Portfolio Managers Weigh in on Reporting Rules

November 7, 2001(PLANSPONSOR.com) - Although professional investors want more detail and clarity in financial statements, and recognize the limitations of pro forma results, they still consider such reporting valuable in analyzing the businesses they follow, a recent survey by Broadgate Consultants finds.

The survey of portfolio managers, intended to gather views of proposals by the Financial Accounting Standards Board (FASB) for the development of new standards in financial reporting, revealed that 90% of the sample believes that corporate financial reporting needs to be upgraded.

Pro Forma Results

Despite the frequent complaints that pro forma financial reporting allows companies to hide negative results and highlight only positive ones, three-quarters of the sample find pro forma accounting at least somewhat useful, if not extremely so.

Two-thirds of respondents were opposed to banning pro forma reporting from press releases. Of those, 91% felt that corporations should provide more detail in their pro forma statements.

Balance Sheet Entries

Portfolio managers are somewhat divided about whether or not FASB should require companies to include financial metrics such as ratios in their statements, with 47% believing it should, and the remainder believing the opposite.

The survey also revealed that 95% of all managers would like more consistency in how Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, is calculated.

Furthermore, 60% want more information about intangible assets, and the same percentage want more detailed disclosures about internally generated intangibles, such as the value of brand names and customer lists.

Bottom Line

When asked what the most relevant measure of financial performance was, portfolio managers cited:

  • cash flow after capital expenditure and interest expense as most important
  • followed by balance sheet strength,
  • EBITDA and earnings tide for third,
  • book value ranked last

The survey comprised the responses of 223 market participants.