12. Forward Looking Information
As part of its oversight activities, the Oversight Committee of the Financial Accounting Foundation interviewed and requested written comments (collectively, "the interviews") from thought leaders among the FASB's constituencies. There were 107 interviews in total, including 12 with representatives of financial statement users and 17 with regulators (a special class of financial statement users). [FASOversight, p. 1]
While the interviews were not designed to elicit criticisms of financial reporting, in general, or to identify the needs of users of financial information, interviewees did comment on those matters. [FASOversight, p. 1]
Following is a summary of the principal comments received [on the subject] from users and regulators relating to . . . the needs of users. [FASOversight, p. 1]
Projections and forecasts are helpful financial information; however, projections and forecasts need not be part of the basic financial statements. [FASOversight, p. 2]
__________
Need for a One-Year Cash Flow Statement [following 3 paragraphs]: Many of your questions regarding this subject can be answered with a simple statement. We make loans to enterprises that currently do not have sufficient cash to make business investments that are intended to generate more than sufficient cash in the future to repay the loan. It is our job, in making the loan, to assess the amounts, timing and uncertainties of those future cash flows. What document could be more relevant to and useful for that purpose than the enterprise's own projections of its cash flows, prepared under the supervision and with the advice of its independent accountants? [Also included in 5(c)] [RMA92, p. 3]
To be more specific, we use the projected cash flow data to: (1) assess the viability of the operation, (2) project debt service capability, (3) anticipate additional borrowing needs, and (4) understand the borrowers' expectations. We do not use those projections without first testing them for reasonableness. That task that is diminished in importance and complexity when either or both of two factors are present. One is the involvement in the forecast of the borrower's independent accountant. The other is assumptions that are set forth in detail; the more detailed they are, the less reasonableness testing we have to do. Nevertheless, we as lenders tend to "haircut" the borrowers' expectations and to supplement them with our own worst case scenarios. But, we do use forecasts! [Also included in 5(c)] [RMA92, p. 4]
You also ask why cash forecasts would be useful if there were more detailed income statement data and cash flows were presented in the direct format. The point is forecasts address the future. No amount of additional detailed reporting about the past, either on the income statement or on the cash flow statement, can replace projections of the future. Did we misunderstand you here? [Also included in 5(c)] [RMA92, p. 4]
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In their comments, professional [investors] . . . said that they are interested in long-range forecasts by segment, and that they feel companies sometimes manipulate segment data to obscure, rather than inform: [Also included in 3 (a) and 3(e)] [HILL KNOWLTON, p. 10]
"I'd like the annual report to show sales and earnings projections over the next ten years for each business segment." (Milwaukee brokerage analyst) [HILL KNOWLTON, p. 10]
__________
"Forecasts of company performance" was rarely mentioned by individual investors. Professionals wish they could obtain reliable, unbiased forecasts and would rate them much higher, but their experience has shown that company-generated forecasts are overly optimistic. Professionals tend to generate their own forecasts, lacking trustworthy forecasts from other sources. [Also included in 1(b)] [SRI, p. 32]
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[Context] The AIMR report's introduction to the section entitled "Summary of Important Positions and Guide to Future Actions" begins and ends as follows:
Much of this report relates to the present state of the art and implications for future developments in financial reporting. Righfully, so do most of the positions stated in this section . . . [T]hey all build on positions taken by AIMR in the past . . . [Also included in 1(b), 1(d), 3(d), 4, 5(a), 8(c), 11(a), 18(a), 18(c) and 18(d)] [AIMR/FAPC92, p. 59]
We expect the positions set forth below to build on the precedents of the past. That does not prevent them from breaking new ground, but they do not introduce significant inconsistencies with previous AIMR positions. To the extent that they do establish new stances those are largely the result of the changing world that we describe earlier in this report. [Also included in 1(b), 1(d), 3(d), 4, 5(a), 8(c), 11(a), 18(a), 18(c) and 18(d)] [AIMR/FAPC92, p. 60]
Those two paragraphs introduce the following summary of a position taken by the Committee.
First, management should explicitly reveal its strategies, plans and expectations. Much of this must come in the form of narrative descriptive material. Dollar amounts of budgeted and other anticipated amounts are useful for expressing plans in more concrete terms. Goals for growth rates in revenues, market share and the like should be stated. Analysts need anticipated amounts of key ratios, such as the return on total invested capital or on equity, the ratio of debt to equity and so forth. Factors that are expected to affect those ratios should be divulged, eg. major financing or capital spending plans. [Also included in 1(b) and 1(d)] [AIMR/FAPC92, p. 61]
[Context] Meeting of the Investor Discussion Group on October 16, 1992. When discussing the types of information they use to achieve their objectives, investors were asked a specific question on the use of forward looking information.
Committee/Staff/Observer
Nobody . . . brought up projected or forecasted financial information. I realize you all have your models and do what you have to do with the information, but do you get from somebody outside of your own machinations a statement of forecasted information? [Also included in 1(b)] [TI 10/16, p. 48]
Participant I-11
Some companies will give you their forecast, some on a regular basis, some only when something extraordinary has happened. Obviously, if they give you that information and you use it, you should use it with caution. [Also included in 1(b)] [TI 10/16, p. 48]
Participant I-10
Most companies will give you an objective they are trying to achieve or enough information to derive what implications for growth are by the things they tell you. I have not found too many companies unwilling to do that. [Also included in 1(b)] [TI 10/16, p. 48]
Participant I-9
How about requiring in financial reporting that a company submit at least the next year's projected results? [Also included in 1(b)] [TI 10/16, p. 48]
Participant I-10
I think it's crazy. [Also included in 1(b)] [TI 10/16, p. 48]
Participant I-1
A lot of companies stand behind the veil of "we're not allowed to give projections". But there are a few brave souls; one company we're involved with put a five year projection in the annual report and in the chairman's letter. [Also included in 1(b)] [TI 10/16, p. 49]
Committee/Staff/Observer
We're certainly not talking about requiring a five year projection, but perhaps asking management to put a one year projection. It seems to be that management ought to have an idea of where they're going for the next year. [Also included in 1(b)] [TI 10/16, p. 49]
Participant I-7
We have become a very litigious society. Until the society changes, I think that puts a great deal of burden on the company and its investors to require companies to come up with specific projections. [Also included in 1(b)] [TI 10/16, p. 49]
[Context] Meeting of the Investor Discussion Group on March 17, 1993. Part of the meeting was devoted to the topic of auditor involvement. During the discussion, comments were made on forward looking information.
Committee/Staff/Observer
. . . [W]ould you find projections of future performance prepared by management and audited to be of value? [Also included in 17(c)] [TI 3/17, p. 17]
Participant I-12
No. [Also included in 17(c)] [TI 3/17, p. 17]
Participant I-16
Yes. I don't see why that has to be audited, but I think that is something that management should be encouraged to do. If I own 100% of a business and I had somebody running it, I would ask to see his plans for the coming year. I understand that for a company with 1 million shareholders, you're not going to put out that kind of detail. But giving some indication of what you anticipate being able to accomplish in the future, the obstacles that you have to overcome, and the opportunities that you pursue, I think management should be encouraged to provide broad guidelines on that. And I don't think they should be encumbered by the auditors in that regard. I think that's between management and shareholders and I don't think the auditor has a role in that. If the auditor did have a role, it would dampen the explicitiveness of what management is saying; you don't want boilerplate, you want something that is meaningful. [Also partly included in 10(c) and included in 17(c)] [TI 3/17, p. 17]
Participant I-7
Coming back to [committee/staff/observer] comment about companies in the same major industry having different auditors, it puts auditors at a great disadvantage when asked to express an opinion about management's forecasts compared to analysts following a specific industry and being able to look at the whole forest. Auditors don't have the sense of what's going on from a competitive point of view. I see no reason for the auditors to be involved with management's forecasts. [Also included in 17(b) and 17(c)] [TI 3/17, p. 18]
Committee/Staff/Observer
I'd like to challenge that. Management makes a projection which is based upon estimates and assumptions. You said you want us to be involved in historical financial statements, in either expanding in a note or in an AD&A, by having standards to disclose more about measurement uncertainties. Those same uncertainties enter into a projection. As a starting point, couldn't the auditor be properly involved in a projection by expressing an opinion about whether management's assumptions are realistic (based on x dollars, x volume, x units)? [Also included in 9 and 17(c)] [TI 3/17, p. 18]
Participant I-12
That's our business, that's what we do. There's no need for us if the auditor is going to do it. [Also included in 9 and 17(c)] [TI 3/17, p. 18]
For real estate properties, there are current appraisals on most of these properties. Theoretically, banks and other financial institutions have set aside reserves to appropriately reduce the value of the assets to reflect the current situation. I don't know if real estate prices are going to go up or down; I will look at all of that and I'll make an estimate of my own. What I would like the accounting profession to do is to make it clear to me what the basis of all of that is. A question analysts ask a lot is: what percentage of original value have your nonperforming real estate loans be written down? If we know how much has already been written down, we then have some information that will help us make estimates about how much more write-downs should be made given our general outlook. I would like to know what has already been done and what the status is. Managements are always making estimates; analysts try to know what the assumptions are and make their own estimates that can be radically different. I'm not sure the accounting profession needs to get involved in future estimates; the most important function of financial statements is clarity. [Also included in 9, 17(b), and 17(c)] [TI 3/17, p. 19]
Participant I-11
The MD&A should be a discussion by management of the operating events that produce the financial statements. We all know that's not what it usually is. It's usually a regurgitation of the numbers. Similarly, the AD&A would be the auditors' discussion of the way the accounting principles and techniques were applied to the operating events to produce the financial statements. In that context, I think it's appropriate to have the auditors involved in estimates. For example, taking the real estate portfolio example, the balance sheet shows that on the balance sheet date there was an asset called real estate portfolio, and the value assigned to that asset was reached by making certain assumptions or estimates. In order to judge the accuracy of that figure, a user needs to have an idea of what those estimates were. As far as estimates in the future are concerned, I think [participant I-12] is right; that is what we're doing and I don't get any additional comfort by having an auditor tell me that management's estimates are good or bad because I'm making my own anyhow. A few years ago, when [name deleted] tried to do a big deal based on some projections of air travel that had factors and yields going nothing but up, that deal never got done because independent financial analysts said the assumptions were preposterous. [Also included in 13, 17(b), and 17(c)] [TI 3/17, p. 21]
Participant I-16
Perhaps there is a problem here with two different types of transactions. For manufacturing companies, we're dealing with transactions that occur in the future. Companies are going to provide a service and be paid for it. While in many financial business, transactions occurred 5 years ago and what we're putting in the financial statements are the results of those past transactions. For example, insurance companies selling a policy where you're not going to find out for 5 years whether the person dies or not, or gets sick, or his house collapses. Or lend money to a hotel and you don't know whether the hotel is going to be able to service the debt. Maybe there are different types of transactions here, but most of the transactions we deal with outside of financial transactions are prospective transactions. A forecast does not relate to questions of what happened in the past. A forecast of how many of [name deleted] is going to sell next year, I don't think that the auditors' job, that's my job as a software analyst. But if I were doing a bank, I would have to know what is the status of the loans I made 5 years ago because that has a bigger impact on my reported earnings of 1993 than the loans I make in 1993. [Also included in 17(b) and 17(c)] [TI 3/17, p. 21-22]
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Participant I-16
I would not grant that an auditor could write a good MD&A. If an auditor could, he's not doing his auditing job; he's spending too much time learning the nuances of the business. Management can write a much better MD&A than the auditor. Secondly, if the auditor is going to get involved in making projections or auditing projections about the future, the auditor is no longer independent. He now has a vested interest in the future financial reports corresponding to those forecasts; his objectivity is lost and I can no longer rely on his opinion. [Also included in 17(c)] [TI 3/17, p. 23]
[Context] Meeting of the Creditor Discussion Group on December 8, 1992. Part of the meeting was devoted to the topic of creditors' objectives and approaches. During the discussion, comments were made on forecasts and projections.
Participant C-11
It seems to me it's pretty important to do that if you have the opportunity to sit down and meet with management, and get some forecasts or projections, it's important to know the underlying assumptions. Then you can do your own research to see if they're reasonable or not. [Also included in 1(b)] [TC 12/8, p. 25]
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Participant C-5
The items that we are always looking for are projections on revenues and new products, particularly when they're rolling something out, or when they make a capex spending that's directed at a specific revenue target. We're looking back into historicals for as much as we can get, price-volume changes in revenues. And backlog is something we keep in mind. Backlog has proven to be fleeting in many cases, but it does give you a sense in evaluating this the potential success that a revenue stream and the realism associated with those projections. Everything is almost a reaction to the top line for management, and so the more we understand about the top line, the better off we are. [Also included in 1(b) and 13] [TC 12/8, p. 50]
Participant C-9
I second that one, and would add in the relationship between volume and cost structure. [Also included in 1(b) and 13] [TC 12/8, p. 51]
Participant C-7
The revenue side is where we start. Projected revenues, backlog comparisons from period to period to see the trends. [Also included in 1(b) and 13] [TC 12/8, p. 51]
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Participant C-14
We do a lot of the things everyone has mentioned. We get all the historicals, we calculate maybe 50 to 100 ratios, depending on the industry, we meet with the management, and then we put the other financial forecasts. But if there is one thing that we do in every credit analysis these days is run through this analysis, which is taking EBDIT, earnings before depreciation interest and taxes, after taking out non-recurring items. Then we take out capex, working capital changes, cash taxes, dividends, interest, principal payments to try to get to what's left. And it's sort of a smell test. But you can really get a good handle on the company if you're doing the forecast and you run this number. [Also included in 1(c)] [TC 12/8, p. 62-63]
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Participant C-14
We put together a five year financial forecast, principally because first of all managements provide us with their forecast, and we like to compare ours against theirs. But also because it forces you to consider and assess the debt maturities. [Also included in 1(c)] [TC 12/8, p. 63]
Participant C-15
We obviously do things in a very similar way. But in looking at forecasts, we look at management forecasts and then our own forecasts. But also importantly, we would do comparisons for management forecasts with one company versus how other companies in the same industry, how do they view their industry going forward. And over time you can build up a certain track record of which companies are consistently optimistically and overshoot, and which ones have unrealistic assumptions and so on. I think a lost can be done I guess both prospectively using comparative analysis, and also retrospectively, how has a company done versus its competitors, because just looking at the numbers in a vacuum or ratios in a vacuum may not tell you all you really want to know. [Also included in 1(c)] [TC 12/8, p. 63-64]
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Participant C-5
I sit on a credit committee and I'm probably one of the few people that still believes in projections. Everyone else has been so soured by the hockey stick of the past, and the lack of any kind of realism in the projections, that everyone has pretty much said give me the old, the historical, and I'll make my own set of projections out of this. Everybody that sits around the committee has already put their own particular view on what's going to happen. Personally, I don't care what we (the bank) think, but more what does the company actually think, and where do they really project they're going? One of the big issues we as a bank are wrestling with is that we get so much that we do get information overload, and we don't use the information effectively. Some of this abundance of information may ultimately just compound that problem instead of helping satisfy it. [Also included in 1(c)] [TC 12/8, p. 65]
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Committee/Staff/Observer
The last two questions, 16 and 17, deal with future and forward looking information. I would like to take these separately. What kind of future or forward looking financial information do you prepare? That question deals not just with whether you do X periods forward or if you prepare them at all, but what is the purpose in doing those forward? [Also included in 1(c)] [TC 12/8, p. 66]
Participant C-15
Most of the companies that we deal with that provide forecasts go out five years. But I think the credibility goes off dramatically after the second year; certainly beyond the third year it is real problematical as to how much weight you put on anything like that. [Also included in 1(c)] [TC 12/8, p. 66]
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Committee/Staff/Observer
The second question follows (question 17): should companies provide estimates of future cash flow earnings or financial position? If those estimates were provided, would they eliminate the need for you to do your own calculations? And if not, please distinguish how you would use company provided estimates in contrast to your own estimates? [Also included in 1(c)] [TC 12/8, p. 69]
Participant C-11
I think that any company estimate of some sort of five year earnings growth, or something like that, or for that matter any of the ones that I've seen in private placement basis, are definitely being taken with huge grains of salt, and relatively speaking, ignored. I mean it's dangerous for a company to put precise longer term estimates on anything because things aren't going to work out the way you might think, and it's just a way to get sued. Any forward looking information should be put in the context of goals and the very important things that company management should do in their public disclosure is to set out broad business oriented objectives. Do they want to get into this area or that area, and are the prospects in a general sense good or not as good as they had been, or whatever. And also some financial ratio guideposts in terms of goals for return on assets, or equity, or capitalization ratios. So I think some information can be given that gives people a sense of the future. [Also included in 1(c) and 13] [TC 12/8, p. 69]
Participant C-4
Most of our contractors don't prepare this type of information, and in some instances they're using the information we give to them. But it would be helpful, I think, as a discipline for them to make some projections with maybe the help of their CPA, and then compare themselves at year end. It would mean more management information they could use, and that we could look at, and they could give us in their financial statements a projection of where they're going to be. Then at the end of that year we could look at where they actually were in comparison to that projection, and question them probably in some very specific areas that we otherwise might not be able to have that information on, trying to determine why they didn't meet what they hope they would meet. [Also included in 1(c)] [TC 12/8, p. 69-70]
Participant C-3
I would emphasize the qualitative factors in reporting as to whether or not the past is indicative of the future. Case in point: We've had a very favorable yield curve environment here in the U.S. and bank margins have risen sometimes 100 basis points in the last four quarters. Do you expect that that will continue? I don't think that putting projections in financial statements meets anyone's needs. I agree with you, [participant C-11]. I also think that there is a danger involved in putting numbers in financial reports about the future. [Also included in 1(c) and 13] [TC 12/8, p. 70]
Participant C-13
I'm opposed to having companies publicly make estimates about future earnings and cash flow. I guess for three reasons: one would be if there is one area where we don't need information overload, this is one, so we can eliminate that potential information overload question. The second would be that I believe they lack credibility and reliability. And the third would be the temptation to game the numbers. I mean having once predicted a certain amount of earnings or cash flow or whatever it might happen to be, 12, 24, or however many more months out you're talking about, the temptation to game the numbers becomes extremely strong. Finally I might say that maybe it's preempting the job of the analyst, too. [Also included in 1(c)] [TC 12/8, p. 70]
Participant C-12
It would certainly never stop me from doing my own projections just because the company has got something in its reports. And generally I'd rather see the type of thing that [participant C-11] was talking about. If management has a number or a concept or a philosophy that they're managing to, I'd like to know that. That's important. Historically, most management that I've seen is terrible at projecting; the projections I've seen going out any length of time are pretty simplistic and pretty poor. One thing that is of value is certain negative information. Do these guys really think that they have so much revenue growth that they don't have to do a better job than this controlling expenses? Do these guys think there is so little volatility in the world that this is the kind of leverage they think they can get away with? So there's that kind of negative value, but that's about all I see. [Also included in 1(c) and 13] [TC 12/8, p. 70-71]
Participant C-5
I don't agree with providing projections in the public financials and with auditors contributing to those in a published financial statement, even for a private company. We do get projections, we wouldn't do any term finance without projections. Any credit greater than a year, we require projections. We do a separate bank case which is our own assessment of that and which is much more a downside analysis. What we do use them for are two key purposes. One is management is forced to reconcile their ability to do certain things in the future such as capital expenditures. We don't have to worry about two years from now management coming back and in and wanting to discuss a dramatic new capital expenditure program, because we've had an adequate discussion of those items well in advance of that. A second item and what we really do use management projections for is we tie our fences right off of that. Every covenant is tied just off of management numbers. So whether they want to be optimistic and rosy and put a 25% sales growth in there, we'll be just under them at 24% with our hurdle. And when they come back in, we'll charge them default rate pricing until you get that corrected. Projections are a valuable tool, and we wouldn't ignore them, but we would end up discounting them just like we discount managements' projections if they came from an auditor and would be part of the financial package. It would add to cost, it wouldn't add to value, necessarily. There are pieces of current historical information with more detail that would allow us to make our own judgments about those projections which are not adequately disclosed, like capital expenditures. That's what we need to do our analysis better. [Also included in 1(b), 1(c), and 17(b)] [TC 12/8, p. 71-72]
Participant C-1
I would not be a big supporter of projections. I agree with the comments that managements are terrible at making projections. Most buy-side analysts could probably get within 5% of five year cash flow; it's just not that complex. Projections have been of some help in companies that are rapidly growing. A good recent example would be [name deleted] that's adding 75 stores a year, and there it's very difficult to come anywhere near accurate projections. The other thing has already been brought up; the risk of not meeting projections provides substantial downside price action on bonds, much more than is warranted. And finally, quite often projections have a tendency to be more detailed and you're never able to reconstruct them in the future anyway. So they're not really that worthwhile. [Also included in 1(c)] [TC 12/8, p. 72]
Participant C-10
Sometimes we will get a company giving us a private placement, and then they'll put in a second package their projections. And first we're given the choice of do we want it, or sometimes they'll mail it, we'll mail it right back, because we don't want to be tied down. So we'll just work with the document that doesn't have the projections, and say we don't want it. Because otherwise we end up signing a letter of confidentiality, and our lawyers give us all sorts of hassle about how long that says we're tied down. There is a big issue here legally in terms of how far are you tied down and when are you released? [Also included in 1(c), 1(d), and 18(b)] [TC 12/8, p. 72]
Participant C-7
From a bank creditor's standpoint, the companies we're dealing with have very simple capital structure. You've got your typically privately-held company, you've got your owner's equity, and we're their other source of capital, we're their capital market. In that case, we want to see projections. It's essential for us. [Also included in 1(c)] [TC 12/8, p. 72]
Committee/Staff/Observer
When you get those projections, then, what do you do? [Also included in 1(c)] [TC 12/8, p. 73]
Participant C-7
Typically we'll take the historicals and almost do a variance analysis. What are the points of departure? What's changing, why do you think it'll change, and then we try to assess how likely or how realistic those assumptions are. [Also included in 1(c)] [TC 12/8, p. 73]
Participant C-2
This is where a wide user body does have different views on this issue. As a banker, particularly dealing with smaller and in many cases privately-held companies, I do like to get those projections. I use them in much the same way as [participant C-7] does, trying to understand how I think they will or won't be met, make some judgments about management's ability even to put together a forecast, in some cases. And definitely use them to look out over a period of time to project future borrowing needs, whether or not we're going to be willing to make additional loans in the future, given what we're looking at as a financial condition and structure. And we do use them. We use management's as a starting point, and tweak them as we feel appropriate based on our own observations. [Also included in 1(c)] [TC 12/8, p. 73]
Participant C-16
I heard different people use them differently, but I didn't really hear any consensus that we want to see them in the financial statements. I mean if we're going to make a loan to a cable system, clearly we want to have projections, and we'll get that in the ordinary course of our due diligence. But I didn't hear anybody here say they wanted to see them in standardized financial reports. [Also included in 1(c)] [TC 12/8, p. 73]
Committee/Staff/Observer
Does everybody agree that management's projections should not be in the financial statements? [Also included in 12] [TC 12/8, p. 73]
Group
Yes. [Also included in 1(c)] [TC 12/8, p. 74]
Committee/Staff/Observer
Now, let me go back to [participant C-16] and [participant C-2] and [participant C-7]; since you do get them on the initial credit, do you then get them periodically thereafter? [Also included in 1(c)] [TC 12/8, p. 74]
Participant C-16
By agreement, yes. [Also included in 1(c)] [TC 12/8, p. 74]
Participant C-7
Same situation. It's negotiable. [Also included in 1(c)] [TC 12/8, p. 74]
Participant C-2
In most cases, I do get them in the normal course of receiving the financial statement each year. They're supplemental information that we try to get. We don't always get them after the deal is done, but we try to. [Also included in 1(c)] [TC 12/8, p. 74]
Participant C-4
I can't remember the last time I've seen a going concern opinion on a financial statement. I don't know how much forward looking work auditors are doing when they're doing their audit work, and then how much historic hindsight review they're doing when they're auditing of financial statements. It's not happening, particularly as I mentioned earlier, in the percentage of completion accounting. [Also included in 17(b) and 17(c)] [TC 12/8, p. 74]
Participant C-15
I think that in certain industries, the utility industry, for example, it is common for companies to give a projection of what their three year or five year construction program is. So maybe some base level of information going forward could be provided in the financial statements, as opposed to full P&L and balance sheet for five years. [TC 12/8, p. 74]
Participant C-3
A lot of companies at least put in next year's expected capex. [TC 12/8, p. 75]
Committee/Staff/Observer
I think there is a distinction, though, there between what might be committed versus what might be planned. The public reporting is more along the commitments line as opposed to a plan might be for the next three years. [TC 12/8, p. 75]
Participant C-15
Well, even for utilities, there was--if I remember right, there was flexibility in the fact as to when they would time different expenditures, particularly when you're not talking about the big generating plant, but some of the transmission lines, or whatever. [TC 12/8, p. 75]
[Context] Meeting of the Creditor Discussion Group on February 2, 1993. Part of the meeting was devoted to the topic of disclosure about operating opportunities and risks. During the meeting, comments were made on forward looking information.
Participant C-17
The way I look at this is that I want help from you folks in terms of being able to identify a quantifiable risk, something that's measurable. Insurance that you dropped. But I don't want an accountant getting involved in trying to determine the future. I think that's management's responsibility, and my responsibility. [Also included in 10(b)] [TC 2/2, p. 31]
Participant C-13
I agree with that. I approach this whole thing with a fair degree of skepticism. I agree with what [participant C-11] said, I draw the analogy with the discussions of forecasting. I don't think that forecasting has a place in financial disclosure. And I don't think that what we're talking about here has a place in financial statements. Its place is elsewhere. [Also included in 10(b)] [TC 2/2, p. 31]
[Context] The papers are a summary of a committee and staff members' discussions with selected sell-side analysts from Goldman Sachs.
With the exception of disclosure of management's forecasts and projections, the analysts generally confirmed that [the following] list of areas for improvement is both accurate and complete. In particular, most emphasized the importance of disaggregated information. In contrast, most of the analysts were uncertain about management's forecasts and projections. Many were concerned about whether they could ever rely on those forecasts. [Some believe] that analysts [themselves] should develop their own forecasts. [The list recommends:]
1. better disaggregated information.
2. more complete quarterly reporting. That is, interim reporting that more closely resembles annual reporting.
3. better identification and explanation of extraordinary, unusual, and infrequent items.
4. better information about measurement uncertainties, and operating opportunities and risks.
5. improved comparability and consistency in financial reporting methods over two business cycles, including disclosure of ten year summary information.
6. disclosure of the company's goals and objectives
7. better clarity in external reporting without reducing the amount of information.
8. disclosure of management's forecasts and projections.
[Also included in 11(c) and 15] [GOLDMAN, p. ii-iii]
Every analyst emphasized the critical role in their work of external financial reporting. They also affirmed the importance of audited financial statements.
[Also included in 11(c) and 15] [GOLDMAN, p. iii]
[One analyst] examines 10 K's very carefully. He puts little or no stock in earnings forecasts, which he said are fragile and usually wrong. He emphasized that liquidity trends affect prices for real estate and he repeated his emphasis on cash flow per share. [Also included in 1(b)] [GOLDMAN, p. 1]