The Securities and Exchange Commission has been conducting a review of the effectiveness of financial disclosures by public companies within and outside of financial statements, and some investors have wondered about where forward-looking statements should fit into them.

A new report from the CFA Institute, Forward-Looking Information: A Necessary Consideration in the SEC’s Review on Disclosure Effectiveness, provides investor perspectives on forward-looking information and the question of whether a dividing line can be drawn between the forward-looking information that belongs outside and inside financial statements. As the SEC reviews disclosure effectiveness, investors are eager for improved disclosures to inform their investment decisions, according to the report.

“Our recommendation is really for the SEC to tell us where they stand on the issue so we can see where the clear dividing line is,” said Sandy Peters, head of the Financial Reporting Policy Group at CFA Institute.

“We think that for investors there are disclosures and things that aren’t being improved in financial statements because everybody has this near-automatic association with the term ‘forward looking,’ that it belongs outside the financial statements without critically analyzing what’s going on,” she said. “The SEC didn’t resolve that conversation, and we’re trying to say as part of the conversation about disclosure effectiveness, we need the SEC to consider and explain to users of the financial statements whether forward-looking statements belong in or outside of the financial statements. The debate about it not being in the financial statements is just stopping progress and is really inconsistent with what we have actually seen happen. Where’s the dividing line? We’re not sure you can draw a dividing line because, as we say in the paper, we feel the conceptual Rubicon has been crossed, but we would just like to have some indication so that articulation of the argument against disclosure isn’t used continually when in fact the investors find forward-looking information to be exceedingly useful in the financial statements and elsewhere in the document.”

The Financial Accounting Standards Board has been working on its own disclosure framework as well, releasing a draft version in March (see FASB Proposes Disclosure Framework).

“Just as we were finishing up the report, the FASB came out with this definition in the disclosure framework of future-oriented information, so we analyzed that in the context of what we were saying,” said Peters. “We think that the FASB is doing something important in saying, ‘OK, this is what we think the definition of future-oriented information is. What do you think it is, SEC?’ At least they’re trying to create some dialogue and conversation around it. But if you look at our comments, we’re not certain that they can draw a clear line either. They’re saying, if it’s measured or disclosed in the financial statements and incorporates forward-looking information, if there’s a measurement for forward-looking or disclosed as forward-looking, then you can add disclosures about it. We don’t understand how they decide what measures are forward-looking and belong in the financial statements. The condition precedent is that they’ve decided to measure something that’s forward-looking. Then they can disclose something about it. So we say we’d like to know how you come to that conclusion.”

The CFA Institute would like to see disclosures about the use of forward-looking information. “We think if you’re going to use forward-looking measures in the financial statements, you need to include disclosures that help explain them, even if they are forward-looking,” said Peters. “Then we feel like we need a better idea of the boundary of when you decide you’re going to measure something using forward-looking measures. What are the characteristics of it that make it OK to include it in the financial statements?”