Accounting & Tax

How to Issue Honest Earnings Reports

NIRI spells out tough new guidelines for reporting earnings, giving pro forma the old short shrift.
Stephen TaubOctober 10, 2002

The National Investor Relations Institute (NIRI) adopted a tough set of guidelines for companies when they report earnings, including more forthcoming reporting of pro forma results.

The guidelines arose from a 10-point program NIRI announced back in April as a way of helping to restore investor trust and confidence.

“The quality and content of quarterly earnings releases varies widely,” said Louis M. Thompson, president and chief executive officer of NIRI. “Implementation of these guidelines will result in consistency and a higher standard of information in the releases – an important means of regaining credibility among the investing public.”

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NIRI is urging companies to do some or all of the following when they release quarterly earnings results:

  • Include a complete income statement and a complete balance sheet. NIRI said the income statement should include data for the current quarter, comparison to the prior-year quarter and, if that’s “informative,” to the sequentially previous quarter, with similar comparisons for the year to date. The balance sheet should include data for the current period and the previous fiscal year-end and, if that is informative, comparisons with the comparable period in the previous year. “This disclosure gives investors the information to determine free cash flow and the company’s ability to meet its financial requirements,” NIRI said in a report.
  • Put GAAP earnings up front and before pro forma results. NIRI has for some time encouraged companies to announce GAAP earnings on the first page of the earnings release, ideally in the first paragraph and before their discussion of pro forma results. Pro forma results should be reconciled to GAAP earnings, either through words or the use of a table, NIRI recommends. Only GAAP earnings should appear in headlines of a release.
  • Include key information in the earnings announcement. NIRI acknowledged that added information that investors need or want in order to evaluate a company’s results is included in the Management’s Discussion and Analysis (MD&A) of the 10-K and 10-Q filings. It noted, however, that while that information is discussed in conference calls and in filings made with the Securities and Exchange Commission, it’s often omitted from press releases. “This makes it harder for investors to obtain the information unless they listen to the conference call or wait for the relevant SEC filings,” NIRI added.
  • Either include a summary MD&A with earnings announcement, or make other “critical” information part of the release. That would improve transparency and encourage companies to be more forthcoming and expansive in disclosure, the institute contends.

The critical information might include:

— A brief description of the company’s business that clarifies how it makes money.

— The primary factors or trends, both short-and long-term, causing revenues to increase, decrease, or remain flat.

— A brief discussion of what drives other key data, such as gross profit, sales, general, and administrative (SG&A) expenses, other income (or expense), interest expense, income taxes, and the effect of currency translation or transaction on net income.

— An explanation of any charges, including both pre- and after-tax numbers and whether there will or could be similar additional charges in future quarters.

— A brief discussion of liquidity and capital resources, including debt levels and key ratios, the adequacy of cash resources, cash provided from operations, capital expenditures, any anticipated changes in financing and any share repurchases.

— Key industry-specific measures that a company uses to evaluate performance, like same-store sales growth for retailers, or net-interest margin for financial institutions.

— Any material changes in accounting practices adopted during the quarter, either made because of changes in Financial Accounting Standards Board requirements or by company choice.

— The company’s current expectations for sales and earnings (if the company provides such guidance at all).