How Financial Accounting Disclosures Can Be Improved

Fair value measurement is one of the models which provide guidance on how entities should determine the fair value of financial instruments for reporting purposes. This paper discusses the Financial Accounting Standards Board (FASB) Exposure Draft issued on December 3, 2015 which proposed amendments to Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements. The paper analyzes some of the key points of the exposure draft, among other things, the history and development the concept of fair value management, the necessity of the amendments to the topic, the provisions and conceptual framework of the fair value measurement. The paper also compares and contrasts the FASB Topic 820 formerly known as to the International Accounting Standards (ISA) No. 13 of the International Financial Reporting (IFRS). Finally, the paper concludes on the response to the exposure draft.

The FASB mission is to “establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernment entities that provides decision- useful information to investors and other users of financial reports.” (www.FASB.org)

The most important thing to any company’s stakeholders is high-quality reporting of its financial statements. Investors, for instance, need to know the truth about a company in order to make an informed decision on whether to make private investment, buy stock or bonds. However, for stakeholders to get the truth about a company, they need to read and understand management’s discussion and analysis, the president’s letter, the notes, as well as the financial statements. Conversely, financial statements must be accompanied with disclosures to prevent them from misleading the stakeholders.

For BHP Billiton and ANZ, financial reporting is an integral part of their business, the primary objective is to provide the most useful information for stakeholders in their decision-making; it helps ensure that the companies and organizations are in good financial condition in the industry and that their operations are honest and transparent to follow the rules and regulations under the restriction of the law. Both of these companies comply with the necessary government requirements and disclosure for the sake of their investors, and stakeholders, while managers use this data to make important decisions, adjustment, budgeting and changes needs for their investment.

According to WebFinance, Inc., the definition of disclosure, in relation to accounting practices, regards “Statutory or good faith revelation of a material fact (or an item of information that is not generally known) on a financial statement or in the accompanying notes (footnotes)” (2015). Furthermore, as per the Financial Accounting Standards Board [FASB], “The purpose of the notes to financial statements is to supplement or further explain the information on the face of the financial statements by providing information relevant to existing and potential investors, lenders, and other creditors . . .” (2013, p. 1). Publicly traded companies fall under regulations that are set forth by governing authorities to assist in bringing concise information to external users. The Starbucks Corporation [SBUX] implements the disclosing of pertinent information in its annual report by expanding within the section named “Notes to Consolidated Financial Statements” (SBUX, 2014, p. 51). The company’s cash and its equivalents, receivables, and inventories are further explained according to data as provided by SBUX.

Main Features of this Pronouncement Application Date This pronouncement makes amendments to the Framework for periods ending on or after 20 December 2013, with allowance for earlier application. AASB CF 2013-1 4 PREFACE  Main Amendments This pronouncement replaces the guidance in the Framework on the objective of general purpose financial reporting and the qualitative characteristics of useful financial information with, as an integral part of the Framework, the Appendix: Objective and Qualitative Characteristics.

Continuing disclosure consists of a variety of financial information about a bond after the issuance. In general, continuing disclosure data provide an idea of the financial

For authoritative guidance on accounting rules, one must turn to the Financial Accounting Standard Board’s Codification. Since 2009, FASB has arranged the generally accepted accounting principles (GAAP) into an easier to access format, known as the Codification. One of these pronouncements is FASB 235- Notes to Financial Statements (FASB, ASC 235-10, 2009). In this pronouncement, the overall required structure of disclosure notes is discussed.

As per Lindblom, and Dowling, and Pfeffer, the public disclosure of information in spaces like the annual reports can be made use of by a business to apply legitimation strategies i.e. to elevate the legitimacy and reduce legitimacy gap. This principle has been adopted by several researchers across the globe. Through Annual reports a firm can disclose information to offset any previous negative news or provide information to relevant parties regarding positive features of the organization that was not known beforehand, awards and recognitions received, initiatives executed etc. Even though such disclosures might not necessarily mean there has been any real change brought about by the organization, according to Ashforth and Gibbs (1990), the use of substantive management techniques might require real, objective change in organizational goals, structures, and procedures and practices. Consistent with the conclusions of Lindblom and Dowling, and Pfeffer, Hurt (1970) has deduced that one of the primary functions of accounting as well as accounting reports, is to legitimate the existence and operation of the business. Such views focus on the strategic nature of financial statements and relevant disclosures.

This increased disclosure is a result of the efforts of the SEC and the FASB. The pronouncements issued by these organizations include many disclosure requirements that are designed to improve the financial reporting process. Numerous reasons can be cited for this increased emphasis on disclosure requirements. Some of the more significant reasons include (a) the complexity of the business environment, (b) the necessity for timely financial information, and (c) the use of accounting as a control and monitoring device. Notes to Financial Statements 3. (S.O. 2) Notes are an integral part of the financial statements of a business enterprise. Although they are normally drafted in somewhat technical language, notes are the accountant 's means of amplifying or explaining the items presented in the main body of the statements. Many of the note disclosures which are common in financial accounting are discussed and presented throughout the text. The more common note disclosures are as follows: a. Significant Accounting Policies. This information is designed to inform the statement reader of the accounting methods used in preparing the information included in the financial statements. Accounting policies of a given entity are the specific accounting principles and methods currently employed and considered most appropriate in the circumstances to present fairly the financial statements of the

Financial statements are used to track performance and explain differences in multiple companies (Melicher & Norton, 2013). The information available on these reports is important to have if you run a company, or are researching it for investment purposes. These statements can show where money could have been saved, or used in a different way. They are a useful tool for management to adjust their approach as needed. There are different industries, which results in a variety of assets, liabilities, products, services, and approaches to producing profit (Melicher & Norton). There are large and small companies and financial statements provide a way to research and, or compare them. The following will discuss financial statements, including income statements, balance sheets, and statement of cash flows.

Understanding of the information contained in the financial statements is necessary because of its significance to the users. If the accounting dealing concerned and disclosures associated aspects of presentation is very complicated for the user to understand despite the presence of sufficient knowledge of the entity and accounting in general, this would undermine the credibility of the whole financial statements because the forced users to base economic decisions on a non-reliable information (understandability,

The article discusses that in 1976 the U.S. Supreme Court ruled in one case that omitted financial statement information altering a reasonable investor’s decision proves the material nature of the information. The article continues by describing that lower courts earlier ruled that all financial information whether material or not must have full disclosure in a company’s financial statements. The rejection of the lower courts’ ruling by the U.S. Supreme Court gives the investor the ability to focus on the aspects of the financial statements that are most important by allowing the elimination of minute details (Sauer 2007, 317-357). In essence, this ruling allows for the elimination of financial information below the determined materiality threshold unless otherwise required by the ruling of a regulatory body.

With respect to the field of auditing, materiality is a critically important concept addressing the significance of discrepancies, amounts, and transactions. Specific materiality guidelines are required in accounting practices to avoid judgmental (legal) decisions. Materiality is applied for most, if not all, economic decisions, and the topic of materiality is not a new issue. Disclosures in re financial statements have been emphasized by courts in the United Kingdom since the 1800 's, whereas materiality initially rose to importance in the United States following 1933 's Security act. The significance of the materiality concept and its implications are pertinent to business decisions, as well as for

There is a significant incentive for companies to reduce information asymmetry via their cost of equity capital, namely that their market valuation could increase as investors better understand the risks and performance of the company. These two papers document the relationship between the quality of financial reporting and the cost of equity capital. Francis, LaFond, Olsson and Schipper (2004) use a number of measures to capture the quality of financial reports, whereas Artiach & Clarkson (2014) focus on just one measure of financial reporting quality. Notably they find different results for the one information quality measure they have in common, conservatism of financial statements. Francis et al (2004) find it has no relationship with