The Proforma Earnings

Questions: (1) What is the background and motivation for the study? This part should indicate why the researchers did the study in the first place. Questions to think about here are: What issue were they trying to address? Why was it important at the time? Is it still as important today? If not, is there a related issue thats important today? (2) What types of conceptual or theoretical arguments did the researchers make to develop their hypotheses and/or analyses? How do they build upon what we have already seen from the studies weve already read? What additional/new concepts or theories do they use (NOTE: here you dont need to go to the previous literature to look these up; well talk about them in class and summarize them briefly)? Apply a bit of critical thinking here. Do the conceptual arguments make sense? Its easy to take the researchers word for it, but sometimes you can tell that they are taking shortcuts or ignoring certain things (accidentally or otherwise) when developing their arguments. See if this seems to be the case. (3) How do they design the study to examine what they want to examine? The parts to focus on here include: How do they choose the sample of companies to study? Why do they drop certain companies or choose certain time periods? Do these choices make sense? How do they statistically test their hypotheses or conduct their analyses? (NOTE: here you dont need to look up and study the particular statistical methods they use. We can, in general, trust that the peer review process in publishing has done its job, and the methods work well in general.) How do they achieve research control (eliminate alternative explanations)? (4) What results do the researchers find? How strong are the results? Are they slam-dunk very strong results, or do they seem weak? (NOTE: here, as I told you in class, look at the tables and graphs and see if they tell you the same thing that the researchers are trying to sell you when they explain the results in words. Apply some critical thinking here. Its hard to do at first, but youll get better at it over time.) (5) (Most importantly) What are the implications for accounting and financial reporting of their findings? What does your group feel like it can take away from the study? Here Im asking you to reflect on the studys contribution to what you know and understand about accounting. Im not having you read these articles and present them as busy work. Think about why the particular study matters, not to academics, but to professionals and the profession itself. Answers: 1. The main focus of the researchers is on the proforma earnings. They explore that the most prominent measure of the proforma earnings eradicates some of the expenses that are considered noncash, nonrecurring or somehow not relevant for comprehending the firms future value. They claim that such eradications can result in the lower cash flows within the future. The study is quite important at the time and is still important today because companies claim that the business events that are non-recurring are not expected to occur within the future years. But it should be noted that that Pro-forma earnings might get above or fall below of the typical reports of earnings and that they are only reported usually by the companies if the proforma earnings surpass the true performance. The major issue that they are trying to address is that Pro-forma earnings are found to be debatable within the financial environment. The reason behind this is that the Pro-forma earnings are inconsistent with t he GAAP i.e. accepted accounting principles and are not found to be audited. Most of the organizations can report the results of the Pro-forma earnings by the solid business ethics, but an unaudited work can prove to make it troublesome for verifying the Pro-forma earnings accordingly. The authors also pinpoint the fact that the management in todays world has abused the utilization of the non-GAAP financial metrics to overstate the earnings and mislead investors. 2. The authors have cited numerous sources that favor the Pro-forma earnings through which they have developed their hypothesis. For instance, Bradshaw and Sloan (2002) and Brown and Sivakumar (2001) were already for the proforma earnings than the accepted accounting principles as they believed that pro forma earnings reflect the actual earnings per share. But the author of the article denies their procedures and claims by stating that the response of the stock market can be a good way to respond to the earnings announcement and can be considered a significant way to determine the relevancy of the information market is utilizing, but it does not consider the fact that the market can be misled by the utilization of the proforma earnings, and this is the only debatable issue that the financial press and regulators have expressed. The researcher has favored his viewpoint by exploring that it is not clear as to why the capability to predict itself can be found to be a desirable character istic of the performance measure. They have also differentiated the Pro-forma earnings and GAAP where they indicate that the earnings within the GAAP rule entails as to how much money an organization made, but they criticize the fact that pro forma earnings would just indicate as to how much money any organization has made from its ordinary or usual activities of the business. They further give an example of ATT, which in the 4th quarter of 2001 had a pro forma earnings of 0.05 and their GAAP earnings were 0.39 which meant that the total exclusions were 0.44. These exclusions included losses on the sale of businesses, asset impairments and other losses on the equity method investments. They defend the usage of GAAP by claiming that it corresponds with Financial Accounting Standards Boards conceptual framework when there is an involvement of the decision usefulness which will allow the certainty of the decision making and uncertainty of the future cash flows. 3. The researchers had opted for the selected companies within the selected period because in the 4th quarter of 1999 earnings announcement press release for the 50 randomly selected firms, the 48 cases had the Institutional Brokers Estimate System true earnings per share was featured predominantly within the PR. While, for the remaining two of the case, the GAAP EPS was reported and that the exclusions that were required for reconciling to the Institutional Brokers Estimate System actual EPS were demonstrated in the lead paragraph of the press release. 4. According to me, the results seem to be quite reliable because they have clearly stated that if the accounting principle as per GAAP is implemented, then there would be a provision of the decision usefulness of it. This would mean the businesses would maintain persistency within the presentation of the financial data which would further facilitate the risk of any fraud or misrepresentation. It is the only GAAP framework it should be there for safeguarding the rights of stakeholders that would incorporate investors too. Their claim proves that fact that GAAP would hold the company to get to be responsible for their activities within the financial reporting while making a provision of a significant assurance for all of the parties interested. With the utilization of GAAP, the companies can make a provision for a fair and true presentation of the financial information. Holding fast to the guidelines of GAAP can help one to actualize legitimate safeguards and controls. The way that th e GAAP rules recommend utilizing a persistent premise that the professionals can apply to accounting transactions makes an illustration of the fact. Consistency prompts an all the more fair representation and aides in looking at financial statements over numerous periods. This helps one to make a determination of the overall performance of the company, make an identification of the areas that require improvement while judging the advantage of the changes being implemented. 5. By the financial reporting, one significant implication could be that the financial reporting is found to be a language which corresponds the information about the operational results and financial condition of the company. GAAP earnings would make a provision of information that would be quite useful and imperative for the lenders, investors who would potentially give resources to any particular organization and this indicates that GAAP is based on the established objectives, standards, concepts and conventions that seem to be evolved time by time to guide as to how the financial statements are prepared and then presented. It gives us a true explanation as to what items are recognization within the financial statements of revenue, assets, expenses, and liabilities. It also gives us a significant information as to the reporting of the amounts for all of the elements incorporated into the financial statements. Furthermore, it also provides us with a core and imperative information that is found to be quite favorable to the users of the financial statements and that the Disclosures explain and supplement the amounts within the statements. Therefore, GAAP is the definite guideline on which the companies or organizations can depend on while preparing the financial statements.