International Accounting, 6/e Frederick D.S. Choi Gary K. Meek Chapter 5: Reporting and Disclosure Choi/Meek, 6/e

Learning Objectives Distinguish voluntary and mandatory disclosure and the applicable regulatory measures. Identify the broad objectives for accounting disclosure systems in investor-oriented equity markets. Discuss “triple-bottom line” reporting and why it is a growing tendency among large multinational corporations. Have a basic understanding of the following selected corporate financial-disclosure practices: (a) disclosures of forward-looking information, (b) segment disclosures, (c) social responsibility reporting, (d) special disclosures for non-domestic financial statement users, and (e) corporate governance disclosures. Choi/Meek, 6/e

Development of Disclosure Disclosure standards and practices are influenced by sources of finance, legal systems, political and economic ties, level of economic development, education level, culture, and other factors. National differences in disclosure are driven largely by differences in corporate governance and finance. Choi/Meek, 6/e

In the United States, the United Kingdom, and other Anglo-American countries, equity markets have provided most corporate financing and have become highly developed. In these markets, ownership tends to be spread among many shareholders, and investor protection is emphasized. Institutional investors play a growing role in these countries, demanding financial returns and increased shareholder value. Public disclosure is highly developed in response to companies' accountability to the public. Choi/Meek, 6/e

In many other countries (such as France, Germany, Japan, and numerous emerging-market countries), shareholdings remain highly concentrated and banks (and/or family owners) traditionally have been the primary source of corporate financing. Structures are in place to protect incumbent management. Banks (which sometimes are both creditors and owners) and other insiders (such as corporate members of interlocking shareholder groups) provide discipline. These banks, insiders, and others are closely informed about the company's financial position and its activities. Public disclosure is less developed in these markets and large differences in the amount of information given to large shareholders and creditors vis-a-vis the public may be permitted. Choi/Meek, 6/e

Voluntary disclosure Voluntary disclosures are increasing as investors demand more detailed and timely information. But managers’ incentives for disclosure aren’t always aligned with those of investors. Disclosure regulations and third party certification can improve the functioning of capital markets. Choi/Meek, 6/e

lower transaction costs in the trading of the firm's securities, Managers have better information than external parties about their firm's current and future performance. Several studies show that managers have incentives to disclose such information voluntarily. The benefits of enhanced disclosure may include lower transaction costs in the trading of the firm's securities, greater interest in the company by financial analysts and investors, increased share liquidity, lower cost of capital. companies can achieve capital markets benefits by enhancing their voluntary disclosure. Choi/Meek, 6/e

Regulatory disclosure requirements To protect investors, most securities exchanges impose强制 reporting and disclosure requirements on domestic and foreign companies that seek access to their markets. These exchanges want to make sure that investors have enough information to allow them to evaluate a company's performance and prospects. Choi/Meek, 6/e

Twin objectives of investor oriented markets Investor protection Investors are provided with material information. And are protected through monitoring and enforcement. Market quality Markets are fair, orderly, and efficient. And free from abuse滥用 and misconduct不端行为. Choi/Meek, 6/e

SEC financial reporting debate Foreign registrants注册人 must furnish提供 financial information substantially similar to that required of domestic companies. Must reconcile一致 net income and stockholders’ equity to U.S. GAAP if the registrant uses another GAAP. Do SEC requirements deter foreign companies from listing their securities in the U.S.? Or do the requirements protect investors and ensure the quality of U.S. capital markets? Sarbanes-Oxley requirements are also believed to deter foreign companies from listing in the U.S. Choi/Meek, 6/e

Reporting and Disclosure Practices Forward-looking information前瞻性信息 Includes Forecasts of revenues, income, cash flows, capital expenditures Prospective information about future economic performance or position Statements of management’s plans and objectives for future operations Softer information about future prospects is more common than precise forecasts精准预测. Why? Forecasts are inherently固有的 unreliable. Legal repercussions影响 if forecasts aren’t met. Choi/Meek, 6/e

Segment disclosures Disaggregated information about a firm’s industry and geographic operations and results Includes disaggregated information on Revenue Income Depreciation and amortization Capital expenditures Assets Liabilities Helps users understand how the parts make up the whole Product lines and areas of the world vary in terms of risks, returns, and opportunities Choi/Meek, 6/e

Social responsibility reporting Reporting to “stakeholders”: employees, customers, suppliers, governments, activist groups, the general public, in addition to investors The measurement and communication of information about a company’s effects on employee welfare, the local community, and the environment A way to demonstrate corporate citizenship “Sustainability”可持续性 reports integrate economic, social, and environmental performance “Triple-bottom line reporting”: profits, people, planet Increasingly being audited to avoid the charge of “green-washing”绿色外衣 Choi/Meek, 6/e

Examples: Employee reporting Employment levels and personnel costs by division and region of the world Management development员工发展管理 Compensation Diversity Human rights Choi/Meek, 6/e

Environmental reporting Impact of production processes, products, and services on Air Water Land Biodiversity生物多样性 Human health Water, raw material, and energy consumption Activities to reduce pollution Spending on all of the above Choi/Meek, 6/e

Global Reporting Initiative全球持续性发展组织 has issued guidelines Despite criticisms尽管批评纷纭, becoming mainstream among multinational companies Global Reporting Initiative全球持续性发展组织 has issued guidelines Choi/Meek, 6/e

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Special disclosures for non-domestic financial statement users Language translations and currency restatements Discussion of GAAP differences Limited restatement of income and stockholders’ equity to another GAAP This is the SEC requirement Complete financial statements using another GAAP, such as IFRS Choi/Meek, 6/e

Corporate governance disclosures Governance means the responsibilities职责, accountability义务, and relationships among shareholders, board members, and managers to meet corporate objectives. Governance issues治理问题 include: Rights and treatment of shareholders股东的权利和义务 Responsibilities of the board董事会的职责 Disclosure and transparency披露的透明度 Role of stakeholders利益相关者 Choi/Meek, 6/e

Governance framework (Dallas 2004) Market infrastructure Ownership patterns Extent to which companies are publicly listed Ownership rights Market for corporate control Board structure Legal environment Type of legal system Shareholder/stakeholder rights Company/securities laws Regulatory environment Regulatory bodies and their purview Regulatory gaps/overlap Information and timing requirements Effectiveness of enforcement Choi/Meek, 6/e

Informational infrastructure Accounting standards Auditing standards Structure of the accounting/auditing profession Governance mechanisms and disclosures are improving around the world. OECD经济合作发展组织（Organization for Economic Co-operation and Development）issued its revised Principles of Corporate Governance in 2004. Disclosure is a key element of any good system of corporate governance. Choi/Meek, 6/e

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Internet business互联网业务 reporting and disclosure World Wide Web increasingly used as an information dissemination channel信息传递通道. XBRL (Extensible Business Reporting Language可扩展商业报告语言)will allow users to easily manipulate操纵 companies’ financial statement data. Choi/Meek, 6/e

Annual Report Disclosures in Emerging-Market Countries Generally less extensive and less credible than disclosures of companies from developed countries. Empirical evidence shows that earnings are less opaque in developed countries than in developing countries. Monitoring and enforcement of disclosure requirements are also less extensive in developing countries. Choi/Meek, 6/e

Implications for Financial Statement Users Expect wide variation in disclosure levels and financial reporting practices. The levels of mandatory and voluntary disclosure are increasing worldwide. Managers of companies from low-disclosure countries should consider adopting enhanced disclosure. Enhanced disclosures can result in competitive advantage over companies with restrictive disclosure policies. Choi/Meek, 6/e

Chapter Exhibits Choi/Meek, 6/e

Exhibit 5-1 (contin) Choi/Meek, 6/e

Exhibit 5-1 (contin) Choi/Meek, 6/e

Chapter Exhibits (contin) Choi/Meek, 6/e

Exhibit 5-4 (contin) Choi/Meek, 6/e

Chapter Exhibits (contin) Choi/Meek, 6/e

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Chapter Exhibits (contin) Choi/Meek, 6/e