Separate Facts from Forecast In this article, the author makes a very logical point in that on financial statements, separating hard numbers from forecast and business predictions, will help everyone. It will help investors delineate between the two in an effort to make a sound decision on the future risk of the company and it will help the executives in their role by making them accountable for the facts and less liable as it relates to forecast. The outcome of this approach, will help all parties. This argument seems to be a win win situation by simply creating two columns on financial statements - one for facts and one for forecast.

Businesspeople know that financial statements are impressionistic. Because GAAP requires accountants to include forecasts in statements, some numbers are, by definition, educated guesses (quick: What's your pension liability for employees retiring in 2020?). That guesswork may not be obvious to observers, in part because financial statements often lump together hard numbers and forecasts.

That's a problem for both executives and investors. It forces CEOs and CFOs to certify the accuracy of statements that involve conjecture, opening these executives up to legal liability for sometimes unavoidable inaccuracies. And it gives investors a false confidence in the numbers, when instead they should be mindful of how uncertain the numbers can be.

In collaboration with Jonathan Glover and Pierre Jinghong Liang, we have developed a straightforward and low-cost solution to this problem: Have executives and their accountants state plainly which of the numbers on their statements are estimates.

This can be done by organizing financial statements into two separate columns, one for facts and one for forecasts. (See the exhibit "Separating Facts and Forecasts.") Prepared this way, the total of the two columns would be identical to the total arrived at on a traditional financial statement. Depreciation of a building, for example, is a forecast; it requires, among other things, estimating the building's residual value at the end of its life and the expected length of service. Cash sales, on the other hand, are facts; at the end of the quarter, there is no mistaking how much cash a company generated from the sale of its goods or services.

A key benefit of this method is that the SEC's safe harbor rules may apply to the forecasted portion of the financial statement, reducing the legal risk posed to executives certifying conventional statements. The safe harbor rules were originally enacted to protect managers and others from liability when certain forecasts made in good faith proved to be off the mark. As it stands, the forecasts combined with facts in financial statements are often invisible and so aren't eligible for protection. Because CEOs certify the entire financial statement, the burden will be on them to prove that subsequent inaccuracies, brought to light by investors, were initially reasonable based on their knowledge.

For a detailed discussion of our method, see http://littlehurt.gsia.cmu .edulgsiadoc/WP12004-E27.pdf