International Accounting, 6/eFrederick D.S. ChoiGary K. MeekChapter 5: Reporting and Disclosure1Learning ObjectiveslDistinguish voluntary and mandatory disclosure and the applicable regulatory measures.lIdentify the broad objectives for accounting disclosure systems in investor-oriented equity markets. 2lDiscuss “triple-bottom line” reporting and why it is a growing tendency among large multinational corporations.lHave 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.3Development of DisclosurelVoluntary disclosurelVoluntary disclosures are increasing as investors demand more detailed and timely information. lBut managers incentives for disclosure arent always aligned with those of investors.lDisclosure regulations and third party certification can improve the functioning of capital markets.4Development of Disclosure (contin)lRegulatory disclosure requirementslStock exchanges want to be sure that investors have enough information to evaluate a companys performance and prospects.lDisclosure protects investors, but shareholder protection varies across countries.5lTwin objectives of investor oriented markets (Frost and Lang 1996):lInvestor protectionInvestors are provided with material information.And are protected through monitoring and enforcement.lMarket qualityMarkets are fair, orderly, and efficient.And free from abuse and misconduct.6lSEC financial reporting debatelForeign registrants must furnish financial information substantially similar to that required of domestic companies.lMust reconcile net income and stockholders equity to U.S. GAAP if the registrant uses another GAAP.lDo SEC requirements deter foreign companies from listing their securities in the U.S.?lOr do the requirements protect investors and ensure the quality of U.S. capital markets?lSarbanes-Oxley requirements are also believed to deter foreign companies from listing in the U.S.7Reporting and Disclosure PracticeslForward-looking information IncludeslForecasts of revenues, income, cash flows, capital expenditureslProspective information about future economic performance or positionlStatements of managements plans and objectives for future operations8lSofter information about future prospects is more common than precise forecasts. Why? Forecasts are inherently unreliable.Legal repercussions if forecasts arent met.9Reporting and Disclosure Practices (contin)lSegment disclosureslDisaggregated information about a firms industry and geographic operations and resultslIncludes disaggregated information onlRevenuelIncome10lDepreciation and amortizationlCapital expenditureslAssetslLiabilitieslHelps users understand how the parts make up the wholelProduct lines and areas of the world vary in terms of risks, returns, and opportunities11Reporting and Disclosure Practices (contin)lSocial responsibility reportinglReporting to “stakeholders”: employees, customers, suppliers, governments, activist groups, the general public, in addition to investors.12lThe measurement and communication of information about a companys effects on employee welfare, the local community, and the environmentlA way to demonstrate corporate citizenshipl“Sustainability” reports integrate economic, social, and environmental performancel“Triple-bottom line reporting”: profits, people, planetlIncreasingly being audited to avoid the charge of “green-washing”13Reporting and Disclosure Practices (contin)lExamples:Employee reportingEmployment levels and personnel costs by division and region of the worldManagement developmentCompensationDiversityHuman rights14lEnvironmental reportingImpact of production processes, products, and services on AirWater LandBiodiversityHuman health15Water, raw material, and energy consumptionActivities to reduce pollutionSpending on all of the abovelDespite criticisms, becoming mainstream among multinational companieslGlobal Reporting Initiative has issued guidelines16Reporting and Disclosure Practices (contin)lSpecial disclosures for non-domestic financial statement userslLanguage translations and currency restatementslDiscussion of GAAP differenceslLimited restatement of income and stockholders equity to another GAAPlThis is the SEC requirementlComplete financial statements using another GAAP, such as IFRS17Reporting and Disclosure Practices (contin)lCorporate governance disclosureslGovernance means the responsibilities, accountability, and relationships among shareholders, board members, and managers to meet corporate objectives.18lGovernance issues include: lRights and treatment of shareholderslResponsibilities of the boardlDisclosure and transparencylRole of stakeholders19Reporting and Disclosure Practices (contin)lGovernance framework (Dallas 2004) lMarket infrastructureOwnership patternsExtent to which companies are publicly listedOwnership rightsMarket for corporate controlBoard structurelLegal environmentType of legal systemShareholder/stakeholder rightsCompany/securities lawslRegulatory environmentRegulatory bodies and their purviewRegulatory gaps/overlapInformation and timing requirementsEffectiveness of enforcementlInformational infrastructureAccounting standardsAuditing standardsStructure of the accounting/auditing professionlGovernance mechanisms and disclosures are improving around the world.lOECD issued its revised Principles of Corporate Governance in 2004.lDisclosure is a key element of any good system of corporate governance.20Reporting and Disclosure Practices (contin)lInternet business reporting and disclosurelWorld Wide Web increasingly used as an information dissemination channel.lXBRL will allow users to easily manipulate companies financial statement data.21Annual Report Disclosures in Emerging-Market CountrieslGenerally less extensive and less credible than disclosures of companies from developed countries.lEmpirical evidence shows that earnings are less opaque in developing countries than in developed countries.lMonitoring and enforcement of disclosure requirements are also less extensive in developing countries.22Implications for Financial Statement UserslExpect wide variation in disclosure levels and financial reporting practices.lThe levels of mandatory and voluntary disclosure are increasing worldwide.lManagers of companies from low-disclosure countries should consider adopting enhanced disclosure.lEnhanced disclosures can result in competitive advantage over companies with restrictive disclosure policies.23Chapter Exhibits24Exhibit 5-1 (contin)25Exhibit 5-1 (contin)26Chapter Exhibits (contin)27Exhibit 5-4 (contin)28Chapter Exhibits (contin)29Chapter Exhibits (contin)30Chapter Exhibits (contin)31Chapter Exhibits (contin)32Chapter Exhibits (contin)33