VOLUNTARY DISCLOSURE IN FINANCIAL REPORTING

By Jaya Sinha Under the guidance of Dr. Sanjib Kumar Basu

AGENDA
Objective of the study Introduction What is voluntary disclosure Requirements of voluntary disclosure Benefits of voluntary disclosure Types of voluntary disclosure A real life case study-ENRONS CASE A way out-GoIs voluntary disclosure scheme Conclusion Recommendations Acknowledgement

OBJECTIVE

The objective of this study is to help companies (the preparer community) improve their business reporting by providing evidence that many leading companies are making extensive voluntary disclosures and by listing examples of those disclosures. The examples serve to provide companies with helpful ideas of how to describe and explain their investment potential to investors. The basic premise underlying this Business Reporting Research Project is that improving disclosures makes the capital allocation process more efficient and reduces the average cost of capital. The examples are not a list of recommended disclosures. They do illustrate, however, how companies are communicating with investors.

INTRODUCTION

Information is the lifeblood of global capital markets. High-quality, consistent, comparable and understandable reporting by business enterprises enhances investor confidence and market efficiency, and thereby contributes to the depth and liquidity of capital markets, which businesses depend upon for sustainability and growth.

WHAT IS VOLUNTARY DISCLOSURE?

"Disclosure" is to reveal information. "Voluntary Disclosure" is to give permission for that information to be revealed, such as allowing your doctor to reveal your medical records to your medical insurance company, or allowing your bank to reveal your financial information to a lending company.

REQUIREMENTS FOR VOLUNTARY DISCLOSURE

Four conditions must exist to use Disclosure: 1.The disclosure must be voluntary.

Voluntary

2.The disclosure must be complete and accurate. 3.The disclosure needs not involve a penalty. 4.Disclosure must be information that is related to current period, past events or future happenings.
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BENEFITS OF

VOLUNTARY DISCLOSURE

1. Enhance transparency & credibility: Provide more information. Lower risk and uncertainty. Reduction of cost of capital & required rate of return . Attract more investment.

Example: If a company disclosed nothing, its cost of capital, if any was available would be very expensive. However, informative disclosures that help investors interpret companies economic prospects are believed to reduce the cost of capital.

BENEFITS

OF VOLUNTARY DISCLOSURE

2.Prevent information asymmetry: different level of information between management and investors. investors can know if there are shirking & insider trading by management. 3.Innovative business environment: manifest an increasing and changing demand for business information and a larger role for voluntary disclosures. setting or changing a new standard require much time & discussion. the existing regulatory and standard-setting system may not be fast enough to keep up with the changes.

BENEFITS

OF VOLUNTARY DISCLOSURE

4.Different aspects to disclose: Each single company has different factors and aspects that are especially important to its success. Information about those factors and aspects for the company will be especially useful to investors.

Example: 1. R & D activities appear to be important for companies that manufacture and sell medicines. 2. The qualities of pop stars appear to be important for entertainment companies .
The reasons are: 1. Different companies have different views on their own important aspects & factors 2.Different companies compete with each other by employing different strategies in a same industry

BENEFITS OF VOLUNTARY DISCLOSURE

5.Unrecognized Intangible Assets Accounting standards only allow a few kinds of intangible assets to be stated in balance sheets For Example: Internally generated goodwill is not allowed to disclose in any financial statements However in some companies, the value of their intangible assets are definitely more valuable than tangible assets It is very unfair to those companies if their valuable intangible assets are not allowed to disclose Result Unlikely to attract investors & may mislead users decisions
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A Real Illustration:

It is one of the Hong Kong famous media and entertainment companies to provide multimedia content and lifestyle information to the global Chinese community

Extracted from StarEastNets annual report:

The celebrity element is what makes the Group uniquethe Group has contracted with over 200 artistesLeon Lai..Jackie Chan Kelly Chan.

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TYPES

OF VOLUNTARY DISCLOSURE

1.Business data: Example: high-level operating data. 2.Managements analysis of business data: Example: reasons for changes in the operating and performance-related data. 3.Forward-looking information: Example: opportunities and risks including those resulting from key trends 4.Information about management and shareholders: Example: directors, management, major shareholders 5.Background about the company: Example: broad objective and strategies 6.Information about intangible assets : Example: R&D, human resources, customer relations

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REFERRING ENRONS CASE

Implication 1. After the figures in financial statements were audited, investors have to trust and they do not have other means to judge the correctness of the figures. 2. After the collapse of Enron, investors become more vigilant than before and look deeper into companies and demand full disclosures. 3.Voluntary disclosures provide an extra way for investors to judge a companys performance. 4.Only successful companies are confident to disclose more information voluntarily as to increase transparency and attract more investments.

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A WAY OUT : GOI'S VOLUNTARY DISCLOSURE SCHEME

Government of India, The Central Board of Direct Taxes launched on June 18, 1997 the Voluntary Disclosure of Income Scheme (VDIS) which provides income-tax defaulters an opportunity to disclose their income at the prevailing tax rates under the umbrella protection of immunity from major laws relating to economic offences. Those opting for the VDIS would be granted immunity from prosecution under the Foreign Exchange Regulation Act, 1973, the Income Tax Act, 1961, the Wealth Tax Act, 1957, and the Companies Act, 1956.

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A WAY OUT : GOI'S VOLUNTARY DISCLOSURE SCHEME

The scheme, which comes into force from July 1, 1997, will close on December 31, 1997. Those eligible under the scheme include persons who have failed to furnish I-T returns for any year or those who have part-disclosed their income in returns or have completely escaped assessment.

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CONCLUSION Effective voluntary disclosures do signal success In companys view, voluntary disclosures increase transparency, reduce information asymmetry & disclose more intangible assets Success Lower cost of capital, attract more investments, more credibility & enhance corporate governance In Investors view, voluntary disclosures provide extra information Success Able to make better investment decisions & better capital allocations

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RECOMMENDATIONS

1.Many leading companies are voluntarily disclosing an extensive amount of business information that appears to be useful in communicating information to investors. 2.The importance of voluntary disclosures is expected to increase in the future because of the fast pace of change in the business environment. 3.Voluntary disclosures related to matters that are important to the success of individual companies are very useful, particularly disclosures of managements view of the companys critical success factors and trends surrounding those factors. 4.Although some disclosures were found about unrecognized intangible assets, additional data about those assets would be beneficial because of the importance of intangibles to a companys value.

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ACKNOWLEDGEMENTS

Dr. Sanjib Kumar Basu Dr. Madhushree Mukherjee, Dean of M.Com Department, St. Xaviers College (Autonomous), Kolkata

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