.. CHAPTER-9 CONCLUSION AND SUGGESTIONS
CHAPTER-9 CONCLUSION AND SUGGESTIONS Corporate reporting and disclosure of information to the finan ial community play an important part in building investors confidence and interest nd in stimulating the development of capital market. In the modern business envir nment the objective of corporate financial reporting is to assemble financial inform tion and communicate economic measurements of information about the resource and performance of reporting entity useful to those having reasonable rights to suc information. The conceptual framework of corporate reporting is generall based upon timeliness of communication, reliability of information communicat d, materiality of the information, relevance of information to the users and rms of presentations. Financial Statements of business enterprises are used by a di erse group of users for making sound economic decisions such as shareholders ( xisting and potential), suppliers (existing and potential), trade creditors, custome s, employees, taxation authorities, and other interested parties. It is necessary, ther fore, that the financial statements present a fair picture of the position and progress f the enterprise. It is the function of accounting (and auditing) standards to creat this general sense of confidence by providing a structural framework within hich credible financial statements can be produced. In a dynamic business environment with the increased scope and complexity of business enterprises, annual data are insufficient to evaluate developments in general economic, industry, and company activities and making or revising projections of earnings and financial position as a basis for investment decision. Therefore, company financial reporting should continuously measure and report on the firm's progress and provide information on a less than annual basis for the benefit of shareholders and other external users. In view of the need of information on a regular basis the need was filled to provide information at regular intervals. In this connection the accounting bodies at national and International level and regulatory authorities emphasized on the interim financial reporting and incorporated one of the important 192
accounting standard AS-25 at national level and las -34 at international level on the area of interim financial reporting. Thus, in this study an effort was made to analyze and examine the practices of the selected banks of India and Malaysia about their interim financial reporting practices. It is the time to summarize the study and bring out the main findings and conclusion and suggest certain suggestion for effective application of interim financial reporting practices. Interim financial reporting began in 1902, when the United States Steel Corporation became the first corporation to publish quarterly financial statements. In 1946, the Securities and Exchange Commission (SEC) recognized this need for more timely reports by external investors by requiring that publicly listed companies issue quarterly sales reports. Although this requirement was rescinded in 1953, it was followed in 1955 by the requirement that abbreviated (unaudited) income statements prepared on a semi-annual basis be filed on form 9K by companies under the SEC's jurisdiction. In 1962, the American stock exchange revised its listing agreements to include a requirement for the publication of quarterly report. The Securities Act Amendment of 1964 has extended to over-the -counter companies with at least five hundred stock holders. In 1973, the Accounting Principle Board (APB) opinion no. 28 of AICPA adopted the concept of interim report as an integral part of an annual period to provide interim financial information of the corporate body between the annual reports for the investors and other users to comply the progress of the enterprise. In India, Sanchar Committee, through its report of the high powered expert committee on companies and MR TP Act, recommended that a provision be made in the companies act to the effect that all public limited companies, whose shares are listed in any stock exchange should publish an abstract in a summarized form of half-yearly unaudited accounts of the company and brief report thereon. The Securities and Exchange Board of India (SEBI) has directed the companies listed on them to secure that companies listed comply with relevant clause of the listing agreement (Clause 41) in preparation and presentation of interim financial results. 193
Accounting Standard (AS) 25, 'Interim Financial Reporting', issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2002. If an enterprise is required or elects to prepare and present an interim financial report, it should comply with this standard. las 34 was issued in June 1998 and this standard came into effect for annual periods beginning on or after 1 July, 1999. This standard prescribes the minimum content of an interim financial report and the principles for recognition and measurement in complete or condensed financial statements for an interim period. The basic philosophy behind this standard is to provide timely and reliable interim financial reports to various user-groups. THE STUDY CONCLUDES The analysis of the interim financial reporting practices of the selected Indian banks as regard to the provisions of AS 25 depicts that none of the Indian Banks are preparing the complete set of financial statement. Al 1 the Indian banks prefer to prepare condensed financial statements. In strict sense, the comparison of the published interim financial statements shows that no Indian bank prepared the condensed set of financial statement as prescribed by AS 25. The format and presentation of the various statements presented as Interim financial result differ in content and context with the standard. As per the provision four condensed set of financial statement are required viz., Condensed balance Sheet, Condensed statement of Profit and loss, Condensed cash flow statements and selected explanatory notes. None of the banks has been found to prepare first three statements in individual manner in the required format. The banks under this study are providing only a single exhaustive statement which depicts the information of condensed balance sheet and statement of profit and loss. The banks do not prepare the statement of cash flow. However, selected explanatory notes are being provided separately. The single statement provides detailed information of items of profit and loss and it hardly provides disclosure of balance sheet items. In respect to the period for which interim financial statements are required. It has been found that all the Indian banks provide information in respect of the statement of 194
profit & loss for the current interim period and cumulatively for the current financial year to date with comparative statement of profit & loss for comparable interim period of the immediately preceding financial year. Period as regard to balance sheet and cash flow statement could not be examined as condensed balances sheet and cash flow statement has not been prepared by Indian banks. Securities Exchange Board of India have issued specific guidelines on interim and annual financial reporting in clause 41 of equity listing agreement and from time to time has made various amendment in the clause. The board requires that quarterly report should follow uniform accounting practices and submit either audited or unaudited result within the prescribed time period. The quarterly results should be approved by the board of directors and should be submitted to the stock exchange within the specific time period. The quarterly results should be placed for limited review. In case of any qualification made by the auditors the same should be disclosed in the report. It has been found that the interim financial result prepared and presented by all the banks are strictly in line with the requirement of Clause 41. All the banks have presented their quarterly results in the prescribed format suggested by SEBI. It can thus be said that all the banks under study has adhered to the requirement of SEBI as regard to form and content is concerned. This is the main reason as to why there is non compliance to the format as suggested in AS25. A check list was prepared considering the guidelines in respect of IFR as laid down by SEBI. From analysis, it can be concluded that bank under the study provide unaudited quarterly results and they are published or made available on website in the last week of the month from the end of each quarter. The unaudited results are subject to review by the statutory auditors and the review reports and the quarterly reports are furnished to the stock exchange within the stipulated time period. The quarterly results are approved by the board of directors. The quarterly results of all the banks highlights about the complaints received from the shareholders and it also shows the number of complains resolved during the respective quarter. It has been found that a large numbers of complaints ranging between 1000 to 1500 or more are received and only two percent of the complaints 195
received was remains unresolved at the end of quarter. The banks consider business segment as a primary segments and reportable segment ranges between 2 to 5. All the banks make available the financial results in Newspaper and on the website within 48 hours of conclusion of board meeting. The comparison of IFR in Indian and Malaysian bank has been conducted with the help of the accounting standard formulated in the respective countries. In India AS-25 has been devoted for IFR where as in Malaysia FRS-134 deals with IFR. The analysis has been broadly categorised in the following major heading: I. Main contents of interim financial report. II. Minimum components of an interim financial report. III. Form and content of interim financial statements. IV. Selected explanatory notes. V. Period for which interim financial statements are required to be presented. As regard to the mam content of the IFR the Malaysian standard requires an additional statement to be presented in IFR, which is devoted to highlight the changes in equity. It has been found that none of the Indian and Malaysian banks are presenting IFR in form of a complete set. The banks in both the countries prefer IFR to be prepared and presented in condensed manner. All the Malaysian banks provide the minimum components of an IFR as stated in FRS- 134 where as the Indian banks are lagging way behind the Malaysian bank as regard to the minimum component of IFR. The heading and subtotals that were included in most recent financial statement were found to be fulfilled in the Interim financial statements of the Malaysian banks where as Indian banks only fulfil this condition in respect of the profit and loss statement. The selected explanatory notes are prepared presented in a more systematic manner in the Malaysian Banks and almost all the explanatory notes required by the Malaysian Standard are being disclosed. However, in Indian banks the presentation of explanatory are in an unsystematic manner and there are few explanatory notes which requires disclosure are not reported. On the whole it can be said that the disclosure practices of Malaysian Banks are superior to Indian Banks. 196
The indexation score of the Indian banks shows that the Allahabad and Canara Bank are complying more provisions of AS 25 as regard with content section. As regard to context section only Allahabad Bank is complying more toward timeliness of releasing the results, conducting the board meeting and the approval of the results. On the whole the results of the index section shows that the Allahabad Bank is leading from the front followed by Canara bank and Bank of India and Punjab National Bank are at the bottom of the level at par. The analysis of the content section of the indexation score of the Malaysian Banks shows that the Affine Bank and HSBC Bank are complying more disclosures as required by the standard. However, in terms of percentage the disclosure ranges between 72 to 73 percent. As regard to context section only Affine Bank is found to be following greater compliances toward timeliness of releasing the results conducting the board meeting and the approval of the results. On the whole the results of the index section shows that the Affine Bank is leading from the front followed by Standard Chartered Bank and HSBC Bank. On comparison of score of index table of the banks of both countries, it is found that Malaysian banks are far ahead then Indian banks in complying of provision as laid down in their standards and their disclosures. The comparative analysis carried out in respect of IFR compliances as per las 34 for banks of both the countries it has been found that the fourth quarter report is not prepared by Malaysian banks separately instead they prefer to prepare annual financial report. A separate condensed balance sheet and statement of changes in equity is not prepared by Indian banks. Condensed statement of cash flow is not prepared by Indian banks in any quarter however; this statement is prepared and presented along with annual reports. All the Malaysian banks discloses about the adoption of accounting policies and method of computation of financial results. Inspite of the fact that there were no unusual items affecting assets/liabilities/equity/net income etc. are being disclosed by Malaysian banks. No disclosures were made by the Malaysian banks in any of the quarter as regard to segment reporting. Changes in contingent liabilities and contingent assets were not reported either by Indian banks or by Malaysian banks. Form and contents of interim financial statements were followed to a large extent by Malaysian banks. 197
As regard to perception of respondents about the concept of interim financial reporting, it has been found that respondents are aware about the concept of interim financial reporting. For collecting the information from the interim financial reports, they generally prefer the website of the respective banks / organization. They also accepted that the information provided by the interim financial reports are adequate for their required decision or purposes. Generally information of 2 nd quarter is considered more valuable for investment decision by the respondents. The study also reveals that information provided by the interim financial reports in quarterly results is also an important indicator of financial performance of the respective banks /companies. The study further reveals that respondents considered the information provided by the quarterly reports for their short term as well as long term investment decision. 198
Chapter-9- Conclusion & Suggestions SUGGESTIONS TO ENHANCE THE USEFULNESS OF INTERIM FINANCIAL REPORTS I. The interim financial report should be made mandatory. II. The Indian banks should prepare and present the Interim financial results in the prescribed format as recommend in AS-25. III. The Indian Banks should prepare and present the condensed balance sheet in the interim financial results, which will enable the users to analyze the financial positions. IV. The Indian Bank should prepare the statement of cash flow in interim financial results, which will enable the users to know the sources of generating the cash and assist in predicting, comparing and evaluating potential earnings and cash flows in terms of amount, timing and related uncertainty. V. The auditors should strictly be made more responsible for compliance of the norms laid down in the accounting standards at national and global level. VI. The Malaysian banks are suggested to prepare and presents the segmented information in Interim Financial Statements for a proper understanding and comparison of information with other banks and assessing banks future potential and to measure a degree and type of risk. VII. AS - 25 and IAS-34 and MFRS- 134 which recommends special formats for banks should include disclosure of nonperforming assets in their quarterly report. VIII. Interim financial reporting should also be applied to other entities, including nonprofit organization, to voluntary issue such reports. IX. Interim period foreign currency exchanges gains and losses should be measured and recognised at the each quarter which at present is not being reported. X. Interim reports should present management' s review and analysis of significant matters regarding performance and future prospects. 199
SCOPE OF FURTHER RESEARCH The present study deals only with the interim financial reporting practices, specially focused on preparation and presentation of quarterly financial results. A further study can be initiated on measurement and recognition of items being reported in the financial statements in order to assess accounting problems, probably the most important issue as to extent of disclosure in interim reports. 200