CFA Institute Centre and Business Roundtable Institute for Corporate Ethics
Released Quarterly Earnings Template for More Transparent,
“Apples to Apples” Reporting of Earnings

Apples to Apples – A Standard Template for Reporting Quarterly Earnings Recommends
Companies Go Beyond Baseline Regulatory Requirements

(Read: Apples to Apples – A Standard Template for Reporting Quarterly Earnings)

NEW YORK, April 2, 2007 – In a report published today, the CFA Centre for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics jointly called on companies to improve the quality and clarity of quarterly earnings announcements by adopting a standard template for reporting quarterly earnings information. The recommendations follow the two organizations’ work on short-termism in the markets. (Read previous report: Breaking the Short-Term Cycle)

Currently, the content and organization of quarterly announcements vary widely and the clarity has slowly been deteriorating from what had been intended when Regulation G was enacted in 2003. “Although the information necessary to reconcile the text of the earnings release and the GAAP financial income statement data is often contained in the release, it is too often unnecessarily cumbersome and challenging to find and piece together,” according to the report.

“As the quarterly reporting process stands today, we fear that too many investors make short-term trading bets based on headline numbers. The recommendations improve the clarity of reporting, without materially increasing reporting expense,” said Kurt Schacht, CFA, managing director of the CFA Institute Centre for Financial Market Integrity and a co-author of the report. ” When the SEC adopted Reg G, it directed companies to be clear and reconcile any non-GAAP numbers they report. We are not proposing any changes to Reg G and investors fully understand and accept that all firms have variability. We merely seek direct and clear discussion.”

The report, Apples to Apples – A Standard Template for Reporting Quarterly Earnings, calls on companies to go beyond the baseline of regulatory requirements by recommending that earnings reports adopt a standard that:

• Includes a GAAP income statement that starts at the revenue line and proceeds to net income: The GAAP statement—which could use either gross or net measures, depending on how the company normally reports—ought to: 1) provide sufficient line-item information for the investor to follow the calculation from revenue to net income; and 2) display shares outstanding, making it easy for investors to calculate per share figures and the per share earnings for the quarter.
   

• Positions GAAP reconciliation tables in immediate proximity to the non-GAAP financial measures they are meant to illuminate: A concise GAAP reconciliation table should be positioned immediately after (or next to) non-GAAP earnings or income highlighted in the release. The table should clearly present the management adjustments from GAAP net income to the particular metric management has defined as most useful for understanding the financial status of the firm.
   

• Includes a consolidated balance sheet and statements of cash flows: A balance sheet and cash flow statement, along with any relevant reconciliation tables needs to be in a consistent position following the primary GAAP reconciliation table, so that it is easy for all investors to find and to follow how any quarterly income statement data flow through the balance sheet and cash flow.

These recommendations are a result of the two sponsoring groups’ efforts to address the issue of short-termism in the marketplace—a mindset that often leads to the unintended consequences of destroying long-term value and impeding corporate governance. “Adopting these guidelines will help proliferate a long-term value creation mindset—it will improve communications and transparency, leading to a better informed investor,” the report says.

An analysis of recent quarterly earnings releases sampled from the S&P 1500 found that:

• For companies presenting non-GAAP information and thus, required by Reg. G to reconcile to GAAP, 2/3 of large-cap companies presented the reconciliation in close proximity to the income statement; however, only 1/3 of mid-cap and small-cap company releases have their non-GAAP reconciliation tables nearby.
   

• Significantly, all companies analyzed present GAAP income statements and balance sheets, however, complete cash flow statements are provided by approximately 60% of large-cap companies, and approximately 1/3 of mid-cap and small-cap companies.

“The template is one tool companies can incorporate to support efforts at greater transparency through consistency of quarterly communications” says Dean Krehmeyer, executive director of the Business Roundtable Institute for Corporate Ethics. “The expectation is that this will also lead to fostering a longer-term mindset—companies can provide more robust and qualitative information about the overall financial health of the firm and its strategy for creating long-term value.”

The full report, which includes a sample earnings report reflecting the recommendations of the standard template and an executive summary, are available online at http://www.corporate-ethics.org/pdf/earnings_release_template.pdf. 

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CFA Institute Centre for Financial Market Integrity
The CFA Institute Centre develops timely, practical solutions to global capital market issues, while advancing investors’ interests by promoting the highest standards of ethics and professionalism within the investment community worldwide. The CFA Institute Centre builds upon the CFA Institute 40-year history of standards and advocacy work, especially its Code of Ethics and Standards of Professional Conduct for the investment profession, which were first established in the 1960s. More information can be found at: www.cfainstitute.org/cfacentre/ 

Business Roundtable Institute for Corporate Ethics
The Business Roundtable Institute for Corporate Ethics is an independent entity established in partnership with Business Roundtable—an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees and $4.5 trillion in annual revenues—and leading academics from America’s best business schools. The Institute, which is housed at the University of Virginia's Darden Graduate School of Business Administration, brings together leaders from business and academia to fulfill its mission to renew and enhance the link between ethical behavior and business practice through executive education programs, practitioner-focused research and outreach. More information on the Institute can be found at www.corporate-ethics.org.

CFA Centre for Financial Market Integrity Media Contacts:

Kathy Valentine, APR (The Americas)
T: +1 (434) 951-5348
kathy.valentine@cfainstitute.org

Jessica Galehouse (The Americas)
T: +1 (434) 951-5376
jessica.galehouse@cfainstitute.org

Steve Wellard (Europe, Middle East, Africa)
T: + 44 (20) 7531-0755
steve.wellard@cfainstitute.org

Henry Chua (Asia Pacific)
T: + (852) 3103-9363
henry.chua@cfainstitute.org

Business Roundtable Institute for Corporate Ethics Media Contact:

Brian Moriarty
T: +1 (434) 982-2323
MoriartyB@darden.virginia.edu 
 

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