CHAPTER 13

Financial Reporting Disclosures

Bait Putra; Nadiya Alya
Financial Accounting Theory English Class 2022

DEFINITION AND TYPES OF DISCLOSURE

The word disclosure has the meaning of not covering or not hiding. When associated
with data, disclosure means providing useful data to those who need it. So the data must be
really useful, because if it is not useful, the purpose of the disclosure will not be achieved.
When associated with financial statements, disclosure means that the financial
statements must provide sufficient information and explanation regarding the results of the
activities of a business unit. Thus, the information must be complete, clear, and can accurately
describe economic events that affect the operating results of the business unit.
The three disclosure concepts that are generally proposed are adequate, fair, and full
disclosure. The most commonly used of the three concepts above is adequate disclosure. Fair
and complete is a more positive concept. Positive objectives are intended to provide significant
and relevant information to users of financial statements and assist them in making economic
decisions in the best possible way. Fair disclosure demonstrates the ethical objective of
providing equal and general treatment to all users of financial statements. Full disclosure
requires the presentation of all relevant information. For some parties, this full disclosure is
interpreted as an excessive presentation of information, so it cannot be said to be feasible
(Hendrikson & van Breda, 1992). Therefore, proper disclosure of information that is important
to investors and other parties should be sufficient, fair and full. Thus, information that is not
material or relevant can be ignored so that the presentation is truly useful and easy to
understand.
The refusal to increase the amount of financial data that needs to be disclosed is based
on the following reasons (Hendrikson & van Breda, 1992):
1. Disclosure will help competitors and harm shareholders. This reason actually does not
have a strong basis because competitors generally obtain information from other
sources.

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 2. Trade unions/employees will benefit in bargaining over wage and salary levels with
complete disclosure of financial information. However, in reality, it is precisely with
full disclosure that in general, negotiations between labor unions and management will
be more healthy.
3. It is often stated that investors do not understand accounting policies and procedures
and that full disclosure would be misleading rather than explanatory. This reason is also
inappropriate because in general financial analysts and investors should have sufficient
understanding and knowledge of accounting so that they can benefit from the existence
of financial information in an efficient market or they are able to learn it through the
study of reported financial information.
4. One reason that is quite strong is that often other sources of financial information can
provide information at a lower cost about what a company presents in its financial
statements.
5. Lack of knowledge about the needs of investors is also a reason to limit disclosure.
However, because of the possibility of many investment models and the increase in
information, it is not a limiting factor.

WHOM IS THE INFORMATION DISCLOSED?

The company's financial statements are addressed to shareholders, investors and
creditors. More specifically, the FASB (1980) in SFAC No. 1 states:

"Financial reporting must provide information that is useful for potential investors and
creditors and other users in the context of making rational investment decisions, credit and
other similar decisions."

In addition to the three parties above, disclosure is also provided to employees,

consumers, government and the general public, but all of these are seen as second recipients of
annual financial statements and other forms of disclosure. The reason why the emphasis is on
disclosure is that investors lack knowledge of decisions that will be taken by other parties
outside of investors. Decision making by investors and creditors can be clearly identified and
well defined. For investors, the desired decision is to buy - sell - hold shares and the creditor's
decision is related to granting credit or extending credit to the company. The purpose of
financial reporting to these two users is relatively clear. Meanwhile, the objectives of financial

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reporting to employees, consumers and the general public are difficult to formulate. So it is
considered that information that is useful for investors and creditors is also useful for other
parties.

INFORMATION THAT MUST BE DISCLOSED

Decisions about what to disclose should be based on the basic objectives of financial
reporting. If the pressure is on investors, then one of the objectives is the presentation of
adequate information so that comparisons can be made regarding the expected results.
Comparisons can be applied in two different ways. The first is to provide sufficient
disclosure of how accounting numbers are measured and calculated. In this way, investors can
convert figures from different companies into directly comparable disclosures. That is, it is
assumed that the adjusted accounting figures for several companies can be used by investors
to determine the degree of difference. For example, the growth rate of net income or dividends.
The second way is to give investors the opportunity to rank several inputs into the decision
model. For example, investors can compare the risk of two companies and can conclude that
one company is higher or lower risk than the other.
The FASB states that financial reporting includes not only financial statements but also
other information reporting media, which are related directly or indirectly, to the information
provided by the accounting system-namely information about economic resources, liabilities,
periodic earnings and others. The scope of financial reporting can be seen in display 13.1.

Display 13.1
FASB Version of Financial Reporting Scope (SFAC No.1)

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The objectives of financial reporting contained in SFAC No.1 are as
follows:
● Financial reporting provides information that is useful for investors and creditors, and
other users in making rational investment, credit and similar decisions. The information
should be comprehensive for those who have a rational understanding of business and
economic activities and have a willingness to study the information in a rational way.
(Paragraph 34)
● Financial reporting provides information to assist investors, creditors and other users in
assessing the amount, recognition, and uncertainty about net cash receipts relating to
an enterprise. (Paragraph 37)
● Financial reporting provides information about an enterprise's economic resources,
claims to those resources (the obligation of an enterprise to transfer resources to other
entities or owners of capital), and the effects of transactions, events, and conditions that
change economic resources and claims to that source. (Paragraph 40).
● Financial reporting provides information about the results of operations (financial
performance) of a company for a period. (Paragraph 42)
● Financial reporting provides information about how companies obtain and spend cash,
about loans and loan repayments, about capital transactions, including cash dividends
and other distributions of the company's economic resources to owners, as well as other
factors that affect the company's liquidity and solvency. (Paragraph 49)

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 ● Financial reporting provides information about how the company's management is
accountable to the owners (shareholders) for the use of economic resources entrusted
to them. (Paragraph 50)
● Financial reporting provides useful information for managers and directors in the
interests of owners. (Paragraph 52)

From the scope of the reporting objectives presented above, it can be seen that if an
event transaction meets certain criteria, the transaction/event will be presented as part of the
basic (main) financial statements, which are presented in the Balance Sheet, Income Statement,
Cash Flow Statement, and Statement of Changes in Capital.

The criteria for recognizing certain event transactions in the

financial statements are:
1. Definition
An item will be included in the accounting structure if it meets the definition of a
financial statement element.
2. Measurability
A post must have a certain meaning that is relevant and can be measured in number
with high reliability.
3. Relevance
The information contained in these items has the ability to make a difference in the
decisions made by users of financial statements.
4. Reliability
The information produced must be in accordance with the conditions described or
represented, verifiable and neutral.

If a particular transaction/event cannot be included as part of the Main Financial

Statements, the transaction/event can be disclosed in other ways, such as notes to financial
statements, complementary information, other reporting media, and other information. The
following will discuss some of the information that needs to be disclosed in the financial
statements.

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Disclosure of Quantitative Data
In selecting criteria for determining material and relevant quantitative data for investors
and creditors, the emphasis is placed on financial information or other data that can be used in
decision models. However, in making comparisons over time and between different companies,
investors cannot assume that all reported quantitative data have the same probability of
accuracy. Therefore research in accounting should focus more on methods of measuring and
reporting probability data rather than on deterministic quantities. However, users of financial
statements who have obtained information generally rely on several items in the financial
statements and obtain more complete disclosures if the assumptions are not true. For example,
cash and the items associated with it are generally considered to be measurable with relative
accuracy; the current value of accounts receivable is slightly less accurate; and intangible items
can be measured only over a relatively wide range of reliability. Therefore, disclosure of
uncertainties in cash items, such as deposits in closed banks or in foreign currency, may be
considered material and relevant, while an intangible item of the same size may not be relevant.

Disclosure of Qualitative Data

The qualitative disclosures describe management's objectives, policies and processes for
managing those risks. The quantitative disclosures provide information about the extent to
which the entity is exposed to risk, based on information provided internally to the entity's key
management personnel.
- Qualitative Information are meant to give non-quantitative information.
- Qualitative information will be relevant and useful to disclose if the information is
useful in the decision-making process.

Qualitative Data provides information on:

1. Uncertainty/contingencies
Decribes any events that are likely to occur in the future and materially affect the company's
financial condition.
2. Accouting Policy
Disclosures about the basis or valuation method used by companies like inventory valuation
methods need to be disclosed in the financial statements.
3. Accounting Changes

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 Disclosure of changes to the policies used by the company, like changes in the inventory valuation
method from FIFO to LIFO and so on
5. External Relationships
Disclosure about the existence of relationship and/or restrictions of one or more assets to
debt/contracts to external parties.

Disclosure Charateristics
- Form and structure of formal reports
- Detailed terminology and presentation
- Footnote
- Additional overview and schedules
- Comments in the auditor's report
- Statement of the President Director or Chairman of the Board of Commissioners