Pacesetters in Financial Reporting

Transcription

1 Pacesetters in Financial Reporting Takeaways from the 2017 conference hosted by Pace University, FEI and EY Overview The second annual Pacesetters in Financial Reporting Conference was held in November 2017 at Pace University. Pacesetters a joint initiative of Pace s Lubin School of Business, Financial Executives International (FEI) and Ernst & Young LLP. The conference is designed to stimulate discussion and promote ideas about how to enhance corporate financial reporting. It also serves as a forum to recognize and learn from companies that are striving to better meet the information needs of today s investors. This publication summarizes the discussions at Pacesetters 2017 and the views expressed by the conference speakers,1 who represented a broad spectrum of financial reporting stakeholders, including: Representatives from the Securities and Exchange Commission (SEC), the New York Stock Exchange (NYSE), Fitch Ratings and the CFA Institute Financial analysts and investors Company executives, including those responsible for preparing financial statements and SEC filings and discussing them with market participants Legal advisers, accounting professionals and academics Last year s inaugural Pacesetters conference focused on disclosure effectiveness and the efforts by regulators, standard-setters and the companies themselves to initiate and catalyze improvements. This year s conference continued that conversation and also expanded it to include other aspects, such as: Preparing investors for the new revenue recognition standard: Microsoft s journey as an early adopter The investor s point of view: 10 key questions about the new revenue recognition standard that help uncover potential changes in company reports Enhancing disclosures about risk: the challenge of moving from compliance to communication W ho s looking at your data, and what are they doing with it? Data collection and data crunching are driving investor decisions and SEC oversight T aking the pulse of the markets: A fireside chat with Chris Taylor, the NYSE s Vice President, Listings and Services The views expressed by individual Pacesetters speakers do not necessarily represent the views of their employers or other organizations. 1

2 What follows are highlights and takeaways from the sessions, which can be viewed through this link. Our goal is to identify areas of reporting that are important to investors, and then motivate companies to improve in those areas by recognizing excellence, talking candidly about obstacles and developing specific suggestions to make it easier for others to enhance their reporting. Leslie F. Seidman Executive Director, Center for Excellence in Financial Reporting Lubin School of Business Pace University Learning from the leaders: preparing analysts and investors for the new revenue standard Microsoft s thoughtful approach as an early adopter was designed to help investors understand the changes before their implementation. Patrick Finnegan, Senior Director of Fitch Ratings and a former board member of the International Accounting Standards Board (IASB), moderated the panel discussion about Microsoft s experience as an early adopter of the new revenue recognition standard. He was joined by two Microsoft executives Stacy Harrington, Senior Director, Corporate Revenue Assurance, and Kristin Chester, Senior Manager, Investor Relations who have been deeply involved in the transition to the new rules, known formally as ASC 606. The new standard, issued by the Financial Accounting Standards Board (FASB), is effective for all public companies for reporting periods beginning after Dec. 15, 2017 (Jan. 1, 2018, for calendar year-end entities). As part of the transition, SEC registrants are required by Staff Accounting Bulletin (SAB) 74 to disclose the potential effects, if known, of Accounting Standards Codification (ASC) 606 on the company s financial statements. ASC 606 supersedes almost all US GAAP guidance on revenue recognition. Microsoft began planning for the adoption in 2014, deciding that a concerted effort to explain the changes to analysts and investors, was the best way to reduce confusion and achieve a smooth transition for the company, which has a June 30 fiscal year end. At the same time, it was also an early adopter of the new leasing standard (ASC 842) in order to provide one set of restated financials to investors. In August 2016, more than a year before it issued its first 10Q under ASC 606, Microsoft began to scope out its external messaging. The Corporate Accounting, Finance and Investor Relations departments worked closely together to identify the specific impacts on Microsoft and to formulate explanations about the pending changes. Their pace picked up in As its adoption date got closer, Microsoft could sense a growing interest from its investment community. So, in May, Microsoft briefed both the buy and sell sides, initially providing qualitative information on the changes and their plan for rolling them out with quantitative details offered later as they developed. In July, Microsoft issued its fiscal year (FY) 2017 final results under the existing rules, also using those rules for its initial FY 2018 guidance. The next month, it held another conference call with analysts and investors, and this time, it applied the new rules, 2 Pacesetters in Financial Reporting

3 restating its FY 2017 and FY 2016 financials to reflect the new rules in a comparative fashion. It also applied the new rules to its FY 2018 guidance, in what it thought of as a translated version. One of the key messages the company wanted to communicate was how much in the financial reports was not changing, at least at Microsoft, where a significant amount of the reporting stayed the same. But it also wanted to stress the importance of applying a granular analysis to recognizing and understanding what was changing. The company has a variety of businesses and the new rules impacted these businesses in different ways a dynamic that becomes much more transparent through the apple-to-apple comparisons made possible by the restated and translated metrics and reports, coupled with the accompanying presentation and disclosures. These materials further educated investors on the impact of the changes helping them to understand, for example, why the guidance for FY 2018 Q1 showed lower revenue amounts under the new rules. This decrease wasn t related to changes in the business, but rather to shifting recognition of certain revenues under the new rules to prior quarters, relating to the signing of contracts during that period. In short, the comparisons illustrated the netting effect of the new rules at Microsoft during the transition, the impact to the individual businesses within Microsoft, changes in quarterly seasonality, as well as the impact to the balance sheet. The company followed up with one-on-one calls to make sure that the investment community understood what was changing and had ample time to adjust their versions of Microsoft s performance models. The goal was to answer investor questions well before the new rules went into effect in FY 2018 reporting. Indeed, when Microsoft issued its FY 2018 Q1 results in October under the new standards, the company received very few questions, a strong indication that the communication efforts had paid off, because investors were focused on the business performance and not on the new standard. Overall, it was key that the restated financials and education were provided to investors ahead of 2018 Q1 and outside of the typical earnings cycle, giving the investors more time to rebuild their models by quarter and not confusing quarterly analysis of business performance with analysis of accounting changes. Microsoft was recognized at the conference as the Pacesetter in Financial Reporting for 2017, cited for its leadership in early adopting two major accounting standards, proactively educating investors and willingly sharing insights with others. Pacesetters in Financial Reporting 3

4 Top 10 questions investors ask about the new revenue recognition standard Investors want to know about the changes, but sometimes not until pretty far down the road. It would be better to answer their questions even before they pose them. Patrick Finnegan, Senior Director at Fitch Ratings and a former member of the IASB, discussed investor concerns about the new revenue recognition standard with Sandra Peters, head of the Financial Reporting Policy Group at the CFA Institute who shared key questions investors should ask about the standard. She encouraged companies to proactively provide this information and not wait until investors actually ask it (which is often after the new guidance is adopted). 1. Will there be a change in revenue recognition at all companies? No. It often depends on the company s business model. For many companies with simple models (for example, point of sale), nothing will change. That is not likely to be the case for those with a complex model. 2. What is the effect on one industry versus another? The standard is not industry-specific, but investors and analysts are heavily industry-centric. The rules will have different impacts on different transactions, depending on the specific terms of their arrangements. Within that context, it is important to understand that companies in the same industry may have different types of contracts, which may lead to very different effects from the new standard. 3. What is the expected impact of the new rules on company reports? A May 27, 2017 survey by UBS of 300 companies (100 each in the US, Europe and Asia-Pacific) revealed that 33% saw no material impact ; 61% did not comment. (In November 2017, FEI issued its Professional Accounting Update on corporate disclosures related to the anticipated impact of the new standard. It found that companies are continuing to expand their disclosures. However, as of Q3 2017, only 14% of the Fortune 500 had quantified the impact, with more than half disclosing that it would be immaterial to their financial statements.) 4. What about the method of transition? The UBS survey found that 21% of the companies were planning on a modified retrospective approach, and 9% were opting for a full retrospective. The remaining 70% didn t disclose their choice. A more recent study by the Analyst s Accounting Observer of 391 US companies in the Standard and Poor s (S&P) 500 found that 63% were choosing the modified approach and 11% a full retrospective. Two benefits of the full approach versus modified are (1) it produces trend data and (2) it offers comparability with prior periods. Separately, few companies have been early adopters, just 2% globally, including 4% in the US. 5. Is the revenue caption the only thing changing on the income statement? No. Investors should review all line items for changes as well as the potential impact on deferred and current taxes. There might be cash changes, in the future because of the impact on taxes. And the balance sheet may be affected, too, for example, related to capitalized costs. 6. Is cash flow changing? The standard has no impact on cash flow, at least retrospectively. But taxes and the terms of some contracts might change, and those shifts could affect the timing and amount of cash flow. 7. Will ratios be affected? Profitability ratios are likely to change if reported revenue changes. Balance sheet ratios and solvency ratios are also subject to change, as well as, to a lesser extent, liquidity ratios. 8. Will valuation multiples change? It depends. Given that there should be no cash flow change and no discounted cash flow change, it would seem that a change in earnings per share should result in a change in the price-to-earnings (P/E) ratio. For the same reason, it would seem that the change in book value would produce a change in the price-to-book (P/B) ratio. But as investors learn more about the quality of earnings and receive new estimates, it may give them a different perspective and lead to major changes in their views of growth and the rate of return. So would the justified P/E and P/B ratios change? That is something that investors will have to think through. 9. Will a company s non-gaap measures change? The most common non-gaap measure is earnings before interest, taxes, depreciation and amortization (EBITDA), and it is likely to change if the income statement changes. But exercise caution in using EBITDA to make changes in estimates about cash because the actual cash flow likely have not changed. There are numerous other non-gaap measures to think about. The degree to which they change or don t change, or are being switched back to historical accounting, may reveal a lot about management s view of the earnings process. 10. What will be the nature of disclosures about revenue and cash flows from customer contracts? Investors are looking forward to the new disaggregated disclosures about revenue. There are some concerns about the quality of disclosure regarding the greater use of estimates and judgments that will underpin revenue, especially for multi-element arrangements. Investors worry the new disclosures may become highly qualitative and boilerplate in nature. It will be important to have more transparency about the treatment of costs under the new standard and the terms of performance obligations and contract liabilities. 4 Pacesetters in Financial Reporting

5 We don t think there is any change in cash flows per se [under the new standard]. But the discussion about the difference in trends per quarter [along with] the difference in estimation that may impact the quality of earnings may change the market s perception of the recognition of revenue, particularly as [investors] use those to anticipate future growth rates and the risk associated with those earnings. And that is an important consideration for investors as they think about the impact going forward. Sandra Peters Head, Financial Reporting Policy Group CFA Institute Risky business: the demand to enhance disclosures about risk At a time of existential threats like cyber attacks and climate change, compliance is not enough communication should be the marching order. Keith F. Higgins, Chair of the Securities and Governance Practice at Ropes & Gray and a former Director of the Division of Corporation Finance at the SEC, moderated a panel discussion about the current state of risk disclosures and initiatives for enhancements. The panelists were Sam Eldessouky, Senior Vice President and Corporate Controller, Valeant Pharmaceuticals; Mary Hartman Morris, Investment Officer, CalSTRS; Jonathan Nus, Executive Director, EY; and Lori Zyskowski, Partner, Gibson Dunn. Since 2005, all public companies must list their risk factors in 10Q and other documents. Over the years, disclosing risks has become a big, and ever growing, part of company filings. Too often, though, the disclosures have been criticized for being generic and boilerplate in nature, a flood of words that obscures, rather than reveals, the actual risks that a company is facing. As new risks emerge some of which, like cybersecurity, pose new and at times quite meaningful dangers it is increasingly important for risk disclosures to be more transparent. The panel discussed the systemic problems in this area and efforts to make disclosures more effective. It was noted that other types of disclosures have evolved over time, and risk factors are starting evolve to as well. The original intent of the disclosure effort was to provide information in plain language and concise context. What has typically resulted, however, is a treatment of risks designed to minimize legal actions. With the involvement of the legal department, risk factor disclosure is largely driven by litigation fears and mitigation efforts. In turn, the disclosures have become longer and longer. There is a notion that risk factors are akin to drug company disclaimers, meaning they should encompass a vast number of issues so that all liability is covered. And companies often seem to disclose in lockstep, with industry leaders tending to report on the same factors and to the same degree. The disclosure journey should be refocused on communication rather than compliance. The better approach is to report true company risks and eliminate risks that are remote. Companies should look to reorder risks by relevance, by topic or in groupings. In addition, a more insightful discussion on the approach to managing and mitigating risks is warranted. And while some aspects of disclosure need to be pruned, others should be accentuated. Cybersecurity, of course, is one. More meaningful disclosures may also be needed on geopolitical risks, as well as risks associated with human capital investments, particularly as they relate to the potential loss of intellectual property. One positive trend is a movement toward integrated reporting, where information focuses on important themes and related risks. The dynamic nature of risks also should be emphasized. Risk factors should be viewed less like a photo and more like a movie, an ongoing story rather than a moment in time. Toward that end, companies should include an assessment of risk factors in their long-term strategic planning. Pacesetters in Financial Reporting 5

6 Hopeful signs of change are emerging. As companies begin to organize risk factors by topics, the word and page counts of risk disclosure sections are being reduced and some greater focus is provided. Generic and irrelevant risk factors are being eliminated. And outdated information is being removed to keep the factors current with business conditions. Meanwhile, infographics are being added that highlight risk significance and reveal trends. 2 The threat posed by cyber attacks may be another catalyst for change. Cyber is an issue that affects all companies but its impact is more pronounced in some industries than in others, and it will force companies to evolve their approach. For now, though, many are using cyber disclosure boilerplate language so that their legal exposure is covered, but they are not addressing the unique risks they face and the specific actions they have taken to protect privacy or to guard against breaches. 3 When a breach occurs, how soon should it be disclosed: as soon as it is known or after it has been investigated and addressed? Panelists suggested that premature disclosures are not prudent in this context, nor are those disclosures without appropriate context even if some major uncertainty remains. Companies first should assess the materiality of what has gone on to size it and figure out the nature of the problem. The timing then of disclosure depends on the circumstances on the impact and size of the breach and how the company plans to deal with it. Panelist takeaways: Investors want to see more on how long-term strategy is tied to risks. They want to know how boards are actively addressing cyber and whether board members, and senior management, have the right skill sets for the job. Investors are very interested in some type of certification which shows the Board and the CEO have considered opportunities and risks that truly matter to the company s long-term business plan. Boards should ensure there is a comprehensive focus on the company s distinctive dimensions of strategic risks which would prevent an organization in achieving its mission, vision and core values. Companies should change up their risk factors every quarter, cutting what they can and adding new concerns, to show they are responding to market changes and are looking ahead. Risk disclosures can t just be about compliance or use a one-sizefits-all approach. Companies must connect the dots to reveal the real contours of their risks. Context matters and so does clarity. Clearly communicate your unique risk-profile story. 2 See EY publication, Disclosure effectiveness in action: How are companies enhancing their risk factor disclosures? 3 See EY publication, SEC reporting update: Spotlight on cybersecurity disclosures. What will it take to reform disclosure practices? I don t think it will be a regulatory fix. It will be investors pushing companies for better disclosure. Once you are crossing the street in a pack, you ll feel better about doing it. Keith F. Higgins Chair of the Securities and Governance Practice Ropes & Gray 6 Pacesetters in Financial Reporting

7 Demystifying the investment process: how investors (and others) analyze your data Your financial information and disclosures are being consumed by analysts, investors and, yes, regulators. Data analysts are using artificial intelligence to quickly identify red flags in corporate communications that affect their investment decisions or regulatory actions. Leslie F. Seidman, Executive Director, Center for Excellence in Financial Reporting, Pace University Lubin School of Business, and a former Chair of the FASB, moderated a discussion about how investors and regulators analyze and use the data that corporate America produces. She was joined by Mike Willis, Assistant Director, SEC Office of Structured Data, Division of Economic and Risk Analysis, and Javed Jussa, an equity strategist at Wolfe Research. The mountains of data that companies file in their quarterly, annual and other reports are a gold mine to financial analysts, investors, economic researchers, data aggregators, academics and regulatory agencies, especially when it is provided in machine-readable formats. The SEC, Mike Willis explained, has recently compiled data sets of text and numeric information from all of the financial reports filed by all public companies that use extensible Business Reporting Language (XBRL) since The best commercial data aggregators currently track about 750 information elements for each company. By contrast, the SEC data sets offer 5,000 to 7,000 elements, an exponential increase that provides far more precise data. At the click of a mouse, trends, insights and anomalies are revealed about sectors, industries and individual companies that were either never available before or could be gathered only after lengthy and arduous data collection and data crunching. As of mid-2017, the SEC has made these data sets available to the public at no cost. The data, which is updated quarterly, is extracted and analyzed by a number of tools that the agency has developed for its staff to use (public users need to develop their own tools or find vendors to provide them). The agency s view is that the more data, the more insights so long as that data is structured properly and is of high quality. For instance, the Financial Statement Query Viewer tool, which is available to SEC staff, allows users to search and review data across all filers. Disclosures that are readily available from structured filings include accounting policies (and changes), unremitted earnings from foreign subsidiaries, restructuring charges and revenues and unearned revenue by segment and product lines, among others. Still another tool, the Inline XBRL Viewer, is available to both the SEC staff and to public users to search filings that have been submitted in ixbrl format. It allows searching by key words or concepts, and the files are viewed in both HTML and XBRL. It is open source and users can change it; some are sharing tips via blogs. The agency is using it to enable time series benchmarking of filings, and the scope of its search features has reach. For instance, a user interested in a particular item in a company s filing, say deferred tax assets, can connect, with a click, to the relevant FASB codification, SEC interpretations and SEC comment letters for that company and others in its sector. A number of companies are voluntarily providing information in ixbrl format; the SEC has not yet acted upon a March 2017 proposal to require public companies to file using ixbrl. The benefits from these tools, besides their lightning speed, include the ability to sift through disclosures to reveal risk patterns, to compare disclosures and specific sector risk profiles across targeted filers, and to assess data quality by identifying incorrect tagging, scaling errors and other mistakes. In the private sector, analysts are busy applying their own quantitative tools to SEC data, as well as to hundreds of other data sets, revealing insights that inform their portfolio investment strategies and recommendations. At Wolfe Research, Javed Jussa uses sophisticated methods to unearth anomalies that are predictive of market performance on a range of fronts. One analysis, for instance, reviews approximately 120 accounting items from the balance sheet, income statement and cash flow statement for conformity with the mathematical law of first digits (Benford s Law). Companies that are deemed non-conformers under the review criteria are found to sharply underperform in the market. An analysis of accounting restatements can also reveal negative connotations, including the potential timing of underperforming periods. Other techniques involve so-called sentiment and tone analysis of word choices made in reports and an analysis of the proportion of numbers to text in a filing, where more text can be a signal of potential underperformance. Today, the primary reader of financial data is a machine, not a person, said Mike Willis. Tomorrow, Javed Jussa added, there will be even more applications for machines to read data and to interpret it for better decision-making and investor knowledge. Another staff tool is the Corporate Issuer Risk Assessment dashboard (CIRA), which provides a persistent view of all filings, giving the agency a more holistic approach that can reveal where mishaps are occurring. Pacesetters in Financial Reporting 7

8 For issuers to make their data more useful and reliable, they should build the new tools and capabilities into their processes. It s no different from using a browser. Once you start down that path, this whole new world opens up and you begin to see what s possible on the analyst s side Becoming a user makes your data quality and communication cycle much more relevant. Mike Willis Assistant Director SEC Office of Structured Data Division of Economic and Risk Analysis A fireside chat with the NYSE s Chris Taylor An overview about major market trends involving ETFs, shareholder activism, sell-side research and more. Mark Besca, New York City Office Managing Partner, Ernst & Young LLP, and Chairman of the Board of Trustees of Pace University, had a wide-ranging conversation with Chris Taylor, the NYSE s Vice President for Listings and Services. The discussion offered an overview of key trends affecting the markets and company interactions with the investment community. The initial part of the discussion revolved around three of the biggest market developments: the growth of exchange traded funds (ETFs), the new strategic focus of shareholder activists and a looming regulation that separates sell-side research from trade execution. Exchange traded funds. ETFs have grown dramatically in the past decade. Dedicated assets have soared to $3.2 trillion, from less than $500 billion, and the number of ETFs has more than quadrupled to 2,200, with new ones added every day. Featuring lower costs than mutual funds and structured for intraday trading, ETFs offer a dizzying variety of investment options. They have become more of an institutional product than a retail vehicle, and many hedge funds use them to deploy strategies that avoid individual stocks. With the huge amounts of money now under their control, ETFs are responsible for a major shift in market flows. Shareholder activism. Once known for their short-term focus on wringing value from target companies, more and more activists are now taking a longer-term view, rebranding themselves as constructivists and strategic activists. Eschewing personal attacks on management, this new brand of activists uses white papers and exhaustive research to support campaigns to improve market performance. Representing themselves as agents for change, the activists spark a referendum on a company s strategy and test the confidence that investors have in the CEO and management team to execute that strategy. Activists now sometimes are invited to start campaigns for change by prominent institutional investors that are unhappy with management and will support the activist s demands. The campaigns are typically long-lasting and very expensive. Proxy battles at the biggest companies draw the headlines, but boards at many smaller companies are now finding themselves in the fray for the first time. Sell-side research. In what amounts to an absolutely huge regulatory change, buy-side investors in Europe are no longer getting a free ride in receiving sell-side research to guide their investment decisions, and American investors may be affected as early as this year. Mandated by MiFID II (Markets in Financial Instruments Directive, the comprehensive European securities legislation) the new rule, which just went into effect in Europe on Jan. 3, 2018, separates the research from trade execution. Investors have actually been paying for the research all along, in the form of commissions charged back to their accounts. Under the new rule, they will have to pay for the research themselves or have an arrangement under which they can charge the cost back to their asset managers. As a practical matter, research spending will decline sharply. The biggest sell-side firms provide enough other services to survive, but many mid-tier firms are challenged and some are expected to go under. Boutique firms may well continue to find a market for their focused research. The new rule may have extraterritorial effects because global policies are being put in place 8 Pacesetters in Financial Reporting

9 by the buy and sell sides. The change may have a modest impact in the US this year, with the bulk of the impact expected to come in 2019 and The discussion also involved a number of US-centric trends: IPOs. The average annual number of IPOs was 425 from 1991 to 2000; during the current decade, the highest annual number has been 290, with about 150 or so in One big reason for the decline has been slower global growth in reaction, a lot of bigger companies have sought growth by buying smaller private firms that would have gone public. Not surprisingly, the overall number of US public companies has also declined sharply, to little more than half of what it was 20 years ago. One positive step forward was the 2012 Jumpstart Our Business Startups (JOBS) Act, which made the IPO process less onerous. The SEC is now focusing more on capital formation, including expanding the JOBS Act to more companies. The US is still the deepest capital market in the world about 90% of foreign companies that don t list at home or list abroad select the US for listing. ESG. Companies are paying more attention to environmental, social and governance (ESG) factors: about 82% of the S&P 500 issued a Corporate Social Responsibility (CSR) report in 2016, up from a little more than 50% in But is ESG important in the investment process? Portfolio managers in the US, unlike those in Europe, have been slow to get on board. The increasing move to passive investing, will likely give ESG a higher profile, as significant companies like Vanguard, BlackRock and State Street Global Advisors have requested more of this information from their investees. Short-term vs. long-term. Quarterly reporting is not about to disappear. Yes, there is concern about short-termism and the risk of focusing too much on immediate results, rather than the longer-term. But investors would not be happy with longer gaps in reporting. And a long-term orientation doesn t have to be at odds with quarterly reporting. A balance is achievable if top management embraces a culture that is not swayed by short-term pressures and is also clear about the company s purposes and strategy for growth, and communicates its messages well. Mark Besca added EY, in conjunction with the Coalition for Inclusive Capitalism, recently launched a project to support long-term value creation. The project which involves companies in three industries as well as investors and passive owners, including pension managers has a mandate to identify and develop output metrics tailored to those industries. For more information, go to com/embankment-project/ AI. The impact of artificial intelligence (AI) on long-term value is unclear. Right now, AI is still pretty nascent. Yes, there is a lot of buzz surrounding AI and natural language processing but much of the chatter is reflective of companies trying to get ahead of the crowd and position themselves to take advantage of future developments. Investor trust and confidence in reporting. The investment community has broad confidence in the disclosure process. According to the Edelman Trust Barometer, 66% of buy-side respondents trust companies, compared with 28% who trust the government. On increasing the number of public companies: There s something special about being a CEO of a publicly listed company. To see entrepreneurs who started a company and grown it to become public; the emotion that you see all over their faces, through their tears and their words, is really priceless. I still think it is a goal for most entrepreneurs to be in the public market. I am very hopeful. Chris Taylor Vice President, Listings and Services New York Stock Exchange Pacesetters in Financial Reporting 9

10 Conclusion This year s Pacesetters in Financial Reporting Conference built on last year s dialogue about the improvements being made in disclosure and disclosure effectiveness opportunities, underscoring why clear and timely communication is important, not only in the formal setting of financial reports but in all interactions with the investment community. A growing number of companies are making great strides toward improving their disclosures and crafting more effective and understandable financial and investor communication, including embracing new digital technologies that help them present information in a more streamlined, effective and contemporary way, according to a research study by Ernst & Young LLP and the Financial Executives Research Foundation (FERF), the research arm of FEI, that was issued in conjunction with last year s conference. 4 The panelists this year cited a number of settings in which effective communication was a key element: In the area of risk disclosure, communication that is generic and boilerplate is itself becoming recognized as a risk and more companies are becoming champions of transparency and greater specificity. What companies say, and how they say it, has become grist for data professionals to analyze, a development that is influencing investment decisions and regulatory actions. Disclosures that are clear and well-communicated serve as the lifeblood for investors. In turn, they support and strengthen the American financial system as a whole. The quote of the day, said Leslie F. Seidman, referring to a comment made by Chris Taylor of the NYSE, is that the US capital markets are still the best place to raise capital in the world and that s partly because of our excellent financial reporting and auditing standards. Microsoft s decision to early adopt the new revenue recognition standard was built around conference calls and one-on-one meetings with analysts and investors to explain the coming changes, greatly reducing potential confusion in the markets when the company s revenue recognition was recast. 4 See EY/FERF report, Disclosure effectiveness in action: companies make great strides. For additional resources on financial reporting disclosure effectiveness publications, refer to 10 Pacesetters in Financial Reporting

11 Contacts Neri Bukspan Partner Ernst & Young LLP Jonathan Nus Executive Director Americas Financial Accounting Advisory Services Ernst & Young LLP Leslie F. Seidman Executive Director Center for Excellence in Financial Reporting Lubin School of Business at Pace University Dianora Aria De Marco Manager, Accounting Policy Financial Executives International (FEI) Financial Executives Research Foundation (FERF) Sarah Ovuka Professional Accounting Fellow Financial Executives International (FEI) Financial Executives Research Foundation (FERF) Pacesetters in Financial Reporting 11

12 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com