Beyond Earnings: A User's Guide to Excess Return Models and the HOLT CFROI® Framework

Disclosure-Derived Financial Statement Adjustments in Equity Valuation

“…Appendix A provides details on the nature of different adjustments as well as their frequency in the data. It also offers a comparison of Moody's adjustments with adjustments performed by Standard and Poor's, those suggested by the current (Robinson et al, 2009) and former (White et al, 2003) CFA preparation textbooks, as well as those utilized by leading investment banks (Larsen and Holland, 2008;Harris et al, 2008). The comparisons suggest that the adjustments contained in the Financial Metrics dataset broadly represent standard practice among financial statement users and are not limited to credit instrument analysts.…”

“…Investment bank recasting processes (Larsen and Holland, 2008;Harris et al, 2008), as well as the current (Robinson et al, 2009) and former CFA preparation texts (White et al, 2003) prescribe additional adjustments be made that Moody's does not perform, and in some cases, exclude certain adjustments Moody's analysts perform. Appendix A lists the set of adjustments performed by practitioners.…”

“…Moody's does prescribe adjustments for IFRS-reporting firms that are not applicable to U.S. GAAP-reporting firms: Adjustments for capitalized development costs and adjustments for interest expense related to discounted long-term liabilities other than debt (Moody's, 2010a). 4 Major investment banks have introduced processes for statement recasting (Larsen and Holland, 2008;Harris et al, 2008), while rating agencies regularly adjust financial statements as part of the credit rating process (Moody's, 2010a;S&P, 2006). Additionally, both the former (White et al, 2003) and current (Robinson et al, 2009) preparation textbooks for the Chartered Financial Analyst (CFA) designation prescribe adjustments to financial statements in order to enhance comparability among analyzed firms.…”