FASB EXPLORES MAKING FINANCIAL STATEMENTS MORE USEFUL TO INVESTORS
Studies Under Way on Nonfinancial Data and Internet Delivery of Annual Reports
Making financial statements more useful to users by reporting expanded information on corporate operations and other nonfinancial data continues to gain momentum as the FASB recently agreed to study the issue.
FASB will review what type of information beyond the more traditional accounting and earnings statistics will make annual reports more relevant to investors. The 7-0 vote to research the issue comes as no surprise given that Edmund Jenkins was the chair of the AICPA Special Committee on Financial Reporting prior to becoming FASB chair last year. Jenkins has long been a champion of providing investors with more useful "soft" data to help individuals make more informed investment decisions. From quality control problems to market share to employee turnover to criminal convictions or other disciplinary or behavioral problems of senior executives, FASB will view the categories of information that companies should consider reporting. The research will likely take two years after which FASB will draft guidelines for companies.
FASB as yet has no plans to require companies to report this type of information. Many of its members and others in the investing world feel the marketplace will recognize the merits of the additional data and investors will prod companies to report more. Some advocates of fuller disclosure, however, feel that companies will not voluntarily provide such data, particularly the more risky forward-looking information.
The project is likely to cause controversy, something FASB has grown accustomed to in recent years with its experiences with employee stock options and derivatives. The issue of reporting nonfinancial data has been under greater scrutiny since the AICPA Special Committee issued its report, Improving Business ReportingA Customer Focus, in 1994, which recommended a number of operational areas where companies should come forward with more information. Commenting when the report was released, the Financial Executives Institute stressed that adoption of the recommendations would cause undue extra costs and liability exposure to companies, among other criticisms.
On the other side, groups such as the Association for Investment Management and Research, which represents financial analysts, point out that some analysts and institutional investors already have access to more corporate information and that fuller disclosure in financial statements will give the average shareholder or investor the same resources. When the AICPA Special Committee issued its report, the AIMR also published a study recommending changes to make financial reporting more relevant to users.
FEI will likely continue its criticism of the issue and FASB's latest project. In 1996, for example, the institute wrote to FASB and explicitly stated that that board does not have the right to oversee all shareholders' communication and should not expand its authority to nonfinancial information.
Technology's Impact on Reporting
Part of the report of the AICPA Special Committee on Financial Reporting included sample financial statements of the fictitious computer company, Fauxcom. In a move that shows FASB's awareness of the impact of the Internet on shareholder communications, another research project takes the Fauxcom financial statements and creates a model website, exploring the best ways to use current technology to present financial data.
The Fauxcom demonstration website goes beyond how companies currently present online versions of their financial statements, which, in most cases, is similar to their printed reports.
The project explores interface delivery of financial statements including how to organize the data, provide users with an easy way to navigate the financials, and make key information portable. According to FASB Senior Project Manager Wayne Upton, "There is not much future here if business reporting information on the Internet continues to simply duplicate the traditional printed reports."
Upton explains how, when used effectively, the Internet gives companies the opportunity to better integrate elements of a business-reporting package. Users can use site maps and links to navigate the whole package, search for key areas of interest, follow a discussion on a specific item from one section to the next, and capture key information in forms adaptable for later use.
While the FASB encourages companies to experiment with the techniques illustrated in the FauxCom website, it is intended only as an example of the use of Internet technology. The staff wants comments and includes a feedback response mechanism throughout the site. Users can access the Fauxcom demonstration at http://www.rutgers.edu/Accounting/raw/fasb/fauxcom/Default.htm.*
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