Financial Reporting: Its Past, Its Present, Its Future - PowerPoint PPT Presentation

About This Presentation
Title:

Financial Reporting: Its Past, Its Present, Its Future

Description:

Financial Reporting: Its Past, Its Present, Its Future UAA ACCT 650 Seminar in Executive Uses of Accounting ... – PowerPoint PPT presentation

Number of Views:115
Avg rating:3.0/5.0
Slides: 81
Provided by: facultyCb7
Category:

less

Transcript and Presenter's Notes

Title: Financial Reporting: Its Past, Its Present, Its Future


1
Financial Reporting Its Past, Its Present, Its
Future
  • UAA ACCT 650
    Seminar in Executive Uses of Accounting
    Dr. Fred
    Barbee

2
When You Come to a Fork in the Road Then What?
When you come to a fork in the road - take it
Yogi Berra
3
Financial Reporting
its
t
s
Up Close and
a
P
Personal
4
The Third Wave Breaks on the Shores of Accounting
  • Robert K. Elliott
    Accounting Horizons, June
    1992, Vol. 6, Issue 2

5
The Great Waves of Change
  • Information Technologies
  • 1st Wave Writing
  • 2nd Wave Movable-Type Printing
  • 3rd Wave Computer

6
The Great Waves of Change
  • Accounting
  • 1st Wave Single-Entry Accounting
  • Balance Sheet
  • 2nd Wave Double-Entry Accounting
  • Income Statement
  • Statement of Cash Flows
  • 3rd Wave Triple-Entry Accounting (?)

7
Changes in Internal Accounting Information
  • Managerial Accounting Information

8
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

9
Current GAAP Model
  • Nothing accountable happens until there is an
    exchange.
  • Exchanges are bargained at arms length.
  • Exchanges are simple (cash for goods/services)
  • One side of each exchange is cash virtually now.

10
3rd Wave Accounting Systems
  • Should provide measures of transformation.
  • Repudiate the Taylor model.
  • Account for information-based resources.

11
3rd Wave Accounting Systems
  • Concerned with measuring the values created for
    customers.
  • Must enable the network, rather than lock in the
    hierarchy.

12
Changes in External Accounting Information
  • Financial Accounting Information

13
Financial Accounting Model
  • Limits reporting entitys accountability to
    financial information.
  • Periodic, historical, cost-basis statements.

14
Financial Reporting
t
its
e
n
s
Up Close and
r
e
Personal
P
15
The Oakland Raiders
Pro Forma and Football
  • Today released their January 2003 pro forma
    results.

16
  • 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.

17
The New York Yankees
Pro Forma and Baseball
  • Today released their 4th Quarter 2001 pro forma
    results.

Ed Scribner, Professor of Accounting,
New Mexico State University
18
  • 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.

More
19
  • Games 3 and 4 results, already indicating Yankee
    wins, were not restated on a pro forma basis.

More!
No
20
Pro Forma and Golfing
Dennis Beresford Professor of Accounting
and Former Chairman
Financial Accounting Standards Board
21
  • 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,
    its appropriate to leave out the scores for my
    first four holes, Im still warming up then and
    those scores certainly arent representative of
    my true ability. And my out of bounds shots
    shouldnt count either I define them as unusual
    and non-recurring.

More
22
  • 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 Georges generally
    accepted golf average (GAGA).

More!
No
23
Pro Forma Reporting
24
What is Pro Forma Reporting
  • Companies use every trick to pump earnings and
    fool investors. The latest abuse Pro Forma
    reporting.

25
What is Pro Forma Reporting
  • How Did They Value Stocks? Count the Absurd Ways

26
What is Pro Forma Reporting
27
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 doesnt
    mean.
  • Pro-forma earnings are just about anything other
    than the real net income of a company determined
    by GAAP.

28
What is Pro Forma Reporting
  • In fact, SECs 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

29
What is Pro Forma Reporting
  • Pro forma is Latin for matter of form
  • Refers to statements where certain amounts are
    hypothetical
  • Barrons Dictionary of Finance and Investment
    Terms

30
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
31
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
32
Can you please define pro forma reporting?
33
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

34
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.

35
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.

36
Other Pro Forma Transactions
  • Change in accounting principles
  • Debt issues
  • Proposed sale of securities and application of
    the proceeds

37
Other Pro Forma Transactions
  • Mergers and acquisitions
  • Disposition of a portion of business
  • Change in form of business organization

38
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.

39
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.

40
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 firms explanation!)

41
  • At some real world stuff . . .

42
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.

43
Corporate Americas New Math
  • Investors Now Face Two Sets of Numbers in
    Figuring a Companys Bottom Line
  • Justin Gillis Washington Post Staff Writer
  • July 22, 2001

44
Pro Forma Reporting
45
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

46
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.

47
Cisco
  • One of Ciscos 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.

48
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, Ciscos pro forma income
    of 163 million was 23 times its actual net
    earnings. (GAAP)

49
(No Transcript)
50
(No Transcript)
51
And yes . . .
  • There have been others!

52
Is there anything good about pro forma?
53
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
54
Pro Pro Forma?
  • Why issue pro forma results?
  • 45 said pro forma results help convey the
    companys 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
55
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
56
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
57
Another Survey
  • Conducted by Broadgate Consultants, Inc.
  • 223 Fund Managers

www.broadgate.com
58
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
59
What does the SEC say?
60
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.

61
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.

62
SEC Cautionary Advice
  • Investors are encouraged to compare pro forma
    results with GAAP-based financials.

63
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?

64
What has the SEC done?
65
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 companys 3rd
    quarter 1999 earnings release.

66
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.

67
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.

68
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.

69
Some Criticisms of Pro Forma Reporting
70
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.

71
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.

72
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)

73
Some Suggestions
74
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
75
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
76
Best Practices . . .
  • Financial Executives Institute (FEI) National
    Investor Relations Institute (NIRI)

77
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)

78
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.

79
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

80
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.
Write a Comment
User Comments (0)
About PowerShow.com