INTERIM FINANCIAL REPORTING AND INVESTMNET DECISIONS

BY
A.A. OWOJORI, PhD, FCA
Senior Lecturer in Accounting & Business Education
Accounting and Business Education Unit
Department of Educational Management
Faculty of Education
Ekiti State University
Ado-Ekiti, Ekiti State, Nigeria
[emailprotected]
[emailprotected]
08033525195
ABSTRACT
The main objective of financial report, annual or interim, is to provide information
about the reporting entity?s financial performance and financial position that is useful to a wide range of user for assessing the stewardship of management and for making economic decisions. Investment decision is function of information present in financial report. The only means by which the investors and other parties having interest in the coy con know the financial position of a company is through financial reporting which is prepared at the and of the accounting period. At this stage, arbitrage may occur depending on the information gathered from the financial report. To wait or retain ones capital in some companies for a year could be disastrous. This is the reason why most investors prefer interim financial reporting, which keeps the investors informed about the financial progress the company is making with their capital. Quick decision can be made before it is too late. This study delves into the development of financial reporting at international level as well as various regulations of financial reporting. The paper went further to compare the result of UAC Nigeria Plc and that of University Press Plc?s statement with that which was reported at the end of the year. Finally, the paper identified the limitation to the use of interim financial statement.

Keywords: Interim, Financial Reporting, Investment Decision
Introduction
It is necessary to revise forecast in other to incorporate current business conditions. According to John I. W. et al (2003) interim [less than one year] financial statements are a valuable source of information for monitoring performance. Interim statements are usually issued quarterly and are designed to meet user?s needs. They are useful in revising estimates of earning power and earning forecasts. Yet we must recognized certain limitations in certain reporting related to difficulties in assigning earnings components to period of under one year in length.
Timely and accurate financial report is the main stay of investment decision. IAS 34 describes financial report as being annual and interim. The standard define interim period and interim financial report as follows: Interim period is a financial reporting period shorter than a full financial year and interim financial report as a financial report containing either a complete set of financial statement or a set of condensed financial statement for an interim period.
The subject of financial reporting objectives has been generally recognized as very important in accounting area since a long time. Many accounting bodies and professional institutes all over the world have made attempts to define the objectives of financial statement and financial reporting which are vital to the development of financial accounting theory and practice. (Jawahar Lal, 2003 P 19) this section describes developments in this area at the international level, particularly USA and UK. It can be rightly said that most of the attempt in this area of financial reporting objectives has been made in USA and UK and accounting development in these countries have great impact on accounting developments and practice in other countries of the world.
The Accounting Principles Board (APB) statement No 4 1970 was the first publication which formulated the objective of financial reporting. Trueblood Report (1973) gives the following objective of financial report.
1.An objective of financial statement is to provide information useful to investors and creditors for predicting, comparing and evaluating potential cash flows to them in terms of amount, timing and related uncertainty.
2.An objective of financial reporting is to provide a statement of financial position useful for predicting, comparing and evaluating an enterprise earning power. This statement should provide information concerning enterprise transactions and other events that are part of incomplete earning cycles. Current value should also be reported when they differ significantly form historical costs. Asset and liabilities should be grouped or segregated by the relative uncertainty of the amount and timing of prospective realization of liquidation. The Corporate Report (UK) 1976 alludes to the above by adding that, the report assigned responsibility for reporting to the economic entity. Having an impact on the society through its activities. These economic entities are: limited companies, listed and unlisted as those having a reasonable right to information and whose information need should be recognized by corporate reports. These are: the equity investor group, the loan creditor group, the employee group, the analyst ? adviser group etc
From the foregoing, it could be overtly seen that investment decision cannot be successfully taken without timely, accurate, relevant and reliable financial statement.

The Regulation of Financial Reporting
The financial reporting is being regulated by the following regulations:
1.Legal regulation
2.Regulation by the accountancy profession
3.Regulation by Stock Exchange
4.Corporate governance
5.International influences
Legal Regulations
Since the first general legislation on companies was enacted in 1844, numerous Companies Acts have introduced varying amount of change into the legal requirements for accounting disclosure. The current framework is the result of legislation over a period of over forty years beginning with the companies Act 1948 which was added to by subsequent acts in 1967, 1976, 1980 and 1981, as consolidated in the companies Act 1985 and the Companies Act 1989.

The introducing of the companies Act 1948 marked a radical departure from the approach adopted in previous legislation. For the first time emphasis was placed on the importance of providing information in financial reports to assist in investment decisions.

Regulation by the Accountancy Profession
The Accounting Standards Board (ASB) replaced the Accounting Standards committee in 1990. The ASB has the power to issue accounting standards (Financial Reporting Standards or FRSs) on its own authority and is part of a larger structure. The Financial Reporting council gives guidance to the ASB on priorities, work programme and issues of public concern, and acts as an instrument for promoting good accounting practice.
Regulation by Stock Exchange
Any company which wishes to obtain a full listing and hence a quotation on the stock Exchange must comply with the listing requirements in the rules issued under the authority of the Stock Exchange council. These impose additional disclosure requirements such as the publication of interim reports and a statement that shows how much of a company?s bank loans and other borrowings are repayable within one and two years, between two and five years and in excess of five years.
Corporate Governance
The combined Code on corporate Governance (1998) was an important step in improving company reporting. It brought together the work of three committees which were set up because of the low level of confidence in financial reporting and auditing.

International Influences
Two international bodies which have influenced accounting regulations in the UK are the European Union (EU) and the International Accounting Standards Committee (IASC). The EU has a broad commitment to economic and political union and harmonization of laws. To encourage capital movement and capital formation, the EU is harmonizing the generally accepted accounting principles of member countries.
Interim Financial Reporting and Investment Decision
Interim Financial reports provide financial information for a period of less than one year. in the United Kingdom quoted companies have to deliver a six-monthly report of profitability and financial position to their shareholders. In the United States the disclosure requirement is on a quarterly basis. Interim reports are not audited.

One normative characteristic of the purpose of reporting to users discussed previously was that of timeliness. The aim of interim reports is to provide users with more timely information about companies so as to alleviate the disadvantages of the significant time lag between annual reports. American experience indicates that a more extensive use of interim reports in the United Kingdom would enhance the predictability of company reports.
Accounting to the Jenkins Committee (1944) user in the United States believe strongly that quarter reporting by public companies should be retained. They provide three main reasons:
1.Quarterly reporting helps users with a longer-term focus. Interest in recent developments is not inconsistent with a longer-term view. It is critical that the user with a longer-term focus detect, on a timely basis, changes in long-term trends. Quarterly reporting helps provide that information.
2.Quarterly reporting provides for an orderly dissemination of reliable information. In its absence investors may base trading decision on less reliable information, such as rumour.

3.Quarterly reporting reduces problems of trading on inside information. Quarterly reporting provides a vehicle for companies to disseminate information so market participants have equal access to reliable information about a company on which to trade freely.

Glantier and Underdown (2003:303) argued that financial reporting should be concerned with the provision of such information as is required for making those decision. We assumed, also, that investors were principally concerned with the worth of their investment in two senses. First, they are concerned with maintaining and increasing the value of their capital. Second, they are concerned with maintaining and increasing the income which is derived from that capital. Financial reporting ought to be concerned, therefore, with the valuation of shareholders? capital and income. In accordance with the stewardship concept of financial reporting, feedback information is required in order that investor may ascertain the current value of share capital and income. The decision-making concept of financial reporting asserts that financial reports should contain information which is useful in assisting investors to predict future changes in capital and income.
Milton Friedman (1962 :133-134) a classical economic theorist?s argument is in line with that of Glautier and Underdown (2001) in that he opined that the firm has one and only one objective, which is to maximize profit by extension, the objective of a corporation should be to maximize shareholders? wealth. It is asserted that in striving to attain this objective within the constraint of the existing legal and ethical framework, business corporations are acting in the best interests of society at large.

The Efficient Market Hypothesis
The efficient market hypothesis in conjunction with the idea of Glautier and Underdown (2003), assume the following:
i.Investors react to new information in such a way as to cause the price of shares traded on the Stock Exchange to change instantaneously. Therefore, an item of information disclosed in a footnote to the financial report will be impounded in the share price just as surely as it had been included in the main body of the report.

ii.The price of shares traded on the Stock Exchange fully reflects all publicly available information.

iii.Abnormal returns cannot be earned by investors, that is, no investor can expect to use published information in such a way as to increase the benefits accruing to him/her as against those accruing to other investors. Each investor can expect to earn the return on a security commensurate to its risk class.
The Decision usefulness Approach:
The ASB?s statement of principles argues that the usefulness of information is a function of its relevance and reliability user need information that is most relevant for their purpose. They also need information to be as reliable as possible. The decision usefulness approach takes the view that financial reporting should provide sufficient quantitative and qualitative information to help investors to make predictions about future performance. It is concerned with long-term discloses will have the following advantages:
i.The amount and quality of the information available to the market will be enhanced, which should help the efficiency of the market, and should also improve the market?s ability to value the entity concerned.

ii.The control of investors over management and their decisions will be improved.

iii.Investors, while they will still have to make their own judgments about the past, present and future of the entity will be provided with a firmer foundation on which to base those judgments.

iv.The reputations of entities that take a forward-looking stance are normally enhanced.

The following suggestions were made by Glautier and Under down (2003:346) for enabling financial report to attain the objection of providing information useful to investors in making predictions about enterprise performance.

i.Adopting a forward looking perspective;
ii.Reporting high- level operating data
iii.Reporting current value information
iv.Extending background information.

Adopting a Forward-Working Perspective
Jenkins committee (AICPA, 1994) concluded that financial reports should include the following
i.Information about a company?s broad objectives and business strategies used to achieve each broad objective;
ii.Details of opportunities and risks, but limited to those opportunities and risks that have been identified and considered by management in operating the business understanding what management thinks about opportunities and risks help users to understand where management plans to lead a company;
iii.Management?s plans, including critical success factors i.e. those factors or conditions that must be present for the plans to be successful;
iv.A comparison of actual business performance with previously discloses opportunities, risks and management plans.

The Jenkins report (AICIPA, 1994) does not include a requirement for a forecast in its consideration of committee of the ICAS (1988) in making corporate reports valuable (MCRV) which recommended a forecast financial report for the coming year, although this period could be longer if management so decided. Also, MCRV asserts that the major assumptions on which they plan is based should be disclosed. Furthermore, management should provide reasons for the differences between the financial plan disclosed in the previous year?s report and the actual results for the year.

It may be argued that the disclosure of company forecast of future profits or cash flows would be very advantageous to investors. The advantages perceived as attached to the disclosure of company forecasts are as follow:
1.Since investment decisions by management are in the context of the expectations which they hold of the profitability of future operations, the disclosure of their forecasts would represent the essential needed by investors.

Reporting High-Level Operating Data
MCRV concludes that the information which investors need in order to make proper decisions about their involvement with an entity is the same in kind as the information which management need to run it. Similarly, the Jenkins committee?s study (ibid) indicates that user believe they would benefit by greater access to the high-level operating data and performance measurements managing is using to manage the business.

Reporting Current Value Information
1)Most defenses of historical cost account centre on the reliability of its measures of how funds have been disbursed and on its indispensability to the stewardship function. Current values or costs are more relevant to users who wish to evaluate the current performance and position of the business as a basis for making predictions about the future.

2)MCRV strongly advocates the adoption of net realizable value (NVR) in reporting. It argues that NRV has a number of advantages:
i.It is based on values which may be readily observed in the marketplace
ii.It is readily understandable by investors.
iii.It removes the need for depreciation calculations
iv.It produces values which are additive because they are all expressed in the same current terms.

v.It provides a useful measure of an entry?s liquidity.

vi.Its use would improve the comparability of financial statements between entities and between different period.
Extending Background Information
Price Waterhouse?s study (Coleman and Eccles, 1999) questioned more than 200 financial analysts and fund managers with the aim of assessing their satisfaction with companies? financial reporting. This report identified an information gap between the needs of analysts and the information provided by companies. Seven measures which the analysts considered valuable were not adequately reported, namely market share, employee productivity, new product development, customer retention, product quality, research and development and intellectual capital.

Financial Accounting Standard Board (FASB)
FASB identified five comprehensive objectives of financial reporting. The most comprehensive statement on objectives of financial reporting is FASB (USA) concept number 1 ?Objective of finance reporting by business Enterprise? issued in November 1978 by US FASB.

1.Financial reporting should provide information that is useful to present and potential investors, creditors and other users in making rational investment, credit, and similar decisions. The information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence.
2.Financial reporting should provide information to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds for the sale, redemption, or maturity of securities or loans.

3.Financial reporting should provide information about an enterprise?s financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decision reflect investors? and creditors? expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance.

4.Financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resource entrusted to it.

5.Financial reporting should provide information that is useful to managers and directors in making decision in the interest of owners.

Benefit of Financial Reporting
Jawahar Lal (2003:447) identified the following benefits of financial reporting.

Economic Decision Making
The ultimate goal of any economy is to maximize the social welfare for which an efficient allocation of resources is required. This goal is of particular significance in developing economies where resources are not plentiful. The availability of capital is one of the scare and major productive factors needed to pursue economic activity and to achieve the goal of efficient allocation resources.
Mautz and May() observed that financial disclosure is essential to the functioning of a free enterprise economy. One aspect of a market oriented economy is the allocation of capital on a market basic. Financial disclosure is required to support a viable capital market. Indeed, without adequate financial disclosure there is a real question whether significant amounts of capital could be formed. In addition, a viable capital market is essential to resource allocation within the economy. It is in the capital market that a major protion of the nation?s resources are allocated to those companies which serve customers effectively, and capital is refused to those companies who do not serve customers effectively.
Cost of Capital
Adequate disclosure in annual reports is expected, in the long run, to enhance market price of company?s share in the investment market. Higher price of company share resulting from the full disclosure will have a favorable impact on the company?s cost of capital. It also enhances the future marketability of subsequent issue of company?s share. Choi (1984) argues that if analysts are kept well informed than, over the long run, an individual company?s share prices will be relatively higher.

Fluctuations in Share Prices
Adequate disclosure will tend to minimize the fluctuations in company?s share prices. Fluctuations in share prices occur because of the ignorance prevailing in the investment market. Fluctuations show an element of uncertainty in investment decisions. If the securities markets are in possession of full information, the ignorance and uncertainty will be reduced and share prices will tend to maintain equilibrium.

Limitations to the Use of Interim Financial Reporting
John, et al gave two limitations which are:
1.Period-End Accounting Adjustment
2.Seasonality In Business Activities
Period-End Accounting Adjustment
Determining operating results for a one year period requires many accrual adjustments and estimates. These year-end adjustments are often complex, time-consuming, and costly. Examples include revenue recognition, determined inventory costs, allocating overhead, obtaining market values of securities, and estimating bad debts. Adjustments for interim periods are often less complete and use less reliable information than their year-end counterparts. This likely yields a less accurate earning measure for interim periods.

Seasonality In Business Activities
Many companies experience seasonality in their business activities. Sales production and other operating activities are often unevenly distributed across interim periods. This can distort comparisons of interim earnings. It also create problems in allocating certain discretionary costs like advertising, research, development, repairs, and maintenance. If these expenses vary with sales, they are usually accrued on the basis of expected sa forthe entire year. Reporting problems also extend to allocating fixed costs across interim periods
1.I A S 34 (2) states that ?the fact that an entity may not have provided interim financial reports during a particular financial year or may have provided interim financial reports that do not comply with this standard does not prevent the entity?s annual financial statements from conforming to International Accounting Standard if they otherwise do so! That is, interim financial report may not be fully prepared in accordance with IAS but the annual or final report must comply. In fact, interim financial reports are not audited.
2.Financial reporting is not an end in itself but is intended to provide information that is useful in making business and economic decision.

3.The objectives of financial reporting are not immutable ? they are affected by the economic, legal, political and social environment in which financial reporting takes place.

4.The objectives are also affected by the characteristics and limitations of the kind of information that financial reporting can provide.
(i)The information pertains to business enterprises rather than to industries or the economic as a whole.

(ii)The information can results from approximate, rather than exact, measures.

(iii)The information largely reflects the financial effects of transactions and event that have already happened.

Research Methodology
For the purpose of collecting necessary data for the study, secondary data were primarily used; data are collected from various Accounting Standards, Journals, Textbooks and other official documents. The research gathered Annual Financial Statement of ten (10) firms together with their relevant interim financial statement and compare to show correlation between what is report in the interim financial report and the annual (final) financial report. For firms to be included in the sample, they most have been quoted on the Nigeria Stock Exchange at least since 1998. The rationale for such selection criteria is based on the fact that quoted firms performance is better than those of unquoted firms.
Hypothesis Developed
The null and alternative hypothesis I & II are:
Hypothesis I
HAo: Adequate disclosure of financial reports have impact on cost of capital.

HAi:Adequate disclose of financial reports have no impact on cost of capital
Hypothesis II
HBo:Timely and adequate disclosure of financial report stabilizes company?s share prices.

HBi:Timely and adequate disclosure of financial report does not stabilize company?s share prices.
Summary, Conclusion And Recommendations
These findings show that accounting information is the determinant of investment decisions. Therefore, investment decision (id) is function of financial report (fr) i.e. Id=F(fr).

The decision to buy or to sell or hold a share. An investor in a buying decision determines the ability of enterprise to pay divided, currently prospectively or even at liquidation. It is also evidence from this findings that the stock Exchange reacts to accounting information. This will invarioubly result to sharp price changes.
On the announcement of new information price change will occur, but no discernible price movements thereafter, since the adjustment made at that time removes the possibility of future abnormal returns to individual investors. Care need be taken by investors to interprete accounting information correctly in that a change in accounting policy have significant impacts on reported earnings. For example, a company switching from first in first out (FIFO) methods of stocks valuation to last in first out (LIFO) will report a lower profit but from LIFO to FIFO reports on higher profit.
It was also found that adequate financial disclosure leads to decrease in the cost of capital. This is due to the fact that investors will know the viable companies and the invariable one. This is in consonance with Diamond and Verrecchia model, voluntary/adequate disclosure reduce, information asymmetry between the firm and the market which facilitates trading in its share.
Therefore, the importance of interim dividend in investment decision cannot be over emphasized. We, therefore, recommend that efforts should be made as much as possible to make interim financial report more reliable through auditing, compliance to accounting standards e.g. IFRS, SAS, SAG,.
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