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Analytical Techniques - What You Need to Know

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Government's Financial Literacy Challenge

In December 2009, Treasury Secretary Tim Geithner and Education Secretary Arne Duncan announced the National Financial Capability Challenge. The goal is to make sure all Americans get the financial education they need to help them take responsibility for their financial futures.

• Learn about the U.S. government's efforts to reach out to high school students and their mentors.

• Educators must register for the Challenge by March 14, 2010.

Meeting the Challenges of Financial Literacy:

The Need for a Better Framework for Disclosures

Recent trends in financial reporting have combined to make financial literacy more of a challenge for today's investors. Specifically, financial statements have grown more complicated, changes in accounting standards have proliferated, and the disclosures in financial statements and SEC reports have grown longer and seemingly less understandable. In response, an important committee, the FASB's Investors Technical Advisory Committee, has called for a better framework for disclosures with an emphasis on information that is useful to investors and will work together seamlessly with XBRL technology.

The new framework would provide the following information about each account displayed on the financial statements:

• The relevant accounting principles.

• An analysis of the items included and the nature of any changes since the prior period's report.

• Key assumptions, estimates, risks and uncertainties.

• The nature and magnitude of nonrecurring transactions.

• Other disclosures needed to keep the financial statements from being misleading. 

The FASB is studying the issues and considering whether the framework should apply to all entities or perhaps exclude certain sectors, such as private and nonprofit entities, whether it should apply to interim reporting, and whether it should focus only on notes to financial statements or also include ways to better integrate the statements with other parts of a company's SEC reporting package. A preliminary views document is expected in 2010.

Links

Proposal by Investors Technical Advisory Committee

Key Performance Indicators

As disclosures grow ever more detailed and difficult to understand, there is a growing awareness that financial literacy should include an understanding of generally accepted analytical techniques to complement GAAP. This might include an understanding of key performance indicators (KPIs)  In recent years, management, boards of directors, and securities analysts have begun to focus more closely on KPIs as a result of recent developments, including the following:

• Investors commonly view KPIs as value drivers, i.e., indicators of whether the value of a company is increasing or decreasing. Some indicators vary by industry. For example, key KPIs for the retail industry include same-store sales and sales per square foot. Others are still evolving. But general purpose indicators are also growing in importance following the financial crisis of 2008 and 2009. The crisis reinforced the importance of good risk metrics and indicators of intangibles, such as the quality of a company's management and governance processes.

• The U.S. Securities and Exchange Commission appointed an Advisory Committee on Improvements to Financial Reporting (CiFIR). This Committee made a series of recommendations, including one for disclosure of KPIs based on standard definitions.

• Indicators that are not defined in U.S. generally accepted accounting standards are known as non-GAAP measures and are covered by the SEC's Regulation G that was issued in 2002. The SEC staff provides informal guidance known as Compliance & Disclosure Interpretations (C&DIs). The C&DIs for non-GAAP measures were updated in January 2010 in response to questions raised by companies and investors.

These events reflect the importance of KPIs and the need for better communication of KPIs to investors as a key way to improve financial reporting.

CiFIR's Final Report

SEC's Regulation G

C&DIs on non-GAAP measures

Analysts' Recommendations

July 2, 2008. The U.S. Securities and Exchange Commission issued an explanation of how to analyze the recommendations made by analysts.

"Pro forma" Financial Information

The U.S. Securities and Exchange Commission provided tips on the use of pro forma information contained in press releases and other materials issued by companies.

SEC Tips on Use of Pro Forma Information

Measures of Earnings

Standard & Poor's explains measures of earnings, including operating earnings and core earnings.

Standard & Poor's Measures of Corporate Earnings