Title: Financial Reporting: Its Past, Its Present, Its Future
1Financial Reporting Its Past, Its Present, Its
Future
- UAA ACCT 650
Seminar in Executive Uses of Accounting
Dr. Fred
Barbee
2When You Come to a Fork in the Road Then What?
When you come to a fork in the road - take it
Yogi Berra
3Financial Reporting
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4The Third Wave Breaks on the Shores of Accounting
- Robert K. Elliott
Accounting Horizons, June
1992, Vol. 6, Issue 2
5The Great Waves of Change
- Information Technologies
- 1st Wave Writing
- 2nd Wave Movable-Type Printing
- 3rd Wave Computer
6The 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 (?)
7Changes in Internal Accounting Information
- Managerial Accounting Information
82nd Wave Accounting Systems
- Lock in the Taylor Model
- Focuses on tangible assets
- No information recorded unless there is a
transaction with an outside party
9Current 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.
103rd Wave Accounting Systems
- Should provide measures of transformation.
- Repudiate the Taylor model.
- Account for information-based resources.
113rd Wave Accounting Systems
- Concerned with measuring the values created for
customers. - Must enable the network, rather than lock in the
hierarchy.
12Changes in External Accounting Information
- Financial Accounting Information
13Financial Accounting Model
- Limits reporting entitys accountability to
financial information. - Periodic, historical, cost-basis statements.
14Financial Reporting
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15The 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.
17The 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
20Pro 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
23Pro Forma Reporting
24What is Pro Forma Reporting
- Companies use every trick to pump earnings and
fool investors. The latest abuse Pro Forma
reporting.
25What is Pro Forma Reporting
- How Did They Value Stocks? Count the Absurd Ways
26What is Pro Forma Reporting
27What 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.
28What 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
29What 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
30What 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
31What 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
32Can you please define pro forma reporting?
33What 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
34What 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.
35More 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.
36Other Pro Forma Transactions
- Change in accounting principles
- Debt issues
- Proposed sale of securities and application of
the proceeds
37Other Pro Forma Transactions
- Mergers and acquisitions
- Disposition of a portion of business
- Change in form of business organization
38To 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.
39To 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.
40To 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 . . .
42Associated 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.
43Corporate 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
44Pro Forma Reporting
45Pro 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
46Pro 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.
47Cisco
- 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.
48Cisco
- 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)
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51And yes . . .
52Is there anything good about pro forma?
53Pro 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
54Pro 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
55Pro 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
56Pro 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
57Another Survey
- Conducted by Broadgate Consultants, Inc.
- 223 Fund Managers
www.broadgate.com
58Another 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
59What does the SEC say?
60SEC 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.
61SEC 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.
62SEC Cautionary Advice
- Investors are encouraged to compare pro forma
results with GAAP-based financials.
63SEC 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?
64What has the SEC done?
65SEC 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.
66SEC 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.
67SEC 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.
68SEC 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.
69Some Criticisms of Pro Forma Reporting
70Pro 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.
71Pro 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.
72Pro 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)
73Some Suggestions
74Pro 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
75Pro 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
76Best Practices . . .
- Financial Executives Institute (FEI) National
Investor Relations Institute (NIRI)
77FEI/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)
78FEI/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.
79FEI/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
80FEI/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.