Bloom, Robert National Public Accountant v41n9 PP: 32-34+ Sep 1996　　 　ABSTRACT: Three reports on financial reporting are compared: 1. the JenkinsReport (1994), 2. the Trueblood Report (1973), and 3. the British FutureShape of Financial Reporting (1991). All three reports deal with the sameuser - an investor or creditor. They recommend that predictive informationbe furnished in financial reports to help users forecast the cash flows ofthe firm. All three reports deal with enduring issues in financialreporting, including: 1. aggregation versus segmentation, 2. disclosureadequacy, 3. uncertainty in financial reporting, 4. the consequences ofdisclosing forward-looking information, and 5. alternative methods of assetand liability valuation. Extensive details about the Jenkins report areprovided, as well as a table comparing all three reports' stances on theaforementioned issues. On first view, the Jenkins Report might appear to beprovocative and novel. However, after comparing it with its current Britishcounterpart and its AICPA predecessor, a different perspective emerges: TheJenkins Report is original essentially in its emphasis. Classroomapplications for the comparison are recommended. 　TEXT: Not since the AICPA's Trueblood Report (Report of the Study Group onthe Objectives of Financial Statements, 1973) has there been anauthoritative American document on recommendations for future financialreporting. Three years in the making, the AICPA Special Committee onFinancial Reporting released its full-fledged report in September 1994.Chaired by Edmund Jenkins, managing director of accounting standards atArthur Andersen, the report calls for changes in the scope and contents offinancial reports to improve their relevance to users. 　External financial reporting has long been past-oriented. Users, however,need future-oriented information, both financial and operational. How didthe Committee determine that? The Committee says it sought first-handknowledge about users needs from the usersinvestors and creditors and theiradvisors. Previous studies, for the most part, postulated what users needfrom financial statements. This study apparently found out from usersthemselves what they believe they need.Recommendations 　The Committee makes the following principal recommendations: 　1. Standard setters should develop a model of business reporting to: (a)Provide financial and nonfinancial data. * Financial statements and relateddisclosures * High-level operating data and performance measurements 　(b) Provide management's analysis of financial and nonfinancial data. *Reasons for changes in the financial, operating and performance-relateddata, and the identity and past effect of key trends 　(c) Provide "forward-looking" information in addition to historicalinformation. * Opportunities and risks * Management's plans, includingcritical success factors * Comparison of actual performance to plans 　(d) Provide information about management and shareholders. * Directors,management, compensation, major shareholders and transactions, andrelationships among related parties 　(e) Provide background about the company. * Broad objectives and strategies* Scope and description of business and properties * Impact of industrystructure on the company 　(f) Report on each business segment, focusing on those segments that seniormanagement uses to manage the business. 　(g) Disclose the financial and nonfinancial measurements the firm uses inmanaging the business. 　(h) Balance the costs and benefits of business reporting. 　2. Address the disclosures for innovative financial instruments: theobjectives of the company in using these instruments, the instruments used,how they have been accounted for and the effect of that accounting on thefinancial statements. 　3. Improve disclosures and "accounting" for off-balancesheet financingarrangements. 　4. Report separately the effects of core and non-core events, measuring atfair value non-core assets and liabilities. Core activities reflect usual,recurring events, which can be helpful in future predictions. Non-coreactivities are unusual or infrequent. The conventional approaches tomeasure core assets and liabilities should be retained. 　5. Improve disclosures about the uncertainty of measurements of particularassets and liabilities. 　6. Improve quarterly reporting by reporting on the fourth quarterseparately and including quarterly business segment data. Such informationcan help users achieve a better understanding of the firm's opportunitiesand risks. 　7. Defer consideration of the following less pressing issues: (a)Conversion from a historical cost to a value-oriented model. (b) Accountingfor intangible assets, including goodwill. (c) Management forecastsprovided in financial reports. (d) Accounting for business combinations:purchase and pooling methods. (e) Narrowing down the choice of alternativegenerally accepted accounting principles. 　Allow flexible auditor association with business reporting, whereby theelements of information on which auditors report and the level of auditorinvolvement with those elements are decided by agreement between a companyand the users of its business reporting.Prepare the auditing profession to be involved with all the information inthe comprehensive model, so that companies and users can call on them toprovide assurance on any of the model's elements. 　10. Have the newly formed AICPA Special Committee on Assurance Servicesresearch and formulate conclusions on analytical commentary in auditors'reports within the context of the Committee's model. 　11. Encourage the AICPA to continue its projects on other issues pertainingto auditor association with business reporting, including internal control,credibility of business reporting and responsibility for detecting fraud. 　12. Encourage national and international standard setters and regulators toincrease their focus on the information needs of users, and encourage usersto work with standard setters to increase the level of their involvement inthe standard-setting process. 　13. Encourage U.S. standard setters and regulators to work with theirnon-U.S. counterparts and international standard setters to developinternational accounting standards. 　14. Encourage lawmakers, regulators and standard setters to develop moreeffective deterrents to unwarranted litigation that discourages companiesfrom disclosing forward-looking information. 　15. Encourage companies to experiment voluntarily with ways to improve theusefulness of reporting consistent with the Committee's model. 　16. Encourage standard setters to adopt a longer-term focus by developing avision of the future business environment and users needs for informationin that environment. 　17. Encourage regulators to consider whether there should be any changes tothe current requirement that public companies make all disclosures publiclyavailable. 　On first view, the Jenkins Report might appear to be provocative and novel.However, after comparing it with its current British counterpart and itsAICPA predecessor, a different perspective emerges: The Jenkins Report isoriginal essentially in its emphasis. Most of the recommendations in theJenkins Report had been set forth before in authoritative professionalreports, albeit with much less specificity and clarity. 　Comparison of Three Authoritative Reports 　The Jenkins Report, the British Future Shape of Financial Reporting(1991)henceforth, the British Report-and the Trueblood Report ( 1973) allappear to deal with essentially the same user: an investor or creditor wholacks the authority to require the firm to furnish the necessaryinformation. The Trueblood Report is even more explicit than the other tworeports in saying that the user has limited resources to secure the neededinformation and hence has to rely on financial statements as the principalsource of information about an enterprise. The Jenkins Report-and Truebloodto a much lesser extentbased its research and findings on direct input fromusers. 　In view of the user orientation in these reports, they emphasize theapplication of financial reports to decision making. They also recommendthat predictive information be furnished in financial reports to help usersforecast the cash flows of the firm. The British Report actually calls fordirect forecasts, which need not be disaggregated, and comparisons ofactual results with those forecasts. 　While the Jenkins Report does not call for direct forecasts, it recommendscomparisons of actual business results to previously reported plans,opportunities and risks. The users interviewed by the Jenkins Committeeapparently took the position that forecasting is their own responsiblity.Therefore, they do not need direct forecasts from management, which can beunreliable. Forward information to the extent provided by management shouldmake the user's task of forecasting less onerous. 　The Trueblood Report, which stressed the importance of providing a vastarray of information, including "future-oriented" in financial reports,recommended as one of its last objectives of financial statements theprovision of direct forecasts by management when such forecasts serve toenhance the users' own forecasts. Nonetheless, the central objective of theTrueblood Report is for management to provide users with a potpourri ofdata which they can select to make their own forecasts. 　All three reports accentuate the importance of future cash flows. TheTrueblood Report was the first authoritative professional document to dothat, asserting that users are essentially concerned with forecasting thelongrun cash flows to the firm and to themselves in terms of amounts,timing and related uncertainties. The British Report stresses future cashflows as the key to the viability and success of the company. The JenkinsReport makes its recommendations for the purpose of improving the user'sability to forecast the cash flows of the firm. 　Disaggregated information is recommended in each of the three reports. TheTrueblood Report calls for such information in general, whereas the Britishand Jenkins reports recommend such information be furnished by industry andgeographic area. 　All three reports recommend greater disclosure of the uncertaintiesunderlying the figures in financial statements. In fact, the TruebloodReport in 1973 was the first authoritative professional report to call forexpanded disclosure of uncertainties in financial statements. 　All three reports provide blueprints for new financial statements. TheTrueblood Report is least explicit on the format and contents of suchstatements. The other two reports provide considerably more detail on theframework of the proposed statements. Indeed, examples of these statementsare provided in both the Jenkins and British reports. 　On the subject of valuation methods, the Jenkins Report calls forcontinuation of the methods currently used to reflect assets andliabilities. Only with respect to non-core assets and liabilities does theJenkins Report recommend current valuation. The Jenkins Committee assertedthat the conventional valuation system is stable and that fair values aresubjective, if not erratic. The British and Trueblood reports proposeeclectic current valuation-different valuation methods for differentpurposes. Monetary assets should be valued at discounted cash flow. 　For most inventory, property, plant and equipment, current cost or netrealizable value is appropriate. That is not the case, however, for highlyspecialized assets or various intangibles of value to the firm but not toother parties. According to the Trueblood Report, discounted cash flow maybe especially useful to measure benefits from groups of related assets forwhich no market value exists. Historical cost is still suitable, inTrueblood's judgment, for the past sacrifices to acquire assets andbenefits received from liabilities. Current replacement cost is appropriatefor consideration of the benefits from long-term use of assets. Exitvaluation is suitable for the benefits or sacrifices from assets andliabilities expected to be sold. 　Interestingly enough, there is nothing on present valuation per se in theJenkins Report. In the British and Trueblood reports, present valuation istreated as one form of eclectic current valuation. Also, present valuationis implicit in the central objective set forth in each report, to provideinformation to assist users in forecasting and evaluating the amounts andtiming of long-run cash flows to the firm and to the users as investors andcreditors. The Jenkins Report differentiates between core and non-coreearnings and calls for elimination of the separate category forextraordinary gains and losses. The British Report also suggests apartitioning of regular and irregular earnings, proposing separatestatements of income from operating activities and gains from holding orselling non-current assets. The Trueblood Report recommends information tohelp users distinguish the usual and frequent from the unusual andinfrequent sacrifices and benefits. The Trueblood Report develops a conceptof an "earnings cycle"-a set of events affecting past, current or futureincome and involving sacrifices and benefits. Completed, incomplete andprospective earnings cycles exist based on whether sacrifices and benefitshave occurred fully, partially or not at all. 　The Jenkins Report calls for reporting of management information of anoperational nature along with the objectives, strategies and opportunitiesof the firm, in addition to comparisons of actual results withexpectations. The British Report previously recommended much the sameinformation. The Trueblood Report was not explicit on these items. 　The Jenkins Report recommends more timely reporting of financialinformation-quarterly reports 　Many accountants are hesitant about confirming all aspects of an engagementbecause they feel that written confirmation is not necessary with respectto long-term clients or they fear that clients may be insulted by thesuggestion that all actions need to be confirmed in writing. However, asmentioned above, it is often quite surprising how rapidly both personal andprofessional relationships can break down when the client is exposed tofinancial loss. Therefore, written correspondence and confirmations shouldbe used without exception. Modified Fee Arrangements 　In order to compensate for an increased risk of malpractice exposure,especially when a client's financial stability is placed in question,accountants may wish to consider modified fee arrangements. First, anaccountant may simply increase fees or demand fees in advance. However, theaccountant must ensure that the fee charged is commensurate with the levelof risk associated with providing the services requested. As mentionedearlier, if the risk is high, no amount of fees may be worth the potentialexposure. 　Second, many accountants are turning to secured promissory notes as a meansof ensuring payment for professional services rendered. A securedpromissory note is a written agreement between the accountant and theclient in which the client agrees to pay for the accountant's professionalservices over a stated period of time in installment payments. Promissorynotes are especially helpful when dealing with clients who are sufferingfrom cash flow problems. Practitioners have found that secured promissorynotes present an alternative method of handling a client's financial needswithout necessarily compromising the financial integrity of their firm. 　Lastly, accountants may consider inserting arbitration provisions withintheir engagement letters that would mandate that all fee disputes betweenthe accountant and client be submitted to arbitration. In that regard, anaccountant's suit for unpaid professional fees brought within a traditionallegal forum often prompts the filing of a cross-complaint for professionalnegligence. However, arbitration provisions often allow accountants topursue unpaid fees in a forum that is less likely to draw a cross-complaintfor malpractice. 　At one time, accountants could accept almost any engagement withoutincurring ma practice risk. However, the increasing prevalence ofaccounting malpractice actions, as well as management fraud, client paymentproblems and financial troubles effecting both small and large enterpriseshas made it necessary for accountants to screen both existing and potentialclients as part of a worthwhile malpractice defense program. Creating andadhering to strict client-acceptance and continuation procedures can helpaccountants recognize high-risk clients and engagements and thereby reducethe likelihood of future malpractice claims. 　As initially stated, the foregoing checklist and information is designed toprovide practitioners with a broad overall framework in which to assess therisks associated with potential and existing clients. However, asemphasized above, no checklist, no matter how comprehensive, could possiblyaddress every conceivable scenario. Therefore, when confronted with moreindividualized dilemmas regarding malpractice risks, accountants would beadvised to consult either an attorney or their state society, which may beable to provide assistance. including meaningful segment data. While therecommendation for timely disclosure is not explicit in the other tworeports, it is more or less implicit. 　The Jenkins Report considers flexible and differential reports to differentusers, calling for new ways of presenting accounting information, e.g.,databases. The other two reports are less explicit on thoserecommendations. 　The Trueblood Report sets forth stewardship objectives pertaining to socialaccountability of the firm and not-for-profit entities. Neither of theother two reports does that, although they touch on stewardship of thebusiness. 　The Jenkins Report deals with the tradeoff between full disclosure andconfidentiality by the firm. According to this report, management shouldnot be required to publicize information detrimental to the competitiveposition of the firm. The British Report also makes this point with respectto disclosure of management's strategic plans, one of its proposals. Thisreport asserts that the costs and benefits of expanded disclosure should beconsidered in light of the loss of confidentiality, but higher userawareness; and stockholder loyalty associated with a better knowledge ofthe firm. Nothing about the issue of confidentiality appears in theTrueblood Report itself. 　On qualitative attributes of financial reporting, the Jenkins Reportdiscusses the following: relevance, reliability, neutrality, comparability,conservatism and volatility. The Trueblood Report is concerned withrelevance, reliability, freedom from bias, comparability, form versussubstance, materiality, consistency and understandability. The onlyexplicitly considered qualitative attribute in the British Report is"economic substance versus legal form." 　The Jenkins Report recommends legal safe harbors for management disclosureof forward-looking information, to avoid nuisance lawsuits by disgruntledinvestors. The British Report exhibits an awareness of legal constraintsaffecting its recommendations, calling for further research on suchconstraints and changes that may be needed to eliminate the effects ofthose constraints. While nothing on legal constraints to financialreporting appears in the Trueblood Report itself, background papers inVolume II of this report deal with this issue. 　Only the Jenkins Report addresses the realm of international financialreporting, calling for global accounting standards, i.e., harmonization ofaccounting standards for the benefit of the international user. The twoother documents are silent on this subject. 　The Trueblood Report had a profound impact on contemporary financialreporting, which served as the foundation for the FASB's conceptualframework. The British Report has had a significant impact on U.K.accounting standards. Among the new standards issued by the U.K. AccountingStandards Board are those pertaining to new or revised financialstatements. Those standards appear to be heavily influenced by thefinancial statements proposed in the British Report. Since the JenkinsReport was just issued, it has yet to have any impact. Nonetheless, theFASB is studying the report.By and large none of the three reports is original, except in emphasis. Allof these reports borrow from their predecessors, though generally withoutattribution. The reports deal with enduring issues in financial reporting,including: aggregation versus segmentation, disclosure adequacy,uncertainty in financial reporting, usefulness of information reported, theconsequences of disclosing forward-looking information and alternativemethods of asset and liability valuation. 　Table 1 provides "A Comparative Analysis of the Characteristics andRecommendations of Three Authoritative Reports on Changing FinancialReporting." Conclusions 　The Jenkins Report makes a number of controversial recommendations. In itsfocus on users' direct needs, the Report calls for differentiation of coreand non-core events in the financial statements and for elimination of theextraordinary gain and loss category. The Report also accentuates theimportance of disaggregated and segmented data to help users predict thelong-run cash flows of the firm. Emphasis is placed on disclosure ofoperating performance measures of the firm. An accent is put on expandedmanagement analysis at the segmented level and from an operational point ofview in the financial reports. Additionally, the Report calls for morebackground information about the company, including its objectives andstrategies, the scope of its business and the impact of industry on thecompany. Furthermore, the Report recommends information on managementplans, opportunities, risks and a comparison of actual results withprevious plans. 　The Jenkins Report provides a much greater push for non-accountingdisclosures than previous authoritative professional documents. This reportcalls for comprehensive business reports to replace financial reports. TheJenkins Report can be viewed as an extension of the Trueblood Report: morespecific, pragmatic and understandable, though less provocative. The keyquestion is what will the AICPA and FASB now do about the Jenkins Report. 　This paper, especially Table I, can be useful in the classroom,particularly in intermediate accounting, accounting theory and policy, andinternational accounting courses. One application would be to haveindividual students or groups pick a particular company and examine itsrecent annual reports and SEC reports, comparing the provisions in theJenkins Report with disclosures in the company reports. Then the studentscould consider the specific benefits versus costs of the additional Jenkinsrecommendations. Another application would be to ask students to selectparticular countries and to consider specifically how appropriate thevarious Jenkins recommendations would be in light of the financialreporting frameworks and cultures in each country. Put another way, thestudents could be required to formulate a conceptual framework for eachcountry and then to use that framework for the purposes of comparison withthe Jenkins Report. This educational methodology would provide not only atheoretical understanding but an important "hands-on" practical applicationas well. 　Captioned as: Table 1: A Comparative Analysis of the Characteristics andRecommendations of Three Reports on Changing Financial Reporting 　The author is grateful to Shirley Daniel of the University of Hawaii forideas on the pedogogical and research applications of this paper.-RobertBloom 　AICPA. Special Committee on Financial Reporting. Improving BusinessReporting-A Customer Focus: Meeting the Information Needs of Investors andCreditors-Comprehensive Report. New York, 1994 (Jenkins Report) AICPA.Study Group on the Objectives of Financial Statements. Objectives ofFinancial Statements. New York, 1973 (Trueblood Report) Arnold J, P Boyle,A Carey, M Cooper, and K Wild. The Future Shape of Financial Reports.London, U.K., Institute of Chartered Accountants in England and Wales;Glasgow, Scotland, Institute of Chartered Accountants in Scotland, 1991 Author Affiliation: 　Randall J. Dean is a partner in the Los Angeles and Costa Mesa,California-based law firm of Chapman & Glucksman. Michael R. O'Neill is anassociate at the Los Angeles and Costa Mesa, California-based law firm ofChapman & Glucksman. Appendix: 　Robert Bloom, PhD, is professor of accountancy at John Carroll Universityin Cleveland, Ohio.