2.3 The Role of Voluntary, Non-financial and Forward-Looking
2.3.3 Forward-Looking and Historical Information
The last level of analysis regards the distinction between forward-looking and historical information. Forward-looking information could be defined as a set of disclosures regarding prospective changes in a firm’s environment, its mission and strategy, and short and long-term forecasts; on the other hand, historical informa- tion could be defined as a set of documents relating to past company performance, the company’s organizational structure, features and a history of a firm’s produc- tion, and features of past and current customers.
As shown in Fig.2.1, forward-looking information could be either financial and non-financial. The same considerations could apply to historical information.
In this regard, some academics and professional associations have pointed out the relevance of extending the financial reporting boundaries beyond traditional models based on classical financial statements and historical dates (Cattaneo1959;
Elliott1992; Wallman1995; Lev and Zarowin1999; ICAEW 2003; Quagli and Teodori2005; Seyfert et al.2006). In a similar vein, some academics have dem- onstrated the low relevance and usefulness of classical financial and historical- based metrics (Sveiby1997; Edvinsson and Malone1997).
In this setting, academics have pointed out the growing relevance of forward- looking information. As a matter of fact, this theory is supported by academics who underlined the greater relevance of forward-looking financial and non-financial performance indicators, especially in a changing world (Kaplan and Norton1996;
Mavrinac and Siesfeld1999).17
17“In this regard, Mavrinac and Siesfeld stated: “In a world of increasing technological change and shortened product life cycles, and in a world where knowledge work and intangible assets have become of profound importance, future financial performance is often better predicted by non-financial indicators than by financial indicators” (Mavrinac and Siesfeld1999). Furthermore, Kaplan and Norton stated: “financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and custode
Similarly, other academics have emphasized that forward-looking disclosure improves the accuracy of analysts’ forecasts (Robb et al. 2001; Bozzolan et al.2003; Vanstraelen et al.2003). Lev and Penman pointed out that management forecasts are credible, because these can be verified ex-post by comparison with audited reports (Lev and Penman 1990). Furthermore, other authors have highlighted the increasing relevance of soft information, that is, unquantified and unquantifiable information. According to their perspective, soft information is not possible to quantitatively determine and to quantify with accuracy, especially when information is future-oriented (Beattie et al.2004).18
The viewpoint of professional associations on this topic is quite consistent with those in academic circles, with an emphasis on the growing relevance of forward- looking and non-financial information, which is considered particularly relevant for creating long-lasting value for a company. As a matter of fact, AICPA underlined the pivotal role of forward-looking information based on prospective information in order to increase the significance and meaning of classical financial reporting (AICPA1994).19As shown in the previous section, the Jenkins Report underlined that company information could be improved through the adoption of different perspectives with respect to the economic-financial one. These different perspec- tives especially regard non-financial and future-oriented information such as:
consumers, creditors, investors, aims and strategies, and managerial analysis.20 Moreover, in 2010 the IASB issued the IFRS practice statement No. 1 on Management Commentary,21which seems to be in line with the Jenkins Report.
relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innova- tion” (Kaplan and Norton1996).
18“The general trust of these articles and reports is that there is a need for more information that is forward-looking and non-financial in nature. It is recognized that much of this new information will be soft, i.e., either unquantified or unquatifiable” (Beattie et al.2004).
19The AICPA stated “The Committee believes that disclosure of performance measures would provide leading indicators about a company’s future (. . .). Users are forever searching for better leading indicators of performance; indicators about existing conditions that provide insight into a company’s future performance. Since future performance is often a function of how well a company performs key activities, performance measurements are often superior leading indicators of a company’s performance” (AICPA1994).
20For further considerations about the Jenkins Report, see also: (Ansari and Euske1995; Eaton and Roth1998). In particular, Ansari and Euske argued that the aim of the Jenkins Report was to reduce barriers between FA and MA disciplines. This point is particularly interesting for the present work.
21Management Commentary has the purposeof providing a broad, non-binding framework for the presentation of management commentary that relates to financial statements that have been prepared in accordance with International Financial Reporting Standards (IFRSs), (IASB 2010b). This report should include, as the Jenkins Report does, the following information:
(1)forward-looking information; and(2)information that possesses the qualitative characteristics described in the Conceptual Framework for Financial Reporting (IFRS practice Statement Management Commentary) (IASB2010b).
2.3 The Role of Voluntary, Non-financial and Forward-Looking Disclosure in. . . 21
In particular, the Management Commentary attempted to stimulate the alignment between FA and MA, by suggesting to firms to disclose, in their financial reporting, more non-financial and forward-looking information than financial and historical information (IASB2010b).
In a similar vein, the Accounting Standards Board in the U.K. issued the Reporting Statement: Operating and Financial Review (ASB2006),22which is a
“narrative explanation, provided in or accompanying the annual report of the main trends and factors underlying the development, performance and position of an entity during the financial year covered by the financial statements, and those which are likely to affect the entity’s future development, performance and position.” The OFR statement was replaced by the Financial Reporting Council’sGuidance on the Strategic Report,which was issued in June 2014. The guidance encourages com- panies to prepare a “high quality strategic report—which provides shareholders with a holistic and meaningful picture of an entity’s business model, strategy, development, performance, position and future prospects” (ASB2014).
Furthermore, the Global Reporting Initiative (GRI) contributes to promoting forward-looking and non-financial indicators, by helping firms to disclose environ- mental and social sustainability items. In a similar vein, the World Intellectual Capital Initiative (WICI) supports firms in defining and disclosing internal Key Performance Indicators (KPIs) on intangibles (WICI2010). Therefore, examples of non-financial and forward-looking information are the Intellectual Capital and the CSR disclosures.
Despite the aforementioned considerations about the growing relevance of this kind of FA information, a survey carried out by PricewaterhouseCoopers (PwC 2007) demonstrated that analysts and investors do not rely on management infor- mation, because they do not expect neutral behaviour by managers in disclosing sensitive information. Managers are indeed prone to emphasizing the positive performance of the company, hiding or simply omitting negative news and perfor- mance (Silvi and Bartolini2011).
In the end, FA has evolved from backward-looking stewardship accounting to a contemporary forward-looking valuation focus, assisting investors in their decision making (Jones and Luther2005; Hemmer and Labro 2008; Eierle and Schultze 2013). Therefore, faced with the proliferation of voluntary disclosure in terms of forward-looking and non-financial information, it is becoming more and more relevant to set new control activities and new tools in order to verify the reliability of the overall FA disclosure. The difficulty of control mainly concerns the fact that soft information is not so easily verifiable. Thus, a possible solution could be the
22The mentioned document states that: “the Reporting Statement recommends that directors prepare an OFR addressed to members, setting out their analysis of the business, with a forward-looking orientation in order to assist members to assess the strategies adopted by the entity and the potential for those strategies to succeed. The information disclosed in OFR will also be of relevance to other stakeholders. The OFR should not, however, be seen as a replacement for other forms of reporting addressed to a wider stakeholder group.” (ASB2006).
one emphasized by Lev and Penman, which entails an ex-post comparison between forward-looking information and ex-post audited reports (Lev and Penman1990).
Furthermore, another possible solution could be the introduction of new mecha- nisms and tools aimed at encouraging the reasonableness of the assumptions that lie behind such estimates and assumptions (Superti Furga1985).
These development paths that involved the overall FA flow of information have led to some relevant changes to Management Accounting (MA),23thus providing promising initial evidence about the convergence between FA and MA (Ansari and Euske1995), as will be shown more clearly in Chap.3.
The following sections will discuss several theories which could represent a possible explanation of the FA development paths.