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Voluntary disclosures inthe Annual Report signal
success
Stephen Wong Siu Kei (50184032)Stephen Wong Siu Kei (50184032)
Tony Chan Sai Chung (50183940)Tony Chan Sai Chung (50183940)
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Voluntary disclosures in
the Annual Report DOsignal success
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AgendaDefinition of voluntary disclosure
Meaning of success
Types of voluntary disclosure
Study findings
Major benefits of voluntary disclosure
Real life Examples & Enrons Case
Conclusion
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Definition of voluntary disclosure
mandatory
describes disclosures, primarily outsidethe financial statements, that is not
explicitly required by GAAP or an SECrule
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Meaning of successFrom Companys view:
1) Financial aspect
- cost of capital is lower- profit & share price
2) Non-Financial aspect- better internal management
- growth e.g. market share
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Meaning of success
From investors view:
3) increase transparency- helpful to investors for making investment
decisions
- satisfy the objective of disclosures
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Types of voluntary disclosureFASB study classifies 6 categories:
1st five categories: included in the AICPA
Special Committee on FinancialReportings comprehensive business
report model.
6th category: intangible assets
- increasing importance to companies andinvestors
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Types of voluntary disclosure1) Business data
e.g. high-level operating data
2) Managements analysis of businessdata
e.g. reasons for changes in the operating andperformance-related data
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Types of voluntary disclosure3) Forward-looking information
e.g. opportunities and risks including thoseresulting from key trends
4) Information about management and
shareholderse.g. directors, management, major shareholders
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Types of voluntary disclosure
5) Background about the company
e.g. broad objective and strategies
6) Information about intangible assets
e.g. R&D, human resources, customer relations
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Study findings1) FASB study Improving Business Reporting:
Insights into Enhancing Voluntary Disclosures
- support voluntary disclosure
2) Disclosure Redundancy in Annual Reports
- there is no persuasive evidence that annual
report redundant voluntary disclosure is aproblem requiring intervention by professionalaccounting or regulatory authorities
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Major benefits of voluntarydisclosure
1) Enhance transparency & credibility1) Enhance transparency & credibility
- provide more information:Good News + Disappointments
lower risk and uncertainty
cost of capital & required rate of return attract more investment
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Major benefits of voluntarydisclosure
e.g. If a company disclosed nothing, its
cost of capital, if any was availablewould be very expensive. However,informative disclosures that helpinvestors interpret companieseconomic prospects are believed toreduce the cost of capital.
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Major benefits of voluntarydisclosure
2) Prevent information asymmetry2) Prevent information asymmetry
- different level of information betweenmanagement and investors
- different level of information
- investors can know if there are shirking &insider trading by management
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Major benefits of voluntary
disclosure3) Innovative business environment3) Innovative business environment- manifest an increasing and changing demand
for business information and a larger role forvoluntary disclosures
- setting or changing a new standard requiremuch time & discussion
the existing regulatory and standard-settingsystem may not be fast enough to keep upwith the changes
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Different Companies do have Different
Important Aspects to Disclose
4) Different aspects to disclose4) Different aspects to disclose
Each single company has different factorsand aspects that are especially importantto its success
Information about those factors andaspects for the company will be especiallyuseful to investors
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Different Companies do have Different
Important Aspects to Disclose
Examples
R &D
activities appear to be important forcompanies that manufacture and sellmedicines
The qualities of pop stars appear to beimportant for entertainment companies
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Different Companies do have Different
Important Aspects to DiscloseCan accounting standards determine adefinitive list of all important aspects to
disclose in any particular industry?
No. Thats Impossible
Why?
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Different Companies do have Different
Important Aspects to Disclose
The reasons are:
Different companies have different views ontheir own important aspects & factors
Different companies compete with each
other by employing different strategies in asame industry
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Different Companies do have Different
Important Aspects to Disclose
In summary:
Each company is uniqueA one-size-fit-all accounting standard approach willnot work for all companies disclosure demands
Accounting standards can just rule all companies to
disclose some common owned information cash,liabilities, amount of expenses, etc.
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Different Companies do have Different
Important Aspects to DiscloseVoluntary disclosures provide a good way forcompanies to disclose their own important aspectsto investors
E.g. Medicines Company will disclose moreinformation about its R & D activities whileEntertainment Company will disclose moreinformation about its contracted Stars
Investors will have more relevant information formaking a better investment decision
Companies will be successful by attracting moreinvestors
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Unrecognized Intangible Assets
are also Important
5) Unrecognized Intangible Assets5) Unrecognized Intangible Assets
Accounting standards only allow a fewkinds of intangible assets to be statedin balance sheets
For Example: Internally generatedgoodwill is not allowed to disclose inany financial statements
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Unrecognized Intangible Assets
are also ImportantHowever in some companies, the value oftheir intangible assets are definitely more
valuable than tangible assetsIt is very unfair to those companies if theirvaluable intangible assets are not allowed
to discloseResultxUnlikely to attract investors &may mislead users decisions
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Unrecognized Intangible Assets
are also Important
Example:
It is one of the Hong Kong famous mediaand entertainment companies to provide
multimedia content and lifestyle informationto the global Chinese community
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Unrecognized Intangible
Assets are also ImportantWhat are the most important assets ofStarEastnet Company?
ALL POP STARS z x
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Unrecognized Intangible
Assets are also ImportantHowever, all Pop Stars are not included inthe companys balance sheet
GAAP prohibits the inclusion of humanassets in any financial statements
Investors would miss this importantinformation if they only investigate thecompanys balance sheet
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Unrecognized Intangible
Assets are also ImportantExtracted from Stareastnets annualreport:
The celebrity element is what makesThe celebrity element is what makesthe Group uniquethe Group uniquethe Group hasthe Group has
contracted with over200
contracted with over200
artistesartistesLeon LaiLeon Lai...Jackie.JackieChanChan KellyKelly ChanChan..
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Corporate Governance
Best Hong Kong Corporate GovernanceDisclosure Award 2001 organized by HKSA
Winners are all successful companies e.g. HSBC
All winners did a lot effective voluntarydisclosures in their annual reports
Annual Reports xGood transparency &accountability
Prove that successful companies do make a lotof voluntary disclosures and more voluntarydisclosures signal better corporate governance
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Real Life ExamplesWell Performed companies like HKBC &Hutchison Whampoa Ltd, they do have
a lot of voluntary disclosuresIncrease Transparency & Attract MoreInvestors
Bad Performed companies are not thesame
Less voluntary disclosures
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Real Life ExamplesSuccessful companies do disclose more
Further Supported by the StudyDisclosure Redundancy in AnnualReports
t-tests indicate that large, profitable, low
risk companies disclose significantly morethan smaller, less profitable and high riskcompanies
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Enrons Case
Implication xAfter the figures in financialstatements were audited, investors haveto trust and they do not have other means
to judge the correctness of the figures
After the collapse of Enron, investors
become more vigilant than before andlook deeper into companies and demandfull disclosures
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Enrons Case
Voluntary disclosures provide an extra wayfor investors to judge a companys
performance
Only successful companies are confident to
disclose more information voluntarily as toincrease transparency and attract moreinvestments
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ConclusionWe stress that effective voluntary disclosuresdo signal success
In companys view, voluntary disclosuresincrease transparency, reduce informationasymmetry & disclose more intangible assets
Success xLower cost of capital, attractmore investments, more credibility &enhance corporate governance
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Conclusion
In Investors view, voluntary disclosures
provide extra information
Success xAble to make better
investment decisions & better capitalallocations