Transcript International Accounting, 6/e

International Accounting, 6/e
Frederick D.S. Choi
Gary K. Meek
Chapter 5: Reporting and
Disclosure
Choi/Meek, 6/e
1
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
2
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
3
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



Market quality



Investors are provided with material information.
And are protected through monitoring and enforcement.
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
4
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?


Choi/Meek, 6/e
Forecasts are inherently unreliable.
Legal repercussions if forecasts aren’t met.
5
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
6
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 “greenwashing”
Choi/Meek, 6/e
7
Reporting and Disclosure
Practices (contin)

Examples:

Employee reporting






Environmental reporting






Employment levels and personnel costs by division and region of the world
Management development
Compensation
Diversity
Human rights
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
8
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
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:




Choi/Meek, 6/e
Rights and treatment of shareholders
Responsibilities of the board
Disclosure and transparency
Role of stakeholders
10
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
11
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
12
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
13
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
14
Chapter Exhibits
Choi/Meek, 6/e
15
Exhibit 5-1 (contin)
Choi/Meek, 6/e
16
Exhibit 5-1 (contin)
Choi/Meek, 6/e
17
Chapter Exhibits (contin)
Choi/Meek, 6/e
18
Exhibit 5-4 (contin)
Choi/Meek, 6/e
19
Chapter Exhibits (contin)
Choi/Meek, 6/e
20
Chapter Exhibits (contin)
Choi/Meek, 6/e
21
Chapter Exhibits (contin)
Choi/Meek, 6/e
22
Chapter Exhibits (contin)
Choi/Meek, 6/e
23
Chapter Exhibits (contin)
Choi/Meek, 6/e
24