1. International Accounting, 6/e
Frederick D.S. Choi
Gary K. Meek
Chapter 5: Reporting and Disclosure
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2. 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.
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3. 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.
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4. 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.
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5. 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.
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6. 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
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7. 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”
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8. 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
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9. 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
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10. 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
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11. 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.
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12. 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.
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13. 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.
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14. 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.
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15. Chapter Exhibits
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16. Exhibit 5-1 (contin)
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17. Exhibit 5-1 (contin)
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18. Chapter Exhibits (contin)
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19. Exhibit 5-4 (contin)
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20. Chapter Exhibits (contin)
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21. Chapter Exhibits (contin)
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22. Chapter Exhibits (contin)
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23. Chapter Exhibits (contin)
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24. Chapter Exhibits (contin)
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