For the Investor
By Marc Siegel, FASB Member

Footnotes vs Face of Financials

Many times in setting new standards, the FASB is presented with the question of whether something should be displayed on the face of the financial statements or in the related footnotes. It has become an even more interesting question as more financial statement users consume information electronically.

In fact, some investors and analysts have suggested that all financial information constitutes a financial “data warehouse” containing financial statements, footnotes, proxy statements, or other regulatory filings. The continued growth of machine-readable data like XBRL contributes to that view.

It definitely matters whether something is presented on the face versus only disclosed in the footnotes.
An investor’s perspective about how to approach this question depends on how and when the analysis is performed. It might be illustrative to describe how my prior research process, as a former investor, led to my conclusion that it definitely matters whether something is presented on the face versus only disclosed in the footnotes.

Three major factors influencing my view relate to:
  1. The timing of available information
  2. The content of that information, and
  3. Time constraint on analysts and investors to come to decisions.
In a perfect situation, all information would be available at the same time and there would be no time constraint in which to analyze it. However, as that was not the case, presentation became more important to me.

Prior to joining the FASB, as an analyst I followed a large number of companies in a particular group of industries (technology, media and telecom). Each quarter during earnings season, an onslaught of information would become available in a very short period of time.

Earnings releases were issued, often with accompanying income statements, balance sheets (and often, but not always, cash flow statements), and supplemental voluntary disclosures. These might include key performance indicators, non-GAAP measures and/or a PowerPoint slide deck to accompany the management conference call. More often than not, 10-Q filings were not made available at the same time as the earnings releases.

While my research process allowed for more time before coming to conclusions, many analysts did not have that luxury. Most sell-side analysts covering a stock looked to publish their research notes with their thoughts very quickly after the earnings release, using the face of the financial statements, the conference call, and any supplemental information the company voluntarily provided.

Shareholders often look to make investment decisions rapidly after the earnings release.
Shareholders often look to make investment decisions rapidly after the earnings release. Trading volumes spike around earnings releases, and obviously can be based only on the information that’s provided at that time, which do not usually include the full footnotes.

As a sell-side analyst using an accounting “lens” when reviewing financial statements, the process I used was a little different—but I believe still illustrative. The first step I took was comparing the operating results and financial positions of all the companies by subsector. For example, based on information provided by a data aggregator (such as Bloomberg, Factset or Compustat), I would analyze, compare, and contrast the financial and operating metrics I deemed most important for the group of companies.

The objective of this was two-fold. First, it provided a sense of how the overall group performed in the reporting quarter. The second objective hinged on the understanding that time was not available to analyze every single company in the group. In order to appropriately prioritize which companies I was going to subject to detailed review, I needed to narrow down the list to those firms which had surprising results or red flags in the metrics I reviewed.

This prioritization was a key part of my investing process. My time was valuable and it was critical to first focus my attention on the firms where I found red flags. Later, I would be able to take the time to do deeper dives on more companies—but at this stage, the goal was to create a list of which 10-Q filings would be reviewed first.

The red flags were based on metrics derived from the information available at press release date. That data is limited to that which companies provide—usually the face of the financial statements and other non-GAAP supplementary data.

Footnote information is critical to the process of fully understanding the operating results and financial position of any one particular company over a time series. However, that information was just not available in this first phase of my research. It only became available once I prioritized my list of companies upon which to perform a deep dive.

As a result, what companies present on the face of the financial statements was critical to the first phase of my research process in prioritizing the companies I wanted to review more closely.

Therefore, as a FASB member, I take very seriously the question of whether presenting information on the face of the financial statement matters. In the future, if more footnote and 10-Q information becomes available earlier in the cycle of quarterly earnings results, it’s possible that the distinction might become less important. But until such a time, it will continue to be my view that presentation matters.