Financial reporting in the year 2000: who will call the shots?

• Position: Corporate Reporting - Panel Discussion

What will financial reporting look like in the next century? Does the current reporting model need a tuneup or major body work? How will users' needs drive the information that businesses produce? To answer these questions, Lonnie A. Arnett, vice president and controller of Bethlehem Steel Corp., moderated a panel of four representatives from the investment analyst, accounting, small-business and corporate financial management sectors on the future of financial reporting at FEI's Conference on Financial Reporting Issues. Each panelist responded to a different question posed by Mr. Arnett. After that, the panel engaged in a lively discussion about the future of financial reporting.

INVESTMENT ANALYSTS

GERALD I. WHITE President of Grace & White

Member of the Association for Investment Management and Research

What do users really look for in financial statements? Preparers, auditors, and financial analysts seem to be trying to determine where financial reporting ends and financial analysis begins.

Let me begin with some background on the Association for Investment Management and Research's white paper, Financial Reporting in the 1990s and Beyond, which is scheduled to be published early in 1994. Two years ago, we decided that as users of financial statements, we should publicize our views on the role of financial reporting. We gave this topic more attention than we've ever given anything in the accounting realm. AIMR's Financial Accounting Policy Committee prepared the information, and Peter Knutsen, a professor at Wharton, wrote the paper. Both the preliminary and the final versions had to meet the approval of AIMR's board of governors. The exposure process included reviews by all of our local societies and anybody else who was interested, so this document reflects the views of financial analysts as well as those of our committee.

Here's the distinction we've drawn between financial reporting and financial analysis. Financial reporting is a historical record of the company's performance, based on past transactions and events. It does require estimates, but the information is relatively reliable and auditable. Forecasts are helpful, but we feel quite strongly that they should be separate from financial reporting. Financial reporting should reflect what has actually happened, not what management or some other party thinks may happen in the future. Financial reporting works best when accompanied by management's discussion of the results of operations. The MD&A provides users with a context in which to evaluate the numbers presented. Knowing management's plans and how those strategies may affect future results are also extremely important to financial reporting, but the process is essentially geared to the past.

Financial analysis, in contrast, is oriented to the future. It inherently lacks the reliability of financial reporting because until future events actually happen, you can't validate the forecasts. Analysts and other users employ financial analysis to forecast future cash flows, earnings and financial condition, in order to come up with a valuation for the company. This forms the basis for investment decisions.

Investment decisions by nature are comparative. We do not evaluate company X in a vacuum, but in comparison with other companies in its industry and with companies in other industries and other countries. International comparability is a big issue for analysts.

Also, analysts like to make their own adjustments to financial statements and are more interested in knowing how companies arrive at their numbers than what those numbers are. For instance, I like the disclosure requirements in Statements 87 and 106, because if you understand how the statements work, you can figure out what happens in the pension plan during the year. It's a real contrast to APB 8, where all you had was a number -- pension cost -- that came out of a black box. Companies used a variety of methods and assumptions to come up with that number, and users had no idea which ones they were. Since many companies will be changing their discount rate this year to comply with Statement 87, analysts can determine the current assumptions, based on 1993 estimates. That shows that knowing the background, the method and the assumptions serves users far better than a simple, bottom-line number for pension costs.

This is an area where analysts differ in approach from auditors, and the gap is probably too wide to be bridged completely, but we can develop solutions in certain areas. Our paper recommends that the FASB proceed quickly to develop the concept of comprehensive income, which would encompass everything, includingsome items that now go directly to stockholders' equity. With proper disclosure, that would enable financial-statement users to compute their own net income and would help make financial statements more useful to them.

INDEPENDENT ACCOUNTANTS

RAYMOND J. BROMARK Partner with Price Waterhouse

Member of the AICPA's Special Committee on Financial Reporting

The chairman of the AICPA's Special Committee on Financial Reporting commented on users' need for a broader audit report that would contain something similar to an annual report's...