15. Priority of Improvements Needed in External Reporting
Investors have made numerous suggestions for improving annual reports, as shown in [the] table [below]. The suggestions address not only the information needs of investors, but also the needs for increased efficiency, improved credibility, and, for individuals only, better readability. [SRI, p. 65]
Suggestions for Improving Annual Reports
Professional Individual
Investors Investors
Suggestion Agree Disagree Agree Disagree
Be frank about
reporting
poor company 88.1% 3.8% 84.9% 2.5%
performance
Provide information on
the
company's position in
the
marketplace (e.g.,
market
shares) 84.0 3.5 ** **
Clearly define
management
plans for the future ** ** 82.6 4.3
Provide standard
financial
statements for each
business
segment 81.7 7.4 ** **
Provide comparisons
with
industry averages 81.1 8.0 ** **
Provide industry trend
information 75.6 7.1 ** **
include the Form 10K 75.6 10.9 ** **
Define management goals
and objectives 75.0 5.8 ** **
Show key financial
ratios
(e.g., debt to
equity, return
on sales, and profit ** ** 74.4 11.2
margin)
Include company
performance
statistics and ratios 73.7 5.1 ** **
Summarize key facts and
statistics to be
found in
the annual report in
a brief
abstract 54.8 19.6 68.6 11.0
Provide information on
the
performance of the
company's
stock 26.9 33.0 67.2 15.0
Provide financial
projections
or forecasts for the 54.5 21.2 61.5 15.2
company
Use understandable
language
without technical 32.7 37.8 60.9 16.8
jargon
Be shorter; use less ** ** 53.8 19.3
redundancy
Be less promotional ** ** 44.8 21.7
Publish all annuals in
a
standard format 40.7 36.2 ** **
Present more
information
in graphs 37.5 22.8 38.6 27.6
Provide a detailed
table of
contents 33.3 37.8 ** **
Produce report on video
cassettes 12.8 70.2 8.9 80.8
**Not suggested.
Source: SRI International survey, 1986. [SRI, p. 66]
The need for efficiency is the need for investors to be able to rapidly and correctly absorb the information relevant to investment decision making. To individuals, many of whom have difficulty interpreting financial information and relating it appropriately to their own investment objectives, efficiency also involves making the available information more understandable and emphasizing the more important elements. For professionals, efficiency involves providing information they would obtain from other sources and including information with a high analytical content (e.g., ratios, comparisons with norms, graphs). For increased efficiency, professionals would like annual reports to: [SRI, p. 65]
Provide more company performance statistics and ratios
Summarize key facts and statistics
Provide financial projections and forecasts
Be published in standardized format
Include the SEC Form 10K
Have more graphs
Have a detailed table of contents
Include stock performance information (over the longer term)
Keep technical jargon to a minimum [SRI, p. 67]
Individual investors have less need to improve their efficiency than the professionals do, but still want annual reports to: [SRI, p. 67]
Provide key financial ratios and statistics
Summarize key facts and statistics
Be shorter and less redundant [SRI, p. 67]
The suggestions made by individuals to improve the information content of annual reports correlate poorly with their previously expressed information needs, in part because they, unlike the professionals, do not view the annual report as an important information source for decision making, and in part because they do not view it as a vehicle for such information types as the industry outlook, economic information, and the company's own reputation. In brief, individuals would like the annual reports to: [SRI, p. 67]
Define management plans for the future
Include more key financial ratios (with some interpretation)
Provide information on the company's stock performance
Include financial projections and forecasts [SRI, p. 67]
Professionals, who do view the annual as important for investment decisions, and whose information needs are more varied and more precise than those of individuals, suggest that annuals could improve their information content if they: [SRI, p. 67-68]
Show the company's position in the marketplace with market share information and other indications of competitive standing
Provide standard financial statements for each of the company's business segments
Compare the company's financial performance with industry averages
Provide industry trends and other relevant information on the company's industry
Present, in as much detail as possible, management's goals and objectives for the company [SRI, p. 68]
The professionals acknowledge that much of the information they would like presented in annual reports is competitively sensitive or proprietary. They feel strongly, however, that companies can disclose much more vital information than they do at present without compromising their companies' competitive positions or their management responsibilities. [SRI, p. 68]
The most frequent suggestion made by both individuals and professionals for improving annual reports is for managers to be frank and open about reporting their company's problems and poor performance. Not only do both groups need such information for investment decisions, but they feel strongly that management owes its current and potential shareholders a candid disclosure of information bearing on the value of their investments. [Also included in 2(b) and 2(d)] [SRI, p. 68]
In addition to more frankness and openness, individuals would like annual reports to be less promotional (less like advertising), and professionals would like the SEC Form 10K included in the annual (the 10K is closely regulated and therefore highly credible to them). [SRI, p. 68]
The individual investors' suggestions were also aimed at improving the readability of annual reports. They would like annual reports to: [SRI, p. 68]
Include brief abstracts summarizing important facts and statistics
Use more understandable language and less technical jargon
Present more information in the form of graphs [SRI, p. 68-69]
Videotape, audio tape, personal computer diskettes, and on-line access to a service organization are not attractive options for most individual investors. Videotape and audio tape are seen as too inflexible and somehow not appropriate for investment information, and even less so for the annual report. The other two options require computer literacy and access to appropriate equipment--capabilities that are not yet typical among the individual investors interviewed. [Also included in 16(a) & 16(b)] [SRI, p. 69]
Professional investors express a different level of interest and are more computer literate. When asked, "Would receiving company information in any of the following ways be useful to you?" their responses were as follows: [Also included in 16(a) & (b)] [SRI, p. 69]
Yes No
On videotape? 34.9% 64.7%
On audio tape? 31.4 68.6
On diskettes for
your
personal computer? 60.9 38.8
From on-line access
to
a service 67.6 32.1
organization
[Also included in 16(a) & (b)] [SRI, p. 69]
Videotape is seen by all professionals except retail stockbrokers as inflexible, and not at all useful for investment analysis; audio tapes are thought to be even less useful. Retail brokers see the possibility of using videotapes in the sales process. [Also included in 16(a) & 16(b)] [SRI, p. 69]
Diskettes for personal computers have initial appeal, but concern about their usability prevails. To ensure compatibility with various computers, the diskette would have to be created in one or a very few standardized formats. In addition, most professionals, especially the analysts, have developed individualized approaches to security analysis. These problems are more perceived than real, however. As these technologies become better understood and more widely available, the personal computer will become an increasingly important element in financial information distribution. [Also included in 16(a) & 16(b)] [SRI, p. 69]
On-line information is appealing to all segments of professional investors. Most analysts, surprisingly, are not aware of the SEC's experiment with EDGAR (Electronic Data Gathering and Retrieval). As EDGAR is just such an on-line service, professionals are likely to receive it with enthusiasm. [Also included in 16(a) & 16(b)] [SRI, p. 69-70]
Professionals and individuals alike are against creating different versions of the annual report for different audiences. In addition to believing that one group should not be deprived of information given to another group, which is perceived as a form of discrimination, they believe that those receiving more information have an unfair advantage. Even though professionals believe that they would receive the more detailed versions of annuals, and even though some individuals complain of the detail and complexity in annual reports, a majority of both groups opposes differential reporting. [Also included in 2(d) and 5(d)] [SRI, p. 70]
When asked to agree to disagree with the statement, "Companies should publish different versions of the annual report for different audiences," investors expressed the following views: [Also included in 2 (d) and 5(d)] [SRI, p. 70]
Professional Individual
Investors Investors
Agree 22.8% 30.3%
Neutral 6.7 11.6
Disagree 70.5 52.8
[Also included in 2(d) and 5(d)] [SRI, p. 70]
In 1983, FERF reported on an experiment, which is still underway, exploring the concept of a "summary annual report." It would relieve information overload, while being a more useful, informative communication device for a company's shareholders and for unsophisticated investors. Thus, the summary report would become an abbreviated, efficiently formatted, highly readable successor to today's annual report. Those needing more information would still have access to the SEC Form 10K. [Also included in 2 (d) and 5(d)] [SRI, p. 70]
This study has shown that those aspects of summary reporting that clarify, summarize, present in more understandable form, and add value to annual report information would be well received, but reducing the amount of information included in the annual report would not be. Many of the suggestions offered for improving the annual report had to do with the need for more information, rather than less, and for information with a higher added value. [Also included in 2(d) and 5(d)] [SRI, p. 70]
__________
[Context] Meeting of the Investor Discussion Group on March 17, 1993. Part of the meeting was devoted to the topic of priority of improvements needed in external reporting.
Committee/Staff/Observer
Question 16 deals with the relative priority of areas to improve external reporting. We have discussed through these four meetings important issues. On page 20 and 21 of the meeting materials, we've listed 18 items. Our question is: which three areas of external reporting, other than disaggregated information which we know is the first priority, should standard setters work on to most improve external reporting? [TI 3/17, p. 66]
Participant I-12
Interim reporting is very important. [TI 3/17, p. 66]
Participant I-11
Interim reporting, accounting for financial instruments, and unconsolidated entities and there I favor the expanded equity method. [Also included in 6] [TI 3/17, p. 66]
Participant I-5
Consolidation practices and unconsolidated entities are in the top three. [TI 3/17, p. 66]
Participant I-11
Number 2 (consolidation practices) and 3 (unconsolidated entities) are closely linked. [TI 3/17, p. 66]
Participant I-16
I would agree with numbers 3 (unconsolidated entities) and 12 (interim reporting). I would add numbers 5 (business combination practices), 8 (disclosure of measurement uncertainties), and 16 (impairment); for number 16, I'm more concerned about long-lived assets than receivables. For number 8, I'm concerned with getting more explanations about where things are and come from. Business combination practices is an area where we don't understand how companies account for acquisitions; they don't explain that and you can't follow it. [Also included in 8(b) and 9] [TI 3/17, p. 66]
Participant I-7
Numbers 5 (business combination), 8 (measurement uncertainties), and 10 (disclosure of operating opportunities and risks). [TI 3/17, p. 66]
Participant I-12
Numbers 13 (financial instruments) and 8 (measurement uncertainties), and 10 (operating opportunities and risks). [TI 3/17, p. 67]
Participant I-5
I would add 7 (fair values), 8 (measurement uncertainties), and 11 (core earnings). [TI 3/17, p. 67]
[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, creditors were asked about their priorities for improvements in external reporting.
Committee/Staff/Observer
We understand from investors and equity analysts that improvements in disclosure of disaggregated information might be needed. The question we have is: is that the highest priority? [TC 12/8, p. 26]
Participant C-1
Yes, most definitely. Disaggregated information is very important to us. [TC 12/8, p. 26]
Committee/Staff/Observer
[Participant C-1] is it more important than straightening out what I'll call core earnings to get the unusual items out of it, or separated from it? [TC 12/8, p. 26]
Participant C-1
That's very difficult, because I think that core earnings is equally critical. The problem with core earnings is just that the accounting standards have become so much more complicated that they tend to even hide further what core earnings are. [Also included in 5(a)] [TC 12/8, p. 26]
Participant C-13
I think the pressure from the investment community on disaggregated information has been strong on the business community, and relatively successful, with one glaring exception, and that's interim segment information. And as a result, my answer to [committee/staff/observer] question would be that I think that at this point establishing core earning power is maybe more critical. [Also included in 3(d) and 11(c)] [TC 12/8, p. 26-27]
Participant C-6
Many times in my business we virtually get no disclosure at all. For example, a balance sheet and income statement with no footnotes. So, it's incumbent upon the lender to go in and query management and dig up pertinent information that we need to make any kind of educated decision. [Also included in 2(d) and 5(d)] [TC 12/8, p. 27]
Participant C-2
I would like to see direct method cash flow presentation, for cash from operations. The gross cash flows are very important to us, and the indirect method does not let you get at those with any source of comfort. You can back into them mathematically and assume that the number you get mathematically is equivalent to cash flows, but I think a direct method cash flow would be a big improvement for presentations. I would put that first as my first priority. I think we can get at disaggregated information a lot of times in our dealings with our borrowers, but getting the direct method cash flow as part of an audit or reviewed statement is important. [Also included in 5(c)] [TC 12/8, p. 27]
Participant C-4
I deal with a lot of smaller companies that probably a lot of you, revenues of $50 million and less primarily. Understanding core earnings is a key to our analysis, and I see no consistency in footnotes of supplemental information that we're receiving for customers of that size. One good example of what we need would be a cost of sales breakdown. That helps us assess cash flow, assess profitability, gross profits, and what's causing the gross profits to fluctuate, what's causing the cash flow to fluctuate. Overhead schedules are very important, and in percentage of completion accounting, open and closed job schedules are essential in determining the success and the prospects of the company that we're trying to grant credit to. [Also included in 5(a) and 5(b)] [TC 12/8, p. 27-28]
Participant C-12
I deal mostly with large investment grade institutions, and I find in general they do a pretty good job of giving me information I need to see to know what the core earnings are. For example, [name deleted] in its quarterly press release will give me a chart showing the changes quarter to quarter in ten different items, but they've never told me what they earn in credit card. One of the most basic segments I'd want to get just is not there. So, segment information is my first priority. [Also included in 3(a), 3(b), and 5(a)] [TC 12/8, p. 28]
Participant C-5
Core earnings are the key for us. Comparability of revenues and expenses from prior periods, same store sales, subscriber counts, whatever it is. And then capital expenditures is an item that is just under-addressed. And all of that allows me to understand the contribution to future earnings or future reduction in cost, likely expenditures moving forward, the quality of return on recent investment in plant and equipment. It all gets back to core earnings. [Also included in 5(a)] [TC 12/8, p. 28]
Participant C-16
I'm in the leasing business, and we are continuously asked to extend credit to subsidiaries of major companies, and even subsidiaries of mid-sized companies. The absence of consolidating financial statements is difficult. I guess it's unrealistic to expect consolidating statements on a major company, but certainly for mid-sized companies I'd like to see more segment reporting a greater level of detail. [Also included in 3(a) and 3(b)] [TC 12/8, p. 28]
Participant C-3
When you look at a large financial institution, the biggest question that pops up is whether the accounting model that we're using is right. That focuses on the mark-to-market issue. The investment portfolio discussions that have gone on is really just the tip of the iceberg. In looking at some of the companies that I look at, segments become the secondary issue; how you determine earnings is the number one issue, or what are the earnings of a company. [Also included in 4 and 5(a)] [TC 12/8, p. 28-29]
Participant C-9
Another issue I would be interested in getting more information to work with is the off balance sheet information regarding swaps, derivatives, futures, etc. I think [name deleted] has set a standard of disclosure for others to strive toward, but I think there is a lot more that could be reported, and we're talking very significant dollar flows. I mean you look at [names deleted], we're talking trillions of dollars that aren't even on the balance sheet, and you have very little information. [Also included in 19] [TC 12/8, p. 29]
[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.
Committee/Staff/Observer
Question 17 is the last question. I'd like if I could to get you to tell me those two or three things that you think ought to be given the greatest amount of attention in terms of what could improve financial reporting. Auditors, financial statements, the ball park is as wide and as broad as you want to define it and it certainly isn't restricted to the list in the meeting materials. I would also ask that you give me an understanding of whether or not it's the rules of the game that need to be changed, that is, there is something that we are doing that is correct according to what the rules are that needs to be changed, or whether or not it's the way people do things, that is, the practical application of the rules. [TC 3/11, p. 68]
Participant C-1
For me, the most important one would be number eleven, this concept of core earnings. There are things which we consider unusual or extraordinary that are not classified that way. I think it's more a rule change. Now maybe it doesn't need to be a rule change, maybe additional disclosure on it, but if I had to go through this whole list, that would be the most important thing to me. [Also included in 5(a)] [TC 3/11, p. 69]
Participant C-4
I had three circled, one being the core earnings. We find it very difficult to pick out what core earnings truly are on a consistent basis. I also had ten; we see a real need to get more information about off balance sheet activity including particularly operating risks. And disclosure of measurement uncertainties is the final area that I circled. [Also included in 5(a) and 19] [TC 3/11, p. 69]
Participant C-13
I also picked core earnings as one of my three. I'm not sure that we need specific rule changes but improved disclosure under existing rules would probably be adequate. Secondly, I chose interim reporting because I think a rule change for a reporting segment would be a major step forward. And thirdly, I chose number thirteen, off balance sheet financing and hedge accounting. I think practice is ahead of theory in this sphere and we need some codification. [Also included in 3(d), 11(c), and 19] [TC 3/11, p. 69]
Committee/Staff/Observer
You chose number 12, interim reporting because of the disaggregated information aspect? [TC 3/11, p. 69]
Participant C-13
Yes. I would also choose number 3 (unconsolidated entities). [TC 3/11, p. 69]
Participant C-14
9, 11 and 13. And no particular order. Starting with number 9, display of financial information. We at one time talked about more focus in the balance sheet on liquidity going from maybe differentiating current liabilities rather than just something that matures under one year but get into how much of it is truly interest rate sensitive and how much is reflex roll over or refinancing risk. So I'd want to stress that. And also stress the things we talked about in the cash flow statement. We talked about going to a direct cash flow statement and I'm still in favor of that. 11, core earnings. I think everybody's said enough about that that covers my views. 13 (financial instruments); it is very important to find a new way to assess the company's cash flow sensitivity to all those items related to financial off-balance-sheet transactions that are difficult for us to understand as they're presented today. [Also included in 5(b), 5(c), and 19] [TC 3/11, p. 69-70]
Participant C-15
I'll go with number 11 (core earnings) as my first choice. And 13 (financial instruments) is my second choice. [W]e always ask the questions and we meet with financial institutions and increasingly with industrial companies and so on about their off-balance-sheet financing, in particular swaps and other types of instruments. And I think that we find at the senior management level, CFO level, that we deal with that they broadly understand the issues. But when it comes down to getting into specifics, they say that they have somebody locked away in a corner room someplace who is really doing all this work. Something going forward which I think is going to be increasingly important are these environmental liabilities (number 14). They're kind of difficult to get your hands around but these are the types of things, if you look at a company like [name deleted] for example, that just came out of the clear blue. You looked at their balance sheet and income statement, you didn't have a hint anything was wrong with the company. Well, you knew something was wrong by reading the footnotes that they had these asbestos related liabilities but the next thing they're on their way over to bankruptcy court. I think that disclosure of those types of liabilities going forward is going to be increasingly important. [Also included in 10(b) and 19] [TC 3/11, p. 70-71]
Participant C-5
I would agree with the core earnings. On the hedging things, knowing on the other side of the world how this operates, the users of the information are not even close enough for your disclosure. We need some increased disclosure but we're ten years, fifteen years from being able to turn it into user-friendly information that the users could understand and really value. The whole issue of what's current value is one thing. The other is what's its sensitivity to future changes and the combination of changes, the volatilities that drive swaps and options. I actually am a little uncomfortable with the accounting profession that views hedge accounting and some of the hedge accounting rules right now. Hedging really operates in aggregate in this concept that you can only, you know, direct match hedging. I just spent two and a half days going through a credit process to approve a whole new set of financial transactions to shift to an accounting focus because we weren't allowed to recognize hedge accounting on something we had done pretty successfully over the last seven or nine months but realizing that we're getting killed on the accounting side of it. I'm still very perturbed with business combination practices and the flexibility that's allowed there. That's either two or three for me. And fair market values, I don't like it from the bank side but I think it's good supplemental disclosure and I wouldn't expect financials to be prepared on that basis. And I mixed that with impairment. To me, impairment is fair market value to some extent. [Also included in 4, 8(b), and 19] [TC 3/11, p. 71-72]
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 13] [TC 3/11, p. 72]
Participant C-10
9 (display), 11 (core earnings) and 12 (interim reporting). Basically try to improve cash flow information. Under nine, I think there's too much alternative uses here. I'd like to get more consistency. And like core earnings, one of the things that we're always doing is pulling out depreciation, normal depreciation and extraneous or non-normal. Most companies will just lump it in one figure. On interim reporting I just think that we have to keep hitting on this issue with you folks, otherwise you'll back up on us. [Also included in 5(a) and 5(d)] [TC 3/11, p. 72]
Participant C-8
I think in short just improve disclosure, probably as it relates to 3, 11 and 13. My feeling principally with private companies we have access to getting most of this information and, in fact, do get it but we don't have the ability or the insurance that you would provide in disclosing more of this information in the annual reports. [TC 3/11, p. 73]
Participant C-11
11 (core earnings), 3 (unconsolidated entities) as it encompasses also annual and interim segment reporting by business, major business segments. And also 13 (financial instruments) but only if you really can get something related to the risk aspects of those matters as opposed to just lots more numbers. And I don't know if that's possible so I really want to put it with that caveat, that more information that is not analytically useful in terms of understanding risk is not helpful. [Also included in 19] [TC 3/11, p. 73]
Participant C-6
9 (display), most importantly their consistency in display of information. Because I feel if I get consistent year to year or quarter to quarter, I can analyze it a lot better and draw my own conclusions. 12, interim reporting, which we always find to be a difficult thing to achieve but we always push for interim statements. And 18, improving auditing. [Also included in 5(d)] [TC 3/11, p. 73]
Participant C-17
I'm not going to expound on what's already been said about the categories, just add whatever addition or comment that seems appropriate. Number 11, core earnings, is my first choice. And I really felt that number 9 (display) was almost an integral part of that. And then from there, I looked at number 13 (financial instruments) as second in order because I am not convinced that even senior management of the company really truly understands what it's all about. So it's sort of a backdoor way of getting their attention. There are too many instances where they've had surprises that they were totally unaware of because they didn't completely understand. And then 10 (operating opportunities and risks) for the obvious reasons. [Also included in 19] [TC 3/11, p. 73-74]
Committee/Staff/Observer
I have proxies for both [participant C-2] and [participant C-7]. [Participant C-2] would opt for 9 (display) first, 11 (core earnings) second. She had four that were tied for third, 4 (reducing accounting choices), 6 (goodwill), 8 (measurement uncertainties), and 18 (auditing). She didn't explain what aspect of 18. She points out though that if 9 is done correctly, the importance of 11 isn't as significant. And then [participant C-7] votes are 11 (core earnings), 10 (operating opportunities and risks) and 9 (display) in that order. [TC 3/11, p. 74]
Committee/Staff/Observer
I have a specific question on 13 which is accounting for financial instruments including off balance-sheet-financing. Those who ranked that in the top three, did you include off-balance-sheet leases or weren't you thinking about it? [Also included in 8(c) and 19] [TC 3/11, p. 74]
Participant C-11
Not in the same context. For different reasons, I think this classifies as off-balance-sheet. I think they're very different risks. [Also included in 8(c) and 19] [TC 3/11, p. 74]
Committee/Staff/Observer
So would you also encompass in 13 changes in accounting or information about off-balance-sheet leases? [Also included in 8(c) and 19] [TC 3/11, p. 75]
Participant C-11
I think it should be on balance sheet myself but . . . [Also included in 8(c) and 19] [TC 3/11, p. 75]
Committee/Staff/Observer
But the reason is not because of the qualitative questions you had with respect to everything else that's off-balance-sheet? [Also included in 8(c) and 19] [TC 3/11, p. 75]
Participant C-17
I don't think anybody's mystified about what an operating lease is all about. I think there's a great deal more esoteric around the hedging situation. I'm not certain that the management itself always has the sophistication or focus that they ought to. [Also included in 8(c) and 19] [TC 3/11, p. 75]
[Context] Responses to the postmeeting questionnaire to the March 17, 1993 Investor Discussion Group meeting.
QUESTION 27
At the meeting, each group participant was asked to identify the three most important accounting and reporting issues that should be addressed urgently by standard setters. You are asked to answer that same question again, but please note that you are not bound by the answers you gave at the meeting. You have had the opportunity to hear others' views as well as reconsider your own. This is your opportunity to change or reaffirm your initial response.
REMEMBER: We have already recorded the user need for disaggregation as an urgent need. You do not have to include it in your rankings.
Please rank from 1 to 3 (1 is highest) the three of the eighteen general categories listed on the next page that you believe are most important and in need of urgent attention by standard setters. For each of the 3 general categories that you identified, please indicate whether the change needed is:
R A change in the rules or standards that pertain to the issue (that is, you believe the rules or standards are inadequate)
A A change in the practical application of the existing rules or standards that pertain to the issue (that is, you believe the way companies or auditors apply the rules or standards in practice is inadequate, not the rules or standards themselves)
Also, for each general category identified, please circle the subcategories that caused you to select the general category.
Please do not consider yourself limited to the topical list below.
List of topics Priority of Change needed
general category
(select 3)
Rules Application
1. Disclosure of Nonbusiness Participant I-7 1
Information such as: -3
Statistics on the economy or
industry
The company's mission and intent,
its strategy, its competitive
advantages and disadvantages, the
description of its segments, etc.
2. Consolidation Practices, such Participant I-11 1
as what entities should be -2
consolidated
Participant I-11: Finance subs
of non-finance companies. I don't
think you can separate 2 and 3.
3. Unconsolidated Entities: Participant I-11 1
Proportionate consolidation -2
versus equity method versus
expanded equity method
Scope and content of additional
disclosures about unconsolidated
entities
List of topics Priority of Change needed
general category
(select 3)
Rules Application
4. Reducing Accounting Choices Participant I-16 1
for: -1
Inventory valuations
Depreciation
Leasing
5. Business Combination Practices: Participant I-16 2 2
Purchase method versus pooling of -2, Participant
interests I-11 -3
Extent of disclosures to be made
about the acquisition (fair values,
provisions set up on acquisition,
etc.) [Participant I-16]
Participant I-16: Inadequate
disclosure of reserves, asset
writedowns, tax considerations
6. Accounting for Goodwill and
Other Intangible Assets
7. Use of Fair or Market Values in
Financial Reports:
Recording assets and liabilities
at fair value in financial
statements
Disclosing fair or market value
information in the notes to
financial statements
8. Disclosure of Measurement
Uncertainties
9. Display of Financial Participant I-7 2 1
Information: -1, Participant
To better identify nonrecurring I-11 -1
items
To provide more insight into the
operations of the company's
business
10. Disclosure of Operating Participant I-7 1
Opportunities and Risks -2
List of topics Priority of Change needed
general category
(select 3)
Rules Application
11. Developing a Concept of Core Participant I-16 2 1
Earnings for the Income Statement -3, Participant
addressing (among other issues): I-7 -3,
Nonrecurring versus unusual Participant I-10
versus extraordinary items -3
Depreciation and other noncash
charges
Amortization of goodwill and
other intangible assets
Participant I-16: Companies
boost earnings by understating
expenses and then taking
"non-recurring" adjustments to
asset values
12. Interim Reporting:
Frequency and scope of reporting
Integral versus discrete view
13. Accounting for Financial Participant I-10 1
Instruments, including: -2
Off-Balance-Sheet Financing
Hedging and Hedge Accounting
14. Environmental Liabilities
15. Stock Compensation
16. Impairment of Receivables
(including loan receivables) and
Impairment of Long-Lived Assets
17. Conservatism versus Neutrality
18. Auditing, including: Participant I-10 1
Improving the quality of audits -1
as currently defined
Expanding the scope of the
material audited
Expanding the scope of the audit
report
1 Please write A or R for the three
general categories that you
selected.
2 For each general category
selected, please circle the
subcategories that caused you to
select the general category.
[PMQI 3/17, p. 45-48]
[One analyst] expressed the following . . . regarding his approach to securities analysis: [Also included in 1(a), 1(b), and 2(c)] [BEAR STEARNS, p. 1]
It is critical that there be consistency in the application of accounting principles, not only for purposes of comparing a company's performance over a period of time, but in comparing a company against other companies in the same industry. For example, the flexibility provided by FASB Statement No. 86 (software costs) allows flexibility in determining the point at which software product development costs should begin to be capitalized. Depending upon the company's approach to software development, a relatively large portion or relatively small portion of software development costs can be capitalized, resulting in diminished comparability between software companies. (He would prefer that companies expense all software development costs.) [Also included in 1(b) and 2(c)] [BEAR STEARNS, p. 1-2]
He believes that there should be greater clarity in financial reporting and would like to receive the following as part of general purpose financial reports:
More detailed information on a company's international operations.
Disclosure of sales/margins by product line and plans for future shipments.
Historical data compared to management's goals.
Revenue breakdown by product on a quarterly basis.
Better disclosure of foreign currency effects on the financial statements.
Separate disclosure of depreciation vs. amortization expense amounts in order to better analyze changes and trends in the related asset accounts.
A table that shows scheduled depreciation charges for each of the next five years and thereafter (similar to a lease commitment table).
[Also included in 1(b)] [BEAR STEARNS, p. 2]
To improve financial reporting, from an analyst's point of view, [one analyst] recommended . . . the following. . . : [Also included in 1(b), 2(c), 3(a), 8(d), and 17(d)] [BEAR STEARNS, p. 2]
Include disaggregated disclosures by operating unit that would show revenues and operating income, cash flows and relative returns for each operating unit. [Also included in 1(b) and 3(a)] [BEAR STEARNS, p. 2]
Improve comparability in the use of accounting principles between companies within the same industry. For example, the transition provision in FASB Statement No. 106 (OPEBs) that allows companies to adopt the Statement either by cumulative adjustment or by recording a transition obligation and amortizing that obligation over a long period of time, results in diminished comparability of otherwise similar companies. [Also included in 2(c) and 8(d)] [BEAR STEARNS, p. 2]
[One analyst commented on the] following regarding her approach to securities analysis and financial reporting in general: [Also included in 1(a), 1(b), 5(c), and 6] [BEAR STEARNS, p. 3]
It would be helpful if nonhomogeneous (e.g., finance) subsidiaries were disaggregated from the consolidated financial statements. [Also included in 1(b) and 6] [BEAR STEARNS, p. 3]
[Context] For companies in the precious metals business, the Mining Industry Subcommittee of the AIMR Corporate Information Committee would like to see improvements in reporting the following:
Costs:
While most precious metals companies provide operating costs per unit, each company defines these differently. The subcommittee would like to see the industry take the initiative on developing some uniform reporting standard. [AIMR/CIC91, p. 1]
Reserves:
While reserves are provided by all companies, like costs they are derived differently. The subcommittee would like more consistent definitions of reserves and assumptions behind these reserves. (Ditto for the oil industry.) [AIMR/CIC91, p. 1]
[The Oil Industry Subcommittee of CIC] note[d] the wide disparity that very often exists between the reported earnings for many oil companies and true operating income that provides a basis for future expectations. With a large number of major corporations in the midst of major restructuring moves, the impact from nonrecurring events can completely distort reported earnings and conceal a company's true operating position. If professional analysts are confused with some of the reported earnings data we can only assume the individual investor is even more so. [Also included in 5(a)] [AIMR/CIC91, p. 1]
The most often repeated shortcomings or suggestions in a broad range of [CIC] subcommittee reports might be summarized as follows:
Better segmented reporting, particularly in quarterly reports. [Also included in 3(a)]
Change is occurring so rapidly that well informed, readily available investor contact is crucial. [Also included in 16]
Strategic input from top management, communicated in annual reports, meetings, and or by other means. [Also included in 16]
Consistent operating data should be available that can, in some way, be related to reported financial data. [Also included in 2(c)]
[AIMR/CIC91, p. 2]
[The CIC] Retail [S]ubcommittee. . . suggested [the following] improvements:
More release of monthly sales data.
Break-out of results for the seasonally important fourth quarter. [Also included in 11(a)]
Annual and quarterly release of divisional operating results. [Also included in 11(a)]
Greater disclosure of historical health benefit liabilities.
[AIMR/CIC91, p. 2]
__________
[The CIC has commented that] while the annual report remains the primary corporate communication and the quarterly report ranks very high, there is increasing emphasis on "extra efforts" put forth by management. The "factbook" with up to ten-year financial records continues as the most respected extra. Timely and meaningful press releases covering important developments are often cited. Quarterly conference calls and analyst meetings are also becoming more important and may well reflect growing investor concern for short-term "market performance." Many investors cite the absence of a separate fourth quarter report as a continuing sore point. Fax machines are a wonderful tool for the rapid dissemination of hard copy data but this newer means of distribution is often overworked. We stress again that corporate communications should not be confined to the professional investment community but also directed to the general investing public. [Also included in 11(b) and 16(b)] [AIMR/CIC92, p. 2]
The following comment by [the] Chairman of the [CIC] Foreign-Based Oil Subcommittee, puts into good perspective many of the shortcomings overseas companies have in dealing with investors: "The committee felt that the area where there is most room for improvement was in the frequency and timing of interim reports and communications of business trends to investors on a timely basis. In general, quarterly/semi-annual/annual results are published much later than those of U.S. companies. The French practice, for example, is to release partial data on a timely basis (i.e. less than one month after a period's close), but not to release sector and financial details for one or even two months later. Without details, the initial release is of limited analytical value. . . . Most U.K. companies report semi-annual and do so quite awhile after the period has ended. Overall, these practices are in line with those of respective home markets but American investors, used to full detail within three to four weeks of the quarter's close, would prefer quicker and more detailed reports. [The Chairman] realize[s] there is a cost involved with doing this, but feels the market would be better informed and more efficient as a result. [Also included in 2(a), 11(a), and 16(b)] [AIMR/CIC92, p. 3]
__________
The quality and usefulness of the information available to the public is an integral part of the analysis of a financial institution's performance and of its estimated value. The questions in this section address the usefulness of the existing financial information and [analysts'] views toward enhancing such information: [Also included in 1(b), 2(a), 2(d), and 4] [KPMG BANK STUDY, p. A-3]
If you could obtain additional information about a financial institution, select the letter which best describes your preference for expanded disclosure:
a. Strongly favor
b. Favor
c. Do not favor
d. No opinion
_______________________________________________________________
A B C D
45% 33% 20% 2 Anticipated amount and
timing of future cash
flows from non-performing
assets
10 55 28 7 Loan maturity
characteristics
incorporating
estimate prepayment
assumptions
43 43 13 1 Original loan terms and
renegotiated terms for
restructured assets
83 17 Prior loan charge-offs
relating to existing
problems assets
55 38 3 4 Cash flow experience
relating to problem
assets
70 18 10 2 Internal loan
classification/risk ratings
65 28 7 Material comments contained
in regulatory
reports
18 40 33 9 Amount and timing of future
cash flows from
off-balance-sheet financial
instruments
3 97 Other
[KPMG BANK STUDY, p. A-6]
If you could obtain only one additional piece of information about a financial institution, what would it be?
Cash flow experience relating to problem assets.
Loan collectibility.
Material comments contained in regulatory reports.
Expected maximum loss content in identified non-performing assets. This provides one with a measure of the "worst case" scenario and the ability of a bank to cope with that scenario.
Internal loan classification.
More detailed information regarding long-term credit record for assets by original actual risk classification.
Breakout of retail loans and deposits by type.
Internal risk classification of performing loans.
Variance analysis comparing results to management expectations.
Relevant data from examination reports (not including specific credits).
Since your question does not specify "financial" information, I would like to know the hiring priorities (senior level). This information for the future tells me more about the company than any historical information could possible convey!
More detailed information about loan characteristics.
Criticized and classified loans - it would provide great insight into likely trends of nonperforming assets.
Prior loan charge-offs of problem and criticized assets. Lack of disclosure of these amounts renders any attempt to measure reserve adequacy useless.
Breakdown of funding against assets (on and off-balance-sheet) i.e. mismatch or match funding positions.
All relevant data on any significant non-performing assets.
A look at loan risk-ratings outside the non-performing category.
Latest bank examination report or at least the resulting CAMEL rating and components.
Further information on non-performing assets with historical analysis.
Dollar amount of loans classified substandard and doubtful.
Current status of collateralization of non-performing assets (not just loans).
Internal loan classifications.
Line of business reporting for companies operating in several sectors (business or geographic depending on the company).
Internal loan classifications and risk ratings which are most important to estimating changes in risk/reward ratio of a bank stock.
Sources and uses detailed to estimate [recurring] operating cash flow.
A detailed breakdown of loan classification over time.
A better breakdown of the loan portfolio and non-performing loans in each category.
Mark-to-market estimated value.
Loans-more information about the composition of the portfolio, especially with respect to quality.
Real allocation of loss reserves by loan category and to problem assets.
Internal loan classifications/risk ratings.
[KPMG BANK STUDY, p. A-6 and A-7]
The FASB, the Securities and Exchange Commission (SEC) and other regulatory bodies are currently considering a requirement to prepare financial statements based on market values in place of financial statements prepared on a historical cost accounting basis. The questions in this section relate to this issue: [Also included in 1(b), 2(a), 2(b), 2(c), 4, 10(b), and 11(a)] [KPMG BANK STUDY,
p. A-9]
Select one of the following letters that best describes the usefulness of the following financial statement presentations:
a. Very useful
b. Useful
c. Not useful
d. No opinion/No response
_______________________________________________________________
A B C D
8% 68% 24% Historical cost without fair value
disclosures
70 25 2 3 Historical cost with fair value
disclosures
18 70 4 Financial statements adjusted to
reflect fair value
28 42 Two separate financial statement
presentations, one based on
historical cost and one based on
fair value accounting
__
[Also included in 1(b) and 4] [KPMG BANK STUDY, p. A-9]
Indicate whether you believe fair value accounting should be the primary accounting basis for the preparation of an institution's financial statements.
10% Yes
90 No
0 No opinion
[Also included in 2(a), 2(b), 2(c), and 4] [KPMG BANK STUDY, p. A-9]
[One user commented] no. The SEC plan takes a portion of assets and no liabilities. While the mix of these factors and the stability of the interest spread are the important elements for financial intermediaries. If fair value is adopted, both sides need to be revalued. Also, fair value accounting would destroy any ability to analyze any asset or liability trends and cash flows. [Also included in 4] [KPMG BANK STUDY, p. A-9]
[One user commented] no. [Fair value accounting] would create too much volatility in earnings and, in turn, would impair valuations. [Fair value] disclosure is sufficient. [Also included in 4] [KPMG BANK STUDY,
p. A-9]
[One user commented] no. Market values are too judgmental, I prefer historical cost plus disclosure. [Also included in 4] [KPMG BANK STUDY, p. A-9]
[One user commented] no. Grave doubts exist as to the usefulness and accuracy of estimates of 'fair value'. [Also included in 2(a), 2(b) and 4] [KPMG BANK STUDY, p. A-9]
[One user commented] no. Fair market value can be easily manipulated for many financial instruments. In fact, many had commercial real estate loans made based upon 'estimates of market value'. [Also included in 2(b) and 4] [KPMG BANK STUDY, p. A-9]
[One user commented] no. Two formats [are] needed. Fair market value and historical cost [are] required to show reasonableness of prior management decisions.
[One user commented] no. No one is smart enough to place a fair value on an asset or liability for which there is not an active daily market to establish value. [Also included in 4] [KPMG BANK STUDY, p. A-9]
[One user commented] no. It is difficult to determine the fair value of many assets and liabilities. This could distort financial statements and hinder comparability. [Also included in 2(b), 2(c), and 4] [KPMG BANK STUDY, p. A-9]
[One user commented] no. Fair value accounting is too judgmental and too susceptible to external factors (i.e., market fluctuations) to serve as the primary accounting basis. [Also included in 2(b) and 4] [KPMG BANK STUDY, p. A-10]
[One user commented] no. Fair value only would distort the historical trend to management activity. Must have a point (or points) of historical comparison. [Also included in 4] [KPMG BANK STUDY, p. A-10]
[One user commented] no. [There is an] inability to accurately adjust values of all asset and liability categories. [Also included in 2(b) and 4] [KPMG BANK STUDY, p. A-10]
[One user commented] no. Banking is the business of managing credit for intermediate term returns. Fair value accounting does not reflect value added in risk management and creates pressures which will distort the time frame over which credit is managed (i.e., will shift focus from intermediate term to short term). [Also included in 4] [KPMG BANK STUDY, p. A-10]
[One user commented] no. [Fair value estimates] should be handled in notes. [Also included in 4] [KPMG BANK STUDY, p. A-10]
[One user commented] no.
--Misrepresents "lending to maturity" aspect of bank loans.
--Concern about behavioral impact on bankers.
--Costs more to gather information than benefits users.
--Too much estimation required; comparability and integrity [are] questionable.
--Misuse of information by less-sophisticated users. [Also included in 2(b), 2(c), and 4] [KPMG BANK STUDY, p. A-10]
[One user commented] no.
1) High degree of subjectivity, and the inherent uncertainty of forecasts on which valuations are based, will diminish both the consistency and comparability of financial institutions' reports. [Also included in 2(b), 2(c), and 4] [KPMG BANK STUDY, p. A-10]
2) In loan valuation, changes due to changed assessment of credit risk would be indistinguishable from changes due to interest rate movements. [Also included in 4] [KPMG BANK STUDY, p. A-10]
3) Increase potential for accounting abuses. [Also included in 2(b) and 4] [KPMG BANK STUDY, p. A-10]
4) Certain intangible franchise values would be ignored. [Also included in 4] [KPMG BANK STUDY, p. A-10]
[One user commented] no. You need both to gain a proper perspective. [Also included in 4] [KPMG BANK STUDY, p. A-10]
[One user commented] no. Banks match liabilities and assets to reduce interest rate risk. I don't believe fair value accounting could properly gauge the matching and may force banks into making uneconomic decisions for accounting reasons. [Also included in 4] [KPMG BANK STUDY, p. A-10]
[One user commented] no. Need to understand strategic posture of company with respect to the balance sheet and contingent items to determine whether fair value approach is appropriate. [Also included in 4] [KPMG BANK STUDY, p. A-10]
[One user commented] too judgmental once one gets away from liquid and marketable instruments. [Also included in 2(b) and 4] [KPMG BANK STUDY, p. A-10]
[One user commented] no. Loan and deposit contractual agreements are not normally sold and do not have legitimate secondary markets that permit more than conjectural market value assessment; therefore, to force such assessments is a costly sham! [Also included in 4] [KPMG BANK STUDY, p. A-10]
[One user commented] yes. Most realistically reflects market value of company's equity - market now guesses at the value - greater disclosure will result in more efficient pricing of stocks. Also, will force management to take into account information from the market - e.g., declining value of real estate loans might have shut off real estate lending spigot sooner. [Also included in 2(a) and 4] [KPMG BANK STUDY, p. A-10]
[One user commented] yes, however, I would qualify my answer by acknowledging that valuation of many loans is subjective. Thus I have serious concerns regarding:
1. Comparability among more conservative and less conservative banks
2. Restrictions in lending/credit crunch involving borrowers which are very difficult to value.
[Also included in 2(b) and 4] [KPMG BANK STUDY, p. A-11]
[One user commented] yes. But need a transition period with both historical and current provided. [Also included in 4] [KPMG BANK STUDY, p. A-11]
For each of the categories list below, select the letter that best describes the manner in which you prefer fair values to be presented in the financial statements:
a. Adjustment to income
b. Adjustment to stockholders' equity
c. No adjustment, prefer historical cost accounting basis supplemented with fair value disclosures
d. Do not prefer fair values
e. No opinion
_______________________________________________________________
A B C D E
5% 33% 60% 2 Equity investments
securities
8 18 72 2 Debt investment securities
5 18 68 8 1 Purchased mortgage
servicing rights
10 18 57 13 2 Excess mortgage servicing
rights
8 15 45 32 Loans
8 13 55 24 Demand deposits
8 12 52 28 Time deposits
5 15 60 20 Long term debt
5 15 55 23 2 Other borrowings
3 13 50 30 4 Financial guarantees
3 10 53 32 2 Commitments to extend
credit
2 13 58 25 2 Letters of credit
5 15 68 8 4 Swaps, options, futures,
etc.
3 3 Other
[Also included in 4] [KPMG BANK STUDY, p. A-11]
There are current accounting rules that require the disclosure of fair values, realized and unrealized gains and losses, cash flow information and maturities and yields of investment securities. Considering that this information is already available, indicate whether you believe the historical cost based accounting should be replaced with fair value based accounting.
8% Yes
88 No
2 No opinion
2 No response
[Also included in 2(a), 2(b), 2(c), and 4] [KPMG BANK STUDY, p. A-11]
[One user commented] no. Much of the additional information that would be available with fair value accounting must be based on estimates which are likely to incorporate varying assumptions and therefore, is unlikely to be reliable or consistent. Further, much of what is proposed is irrelevant for valuing a banking company. [Also included in 2(a), 2(b), 2(c), and 4] [KPMG BANK STUDY, p. A-11]
[One user commented] no. Fair values may be considered in evaluating an institution's capital adequacy, but should not be the primary factor. [Also included in 4] [KPMG BANK STUDY, p. A-11]
[One user commented] no. The principal asset of intermediaries is loans, which don't lend themselves (particularly commercial loans) to fair value accounting due to differences in loan quality. [Also included in 4] [KPMG BANK STUDY, p. A-11]
[One user commented] no. I would like increased footnote disclosure of fair market calculations. [Also included in 4] [KPMG BANK STUDY,
p. A-12]
[One user commented] no. If implemented, it would result in undue and unpredictable fluctuation in financial results (earnings and equity) even where the institution has no intention of selling the assets. [Also included in 4] [KPMG BANK STUDY, p. A-12]
[One user commented] no. Information is subject to too much management judgment. [Also included in 4] [KPMG BANK STUDY, p. A-12]
[One user commented] no. Fair market value accounting should be supplementary in nature. [It] does not allow [for] reasonable predictions of product performance-loans and mortgages would be confusing if the balance sheet was marked to market. [Also included in 4] [KPMG BANK STUDY, p. A-12]
[One user commented] no. Historical data has significant value and most importantly provides some comparability enhancement for depreciation, amortization, and many other financial statements items. [Also included in 4] [KPMG BANK STUDY, p. A-12]
[One user commented] no. I believe more detailed information as to asset quality would better allow the user to interpret financial statements. [Also included in 4] [KPMG BANK STUDY, p. A-12]
[One user commented] no. Footnote disclosure [is] largely adequate -- would like for swaps, and hedges also. True fair market for entire balance sheet puts banks into a different business, from long-term investor to broker or short-term investor. [Also included in 4] [KPMG BANK STUDY,
p. A-12]
[One user commented] no. Historical cost should be maintained but disclosure should be broadened. [Also included in 4] [KPMG BANK STUDY, p. A-12]
[One user commented] no. Volatility in reported numbers could create unnecessary volatility in securities -- potentially disrupting capital raising activities. [Also included in 4] [KPMG BANK STUDY, p. A-12]
[One user commented] no. Should not be done piecemeal. [Also included in 4] [KPMG BANK STUDY, p. A-12]
[One user commented] no. Investment securities are only a minor part of most balance sheets. Information relevant to the economic value of the corporation is already disclosed. Marking securities to market on the financial statements would lead to spurious volatility without adding information. Attempting to mark some corresponding subset of liabilities to market adds complexity, but again fails to add valuable information. Further, it would distort existing important information regarding net interest margin. [Also included in 4] [KPMG BANK STUDY, p. A-12]
[One user commented] no. The footnote of market values works fine. [Also included in 4] [KPMG BANK STUDY, p. A-12]
[One user commented] no. Most adjustments would be unreliable approximations of improbable or impossible transactions; they would create destabilizing volatility of earnings that would not fairly reflect realities of going concerns. Lack of timeliness a problem also. [Also included in 2(b) and 4] [KPMG BANK STUDY, p. A-12]
[One user commented] no. Both give you a more comprehensive picture. [Also included in 4] [KPMG BANK STUDY, p. A-12]
[One user commented] yes. Provided that liabilities funding investments are similarly adjusted. [Also included in 4] [KPMG BANK STUDY, p. A-12]
If the FASB requires fair value accounting for certain investment securities, indicate whether you believe it would be useful for certain liabilities to be also recorded at fair value.
85% Yes
10 No
5 No opinion
0 No response
If yes, indicate which liabilities.
50% Demand deposits
60 Time deposits
70 Long term debt
65 Other borrowings
Other,
2 Insurance liabilities
13 All liabilities
2 Other
[Also included in 4] [KPMG BANK STUDY, p. A-13]
For an institution that has the intent and ability to hold assets for the foreseeable future (defined as 12 to 18 months), indicate whether you believe fair value accounting is appropriate.
30% Yes
60 No
8 No opinion
2 No response
[Also included in 2(b), 2(c), 4 and 10(b)] [KPMG BANK STUDY,
p. A-13]
[One user commented] no. Provided there is assurance that assets will be held to maturity, short term market swings would be misleading if fair market value accounting is applied. [Also included in 4] [KPMG BANK STUDY, p. A-13]
[One user commented] no. Not appropriate, but 12-18 moths is too short. [Also included in 4] [KPMG BANK STUDY, p. A-13]
[One user commented] depends, fair value footnotes would be helpful. [Also included in 4] [KPMG BANK STUDY, p. A-13]
[One user commented] no. If institution has the intention of holding the securities through changes in interest rates, then the equity of the organization would not seem to be at risk. Further, in most instances securities portfolios are funded with wholesale liabilities which generally match fund portfolios. [Also included in 4] [KPMG BANK STUDY,
p. A-13]
[One user commented] no. For many of these investments it is almost impossible to determine the net realizable value. [Also included in 4] [KPMG BANK STUDY, p. A-13]
[One user commented] no. Foreseeable future defined as 12-18 months seems too short. I would think foreseeable future implies a multi-year holding [period]. [Also included in 4] [KPMG BANK STUDY, p. A-13]
[One user commented] no. The crux of bank valuation is the ability to manage risk over an intermediate time frame so day to day market values may be irrelevant. [Also included in 4 and 10(b)] [KPMG BANK STUDY,
p. A-13]
[One user commented] no. Ultimately will discourage bank intermediation function if banks are forced to recognize fluctuations in their assets and liabilities. [Also included in 4] [KPMG BANK STUDY, p. A-13]
[One user commented] no opinion. Should not be done piecemeal. [Also included in 4] [KPMG BANK STUDY, p. A-13]
[One user commented] no. Caveat - must establish way for investment or analyst community, to verify that assets are being held for the stated period. [Also included in 4] [KPMG BANK STUDY, p. A-13]
[One user commented] no. Distorts the precept of a going concern, will distort activities of the firm -shortening the timeframe for decisions (which is already too myopic). Should we mark plant and equipment to market, based on current demand for the output? Nonsense! [Also included in 4] [KPMG BANK STUDY, p. A-14]
[One user commented] no. Fair value accounting would not reflect the nature of the true intermediary function banks provide. [Also included in 4] [KPMG BANK STUDY, p. A-14]
[One user commented] yes. [Fair value accounting is appropriate] provided there is an active market in those assets. [Also included in 4] [KPMG BANK STUDY, p. A-14]
[One user commented] yes. If interest is to hold to maturity at the present time, regardless of whether future events could change, historical cost is appropriate. [Also included in 4] [KPMG BANK STUDY, p. A-14]
[One user commented] yes. Some effort at fair accounting is still useful for these organizations. However, if the subjectivity involved is too great for certain loans so that comparability is destroyed, I would favor historical cost with an explanatory footnote. [Also included in 2(b), 2(c), and 4] [KPMG BANK STUDY, p. A-14]
[One user commented] yes. Intent and ability are subject to change. [Also included in 4] [KPMG BANK STUDY, p. A-14]
[One user commented] yes. You need both! [Also included in 4] [KPMG BANK STUDY, p. A-14]
[One user commented] yes. Use historical [cost accounting and] supplement [it] with fair market values. [This will make the financial statements] easier to use and interpret. [Also included in 4] [KPMG BANK STUDY,
p. A-14]
Indicate whether you believe fair value accounting will provide a more accurate measure of a financial institution's capital.
38% Yes
60 No
2 No opinion
[One user commented] no. Assuming adequate footnotes [provide] market values, where available, as well as asset quality. [Also included in 4] [KPMG BANK STUDY, p. A-14]
[One user commented] no. Not unless all asset and liability categories are accurately adjusted. [Also included in 4] [KPMG BANK STUDY,
p. A-14]
[One user commented] no. The crux of bank valuation is the ability to manage risk over an intermediate time frame so day to day market values may be irrelevant. [Also included in 4] [KPMG BANK STUDY, p. A-14]
[One user commented] no. Only where liquidation is imminent. [Also included in 4] [KPMG BANK STUDY, p. A-14]
[One user commented] no. [Because fair value accounting would] include unrealized gains/losses [in capital even though they] may never be realized and thus [may never be] part of capital. [Also included in 4] [KPMG BANK STUDY, p. A-14]
[One user commented] no. Because of difficulty in determining fair value of loan portfolios and [the number of] possible alternatives in assumptions and/or methodologies. [Also included in 4] [KPMG BANK STUDY,
p. A-14]
[One user commented] no. Since foreign institutions would not be covered, [fair value accounting will] present competitive inequities. [Also included in 4] [KPMG BANK STUDY, p. A-14]
[One user commented] no. Can do with the current footnote disclosure. But this market value accounting puts [a] company into a liquidation mode -- not their function. Would overstate. [Also included in 4] [KPMG BANK STUDY, p. A-14]
[One user commented] no. Disclose the pieces and allow investors to make their own judgements. [Also included in 4] [KPMG BANK STUDY,
p. A-14]
[One user commented] no. Interest rate and related market fluctuations of a transitory nature will distort the financial realities of the firm. [Also included in 4] [KPMG BANK STUDY, p. A-14]
[One user commented] an institution's capital may be more than adequate to fund growth and cover losses over time whereas at any point in time (when interest rates are at extremes) it may be inadequate. [Also included in 4] [KPMG BANK STUDY, p. A-15]
[One user commented] yes. If done for entire balance sheet. [Also included in 4] [KPMG BANK STUDY, p. A-15]
[One user commented] yes. Negative trends will be apparent quicker. [Also included in 4] [KPMG BANK STUDY, p. A-15]
[One user commented] yes. [Fair value accounting] will create huge volatility in price and market value. [Also included in 4] [KPMG BANK STUDY, p. A-15]
[One user commented] yes. Adjusting the capital account for unrealized gains and losses is something the capital markets already do. [Also included in 4] [KPMG BANK STUDY, p. A-15]
[One user commented] yes. If fair value is applied only to maturing instruments in any twelve month period. [Also included in 4] [KPMG BANK STUDY, p. A-15]
[One user commented yes.] Only if handled correctly. [Also included in 4] [KPMG BANK STUDY, p. A-15]
[One user commented yes.] It will provide another view. [Also included in 4] [KPMG BANK STUDY, p. A-15]
Financial institutions generally release their results of operations and financial position two to three weeks after period end. If historical cost accounting was replaced with fair value accounting, it is expected that a financial institution's results of operations and financial position based on fair values would take more time to gather and not be released as soon. Indicate the amount of additional time delay that you would be willing to accept in order to obtain financial statements presented on a fair value basis of accounting.
58% Two weeks or less
18 Between 3 and 4 weeks
0 Between 5 and 6 weeks
0 Between 7 and 8 weeks
15 Other
9 No response
[Also included in 11(a) and 4] [KPMG BANK STUDY, p. A-15]
[One user commented] disclosure of characteristics of assets/liabilities is easier to use, takes less time, and provides more flexibility. given this information, analyst can mark to market anytime in [a] cycle. [Also included in 4] [KPMG BANK STUDY, p. A-15]
[One user commented] fair value accounting would make quarterly reports more difficult, but should not affect [the] timing of the annual report. [Also included in 4] [KPMG BANK STUDY, p. A-15 ]
[One user commented I would] prefer to have timely cost data. [Also included in 4] [KPMG BANK STUDY, p. A-15]
[One user commented] the existing delays are already too long. Further delays would result in fair values that are stale and no longer reflect current market conditions. [Also included in 4] [KPMG BANK STUDY, p. A-15]
[One user commented] there is no reason why fair value accounting should take longer. Provided the date of fair value was evenly distributed and prominently displayed, it wouldn't have to be after quarter end. [Also included in 4] [KPMG BANK STUDY, p. A-15]
[One user commented] when a financial institution is late reporting, it means trouble. To add an excuse to delay a report reduces the efficiency of capital markets. [Also included in 4] [KPMG BANK STUDY, p. A-15]
__________
[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 12] [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 12] [GOLDMAN, p. iii]
[One analyst's] main complaint is the lack of segment information. He would like drug companies to report product segments by geographic area. He wants information on new products and their margins. [Also included in 1(b), 3(a), and 13] [GOLDMAN, p. 2]
[One analyst] said the bulk of information in financial statements is used by analysts but not by most individual investors. He would like one number on the cash flow statement that shows the result of operations alone, not changes in the various assets. [Also included in 1(b) and 5(c)] [GOLDMAN, p. 4]
[One analyst] would like income to be determined more by cash activities than by accrual. He would like more disclosure and reconciliation between cash income and GAAP income every quarter. He feels that the standards are too loose in the allowance of one time charges. [Also included in 1(b) and 5(a)] [GOLDMAN, p. 4]
On the pension footnote, [one analyst] said he just wants to know whether the plan is under or over funded. He felt the tax footnote should provide the differential between cash taxes and the tax provision and the reasons therefore. [Also included in 1(b)] [GOLDMAN, p. 4]
__________
From what has briefly been described of the [foreign] financial analysts' work, there results a series of requirements with regard to accounting data, which are but insufficiently met at present. We have broken them down into . . . major categories. [Also included in 1(b), 2(c), 2(d), 3(c) 4, 5(a), 5(c), 6, 8(a), 9, 11(b), and 11(c)] [BETRIOU, p. 1]
Data relating to one period must be made available as soon as possible to [foreign] financial analysts so they may draw up estimates for the following period. [Also included in 2d] [BETRIOU, p. 1-2]
Too many groups await the regulatory deadline to issue compulsory data. It may, in particular, come from the fact that data is now available (greater rapidity within groups would ease decision-making) but also sometimes because data is retained (in order to avoid giving data to competition). [Also included in 2(d)] [BETRIOU, p. 2]
If accounting data should be complete, using it should nonetheless remain as simple as possible. [Also included in 2(d)] [BETRIOU, p. 2]
The fact that appendixes exist should not justify a large diversity in presentations, even if data is published in the end. [Foreign] financial analysts must, in fact, react rapidly. Data which would be stifled in bulky appendixes may very well be partly lost. [Also included in 2d] [BETRIOU, p. 2]
It therefore seems more advisable to have less possibilities in presentations. [Also included in 2(d)] [BETRIOU, p. 2]
Statements of changes in financial position. They are often published by large groups, but with partially dissimilar presentations and with definitions inadequately standardized. [Also included in 1(b) and 5(c)] [BETRIOU, p. 2]
Semi-annual and quarterly accounts (same observation as for statements of changes). The systematic publication of semi-annual accounts (even if non audited, should that be the requisite condition for rapidity), would be considerable progress. They should include the main items of the balance sheet, of the profit and loss account, of the statement of changes, as well as data per activity. [Also included in 1(b), 11(b), and 11(c)] [BETRIOU, p. 2]
Furthermore, it is important that intermediate accounts be set up according to the same nomenclature as the closing accounts, to which financial analysts compare them. [Also included in 1(b), 11(b), and 11(c)] [BETRIOU, p. 2]
Breaking down business, profit and main items of the balance sheet per origin (geographical zones and business segments). This type of data which could be limited to a few major elements of the profit and the balance sheet is still too often unavailable. [Also included in 1(b) and 3(c)] [BETRIOU, p. 2]
The publication of the profit/loss of the main divisions of a group is also desirable, especially when they have appreciably different margin ratios (moreover, when some lose money). This data is in fact particularly useful for examining the development of the total profit. [Also included in 1(b) and 3(c)] [BETRIOU, p. 2]
[T]he standardization of accounting data sometimes leads to its impoverishment when new standards plan for less details or less significant data (for [foreign] financial analysts) than the preceeding ones. For example:
The componants of costs per kind (personnel costs in particular). In the past this data was published in "French type" accounts but are not always included in the appendixes of "anglo-saxon type" accounts, especially in semi-annual publications. [Also included in 1(b)] [BETRIOU, p. 2]
Consolidation through global integration of financial subsidiaries (required by the American SFAS 21 standard). Such practice may obscure groups accounts, whose main business is not finance. The equity method consolidation of subsidiaries seems preferable, with an indication in the appendixes of the impact of their consolidation through global integration. [Also included in 1(b)] [BETRIOU, p. 2]
[I]n some countries (in France, notably), priority is still too often given to corporate accounts in published data. Consolidated accounts are then often limited to the minimum requirements of the directives. Progress is being made and should be continued. [Also included in 1(b)] [BETRIOU, p. 2]
If it is accepted that the existence of options leads accountants to make different choices, the comparison between companies may nevertheless require the elimination of the incidence of these choices. Published data does not always allow for such process. Consequently, IASC's efforts to reduce the number of options seems to us positive. Such an orientation should also be sought at the European level. [Also included in 1(b) and 2(c)] [BETRIOU, p. 2-3]
The case of companies modifying their structures is worth mentioning: comparability in time would be greatly improved by the publication of data with a constant structure over three years (two years are often insufficient to determine trends). [Also included in 1(b) and 2(c)] [BETRIOU, p. 3]
In consolidated accounts in particular the impact on the profit and loss account, over a full year, for recently consolidated or deconsolidated companies becomes requisite data in order to make estimates. In our opinion this should be published. Alternations in the consolidation circle during the financial year are presently made "pro rata temporis". [Also included in 1(b) and 2(c)] [BETRIOU, p. 3]
It is likely that the objectives of all accounting data users do not coincide. As far as they are concerned, [foreign] financial analysts essentially need data which reflects the economic reality of entities they examine (groups or companies). Further progress is still required and we have broken this down into . . . categories: [Also included in 1(b), 4, 5(a), 6, 8(a), and 9] [BETRIOU, p. 3]
Fiscal distorsions, too frequent in various European countries (including France, Italy, Germany). It seems to us that these distorsions must be eliminated from corporate accounts, as they are from consolidated accounts. The latter are still too often influenced by fiscality in some countries (Germany, notably). [Also included in 1(b)] [BETRIOU, p. 3]
The impact of legal considerations: generally speaking, off-balance sheet commitments should benefit from more detailed data then they presently do. Pension costs for instance show the importance of these potential debts. [Also included in 1(b)] [BETRIOU, p. 3]
[L]easing should be entered in the assets and liabilities on the balance sheet (and not off the balance sheet which distorts the meaning of debts and fixed assets). Standardization at the European level would be useful. [Also included in 1(b) and 8(a)] [BETRIOU, p. 3]
[G]enerally, from the [foreign] financial analysts' viewpoint, seeking economic meaning seems to have to prevail on strictly legal considerations. This principle would lead to setting up consolidated accounts for example in cases when the percentages of shares held do not formally require it. Combinations meant to artificially improve the balance sheet ratios would thereby become transparent. [Also included in 1(b) and 6] [BETRIOU, p. 3]
Undervaluation of asset items. The differences between accounting valuations and the "economic reality" results notably from:
[1] the "conservative rule", indeed useful to protect creditors, but which plans for immediate entering of potential loss and does not take into account latent gains. [Also included in 1(b), 4, and 9] [BETRIOU, p. 3]
More particularly, the historic cost method does not allow showing the potential revaluation of assets. This data would be necessary for investment securities, because of the development of money market funds: part of the financial products are released only when mutual fund shares are sold, distorting the meaning of net financial expenses. [Also included in 1(b), 4, and 9] [BETRIOU, p. 3]
Data on market values included at least in the appendix would give a more precise view of reality. It could concern in priority current assets (investment securities and raw material notably). [Also included in 1(b), 4, and 9] [BETRIOU, p. 3]
[2] of the too large latitude (allowed by the Fourth Directive) in the determination of provisions which may sometimes be profit. It would be preferable to have stricter allowance criteria. [Also included in 1(b), 4, and 9] [BETRIOU, p. 3]
[3] of the too large liberty to capitalize research and development expenditures which could lead to overestimating profit over a period. [Also included in 1(b), 4, and 9] [BETRIOU, p. 3]
Exceptional earnings are still too often under detailed. The distinction made with regular profit permits a keener analysis of the past and future profitable developments. [Also included in 1(b) and 5(a)] [BETRIOU, p. 3]
[T]he impact of changes in accounting methods, the impact of recently acquired (or sold) businesses, and finally the impact of changes in the consolidation circle (see above) are a source of data which is particularly useful. [Also included in 1(b)] [BETRIOU, p. 3]
[Context] November 17, 1992, a committee member and staff met with a buy-side equity analyst. The materials for the first meeting of the Investor Discussion Group provided the basis for the discussion.
[The buy-side equity analyst] believes that the biggest problem with external reporting is that companies manipulate reported earnings by:
artificially smoothing key trends in revenues and costs to create an illusion of consistency
reporting from time to time accumulated charges as non recurring items, often included in a "restructuring" charge, even though the charges are recurring and result from the normal operations of the business.
[FREEDMAN, p. 2]
As a result of that manipulation, [it is] believe[d] that many investors underestimate the riskiness (because of the artificial smoothing) and overestimate the company's ability to generate future cash flows (because of non recurring label assigned to certain charges). [FREEDMAN, p. 2]
[A]nother serious problem for investors results from the accounting convention of amortizing intangibles and goodwill. [D]uring the 1980's, many companies entered into LBO transactions, adopted a new basis of accounting, and recognized significant amounts of intangible assets and goodwill. On the other hand, other companies did not participate in LBO transactions and continued to follow their historical basis of accounting often reporting only modest amounts of intangible assets and goodwill. Because of the requirement to amortize intangibles and goodwill and the diversity in accounting measurements resulting from some companies adopting a new basis of accounting, two companies in similar economic circumstances often report very different income. [M]any sophisticated investors have not considered the differences resulting from amortization expense when comparing and valuing companies. Thus, when comparing the income of companies, the reported amount of amortization expense [often is added to income]. [FREEDMAN, p. 2-3]
Because of the problems discussed in [the previous two paragraphs], [the] assessment of a company's performance gives heavy weight to the following performance measure:
Fair value of the company's debt and equity
Cash flow from operations
[FREEDMAN, p. 3]
[I]mprovements in disaggregated information should be a high priority. The need [is emphasized] for improved information related to operations in different geographic areas because the risks, prospects for growth and profitability often differ widely depending on the geographic location of the business. [Also included in 3(a)] [FREEDMAN, p. 3]
[T]he general categories of information on the Nonfinancial Business Subcommittee's list of information needs [was discussed]. [E]ach of those categories [were found] to be relevant, and no additional categories [were offered] for consideration. [T]he relative usefulness of information in those categories varies widely depending on the company's circumstances such as its industry structure, the stage in its life cycle, or at the time of new developments. That is, sometimes the information is critical and other times it is not. [FREEDMAN, p. 3]