Raising the profile of PFI

Dot.com investors and analysts know to their cost that it is difficult to get hold of reliable forward-looking information about companies.

Dot.com investors and analysts know to their cost that it is difficult to get hold of reliable forward-looking information about companies. The Institute of Chartered Accountants recently published a discussion paper, Prospective financial information: Challenging the assumptions, which it believes will help raise the profile of prospective financial information (PFI) in promoting efficient capital markets and will help companies to report more useful information. The paper proposes redrawing the distinction between forecasts and projections, and specifies conditions for the preparation and publication of both types of information. It also suggests

additional forward-looking disclosures when these conditions are not met. Preparers of PFI should acknowledge their responsibility for it, explain its limitations, avoid misleading presentation and accept that comparisons will be made between PFI and what eventually happens. This idea of accountability is crucial. The paper distinguishes two types of PFI:

forecasts that are confidently expected to be achieved and contain only limited information about assumptions

other prospective financial information, referred to as projections, in which assumptions are explained in detail.

In the case of a forecast, the discussion paper poses three main questions for directors to answer:

Does the forecast represent an outcome that the directors believe is highly likely to be achieved?

Do the directors have a reasonably objective basis for their belief?

Are the directors disclosing assumptions and related uncertainties that cast doubt on whether they believe that the PFI is highly likely to be achieved?

In the case of a projection, where uncertainties and assumptions have a much greater significance, four main questions are proposed:

Does the projection represent an outcome that the directors consider reasonably likely to be achieved?

Do the directors have a reasonably objective basis for their view?

Are the assumptions and related uncertainties adequately disclosed?

Do the disclosures indicate that it would be misleading to focus on the numbers projected in the PFI? The Institute's paper aims to provide practical help to people working with today's regulatory requirements and does not depend on changes to existing rules on PFI. It is open for comment until 16/2/ 2001. Download copies at www.icaew.co.uk/news/consultations/ document.asp?WSDOCID=4758 .