International Accounting, 6/e

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International Accounting, 6/e

• Frederick D.S. Choi
• Gary K. Meek

Chapter 5 Reporting and Disclosure
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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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Development of Disclosure

• Voluntary disclosure
• Voluntary disclosures are increasing as investors
  demand more detailed and timely information.
• But managers incentives for disclosure arent
  always aligned with those of investors.
• Disclosure regulations and third party
  certification can improve the functioning of
  capital markets.

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Development of Disclosure (contin)

• Regulatory disclosure requirements
• Stock exchanges want to be sure that investors
  have enough information to evaluate a companys
  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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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 managements 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 arent met.

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Reporting and Disclosure Practices (contin)

• Segment disclosures
• Disaggregated information about a firms 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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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 companys 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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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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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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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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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

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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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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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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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Chapter Exhibits
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Exhibit 5-1 (contin)
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Exhibit 5-1 (contin)
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Chapter Exhibits (contin)
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Exhibit 5-4 (contin)
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Chapter Exhibits (contin)
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Chapter Exhibits (contin)
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Chapter Exhibits (contin)
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Chapter Exhibits (contin)
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Chapter Exhibits (contin)