Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Wednesday, August 24, 2005

Non financial reporting – sell side firms respond in housing

Looks like the word is getting out that institutional investors are determined to see more ‘non financial reporting’ from the sell side. (see posting dated July 8th). These are research reports that have the potential to impact companies' financial performance or reputation in a material way, yet are generally not part of traditional fundamental analysis.

Extra-financial issues typically include corporate governance, environmental and social areas. They may be specific to a company, an industry or cut across several industry-groups. There is increasing agreement that a substantive part of a company's value is related to its extra-financial performance or intangibles.
Research reports written by the sell side analysts used to focus mainly on price-earnings ratios, producing models that estimate the future earnings of issuers.
Not anymore. In their missives to clients, investment strategists are increasingly shunning stocks and devoting more ink to the kinds of extra financial research listed above.
A good example is in the booming housing sector. Recent publications include a 35-page midyear outlook to predicting what the economic and financial landscape might look like after home prices peak. Money manager Cumberland Advisors published a three-part series on the real estate bubble. Citigroup's chief U.S. equity strategist Tobias Levkovich penned a 14-page report headlined: "Homesick?"
The institutions would argue that this presents an opportunity for companies to enhance the understanding of the value of their companies. By creating and distributing innovative research about their own companies, and about their own industry, they win the attention of both the sell side analysts – and of the institutions. Which enhances their own valuation…

Thursday, August 11, 2005

An unsung proposal from the Committee of European Securities Regulators (CESR) has the potential for major impact on the way European IR’s create resu

CESR (The Committee of European Securities Regulators) has proposed that standards be set for “alternative performance measures’. These can best be described as financial data which are not extracted or derived from the statutory financial statements, and In some cases, rely on non-standardised accounting terms. Examples include sales, EBITDA, EBITDA margin, return on equity, free cash flow, one-off costs and “sales per” measures. Many issuers also provide extra ratios in their annual report. EU listed companies often present diverging financial data in press releases and other documents.

As the adoption of IFRS will bring about the elimination of binding formats for consolidated financial statements, it is likely to increase the use of APMs. These APM’s are not defined in IFRSs. Nonetheless, APMs provide investors with appropriate additional information if they are properly used and presented.

The CESR proposals aim to provide guidance on the best way to use and present APMs. The recommendation will apply to all consolidated financial information issued by listed companies to markets including press releases. The main proposals in the recommendation are as follows:
An issuer should define the terminology used and the basis of preparation adopted.
APMs should be presented only in combination with defined measures and differences should be explained.
APMs should be presented with less prominence than defined measures.
Comparatives should be provided and APMs should be presented consistently over time. Explanations should be provided if, exceptionally, APMs are changed.
The internal use of APMs should be described to explain their relevance. The recommendation proposes also that auditors be involved in relation to APMs.

What is troubling about this proposal for Investor Relations professionals – and the preparation of press releases?

First the proposals regarding the “prominence” of alternative performance measures compared to IFRS defined performance measures. Most companies would believe they should be able to highlight elements of the financial performance of the company in a way consistent with how management usually focuses.

Next, there should be enough to secure a sufficient context with the IFRS financial statement, however a full reconciliation would often seem to be irrelevant and perhaps even reduce focus on what management wants to inform investors about.

On the involvement of auditors, many companies would expect the CESR recommendation to result in extension of the audit scope to new documents.

Questions also exist over whether these proposals are right way to achieve these standards. Should the preparation of guidance and principles for alternative performance measures not be more appropriately be dealt with by the IASB, preferably as part of the project on Performance Reporting? The IASB should fast track this project, rather than creating a new one.

And for companies with US listings and/ or registrations, where do these requirements sit relative to US reporting? The SEC requires a quantitative reconciliation of any non-GAAP measure used, under Regulation G. Even though the registrants follow IFRS as their primary GAAP, few, if any, alternative performance measures will be acceptable for US GAAP reporting.

Finally, from an IR perspective, how crucial is the creation of standard APM’s? Performance indicators are only one element required to create a compelling presence in the world’s capital markets; key factors for investment decisions and recommendations more often come from personal contacts and from confidence in corporate governance and
transparent communication.

On balance, many companies may not think that the regulation of alternative performance measures is necessary or suitable for a transparent and investor-orientated description of a company – in the end, transparency and investors’ satisfaction are the result of the company’s overall communications policy.