Interim reporting is financial reporting for periods of less than a year, generally for a period of three months (quarterly reporting). Many of the interim reporting concepts discussed have developed from the need of public entities to provide quarterly financial information to the United States Securities and Exchange Commission and investors. The discussions use those practices as a basis for providing guidance to not-for-profit organizations that prepare and publish interim financial information. Book in for a Lucy Hall signature service that combines cutting-edge style with everyday wearability.
The purpose of quarterly reports is to provide financial statement users with more timely information for investment and credit decisions. Not-for-profits may provide interim financial reports to meet one of two needs. Its board of trustees may request that this information be prepared to assist it in its stewardship responsibilities. This is likely to include a comparison of budget to actual results each quarter.
Organizations that are debtors (either with private lenders or publicly issued debt) may be required to prepare interim financial reports. Organizations may be required under certain contracts or grant agreements to provide interim financial reports. The basic objective of interim reporting is to provide frequent and timely assessments of enterprise performance.
However, interim reporting has inherent limitations. As the reporting period is shortened, the effects of errors in estimation and allocation are magnified. The proper allocation of annual operating expenses is a significant concern. Other annual operating expenses are often concentrated in one interim period, yet benefit the entire year's operations. Examples include advertising expenses and major repairs or maintenance of equipment. The effects of seasonal fluctuations and temporary market conditions further limit the reliability, comparability, and predictive value of interim reports. For example, many not-for-profit organizations experience an increase in contributions in December as donors rush to seek tax deductions prior to the close of the calendar year. Because of this reporting environment, the issue of independent auditor association with interim financial reports is subject to continuing controversy.
Two distinct views of interim reporting have developed. Under the first view, the interim period is considered to be an integral part of the annual accounting period. Annual operating expenses are estimated and then allocated to the interim periods based on forecasted annual activity levels such as sales volume. The results of subsequent interim periods must be adjusted to reflect estimation errors. Under the second view, the interim period is considered to be a discrete accounting period. Thus, there are no estimations or allocations different from those used for annual reporting. The same expense recognition rules apply as under annual reporting, and no special interim accruals or deferrals are applied. Annual operating expenses are recognized in the interim period incurred, irrespective of the number of interim periods benefited.Proponents of the integral view argue that the unique expense recognition procedures are necessary to avoid misleading fluctuations in period-to-period results. Using the integral view results in interim earnings which are indicative of annual earnings and, thus, useful for predictive purposes. Proponents of the discrete view argue that the smoothing of interim results for purposes of forecasting annual earnings has undesirable effects. For example, a turning point during the year in an earnings trend may be obscured.