing stock: Cash inflows from issuing stock increase equity.
• Treasury stock purchases: Repurchasing outstanding stock from shareholders decreases equity.
• Correction of a prior period error: An error correction that increases profit will increase equity. Error corrections that reduce profit reduce equity.

Certain gains and losses and changes in the fair value of some assets also impact equity.

Notes to the financial statements (footnote disclosures)

The interim financial statements include notes that explain significant changes since year-end. The footnotes disclose new loans, business purchases, or raising additional equity through a stock offering.

Some businesses operate through subsidiaries or operating segments. The notes may include information to clarify the business structure.

What is an interim period?

An interim period shorter than a financial year. Many companies provide interim financial statements at the end of each quarter, but an interim period can be a month, a quarter, or any other period.

When are interim financial statements required?

The SEC requires public companies (SEC registrants) to issue interim financial statements each quarter and to provide financial statements at the end of annual periods.

What are condensed statements?

Condensed financial statements present less detail than the annual financial statements. Condensed statements have fewer line items and less footnote disclosure.

Are interim statements audited?

Interim statements are not audited. A CPA firm’s audit opinion states whether or not the financial statements contain material misstatements. Material misstatements are errors large enough to change the reader’s view of the financial statements.

U.S. GAAP accounting standards have minimal requirements for interim financial statements, and many businesses follow the SEC’s more stringent Article 10 rules for reporting. The SEC does not require an audit for interim financial statements.

What's the purpose of an interim financial statement?

Interim financial statements provide investors, lenders, and other stakeholders with updated financial information between annual reporting periods. There are several reasons why stakeholders need interim financial statements.

Meeting legal requirements

Federal, state, and local governments may require businesses to create interim financial statements. 

For example, a construction company working on a large state contract may be required to produce interim financial statements. The state needs to monitor the financial condition of its contractors.

Provide disclosure to investors

Investors, financial advisors, and stock analysts make investment decisions using financial statements. These stakeholders need timely information and use interim statements to make informed decisions.

For example, assume the interim financials report a large increase in accounts receivable. If receivables are increasing faster than sales, the business may experience a cash shortage.

Thorough accounting and bookkeeping

Interim statements require the accounting department to reconcile all accounts, post adjusting journal entries, and review all financial transactions. If a company does not issue interim statements, the accounting records may not be updated promptly. 

Businesses need to track profitability closely to estimate federal and state income taxes. If the company delays posting entries and doesn’t issue interim financial statements, the income tax liability may be higher than planned.

Make securing loans easier

A lender needs to review updated financial statements before making a loan decision. As stated above, the impact of events after year-end will be reported in the interim financial statements.

For example, assume that the business closes a division and records a loss on discontinued operations three months after year-end. The financial impact is recorded in the interim financial statements and may impact the loan decision.

Interim statement examples

Here are three instances that may require interim financial statements:

Quarterly reports

Publicly traded companies are required to file a 10-Q with the SEC each quarter. The report includes:

• Interim financial statements that are typically not audited
• Year-to-date financial results and quarterly financial statements are compared to the same periods in the prior year
• The management discussion and analysis section includes information on competitors, pricing, and the firm’s industry.

Progress reports

Interim financial statements are produced when major business initiatives are in progress. Stakeholders are informed if the company makes a large capital investment, purchases a key competitor, or finalizes a merger.

Amendments or changes to a major business initiative are also disclosed in the interim financial statements.

Loan statement

A loan statement documents the monthly payment, interest rate, remaining principal balance, and the loan due date. A business may produce interim financial statements that include the loan statement data. The loan is posted to the liability section of the balance sheet.

What are the presentation requirements for interim financial statements?

U.S. GAAP requires a complete set of financial statements with footnote disclosures. Both U.S. GAAP and the SEC have the option of generating condensed statements.

Interim financial statement requirements

Businesses must disclose certain events and transactions and comply with the requirements for each financial statement.

As an example for this discussion, assume a business creates interim financial statements from March 31st (the last date interim statements were produced) to April 30th. 

Significant events and transactions 

If any of these events and transactions are significant, the financial impact must be disclosed in the interim statements:

• Inventory: An inventory write-down to net realizable value or a reversal of a prior inventory write-down entry
• Impairment: Recognizing a loss due to impairment of an asset’s value
• Property, plant, and equipment: Acquisition or disposal of property, plant, and equipment
• Litigation: Settlement of litigation
• Prior period corrections: Entries to correct an error 

Income statement requirements

An income statement or a statement of comprehensive income (if needed for SEC compliance) is required. Statements are required for:

• The current interim period
• Cumulatively for the current financial year to date

Companies must also provide both of these financial statements (current and year-to-date) for the preceding year so that readers can compare the results.

The business creates interim financial statements from March 31st to April 30th. It must also produce reports from December 31st to April 30th and generate the same reports for the prior year.

Balance sheet requirements

The balance sheet is generated as of a specific date. The report is generated at the end of the current interim period. Businesses must also provide a balance sheet as of the end of the prior year.

The company creates an April 30th balance sheet and generates a balance sheet for December 31st of the prior year. For SEC compliance, the business also produces a balance sheet for the end of the most recent quarter (March 31st).

SEC rules only require an April 30th balance sheet for the prior year if the report is needed to understand seasonal fluctuations.

Statement of cash flows requirements

Firms generate a year-to-date statement of cash flows and a year-to-date statement for the prior year.

Statement of change in equity requirements

Businesses produce a year-to-date statement of change in equity and a year-to-date statement for the prior year.

The SEC requires an analysis of changes in each line item of equity for these periods:

• The most recent quarter
• The same quarter of the prior year
• Year-to-date periods in the current year and the preceding year

Using the example, the SEC requires analysis for:

• The most recent quarter (March 31st)
• The same quarter of the prior year (March 31st from the previous year)
• Year-to-date periods in the current year and the preceding year (December 31st to April 30th of the current year and the preceding year)

Interim statements vs. annual statements

Interim financial statements differ from annual financial statements based on the type and amount of required information. 

Auditing differences

Annual financial statements are frequently audited, and the SEC requires a yearly audit of public companies. In most cases, interim statements are not audited.

A CPA firm’s audit opinion states whether or not the financial statements contain material misstatements. Material misstatements are errors large enough to change the reader’s view of the financial statements.

The CPA firm performs test work on transactions, discusses accounting entries with management, and completes trend and ratio analysis. The audit opinion also includes a discussion of internal controls and whether the controls are sufficient to produce accurate financial data.

Disclosure differences

The interim financial statements include footnotes that explain significant changes since year-end. A change may generate a difference between the annual and interim financial statements.

For example, a contingency is uncertainty regarding a possible gain or loss based on the outcome of a future event.

Assume a business discloses a legal issue in the annual financials and records a $200,000 liability for a potential loss. The case is settled months later for only $150,000, and the accounting records are adjusted to reflect the actual loss. The annual and interim financial statements are different.

Seasonality differences

Financial results can vary based on seasonality. A retailer, for example, may incur large expenses to purchase inventory in the third and early fourth quarters. Sales in November and December can represent the majority of annual sales.

These fluctuations impact interim financial results. The third quarter interim financials will report much larger cash outflows for inventory than other quarters. Similarly, fourth-quarter sales will be substantially higher than sales in prior periods.

How to prepare interim statements

Here are the steps required to prepare interim financial statements:

1. Update all income statement account balances 

Post all revenue and expense transactions and reconcile all income statement accounts. Record accrual and deferral entries, such as accrued expenses. Post all necessary adjustments to income statement accounts.

Generate the income statement and post net income (or net loss) to the equity section of the balance sheet. Determine if the business needs to generate a statement of comprehensive income. 

2. Review and reconcile balance sheet accounts

Verify that all asset, liability, and equity transactions are recorded. Post net income (or net loss) from the income statement into the balance sheet and post adjusting entries as needed.

3. Perform calculations for the statement of cash flows

Review all cash transactions and separate them into operations, financing, and investing activities. Obtain the beginning balance in cash in the balance sheet and add the net change in cash from all activities. The ending balance in money should agree to the balance in the balance sheet.

4. Prepare the statement of changes in equity

Analyze the equity section of the balance sheet for dividend payments and other transactions. Prepare the statement of changes in equity.

5. Notes to the financial statements

Review the notes on the financial statements from the prior-year annual report and the most recent set of interim financial statements. Determine if any recent events require additional disclosure in the notes.

6. CPA firm review of the financial statements

Public companies must have their quarterly financial statements reviewed by an independent public accounting firm.        

Conclusion: Automate financial statement preparation

Business owners need to generate timely and accurate interim financial statements for stakeholders. Companies that don’t fully leverage technology will spend far more time on financial tasks and are more likely to make errors.   

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