Interim financial reports: comparative practices and evidence of usefulness in the Indian context

Abstract

Interim Financial Reports (IFRs) are financial reports published by Companies between two successive Annual Reports. IFRs may be published every half year as in the UK or every quarter as in the USA. lFRs were introduced in India in 1987 following the recommendations of the High Powered Committee on Stock Exchange Reforms. Companies listed on Stock Exchanges in India are now required to publish Unaudited Half Yearly Financial Reports. The first part of this study presents a comparison of the history and reporting practices with respect to IFRs in USA, UK, France and India. IFRs are the result of demand by users of financial reports for more frequent information than was provided by Annual Reports. The essential quality of IFRs is Timeliness. The qualities of Relevance and Reliability are traded off against Timeliness. This trade off is evident by the absence of relevant Accounting Standards for IFRs as also from the lack of auditor involvement in their preparation. IFRs are also characterised by problems arising from the choice between the Discrete versus Integral approaches to their preparation. The former approach treats the Interim period as a standalone period. The latter approach views the Interim period as part of the Annual period. Usefulness of IFRs has been tested using a variety of research methods. Of these, the Market Based Accounting Research (MBAR) approach has been adopted in this study to test for the usefulness of IFRs in India. Under MBAR, usefulness of company specific information such as IFRs is inferred from the revision in the probability distribution of the company’s stock returns following the release of such information. An assumption underlying such inference is that the stock markets are informationally efficient in the semi-strong form. Semi-strong form efficiency is an empirical issue, which has found support in the context of the Bombay Stock Exchange (BSE). The sample used in the study comprises of 61 companies on the Forward List of the BSE. IFR releases of these companies over three half years ending on September 3O, l99O, l991 and I992 are examined for their impact on the respective stock prices. The degree of association between Abnormal Returns and Unexpected Earnings, which is the measure of Usefulness of IFRs, is statistically significant. The degree of association found with the Indian sample is higher than what is typically found in the context of developed Stock Markets. This could be indicative of the relatively greater importance of Accounting Reports as a source of information on companies in India than in the developed Stock Markets which are characterised by a variety of alternative sources of corporate information. The other major findings of this study are: 1) The information in IFRs is not contained in a single figure such as the Net Profit After Tax. Other pans of IFRs such as Sales and Gross Profits also convey information useful to the market. ' 2) There are no differences in the information Content of lFRs based on the sizes of the companies. lFRs of large companies were found to be as informative to the market as the IFRs of small firms. 3) Timeliness of announcement of IFRs has no effect on their Information Content. No evidence was found of an association between the type of News (Good vs. Bad) and Timeliness of IFRs. Studies under the MBAR approach are better suited evaluating accounting policy choices than as a guide in making such choices. In that sense the present study is an evaluation of present practices. The comparative study of practices in 4 countries highlights certain features of practices in other countries which may be considered for adoption in India.