Chapter 5Reporting and DisclosureDiscussion Questions1. Accounting measurement is the process of assigning numerical symbols to events or objects.Disclosure, on the other hand, is the communication of accounting measurements to intended users. Advances in financial disclosure are likely to outpace those related to accounting measurement for a number of reasons. First, many would argue that financial disclosure is a less controversial area than accounting measurement. Second, changes in disclosure requirements are more rapidly implemented than changes in accounting measurement rules. Finally, whereas a single set of accounting measurement rules may not serve users equally well under different social, economic and legal systems, a company can disclose without necessarily sacrificing its accounting measurement system.2.Four reasons why multinational corporations are increasingly being held accountable toconstituencies other than traditional investor groups:a.The development and growth of the influence of trade unions.b.The growing recognition of the view that those who are significantly affected bydecisions made by institutions in general must be given the opportunity to influence thosedecisions.c.The rejection by many governments of classical economic premises such as the beliefthat the regulated pursuit of private gain maximizes society’s welfare.d.The increasing concern over the social and economic impact of multinationalcorporations in host countries.3.Arguments in favor of equal disclosure include:a.The absence of equal disclosure would create an unfair playing field for U.S. companies.Non-U.S. companies would have a competitive advantage in that they would not have todisclose the same information and so would not incur the costs involved in generatingand publishing it.b.Investors in non-U.S. companies have the same information needs as those who invest inU.S. companies. A market concerned with investor protection would make sure thatinvestors have timely and material information on all listed companies, not just thosedomiciled in the United States.c.Unequal disclosure might impede cross-company comparisons involving U.S. and non-U.S. companies.Possible reasons against equal disclosure include:a.The high cost of meeting equal disclosure requirements may deter foreign issuers fromlisting in the United States.b.The extra costs involved work against the benefits of listing to the foreign companies.Evaluation of arguments:All of these arguments have merit. There is no unambiguously correct answer as to what disclosure requirements should be imposed on foreign issuers, and there has been a contentious debate on this subject in the U.S. in recent years. In practice, fairness arguments often carry great weight in public debate, even when objective economic analysis does not support them.4.Managers in Continental Europe and in Japan have for many years strongly objected to disclosinginformation about business segment financial results. These managers have argued that the information can be used by their competitors. In addition, Continental Europe and Japan have had traditions of low disclosure.Requirements for disclosure about segment results have become more stringent in Japan, France, and Germany in response to strong investor and analyst demand for the information. More generally, the three countries are striving to improve the quality of their financial reporting standards in order to improve the reputation and credibility of their capital markets.5.The simple answer is that mandatory disclosures are corporate disclosures made in response toregulatory requirements (for example, rules issued by national regulators or stock exchanges), and that voluntary disclosures are purely discretionary in nature. The distinction between mandatory and voluntary disclosures can be ambiguous in some settings, however. For example, the requirement that U.S. companies must file Form 10-Ks with the U.S. Securities and Exchange Commission is straightforward. However, measurement and disclosure approaches for some of the items in the Form 10-K are not. Similarly, there are widely divergent views concerning what types of press announcements are mandatory versus voluntary.Two possible explanations for differences in managers’ vo luntary disclosure practices are: (1) Managers in highly competitive industries may be less forthcoming than managers in less competitive industries due to the expected cost of releasing information of potential use to their competitors. (2) Managers are expected to be more forthcoming when there is good news to disclose, than when there is bad news, particularly when the news can be expected to affect share prices.Two explanations for differences in managers’ mandatory disclosure practices are: (1) C ross-jurisdictional differences in disclosure requirements. (2) Differences in the extent of compliance with disclosure rules due to cross-jurisdictional differences in enforcement.6. Triple bottom line reporting refers to reporting on a company’s eco nomic, social, andenvironmental performance. It is a form of social responsibility reporting designed to demonstrate good corporate citizenship. So-called “sustainability” reports are an increasingly popular means of triple bottom line reporting. There is substantial variation in social reporting today. More regulation would improve comparability, but it might also stifle reporting innovations. The usefulness of social reporting to outside parties, particularly investors, needs to be demonstrated before implementing more regulation for it.6.Often we expect to observe less voluntary disclosure by companies in emerging market countriesthan by those in developed countries:a.Equity markets are relatively less developed in many emerging market countries,resulting in lower total demand for company information by investors and analysts.b.In many emerging market countries, most financing is supplied by banks and insiderssuch as family groups. This also leads to less demand for timely, credible publicdisclosure, and in these markets enhanced disclosure may have limited benefits.8. In general, for the same reasons as in Discussion Question 7, we expect to observe fewerregulatory disclosure requirements in emerging market countries than in developed countries.The equity markets and disclosure requirements in many emerging market countries are not yet well developed, and accounting and auditing systems in emerging market countries are less well developed than in more developed market countries.9. The two broad objectives of investor-oriented equity markets are investor protection and marketquality. In the absence of investor protection, investors will not be willing to participate in a market. However, in the absence of market quality, markets will not function satisfactorily.Many would consider the objectives equally important.10. It certainly is possible that more required disclosure will further encourage investorparticipation in capital markets by providing more and better information on which to base investment decisions. Benefits of increased investor participation include increased liquidity, reduced transaction costs, and more accurate and efficient market pricing. However, it can also be argued that in some situations disclosure requirements are excessive. In markets where disclosure requirements are considered too stringent, companies may be deterred from publicly listing their shares, and may choose to use secondary markets (such as the over-the-counter market in the United States) that lack the investor protections of regulated stock exchanges, and which provide investors with lower liquidity and higher transaction costs. Thus, more required disclosure is not necessarily better than less.11. Forecasts of revenues and income are relatively uncommon because there can be legalrepercussions if forecasts are not met. Forecasts rely on subjective estimates of uncertain future events, making them unreliable in many situations. Vaguer forms of forward looking information are more common than precise forecasts. For example, directional forecasts (up or down) of revenues and income are more common than range forecasts which are, in turn, more common than precise forecasts of these amounts.12. Corporate governance refers to the structure of relationships and responsibilities amongshareholders, board members, and corporate managers. Investors and financial analysts use information about a company’s corporate governance (for example, whether an audit committee’s members are independ ent, and responsibilities and remuneration of board members) to better assess the level of investor protection (and therefore, expected cash flows to investors) at the company.Exercises1. a. Transparent financial reporting means that timely and accurate disclosures are made onall important matters affecting a company’s financial position and performance. Itimplies openness, communication, and accountability.b. Transparent financial reporting protects investors because nothing is hidden from them.Investors can better assess the risks of owning securities when information is truthfuland complete. Transparent financial reporting also improves market quality. Itenhances investor confidence. Open communication creates markets that are fair,orderly, efficient, and free from abuse and misconduct.c. The financial reporting requirements on the Hong Kong Exchange promote transparentfinancial reporting and they protect investors and promote market quality. For example,they require a complete set of audited financial statements, including a balance sheet,income statement, cash flow statement, and explanatory notes. Substantial disclosuresare also required, including segments and forward looking information discussed in thechapter. Reports must include a management discussion and analysis. Accountingprinciples may be either Hong Kong Financial Reporting Standards or InternationalFinancial Reporting Standards. Both sets of standards are known for their high quality.All reports must be in English. There are requirements on corporate governance.Timely disclosure of price sensitive information is required. Annual reports must bepublished within four months of year-end and half-yearly reports must be publishedwithin three months. Overall, the reporting requirements are substantial and complete. 2.Schering AG provides a qualitative forecast of one-year-ahead and two-year-ahead net sales.One-year-ahead net sales are expected to increase in the “mid to high single-digit” range. From this, an investor would likely infer growth of between 6 and 8 percent. Two-year-ahead sales are expected to increase further. Thus, this forecast is directional (up). There are similar forecasts of net sales for certain products and for certain regions. For example, Yasmin® is expected to experience “double-digit” growth, while Betaferon® is expected to grow at “high single-digit” rates. Net sales in Europe are expected to grow at “mid single-digit” rates, while those in the United States are forecast to be “above average.” Schering also forecasts an operating margin of 18 percent for the next year. This is a precise forecast. There is no forecast of net income.Investors should find this information useful, but specific growth percentages would be even useful. Investors are concerned about a company’s future prospects. Management’s expectations guide users’ own forecasts. Investors would also find a forecast of net income useful.3. IFRS 8 requires that the following items be disclosed for each reportable segment:a.Profit or loss.b.Assets.c.Particular income and expense items if such measures are regularly provided to the chiefoperating decision maker.d.Reconciliations of reportable segment revenues, profit or loss, assets, and liabilities toconsolidated totals.(A reportable segment is an operating segment about which separate financial information isavailable that is evaluated regularly by management in assessing segment performance and deciding how to allocate resources to operating segments.)In addition to the above items, information must also be disclosed about:a.Revenues derived from products or services.b.Revenues derived from countries.c.Major customers.d.How operating segments are determined.Lafarge discloses that its reportable segments are its four product lines. The company discloses all of the items required to be disclosed by reportable segment. Operating income, assets, and individual income and expense items are reported. Segment revenues, operating income, assets, and liabilities are reconciled to consolidated totals.Lafarge also discloses revenues by selected countries and regions of the world. In addition, capital expenditure and capital employed by selected countries and regions are disclosed. There is no information about major customers, but Lafarge may have a large, diversified customer base.Overall, Lafarge complies with the requirements of IFRS 8 and even goes beyond its requirements in some cases.4. a. Overall headcount has increased between the two years. Both of its divisions(pharmaceuticals and diagnostics) show increased levels of employment. With theexception of Latin America, all regions of the world also show increased levels ofemployment. Roche attributes these increases to the fact that it has been expanding fasterthan its competitors.b.“Regretted losses” refers to “fluctuations not initiated by Roche,” presumably employeeswho quit the company on their own accord. While the overall percentage of employeeslost (“fluctuation”)has increased between the two years, the percentage of regrettedlosses has decreased.c.Roche states that it “places a high value on diversity and seeks to benefit from it….”Roche seems to have had some success in improving diversity in the company. Rochenotes that it employs people from over 190 countries and that the 336 employees in itsCorporate Center come from 23 countries. General managers from the local country head60 percent of its affiliates, and the trend is rising. Data presented on women in theworkplace all show improvements.d.Outside investors may find this information useful because it speaks to the welfare ofcompany employees. For example, satisfied employees will work harder to achieve acompany’s goals than unsatisfied ones will. The information is also useful in judgingwhether companies comply with employment laws, such as those dealing withnondiscriminatory hiring.5. The overall conclusion is that Roche’s safety record worsened while its environmental recordimproved.Safety:Note that Roche’s total number of workdays increased by 17 percent, while the total number of employees grew by 6 percent. Accidents and other measures of safety can be expected to increase, but not at rates higher than these. Occupational accidents increased by 14 percent, while work-related accidents per million working hours decreased 3 percent. These measures suggest that accident rates are about the same between the two years. There were no work-related fatalities in either year. Workdays lost due to work-related accidents increased by 31 percent, occupational illnesses increased by 60 percent, illnesses per million working hour increased 36 percent, and workdays lost due to occupational illnesses increased 42 percent. These measures indicate a worsening safety record. Transport accident per metric ton transported decreased. In general, most measures got worse.Environmental:Energy consumption increased by 5 percent and TOC t/year increased 36 percent. However, the other pollution measures (such as CO2t/year and NO2t/year) decreased. Figures later in the disclosure compare eco-efficiency measures for 2005, 2004, and 1992. Long-term trends (92/05) of all measures beside the one for CO2show significant decreases. In genera l, Roche’s environmental record has improved.6. a. According to the Web site, the objective of the International Auditing and AssuranceStandards Board (IAASB) is to serve the public interest by:∙setting, independently and under its own authority, high quality standards on auditing, quality control, review, other assurance, and related services, and ∙facilitating the convergence of national and international standards,thereby enhancing the quality and uniformity of practice throughout the world andstrengthening public confidence in the global auditing and assurance profession.b.According to this Web site, auditing standards refer to the audit or review of historicalfinancial information, while assurance standards refer to engagements dealing withsubject matters other than historical financial information.c.PricewaterhouseCoopers states that Roche’s internal sustainability reporting guidelinesare properly applied, that its data collection system is functioning as designed, and that its“social dim ension reporting provides an appropriate basis for the disclosure of socialdimension information…” Thus, Roche has received a “clean opinion” on itssustainability reporting.7. a. Corporate social responsibility is about how companies conduct themselves in relation to“stakeholders,” such as workers, consumers, and the broader society in which firmsoperate.b.Some argue that “the business of business is business.” In conducting their business,companies provide huge and critical contributions to society. Among these areproductivity gains, innovation and research, employment, and human capitaldevelopment. In poor countries, companies often contribute critical capital, technology,and skills that reduce poverty. Companies that compete and prosper make society betteroff. Under this view, the proper guardian of the public interest is government, notbusiness. Another view is that social issues (and social responsibility) are not tangentialto business but fundamental to it. Companies that ignore public sentiment makethemselves vulnerable to attack. Ignoring social issues turns a blind eye to forces thatmay alter a company’s strategic future. Thus, companies ought to do more than the lawrequires since social issues ultimately feed into shareholder value.c.Whether companies ought to report on their social responsibility activities probablydepends on one’s view of corporate social responsibility. Nevertheless, a strong case canbe made that proactive disclosure of a company’s societal contribu tions can positivelyaffect its image and ultimately its bottom line.d.As noted in c., the relevance of CSR disclosures for outside investors is that a company’ssocietal contributions can positively affect its image and ultimately its bottom line.8. a. The performance indicators recommended in the GRI guidelines are as follows:Economic Performance IndicatorsCore IndicatorsAdditional IndicatorsDirect Economic ImpactsCustomersEC1. Net sales.EC2. Geographic breakdown of markets.For each product or product range, disclosenational market share by country where this is 25% or more. Disclose market share and sales for eachcountry where national sales represent 5% or moreof GDP.SuppliersEC3. Cost of all goods, materials, and servicespurchased.EC11. Supplier breakdown by Organization and country. List all suppliers from which purchases in the reporting period represent 10% or more of total purchases in that period. Also identify all countries where total purchasing represents 5% or more of GDP. EC4. Percentage of contracts that were paid in accordance with agreed terms, excluding agreed penalty arrangements. Terms may include conditions such as scheduling of payments, form of payment, or other conditions. This indicator is the percent of contracts that werepaid according to terms, regardless of the details ofthe terms.EmployeesEC5. Total payroll and benefits (including wages,pension, other benefits, and redundancy payments)broken down by country or region. This remuneration should refer to current payments andnot include future commitments.Providers of CapitalEC6. Distributions to providers of capital brokendown by interest on debt and borrowings, anddividends on all classes of shares, with any arrearsof preferred dividends to be disclosed. Thisincludes all forms of debt and borrowings, not only long-term debt.EC7. Increase/decrease in retained earnings at endof period.Public SectorEC8. Total sum of taxes of all types paid broken down by country. EC12. Total spent on non-core business infrastructure development. This is infrastructureEC9. Subsidies received broken down by country or region. This refers to grants, tax relief, and other types of financial benefits that do not represent a transaction of goods and services.Explain definitions used for types of groups.built outside the main business activities of the reporting entity such as a school, or hospital for employees and their families.E10. Donations to community, civil society, andother groups broken down in terms of cash and in-kind donations per type of group.Indirect Economic ImpactsEC13. The Organization’s indirect economicimpacts. Identify major externalities associated withthe reporting Organization’s products and services .Environmental Performance IndicatorsCore Indicators Additional IndicatorsMaterialsEN1. Total materials use other than water, by type.Provide definitions used for types of materials.Report in tons, kilograms, or volume.EN2. Percentage of materials used that are wastes(processed or unprocessed) from sources external to the reporting Organization. Refers to both post-consumer recycled material and waste fromindustrial sources. Report in tons, kilograms, orvolume.EnergyEN3. Direct energy use segmented by primary source. Report on all energy sources used by the reportingOrganization for its own operations as well as for the production and delivery of energy products (e.g., electricity or heat) to other Organizations. Report in joules.EN17. Initiatives to use renewable energy sources and to increase energy efficiency. EN18. Energy consumption footprint (i.e., annualized lifetime energy requirements) of major products. Report in joules. EN4. Indirect energy use. Report on all energy used to produce and deliver energy products purchased by the reporting Organization (e.g., electricity or heat). Report in joules.EN19. Other indirect (upstream/downstream) energy use and implications, such as Organizational travel, product lifecycle management, and use of energy-intensive materials. WaterEN5. Total water use. EN20. Water sources and relatedecosystems/habitats significantly affected by use ofwater. Include Ramsar-listed wetlands and theoverall contribution to resulting environmentaltrends.EN21. Annual withdrawals of ground and surfacewater as a percent of annual renewable quantity ofwater available from the sources. Breakdown byregion.EN22. Total recycling and reuse of water.Include wastewater and other used water (e.g.,cooling water).BiodiversityEN6. Location and size of land owned, leased, or managed in biodiversity-rich habitats. EN23. Total amount of land owned, leased, or managed for production activities or extractive use. EN24. Amount of impermeable surface as apercentage of land purchased or leased.EN7. Description of the major impacts onbiodiversity associated with activities and/or products and services in terrestrial, freshwater, and marine environments. EN25. Impacts of activities and operations on protected and sensitive areas (e.g., IUCN protectedarea categories 1-4, world heritage sites, and biosphere reserves).EN26. Changes to natural habitats resulting fromactivities and operations and percentage of habitatprotected or restored.Identify type of habitat affected and its status.EN27. Objectives, programs, and targets forprotecting and restoring native ecosystems andspecies in degraded areas.EN28. Number of IUCN Red List species withhabitats in areas affected by operations.EN29. Business units currently operating orplanning operations in or around protected orsensitive areas.Emissions, Effluents, and WasteEN8. Greenhouse gas emissions. (CO2, CH4, N2O, HFCs, PFCs, SF6). Report separate subtotals for each gas in tons and in tons of CO2 equivalent for the following: - direct emissions from sources owned or controlled by the reporting entity - indirect emissions from imported electricity heat or steamEN30. Other relevant indirect greenhouse gas emissions. (CO2, CH4, N2O, HFCs, PFCs, SF6). Refers to emissions that are a consequence of the activities of the reporting entity, but occur from sources owned or controlled by another entity Report in tons of gas and tons of CO2 equivalent. EN9. Use and emissions of ozone-depletingsubstances. Report each figure separately in accordance with Montreal Protocol Annexes A, B, C, and E in tons of CFC-11 equivalents (ozone-depleting potential).EN31. All production, transport, import, or export of any waste deemed “hazardous” under the terms of the Basel Convention Annex I, II, III, and VIII.EN10. NOx, SOx, and other significant air emissions by type. Include emissions of substances regulated under: - local laws and regulations - Stockholm POPs Convention (Annex A, B, and C) –persistent organic pollutants - Rotterdam Convention on Prior Informed Consent (PIC)- Helsinki, Sofia, and Geneva Protocols to the Convention on Long-Range Trans-boundary Air Pollution EN32. Water sources and related ecosystems/habitats significantly affected by discharges of water and runoff. Include Ramsar-listed wetlands and the overall contribution to resulting environmental trends. See GRI Water Protocol.EN11. Total amount of waste by type anddestination.“Destination” refers to the method by w hich wasteis treated, including composting, reuse, recycling,recovery, incineration, or land filling. Explain typeof classification method and estimation method.EN12. Significant discharges to water by type.EN13. Significant spills of chemicals, oils, and fuelsin terms of total number and total volume.Significance is defined in terms of both the size ofthe spill and impact on the surroundingenvironment.SuppliersEN33. Performance of suppliers relative toenvironmental components of programmer andprocedures described in response to GovernanceStructure and Management Systems section. Products and ServicesEN14. Significant environmental impacts ofprincipal products and services.Describe and quantify where relevant.EN15. Percentage of the weight of products soldthat is reclaimable at the end of the products’ usefullife and percentage that is actually reclaimed.ComplianceEN16. Incidents of and fines for non-compliancewith all applicable internationaldeclarations/conventions/treaties, and national, sub-national, regional, and local regulations associatedwith environmental issues. Explain in terms ofcountries of operationTransportEN34. Significant environmental impacts oftransportation used for logistical purposes.OverallEN35. Total environmental expenditures by type.。