Center for Financial and Accounting Literacy

 
 

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Analytical Techniques - What You Need to Know

    

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Efforts to Improve Financial Reporting

Two organizations have published reports that have potential to improve financial reporting. The Global Accounting Alliance (GAA) has compiled a report on "Making Financial Reporting Simpler and More Useful: The Way Forward," and the International Organization of Securities Commissions (IOSCO) released a report on "Principles for Periodic Disclosure by Listed Entities" to help securities regulators around the world improve their regulations. 

 

US Government's Financial Literacy Challenge

In December 2009, Treasury Secretary Tim Geithner and Education Secretary Arne Duncan announced the National Financial Capability Challenge. The goal is to make sure all Americans get the financial education they need to help them take responsibility for their financial futures.

  • Learn about the U.S. government's efforts to reach out to high school students and their mentors.  

 

 
 

Meeting the Challenges of Financial Literacy

 

Analytical techniques continue to grow and evolve as companies and investors come to grips with the true economic value of good governance, controls and risk management. The Center is committed to identifying the information you need to follow and understand the new analytics.

 

Here are a few key areas where progress is being made:

 

A Better Framework for Disclosures

The Importance of Key Performance Indicators

More Efforts to Improve Financial Reporting

Analysts' Recommendations

"Pro forma" Financial Information

Measures of Earnings  

 

Links

  
 

A Better Framework for Disclosures

 

Recent trends in financial reporting have combined to make financial literacy more of a challenge for today's investors. Specifically, financial statements have grown more complicated, changes in accounting standards have proliferated, and the disclosures in financial statements and SEC reports have grown longer and seemingly less understandable. In response, an important committee, the FASB's Investors Technical Advisory Committee, has called for a better framework for disclosures with an emphasis on information that is useful to investors and will work together seamlessly with XBRL technology.

 

The new framework would provide the following information about each account displayed on the financial statements:

  • The relevant accounting principles.

  • An analysis of the items included and the nature of any changes since the prior period's report.

  • Key assumptions, estimates, risks and uncertainties.

  • The nature and magnitude of nonrecurring transactions.

  • Other disclosures needed to keep the financial statements from being misleading. 

The FASB is studying the issues and considering whether the framework should apply to all entities or perhaps exclude certain sectors, such as private and nonprofit entities, whether it should apply to interim reporting, and whether it should focus only on notes to financial statements or also include ways to better integrate the statements with other parts of a company's SEC reporting package. A preliminary views document is expected in 2010.

 

 

 

 

Proposal by Investors Technical Advisory Committee

 
 

The Importance of Key Performance Indicators

 

As disclosures grow ever more detailed and difficult to understand, there is a growing awareness that financial literacy should include an understanding of generally accepted analytical techniques to complement GAAP. This might include an understanding of key performance indicators (KPIs)  In recent years, management, boards of directors, and securities analysts have begun to focus more closely on KPIs as a result of recent developments, including the following:

  • Investors commonly view KPIs as value drivers, i.e., indicators of whether the value of a company is increasing or decreasing. Some indicators vary by industry. For example, key KPIs for the retail industry include same-store sales and sales per square foot. Others are still evolving. But general purpose indicators are also growing in importance following the financial crisis of 2008 and 2009. The crisis reinforced the importance of good risk metrics and indicators of intangibles, such as the quality of a company's management and governance processes.

  • The U.S. Securities and Exchange Commission appointed an Advisory Committee on Improvements to Financial Reporting (CiFIR). This Committee made a series of recommendations, including one for disclosure of KPIs based on standard definitions.

  • Indicators that are not defined in U.S. generally accepted accounting standards are known as non-GAAP measures and are covered by the SEC's Regulation G that was issued in 2002. The SEC staff provides informal guidance known as Compliance & Disclosure Interpretations (C&DIs). The C&DIs for non-GAAP measures were updated in January 2010 in response to questions raised by companies and investors.

These events reflect the importance of KPIs and the need for better communication of KPIs to investors as a key way to improve financial reporting.

 

  

 

CiFIR's Final Report

SEC's Regulation G

C&DIs on non-GAAP measures

  
 

More Efforts to Improve Financial Reporting

 

April 8, 2010. The Technical Committee of the International Organization of Securities Commission (IOSCO) published a final report on "Disclosure Principles for Public Offerings and Listings of Asset Backed Securities." The principles are designed to ensure that issuing entities provide all the information needed for full and fair disclosure of the character of the securities being offered or listed in order to assist investors in making their investment decision.

 

February 22, 2010. The International Organization of Securities Commissions (IOSCO) released a report on "Principles for Periodic Disclosure by Listed Entities" to help securities regulators around the world improve their regulations. 

 

January 18, 2010. The Global Accounting Alliance compiled a report on "Making Financial Reporting Simpler and More Useful: The Way Forward."

 

  

 

IOSCO's report on disclosures for IPOs and ABS

 

 

IOSCO's report on periodic disclosures

 

GAA's report

 

  
 

Analysts' Recommendations

 

July 2, 2008. The U.S. Securities and Exchange Commission issued an explanation of how to analyze the recommendations made by analysts.

 

  

SEC Release on Analyzing Analysts Recommenda-tions

  
 

"Pro forma" Financial Information

August 1, 2007.The U.S. Securities and Exchange Commission provided tips on the use of pro forma information contained in press releases and other materials issued by companies.

SEC Tips on Use of Pro Forma Information

 
 

Measures of Earnings

May 14, 2002. Standard & Poor's explains measures of earnings, including operating earnings and core earnings.

 

Standard & Poor's Measures of Corporate Earnings