Value in 60 Seconds: Problem: Footnotes & disclosures may go missing - 14 July 2023

17 Jul 2023 · 1 min

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1:13

In this brief video, the speaker warns that footnotes and disclosures in financial statements are often omitted or disappear over time, which can mislead analysts who rely on them. He highlights operating leases as a common example where capital tied up in lease obligations may vanish from the data if not disclosed, leading to distorted free cash flow and return on invested capital calculations. The issue also extends to pension obligations. To address these gaps, the speaker notes that his team has refined sophisticated estimation techniques for pension data, emphasizing the need for robust methods to handle missing accounting information.

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Most people don't know, because they don't look at footnotes, that you can't trust that that footnote information is going to be there. You can't assume that that financial instrument the footnote was for disappeared because the company chose not to disclose it. Operating leases is the most obvious example. You can't assume that All that capital that was tied up and funded by operating leases last quarter or last year stopped existing in the current quarter because they didn't disclose it. If you did, your free cash flow model, your return on invested capital model would be all messed up. And then, oh, by the way, next quarter they do disclose it. We see this all the time with respect to a lot of different accounting disclosures, including pensions. And so we have to find sophisticated ways to deal with the fact that the data's missing. We recently refined one of those techniques around pension estimates. It's worth taking a minute to explain what that is because it's a really sophisticated update and element of what it is we do.