Äèîðäèÿùåíêî Î.Â., Êëèíûøêîâà Î.Þ.

Ïåðâîìàéñêèé ôàêóëüòåò Õàðüêîâñêîãî ãîñóäàðñòâåííîãî óíèâåðñèòåòà ïèòàíèÿ è òîðãîâëè

Financial and Nonfinancial Disclosure

Disclosures in financial reports are often classified as either financial or nonfinancial. Financial disclosures consist of those items of infor­mation quantifiable in monetary amounts (dollars, for U.S. compa­nies). For example, companies often report one figure for inventory on the balance sheet but show in a footnote how much of that is finished goods, how much is raw materials, etc. A company may show one amount for property in the balance sheet and reveal in a footnote how much is located in the United States, how much in Europe, and so forth. When a company signs a long-term contract obligating it to rent property for a number of years, that obligation does not fit the definition of a liability and therefore will not appear on the balance sheet. However, because cash has been committed for future years, much like the commitments that are considered liabilities, companies generally show lease obligations in footnotes. Similarly, if a company is a defendant in a lawsuit, it wants shareholders to know the amounts of potential damages it may be liable for. The case may not have progressed far enough in the courts for the defendant to know whether it will actually have to pay damages. And so, in the mean­time, it reveals in a footnote the general circumstances surrounding the lawsuit. These are all types of financial disclosures seen in finan­cial statements. For various reasons the related monetary amounts do not appear in the financial statements themselves. They are dis­closed in footnotes (or elsewhere in the annual report) to more fully inform the reader about the company's financial well-being.

Nonfinancial disclosures are either narrative descriptions, facts, or opinions that do not readily lend themselves to quantification in monetary terms or items of information quantified in some­thing other than money. An example of the former is the statement of accounting policies referred to above. An example of the latter is data about the number of employees located in each country. (Labor costs per country are a financial disclosure, but number of employees is nonfinancial.) Nonfinancial disclosures may just be another way to express things that are already expressed monetarily in the financial statements. Most of the information that accountants provide is fi­nancial—financial statements and financial disclosure. However, not everything can be expressed monetarily, and nonfinancial disclosures can be very important, too.

This article examines disclosure from an international perspective. It also illustrates disclosures made by European multinational cor­porations that are not typically made by U.S. firms. Some disclosures have a longer tradition and are better developed in Europe than in the United States. Since this is one area where the United States is not in the forefront of accounting, perhaps they can learn from others.

While most countries require certain disclosures to be made by companies operating within their borders, the amount of disclosure required varies by country. Often the generally accepted accounting principles of a particular country will also suggest items to be disclosed in companies' annual reports. Many companies, though, disclose information that is neither re­quired nor suggested; that is, they disclose some things voluntarily.

The fact that companies sometimes disclose more than they have to suggest that they perceive some advantages in doing so. In partic­ular, it appears that the worldwide competition for investment funds is the most important force propelling increased levels of disclosure by multinational corporations. MNCs significantly increase disclosure whenever they seek major amounts of new funds.

Disclosure can also enlarge the scope of interest in a company by expanding the annual report's audience. After all, the annual report is the major vehicle for getting people interested in what the company is doing. We explained how companies orient their annual re­ports to a primary audience group—investors, creditors, the govern­ment, etc. Disclosure enables the firm to maintain the primary ori­entation of its financial statements and provide information of interest to other parties as well. Continental European companies are especially effective and innovative in doing this.

Disclosure can overcome differences in generally accepted ac­counting principles. The problems associated with transnational fi­nancial reporting for financial statement users and multinational corporations are discussed in this work. Until a worldwide harmoni­zation of accounting practices is achieved, disclosure can be an effec­tive mechanism for overcoming these problems.

Deciding what and what not to disclose is not always an easy decision for corporate managements to make. If they decide not to disclose an item of information, in a very real sense they have chosen to keep something secret from financial statement users. Many things, of course, are simply irrelevant to users of financial state­ments—the size of the company president's waistline, for example. But for many items of information, managements must use judgment to decide on their usefulness to financial statement readers. If too much information is disclosed, a reader can easily get lost in all of the clutter (i.e., suffer from "information overload"). So managements need a way to pare down the amount of information revealed in finan­cial statements.

Disclosure is a substantive issue since information revealed can potentially affect people's decisions and actions. Unrevealed informa­tion does not have that potential. When generally accepted accounting principles requires a disclosure, this is tantamount to saying that the information is potentially sig­nificant enough to affect decisions and, therefore, ought to be re­vealed. A suggested disclosure or a voluntary disclosure should be made whenever knowledge of that information has the potential to influence the decisions of financial statement users.