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International Accounting, 6/e

Frederick D.S. Choi

Gary K. Meek

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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

(3)

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

(4)

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

(5)

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?

(6)

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

(7)

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

(8)

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

BiodiversityHuman health

 Water, raw material, and energy consumption  Activities to reduce pollution

 Spending on all of the above

Despite criticisms, becoming mainstream among multinational

companies

(9)

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

(10)

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

(11)

Reporting and Disclosure

Practices (contin)

Governance framework (Dallas 2004)

Market infrastructureOwnership patterns

Extent to which companies are publicly listedOwnership rights

Market for corporate controlBoard structure

Legal environmentType of legal system

Shareholder/stakeholder rights  Company/securities laws  Regulatory environment

Regulatory bodies and their purviewRegulatory gaps/overlap

Information and timing requirementsEffectiveness of enforcement

Informational infrastructureAccounting standardsAuditing standards

Structure of the accounting/auditing profession

(12)

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

(13)

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

(14)

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

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