S

DisclosureDerek Deonarain, Robbie Glenn, Mike Oudyk, Kyle Robinson

Videos

http://www.youtube.com/watch?v=kbyPL6e5eSM

http://www.youtube.com/watch?v=-uK53xe5jMo

http://www.youtube.com/watch?v=zQxHJzI5nYU&feature=plcp

CICA 1400General Standards of Financial Statement

Presentation

Fair presentation, in accordance with GAAP for financial statements and note disclosures

Provide information on financial position, operations, and cash flows that are necessary in decision making

Information should be clear and understandable

Assess the going concern of the company

Statements should be comparative

CICA 1505Disclosure of Accounting Policies

To increase usefulness of accounting information policies must be disclosed in a clear and concise manner

Policies to be disclosed Those that are significant to the companies operation Policies where judgment has been exercised Peculiar policies When selecting an acceptable alternative policy

IFRS (IAS 1) Comparison

Both CICA 1400 and 1505 are considered under IAS 1

IAS 1 has a few additions and changes from CICA 1400 and 1505

IFRS (IAS 1) Comparison – CICA 1400

Differences are: IAS allows departure from standards when the

relevant regulatory framework permits or requires it Statement of retained earning not required,

Statement of Changes in Equity is required Cannot omit comparative information even if

considered not meaningful

IFRS (IAS 1) Comparison – CICA 1505

Differences are: Requires disclosure of judgments made in applying

accounting policies Required disclosure of assumptions on certain

Canadian standards on individual financial items

S

7 Steps for Better Disclosure

Increasing Investor Demands

Many people make investments through stock exchanges and rely on corporate disclosure to make their investment decisions

Disclosure must begin to provide not only quantitative data but qualitative data as well

Investors are demanding real-time value added disclosures, which puts increased responsibility on public companies

Why?

Good disclosure can reduce uncertainty and improve share valuation while poor disclosure could negatively impact a companies reputation

The MD&A

Investors rely on MD&A to learn about:

Historical and recent results

Financial conditions and future prospects, plans and opportunities

Exposures to risks and uncertainties

Past trends that are indicative of future performance

Current MD&A Issues

Poor performance is rarely discussed or significantly downplayed

Positive matters are overemphasized

Liquidity and capital resources are described as static elements

The future is scantily described

Why Issues Arise

Raising capital during recession is quite difficult – thus management is careful how to report bad news

Financial statements have become more complex and harder to understand yet many companies take a “boiler plate” (the same year to year) approach to MD&A reporting

Until recently Canada has had a limited regulatory involvement with the MD&A due to resource limitations at the OSC The focus has been on regulatory filings however this does not

guarantee the firm meets MD&A regulatory expectations

The Need for Better MD&A Disclosure

SEC Message: “Corporate management and Wall Street need to undergo a wholesale cultural change, rewarding those who practice greater transparency and punishing those who do not… In an attempt to meet Wall Street earnings expectations, those involved in the financial reporting process may be overriding common sense business practices”

Executives are now being held liable if flawed reporting can be attributed to any of their actions

7 Steps to Better Disclosure

Public companies would do well to consider the following suggestions:

1. Avoid Boiler Plate Disclosure

2. Clear Communication

3. Provide Forward Looking Information

4. Reconsider Static Disclosures

5. Segmented Disclosure

6. Ensure Accountability

7. Develop Proactive Processes

Avoid Boiler Plate Disclosure

Need for information that provides explanations not merely calculations that investors can perform themselves

It would be useful for management to provide investors with guidance as to what items will have the most significant impacts on profits and future performance This includes identifying both market and firm

specific factors that impacted performance

Clear Communication

Companies should not forecast only bad news and selectively disclose a few positive events

Companies should communicate events that are under their control and those that are not

If future threats are identified then contingency plans should be revealed This should help to build confidence and credibility

with shareholders

Provide Forward Looking Information

Companies are required to comment on known trends, commitments, events and uncertainties

A two-step analysis is required: A determination must be made whether trend is

likely to occur Whether event would have material effect on

issuer’s financial condition or results of operations

Provide Forward Looking Information Cont.

Often companies are reluctant to disclose forward-looking information that is required

Rather they just disclose general macro-economic forecasts that are not company specific Company may potentially fear future litigation

however omission of material info may be as costly as litigation triggered by actual disclosure

Provide Forward Looking Information Cont.

Companies should strive to provide well thought out, unbiased, understandable forward-looking information To help reduce uncertainty in the market place by

providing greater clarity on how management views the future

Segmented information should be provided if risks vary across business units

Reconsider Static Disclosures

Liquidity and capital ratios are usually revealed only at a specific point in time

Companies should consider providing discussion about trends that occurred throughout the year

There should be discussion about historical and prospective basis – both short term and long term

Segmented Disclosure

Must disclose each segment separately when one or more segments has a disproportionate impact on revenues, profitability or cash needs This helps to prevent companies from lumping 2 or

more segments together with different revenue profiles

Allows readers to better understand business and risks involved

Ensure Accountability

Ensure that the someone in the company has the final say for what is disclosed in the MD&A (usually the CFO)

This way someone can be held accountable for what is disclosed

Develop Proactive Processes

Ensure the CEO, board members and audit committee is familiar with the company’s disclosure philosophy, culture and the processes involved with disclosure

External auditors can provide oversight to ensure that firm policies are working as they should

Auditors

Auditors can aid with financial reporting in the following ways:

Critique and verify that the clients MD&A reconciles to FS

Compare MD&A to the OSC and SEC requirements

Benchmark against industry trends

Recommend disclosure improvements

Preparation of MD&A

People who prepare MD&A information should review the board minutes for items related to future

OSC’s MD&A Guide Published 1993

SEC MD&A Review Program

7 Steps to Better Disclosure

1. Avoid Boiler Plate Disclosure

2. Clear Communication

3. Provide Forward Looking Information

4. Reconsider Static Disclosures

5. Segmented Disclosure

6. Ensure Accountability

7. Develop Proactive Processes

Overall objective: to give investors the opportunity to look through the eyes of management, this time without rose-colored glasses

How investors use the MD&A

Most investors are not satisfied with MD&A disclosures Majority believe MD&A should be audited Generally only unsophisticated investors use the

MD&A

Case: Selective Disclosure and Poor Segmented Reporting

Sony acquired Columbia Pictures and Guber Peters Entertainment Company and resultantly acquired $3.8 billion of goodwill

Sony combined Sony Pictures and Sony Music as one business segment – “entertainment”

Sony’s internal projections for Sony Pictures showed five years of losses after financing and goodwill write-downs

Eventually Sony incurred losses greater than projected – neither of which were disclosed to investors

Case: Selective Disclosure and Poor Segmented Reporting

The success of Sony Music masked the losses incurred by the Sony Pictures division

By 1993 Sony had incurred losses even before considering goodwill amortization and financing costs

In 1995, Sony announced they would change their method of goodwill accounting and was writing off $2.7 billion

The SEC reacted by taking action against Sony

The SEC Claimed

Sony’s disclosure prior to goodwill write-off was inadequate as they did not describe the nature and extend of net losses incurred by Sony Pictures

Sony did not explain the impact of Sony Picture’s losses on consolidated results

Sony “omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading”

Sony failed to disclose known negative results and trends, such as operating income, net income and operating cash flow

Other Things Sony Failed to Do

Disclose extent to which net losses of a subsidiary were reflected in Sony’s net income

Disclose a known trend reasonably expected to have material impact (requirement in Canadian MD&A requirements)

Disclose the potential write-off of a substantial portion of goodwill

SEC Action:

The SEC took action against not only Sony but also the general manager of Sony’s Capital Markets and Investor Relations Division He was responsible for drafting the companies press releases

and MD&A SEC stated that he should have been aware of the losses Sony

Pictures incurred and the effects on consolidated results

"The issuer's legal obligation extends not only to accurate quantitative reporting of the required items in its financial statements, but also to other information, qualitative as welt as quantitative."

The Result:

Sony was required to pay $1 million to the SEC and agreed to engage an independent auditor to report on it’s MD&A

Sony agreed to comply with FASB segment reporting rules and designated its CFO as the officer primarily responsible for ensuring public financial disclosures were accurate and in compliance with law

S

Article: Dissemination of information for

investors at corporate website

Internet Financial Reporting

Prior research on Internet financial reporting looks at disclosure of financial information on corporate websites

This article researches two type of disclosure; voluntary and required

Use regression analysis to test the relationship between several variables and proxies to determine the effect on the amount of voluntary and required disclosure

Background

With the advancement of the internet a powerful channel for communicating financial information has emerged

Accountants have become interested in the provision of financial information via websites

Any type and amount of information can be disclosed as long as it is not fraudulent

Financial information contained

Financial information contained in a firms website can be material filled with SEC or in press releases

A firms website gives the firm access to a wider audience

Prior Research

Ashbaugh et al. 1999 is the only prior research provided on the analysis of required wed disclosures

This study extends research in two ways by looking at two things

1) Characteristics of firms disclosing information already reported with the SEC

2) Characteristics of firms disclosing other information through their website

Goal is to see if web based disclosures are motivated by same factors as traditional disclosures

Ashbaugh et al. 1999

Documents internet financial reporting practices and provides preliminary evidence on why some firms disseminate SEC filings at their Web sites, while others do not

Find that firm size is the sole significant variable in a regression model explaining the dissemination of either

1) a comprehensive set of financial statements

2) a link to the annual report on the internet

3) a link to the SECs EDGAR site

Lang and Lundholm 1993

Looks at a sample of up to 751 firms per year from 1985 to 1989

Identifies six variables that explain differences in analysts rating of firms disclosure practices

Proxies for firm performance, firm size, correlation between returns and earnings and issuance of securities to the public

HypothesisRelationship Effect Reason

Amount of information and a firms need for equity

Positively Managers have incentive to disclose favorable information prior to release

Amount of information related to performance

Positive Absence of disclosure thought to indicate bad news

Amount of information and firm size

Positive Larger firms have less costs and prior research

Information disclosed and correlation between earnings and returns

Negative Larger the correlation in earnings and returns the less surprises to disclose on website

Amount of information disclosed and quality of disclosures

Positive Higher the perceived quality the more realizable information is

Samples and Variables

Sample was obtained from the Association for Investment Management and Research

Level of Disclosure

To form the dependant variable of level of disclosure the firms were scored

Characteristics were filed as either VOL for voluntary of REQ as required

Then the sum was recorded as the value for VOL or REQ and the combined score was INDEX

Explanatory variables

Equity- A firms need for external capital, either one firm was a issuer of net stock or 0 otherwise

Return- The annual return for the year

LNSize- Natural logarithm of market value of common equity

Correl- The correlation between return and annual earnings

Aimr- overall quality of reporting score

Quality- Aimr subtract mean divided by standard deviation to get a measure of quality

¾ more than half for REQ

3/12 more than half for VOL

Results

Hypothesises were correct

Rising equity leads to more disclosure

Disclosure for website is not related to previous year return

Larger firms disclosed more

Firms with low information asymmetry provide less information (CORREL)

Firms with higher quality information disclosed less

Analysis

When Quality is omitted nothing changes significantly

Indicates that firms use more than websites to disclose since the website is correlated but does not cause

Looking at the results its VOL driving INDEX

Conclusion

We use regression to link the variation in the information disseminated through corporate Web sites to factors that also influence the initial disclosure of financial information

Our model is significant for the dissemination of both required and voluntary disclosures

Required items are size and a proxy for information asymmetry

Voluntary information item are size, information asymmetry, demand for external capital, and companies traditional disclosure reputations

Our results confirm that incentives motivating initial voluntary disclosure also explain the subsequent dissemination of voluntary material

S

Article: R&D Progress, Stock Price Volatility, and Post-Announcement

Drift: An Empirical Investigation into Biotech Firms

Purpose of the Article

Investigate the effects of R&D progress on the dynamics of stock price volatility and post announcement drift

To provide insights into whether or not and how capital markets react to corporate R&D progress in the context of the biotech industry

Findings

Stock price volatility and the post announcement drift decrease in R&D progress

The decrease is proportional to the increase in the drug development success rate driven by R&D progress

Findings suggest that R&D progress conveys useful risk-relevant information and plays an important role in explaining stock price volatility change and market anomalies

Introduction

This study takes a dynamic approach to investigate whether or not and how stock price volatility varies with R&D progress through studying stock price volatilities after typical R&D progress announcements

This study looks at for a given R&D project, if its uncertainty is reliant on the project’s advancement A R&D project is less uncertain in terms of future

earnings generation when it reaches a more advanced product development stage than when it remains in an earlier product development stage

Introduction

The biotech industry is used for 3 reasons:1. The drug discovery and development process (DDP) in

this industry takes an average of 12-15 years which allows a better chance to study stock price volatility dynamics driven by R&D progress

2. DDP in the biotech industry contains several unique, clearly separated but highly sequentially correlated stages/phases: discovery and pre-clinical trials, phases

3. R&D in the biotech industry is more risky

Hypothesis (1)

Volatility Hypothesis

Stock price volatility is a diminishing function of R&D progress

Test of Hypothesis (1)

Hypothesis 1 predicts that stock price volatility is a diminishing function of R&D progress

Stock price volatility is calculated in the testing period for each R&D progress announcement of interest and for each firm In common with other event studies, the cross-sectional average

of stock price volatility is used to test hypothesis 1

The findings of this test suggest that capital markets do consider R&D progress as a risk-reduction signal and act on it

Hypothesis (2)

This predicts that stock price volatility decrease caused by a R&D progress is positively associated with the drug development success rate increase brought by this R&D progress

Test of Hypothesis (2)

To test this, an abnormal stock price volatility measure was designed to capture the stock price volatility decrease caused by an announced R&D progress

Test of Hypothesis (2)

Results:

Each and every R&D progress can benefit biotech firms through reducing stock price volatility

The uncertainty reduction benefit is not equal across R&D progresses

As hypothesized, the magnitude of the stock price volatility decrease depends on the degree of the uncertainty reduction implied by the increase in the drug development success rate

Hypothesis (3)

Post Announcement Drift:

Post announcement drift suggests a fact that capital markets fail to fully incorporate released info on announcement dates but continue to react on the original signal for up to 60 days

Hypothesis (3)

The study examines the effect of R&D uncertainty because it is believed that it constitutes the most crucial part of the uncertainty inherent in a biotech firms business model No prior study examines the post announcement

drifts for R&D progress announcements, so it assumed that these drifts exist

The issue that is particularly investigated is whether or not the post announcement drift decreases in R&D progress

Test of Hypothesis 3

The high market reactions to late stage R&D progresses are attributed to the high information contents of these progresses

It is argued that the observed high abnormal returns from late stage R&D progresses in the event window can also be attributed to capital markets quicker and more full incorporations of total information contents

These results showed that hypothesis 3 is strongly supported

Summary and Conclusion

Investors in R&D intensive firms have a major concern with R&D uncertainty

Risk assessment is vital to their investment decisions

To shed light on uncertainty dynamics: Investigated how R&D progress affects stock price

volatility The effect of R&D progress on a closely related issue:

post announcement drift

Summary and Conclusion

It was argued that R&D progress can proportionally reduce R&D uncertainty, thus, having an influence on both stock price volatility and the post announcement drift

Find that both stock price volatility and the post announcement drift decrease in R&D progress

Summary and Conclusion

Findings suggest: R&D progresses, especially late-stage progresses convey useful

risk-relevant information and play an important role in explaining the dynamics of stock price volatility and post announcement drift

The study also contributes to existing literature by shedding light on the limited knowledge about the time series associations among R&D progress, stock price volatility and the post announcement

Also by advocating a dynamic approach to examine associations between firm fundamentals and financial market phenomena