Leading view
Many investors who follow the fundamental approach and many creditors who provide financing on a longer-term basis have extensive needs for nonfinancial business information. The following list indicates the types of that nonfinancial information.
Users need nonfinancial business information for sufficient historical periods to permit analysis of how the segment's business performs through one or two business cycles (often about ten years). The number of periods of forward-looking information that users need depends on their objective and approach and other factors, but rarely exceeds five years.
As shown in the list, users need both information about the past and the present and forward-looking information. The information about the past and the present provides a foundation on which to evaluate or project forward-looking information. Forward-looking information helps users assess the future and the company's riskiness. Forward-looking information alone is insufficient.
In general, the users believe that nonfinancial information about the general economy is outside the scope of company-specific external reporting. (Unfortunately, the Subcommittee does not have a sufficient basis to address which of the other types of nonfinancial business information should be included in external reporting and which should be outside the scope of that reporting for reasons of costs and benefits.)
Note: The following two points are not directly supported by the database. However, the Subcommittee believes that they can be logically inferred from the material in the database.
Users need to understand the linkage and relationship between actual events and activities and the financial statements that represent the financial impact of those events and activities. Nonfinancial business information serves the critical function of helping users understand that linkage and relationship. Thus, the nonfinancial business information needs to be closely correlated to the information in financial statements. That is, the level of detail, disaggregation, and time periods covered should closely match that of the financial information that users' need.
Disaggregation of nonfinancial business information is key. Users need information on an industry and, in some cases, a geographic and line of business basis. To the extent possible, users want to evaluate industry and geographic segments as separate businesses. Thus, the types of information listed below applies to each business segment. To the extent possible, both financial and nonfinancial information should be disaggregated on the same basis.
TYPES OF NONFINANCIAL BUSINESS INFORMATION
I. INFORMATION ABOUT THE PAST AND THE PRESENT
1. The segments' business, methods of conducting the business, and its relationships with others:
(a) segment definition
* In response to a postmeeting questionnaire, 6 of 9 investors ranked "definition of industry" as essential information [page 15]
* In response to a postmeeting questionnaire, 10 of 16 creditors indicated that they always or frequently discuss "definition of the industry" with management [page 28]
(b) description of business and industry structure
* See quotes from the following in Section 13: paragraph 5, p.1; paragraph 8, page 1; paragraph 7, page 2; paragraph 11, page 2; paragraph 1, page 5; paragraph 4, page 5; paragraph 9, page 6; and paragraph 1, page 38
* In response to a postmeeting questionnaire, a majority of investors consistently ranked "essential" information describing the business and industry structure [pages 15, 16, and 18]
* In response to a postmeeting questionnaire, a majority of creditors consistently indicated that they always or frequently discussed with management information describing the business and industry structure [page 28]
(c) financial interests and relationships among major shareholders, directors, management, and the company
* See quotes from the following in Section 13: paragraph 2, page 5; paragraph 2, page 10; paragraph 3, page 10
2. Operating data for recent periods:
* See quotes from the following in Section 13: paragraph 8, page 1; paragraph 6, page 2; paragraph 1, page 5; paragraph 4, page 6; paragraph 1, page 7; paragraph 2, page 7; paragraph 4, page 9; paragraph 7, page 11; paragraph 8, page 11; paragraph 6, page 39
* In response to a postmeeting questionnaire, 4 of 8 investors ranked nonfinancial operating data "essential", 4 of 8 respondents ranked that information "helpful" [page 17]
3. Explanations of relationships and changes among the data, focusing on:
(a) key changes in amounts in the historical financial statements and nonfinancial statistics and the reasons for those changes
* See quotes from the following in Section 13: paragraph 1, page 5; paragraph 7, page 5; paragraph 7, page 5; paragraph 4, page 6; paragraph 3, page 7; paragraph 4, page 8; paragraph 3, page 22; paragraph 4, page 23; paragraph 5, page 23; paragraph 2, page 9; page 33; paragraph 2, page 24; paragraph 3, page 24
* In response to a postmeeting questionnaire, 7 of 9 investors ranked "identity of key trends and relationships among the data" as "essential", 2 of 9 ranked that information as "helpful"
* In response to a postmeeting questionnaire, 11 of 14 creditors and 5 of 6 investors agreed that current MD& A disclosures fall short of user expectations. They indicated three reasons for that view [pages 31 and 36]
* In response to a postmeeting questionnaire, investors offered several suggestions to improve MD& A [page 37]
* In response to a postmeeting questionnaire, 10 of 12 creditors indicated that MD& A disclosures for private companies would significantly improve their financial reporting. However, the creditors were split as to whether the cost of providing the information would be greater than its value. [page 32]
(b) measures in liquidity and reasons for changes in those measures (Refer to Section 10, "Operating opportunities and risks" for users' views about the importance of measures of liquidity. In general, many investors and creditors consider measures of liquidity as essential information.) See paragraphs 1 and 5 page 24 in Section 13
(c) identity and effect of unusual, infrequent, and nonrecurring transactions and events (Refer to Section 5, "Display", for users' views about the identity and effect of unusual, infrequent, and nonrecurring transactions and events. In general, many investors consider information about the identity and effect of those transactions and events as essential in estimating core income or core cash flows.)
II. FORWARD LOOKING INFORMATION
1. Identity and possible effect of key trends
* See quotes from the following in Section 13: paragraph 10, page 2; paragraph 4, page 5; paragraph 5, page 7; paragraph 8, page 37
* In response to a postmeeting questionnaire, 8 of 9 investors ranked "identity of key trends and relationships among the data" as "essential" information [page 21]
2. Major goals, strategy, factors that are critical to successfully implementing strategy, and major plans
* See quotes from the following in Section 13: paragraph 8, page 1; paragraphs 1-5, page 2; paragraph 3, page 4; paragraph 4, page 5; paragraph 7, page 5; paragraph 1, page 6; paragraph 5, page 7; paragraph 7, page 25; page 34; paragraph 6, page 26; paragraph 2, page 39; paragraph 2, page 40
* In response to a postmeeting questionnaire, 8 of 9 investors ranked "mission and intent of segment" as "essential" information [page 18]
* In response to a postmeeting questionnaire, 13 of 15 creditors indicated that they always or frequently discussed with management the company's "mission and intent" [page 28]
* In response to a postmeeting questionnaire, a majority of investors consistently ranked as "essential" information about management's business strategy
* In response to a postmeeting questionnaire, 16 of 17 creditors indicated that they always or frequently discussed with management the company's "strategy and strategic alignment" [page 28]
3. Opportunities and risks (Refer to Section 10, "Operating opportunities and risks". In general, many users consider information about operating opportunities and risks as essential for their purposes.)
4. Measures of leading indicators:
(a) backlog
* See quotes from the following in Section 13: paragraph 4, page 11; paragraph 5, page 11; paragraph 2, page 24; paragraph 4, page 24; paragraph 6, page 25
(b) innovation
* See quotes from paragraph 2, page 24
* In response to a postmeeting questionnaire, a majority of investors consistently ranked information under the caption "ability to innovate, adapt to change, and continuously improve" as "essential" information [pages 16 and 19]
* In response to a postmeeting questionnaire, 12 of 16 creditors indicated that they always or frequently discussed with management the company's ability to innovate, adapt to change, and continuously improve [page 28]
(c) other
* See quotes from the following in Section 13: paragraph 3, page 5; paragraph 6, page 5; paragraph 3, page 6
III. COMMENTS ABOUT OTHER KINDS OF INFORMATION
1. A survey concluded that "Overall economic information seems too general and nonspecific to be useful, while forecasts by economists are viewed skeptically" [paragraph 11, page 2]
2. A survey concluded that ". . . 'quality of management' did not emerge as one of the important types of information. . . Although management quality is extremely important to investors, they believe they can best understand it by evaluating performance , reputation, market position, and other company characteristics. In other words, management quality is an inherent and inseparable aspect of the other types of information." [paragraph 4, page 3]
3. A study of analyst reports concluded that "[Sell-side analysts give] more attention. . . to management when major changes in management have occurred, [when they consider] changes that new management will bring" [paragraph 2, page 5]
4. One investor stated "I don't see programs aimed at giving [investors] information from a marketing, merchandising, and distribution point of view" [paragraph 4, page 7].