From the integratedreporting.org website, we learn that the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer in Deutschland) has released a position paper on the future of corporate reporting.

It’s only available in German, but one of the authors provides an English-language summary. We’ve covered a couple of the main points before. First is the contention that financial statements alone don’t sufficiently display companies’ market value. For example: “The book value of SAP is 25 billion euros, while the market value is 125 billion Euro. Apparently, the capital market suspects values of 100 billion Euro which are not displayed on the balance sheet.” The summary also addresses environmental, social and governance issues: “It is necessary to have concise, investor-focused disclosures on how ESG issues are affecting a company’s position, both now and in the future (risks to the business), integrated into the management report.”

For today’s purposes though we’ll focus more on the following passage:

• It would also be worth considering the following:
• Companies could enhance financial statements by using tables with estimates of key P&L-metrics for the next three to five years, analogous to the content of analyst reports. These should build upon scenario analyses. Some companies are already publishing so-called consensus reports with such estimates (from analysts, not the company itself) on their website.
• Companies could also complement financial statements with a reconciliation from book to market value or vice versa by quantifying e.g. peer group development, brand value, human capital, R&D-pipeline, customer loyalty etc.
• Both evaluations should be displayed as tables, with further explanations in the notes.

The first point raises a recurring irony. Taking Canadian requirements as a reference point, the MD&A requirements in NI51-102F1 emphasize the importance of a forward-looking orientation. For instance, one of an MD&A’s key objectives is to “provide information about the quality, and potential variability, of (the) company’s profit or loss and cash flow, to assist investors in determining if past performance is indicative of future performance.” This makes complete sense of course: there’s no reason an investor would study a company’s financial history as an end in itself – the whole point is to assess to what extent that history is or isn’t a guide to what might lie ahead. And it’s much easier for an investor to make that assessment if the company itself tries to lead them through it.

Now, the investor’s assessment might be easier still when the company expresses its expectations of future performance in terms of specific estimates of key financial measures. Canadian regulations don’t prohibit this. But they don’t really encourage it either. The regulators regularly find fault with the quality of such disclosures – for example, in its most recent branch report, the OSC’s Corporate Finance branch noted:

• “We continue to see generic factors and assumptions being disclosed. We also continue to see FLI (forward-looking information) assumptions not being quantified. Disclosure of specific and relevant material factors or assumptions including material risk factors underlying FLI is necessary for investors to understand how actual results may vary from FLI….

and continued in that vein for another 350 words or so. These factors are also relevant to avoiding liability in an action for a misrepresentation in forward-looking information, not that it comes up a lot. Of course, there’s good reason for focusing on this area, to avoid companies from pumping out over-exuberant forecasts. But perhaps it’s worth asking, if only as a thought experiment, whether the emphasis should shift, to encourage quantified FLI (using the acronym above) wherever a reasonable basis exists for making it, and to find as much fault with companies that altogether withhold their internal expectations as with those that publish them with imperfect accompanying disclosure.

Of course, the other suggestion, of “complement(ing) financial statements with a reconciliation from book to market value or vice versa by quantifying e.g. peer group development, brand value, human capital, R&D-pipeline, customer loyalty etc.” is somewhat (or even?) more fanciful. There’ll never be any way to know whether such a disclosure is “right,” if only because one suspects that in many cases, the “excess” market value largely represents irrational over-exuberance that can’t be identified with any such label. But maybe we need to worry less about whether a particular form of presentation is correct or verifiable, and more about whether it’s stimulating, whether it provides a way (albeit a flawed one) of engaging with matters that otherwise go largely unaddressed. If we think of a company’s stock price as being a function of A * B, where A represents earnings and B is an applied multiple, it’s a little odd how much gets disclosed about the former and how little about the latter. Of course, the company can’t bear comparable accountability for what it says about factors beyond its control. But it’s still in a better position than anyone else to lead a conversation about them…

The opinions expressed are solely those of the author