[Companies] "don't discuss problems candidly. They don't discuss the future of the company clearly." (Boston mutual fund analyst) [Also included in 13] [HILL KNOWLTON, p. 6]
"Companies convey as little as they can. Annual reports tend to be bland and rose-tinted. . . . Most of them gloss over too much." (Los Angeles mutual fund analyst) [HILL KNOWLTON, p. 7]
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[Context] The AIMR position paper provides a two-paragraph summary of the section (pages 20-23) entitled "Qualitative Characteristics of Financial Statements." The second paragraph pertains to timeliness of information:
Some attention is paid in this section to the need for timely reporting. It introduces the view of AIMR that mandated quarterly reporting not only is essential, but that moves to abolish it appear to be based on incorrect premises, blaming quarterly reporting requirements for "short-termism" when the blame can better be placed elsewhere. [Also included in 2(b)] [AIMR/FAPC92, p. vii]
[Context] Because they have that focus, excerpts on timeliness, which normally would be included in 2(a)-Relevance (of which timeliness is a subset in FASB's concepts statements), are included in 11(a)-Frequency of interim reporting.
The first paragraph is as follows:
The qualitative characteristics of accounting that we find most important to the needs of financial analysts are relevance, reliability, both verifiability and representational faithfulness, timeliness and neutrality. First, analysts need to know economic reality -- what is really going on -- to the greatest extent it can be depicted by accounting numbers. The information must be relevant to the process of analysis, one reason why much space in the early part of the report is devoted to describing the analyst's work. [Also included in 2(b)] [AIMR/FAPC92, p. vii]
[Context] It introduces the following excerpts on relevance:
There is general agreement that accounting and other financial data should have certain characteristics. The FASB's Statement of Financial Accounting Concepts No. 2, "Qualitative Characteristics of Accounting Information," creates two groups of these characteristics under the headings "relevance" and "reliability." That grouping is appropriate because in many cases the format and content of accounting data requires a trade-off between the two. Certainly, financial analysts desire information that is both relevant and reliable, but their bias is towards relevance. In a phrase, analysts prefer information that is equivocally right rather than precisely wrong. Inexact measures of contemporaneous economic values generally are more useful than fastidious historic records of past exchanges. A short discussion of several characteristics of accounting quality and our views of them follows. [Also included in 2(b)] [AIMR/FAPC92, p. 20]
Relevance
In an ideal world, the most relevant accounting data would be those that reported assets and liabilities in a way that would allow analysts to impute the future cash flows emanating from them individually and collectively. The certainty embodied in that world does not exist. In fact, if it did, there would be no need for analysis. Therefore, we must strive for an accounting model that reflects the degree of uncertainty that besets a particular enterprise, the consequence of which is a valuation system that is eclectic. Some assets, such as receivables, are stated explicitly at the amounts expected to be received in cash. Other assets, such as certain types of securities, are stated at market value, implicitly the amount of cash that could be received. Some assets are stated at the amounts paid for them (historic cost) pending receipt of evidence that they are worth some other amount (realization). Some assets may not appear in the financial statements at all because there is no sensible way to report them. [AIMR/FAPC92, p. 20]
Historic costs are sunk costs and there is little disagreement that they are often irrelevant to financial decisions. But there is considerable debate as to whether they should be totally replaced by more relevant current values, whether current values should be provided only as supplementary data, what version of current value should be used, and how (in the absence of a firm-specific exchange or and organized auction market) current value should be determined. There also is some opinion among analysts that determination of the current values of specific assets is a function of financial analysis, not financial reporting. However, almost all would agree that so-called lower of cost or market methods are neither informative nor useful. They are based on the untenable premise that market value is a good accounting measure when it is lower than historic cost, but not when it is higher. The best argument that can be made in favor of lower of cost or market is that it does reveal market values when they are lower than cost, thus divulging important information on a variety of asset impairments. [AIMR/FAPC92, p. 20- 21]
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[Context] Meeting of the Investor Discussion Group on March 17, 1993. Part of the meeting was devoted to the topic of interim reporting. During the discussion, an investor commented on the lack of relevance of the 10Qs.
Participant I-11
One of my problems with present 10Qs is that they show the period-end balance sheet and the balance sheet for the preceding fiscal year-end instead of the balance sheet for the 12 month earlier. If there is any seasonality, that can be a terribly distorting factor. [Also included in 11(c)] [TI 3/17, p. 41]
[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 the relevance of information.
Participant C-14
I perceive a lot of the overload to be in the footnotes, but I also find the footnotes to be the most useful part of the financial statements. And I tried to think of how to enhance the understandability of that information, and I think we started to touch on it when we said well, in the footnotes you find the nominal amount of the swaps, but you really don't know what the impact could be. We also need information on the assumptions used by a company or the reasoning for the assumptions they chose in their accounting methods. For instance, why did [one company] pick a 12% return on plant assets, it's 11 or 12%, when inflation is you know, 3 or 4%? Or why did [another company] depreciate its video over 36 months when the economic life is only four months? I'd like to know more about why they choose those kind of things. Or other examples would be why they've changed accounting standards. [Also included in 1(b), 2(c), 9, and 19] [TC 12/8, p. 41]
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Participant C-1
There is also an incentive, especially in the high yield area, not to disclose anything, because you want the value of the securities to decline so that you're able to repurchase them. And the only time you get significant information is when they want your money, and once they have it, you don't get anything. I think there is also a difference between the amount of information that's provided in a prospectus and the amount of information that you get on an ongoing basis. [Also included in 1(b)] [TC 12/8, p. 57]
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Participant C-4
I think one of our objectives for which we need financial reporting is to determine whether or not we're going to continue to extend credit. I think our needs are also to assess our liability as a result of our extending credit. And a lot of times when we're in a distressed situation, information is not available. If the accounting reports were more standardized with some more information that's pertinent to us, then we wouldn't have to go through the process of trying to solicit information that management won't provide to us. [Also included in 1(b)] [TC 12/8, p. 58]
[Context] Meeting of the Creditor Discussion Group on February 2, 1993. Part of the meeting was devoted to the topic of value information. During the discussion, comments were made on the relevance of external reporting.
Committee/Staff/Observer
[Participant C-5], one of the arguments you hear for fair value is the relevance argument. That is, fair value is always more relevant than historical cost. I think what I heard you say is it may or may not be in your situation. Because of not knowing the assumptions that go into it, and the timeliness of it, that may not be any more relevant than other information you have. [Also included in 4] [TC 2/2, p. 6]
Participant C-5
For example, you could have given me a perfect real estate fair value in 1988. And knowing that the land had flipped three times in the course of the last three years, a good lender would have been smart enough to figure out it wasn't worth $500,000 then $1 million, and then a million and a half. And each time an accountant had good comparable sales, analysis and so forth, it could have given you a number showing significant increases. Realizing that this thing was getting into a disequilibrium, a lender knowing historical costs would have been smarter to focus on that than on fair value. Fair value can be misleading. . . . [T]imeliness is so critical. Even trade receivables. You could give me year-end balances but then I need to know what today's are. We advance on a weekly and a daily basis on trade receivables. [Also included in 4] [TC 2/2, p. 6-7]
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Participant C-11
I think that if we're talking about going concerns, the need for fair value information and its reliability and usefulness, in terms of knowing how well the business is doing, is lot less and definitely that puts it into supplemental status. I think we have a great problem in general as to knowing when a company is in distress, and when we have to take a different accounting approach. So far, all the comments have been focused on revaluing at market values specific types of assets. Nobody's mentioned liabilities. But I think we can't forget that. I want to make a comment that in an increasingly distressed situation, a company doesn't have to, necessarily, sell one particular type of loan or securities or whatever. There is often an option of selling part of its business. And so when you're talking about what is the fair or market value of an entity, it isn't necessarily just individual assets. It can be a business component. And the way you value the component of the company's business is going to be a lot different then. And it may be even more successful a way to take care of a distress situation than just selling its individual loans. I think if you're thinking about market value, you have to think in a more complex way and not just value the specific individual assets and liabilities and think you've done the job. I feel strongly about that. I'd also make just a general comment about supplemental information. I don't ascribe more importance to something because it's in a footnote, as opposed to being in a supplemental schedule of some sort. We have all kinds of supplemental schedules that are required and that's where you can get some of your best data. As a user, I don't have a phobia about needing to have it on the balance sheet or a footnote, per se. [Also included in 2(b), 4, and 5(d)] [TC 2/2, p. 7-8]
[The CIC] oil industry subcommittees [complimented oil companies] regarding the quality and timeliness of information made available to investors and the awareness of most managements of their obligation to those who own the company. [However,] the Insurance Subcommittee, [commented]: "In general, comments from subcommittee members showed a growing frustration with the lack of candor and insight into the numerous problems of both the life and property- casualty industries provided by many insurance management teams. There is a sense that too many companies are not being managed in an effective manner. . . .It is hard to believe, but the quality of the industry's reporting to shareholders continues to deteriorate." [Also included in 2(b) and 16(b)] [AIMR/CIC92, p. 1]
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 11(a), 15, and 16] [AIMR/CIC92, p. 3]
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Focus Group Comments, Analysts: The comments made by analysts in the focus group meetings were generally consistent with and supportive of the survey results. Although direct comparisons are not possible, inferences were drawn. The table below presents the main conclusions from the survey with responses from the focus groups: [Also included in 1(b), 1(c), 2(b), and 4] [KPMG BANK STUDY, p. 39]
* Moderately supported fair value disclosures; some indicated that such disclosures would be of little use, or even misleading [Also included in 4] [KPMG BANK STUDY, p. 39]
* Indicated concern over the amount of subjectivity involved in making fair value estimates and questioned the ultimate usefulness of the results
[Also included in 2(b) and 4] [KPMG BANK STUDY, p. 39]
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(d), 4, and 15] [KPMG BANK STUDY, p. A-3]
Indicate the importance of the following current financial statement disclosures. __________________________________________________________________ Very Not No ImportantImportantImportantResponse __________________________________________________________________ Net interest spread 85% 13% 2 Regulatory capital adequacy 70 30 Liquidity 35 53 10 2 Interest rate management 48 50 2 Credit quality 95 5 Investment portfolio maturities15 68 17 Investment portfolio yields 23 60 17 Unrealized gain and loss disclosures 43 55 2 Loan concentration 83 15 2 Contractual loan maturities 3 53 44 Fixed vs. variable rate loan information 18 65 17 Loan portfolio yields 33 60 7 Non-accrual, past due and restructured loans 100 Other potential problem loans 93 7 Charge-off and recovery experience 85 15 Allocation of allowance by loan type 35 40 20 5 Deposit mix 40 53 7 Off-balance-sheet instruments 23 70 5 2 Five-year summary data 43 45 5 7 Other (principally includes intangibles and segment data) 21 6 __________________________________________________________________