Post on 12-Jan-2016
Financial Reporting: Its Past, Its Present, Its Future
UAA – ACCT 650 Seminar in Executive Uses of Accounting Dr. Fred Barbee
When You Come to a Fork in the Road – Then What?
Financial Reporting
Past
The Third Wave Breaks on the Shores of Accounting
Robert K. Elliott Accounting Horizons, June 1992, Vol. 6, Issue 2
The Great Waves of Change
Information Technologies
1st Wave = Writing
2nd Wave = Movable-Type Printing
3rd Wave = Computer
The Great Waves of Change
Accounting1st Wave = Single-Entry Accounting
Balance Sheet
2nd Wave = Double-Entry AccountingIncome StatementStatement of Cash Flows
3rd Wave = Triple-Entry Accounting (?)
Changes in Internal Accounting Information
Managerial Accounting Information
2nd Wave Accounting Systems
Lock in the Taylor Model
Focuses on tangible assets
No information recorded unless there is a transaction with an outside party
Current GAAP Model
Nothing accountable happens until there is an exchange.
Exchanges are bargained at arm’s length.
Exchanges are simple (cash for goods/services)
One side of each exchange is cash virtually now.
3rd Wave Accounting Systems
Should provide measures of transformation.
Repudiate the Taylor model.
Account for information-based resources.
3rd Wave Accounting Systems
Concerned with measuring the values created for customers.
Must enable the network, rather than lock in the hierarchy.
Changes in External Accounting Information
Financial Accounting Information
Financial Accounting Model
Limits reporting entity’s accountability to financial information.
Periodic, historical, cost-basis statements.
Financial Reporting
Pretsen
The Oakland Raiders
Today released their January 2003 pro forma results.
Although Generally Accepted Scorekeeping Principles (GASP) indicate that the Oakland Raiders lost the Super Bowl, their pro forma figures show that this reported loss was the result of nonrecurring items, specifically the extraordinary performance of the Tampa Bay Buccaneers defense and the somewhat lackluster performance of the Oakland offense.
The New York Yankees
Today released their 4th Quarter 2001 pro forma results.
Ed Scribner, Professor of Accounting, New Mexico State University
Although Generally Accepted Scorekeeping Principles (GASP) indicate that the Yankees lost Games 1 and 2 of the 2001 World Series, their pro forma figures show that these reported losses where the result of nonrecurring items, specifically extraordinary pitching performances by Arizona Diamondbacks personnel Kurt Schilling and Randy Johnson.
Games 3 and 4 results, already indicating Yankee wins, were not restated on a pro forma basis.
Pro Forma and Golfing
Dennis Beresford Professor of Accounting and Former Chairman Financial Accounting Standards Board
Some of you may know that George Benson is an excellent golfer. However, on a pro forma basis I can actually out score George. For example, it’s appropriate to leave out the scores for my first four holes, I’m still warming up then and those scores certainly aren’t representative of my true ability. And my out of bounds shots shouldn’t count either – I define them as unusual and non-recurring.
Taking those adjustments and a little other scorekeeping creativity into consideration, I figure my pro forma average score is about 68.
And that beats the heck out of George’s generally accepted golf average (GAGA).
Pro Forma Reporting
What is Pro Forma Reporting
Companies use every trick to pump earnings and fool investors. The latest abuse: “Pro Forma” reporting.
What is Pro Forma Reporting
How Did They Value Stocks? Count the Absurd Ways
What is Pro Forma Reporting
What is Pro Forma Reporting
Denny Beresford former FASB Chair
It means anything you want it to!
In fact, the only constant is what it doesn’t mean.
Pro-forma earnings are just about anything other than the real net income of a company determined by GAAP.
What is Pro Forma Reporting
In fact, SEC’s Chief Accountant has said that companies now want to emphasize EBS instead of EPS
EPS means “Earnings Per Share”
EBS means “Earnings Before Bad Stuff”
What is Pro Forma Reporting
Pro forma is Latin for “matter of form”
Refers to statements “where certain amounts are hypothetical”
Barron’s Dictionary of Finance and Investment Terms
What is Pro Forma Reporting
Pro forma which means “as if”, has in recent years evolved into “a sophisticated term for lying about your results.
Peter H. Knutson Wharton Accounting Professor Emeritus
What is Pro Forma Reporting
“A pro forma is what it would be if it were something other than what it is.
It includes everything except the bad stuff.”
Peter H. Knutson Wharton Accounting Professor Emeritus
Can you please define pro forma reporting?
What is Pro Forma Reporting
Definition
A financial statement in which the amounts stated are fully or partially estimated
Objective
To show what the significant effects on historical financial information might have been, had a transaction or event occurred at an earlier date
What is Pro Forma Reporting
Previously
Companies used pro forma reporting to adjust previously reported financial statements
So they could be directly compared with current results and provide better or more meaningful information for the financial statement reader.
More Recently . . .
Companies have expanded its use
Restructuring charges
Inventory write-downs
Impairment of goodwill or other intangible or tangible assets
Other so called one-time or non-recurring charges.
Other Pro Forma Transactions
Change in accounting principles
Debt issues
Proposed sale of securities and application of the proceeds
Other Pro Forma Transactions
Mergers and acquisitions
Disposition of a portion of business
Change in form of business organization
To illustrate . . .
Company A had a loss under GAAP of $1 per share.
However, the company effected a major restructuring during the quarter, including work force reductions and plant closings, totaling $1.50 per share.
To illustrate . . .
These do not qualify as extraordinary items under GAAP;
However, the company believes adding back these expenses will make the statements more meaningful to investors.
To illustrate . . .
Thus, in their pro forma statements the $1.50 per share will be “added” back.
Result: $0.50 EPS.
This provides “a better comparison and a better baseline for analysts to model future earnings expectations.” (The firm’s explanation!)
At some real world stuff . . .
Associated Press Analysis
The AP analyzed earnings reports of the 100 largest technology companies in Northern California.
It calculated that under GAAP, the 100 companies reported combined losses of $71 billion.
Using pro forma figures, these same companies reported a profit of $10 billion.
Corporate America’s New Math
Investors Now Face Two Sets of Numbers in Figuring a Company’s Bottom Line
Justin Gillis Washington Post Staff Writer
July 22, 2001
Pro Forma Reporting
Pro Forma Reporting
Cisco Systems, Inc. reported results for the first quarter of this year (2001) according to GAAP
Result: Quarterly loss of $2.7 billion
Pro Forma Reporting
Cisco then did some slicing and dicing in ways they preferred – offering an alternative interpretation of its results to the investing public.
Result: Quarterly profit of $230 million.
Cisco
“One of Cisco’s most frequent accounting tactics comes up every quarter when the company directs shareholders to its unaudited pro forma earnings numbers as the best gauge of profitability.”
Cisco
In the first quarter of fiscal 2001, Cisco reported pro forma earnings of $1.4 billion, nearly $600 million over its net income.
In the fourth quarter, Cisco’s pro forma income of $163 million was 23 times its actual net earnings. (GAAP)
And yes . . .
There have been others!
Is there anything good about pro forma?
Pro Pro Forma?
Survey conducted by CFO.com/KPMG
196 finance managers
82% said their companies report some kind of pro forma in their statements
88% believe it is appropriate to include nonfinancial measurements in growth trends
www.cfo.com
Pro Pro Forma?
Why issue pro forma results?
45% said pro forma results help convey the company’s true financial position
27% said they use pro forma to meet demands of analysts.
25% admitted pro forma helps “put the best spin on the results.”
www.cfo.com
Pro Pro Forma?
Who should provide guidance on the use of pro forma?
65% said the formal guidance should come from the SEC rather than FASB.
50% said FASB should not include pro forma in their study of the financial reporting system.
www.cfo.com
Pro Pro Forma?
Most believe work needs to be done on pro forma reporting
93% believe a company should be required to reconcile pro forma and GAAP.
www.cfo.com
Another Survey
Conducted by Broadgate Consultants, Inc.
223 Fund Managers
www.broadgate.com
Another Survey
76% said pro forma information is at least somewhat useful
Many said it is extremely useful.
67% opposed banning pro forma reporting
91% felt that corporations should provide more detail.
www.broadgate.com
What does the SEC say?
SEC: Cautionary Advice
The antifraud provisions of the federal securities laws apply to a company issuing “pro forma” financial information
A presentation of financial results that is . . . on other than a GAAP basis raises particular concerns.
SEC: Cautionary Advice
Companies must pay attention to the materiality of the information that is omitted from a “pro forma” presentation.
SEC recommends following the guidelines developed by the FEI and others.
SEC: Cautionary Advice
Investors are encouraged to compare “pro forma” results with GAAP-based financials.
SEC: Tips For Investors
What is the company assuming?
What is the company not saying?
How do the “pro forma” results compare with GAAP-based financials?
Are you reading “pro forma” results or a summary of GAAP-based financials?
What has the SEC done?
SEC Actions . . .
January 16, 2002
In its first pro forma financial reporting case, the SEC instituted cease-and-desist proceedings against Trump Hotels & Casino Resorts, Inc.
Misleading statements in the company’s 3rd quarter 1999 earnings release.
SEC Allegations . . .
On 10/25/99 Trump issued a press release announcing its 3rd quarter 1999 results.
Pro forma results differed from GAAP results
Expressly excluded a one-time charge.
SEC Allegations . . .
Release was fraudulent because it created the false and misleading impression that the firm had exceeded earnings expectations when in fact it had not.
SEC Allegations . . .
Result: Net income increased to $14.0 million compared to $5.3 million in 1998
On the date of the release, the price of Trump stock rose 7.8%.
Some Criticisms of Pro Forma Reporting
Pro Forma Criticisms . . .
Presenting the pro forma information with greater prominence than the required GAAP results
GAAP results are difficult to discern or perhaps are not disclosed in the earnings release.
Pro Forma Criticisms . . .
Adjustments or assumptions used to arrive at the pro forma results are not clearly spelled out nor easy to understand
Nature of the underlying pro forma adjustments do not warrant pro forma treatment.
Pro Forma Criticisms . . .
Companies rarely, if ever, make pro forma negative adjustments lending credence to the belief that they are looking to “spin” results rather than provide meaningful data.
Use of non-GAAP measures such as EBITDA (Earnings Before Interest, Taxes, Depreciation, & Amortization)
Some Suggestions
Pro Forma Suggestions
Clearly label the data as pro forma
Present historical GAAP data in documents that contain pro forma, and do so with similar prominence
Disclose all assumptions that underlie the pro forma adjustments.
The Business Monthly www.bizmonthly.com
Pro Forma Suggestions
List all of the material pro forma adjustments with adequate and clear explanations.
Clearly define all non-GAAP measures such as EBITDA
Review with Independent accounting firm and legal counsel prior to release to public
The Business Monthly www.bizmonthly.com
Best Practices . . .
Financial Executives Institute (FEI) & National Investor Relations Institute (NIRI)
FEI/NIRI “Best Practices”
Timing
Earnings press releases should generally be issued as soon as practicable after quarter-end.
Content
Earnings press releases should include “reported” results presented under GAAP (as well as pro forma)
FEI/NIRI “Best Practices”
Forward Looking Statements
Management is encouraged to discuss, within appropriate Safe Harbor provisions the outlook for the coming quarters.
Consistency
Reconciliation between GAAP and pro forma results should be treated in similar fashion for comparable periods.
FEI/NIRI “Best Practices”
Other
Display prominently in headlines of the press release the most meaningful information.
Firms are encouraged to include telephone and web site information
FEI/NIRI “Best Practices”
Other
Management should review both the Safe Harbor language in the press release and the firm description to assure it is accurate, complete and specific to all appropriate risk factors.