A peer recently brought something up to me which is a really important topic that I think is not adequately addressed and to which we can all strive to be better: achieving transparency and consistency in line item labeling and characterization with respect to whether line items are positive or negative values.
I agree with him completely in that transparency and consistency in line item labeling are critical, and that in an ideal world a line item will either be always treated as positive or always treated as negative regardless of where it shows up in a model.
The problem is that there are often so many ways of saying the same thing. For instance, for a Preferred Return Accrual, we could also call it Interest on Invested Capital or an Investor Accrual. While all of these descriptions are “valid”, it can be mentally fatiguing and potentially confusing to try to reconcile each of these definitions with one another from tab to tab and model to model.
I think that part of the reason that there are so many ways of saying the same thing is that there is no standards body that gives official definition to terms as they exist in a pro-forma, just convention over many years.
The other problem is that correcting for differences in sign (positive or negative) across a complex model can be a time consuming and potentially treacherous undertaking.
What do you think? How do you address these issues in your models?
