International Accounting, 6/e
Frederick D.S. Choi
Gary K. Meek
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
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
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
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?
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
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
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
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
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
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
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
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
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