Guide To Forward-looking Information - PwC
Corporate ReportingGuide toforward-lookinginformationDon’t fear the future:communicating with confidence**connectedthinkingpwc
I have for many years urged companies touse the narrative aspects of their reportingin as an imaginative and informative wayas possible so that they may provide theirinvestors with real insight into their businessand the strategies that they as Managementhave adopted. I welcome this publication as apowerful contribution to helping makethis a reality.Tony GoodChair of Accounting Advocacy,UK Society of Investment ProfessionalsEvolving good practices in corporatereporting should provide investors with fargreater transparency on a company’s internalperformance targets and how managementassesses the company’s performance againstthose targets. This publication provides veryuseful guidance on how management canprovide the information valued by investors,in a practical way.Lindsay TomlinsonVice-Chairman, Barclays Global Investors Europe
IntroductionThe corporate reporting debate is gathering pace worldwide whether in theform of legal requirements, guidance or evolving good practices. Aspectsof this debate are, understandably, causing concern amongst preparersof annual reports. Not least of these is the provision of a “forward-lookingorientation” which, in our experience, many companies find a real challenge.But what does this mean in practice? Will it require providing competitivelysensitive information? What about the reliability of such forward-lookinginformation? Will companies face the threat of litigation? Will this meanmaking profit forecasts?Put simply, the reporting offorward-looking information is acritical component of effectivecommunication to the marketand this “how to” guide has beendeveloped to provide practicalguidance on how it can be achieved.This guide is not just a theoreticalpaper – progressive companiesworldwide are already adopting aforward-looking orientation in theircorporate reporting.To bring forward-looking reportingalive, we have included a collectionof examples from some of thesecompanies that demonstrate aspectsof what we believe is effectivecommunication of the future thatothers can learn from.So regardless of whether it isdescribed as a managementdiscussion and analysis, operatingand financial review, or somethingelse, the issue remains “how welldoes your reporting articulate thedirection of travel, in relation tothe markets in which you operate,your chosen strategy and theperformance that is delivered?”This publication contains certain text and information extracted from third party documentation and so being out of context from the original third party documents;readers should bear this in mind when looking at this publication. The copyright in such third party text and information remains owned by the third parties concerned,and PricewaterhouseCoopers expresses its sincere appreciation to these companies for having allowed it to feature their information. For a more comprehensive viewon each company’s communication, please read the entire document from which the extracts have been taken. Please note that the inclusion of a company in thispublication does not imply any endorsement of that company by PricewaterhouseCoopers nor any verification of the accuracy of the information contained in any ofthe examples.This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracyor completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees andagents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the informationcontained in this publication or for any decision based on it. 2007 PricewaterhouseCoopers LLP. All rights reserved. ‘PricewaterhouseCoopers’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the UnitedKingdom) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
As a strong supporter of broader corporatereporting, CIMA has an active interestin ensuring that concerns of companiessurrounding exposure to litigation do not result inboilerplate statements. This publication providescompanies with a practical approach to reportingappropriate forward-looking information.Charles TilleyChief Executive, Chartered Institute of Management Accountants
ContentsPageWhy the future matters2A change in mindset towards reportingA view of the future5Going beyond historical financial reportingForward-looking information6Putting the concerns into perspectiveFacing up to the challenge9Realising the benefitsMaking it happen10The seven pillars for effective communication of the futureBringing the seven pillars alive14Practical examples of reporting on the future 1
Why the future mattersA change in mindset towards reportingCompanies worldwide are increasingly being encouraged to place anemphasis on providing a more forward-looking orientation in their reportingwhether through regulatory requirements, guidance or evolving good practice.This has raised a number of concerns amongst companies. Some fear thatthe publication of forward-looking information could compromise competitiveadvantage. Others think the quality of information provided could provokelegal and regulatory sanctions. Yet those companies who approach reportingwith the right mindset – one of transparency, not merely a perceived responseto increasing red tape, will have a real opportunity to leverage their reportingto increase investor understanding.Increasing demandsfor a view of the futureAn overview of some of the worldwide regulatory requirements and goodpractice guidance is shown in Exhibit 1 below:Exhibit 1: Examples of legislation & guidance on forward-looking informationGUIDANCEGlobal“MC should have an orientation to the future” – IASB discussion paper on Management Commentary(published October 2005)“The purpose of the MD&A is to provide management’s assessment of factors and trends which are anticipatedto have a material effect on the company’s financial condition and results of operations in the future” – InternationalOrganization of Securities Commissions (IOSCO) General Principles Regarding Disclosure of Management’s Discussionand Analysis of Financial Condition and Results of Operations (published February 2003)Australia“ the Review should also address known trends and those factors relevant to forming a view as to likely futureperformance” - Group of 100’s Guide to review of operations and financial condition (published 1998, updated 2003)Canada“A forward-looking orientation is fundamental to useful MD&A reporting” - CICA guidance on MD&A disclosure((published November 2002, updated May 2004)United Kingdom“The OFR should have a forward-looking orientation, identifying those trends and factors relevant to the members’assessment of the current and future performance of the business and the progress towards the achievement oflong-term business objectives.” – Accounting Standards Board Reporting Statement: Operating and Financial Review(published January 2006)United States“One of the principal objectives of MD&A is to provide information about the quality and potential variability of acompany’s earnings and cash flow, so that readers can ascertain the likelihood that past performance is indicative offuture performance.” – SEC Guidance Regarding Management’s Discussion and Analysis of Financial Condition andResults of Operations (published December 2003)LEGISLATIONGermany“The main factors which could influence changes in the value of the enterprise in the future should be disclosed anddiscussed” – German Accounting Standard 15, Management Reporting (adopted December 2004)United Kingdom“ the main trends and factors likely to affect the future development, performance and position of the company’sbusiness” – Companies Act 2006 Section 471 (date of implementation tbc) 2
“Telling the future by looking at the past assumes thatconditions remain constant. This is like driving a car bylooking in the rear-view mirror.” Herb BrodyFear of the futureMany companies fear the increasingdemand for forward-lookinginformation will force them todisclose competitively-sensitiveinformation, make profit forecasts orexpose themselves to the threat oflitigation. However, companies needto understand what the demand forthis forward-looking information reallymeans.The danger is that, without suchan understanding, they will takefright at the call for ‘forward-looking’statements, taking refuge insteadin bland and highly-caveatedGiving investors whatthey needI couldn’t stress more thetwo things that I spend mostof my time doing: trying tounderstand what’s happeningto the underlying businessand getting any help I can tounderstand how it will look infive to ten years’ time.Transparent information on currentand future corporate performance isthe raw material of effective decisionmaking in the capital markets. Thisis demonstrated by the commentshighlighted in this section, alldrawn from research conducted byPricewaterhouseCoopers with buyand sell-side analysts.reviews that provide no benefitsto investors, or to the companiesthemselves. Like any new initiatives,these demands will bring a numberof risks for companies that fail toprepare adequately for them. Butit should also bring real businessbenefits, notably: enhanced businessunderstanding, governance andboard effectiveness; improvedrelationships with key stakeholders;and heightened efficienciesflowing from the proper alignmentof reporting and communicationsstrategies.As things stand, existing financialstatements are not, of themselves,sufficient to meet the needs ofinvestors to assess the qualityand sustainability of corporateperformance. The current reportingstatus quo is unsatisfactory. Investorsknow this – and so do the regulators. 3
Giving investors whatthey need (continued) As much forward-lookinginformation as possible. That’sthe most interesting thing. But really what we aretrying to do is to get a view ofthe economic picture of thecompany and how that is goingto change into the future. 4In its ‘Framework for the Preparationand Presentation of FinancialStatements’ the InternationalAccounting Standards Board (IASB)says:The rest of this guide will highlight: The issues and challenges facingcompanies tasked with providingforward-looking information.“The objective of financial statementsis to provide information about thefinancial position, performance andchanges in financial position of anentity that is useful to a wide range ofusers in making economic decisions.” Offer some practical ideas onhow companies might successfully meet the needs of investors,whilst addressing regulations andgood practice guidance, and Provide examples, drawn fromcompanies reporting worldwide,that demonstrate how some havegenuinely embraced the spiritof providing a forward-lookingorientation“Financial statements preparedfor this purpose meet the commonneeds of most users. However,financial statements do not provideall information that investors mayneed to make economic decisionssince they largely portray thefinancial effects of past events anddo not necessarily provide nonfinancial information.”
A view of the futureGoing beyond historical financial reportingDespite a recognition that investors need more forward-looking informationvery few companies come close to providing the breadth of informationrequired. Instead of providing a clear and balanced discussion of the trendsand factors likely to impact future prospects, Companies have continued totake refuge behind historical information. From now on, given the increasingdemand for a more forward-looking orientation in companies reporting, adifferent approach will be called for.Determining what isrequiredThere are no hard and fast rulesdictating what forward-lookinginformation a company must provide.Companies must decide whichinformation to include – and whichto leave out – on the basis of theirown unique business dynamicsand those of the industry sectors inwhich they operate. Our companion‘Preparers’ Guide’ goes into furtherdetail on what should be consideredin reaching this decision.However, the provision of a forwardlooking orientation will meanidentifying and communicatingwhatever trends and factors arerelevant to an investor’s assessmentof current and future businessperformance. It also meanscommunicating the progress that hasbeen made towards achieving longterm business objectives.Relevant factors will be thosethat have affected a company’sdevelopment, performance andposition during the financial year– as well as those likely to affect itsfuture development, performanceand position. These might include thedevelopment of new products andservices, current and planned levelsof investment expenditure, and clearexplanations of how that expenditureis to be used to achieve businessobjectives.In forming a view on what to report,companies should also considerwhether robust, quantifiable financialand non-financial key performanceindicators (KPIs) are available tosupport whatever assertions havebeen made and, to the extentnecessary, whether they should bedisclosed. Assuming that they are,good practice would also encouragethe inclusion of information on futuretargets. As we explain later, however,this does not mean that profitforecasts must be provided. 5
Forward-looking informationPutting the concerns into perspectiveThe ever increasing demand for forward-looking information has raised anumber of frequently-voiced concerns amongst companies (see below).The fact is that, by concentrating too closely on these perceived risks, realopportunities are being overlooked. The value, for companies, of providing aclear forward-looking picture lies in the potential it has to challenge internalperceptions and reporting, as well as the insights that it provides investorsinto the health and sustainability of the business and the way in which it helpsput financial performance into context.In seeking to avoid these demands for a forward-looking orientation thedanger is that companies may miss out on these benefits. By resorting tobland statements, these companies will do nothing to enhance investors’understanding of their business, while exposing themselves to a potential lossof competitive advantage if competitors steal a march with their reporting.Frequently-voicedconcernsAmongst the most commonly-heard concerns provoked by the increasingdemand for a forward-looking orientation, the following stand out: Does this mean having to provide potentiallycompetitively-sensitive information? What can be done to ensure the supportability offorward-looking information? Does this mean that we have to publish profit forecasts?The following sections address each of these concerns. 6
Competitively-sensitiveinformationFor any company, there will becertain information which – were it tobe disclosed – would undermine itsmarket position. However, this shouldnot be seized upon as a convenientsmokescreen for avoiding full andfrank disclosure.Companies need to approachthe disclosure of forward-lookinginformation with the right mindset.Instead of adopting a compliancebased approach and asking ‘Whatare we going to report?’, companiesneed to ask themselves: ‘Whatshould we withhold?’. For example,pharmaceutical companies disclosedetails of their products – in termsof pipeline, stage of development,planned launch and potentialSupportability of forwardlooking informationClearly, forward-looking informationcannot, by its nature, be 100%supportable. But companies thatattempt to rely on this as a reasonfor opting out of providing a forwardlooking orientation are missing thepoint. Forward-looking informationis different from information foundmarket size – without prejudicingtheir competitive position. Specificinformation on the underlying patentformulations is withheld. With thisapproach, they provide investorswith information which is critical tounderstanding the sustainabilityof their performance, withoutcompromising the interests of thecompany.Arriving at a balancing pointbetween disclosing and withholdingforward-looking information needsto be a realistic process. In reality,competitors are already likely to bebetter informed than people realise,as the flow of people and informationfrom one organisation to another hasnever been greater.in historical financial statements.Because it is based on assumptionsthat might prove to be wrong (ratherthan being based on actual facts),there is no expectation that it shouldbe 100% accurate. 7
Supportability of forwardlooking information(continued)Obviously though, the fact thatinformation has been disclosed mayraise an expectation of reliabilityin investors. Companies aretherefore expected to scrutinisewhatever evidence has been used tounderpin this information and, whereappropriate, to explain its source andthe extent to which it is objectivelysupportable.The overall intention is for investorsto assess this information themselvesbefore deciding whether or not to relyon it. For them to do so effectively, itis important that they should have aclear understanding of how certain(or uncertain) it is.What about profitforecasts?Concerns are often raised thatcommunicating about futureprospects means providing profitforecasts with all the additionalregulatory attention that suchinformation can attract and thepotential for short-term pressure tomeet those forecasts rather thanfocus on value delivery.Non-financial drivers of performancecan be used as lead indicatorsof future financial performance.Similarly, market trends and clearlypresented strategic priorities willprovide investors with valuableinsights on which to base theirinvestment decisions. And, of course,targets for these non-financial driversand market trends can also beimportant aspects of this information,communicating companies’aspirations to the market – withoutstraying into the realms of profitforecasts.However, with due considerationgiven to local regulations, forwardlooking information can be providedwithout specific reference to profits,looking instead to the broader pictureof the company shown by contextualinformation. 8Failure to do so can mean investorsrelying on historical financialperformance, thereby exacerbating‘short-termism’.
Facing up to the challengeRealising the benefitsNothing to fear –much to gainBusinesses that are well run on thebasis of comprehensive and accurateinformation about all aspects oftheir operations have nothing tofear from providing forward-lookinginformation. Indeed, they have muchto gain. Provided managementcan adopt the right mindset – oneof transparency, communicatingfinancial and non-financialinformation as a way of increasinggenuine market understanding of thebusiness and its sources of value– they have an opportunity to securesignificant competitive edge.If they take advantage of thisopportunity, they will be able to: improve the quality ofmanagement by making sure theinformation that really matters isavailable, aired and acted uponat board level; help stakeholders to differentiategood management from bad,judgement from luck; simplify and clarify theircorporate reporting, particularlywhere the presentation ofnon-financial information isconcerned; and start to move beyond the‘earnings game’, where acompany is only considered tobe as good as its latest figures. 9
Making it happenThe sevenpillarsfor effectivecommunicationof the future 10
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