Voluntary Disclosure Signal Success for (1)

8/3/2019 Voluntary Disclosure Signal Success for (1)

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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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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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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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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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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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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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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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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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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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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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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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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

Documents

Voluntary Disclosure Signal Success for (1)