PracticeConsultingOn Financial Predictions – Forecasting future without fear.

On Financial Predictions - Forecasting future without fear.

Markets value companies on the basis of what they expect them to do in the future; accountants currently only have rules for presenting information about the past.

The gap and the opportunity are explored by the English ICA in Prospective financial information: Challenging the assumptions. The paper was prompted by a simple problem. You can’t set standards for auditors reporting on profit forecasts unless directors have clear principles for reporting on the future. The lack of such principles raises more serious issues.

Directors’ success and failure depend in large part on their ability to meet expectations. Yet they have to shape expectations without violating market disclosure rules and without succumbing to the paranoid fear that anything they say might cost them dear. The only tool for correcting expectations is the bludgeon of the profit warning.

The absence of routine dialogue about the future impairs quoted company accountability and performance. Within all organisations, prospective and historical information complement each other. Budgets are set and people report actual performance against them. Yet this model is rarely deployed for the benefit of outside investors.

The faultlines of current practice are clear in the new economy. Companies with long profit records find themselves staring into an abyss.

Start-ups see great losses paving the way to super profits. Meanwhile it is commonplace to question the relevance of financial statements and the reluctance of standard-setters to recognise a wider range of assets.

Yet there is an alternative. Why not talk about what future financial statements might show?

The paper, which can be viewed at www.icaew.co.uk, sets ground rules to promote openness and restrain excess.

Directors should acknowledge their responsibilities, avoid misleading and accept that comparisons will need to be made with outcomes. The paper redraws the distinction between forecasts and projections and lays down conditions for both. Where these conditions are not met, additional forward-looking disclosures are encouraged.

– Arthur Andersen’s Robert Hodgkinson chairs the English ICA’s Financial Reporting Committee

Related Articles

5 tips for SMEs to protect cash flow

Accounting Software 5 tips for SMEs to protect cash flow

5m Alia Shoaib, Reporter
Tyrie on Finance Bill 2017: ‘Making Tax Policy Better’

Consulting Tyrie on Finance Bill 2017: ‘Making Tax Policy Better’

11m Stephanie Wix, Writer
Managing partner Q&A - the year ahead: Richard Toone, CVR Global

Accounting Firms Managing partner Q&A - the year ahead: Richard Toone, CVR Global

12m Kevin Reed, Writer
Deloitte 'self-imposes exile' on government contracts to defuse PM row

Accounting Firms Deloitte 'self-imposes exile' on government contracts to defuse PM row

12m Kevin Reed, Writer
Managing partner Q&A - the year ahead: Julie Adams, Menzies

Accounting Firms Managing partner Q&A - the year ahead: Julie Adams, Menzies

12m Kevin Reed, Writer
Friday Afternoon Live: Deloitte's tech thing; PAC wants HMRC 'contingencies'; and Sports Direct

Business Regulation Friday Afternoon Live: Deloitte's tech thing; PAC wants HMRC 'contingencies'; and Sports Direct

1y Kevin Reed, Writer
Friday Afternoon Live: HMRC complaints rise; Deloitte scoops big audits; and corporate reporting woes

Audit Friday Afternoon Live: HMRC complaints rise; Deloitte scoops big audits; and corporate reporting woes

1y Kevin Reed, Writer
New head of equity capital markets for KPMG

Accounting Firms New head of equity capital markets for KPMG

1y Stephanie Wix, Writer