report on disclosure

7/31/2019 Report on Disclosure

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exchange, etc. is also given in annual financial reports. Hence, it is difficult to prescribe the

same medicine for all patients.

However, the following information will be useful to all categories of users in all countries:

1. The traditional financial statements, namely balance sheet, income statement, the

statement of retained earnings, statement of cash flows, chairmans speech.

Directors report, auditors report are usually included in the published annual

reports of all the listed companies. This gives information on how the company has

done in the past year, what its financial position was, and what the sources and

uses of funds were. This is regarded as the minimum information required to be

supplied to external users.

2. Besides the above, the laws of the land and professional pronouncements also

require the following information to be disclosed in many countries:

Disclosure of accounting policies, including those on valuation ofassets.

Any changes in accounting policies on methods of valuation, methods

of charging depreciation, determination of earnings, etc.

Events occurring after the balance sheet date.

Disclosure of segment-wise accounting information.

Interim reports of the companys performance and financial position.

Supplementary information on accounting adjustments for changes in

prices.

Accounting for foreign transactions.

Future prospects of the company.

4. How Should the Information be Disclosed?

The information should be presented in such manner that it can be easily understood by a

person of average knowledge and prudence. He should derive the same meaning from the

information, as it is purported to convey. The methods of disclosure of information have

evolved as a result of the changing environment and consequential improvement in the

ways of presentation effected by accountants on their own, on the recommendations of

professional institutions, and as a result of government measures. Still, there are no hard


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and fast methods of presentation. They differ from country to country, even from a

company to company in the same country. However, the following financial statements are

prepared and reported by all the listed companies:

Balance Sheet

Income Statement

Statement of Retained Earnings

Statement of Cash Flows

FORM AND ARRANGEMENT OF FORMAL STATEMENTS

The balance sheet, the income statement and the SCF are the formal financial statements. It shouldbe the effort of the preparers of these statements to disclose the most relevant and significant

information in these statements. However, in many countries , these statements are prepared to

meet the requirements of law, not necessary those of investors, creditors and other users. The form

and content of the balance sheet and the income statement are prepared and presented in the

traditional manner in strict adherence to law. Whether they show significant and relevant

information or not, it is generally not the concern of the preparers.

Balance Sheet

The statement is meant to reveal the financial position of a concern on a particular day. The usersof balance sheets want particularly to know how much the resources and claims to resources are.

They like to know how much the insiders equity was and what was the amount of the outsiders

equity in order to compute the figure of total capital employed or invested, and the resources in

which it has been applied. They also want to know about the gross working capital and the net

working capital. They are also interested in net current monetary assets to assess the liquidity of

the firm.

Income Sheet

Traditionally called the Trading and Profit & Loss Account, this statement also does not provideinformation in a manner useful to users. Part I is the trading account, which shows gross profit.

Profit II is the profit and loss account. Thissingle-step statement, which associates all items of

expense with all items of revenue becomes more misleading for the readers. The multi-step format

is more useful.


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Prior Period Items

Prior period items means errors of omission or commission belonging to a period earlier than the

current period. Prior period items should be shown in the Statement of Retained Earnings or Profit

and Loss Appropriation Statement. APB Opinion No. 30 has made this point clear. However, as

per AS No. 5, this item is to be shown in the income statement. This approach is wrong. Prior

period item belongs to the period(s) before the current period. It should not be shown in the income

statement. This step will vitiate the current years income. Its rightful place is in the retained

earnings statement.

It is suggested that the multiple income statement should be a required statement, and AS No. 5

should be reviewed to remove the anomalies stated above. Disclosure of earning per share (EPS)

should be made compulsory in the income statement.

SCFP

Hitherto, this statement could be prepared either on the working capital or cash basis. A cash flow

statement, in view of the emphasis on the objectives of financial statements to provide information

useful to external users, has become more relevant for prediction of net cash flows.

TERMINOLOGY

The different terminology used in the presentation of financial statements is also a source of

confusion and misunderstanding. Different terms are used in the United States, and England andother common wealth countries. This makes international comparisons somewhat difficult. In fact,

all international organizations like IFAC and IASC, should take upon themselves the task of

standardization of terms used in the preparation of financial statements on order to achieve

international harmonization in accounting and reporting.

Appropriate captions and descriptions of items in the financial statements should be made.

Accounting data should be summarized to make it more meaningful and useful.

ADDITIONAL INFORMATION

Additional information can be disclosed in many ways: be way of parentheses, footnotes,

supplementary statements and schedules, letters to shareholders, directors report, auditors report,

chairmans speech. There are other sources of information also, such as analysts reports,

economic statistics, news articles about companies, insertions in the important dailies, journals and

magazines.


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Note to Financial Statements

Notes to financial statements can be in the form of (1) parentheses, and (2) footnotes. The ideal

policy would be that all the significant information is given, in the body of a financial statement.

Footnotes and supplementary information should be avoided. But in order to keep the financial

statements wieldy and meaningful, it is prudent to give additional necessary explanation in

parentheses or footnotes. If the captions or sub-captions are likely to be long, it will be better to

disclose descriptive information in parentheses. If the space in a financial statement is not enough,

footnotes should be made. Information, such as the method of valuation adopted, alternative

valuations as current market price or any other current value, contingencies, pledges, number of

shares outstanding etc. should preferably be given in parentheses.

If the additional information or explanation is longer and would occupy more space, it is better to

give it way of footnotes. In the interest of fuller disclosure it is better to have as many footnotes as

are necessary. Most companies provide a lot of formation in the footnotes. Significant information

should be given in the man body of a statement. Footnotes are not substitutes for main statements.

Generally, footnotes are used for presenting non-quantitative information or additional information

of secondary significance. However, long descriptions and explanations generally go unread. Users

have a preference for figures, not so much for textual matter. Some companies annual reports

have footnotes running into two or three full pages. These are likely to go unnoticed by many

investors. Only analysts would like to read these in detail. Too much use of footnotes is not

desirable.

Footnotes are commonly used for stating accounting policy or change in methods, procedures or

policy, contingencies, inventory valuation techniques, alternative measures, e.g., market values of

items carried at historical cost, description of executory contracts, contingent assets and liabilities,

rights of ordinary shareholders, restrictions on dividend payment, etc.

No hard and fast can be laid down for disclosing a particular information in parentheses or in

footnotes. Different are adopted by different companies. No standardization of practices is

possible, much depends upon professional judgment.

Supplementary Statements and Schedules

Finance statements must be readable and understandable. This is possible only when summarized

information is placed in the basic financial statement and detailsof the summarized informationare given in schedules, for example, investments or long-term debt may be shown as a single item

among the assets and liabilities respectively. The details of all the investments or long-term debt

may be put in separate schedules. Those who wish to see the details of any item can look into the


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schedules section. Similarly, expenses can be grouped under three or four convenient subheads in

the income statement, while their details are made available in the schedule.

The purpose ofsupplementarystatements is to give additionalinformation, rather than just moredetailed information. The information that is not presented in the basic statements, but is deemed

relevant and useful for prediction and other purposes, should be presented in supplementarystatements, e.g., the effect of price changes on the financial position and income was presented in

supplementary statements in USA and many other countries. In the UK current cost information

was shown in supplementary statements. IAS No. 15 requires this information to be given in

supplementary statements or notes.

Other Means of Financial Reporting

These include management discussion and analysis, and letters to shareholders. If the management

wants to take the shareholders directly into confidence, a personal letter is addressed to every

shareholder by a vary senior executive, generally the president of the company.

Directors Report

It highlights the financial position, other information and the results of operations of the company

during the year just ended. It is a brief and to-the point report.

Auditors Report

The financial statements are the report of the management, and not of the auditor. However, the

auditor cannot express an opinion that the financial statements are in conformity with generally

accepted accounting principles if they contain any departure from the opinions of the FASB and

former bodies. If a departure is made on the basis that the statement would otherwise have been

misleading, the auditor must state in the auditors certificate the reasons for the departure and its

effects. Hendriksen says that the auditors certificate serves as a method of disclosure of the

following types of information: (1) a material effect from using accounting methods different from

those generally accepted, (2) a material effect from changing from the generally accepted

accounting method to another, and (3) a difference of opinion between the auditor and the client

regarding the acceptability of one or more accounting methods used in the report. Similarly, the

auditor (a C.A. member) in Bangladesh, while discharging his attests function, has to ensure that

the Accounting Standards are complied with in the presentation of financial statements covered byhis audit report. In the event of any deviation from the Standards, it is his duty to make adequate

disclosures in his report so that the users of such statements may be aware of such deviations.

Chairmans Speech


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This is actually delivered in the shareholders annual general meeting. It highlights the main

policies of the company; changes, if any, made in the policies; future plans, and the general

economic condition of the industry and the economy of the country as a while. Some of the

speeches are highly enlightening, analytical and suggestive; others are routine.

Other Sources of Information

These include analysts reports, economic statistic, and news articles about a company, etc.

AnalystsReports are prepared, specially in USAand other developed economies, where there is a

developed capital market. The investors are enlightened, and wish to be well-informed. In the

developing economies, such reports are not common.

Various specialized agencies as well as government agencies develop economic statistics, which

are quite useful in investment decision making.

News articles and newspaper reports relating to a company are a means of making information

publicly available, which is incorporated in the security prices in a semi-strong market

Sometimes companies resort to presenting their viewpoint by providing information about its

affairs, when there is a dispute or deadlock between the management and the workers, by way of

big insertions in the daily newspapers, for the benefit of shareholders and the general public. This

is not the general practice, but it has been resorted to by some large companies.

Disclosure practices are very much determined by the objectives of financial reporting.

Abridged Financial Statements (AFS)The companies Amendment Act 1988 has allowed abridged financial statements to be sent to

members and others in place of full annual report. Clause 341 (iv) of the proposed Companies Bill

also states that in case of a company whose shares are listed on a recognized stock exchange, a

statement containing salient features of such documents will be sent to members of the company

and others, 21 days before the annual general meeting.

Earlier, the companies were required to provide a list of names of all the employees whose annual

remuneration was TK 3000 or higher in the annual reports. This increased the volume of the annual

reports which resulted in the escalation of the cost of printing the reports. The companies,

therefore, desired that only abridged annual financial statements be sent to members and others

before the annual general meeting.

This step has curtailed the right of members to have a full and fair view of the state of affairs of

their of their own company. Trueblood Committee (USA) on Objectives of Financial Statements

had clearly stated:


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Financial statements should serve primarily those users who have limited authority, ability

and resources to obtain information and who rely on financial statements as their principal source

of information about an enterprises economic activity.

This statements pinpoints outside users to be supplied with full accounting information through

these annual financial statements. If salient features of these financial documents only are to besent to the members of a company, the primary purpose of providing full and fair information is

not accomplished. Members of a company are after all investors of their funds therein. They

should have the right to be supplied the full annual report without abridgement.

Summary Annual Reports (SAR)in USA

A SAR contains a condensed financial presentation in a more readable format than that of the

traditional annual report. This approach is based on the concept of differential disclosure, i.e.,

certain stockholders need full disclosures but many need only highly summarized and less

technical analysis of financial information.

The SAR may provide the management with the opportunity to emphasis the good but not the

bad conditions that are affecting the company. Further, the financial analysts do not seem to

favour SARs because the reduced information is not likely to provide the type of information they

desire.

The idea of providing SAR to members in place of full reports should be dispensed with in the

interest of full and fair disclosure.

SEGMENT REPORTING

In recent years, many business enterprises have broadened the scope of their activities to

encompass different industries, foreign countries and markets. Due to the growth of diversified

business and expansion of firms into foreign markets, consolidated information becomes non-

homogeneous information. Consolidated statements enable the management to hide information

from external reporting. Some segments may be running at a loss, but the consolidated statements

will merely show the average profit figure of all the segments taken tighter. It is, therefore,

necessary that along with consolidated information, segment information is also provided to the

users.

Kockanek has stated that large companies with diversified product lines/marketing regions, which

may differ from each other with respect to profitability growth potential and risk, evidently require

segment reporting for highlighting different areas. Consolidated operating results from various

product lines and markets do not provide a reasonable basis for analyzing the overall financial

condition and making future estimates of cash flow.


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Objectives of Segment reporting

Chasteen states that when a companys operations take place in several different industries or are

located in different geographic areas, the difficulty of analyzing its financial condition, operating

trends, the financial ratio can be greatly increased. The various industry segments or geographic

areas of operation of the company can have different rates of profitability, different levels and

types of risk, and different opportunities for growth. Such differences may be difficult to identify

when only consolidated financial data is available for analysis. As a result, financial statement

users believe that consolidated data is more useful when supplemented by disaggregated

information to help them analyze the amounts, timing, and uncertainties of expected cash flows

and risks associated with an investment or loan to a company that operates in different industries

or different geographic areas. Segment reporting aims to provide this disaggregated information.

Bases of Segmenting

The following are the bases of segmenting:

Product lines If a company has diversified its production activities, and is manufacturing

different and distinct types of products, financial information can be provided on the basis of

product lines.

Geographical divisions If a company has operations extended in foreign markets, geographical

division-wise segmentation will be relevant. This will be more relevant in the case of multinational

corporations and other big companies with extensive overseas operations. Even within a country;there can be region-wise segmentation for better management and reporting purposes.

Customer-type Classification may be relevant in case of those who look for comparability

among firms. In this case a uniform standard industrial classification is necessary. Comparability

can be among firms of the same size and type of operations. For investors that classification which

permits the greatest degree of predictability will be most relevant.

Advantage of Segmentation

The main advantages of segmentation are that it enables prediction of future cash flows and risk in

decision models, and makes comparability useful.

Problems of Segmentation


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Some problems in the reporting of income for different segments of a business are related to the

allocation of joint costs and the treatment of interdivisional transfer pricing. To be able to measure

profitability of segments separately, it is necessary that their net assets are reported segment-wise.

There are difficulties in the measurement of assets.

Accounting Standard (AS)

The Institute of Chartered Accountants of Bangladesh (ICAB) has so far issued following sixteen

standards:

AS1 Disclosure of Accounting Policies

AS2 Valuation of Inventories

AS3 Cash Flow Statements (Recommendatory)

AS4 Contingencies and Events Occurring after the Balance Sheet Date

AS5 Net Profit or Loss for the Period, Prior Period Items and Changes in

Accounting Policies

AS6 Depreciation Accounting

AS7 Accounting for Construction Contracts

AS8 Accounting for Research & Development

AS9 Revenue Recognition

AS10 Accounting for Fixed Assets

AS11 Accounting for the Effects of Changes in Foreign Exchange RatesAS12 Accounting for Government Grants

AS13 Accounting for Investments

AS14 Accounting for Amalgamations

AS15 Accounting for Retirement Benefits in the Financial Statements of

Employers

AS16 Borrowing Costs

Highlights of the standards are given below:

Accounting Standard-1: It deals with the disclosure of significant accounting policiesfollowed in the preparation and presentation of financial statements. The areas in which accounting

policies need disclosure include: methods of depreciation, depletion and amortization; treatment of


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expenditure during construction; conversion or translation of foreign currency items; valuation of

inventories; treatment of goodwill; valuation of investments; treatment of retirement benefits;

recognition of profit on long-term contracts; calculation of fixed assets; treatment of contingent

liabilities, etc.

Accounting Standard-2: The financial statements should disclose: (a) the accountingpolicies adopted in measuring inventories, including the cost formula used; and (b) the total

carrying amount of inventories and its classification appropriate to the enterprise.

Accounting Standard-4: If disclosure of contingencies is required by the aforesaidparagraph, the following information should be provided: (a) the nature of the contingency; (b) the

uncertainties which may affect the future outcome; (c) an estimate of the financial effect, or a

statement that such an estimate cannot be made.

If the disclosure of events occurring after the balance sheet date in the report of the approving

authority is required by the aforesaid paragraph of this standard, the following information should

be provided: (a) the nature of event; (b) an estimate of the financial effect, or a statement that such

an estimate cannot be made.

Accounting Standard-5:




Accounting Standard-9: In addition to the disclosures required by AS-1 on Disclosure ofAccounting Policies, and enterprise should also disclose the circumstances in which revenue

recognition has been postponed pending the resolution of significant uncertainties.

Recognition of revenue requires that revenue is measurable. And essential criterion for the

recognition of revenue is that the consideration receivable for the sale of goods, the rendering of

services or from the use by others of enterprise resources is reasonably determinable. When suchconsideration is not determinable within reasonable limits, the recognition of revenue is postponed.

Accounting Standard-10: The following information should be disclosed in the financialstatements:


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(c) Significant restrictions on the right of ownership, reliability of investment, or

the remittance of income and proceeds of disposal.

4. The aggregate amount of quoted and unquoted investment giving aggregate market

value of quoted investments.5. Other disclosure as specifically required by the relevant statue governing the

enterprise.

Accounting Standard-14: The following disclosures should be made in the first financialstatements following amalgamation:

(a) Names and general nature of business of the amalgamation companies;

(b) Effective date of amalgamation for accounting purposes;

(c) The method of accounting used to reflect the amalgamation; and

(d) Particulars of the scheme sanctioned under a statue.

For amalgamation accounted for under the pooling of interests method, the following additionaldisclosures should be made in the first financial statements following the amalgamation:

(a) Description and number of shares issued, together with the percentage of each

companys equity shares exchanged to effect the amalgamation; and

(b) The amount of any difference between the consideration and the value of net

identifiable assets acquired, and the treatment thereof.

For amalgamation accounted for under the purchase method, the following additional disclosures

should be made in the first financial statements following the amalgamation:

(a) Consideration for the amalgamation and a description of the consideration paid

or contingently payable; and

(b) The amount of any difference between the consideration and the value of netidentifiable assets acquired, and the treatment thereof including the period of

amortization of any goodwill arising on amalgamation.

Where an amalgamation is effected after the balance sheet date but before the issuance of the

financial statements of either party to the amalgamation, disclosure should be made in accordance

with AS-4, Contingencies and Events Occurring after the Balance Sheet Date, but the

amalgamation should not be incorporated in the financial statements.

Accounting Standard-15: The financial statements should disclose the method by whichretirement benefit costs for the period have been determined. In case the costs related to gratuity

and other defined benefit schemes are based on an acturial valuation, the financial statements

should also disclose whether the acturial case, the date of the acturial valuation should be specified

and the method by described, if the same is not based on the report of the actuary.


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Accounting Standard-16: The financial statements should disclose:(a) The accounting policy adopted for borrowing costs, and

(b) The amount of borrowing costs capitalized during the period.

report on disclosure

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