3(e). Other
Professional investors want as much detail from annual reports as they can get. When asked to choose 10 different ways in which annual reports could be useful to them, professionals gave the alternative "disclose as many details and numbers as possible" an 84 percent rating, second only to organizing the report using a business segment format . . ., which had a 91 percent rating. [Also included in 1(b)] [HILL KNOWLTON, p. 9]
[P]rofessional investors place a high value on business segment information in annual reports. [Also included in 1(b)] [HILL KNOWLTON, p. 9]
[P]rofessionals ranked the item "present the business in a segment-by-segment format" first among the 10 ways in which annual reports could be most useful to them, giving it a 91 percent rating. And in rating the importance of various information items in the annual report, professionals placed business segment information second, with a 93 percent rating, right behind the report's financial statements, which had a 95 percent rating. [Also included in 1(b)] [HILL KNOWLTON, p. 10]
[P]rofessional [investors] . . . said that they are interested in long-range forecasts by segment, and that they feel companies sometimes manipulate segment data to obscure, rather than inform. [Also included in 12] [HILL KNOWLTON, p. 10]
__________
A standard, if somewhat simplified, approach taken by most analysts in forming recommendations is as follows. Disaggregate the company's operations into as fine a set of operating units as possible and develop earnings forecasts for each unit. This reduction is much finer than GAAP. For example one report commented that a company "reports two lines, but there are actually three". Analysts regularly discuss the above matters with respect to each operating unit. For example, one waste removal company was analyzed by individual landfills; a gaming company was analyzed by individual casinos, etc. [Also included in 1(a), 1(b), and 1(c)] [PREVITS, p. 12]
In the same way, operating revenues and expenses are often assessed [by equity sell-side analysts] for individual segments of a company. Performance analysis by significant product or individual location is common. For example, analysts may evaluate the performance of hotel companies in terms of specific U.S. or international geographic regions, or even specific hotels, while mining companies are evaluated in terms of individual mines. Similarly, consumer goods manufacturers are often evaluated in terms of their individual product lines or products. Some analysts carefully consider the effect on the entire company, industry, and economy as well as revenues and costs in forecasting the results for each reporting unit analyzed. [Also included in 1(b) and 1(c)] [PREVITS, p. 15]
A principal approach of many [equity sell-side] analysts for estimating a company's earnings per share involves the disaggregation of the company into as fine a set of reporting units as possible, followed by an earnings analysis and reaggregation. Segment related phrases appeared more than 20,000 times in the selected reports. This frequency was larger than any other grouping of related words and phrases except for income statement related phrases. Analysts use a variety of phrases to refer to the operating units of corporations, including "lines", "areas", "businesses", "divisions", "units", "segments", and "subsidiaries". [Also included in 1(b) and 1(c)] [PREVITS, p. 15]
__________
[Context] Meeting of the Investor Discussion Group on October 16, 1992. During the discussion on the types of information investors use to achieve their objectives, one investor was asked about the lack of disclosures about J.P. Morgan's "off-balance-sheet" earnings.
Participant I-12
We're starting to see some revenue data and some of the footnote information can be used to interpolate or extrapolate. It's a very difficult situation and that's a company that needs to show segment reporting; [names deleted], where you have banking businesses and securities trading businesses and transaction processing businesses. An analyst can make a lot of money going through those things because nobody knows what it is, so whatever you say, they'll assume you know what you're talking about. I do think there are useful tidbits in the footnotes. [Also included in 1(b)] [TI 10/16, p. 29]
[Context] Meeting of the Investor Discussion Group on October 16, 1992. During the discussion on the types of information investors use to achieve their objectives, two investors specifically mentioned how they use segment information to achieve their objectives.
Participant I-7
To the extent that the companies I follow provide us with some FAS 14 disclosures, I will incorporate in my model an attempt to tie the segmented earnings numbers to my annual and quartely model for the whole company. Increasingly, I have started for larger companies to make an attempt to project some kind of growth rate by business segments for the next 3 to 5 years. [Also included in 1(c)] [TI 10/16, p. 49-50]
Participant I-6
I start with all the details and do a "bottoms up" and that is easier with a basic industry company than a financial company. Even though there is a lack of data, the FAS 14 disclosures of some companies is fairly decent annually. I will look at the production by mine, by plant if I can get it, then I will build up the unit side of the equation and then multiply that by our expectation of the unit selling price to get a revenue-driven model. When we can, we break down the various cost components and forecast those. The production data feeds the income statement, feeds the cash flow statement, feeds the balance sheet, which feeds about 15 standard ratios that we use. You look for variations in those ratios each quarter or each year. That's the methodical part that takes very little of your time. That's where you start. [Also included in 1(c)] [TI 10/16, p. 50]
__________
Participant I-6
I go into as much detail as I possibly can get and that usually is quarterly by segment: income statement, cash flow, I don't do that much on the balance sheet, definitely the equity section and maybe the debt section. Quarterly for the current year and the next year, and then annually for at least 5 years. [Also included in 1(c) and 11(e)] [TI 10/16, p. 54]
[Context] Meeting of the Investor Discussion Group on December 9, 1992. The first part of the meeting was devoted to the topic of disaggregated information.
Participant I-13
I cover a minuscule industry called the precious metals mining business. I have been on a crusade for some time to get gold mining companies to adopt a standardized quarterly reporting format. That would save a great amount of time to analysts because they would know where to look to find the pieces of information they're interested in. It would be easy to impose a standardized format for an industry like mine because the companies are likely to be more uniform in the nature of the business that they're in. In that standardized format, the companies would give us cost by $ millions and revenue per product. In that way, you can build a quarterly income statement based on production data. [Also included in 3(b) and 11(c)] [TI 12/9, p. 18]
__________
Committee/Staff/Observer
Question 6 relates to the format of segment disclosures. Based on the earlier discussions, we suspect that you don't care whether segment information is reported within the body of the financial statements, within the notes, or on a separate schedule. Are we right? [TI 12/9, p. 24]
Participant I-12
As long as it's there. [TI 12/9, p. 24]
Participant I-13
I disagree with that; I would like a standardized reporting format, as I alluded to earlier. [TI 12/9, p. 24]
Participant I-7
If the company in the annual report reports on a FASB 14 basis, the SEC should insist that they do so on the same basis in the quarterly reports. [Also included in 3(d)] [TI 12/9, p. 24]
Participant I-12
In terms of format, there are certain items that I would like to see. I would like to know how much of the costs, and in some cases revenues, are on allocated (or discretionary) basis as opposed to directly attributable to the business, because those allocations can really make a massive difference. As long as I know what the number is, then I can determine whether or not it is appropriate. [Also included in 3(c)] [TI 12/9, p. 25]
Committee/Staff/Observer
Let me get more specific. We have some bullets on page 8 on instances when you would prefer that a specific format be mandated for certain segment information. For example, discontinued operations? [TI 12/9, p. 25]
Participant I-6
If they are truly discontinued operations, then they should be reported separately and the prior years should be adjusted to reflect that fact. [TI 12/9, p. 25]
Committee/Staff/Observer
How about multi-column consolidating financial statements; should they be required? [TI 12/9, p. 25]
Participant I-7
I'm going to distribute two sheets; the top sheet is the [one company] consolidation and deconsolidation, the second sheet is [another company]. Those are two examples of deconsolidating statements; I think this information is very helpful. [TI 12/9, p. 25]
Participant I-11
The answer is yes; the answer is why the FASB didn't think of that before they enacted FASB 94. [TI 12/9, p. 25]
Committee/Staff/Observer
How about the third bullet? If consolidating financial statements are required, should they include consolidating cash flow statements? And should the direct or indirect method be required or should the format be optional? [Also included in 5(c)] [TI 12/9, p. 26]
Participant I-6
Yes, they should be required. I think the cash flow statement is extremely important. [Also included in 5(c)] [TI 12/9, p. 26]
Committee/Staff/Observer
We don't seem to have a strong feeling one way or the other on the direct versus indirect method question. [Also included in 5(c)] [TI 12/9, p. 26]
Committee/Staff/Observer
I'm surprised there's not more reaction for a change to the direct method of cash flow reporting because I have heard that before. [Also included in 5(c)] [TI 12/9, p. 26]
Participant I-12
I'm still waiting for someone to come up with a decent definition of cash flow in a financial company. [Also included in 5(c)] [TI 12/9, p. 26]
__________
Participant I-12
There are a few companies that change how they look at segments about every 2 years. So you get one year's worth of comparable, then the next year they change it. To try to get a 5 year history is extremely difficult. The company [name deleted] says that they do this because they have reorganized the fundamental way they do the business. It would be nice to have some disclosure to assess how much of the revenues, for example, have been altered as a result of the change. [Also included in 2(c)] [TI 12/9, p. 29]
Participant I-4
[Participant I-12] would [name deleted] recast old figures when they do that? [Also included in 2(c)] [TI 12/9, p. 29]
Participant I-12
They will recast for one year, so you get a year over year comparison. [Also included in 2(c)] [TI 12/9, p. 29]
Participant I-6
I would like to see a 5 or 10 year requirement for segment disclosure. My companies do the same thing, they're constantly reshuffling and reorganizing. I'm not opposed to that but they should give us a 5 year history or give us more detail beyong 3 or 4 major categories of segments, which means that the detail within it is more meaningful. [Also included in 2(c)] [TI 12/9, p. 29]
[Context] Meeting of the Investor Discussion Group on January 13, 1993. Part of the meeting was devoted to the topic of display. At the end of the discussion, participants were asked if they had any enthusiasm for display issues.
Participant I-12
The notion of segment reporting is a big display issue, but the substance should drive the display. The display issues should fall from the resolution of the substantive issues. [Also included in 5(d)] [TI 1/13, p. 41]
Participant I-8
I have great enthusiasm for that fixed, semi-fixed, and variable, just as much as for segment reporting. [Also included in 5(a)] [TI 1/13, p. 41]
[Context] Meeting of the Creditor Discussion Group on December 8, 1992. Part of the meeting was devoted to the topic of disaggregated information.
Participant C-6
We're constantly running into managements that are saying they don't want to disclose segment information for competitive reasons. So we get a lot out of them when they come in and have a one on one discussion with us for an hour. We get more out of that than we'll get out of a financial statement. [Also included in 3(a)] [TC 12/8, p. 19]
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Committee/Staff/Observer
Question 7, FASB 14 requires segment disclosure for public companies. Yet we think we hear, and I think that's consistent with words I've heard at this table today, that there may be an interest in non-public company segment reporting. The question is is that true, and if so, when? That is always? Never? Somewhere in between? When? [TC 12/8, p. 33]
Participant C-10
We have public companies in the high yield market. We lots of times have companies that are stockpiling their information, 10-Qs and 10-Ks because they don't have 300 security holders, and they can file I think it's a form 15 with the SEC and stockpile them. Yet to my mind that's a public company. And yet we have just as great a need for that information there as any of the others. [TC 12/8, p. 33-34]
Committee/Staff/Observer
Always you need it? [TC 12/8, p. 34]
Participant C-10
Yes. 10-Ks and 10-Qs is the main flow of information that we use for every financial debt instrument we have. [TC 12/8, p. 34]
Participant C-1
The thing is the smaller the company, the less you need it, because the less likely they are in separate, different segments. A lot of companies, as [participant C-10] points out, that we consider public consider themselves to be non-public. And it should be consistent accounting across all the entities. [Also included in 2(c)] [TC 12/8, p. 34]
Participant C-6
I deal almost strictly with private companies or non-public companies, and of course I would advocate more disclosure as far as non-public companies. However, in thinking about this before the meeting, it's quite difficult to delineate at what size you start to institute these requirements. So it's an area where I think we should try to move towards getting some more information out there to credit grantors, but it's just difficult to say at what size you start to delineate. [TC 12/8, p. 34]
Committee/Staff/Observer
[Participant C-6], what do you mean when you say it's more difficult to get the information or to ask for the information? [TC 12/8, p. 34]
Participant C-6
You can ask for as much information as you want, and I get most of my information through discussions with management. But I'm on a much smaller scale than most of the other people here. So I'm able to go and meet one on one with the company owner, and get information that I want to get. But for having them to start to report information, that becomes a difficult area. [TC 12/8, p. 34-35]
Participant C-15
It just seems to me that a lot of this is driven by the SEC and their disclosure requirements to protect investors. And almost by definition there aren't investors in private companies. There are creditors, and I think it gets pretty expensive to compile all this information. It would seem to me that discussions with companies would suffice rather than have requirements of public companies be imposed on private companies. [TC 12/8, p. 35]
Committee/Staff/Observer
Can I follow up to that and ask [participant C-15] and [participant C-14]: when you rate a private company for credit purposes, do you demand virtually the same type of information that you would get from a public company? [TC 12/8, p. 35]
Participant C-15
Yes. But I can count on one hand the number of private companies that we rate, and they would be for the most part several billion dollars in assets. So I think they may be privately held, but they think and act like public companies, if you will. [TC 12/8, p. 35]
Participant C-12
I feel very strongly about the need for segment information. And for a large company to say it's one segment I think is misleading publicly. [TC 12/8, p. 35]
Participant C-5
I think the establishment of a standard is what's important. We can in bank credit demand disaggregated disclosure of our borrowers assuming the standard is out there. We don't need to force this on non-borrowing private companies. Therefore there is a point at which the public markets, which don't have the ability to do negotiated credit structures, need to have a requirement. [TC 12/8, p. 35-36]
Committee/Staff/Observer
[Participant C-5], there is a standard on segment reporting which is out there, and my question is if you're a private company can a credit grantor and does a credit grantor demand that that company follow that standard, although the standard says it doesn't have to? [TC 12/8, p. 36]
Participant C-5
We typically are legal entity reporting, and we do demand that of our borrowers. We look for legal entity statements at the borrowing/operating company level. We make that demand despite the fact that it's not required for SEC reporting. We get the kind of information we need. I would put that lower on the scale as far as requirements. As I said, the recurring nature and the projecting core earnings is really the driver for us. But if it is out there, the idea of imposing it on the small borrower or the private sector borrowing is not something that I see as necessary. [Also included in 1(d)] [TC 12/8, p. 36]
Participant C-1
That's the difference between publicly disclosed information and non-public inside information. And I think that's one of the problems; you have the ability to get non-public inside information, and we don't have that ability. And we don't want it. [Also included in 1(d)] [TC 12/8, p. 36]
Committee/Staff/Observer
Why don't you want it? [Also included in 1(d)] [TC 12/8, p. 36]
Participant C-1
The issue that we have is the ability to be active in the markets in the trade. And once we receive non-public inside information, we're frozen. And it's a very fine line that we have to walk as analysts or portfolio managers between non-public inside information and public information. And legal entity borrowing, that's just something we would never see. [Also included in 1(d)] [TC 12/8, p. 36-37]
Committee/Staff/Observer
One of the things we're interested in as a committee is information that private companies that don't have to be worried about inside information find essential in order to make their lending decision. And then drawing from that a rebuttable presumption that that information would be useful and perhaps necessary for all entities. So we're very interested in information that lenders to private companies deem very important to see if perhaps that shouldn't be a part of a set of public information. [TC 12/8, p. 37]
Participant C-8
The bonds that we issue for our clients are always at the operating company level. So we almost always will require legal entity financial information. But I don't know that we would want to impose that on every private company to have to put it in, because many companies have thousands, hundreds of legal entities that really aren't active, and they only activate them when there is a reason to activate them. [TC 12/8, p. 37]
Analysts were able to identify many areas in which they believed expanded disclosures would be useful, but most of those had little or no relation to fair value information. The disclosures they were most interested in were: [Also included in 3(c), 5(b), 10(c), 13, and 17(f)] [KPMG BANK STUDY, p. 38]
Detailed qualitative and quantitative descriptions of asset concentration, e.g., by geographic location, borrower's industry, collateral types [Also included in 13] [KPMG BANK STUDY, p. 38]