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) corporate governance disclosures, and (e) Internet
business reporting and XBRL.
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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 besides US GAAP or IFRS.
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)
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. Chapter Exhibits (contin)
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 XBRL
World Wide Web increasingly used as an
information dissemination channel.
XBRL
Makes data interactive, allowing users to easily
manipulate companies’ financial statement data.
Taxonomies have been developed for U.S. and
German GAAP and for IFRS.
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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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