Financial Reporting: Its Past, Its Present, Its Future UAA – ACCT 650 Seminar in Executive Uses of Accounting Dr. Fred Barbee
When You Come to a Fork in the Road – Then What? When you come to a fork in the road - take it Yogi Berra
Financial Reporting its t s Up Close and a P Personal
The Third Wave Breaks on the Shores of Accounting Robert K. Elliott Accounting Horizons, June 1992, Vol. 6, Issue 2
The Great Waves of Change • Information Technologies • 1st Wave = Writing • 2nd Wave = Movable-Type Printing • 3rd Wave = Computer
The Great Waves of Change • Accounting • 1st Wave = Single-Entry Accounting • Balance Sheet • 2nd Wave = Double-Entry Accounting • Income Statement • Statement of Cash Flows • 3rd Wave = Triple-Entry Accounting (?)
Changes in Internal Accounting Information Managerial Accounting Information
2nd Wave Accounting Systems • Lock in the Taylor Model • Focuses on tangible assets • No information recorded unless there is a transaction with an outside party
Current GAAP Model • Nothing accountable happens until there is an exchange. • Exchanges are bargained at arm’s length. • Exchanges are simple (cash for goods/services) • One side of each exchange is cash virtually now.
3rd Wave Accounting Systems • Should provide measures of transformation. • Repudiate the Taylor model. • Account for information-based resources.
3rd Wave Accounting Systems • Concerned with measuring the values created for customers. • Must enable the network, rather than lock in the hierarchy.
Changes in External Accounting Information Financial Accounting Information
Financial Accounting Model • Limits reporting entity’s accountability to financial information. • Periodic, historical, cost-basis statements.
Financial Reporting its t e n s Up Close and r e Personal P
Pro Forma and Football The Oakland Raiders Today released their January 2003 pro forma results.
Although Generally Accepted Scorekeeping Principles (GASP) indicate that the Oakland Raiders lost the Super Bowl, their pro forma figures show that this reported loss was the result of nonrecurring items, specifically the extraordinary performance of the Tampa Bay Buccaneers defense and the somewhat lackluster performance of the Oakland offense.
Pro Forma and Baseball The New York Yankees Today released their 4th Quarter 2001pro forma results. Ed Scribner, Professor of Accounting, New Mexico State University
Although Generally Accepted Scorekeeping Principles (GASP) indicate that the Yankees lost Games 1 and 2 of the 2001 World Series, their pro forma figures show that these reported losses where the result of nonrecurring items, specifically extraordinary pitching performances by Arizona Diamondbacks personnel Kurt Schilling and Randy Johnson. More
Games 3 and 4 results, already indicating Yankee wins, were not restated on a pro forma basis. More! No
Pro Forma and Golfing Dennis Beresford Professor of Accounting and Former Chairman Financial Accounting Standards Board
Some of you may know that George Benson is an excellent golfer. However, on a pro forma basis I can actually out score George. For example, it’s appropriate to leave out the scores for my first four holes, I’m still warming up then and those scores certainly aren’t representative of my true ability. And my out of bounds shots shouldn’t count either – I define them as unusual and non-recurring. More
Taking those adjustments and a little other scorekeeping creativity into consideration, I figure my pro forma average score is about 68. • And that beats the heck out of George’s generally accepted golf average (GAGA). More! No
Companies use every trick to pump earnings and fool investors. The latest abuse: “Pro Forma” reporting. What is Pro Forma Reporting
How Did They Value Stocks? Count the Absurd Ways What is Pro Forma Reporting
What is Pro Forma Reporting • Denny Beresford former FASB Chair • It means anything you want it to! • In fact, the only constant is what it doesn’t mean. • Pro-forma earnings are just about anything other than the real net income of a company determined by GAAP.
What is Pro Forma Reporting • In fact, SEC’s Chief Accountant has said that companies now want to emphasize EBS instead of EPS • EPS means “Earnings Per Share” • EBS means “Earnings Before Bad Stuff”
What is Pro Forma Reporting • Pro forma is Latin for “matter of form” • Refers to statements “where certain amounts are hypothetical” • Barron’s Dictionary of Finance and Investment Terms
What is Pro Forma Reporting • Pro forma which means “as if”, has in recent years evolved into “a sophisticated term for lying about your results. Peter H. Knutson Wharton Accounting Professor Emeritus
What is Pro Forma Reporting • “A pro forma is what it would be if it were something other than what it is. • It includes everything except the bad stuff.” Peter H. Knutson Wharton Accounting Professor Emeritus
What is Pro Forma Reporting • Definition • A financial statement in which the amounts stated are fully or partially estimated • Objective • To show what the significant effects on historical financial information might have been, had a transaction or event occurred at an earlier date
What is Pro Forma Reporting • Previously • Companies used pro forma reporting to adjust previously reported financial statements • So they could be directly compared with current results and provide better or more meaningful information for the financial statement reader.
More Recently . . . • Companies have expanded its use • Restructuring charges • Inventory write-downs • Impairment of goodwill or other intangible or tangible assets • Other so called one-time or non-recurring charges.
Other Pro Forma Transactions • Change in accounting principles • Debt issues • Proposed sale of securities and application of the proceeds
Other Pro Forma Transactions • Mergers and acquisitions • Disposition of a portion of business • Change in form of business organization
To illustrate . . . • Company A had a loss under GAAP of $1 per share. • However, the company effected a major restructuring during the quarter, including work force reductions and plant closings, totaling $1.50 per share.
To illustrate . . . • These do not qualify as extraordinary items under GAAP; • However, the company believes adding back these expenses will make the statements more meaningful to investors.
To illustrate . . . • Thus, in their pro forma statements the $1.50 per share will be “added” back. • Result: $0.50 EPS. • This provides “a better comparison and a better baseline for analysts to model future earnings expectations.” (The firm’s explanation!)
Associated Press Analysis • The AP analyzed earnings reports of the 100 largest technology companies in Northern California. • It calculated that under GAAP, the 100 companies reported combined losses of $71 billion. • Using pro forma figures, these same companies reported a profit of $10 billion.
Corporate America’s New Math • Investors Now Face Two Sets of Numbers in Figuring a Company’s Bottom Line • Justin Gillis Washington Post Staff Writer • July 22, 2001
Pro Forma Reporting • Cisco Systems, Inc. reported results for the first quarter of this year (2001) according to GAAP • Result: Quarterly loss of $2.7 billion
Pro Forma Reporting • Cisco then did some slicing and dicing in ways they preferred – offering an alternative interpretation of its results to the investing public. • Result: Quarterly profit of $230 million.
Cisco • “One of Cisco’s most frequent accounting tactics comes up every quarter when the company directs shareholders to its unaudited pro forma earnings numbers as the best gauge of profitability.”
Cisco • In the first quarter of fiscal 2001, Cisco reported pro forma earnings of $1.4 billion, nearly $600 million over its net income. • In the fourth quarter, Cisco’s pro forma income of $163 million was 23 times its actual net earnings. (GAAP)