13. Nonfinancial Business Information, excluding Operating Opportunities and Risks
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]
"MD&A" information for nonpublic companies seeking capital would be helpful in assessing trends and understanding more about the enterprise and management's analysis of financial results. [FASOversight, p. 2]
__________
Lenders need to understand their customers' businesses, a necessity best met by open and good faith explanations of the business by the customer and his or her accountant, either in writing or verbally. [Also included in 5(a) and 10(b)] [RMA92, p. 2]
__________
[Regarding adoption of FAS 106] in preparing analyses for a specific company, many of the survey respondents (58%) make adjustments for certain company-specific factors. Most of these equity experts say they look at employee demographics (71%), whether the workforce is unionized (62%) and the nature of the benefit plan (52%). . . .Notably, the brokers in the group look more closely at employee demographics and the benefit plan than the money managers do. Fully 80% of the brokers cite employee demographics as a factor, while 57% of the money managers do; 61% of the brokers say they look at the nature of the benefit plan, while 38% of the money managers cite the plan as a factor. [Also included in 1(b) and 1(c)] [TOWERS PERRIN, p. 6]
__________
"[Companies] don't discuss problems candidly. They don't discuss the future of the company clearly." (Boston mutual fund analyst) [Also included in 2(a)] [HILL KNOWLTON, p. 6]
Professional investors . . . feel reports fall short in providing several kinds of information useful to their assessment of a company's future. These include management goals and strategy, research and development, competition, and the outlook. [HILL KNOWLTON, p.10-11]
Fifty-six percent of the professional sample agreed with the statement, "Annual reports all too often fail to clearly present management's goals and strategy." Representative comments: [HILL KNOWLTON, p. 11]
"Discussing the goals of the company and management's strategy of achieving those goals would be very helpful. Also, comments on how close the company came to achieving its goals and why it fell short or exceeded them would be good." (Boston investment counseling firm analyst) [HILL KNOWLTON, p. 11]
"I'd like more discussion of strategies and management objectives over the long term." (Philadelphia brokerage firm analyst) [HILL KNOWLTON, p. 11]
"Annual reports should try to look forward, instead of backward. I'd like to see more discussion of strategies and how a company did in relation to the rest of the industry and the economy." (New York brokerage firm analyst) [HILL KNOWLTON, p. 11]
"Annuals fail a lot on management strategy. Often, they just rehash what' been done in the company before. When that kind of sugar-coating happens, the 10-K becomes critical." (Chicago insurance group analyst) [HILL KNOWLTON, p. 11]
Professionals gave 76 percent rating to describing R&D and product development efforts as a way for annual reports to be most useful. They gave clearly captioned pictures of new products and R&D processes a 57 percent rating in helping them size up a company. [HILL KNOWLTON, p. 11]
Interestingly, 92 percent of the professional investors thought that annual reports all too often fail to present information on a company's competitive situation in its various businesses. (This information is currently required in the SEC-filed Form 10-K, but not in the annual report.) [HILL KNOWLTON, p. 11]
Sixty-two percent of the professional sample agreed that annual reports fail all too often to clearly discuss the outlook for the current year. As a New York bank analyst commented: [HILL KNOWLTON, p. 12]
"They could give a better, more realistic outlook for the coming year. I'd like to see management commit themselves to a certain course of action, and not just say, 'Well, we're expecting a bad year,' and that's all." [HILL KNOWLTON, p. 12]
Addressing one kind of information that often helps in formulating a company's outlook, professionals gave a 76 percent rating to presenting data on trends in the company's industry and in the economy as a way for annual reports to be most useful. [HILL KNOWLTON, p. 12]
__________
[Individual and professional investors] place low importance on overall economic information, but high importance on information about the company's industry. Economic information seems too general and nonspecific to be useful, while forecasts by economists are viewed skeptically. In contrast, information about the company's industry is deemed exceedingly important to understand the company's prospects. [The] table [below] shows the types of information needed by the investors and the percentage of the respondents who consider each type of information important or extremely important. [Also included in 1(b)] [SRI, p. 29]
Individual Investors' Information Needs
Important/
Rank Extremely
Type of Information Important
1 Company reputation 78.8%
2 Industry outlook 78.6
3 Company outlook 78.4
4 Company's stock 70.2
performance
5 Recent company 69.6
developments
6 Company financial 67.6
statements
7 Potential risks for 66.9
company
8 Historical financial 57.7
data
9 Information on 54.5
company's products
10 Information on the 52.0
economy
11 Brokerage company 42.5
research
12 Advice from 42.4
professionals
13 Business segment 39.5
information
Notes: 1. Findings are based on responses to the question, "For each type of information named, how important is that type of information to you when making a decision to buy or sell a company's stock?"
2. Heavy traders and holders of large portfolios generally rated all information types important or extremely important 10 percent to 15 percent more frequently than the overall averages shown above.
3. There is no statistically significant difference between the first three items on the list, nor between the fourth through seventh items.
Source: SRI International survey, 1986.
[Also included in 1(b)] [SRI, p. 30]
Interestingly, "quality of management" did not emerge as one of the important types of information--a significant departure from earlier research studies. 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. [Also included in 1(b)] [SRI, p. 29-30]
"Company reputation" is a vague concept, not clearly defined by the individuals, but extremely important to them nonetheless. The professionals see company reputation much the same as they see quality of management. Reputation is intricately woven with numerous other types of information and is not a separate category unto itself. Management likewise understands the importance of reputation. [Also included in 1(b)] [SRI, p. 30]
"Recent events affecting the company," which was ranked fifth by both individuals and professionals, represents highly situational information. Although timely knowledge of a major event such as an acquisition, sharply reduced revenues, a product breakthrough, or major litigation can prove critical to investment decision making, by and large "recent events" is recognized as an information category that normally does not significantly affect the performance of a security; it merely adds to the cumulative store of information about a company. [Also included in 1(b)] [SRI, p. 30-31]
"Company goals and strategic direction" are important primarily to the professionals. They recognize the sensitivity of this type of information--and thus a company's reluctance to disclose it--but they value the insights to be gained from a thorough understanding of a company's plans. They have a similar desire for market share and other competitive standing information, for details of a company's internal cost structures, and for other sensitive information, but they also understand the proprietary nature of these kinds of information. [Also included in 1(b)] [SRI, p. 32]
Somewhat surprisingly, individual investors rate the financial statements as more important than the narrative, less quantitative parts of the [annual] report, for several reasons. Primarily, of course, is the fact that financial performance is most clearly stated in numerical terms--a few simple terms for unsophisticated investors, plus numerous complex and abstract terms for sophisticated investors. For all their variation and occasional inaccuracy, numbers convey an impression of precision and clarity. The narrative parts of the annual report convey less precision, give more latitude for interpretation by the reader, and allow more room for manipulation by the writer. Importantly, the numbers in the annual report are known to be more closely reviewed by outsiders, specifically, the CPA firm conducting the audit and presenting its findings in the auditor's opinion included in each annual report. In addition, the SEC requires annual reports and other corporate communications to meet certain standards of disclosure Finally, virtually all investors understand that financial statements are governed, however imperfectly, by accounting principles and conventions. None of these disciplines is believed to be infallible, but few comparable disciplines are applied to the narrative parts of the annual report; hence, the narrative portions are felt to be less reliable sources of information. [Also included in 1(b) and 1(c)] [SRI, p. 53&55]
The four lowest ranked parts of the annual report are the same for both professionals and individuals. These are the chairman's/president's letter, general company and product information, the auditor's/CPA's opinion, and the officer and director information. [Also included in 1(b), 1(c) and 17(f)] [SRI, p. 53&55]
__________
Of course sell-side financial analyst reports contain extensive nonfinancial information. The nature and recent history of the company, its products, product pricing (particular pricing changes or promotions), customers, suppliers, industry, the national and international economy, and the company's competitive position (especially market share) are common issues. Market related phrases such as "customer(s)", "market(s)", "demand", "economy", and "competitive" occur approximately 9,500 times. A company's production capabilities, technologies, and marketing and distribution system are often evaluated. This includes new information systems for inventory management, order processing, product design, marketing and sales, etc. Superior production technologies are usually given extensive coverage. Expenditures for research and development, including basic research, are evaluated. [Also included in 1(b)] [PREVITS, p. 13]
The quality of management is regularly addressed [by sell-side analysts]. More attention is given to management when major changes in management have occurred, and in such cases there are considerations of anticipated changes that the new management will bring. It is common to see references to specific key personnel. Some reports discuss the organizational structure of the company. However, management compensation or bonus provisions are rarely discussed. [It is] interesting that there was no trend to provide "pay for performance" analysis. [Also included in 1(b)] [PREVITS, p. 13]
Labor productivity is also infrequently addressed [by sell-side analysts.] However, upcoming labor union negotiations are noted. [Also included in 1(b)] [PREVITS, p. 13]
Analysts extensively disclose and evaluate corporate and management strategy (revenue growth, cost management, marketing strategy, competitive positioning, etc.). Analyst use code phrases in such cases, for example, reporting that "we believe that management is focused on shareholder value." Analysts frequently appraise a company's competitors, and rank an individual company with its competitors on the themes above. Similarly, the potential effects of new, competing products or technologies are discussed, as well as the potential entrance of other companies as competitors. [Also included in 1(b)] [PREVITS, p. 13-14]
Additional analyst interest include:
(1) withdrawal of a public offering.
(2) significant litigation or negotiation over contract settlements,
(3) long-term contracts, and
(4) regulatory issues. [Also included in 1(b)] [PREVITS, p. 14]
The effect of product changes or new products, even when not yet marketed, are almost always assessed [by sell-side analysts,] particularly as to the company's ability to compete, and upon competing products, projected demand, revenue, and costs. [Also included in 1(b) and 1(c)] [PREVITS, p. 14]
Major projects, including modernization, acquisition, expansion, divestiture, and restructuring plans are evaluated [by sell-side analysts], and their estimated effects are also used in forecasting future performance. Major expenditures on plant, property and equipment are evaluated, particularly in terms of product costing and capacity expansion. Downsizing plans, and plans to reduce the size of the labor force, are also addressed by the analysts. Analysts also report on the effect of share repurchase plans and planned issuances of new securities. [Also included in 1(b) and 1(c)] [PREVITS, p. 14]
Phrases which focus on acquisition occur about 1,500 times in [sell-side analysts'] equity reports studied. Acquisitions are studied in several pro forma dimensions, including earnings and cash flow effects of financing the acquisition, the strategic fit, scale economics, and earnings contribution. [Also included in 1(b) and 1(c)] [PREVITS, p. 14]
Finally, analysts use recent and proposed PP&E expenditure levels as a measure of the quality of the company's assets. They evaluate the effect of new contracts (particularly long term) and licensing agreements on EPS. [Also included in 1(b) and 1(c)] [PREVITS, p. 14]
[Equity sell-side analysts'] attention . . . is given to revenue change, particularly as a result of product pricing, volume, and demand, and product mix. Production and sale volume information is analyzed. Expenses are only analyzed at a general level usually in terms of "margins", (c.4,200 times), or less frequently in terms of "operating costs", or "SG&A expenses." [Also included in 1(b) and 1(c)] [PREVITS, p. 15]
[Equity sell-side analysts give] more detailed attention to noncapital expenditures sometimes . . . in the areas of research and developments expenditures, depreciation, materials and labor. Consistent with their general approach, analysts often estimate expenses by operating unit (segment) and sources of possible cost efficiencies are noted. Relative cost levels are compared across companies and management efforts to reduce costs are noted and evaluated. [Also included in 1(b) and 1(c)] [PREVITS, p. 15]
The needs of analysts go beyond the historical cost, transition matching model of traditional statement based reports. Equity analysts provide softer, more frequent and more comprehensive details using subjective interpretations from a collection of micro and macro information so as to construct scenarios of likely alternative prospects of the company. [Also included in 1(a)] [PREVITS, p. 21]
As such traditional statements fulfill their expected role of providing historical perspective useful to analysts interested in developing outlooks based on an objectively reviewed performance report, conservatively states. [Also included in 1(a)] [PREVITS, p. 21]
[Context] Meeting of the Investor Discussion Group on October 16, 1992. Throughout the meeting, investors mentioned the role of nonfinancial business information in their approach to evaluating equity securities and the current lack of adequate disclosure of nonfinancial business information.
Participant I-6
As a fundamental analyst, I try to forecast earnings. In order to forecast earnings, you have to have a basic understanding of what the company is doing and how it does it. That includes an understanding of the product and the market for the product and, basically, when you look at financial reports, the only thing they tell you is a bunch of numbers that are financial related, but it would help if we knew what the quantity was of what the company produces. There is also a lack of compliance with FAS 14 on segment disclosures. So when we try to forecast earnings and we don't know the quantity of products the company produces, it's very hard to really forecast those earnings. [Also included in 1(a) and 3(a)] [TI 10/16, p. 3]
__________
Participant I-6
The one thing that is missing with U.S. financial statements, much more than some of the Australian or Canadian financial statements, is the lack of production data that you need to get to those earnings numbers. In some foreign company reports, you find a lot more data behind the financial numbers. In a mining example, you know the production by quarter, the ore grades by quarter, the recovery rates; none of that is found in U.S. financial reporting. [TI 10/16, p. 8]
__________
Participant I-8
There are just as much adjustments to cash flow numbers or analysis of cash flow numbers as there are if you're looking at earnings. I believe cash flow is more important. When I do a cash flow analysis, I have my own form of abbreviated cash flow statement and I take out nonrecurring items or things that I can't possibly predict. Then I get to a number that is deducted from or added to working capital. Once you get into working capital, there is no way I can predict how management is going to change working capital. Therefore, I would like to see more discussion about, for example, the level of inventory relative to sales and, if they built inventory, why? [Also included in 1(a)] [TI 10/16, p. 16]
Participant I-7
I use much of the information listed here. What I don't see is programs aimed at giving us information from a marketing, merchandising, distribution point of view. [Also included in 1(b)] [TI 10/16, p. 17]
__________
Participant I-11
For example, when I look at companies in the wholesale distribution area, I'm interested in their vision in how their business is evolving and how they are positioning themselves to deal with the changing environment. Then I go back and say what this implies in terms of earnings, sales, expense ratios, cash flows, and other financial issues. But the most important things aren't in the financial statements at all. [Also included in 1(b)] [TI 10/16, p. 18]
Participant I-6
Thinking about the purpose of financial reporting reminds me of an annual report of a mining company a few years ago where two-thirds of the chairman's letter in the report talked about gold. Yet the financial statements did not disclose any financial data on the gold operations. One of the things not clear to me is whether the financial statements are just the audited portion or the report as a whole? [Also included in 1(b)] [TI 10/16, p. 18]
A lot of production data or industry-type data that help rank the company within their peer group. You can find a lot of that in reports by other mining companies elsewhere around the world, but not in the U.S. [Also included in 1(b)] [TI 10/16, p. 20]
Participant I-5
More segment breakout is a critical thing (consistently presented). Also, as for information that you can get externally that could be provided in the financial statements, if you can get the aggregate statistics for an industry from the government or some statistical service or some trade organization, I think you're better served doing that than relying on the company's annual report, because you are going to some kind of an objective benchmark outside the company. [Also included in 1(b) and 3(b)] [TI 10/16, p. 20]
Participant I-7
I head a subcomittee that looks at investor information in the electrical equipment industry. The disseminated information is very uneven. A major effort was made over the last 5 years to get some consistency in FAS 14 reporting; probably 75% of my companies do not report sufficiently on a FAS 14 basis. The other point that is absolutely critical is giving out meaningful industry information. In the more mature industries, you can get government statistics, but in a lot of cases, those statistics are 12 to 24 months old in time. If I can get some consistency in reporting in the annual report on industry information, that is, total statistics, growth by segments, and market share, the truthfulness of that information can be checked by playing one company off against another. That information is very critical. [Also included in 1(b) and 3(a)] [TI 10/16, p. 20-21]
__________
Participant I-11
Another point is the MD&A which usually reads something like this: sales were up because we sold more products at higher prices, cost of goods was up because we paid more for raw materials, and gross profit was down because cost of goods went up more than sales. That's about what you get in 90% of MD&A; that is a farce. Either require management to have meaningful discussion of their operations or get rid of it. [Also included in 1(b) and 2(d)] [TI 10/16, p. 22]
__________
Participant I-12
I want to come back to the MD&A. Not only the discussion of the income statement approach is bad, but try to look at the balance sheet. There aren't many people who would have realized the problems that were emerging at [name deleted] on lending businesses unless you looked at their balance sheet from a lender's viewpoint. The MD&A has just been so bad. Companies say the SEC has certain requirements and you can't get your statements out to the SEC in a timely fashion unless you meet their requirements. If you start looking at MD&As across industries, they all read the same way. [Also included in 2(d)] [TI 10/16, p. 23]
__________
Participant I-8
Part of this will be the result of the pressure that the AICPA can bring on management to make more disclosures. The most common argument for limiting segment disclosures is the fear of competitive disadvantage. A company that I have been following for a long time in Long Island and that has a sensational record of growth have been providing for a long time very detailed market share information, including what they thought their competitors' shares are, and it hasn't been a disadvantage to them. I would argue that additional disclosure doesn't hurt. [Also included in 1(b) and 3(a)] [TI 10/16, p. 25-26]
__________
Participant I-6
I think the formal statements are very important. I include them in my model and I see the % changes. But more importantly, then I read the footnotes and the front of the annual report and I try to reconcile what they say about the company to what the financial statements actually say. Nine out of 10 times, the MD&A doesn't even address what changed in the financial statements. [Also included in 1(b) and 2(d)] [TI 10/16, p. 27]
__________
Participant I-1
Another big issue not easily quantified is the environmental side. The lack of information about environmental considerations is an impediment to business today; you can't get a bank loan on a real estate property without providing information about the current and previous use of the property. The environmental issue is treated the same way that OPEB was handled five years ago; we got a problem and don't know what it is but maybe something can be done to quantify that better (or even a range in the footnotes would be helpful). [Also included in 1(b)] [TI 10/16, p. 31-32]
Participant I-7
Particularly for companies that are in financial difficulty, or moving in that direction, I would like to see bank covenants. [Also included in 1(b)] [TI 10/16, p. 45]
Committee/Staff/Observer
Can you demand a copy of covenants to the company? [Also included in 1(b)] [TI 10/16, p. 45]
Participant I-7
I can ask for it. Let me follow with another point. Especially in the financial area, if companies are setting up reserves, I would like to see when the reserves are used. I would like a stream of information as the assets are written off about what part of the reserves has been applied against those assets. [Also included in 1(b) and 5(b)] [TI 10/16, p. 45-46]
Participant I-5
Generally speaking, you can get the bank covenants directly from the SEC even though the company will not send them to you directly. Similarly, you can get AIS-4 registrations from the SEC well before you can get a preliminary statement out of the company, and the documents available are listed in the exhibits to the 10-K. Although the detail is there at the SEC, the company won't send it to you and they don't let you know that it's there. [Also included in 1(b)] [TI 10/16, p. 46]
Participant I-1
In the way of additional information, a break up between maintenance and gross capital expense and the same for R&D would be worthwhile. On the revenue side, price volume information is provided by some companies; for example, supermarkets provide that information. [Also included in 1(b) and 5(b)] [TI 10/16, p. 46]
__________
Participant I-4
A very important piece of information is the proxy material. We use it because in a lot of cases, there are different types of programs that have a lot to do with bonuses, options, SARs, different things that are important. The proxy statement is as important as the other sources of information we have talked about today; however, reading a proxy statement is always extraordinary confusing but it eventually helps us understand better the company. In the 25 years I have been in this business, when I go to a conference where a company is appearing for the first time and brings a folder of information, one out a 100 companies includes a proxy. It's extraordinary that an analyst meeting a company for the first time never has that material. [Also included in 1(b)] [TI 10/16, p. 47]
Participant I-10
I agree with [participant I-4] about the usefulness of a proxy statement. A lot of the flagrant abuses of stockholders' money have shown up in proxy statements. Often times when you confront management with an issue which is just alluded to in the proxy statement, management is hypersensitive about it because they know they're trying to conceal something from their stockholders. The proxy statement tells you something about the ethics of the people you're dealing with. [Also included in 1(b)] [TI 10/16, p. 47]
Participant I-8
I am on the mailing list of a lot of corporations without being a stockholder. The information that comes out never includes a proxy. When you get the annual report, you don't get a proxy statement unless you're a stockholder. [Also included in 1(b)] [TI 10/16, p. 47]
Participant I-4
It should just be mandatory that the proxy statement be a part of financial reporting. [Also included in 1(b)] [TI 10/16, p. 47]
Participant I-1
When you call for financial information, you can make 2, 3 or 4 requests before that proxy finds its way to your office. [Also included in 1(b)] [TI 10/16, p. 48]
Participant I-6
The proxy statement has a lot of useful information and it is extremely difficult to get. It would help if it could be put into a standardized form as part of financial reporting. One of the most flagrant examples of misinformation I found in a proxy statement was when a board member's salary was the only one in the entire place that was put in there per month instead of on an annual basis. [Also included in 1(b)] [TI 10/16, p. 48]
__________
Participant I-6
A couple of simple ones: book value, debt ratios. Trying to do the book value is difficult on a company based on their quarterly numbers. First of all, most companies don't report actual shares outstanding, they give the average for the quarter; that doesn't help you get a book value number. Debt ratios: every company that I follow has its own little twist to it. I think the value that the accounting profession could bring is some standardized ratios that would be reported and audited on an annual or quarterly basis and have very specific definitions for those ratios. [Also included in 1(c), 11(c), and 17(b)] [TI 10/16, p. 51-52]
Participant I-8
One information that would be useful would be days outstanding and inventory turnovers. [TI 10/16, p. 52]
Participant I-7
I'm interested in knowing the ratios, the information that you look at from an internal point of view providing it is not going to hurt your business position. I want that information. [Also included in 1(c)] [TI 10/16, p. 53]
Participant I-1
Any company which depends upon bids for its business will generally issue a backlog list; the only thing you can track as an externalist is what they publish as a rolling backlog and you have no concept of what kind of margins they bid those contracts at until 18 to 36 months later when it flows to the income statement. [Also included in 1(c)] [TI 10/16, p. 53]
Participant I-7
I had that exact situation where a company in the capital goods industry had an earnings problem and we missed it because, in the prior 6 months, they had taken business in the backlog with a narrow margin. I know that at the plant level that information is available and that should not have happened. [Also included in 1(c)] [TI 10/16, p. 53]
Participant I-1
On the one hand, as investors, we want to know immediately how they bid on that contract. On the other hand, they will argue vehemently that it is a highly competitive industry and they can never give away what the margins were for contracts because they may have a strategic reason on a given contract. I don't know how you balance that out in a particular industry. [Also included in 1(c)] [TI 10/16, p. 53]
Participant I-6
We have asked for a long time that the aluminum companies disclose their average realized prices historically. Now they're starting to do it. I don't understand the competitive disadvantage they experience by giving you the historical realized prices of a commodity and yet it took forever to get it out. [Also included in 2(d)] [TI 10/16, p. 54]
In the mining industry, you have to project your operating data. As I said two hours ago, we lack good operating statistics in the U.S. We get much better operating statistics overseas. I start with the basic output of each mine to get down to how much they are going to earn in that quarter. [Also included in 1(c)] [TI 10/16, p. 55]
Participant I-12
You should try getting operating data for financial companies. How many loan customers do you have? What is the average balance? What I have done is find out all kinds of data sources and created a rather weird model for interpolating those kinds of things and making estimates going forward about potential growth rate for given geographic areas. But it's a lot of work but if we're in a world of low inflation, that unit growth of number of customers is going to be critical in this particular industry. That's one area where financial companies under-report comparative to industrial companies. [Also included in 1(c)] [TI 10/16, p. 56]
Committee/Staff/Observer
Coming back to [participant I-6]'s point about the lack of production data. Do you have an explanation for the fact that you find more disclosures of production data overseas than in the U.S. because, to my knowledge, those disclosures are not required anywhere? [Also included in 18(a)] [TI 10/16, p. 59]
Participant I-6
The only explanation I would have for it is that management of foreign companies tend to feel that it's a better way to communicate with shareholders on how they're growing the company. It is more readily available and more part of their financial disclosures and their presentations to the financial community overseas than it is here. Here, they focus on the financials more, which is very important, but in the basic industries it's hard to get to those numbers without understanding the production data. It seems that the companies here are very reluctant to disclose that information. [Also included in 18(a)] [TI 10/16, p. 60]
Participant I-2
You're also talking about situations where the extractive industry is a much more greater % of GNP than here. In the S&P 500, I think metals are maybe less than 1%. But if you're talking about South Africa or Australia, for example, it's a much bigger %; in Canada, gold is 5% of the S&P equivalent in Canada. [Also included in 18(a)] [TI 10/16, p. 60]
[Context] Responses to the postmeeting questionnaire to the October 16, 1992 Investor Discussion Group meeting.
QUESTION 4
The Committee has identified through its research to date four categories of business information about a company and its environment used by investors who follow the fundamental approach-the economy, the industry, the company, and segments of the company.
Question 1: Please indicate the relative E for Essential
significance of each kind of information H for Helpful
listed by entering the appropriate letter I for Merely Interesting
(right) in the first column of the table: N for Not Useful.
Question 2: Please identify your source X for External Reporting
of each kind of information listed by G for Government
entering the appropriate letter(s) (right) P for Presentations by
in the second column of the table: Management
M for Discussion with
Management
C for Discussion with
Competitors,
Customers, or
Suppliers
T for Industry or Trade
Associations
O for Other. Please
identify
Question 3: For information not provided S for Existing Sources
by external reporting, please indicate in Satisfactory
the Yes or No column of the table whether V for Company not Best
or not the information should be required Source for
to be provided by external reporting. If Verifiability Reasons
your answer is no, explain why by entering H for Disclosure that
the appropriate letter (right) in the final could Harm the
column of the table: Company's
Competitive
Position
B for Cost to Company
Exceeds the
Benefits of the
Information
R for Redundant
O for Other. Please
identify
Question 4 (continued)
Question 1 Question 2 Question 3
Significance Sources Yes No Explain
No
General economy:
Social, demographic, technological, Essential: X2;G3;P3;M-2 1 S1;V1;B-
political, and regulatory trends 3 ;C-2;T-3 1
Helpful: 6 X1;G3;P1;M3; 1 4 S-2;V-2
C2;T3;0-1
Historical macroeconomic data for
period under analysis-usually two
business cycles-and projected
macroeconomic data for one or two
business cycles
Real gross product Essential: G-2; P-1; 1 R-1
2 C-1; T-1
Helpful: 4 G-4;T-2;O-1 3 V-1;B-2
Interesting: G-3;O-1 3 S-2;V-1
3
Major expenditure components of Essential: G-2; P-1; 1 R-1
gross product, for example, personal 2 C-1; T-1
consumption expenditures for durable
goods, nondurable goods, and
services
Helpful: 5 G-5;T-2;O-1 4 S1;V1;B-
2
Interesting: G-2;O-1 2 S-1;V-1
2
Employment Essential:1 G-1;P-1;C-1;
T-1
Helpful: 6 G-6;T-2;O-1 5 S-1;V-1;
Interesting: G-1 1 B-2;R-1
1 G-1;O-1 1 S-1
Not V-1
Helpful:1
Productivity Essential: G-1;P-1;C-1;
1
T-1 4 V-1;B-2;
Helpful 5 G-5;T-2;O-1
2 R-1
Interesting: G-2 1 S-2
2 G-1;O-1 V-1
Not
Helpful: 1
Timing and amplitude of business Essential: G-1;P-1;C-1;
cycles 1
T-1 5 S-1;V-1;
Helpful: 6 G-6;T-2;O-1
1 B-2;R-1
Interesting: G-1 S-1
1
Monetary and fiscal policy Essential: G-2;P-1;C-1; 1 R-1
2
T-1 5 S1;V2;B-
Helpful: 6 2
G-1 1 S-1
Interesting: G-6;T-2;O-2
1
G-1
Inflation Essential: G-3;P-1;C-1;
3 T-1 2 S-1;R-1
G-5;T-2;O-2 4 V-2;B-2
Helpful: 5 G-1 1 S-1
Interesting:
1
Question 4 (continued)
Question 1 Question 2 Question 3
Significance Sources Yes No Explain
No
General economy (continued):
Interest rates (including risk-free Essential: G-2; P-1; 1 S1
rates and risk premiums) 2 C-1; T-1
G-6;T-2;O-2 5 V2;B-2;R
Helpful: 6 G-1 1 -1
Interesting: S-1
1
Tax rates and policy Essential: G-1: P-1;
1 C-1; T-1
G-7;T-2;O-2 6 S-1;V-2;
Helpful: 7
G-1 1 B-2;R-1
Interesting: S-1
1
Each industry in which company
participates or plans to
participate:
Definition of industry Essential: G-1;X-4;P-6; 4 1 S-1
6
M-5;C-1;T-1
Helpful: 1 G-1;M-1;
C-1;T-1 1 S-1
Interesting: P-1;M-1;C-1
2
Shifts in boundaries of industry Essential: X-2;G-2;P-4; 2 2 S-1;V-1
(resulting from economic, social, 5
demographic, technological, M-3;T-4;C-1 1
political, and regulatory trends) Helpful: 3 X-1;G-1;P-1;
1 S-1
Interesting: M-2;C-1;T-1
1 X1;P1;M1;C-1
Industry structure and outlook
Industry trends and outlooks Essential: X-5;G-3;P-8; 3 3 S-3;
9 V-1;H-1
M-8;C-5;T-8;
O-1
Ability of new companies to enter Essential: X-2;G-3;P-2; 2 S-1;V-2;
industry 4
M-3;C-3;T-3; H-1
2 3
Helpful: 5 O-1 S-1;B-1;
X-1;P-3;M-5;
O-1
C-2;T-4
Ability of substitute products or Essential: X-3;G-3;P-7; 7 S-2;V-2;
services to displace industry's 9
M-8;C-6;T-6; H-3;O-1
O-1
Resources (sources and Essential: X-1;G-3;P-2; 1 S-1;V-1;
availability; relative bargaining 3
power of resource providers) M-2;C-3;T-3; H-1
5
Helpful: 5 O-1 S-1;V-1;
X-1;P-2;M-3;
H-2
C-2;T-3
Customers (number, names, and Essential: X-4;G-3;P-2; 3 2 S-2;V-1;
bargaining power of dominant 7
customers participating in M-4;C-5;T-4; H-1
industry's market)
O-1 1
Helpful: 1 O-1
P-1;M-1
Interesting: H-1
1 M-1
Question 4 (continued)
Question 1 Question 2 Question 3
Significance Sources Yes No Explain
No
Each industry in which company
participates or plans to participate
(continued):
Competitors (number and names of Essential: X-2;G-3;P-4; 2 5 S-2;V-2;
and intensity of rivalry among major 9
competitors within industry) and M-8;C-6;T-6; H-3;O-1
their positions within industry O-1
(trends in their market shares,
relative profitability, resources,
and competitive advantages and
disadvantages)
Company:
Historical and projected aggregate Essential: X-3;P-4;M-4; 2 2 R-1;O-1
financial and operating data for 6 C-1; T-3
industry X-1;G-1;P-2; 1 1 B-1
Helpful: 2
M-1;C-1;T-2
Mission and intent (company's Essential: X-3;P-4;M-6; 4
purpose in general terms and its 6
long-term intent) C-1;T-1 1
Helpful: 1 P-1;M-1 1 S-1
Interesting: M-1
1
Strategy and strategic alignment
Business strategy Essential: X4;P7;M8;C-1 5 1 S-1
8 ;T-1
Consistency of strategy with Essential: X-3;G-1;P-5; 1 3 H-1;O-2
external trends (economic, social, 6
demographic, technological, M-6;C-2;T-2 2 1 S-1
political, regulatory, and industry) Helpful: 3 P-3;M-3
Consistency of strategy with Essential: X-5;P-6;M-7; 4 2 V-1;H-1
managerial approach (operations; 8 C-2
allocation of resources; and P-1;M-1 1 S-1
director, management, and employee Helpful: 1
incentives)
Ability to innovate, adapt to
change, and continuously improve
Enabling infrastructure Essential: X-3;P-4;M-5; 2 2 S-1;B-1
(organizational structure, business 6 C-3
strategy, management philosophy, and P-3;M-3 2 1 H-1
employee incentives) Helpful: 3
Recent process, product, or service Essential: X-4;P-3;M-5; 3 1 S-1
innovations; sources and 6 C-3;T-2
consequences X-3;P-3;M-3 2 1 H-1
Helpful: 3
Recent changes in environment; Essential: X-5;P-4;M-6; 5
nature and timing of company's 7 C-4;T-4
response X-1;P-1;M-1 1 H-1
Interesting:
1
Rate of change in company's Essential: X-5;P-5;M-6; 4 1 O-1
performance (key operating and 7 C-3
financial measures; trend in rate of X-2;P-2;M-2 2
change; reasons for that trend) Helpful: 2
Competitive advantages and Essential: X-3;P-6;M-7; 1 4 S-1;V-1;
disadvantages (identity, source, and 7 C-5;T-2
sustainability) P-2;M-2 2 H-2;O-1
Helpful: 2 H-2;B-2
Opportunities and risks managed at
company level
Question 4 (continued)
Question 1 Question 2 Question 3
Significance Sources Yes No Explain
No
Company (continued):
Prospect of participation in Essential: X-2;P-5;M-6; 1 3 H-3
additional industries; resulting 6 C-3; T-1
impact on company X-1;P-3;M-3; 1 2 H-2;B-1
Helpful: 3
C-1
Opportunities and risks resulting Essential: X-2;P-4;M-5; 2 1 H-1
from concentrations (for example, in 5 C-2;T-1
company's assets, customers, or X-1;P-3;M-4; 1 3 H-3
suppliers) Helpful: 4
C-1
Risk of illiquidity Essential: X-5;P-5;M-6; 4
6 C-2;T-1
X-2;P-1;M-2 1 1 H-1;B-1
Helpful: 2
Contingent gains and losses related Essential: X-4;P-5;M-6; 4
to company's assets and liabilities 6 C-2;T-1
X-3;P-2;M-3; 2 1 H-1;B-1
Helpful: 3
T-1
Historical data about company (for
period under analysis, often two
business cycles)
Financial data (financial position, Essential: X-5;P-4;M-5; 5
income, and cash flows) 7
G-1;C-1;T-1 2
Helpful: 2 X-2;T-2
Nonfinancial operating data Essential: G-1; 2
4 X-3;P-2;
M-3; 3
Helpful: 4 C-1;T-2
X-4;P-3;M-3;
C-1;T-1
Identity of key trends and Essential: X-3;G-2;P-6; 2 2 V-1;O-1
relationships among data and reasons 7
that those trends and relationships M-7;C-2;T-2;
related to company differed from 2 V-2;B-2
those related to competitors, Helpful: 2 O-1
industry, or economy to provide G-2;T-2
insight about the company's strategy
and strategic alignment; its ability
to innovate, adapt to change and
continuously improve; identification
and sustainability of its
competitive advantages and
disadvantages; opportunities and
risks; and cash flows
Prospective data about company
Cash flows (cash from operations, Essential: X-2;P-3;M-4; 2 1 O-1
from investments to support 6 C-2;T-1
operations, from nonoperating X-1;P-1;M-1 1 B-1
investments, and for servicing debt) Helpful: 2 X-1;P-1;M-1 1 B-1
Interesting:
1
Stock value Essential: P-1;M-2;C-2; 1
3 T-1
X-1;T-2 3 V-1;B-1;
Helpful: 3
O-1 1 O-1
Interesting: 1 V-1
1
Not Useful:
1
Question 4 (continued)
Question 1 Question 2 Question 3
Significance Sources Yes No Explain
No
Each industry segment within company
Description of business of segment
Principal products and services Essential: X-6;P-7;M-8; 6 1 S-1
9 C-1;T-1
Principal market served by products Essential: X-5;P-7;M-8; 5 2 S-1;V-1
and services; size of market 9
T-4;C-3
Process used to make product or Essential: X-2;P-3;M-4; 1 2 S-1;B-1
provide service 5 C-1;T-1
X-1;P-3;M-3; 3
Helpful: 3
T-2 1 H-1
Interesting:
1
Key inputs to process Essential: X-2;P-3;M-4; 1 2 S-1;B-1
5 C-1;T-1
X-1;P-3;M-3 3
Helpful: 3 T-2
M-1 1 H-1
Not
Helpful: 1
Distribution methods for products Essential: X-2;P-4;M-5; 2 2 S-1;B-1
and services 6 C-1;T-1
X-1;P-3;M-3; 2 1 H-1
Helpful: 3
T-1
Seasonality and cyclicality Essential: X-3;P-5;M-6; 3 2 S-1;B-1
7 C-1;T-3
X-1;P-2;M-2 2
Helpful: 2
Regulation and legislation Essential: X-5;G-1;P-6; 5 1 B-1
affecting segment 8
M-7;C-2;T-4 1 S-1
Helpful: 1 P-1;M-1
Importance of patents, trademarks, Essential: X-3;P-4;M-5; 4
licenses, franchises, and 6 C-2;T-1
concessions held X-1;P-3;M-3 3 H-1;B-2
Helpful: 3
Mission and intent of segment Essential: X-5;P-6;M-7; 6
8 C-1;T-1
P-1;M-1 1 S-1
Interesting:
1
Strategy and strategic alignment
Business strategy Essential: X-7;P-8;M-9; 5 1 S-1
9 C-2;T-1
Relationship between company's and Essential: X-6;P-6;M-7; 4
segment's strategies 7 C-1;T-1
P-2;M-2;C-1 1 1 O-1
Helpful: 2
Consistency of strategy with Essential: X-2;P-3;M-4; 1 1 V-1
external trends (economic, social, 4 C-2;T-2
demographic, technological, X-3;P-5;M-5 4 B-1;S-2;
political, regulatory and industry) Helpful: 5
O-1
Question 4 (continued)
Question 1 Question 2 Question 3
Significance Sources Yes No Explain
No
Each industry segment within company
(continued)
Consistency of strategy with Essential: X4;P4;M5; 1 3 V1;H1;O1
managerial approach (operations; 6 C-1;T-1
allocation of resources; director, X-2;P-3;M-3 2 1 S-1
management, and employee incentives) Helpful 3
Position within industry
Market share and trend in market Essential: X3;P6;M7:C3; 3 2 V1;H1;R1
share 7 T4
Helpful: 2 X2;G1;P2;M2; 1 1 V1;H1
C1;T1
Number of competitors and names of Essential: X2;P3;M4;C2; 2
major competitors 4 T3
Helpful: 5 X2;P3;M5;C2; 2 3 V2;B1;R1
T3
Relative profitability and Essential: X2;P3;M5;C3; 3 V1;B1R1
resources of competitors 5 T4
Helpful: 3 X1;P2;M3;C2; 3 V3;H1;B1
T2
Interesting: P1;M1;T1 1 V1;B1
1
Relative competitive advantages and Essential: X2;P4;M5;C3; 1 2 V1;H1;R1
disadvantages (identity, source, and 5 T3
sustainability)
Helpful: 4 X1;P4;M4;C2; 4 V3;H1;B3
T2
Ability to innovate, adapt to
change, and continuously improve
Enabling infrastructure Essential: X3;P3;M4;
(organizational structure, business 4 C-1;T-1
strategy, management philosophy, and
employee incentives)
Helpful: 2 X1;P2;M2 1 1 S1
Interesting: P2;M3 3 S1;V2;B2
3
Recent process, product, or service Essential: X4;P5;M6;C3; 2 2 S1;H1;B1
innovations; sources and 6 T-1
consequences
Helpful: 2 P2;M2 2 V2;B2
Interesting: M1 1 S1
1
Recent changes in environment; Essential: X5;P6;M7;C2; 5
nature and timing of segment's 7 T4
response
Interesting: M1 1 S1
1
Rate of change in segment's Essential: X4;P4;M5;C2; 4
performance (key operating and 6 T2
financial measures; trend in rate of
change; reasons for that trend)
Helpful: 3 X3;P2;M2 3
Question 4 (continued)
Question 1 Question 2 Question 3
Significance Sources Yes No Explain
No
Each industry segment within company
(continued)
Opportunities and risks managed at
segment level
Prospective changes in segment's Essential: X4;G1;P5;M6; 2 1 V1
industry attractiveness (broad 6 C3;T4
social, demographic, technological,
political, regulatory, and other
trends that affect the segment; and
industry trends including changes in
relative costs, improvements in
existing products or services,
introductions of successful new
products or services, and
development of specific sectors of
market)
Helpful: 3 P3;M3;T1 3 V3;B2
Opportunities and risks resulting Essential: X3;P4;M5; 2 1 H1
from concentrations (assets, 5 C-1;T-1
customers, or suppliers)
Helpful: 4 X3;P3;M3;C1; 4
T2
Risk of illiquidity Essential: X5;P6;M7; 5
7 C-1;T-1
Helpful: 2 X2;P1;M1;C1; 1 V1
T1
Contingent gains and losses related Essential: X3;P4;M5;C-1 3
to company's assets and liabilities 5 ;T-1
Helpful: 4 X4;P3;M3 3 1 H1
Physical resources Essential: X5;P6;M7 4 1 H1;B1
7
Helpful: 1 X1;P1;M1
Interesting: X1 1 B1
1
Factors that increase or decrease Essential: X2;P3;M4;C-1 2
financial value 4 ;T-1
Helpful: 4 X2;P4;M4 3 V2;B2;O1
Not Useful: 1
1
Historical data about segment (for
period under analysis, often two
business cycles)
Financial data Essential: X6;P6;M7;C1; 5
8 T1
Helpful: 1 X1
Nonfinancial operating data Essential: X4;P3;M4 3
5
Helpful: 2 X2;P2;M2;C1; 1
T1
Interesting: X1
1
Question 4 (continued)
Question 1 Question 2 Question 3
Significance Sources Yes No Explain
No
Each industry segment within company
(continued)
Identity of key trends and Essential: X5;G1;P6;M7; 4 1 V1
relationships among data and reasons 8 C2;T2
that those trends and relationships
differed from those related to
competitors, industry, or economy to
provide insight about the segment's
strategy and strategic alignment;
its ability to innovate, adapt to
change and continuously improve; its
competitive advantages and
disadvantages; opportunities and
risks; and cash flows
Interesting: X1;M1;C1 1 H1
1
Prospective data about segment (for
one or two business cycles)
Cash flows Essential: X2;P3;M4;C2; 2 1 O1
6 T2
Helpful: 1 X1;P1;M1;T1 1 V1;B1
Interesting: X1;P1;M1 2 V1;B1O1
2
Nonfinancial and operating data Essential: X1;P2;M3; 2 1 O1
5 C-1;T-1
Helpful: 3 X2;P3;M3;C1; 1 1 V1;B1
T1
Interesting: X1 1 O1
1
[PMQI 10/16, p. 14-23]
[Context] Meeting of the Investor Discussion Group on January 13, 1993. Part of the meeting was devoted to the topic of disclosure about operating opportunities and risks. During the discussion, investors commented on the MD&A.
Committee/Staff/Observer
[T]he next question we have is right on that point. The second framework that we talk about in the materials is the SEC's MD&A requirements. In MD&A, the discussion and analysis of results of operations is to focus on events and uncertainties known to management that would cause the reported information to not be a good indicator of future operating results. It is also to describe known trends or uncertainties that have had or that management expects will have a material impact on net sales or revenues or income from continuing operations. Our question is: do those MD&A requirements provide a workable framework for categorizing and disclosing what you need to know about operating opportunities and risks? Is it a promising starting point or basis from which to develop an accounting standard requiring disclosure of information about operating opportunities and risks? And there is also [committee/staff/observer]'s question; do you believe what you get? [Also included in 2(b) and 10(b)] [TI 1/13, p. 48]
Participant I-7
Reliability is in the mind of the issuer. I think it goes beyond reliability. There are certain managements that are "ept" and others that are inept. So when you read the MD&A or have a discussion with management, for the most part, they're trying to give you as reliable information as they possibly can. But within the context of a competitive environment, some are being inept. [Also included in 2(b) and 10(b)] [TI 1/13, p. 48]
For example, management thinks the company is going to have a 10% sales increase this year in the motor industry; 6% increase in units and 4% increase in sales price. The statement is absolutely true until you go out into the marketplace and find that 25% of the business is distributor-related; so the distributor will also increase its price by 4%, but salesmen of the 75% segment of the business will be under pressure to get the price increase down to as close as 1% as possible. So 10% is going to be wrong if you're setting up your cost structure on that basis. [Also included in 2(b) and 10(b)] [TI 1/13, p. 49]
Participant I-11
Yes, the MD&A provides a promising starting point. But I think that in the vast majority of cases, the present MD&A is a joke. There is a vehicle there that could be used to do what it's supposed to do, but it sure isn't being used for that now. The bad news about the MD&A is that it is an SEC-required thing and it tends to be filled at the lowest possible level. [Also included in 10(b)] [TI 1/13, p. 49]
Participant I-8
I'm not aware of one instance where the SEC has challenged even after the fact what a company wrote in an MD&A. [Also included in 10(b)] [TI 1/13, p. 49]
Committee/Staff/Observer
They have. [Also included in 10(b)] [TI 1/13, p. 49]
Committee/Staff/Observer
Do you think that the filling out to the lowest level would change if it were an accounting standard versus an SEC requirement? [Also included in 10(b)] [TI 1/13, p. 49]
Participant I-11
I think there would be a better chance of it. The idea behind the MD&A was clearly a good one, the execution clearly has been a failure. It seems to me that over the years the accounting profession has had a little more leverage in getting some of these changes effected than the SEC has had. [Also included in 10(b)] [TI 1/13, p. 49]
Participant I-7
You all know what we think of the information coming out of FASB 14. Consequently, I'm not sure that we would be getting anything better setting up an FASB pronouncement relative to an MD&A than we get with FASB 14. But anything is better than what we have now, so go for it. [Also included in 3(a) and 10(b)] [TI 1/13, p. 50]
Participant I-12
I've had companies tell me that if they didn't write the MD&A that way, it would take months to get the annual report out of the SEC. The SEC is looking for certain types of descriptive phrases; it's boilerplate. Part of the reason the MD&A is not that useful, a good structure but not that useful, is because we're looking at accounting items that are not necessarily the relevant ones. Perhaps it would be better if the MD&A evolves into more disclosures about lines of business. [Also included in 10(b)] [TI 1/13, p. 50]
[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 the MD&A.
Participant I-16
There is generally nothing in the MD&A that concerns me at all; it is generally a meaningless statement. Auditing it doesn't make any difference. [Also included in 17(b)] [TI 3/17, p. 20]
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 12, 17(b), and 17(c)] [TI 3/17, p. 21]
[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 nonfinancial business information.
Participant C-14
The best thing that we get, quite often, is the bank agreements. The bank agreements often have the tightest covenant protection for the public creditor. Even though the bond holder is protected by the terms of the indenture, we usually find the bank is in control of the assets, in control of the equity, and it has the tightest restrictive covenants with regard to spending, capital expenditures, share repurchases, dividends. So quite often if the term of the bank agreement were longer than the debt instrument, the bank agreement would probably give you as much or more comfort with regard to controls on management and the way they run the business. Usually the bank agreements are shorter than the term of the debt, and so you're in a position where you've got an unprotected term of the bond you're rating out there. But we think it's still very helpful to look at those bank agreements. It really tells you what the controls are on management. [Also included in 1(b)] [TC 12/8, p. 50]
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 12] [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 12] [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 12] [TC 12/8, p. 51]
Participant C-16
I'd like to understand how close formula based borrowers are to their covenants, to give me a sense for their borrowing capability and liquidity. [Also included in 1(b)] [TC 12/8, p. 51]
Participant C-9
In evaluating a lot of financial institutions, a lot of the information is in management discussion, not necessarily in footnotes. So that's where I would be getting information on commercial real estate, asset quality, loan composition, liquidity. Average amounts of assets and liabilities is very helpful in many ways. Financial institution has dramatic flows during the day, what we're seeing typically is end of the day, and if you look at the average you can make some assumptions about potential window dressing. [Also included in 1(b)] [TC 12/8, p. 51]
Participant C-10
On your list we've got backlog and I wrote "heavy" next to that, in other words heavy use, I put a big emphasis on that. Some companies don't have much backlog, it's almost a daily order business. It varies from company to company, and then sometimes by type of product line; one type of product line would have a heavy backlog because of its link to the construction nature, like your production contracts. That's a short term piece of information, but very helpful to understand how your company is going, especially its liquidity. [Also included in 1(b) and 3(c)] [TC 12/8, p. 51-52]
Committee/Staff/Observer
Do you track backlog as opposed to getting it once a year? [Also included in 1(b)] [TC 12/8, p. 52]
Participant C-10
No. I ask about it all the time, and that's not a very formal measure. In other words, if I'm talking to the management that's one of the first questions I'll be asking to them routinely every month or every quarter. [Also included in 1(b)] [TC 12/8, p. 52]
Committee/Staff/Observer
Is it normally just a verbal passage of information, as opposed to anything written down? [Also included in 1(b)] [TC 12/8, p. 52]
Participant C-10
You also look in the 10-Q for it and other source of information that you have. But lots of times you can get a clue as to the company's current conditions by that type of question early on. [Also included in 1(b)] [TC 12/8, p. 52]
Participant C-4
Backlog is the lifeline of a contractor, obviously. We can use that information to make some pretty accurate projections of where they're heading. We get backlog information on a quarterly basis, and we'll compare the beginning and ending gross margins, do a statistical correlation of those margins. Then when we get a year end financial statement, using percentage of completion basis and we'll adjust that cost to complete number based on historical correlation, and then make a projection of where we think this contractor is headed with the backlog he has on hand. So, it's vital information for us. I would say the accounting profession does not do that detail in general for smaller contractors in any audit work on the cost to complete for contractors. I think they're relying on what management tells them. I don't know how much hindsight review is actually going on in the accounting industry on cost to complete information. [Also included in 1(b), 11(c), and 17(a)] [TC 12/8, p. 52-53]
Participant C-11
I think there are many information items that are important to particular industries. If the purpose of the question is to say what kind of information should be important, I think the question really should be addressed in the context of specific industries? I think that on a more general basis, it certainly is helpful for me for a company to disclose broad goals, be they in terms of the kinds of businesses that they want to get into or get out of, the kind of capital structure they might want to establish in terms of debt or whatever ratios, dividend pay-out. That can be the most important thing; to let you know what management's goals are. [Also included in 1(b)] [TC 12/8, p. 53]
Participant C-5
We do a commercial finance exam program for the company that typically is very revenue-sensitive. Part of that review is looking at the backlog, the order book, the cancellations, the seasonal performance. In some industries we do get regular reporting of backlog information. Others it's just a part of the routine sort of thrice annual commercial finance exam that would be conducted and we do verify to some degree that backlog. [Also included in 1(b)] [TC 12/8, p. 53]
Participant C-10
We're starting to see more environmental claims involved in our different examinations of companies. And we're starting to spend more time trying to identify and understand it. It's still new. [Also included in 1(b)] [TC 12/8, p. 53]
Committee/Staff/Observer
Let me launch just a second tier inquiry, then. Things like environmental, as opposed to backlog. I understand, I think, what you said about backlog, is that you just get in the company's face and you ask the question and in some cases you may get paperwork. Environmental--how do you get that information? [Also included in 1(b)] [TC 12/8, p. 53-54]
Participant C-10
Footnotes. Sometimes it might be a lawyer involved, or there's a reserve. [Also included in 1(b)] [TC 12/8, p. 54]
Participant C-1
A lot of times it's footnotes. Some companies have been more aggressive in putting reserves on for potential liabilities. It's something that is becoming more disclosed. We ask questions like: how big is the potential litigation list for companies getting sued? Any type of class action lawsuits? Etc. Usually what sparks you to ask questions is the prospectus, which will have more of that detailed, which then leads you to be able to ask the question well, what's the status on that? Companies are very loathe to disclose potential liabilities, obviously, and I don't think you're ever going to get that disclosed in financial statements. [Also included in 1(b)] [TC 12/8, p. 54]
__________
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 12] [TC 12/8, p. 69]
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 12] [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 are 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 12] [TC 12/8, p. 70-71]
[Context] Responses to the postmeeting questionnaire to the December 8, 1992 Creditor Discussion Group meeting.
QUESTION 8
Participants frequently referred to discussions with management as an important source of information. Below are several categories of information which could be a topic of discussion with management. For each please indicate:
Frequency of Discussion -- A - Always
F - Frequently
O - Occasionally, if something unusual has occurred
N - Never
Importance of Reliability - V - Very Reliable Information is needed
S - Somewhat Reliable Information is needed
L - Low Reliability, Management's Opinion is Sufficient
FREQUENCY RELIABILITY
A F O N V S L
General economy:
Social,
demographic,
technological,
political and 5 4 6 1 1 6
regulatory trends 9
Historical
macroeconomic
data for period
under
analysis-usually
two business
cycles-
and projected
macroeconomic
data for one
or two business
cycles
(employment,
inflation, real 3 4 8 1 4 4
gross product,
etc.) 6
Each industry in
which company
participates or
plans to
participate
Definition of 4 6 6 3 8
industry
4
Shifts in
boundaries of
industry
(resulting
from economic,
social,
demographic,
technological, 4 5 7 3 9
political, and 3
regulatory
trends)
Industry
structure and
outlook (for
example
example, ability
of new companies
to
enter industry, 6 7 3 6 7
customers, 2
competitors,
etc.)
Historical and
projected
aggregate
financial
and operating 3 7 3 3 3 8
data for industry 3
Company
Mission and
intent (company's
purpose
in general terms 10 3 2 1 7 3
and its long-term 5
intent)
Strategy and
strategic
alignment
(business
strategy,
consistency of
strategy with 11 5 1 9 5
external trends,
etc.)
Ability to
innovate, adapt
to change, and
continuously 4 8 2 2 1 7
improve
3
Competitive 10 5 2 5 10
advantages and 1
disadvantages
Opportunities and
risks managed at
company level 9 5 2 2 10
2
Prospective data 9 6 1 4 9
about company
1
Each industry
segment within
company:
Description of 6 7 3 5 5
business segment
4
Mission and 6 4 6 1 5 5
intent of segment 5
Strategy and
strategic
alignment
(business
strategy,
consistency of
strategy with 7 6 3 1 4 7
managerial
approach) 4
Position within 6 5 5 5 7
industry
3
Ability to
innovate, adapt
to change, and
continuously 2 6 6 2 3 7
improve
4
Opportunities and
risks managed at
segment level 3 9 4 1 2 11
3
Historical data
about segment
(for
period under
analysis, often
two
business cycles) 7 6 3 1 10 4
1
Prospective data
about segment
(for one
or two business 5 7 3 1 3 8
cycles)
3
Participant C-3 - Ability to innovate, adapt to change, and continuously improve has to be observed - not asked.
Participant C-14 - Always want reliable information?
Participant C-15 - Historical data about segment (for period under analysis, often tow business cycles) - 5 years.
Participant C-10 - A lot of this data we desire but we don't get insight into all of these topics in any one meeting with management. We feed on all little tidbits that come out of conversations and put them together judgmentally and make our investment decisions from there.
Participant C-12 - Ability to innovate, adapt to change, and continuously improve has to be observed - I never ask management this.
Participant C-5 - Under the General Economy - second bullet and Each Industry In Which Company Participates Or Plans To Participate - fourth bullet: Other Sources.
Participant C-18 - Historical and projected aggregate financial and operating data for industry - Historical - V and Projected - S.
Participant C-11 - I am bothered by "low reliability" in the question. The information can be very reliable and the intentions, but the outcome can be uncertain because of unknown future conditions. These are two different things that any analyst should understand.
Participant C-9 - An operating group may report mission, strategy or results - yet may cover various diverse products. Due to nature of financial reporting - may not have any conclusive BS or income statement data on either operating group or product. Under the General Economy - second bullet: Use external reports. Each Industry In Which Company Participants Or Plans To Participate - fourth bullet: Information not available publicly. Each Industry Segment Within Company - seventh and eighth bullets: Current segment definition doesn't add value to financial institutions analysis.
[PMQC 12/8, p. 18-20]
[Context] Meeting of the Creditor Discussion Group on February 2, 1993. Part of the meeting was devoted to the topic of display. During the discussion, comments were made on nonfinancial business information.
Participant C-11
This is a very difficult area. Extraordinary, if we're talking about really non-recurring things like the adoption of 106 or something like that, that can be clear cut. I have been having a lot of problems, and I think every analyst must have had the same thing in every quarter now lately about people calling things non-recurring when they're actually happening rather often. And I'm thinking of the obvious restructuring activities that occur on an acquisition or the frequent dispositions we're now seeing. Or not dispositions necessarily, but, cost taken to restructure or to downsize a part of a company. I think that non-recurring is too absolute a word. But I do think we need differentiation between things that I just named that are certainly individually relatively unique events that occur and what I would call unusual items. But the bottom line really to me is that they get identified. I'm talking about the income statement here. I'm saying that as opposed to having it in the management discussion, particularly for the restructuring type things, because that's a two-year kind of picture that you're getting in the management discussion, and it can be just lost in the morass from one annual report to another. The most important thing is that they be identified so that an analyst, if he or she wants to ask more questions, at least is given a clue that something different happened here. I don't think that the magic answer is the difference between unusual and non-recurring. Non-recurring is an absolute word the way it's been used in recent years because there just are lots of restructures going on that aren't going to be non-recurring. [Also included in 5(a)] [TC 2/2, p. 13]
__________
Participant C-17
Kinds of stuff that would come to my mind [for disclosure] is capital expenditure and inventories. What is mandatory or what's repaired, what's unfunded? ... Backlogs or the businesses that are affected by backlogs. What is it? Comparative basis? The inventory, the display, finished, in process, raw, supplies, whatever you may call it, slow moving? Receivables? It drives me nuts when I can't find a provision. Or you can't find what the allowance is, you don't always see a provision. So how do I know what the bad experience is? Borrowing: I hate trying to figure out what maturity horizons are. Fixed assets: categories? Plant? Leasehold improvements? It frustrates me when I look at the liability side and I can't identify trade payables because it's buried in with unrelated payables or accruals. Those kinds of issues come up. I think what most analysts do is they have a group of favorite ratios and they're pretty standard. And you tend to analyze the company around these but when you can't get to the data. When you can't even identify how to do the calculation, then you're forced to go back to management, and you're not sure, you have no independent verification. [Also included in 5(b) and 17(a)] [TC 2/2, p. 19-20]
[Context] Responses to the postmeeting questionnaire to the February 2, 1993 Creditor Discussion Group meeting.
QUESTION 15-Management's Discussion & Analysis (MD&A) [Also included in 10(d)]
We recognize that private companies do not provide MD&A's, at least not according to a regulatory requirement. Consequently, creditors lending principally to private companies may have limited concerns or opinions regarding the SEC-required MD&A disclosures. If you serve private companies, please pay particular attention to item (d) below.
For public companies, the discussion at the meeting left the Committee with the impression that some members of the group felt that improvements could be made in implementing current MD&A requirements.
a. Current MD&A disclosures in annual reports generally fall short of user expectations.
_ AGREE 11 _ DISAGREE 3
Participant C-2: Neutral, depends on quality and candor of report.
If AGREE, please indicate your view of the following (SA - Strongly Agree, A - Agree or D - Disagree):
SA-2,A-5,D-3 Current MD&A's tend to use too much cautious legal language instead of straight-forward descriptions of the pertinent events, circumstances, trends, commitments, and uncertainties that are likely to make the company's future different from its past.
SA-2,A-8,D-1 Current MD&A's tend to repeat the same descriptions from period to period, merely changing the numbers instead of focusing on events, opportunities and risks which may be new in a particular period.
SA-1,A-6,D-4 Current MD&A's tend to overemphasize opportunities and remain mostly silent about potential risks.
Other. Please describe
Participant C-14: Lack of specific discussion on cooperative strategy and alternative financial objectives.
Participant C-11: Lawyers and bureaucrats are the enemy. Rather than just repeating the numbers, the MD&A should provide an analysis of events in the period - written from the CFO perspective. This is not something that AICPA or anyone else can legislate.
Participant C-15: Because of legal liabilities resulting from these disclosures, e.g., CAT, these should improve over time but lawyers will have greater impact.
[Also included in 10(d)] [PMQC 2/2, p. 26]
__________
d. From time to time, users have proposed that private companies should provide disclosures similar to MD&A. Please indicate your reactions to the following using:
SA Strongly Agree
A Agree
N Neutral
D Disagree
SD Strongly Disagree
MD&A disclosures for private companies would significantly
improve their financial reporting. SA A N D SD
4 6 1 1
Participant C-18: It would be a joke. You would never again see an audited financial statement.
While MD&A disclosures for private companies would be
desirable, the costs of providing the information would be of
greater concern than the value of receiving the
information. SA A N D SD
4 1 2 2 1
Participant C-2: What is the cost typically? Hard to judge...
If MD&A disclosures are provided by private companies, the
detailed disclosure requirements should be the same as those for
public companies. SA A N D SD
3 4 4 2
Comments
Participant C-17: I believe it would be helpful but the cost would drive too many away. Direct access to the customer would allow each creditor to seek their own level of disclosure.
Participant C-13: I do not deal with private companies. My assumption is that private companies, in order to get financing, provide investors and creditors with more information in a discussion mode, than public companies.
Participant C-2: MD&A disclosures raise issues that might not automatically come to a lender's attention. Then the lender can seek out additional information. Would be particularly valuable in evaluating a new borrower.
Participant C-4: Standardizing MD&A reporting can provide a basis for further discussion with management of private companies. It would also provide a framework of required disclosure that could be useful in comparative analysis.
Participant C-14: Probably a useful exercise for management.
Participant C-11: I defer to other panelists in general. However, the term "private company" is misleading. We have some private placement investments where the companies are large enough so that we can insist that an MD&A - type discussion is justified.
[Also included in 10(d)] [PMQC 2/2, p. 28-29]
[Context] Meeting of the Creditor Discussion Group on March 11, 1993. Part of the meeting was devoted to the topic of auditor involvement. During the discussion, comments were made on the MD&A.
Participant C-12
I probably get as much, looking at financial institutions, information out of the MD&A as I do out of the balance sheet and income statement and footnotes. Therefore, it would be very important to me to know that I can have as much comfort and faith in those numbers because I do get as many numbers out of the MD&A as I do anywhere else. If I had to pick one thing in expanding the auditor's role, that would be it. [Also included in 1(b) and 17(b)] [TC 3/11, p. 22]
Participant C-15
[Participant C-12] do you think that you would get as much information out of the MD&A section if it was audited as if it wasn't audited? Some of the discussion is real helpful; do you think that might be sort of reduced if the auditors had to sign off on that? [Also included in 17(b)] [TC 3/11, p. 23]
Participant C-1
I would hate to lose the information and the facts that are in the MD&A because they all of a sudden have to be audited. For example, discussion of the estimated impact of a strike or a plant closure that wouldn't necessarily be broken out in the normal financial statements. While I think it would be great if auditors looked at that, I'd hate to lose it because it is such an important way that we look at companies. [Also included in 17(b)] [TC 3/11, p. 24]
Committee/Staff/Observer
Is it your impression that the auditors now do not look at the MD&A's? [Also included in 17(b)] [TC 3/11, p. 24]
Participant C-1
No, it's my impression on talking to companies that they will put stuff in the MD&A that, if you read it carefully, will answer your question in terms of one-time charges, that can not be broken down in the financial statements. [Also included in 17(b)] [TC 3/11, p. 24]
Participant C-11
I know that they have always been told by the companies that the auditors review the MD&A type information. I think that's excellent. I would be nervous about making it a formal requirement, and I don't think accountants should in effect write the MD&A. I want to know about the company's business strategy; I'd hate to lose that information. [Also included in 17(b)] [TC 3/11, p. 25]
Participant C-10
You earlier asked me if I agreed with the point about extending the audit to the MD&A. I would just say that I really like the MD&A. We all use it. The question is how do we keep it as valuable as it is, and if anything, have the auditors help increase that value. But at the same time not put limitations on it. [Also included in 117(b)] [TC 3/11, p. 25]
Committee/Staff/Observer
Would you want an MD&A for private and smaller companies? [Also included in 2(d) and 17(b)] [TC 3/11, p. 25]
Participant C-5
I'd obviously like to start moving down in the middle market segment with more MD&A, even if they are LBO-type companies, where we don't have a public reporting requirement. But, at the same time, I would prefer to know that the auditor feels that there is that obligation associated with the MD&A, by not being able to disclaim any obligation with regard to that, even though they've done work around it. [Also included in 2(d) and 17(b)] [TC 3/11, p. 25]
Participant C-17
If you try to make the MD&A a tool to be used down at the private sector, I think we're just not going to get anything near what we get from them on the public side, and you're basically going to make a lot of privately-owned companies walk away. So, to expand it beyond what it already is today, you'd get very little at a very great cost. [Also included in 2(d)] [TC 3/11, p. 26]
[Context] Meeting of the Creditor Discussion Group on March 11, 1993. Part of the meeting was devoted to the topic of priority of improvements needed in external reporting. During the discussion, a comment was made on nonfinancial business information.
Participant C-12
I think the number 11 concept of core earnings is important to the analysis. I'm not sure that it's something that you're going to be able to give me. If the object is to give me the detail in the financial statements so that I can, in the end, make my own judgment as to what is core earnings, that's fine. On the other hand, if the object is to do what a lot of foreign institutions do and say this is core earnings, I'm always going to adjust that number. This year in [name deleted's] numbers I'm taking out $170 million of foreign exchange gains in the third quarter because it was a great quarter and they've said it was about that much over and above the normal quarter. My second choice is number 13, accounting for financial instruments. I'd also put in a vote for number one, statistics on the economy. Maybe in general, maybe when it comes to banking in terms of local economy, a lot of my decisions don't make it worth my while to figure out what's going on in the local economy in whatever state, whatever city, whatever regions. And one of the things that foreign banks do that's very good is they give me that information. They tell me what rates are doing, which I need to know, they tell me what real estate prices are doing, they tell me what lending volume is doing. I could go out and do that myself but often the decision I'm making doesn't justify doing it. And it's a great help to me to have it in the annual report. [Also included in 5(a) and 15] [TC 3/11, p. 72]
[Context] Responses to the postmeeting questionnaire of the December 9, 1992 and January 13, 1993 Investor Discussion Group meetings.
QUESTION 22 - MD&A
On paper, the Management Discussion and Analysis (MD&A) prescribed by the Securities and Exchange Commission promises to be a valuable source of information about a company's operating opportunities and risks. It is supposed to cover at least liquidity, capital resources, and results of operations and to focus on material events and uncertainties known to management that would cause the reported information not necessarily to be a good indicator of future operating results or future financial position, for example:
Events and circumstances that would affect future operations but did not affect past operations
Events and circumstances that have affected past operations but are not expected to affect future operations
Known events or circumstances that would change the trend of, or vary the relationships between, revenues and expenses
Known trends or known demands, commitments, events, or uncertainties that will or are reasonably likely to increase or decrease materially the company's liquidity
Known trends or uncertainties that have had or management reasonably expects will have a material favorable or unfavorable effect on net sales or revenues or income from continuing operations.
Causes of changes in line items are to be sufficiently described to provide an understanding of the business as a whole.
The discussion at the meeting, however, left the Committee with the impression that many members of the group generally gave MD&A high marks for conception but much lower grades in practice. Please check the applicable boxes to identify the statements with which you most agree.
a. The MD&A generally does not live up to its 5 promise b. The MD&A provides a starting point for 6 disclosing needed information about a company's operating opportunities and risks but needs to be changed to overcome the kinds of weaknesses described in (a) below c. The MD&A generally provides needed information about a company's operating opportunities and risks and should be incorporated into a company's external reporting
If you checked (a)-The MD&A generally does not live up to its promise-please indicate the reason(s) for your choice by checking the applicable box(es) and, if needed, writing an explanation in the space provided [please skip if you did not check (a)]
Companies tend to follow the letter rather than 5 the spirit of the rule-to use legal expressions known by company legal counsel to be acceptable to or favored by the Commission instead of straight-forward descriptions of the pertinent events, circumstances, trends, commitments, and uncertainties that are likely to make the company's future different from its past Companies tend to repeat essentially the same 5 descriptions from period to period, merely changing the numbers, instead of focusing on the most relevant operating opportunities and risks, which may be new in a particular period Companies tend to overemphasize opportunities 3 and remain mostly silent about potential risks Other. Please describe 1 Participant I-11: Descriptions tend to be symptomatic, not diagnostic or prognastic, i.e., "sales increased because we sold more units at higher prices, cost of goods increased because we sold more goods, gross profit increased because sales in dollars were up more than cost of goods in dollars."
Participant I-12: Last few years- seeing general improvements.
If you checked (b)-The MD&A provides a starting point for disclosing needed information about a company's operating opportunities and risks but needs to be changed to overcome the kinds of weaknesses described in (a)-please describe briefly the major improvements needed [please skip if you did not check (b)]
Participant I-6: A real discussion of events during the period covered. Not just a ...of changes by line item in the financial statements but why and what caused the change.
Participant I-7: To general and little emphasis on risks of a major nature
Participant I-9: You cannot ask managements to "bare their souls" and share their innermost concerns with outsiders. What you want is for the management to put you on notice if they know something important that is not generally known. Examples - they are not taking bills on time or collecting receipts as scheduled, their biggest customer is cancelling its contract, a competitor is doubling capacity, currency fluctuations will lead to significant price increases, etc.
Participant I-10: Focus on opportunities.
Participant I-11: Meaningful analysis: "Sales increased 10% because of a 2% average price increase and an 8% increase in unit volume. Growth in the market accounted for 4% of the volume increase, increased market penetration accounted for 2% and new products accounted for 2%." (I recognize this sort of precision often is not possible. The point is, analyze, don't obfuscate.)
Participant I-12: 1)Why a given line item changed (units, prices, economic events), 2) Business segment/geographic factors that affected the results, 3) Specific management actions that affected results.
If you checked (c)-the MD&A generally provides needed information about a company's operating opportunities and risks and should be incorporated into a company's external reporting-please write any additional comments you may have on the MD&A and its use in external reporting [please skip if you did not check (c )]
[PMQI 12/9 and 1/13, p. 43-45]
__________
Most [CIC] subcommittees agree . . . [that] the following suggestion seems appropriate: [Also included in 1(b), 2(b), 2(c), 3(b), 3(d), 5(a), 5(b), 11(a), and 16(b)] [AIMR/CIC92, p. 3]
A factbook that provides considerable major background data and preferably a ten-year financial and operating history. [Also included in 1(b) and 16(b)] [AIMR/CIC92, p. 3]
Prompt communication of significant developments. This includes major changes in strategy as well as business conditions. This would also include full disclosure of the anticipated financial impact from new accounting principals: FAS 107 (Fair Value), FAS 106 (Retiree Health Care), FAS 109 (Income Taxes). [Also included in 1(b), 5(d), and 16(b)] [AIMR/CIC92,
p. 4]
[The CIC has] cited numerous examples of disclosure formats that were particularly useful and insightful. More than one subcommittee, for example, pointed out the utility in trends analysis of having 11 years of historical data made available in a table in the annual report. Still others noted the growing value of factbooks, many of which provide additional layers of detail, not only about a particular company's operations but also about the industry in which the company operates and the broader economic climate as well. [Also included in 1(b) and 5(d)] [AIMR/CIC92, p. 4]