Anyone reading a company’s financial reports should be aware of the assumptions and estimates used by the preparer of the report because it can lead to a distorted picture of a company’s performance
In this article, Multi-Act experts analyze the financial reports of a major airline company and uncover key assumptions in calculating yearly pension cost. In this case, higher assumption of expected return can lead to lower pension expenses and higher earnings. Assumption relaxation in revenue recognition was observed by another major airliner thus boosting revenues and earnings in their reporting period.
Investors need to pay close attention to assumptions and estimates that may be used by the preparer of any report. The examples of these airline companies give a clear picture of how assumptions can be used to project companies in better light.
“Figures often beguile me…particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: ‘There are three kinds of lies: lies, damned lies, and statistics.” – Mark Twain
Had Mark Twain seen the financial statements of various companies, he would have exclaimed- “Lies, damned lies, statistics and accounting”.