Interpreting disclosure information

Back in March 2006, the Controllers’ Leadership Roundtable released a brief report called “The Impact of FIN 47 (So Far),” which followed up the first fiscal year of FIN 47 applicability. FIN 47 requires companies to disclose liabilities from asset retirement obligations, including conditional asset retirement obligations, if their costs can be estimated and are material. The Roundtable examined the SEC filings for 2005 of 166 companies, each with annual revenues of at least $500 million. It found “great disparity” in the “impact” of FIN 47 implementation among similar companies. For example, it observed that United Technologies Corp., with annual revenues of $43 billion, reported an impact of $95 million for FIN 47 implementation. By comparison, Caterpillar Inc., also in the industrial manufacturing sector and with similar annual revenues of $36 billion, reported “immaterial” impact.

A look at the SEC filings reveals more that’s interesting. The $95 million indicated in the Roundtable report for United Technologies Corp. was its after-tax accounting charge for adoption of the FIN 47 standard. In fact, virtually all the FIN 47 “impact” amounts shown for companies in the Roundtable report were identifiable from the SEC filings as accounting charges—most of them after-tax, some pre-tax. What United Technologies Corp. reported for its asset retirement obligation liability in 2005 was $160 million, not $95 million.

Consider, as well, the comparison that the Roundtable report enabled between Wisconsin Energy Corp., with $3.8 billion in revenue, and El Paso Corp., indicated as having $4 billion in revenue, both from the energy and utilities sector. The Roundtable report cited $38.4 million as the FIN 47 impact for Wisconsin Energy Corp. and an “immaterial” impact for El Paso Corp., which are apparently disparate results. From the SEC filings it is determined, however, that both companies reported asset retirement obligation liabilities, for Wisconsin Energy Corp., $356 million, and for El Paso Corp., $252 million. Not at all disparate, those amounts are a similar 7-9% of revenues (after the revenue figure for El Paso Corp. is corrected to $3.4 billion, as determined from its SEC filing).

Interpreting environmental disclosure information remains difficult, including information taken from summary reports, as the observations above indicate. Uncertainty about what such information is representing contributes to difficulties that investors have in making comparisons and that companies have in measuring themselves against competitors.