Seeking: A Disclosure Benchmark
Learning from Adobe’s 10Q
By Nilly Essaides

Adobe Systems’ 10Q for the second quarter provides a case study in best practices in FAS 133-related disclosures.

All 10Qs are not made equal. In the area of FAS 133-related disclosure, that truth is even more pronounced (see related item). Indeed, the current diversity in the content and organization of derivatives disclosures, which in part may reflect companies’ ambivalence about making this information public, calls for the emergence of best practices, or disclosure benchmarks.

The lack of uniformity in disclosure geography and format affect the quality of the information. It certainly makes it hard for users of financial statements to reach broad-based conclusions. But perhaps most important, it opens the door for misinterpretation and exaggeration of the financial impact of corporate derivatives activities.

Emerging benchmarks
What should companies use as a guide? To date, the FAS133.com review of 10Qs has surfaced five basic benchmarks of best practice in FAS 133 disclosure:

• Divide hedge disclosure categories: Fair value, cash flow and net investment, with a discussion of strategy, fair values and ineffectiveness total for each category.
• Explain risk management policy/strategy in clear language, providing hedge activity context.
• Provide a chart or table summarizing all derivatives gain/loss, impact on income or OCI.
• Include pointers as to where in the income statement particular derivatives numbers appear, in income and OCI.
• List how market risk exposures would affect derivatives positions.

Leading by example: Adobe Systems

Some 10Qs contain various elements of best disclosure. Others are very hard to read. But perhaps one of the clearest examples of some of the best practices in FAS 133 disclosure can be found in the second quarter 10Q filed by Adobe Systems on July 16, 2001.

There are several reasons the Adobe 10Q represents best practice:

1. It presents information in context. Disclosure of actual figures on derivatives gain/losses follow clear explanations of risk management strategy and objectives.
2. It highlights strategy based on hedge objective. The context is presented in a very organized manner. Risk management activities are segregated based on their objectives, and the type of exposure being hedged.
3. It summarizes gains/losses in table. Not only does the table provide figures and how they affect OCI, but Adobe lists both quarterly, and year to date information, giving the reader a chance to review the trend.
4. It’s in “English.” Perhaps most important, the disclosures are clearly written, refraining from jargon and providing simple, “lay man’s” explanation of risk management activities.

Salute to treasury
The top-notch disclosure statement represents the product of treasury’s hard work. “We worked hard on it,” confesses Barbara Hill, Adobe’s treasurer. Indeed, the language and the disclosure were the work of the Adobe treasury team, and received only minor tweaking from the external auditor once complete. “We tried to spend a lot of effort to make it clear,” she says. Even at companies where accounting plays a more dominant role, she cautions, treasury’s input is critical. “You have to have someone who is trading and understands options, for example, to put together the disclosures.”

While Adobe reviewed other companies’ 10Qs and went back to the original standard to ensure all i's are dotted and t's are crossed, “we came up with the language in treasury,” Ms. Hill says. In part, Ms. Hill says her group was so well prepared for the task as a result of several months’ worth of FAS 133 studying with Helen Kane of Hedgetrackers (a consultancy).

This approach, Ms. Hill says, is in line with Adobe’s general approach to communications with its investors. “It’s part of our philosophy to be as forthcoming and open in our disclosures.

This straightforward approach carried tangible benefits, she notes. “You get a reputation for honesty and integrity, and analysts and investors know that they can trust your statements.” Overtime, the consistency in reporting helps build credibility “that’s invaluable over the long term,” she says. Basically, it helps determine whether investors and fund managers are interested in investing in the company, or not.

Perhaps the best part of the Adobe disclosure is the summary tables (see below). The tables are Ms. Hill’s idea. “It’s pretty bold,” she admits. She notes some 10Qs seem to lose the content in the language of FAS 133 (as well as in indeterminable geography, such as including ineffectiveness in “costs of good sold,” as some MNCs have).

The tables, she says, “are an offshoot of what I use from a big-pictures standpoint, to make sure that the numbers I see with regard to FX hedging make sense. It’s a tool I use internally, which makes it easy for me (and now investors) to spot problems right away.” Ms. Hill decided shareholders could benefit from sharing the information, which she gathers anyway for in-house performance evaluation purposes.