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 aren’t
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
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.
 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 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.

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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
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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 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”

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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
 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.

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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)

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