International Accounting:Reporting and Disclosure


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International Accounting:Reporting and Disclosure

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