Mark Hynes - thoughts on corporate disclosure

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

Thursday, November 08, 2007

Another ‘IFRS-scale’ task on the horizon?

Earnings. A word at the heart of much of the IR communications culture. We talk of earnings announcements, earnings calls, earnings releases, earnings guidance, earnings forecasts and so on. So what are we to make of proposals coming out of IASB and FASB to change the P&L statement in a way that would effectively remove the need to produce a single bottom line number.

Earnings, or the “bottom line”, is one half of the price/earnings ratio used by investors the world over as a simple guide to a company’s value relative to its peers.

Both the International Accounting Standards Board and its US counterpart, the Financial Accounting Standards Board, are currently developing proposals to change the contents of the main financial statements. And the Corporate Reporting Users’ Forum, analysts from both buy and sell side, has expressed concerns.

“We disagree with the proposal that there should not be an earnings sub-total within a performance statement. We find an earnings sub-total particularly useful in enabling management to communicate with us at a highly aggregated level”, they said.

In letters to the FT, apologists noted that the proposals are at a very early stage, and that analysts always dig deeper than a single headline number.

A couple of things are interesting about this. First, the fact that FASB and IASB – representing therefore IFRS and US GAAP - are cooperating, creates a consistency of approach which is welcome.

Second, an entire industry of investors and communicators would have to change. Crude it may be, but EPS forecasts and company guidance are one of the cornerstones of share price movements. Asking that industry to understand and reconcile "other comprehensive income" may be technically more accurate, but it would take a heck of a lot of getting used to. It is not overstating it to say it would be another “IFRS-scale” task for IRO’s and communicators.


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