The following guidelines for preparation of financial forecasts are excerpted from the American Institute of Certified Public Accountants's (AICPA) publication, Guide for Prospective Financial Information.
Financial forecasts should be prepared in good faith. Good faith in this context includes making a diligent effort to develop appropriate assumptions and exercising care not to mislead a third-party reader. Good faith precludes preparing a financial forecast with either undue optimism or pessimism.
Financial forecasts should be prepared with appropriate care by qualified personnel. Appropriate care means that diligence and proper attention should be exercised in the preparation of the financial forecasts.
Financial forecasts should be prepared using appropriate accounting principles. The accounting treatment applied to events and transactions contemplated in financial forecasts should be the same as the accounting treatment expected to be applied in recording the events when or if they occur.
The process used to develop financial forecasts should provide for seeking out the best information that is reasonably available at the time. The reliability of the basic data should be considered in the process of preparing the financial forecasts and the use of an appropriate level of detail is another key consideration.
The information used in preparing financial forecasts should be consistent with the plans of the entity. Financial forecasts should be consistent with the expected economic effects of anticipated strategies, programs, and actions. An indication of the entity's plans can often be found in its budgets, goals, and policies.
Key factors should be identified as a basis for the assumptions. Key factors are those significant matters upon which an entity's future results are expected to depend and are basic to the entity's operations.
Assumptions used in preparing financial forecasts should be appropriate. Recognizing that assumptions are the essence of developing financial forecasts, the quality of the underlying assumptions largely determines the quality of financial forecasts. Assumptions should be reasonable and suitably supported.
The process used to develop financial forecasts should provide the means to determine the relative effect of variations in the major underlying assumptions. Particular attention should be devoted to those assumptions (1) to which the attainment of forecasted results is particularly sensitive and (2) for which the probability of variation is high.
The process used to develop financial forecasts should provide adequate documentation of both the financial forecasts and the process used to develop them. Documentation makes possible review and approval of financial forecasts by the responsible party. It facilitates comparison of the financial forecasts with actual financial results, and it provides the discipline necessary for developing reliable financial forecasts.
The process used to develop financial forecasts should include, where appropriate, the regular comparison of the financial forecasts with attained results. Comparison of prospective financial results with actual results for the prospective period and for prior periods for which financial forecasts were prepared provides an historical measure of success in developing financial forecasts.
The process used to prepare financial forecasts should include adequate review and approval by the responsible party at the appropriate levels of authority. The ultimate responsibility should rest with the responsible party at the highest level of authority. The review should be conducted in sufficient depth to assure the responsible party of the soundness of the process used to develop the financial forecasts.