Future-Oriented Financial Information . Financial Accounting Theory Grace Bartz , Danielle Cook, Martine Denhertog , David DiMatteo , Mark Haley, Faris Ismailovski , Julie Phillips, & Dorian Temlin. Agenda. Introduction Determining information about the future Assumptions Forecasting
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Financial Accounting Theory
Grace Bartz, Danielle Cook, Martine Denhertog, David DiMatteo, Mark Haley, FarisIsmailovski, Julie Phillips, & Dorian Temlin
Determining information about the future
Who might want to know future information about a company?
What could future financial prospect information be used for?
What type of information about the future of a company would a user want to know?
The assumptions need to be consistent with…?
Who should make the assumptions?
Generated from reasonable and supportable assumptions by management
Reflect most probable economic conditions and planned courses of actions for the entity
Supportable vs. reasonable
How can assumptions made by management be supportable?
Extent of detailed information to support assumptions
Influenced by factors such as the significance of the assumption, and availability and quality of information
Managements way of preparing financial information from the reasonable and supportable assumptions
May use statistical, mathematical, or specialized forecasting techniques
Once assumptions are determined, how do managers come up with the forecasted numbers?
Forecasts can be prepared with extreme precision – to the nearest cent – why is this accuracy misleading to analysts?
If limited to only one forecast number, which would you choose to see and why?
What if limited to only one financial statement?
How are assumptions considered consistent with the plans of the entity?
What would the criteria be for a hypothesis to be considered reasonable?
How could actions and abuses of pro-formas be prevented and stopped going forward?
What is your opinion on the Safe Harbour Rule?
What are some reasons management would not be able to reasonably estimate information?
Can you give examples of industries or companies that would use special purpose financial statements?
When would a range be more useful?
When would an exact dollar value be useful?
Once a company discloses that actual results may vary significantly (or materially) from the forecast, is the forecast still useful ?
Passenger Revenue Projections:
Aircraft Fuel Cost Projections:
1% of the firms reviewed hit their forecast exactly
22% came within five percent either way
On average forecasts were out by 13%