Full Disclosure - Part 2 - Balance sheet Essay Example
Full disclosure is the reporting of any financial facts significant enough to influence the judgment of an informed reader - Full Disclosure introduction. The Financial Accounting Board is responsible for establishing the rules and regulations in regards to a company providing full disclosure with their financial statements. The areas that are directly affected by the FASB include financial statements, notes to the financial statements and the supplementary information. Although these are the ones directly affected by the FASB, for a company to participate in full disclosure the company should also include other means of financial reporting and any other pertinent information. (Kieso, Weygandt, & Warfield, 2012).
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Each business can use a different method of financial reporting so it is important ethically to report anything and everything that the “informed reader” will need to make a fair assessment of the business. According to the AICPA’s Special Committee on Financial Reporting businesses must provide more forward looking information, focus more on the factors that create longer term value and better align information that is reported externally with the information reported internally. For a business to be able to have up to date information it is important to have interim reports. Interim reporting will break down the length of time between the reporting which in turn will give a better forecast.
As part of an interim report the following will be disclosed the sales or gross revenues, basic and diluted earnings per share, seasonal revenue, costs or expenses, significant changes in estimates or provisions for income taxes, disposal of an extraordinary item, contingent items, changes in accounting principles and significant changes in financial reporting. As important as interim reporting is a business does want to stay away from information overload, in which the informed reader
becomes inundated with information not necessary to understand the reports. (Kieso, Weygandt, & Warfield, 2012).
Notes to the Financial Statements
Part of full disclosure is the notes to the financial statements. These notes explain what has been presented in the financial statements. The notes should include the following major disclosures: inventory, property, plant equipment, creditor’s claims, equity holder’s claims, contingencies, commitments, fair values, deferred taxes, pensions, leases and any changes in accounting principles. It is also important to include the way the business reports their finances.
Full disclosure includes the disclosing of any special transactions or events. These transactions should include any related party transactions which is when a company engages in a transaction in which one of the parties has the ability to significantly influence the policies of the other. It is necessary to report the economic portion of these transactions and not the legal portion. The economic portion should include the parties’ description of transactions for each of the periods that income statements are presented. This portion also includes the dollar amounts for which income statements are presents as well as the amounts due from or to the related parties as of the date each balance sheet is presented. The special events would include the subsequent events which take place at the time of the balance sheet but have not been included in the numbers as well as non-subsequent events which take place after the date of the balance sheet and still need to be considered. (Kieso, Weygandt, & Warfield, 2012).
Segmented information is an important part of full disclosure with major companies. The GAAP requires that a company choose one method of segmentation. In the Manager approach there are specific operating segments. The three parts of an operating segment are information regarding the activities from which there are revenues and expenses, results that are regularly reviewed by the comptroller to assess performance and resources, and the information that is generated by the internal financial reporting system. An enterprise must report general information about the operating segments, segment profit and loss and related information, segment assets, reconciliations, information about products, services and geographic areas, and major customers. (Kieso, Weygandt, & Warfield, 2012).
Full disclosure reporting should include the auditor’s unbiased report, the manager’s report, a financial forecast as well as a financial projection. The reason the auditor’s report should be included is to show that an unbiased opinion has gone over the financial reports and concludes that the company is above board. The manager’s report is important because it will show favorable or unfavorable conditions regarding the liquidity, capital resources and the results of operation. The financial forecast with the financial projection will give the informed reader a grasp of where the company is heading. (Kieso, Weygandt, & Warfield, 2012).
Full Disclosure Increase
Full disclosure has increased in the last ten years due to the FASB’s new rules in the last ten years. The need for these rules have become transparent due to the recent businesses in the news who have chosen to do illegal financial reporting which has ended with many people losing their places of employment as well as all of their money. (Kieso, Weygandt, & Warfield, 2012).
In conclusion, full disclosure is important so a company has to answer for the reports they are filing. Full disclosure can protect the company as well as the public if done properly. The FASB has had an important part in the full disclosure laws. As long as there is not an information overload then the informed reader should be able to read a company’s reports and see where they have been, where they are, and where they are going.