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 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

Development of Disclosure (contin) Regulatory disclosure requirements Stock exchanges want to be sure that investors have enough information to evaluate a company’s performance and prospects. Disclosure protects investors, but shareholder protection varies across countries. Twin objectives of investor oriented markets (Frost and Lang 1996): 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 and misconduct. SEC financial reporting debate Foreign registrants must furnish financial information substantially similar to that required of domestic companies. Must reconcile 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 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. Why? Forecasts are inherently unreliable. Legal repercussions if forecasts aren’t met. Choi/Meek, 6/e

Reporting and Disclosure Practices (contin) 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

Reporting and Disclosure Practices (contin) 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” reports integrate economic, social, and environmental performance “Triple-bottom line reporting”: profits, people, planet Increasingly being audited to avoid the charge of “green-washing” Choi/Meek, 6/e

Reporting and Disclosure Practices (contin) Examples: Employee reporting Employment levels and personnel costs by division and region of the world Management development Compensation Diversity Human rights Environmental reporting Impact of production processes, products, and services on Air Water Land Biodiversity Human health Water, raw material, and energy consumption Activities to reduce pollution Spending on all of the above Despite criticisms, becoming mainstream among multinational companies Global Reporting Initiative has issued guidelines Choi/Meek, 6/e

Reporting and Disclosure Practices (contin) 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

Reporting and Disclosure Practices (contin) Corporate governance disclosures Governance means the responsibilities, accountability, and relationships among shareholders, board members, and managers to meet corporate objectives. Governance issues include: Rights and treatment of shareholders Responsibilities of the board Disclosure and transparency Role of stakeholders Choi/Meek, 6/e

Reporting and Disclosure Practices (contin) 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 Informational infrastructure Accounting standards Auditing standards Structure of the accounting/auditing profession Governance mechanisms and disclosures are improving around the world. OECD 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

Reporting and Disclosure Practices (contin) Internet business reporting and disclosure World Wide Web increasingly used as an information dissemination channel. XBRL will allow users to easily manipulate 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

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

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

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

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