Events Triggering Disclosure
Events Trigger Disclosure
Events that trigger disclosure should be based on materiality and the full disclosure principle
Consistency generally requires that a company use the same accounting principles and reporting practices through time. This concept prohibits indiscriminate switching of accounting principles or methods, such as changing inventory methods every year. However, consistency does not prohibit a change in accounting principles if the information needs of financial statement users are better served by the change. When a company makes a change in accounting principles, it must make the following disclosures in the financial statements (in the Notes to the Financial Statements):
- Nature of the change.
- Reasons for the change;
- Effect of the change on current net income, if significant
- Cumulative effect of the change on past income
Another event that can trigger a disclosure is prior period adjustments. Events that trigger disclosure should be based on an accountant's assessment of materiality, especially when facing decisions related to the full disclosure principle. Disclosures will normally include details to materiality decisions in the notes to financial statements.
Voluntary Disclosure
Voluntary disclosure in accounting is the provision of information by a company's management beyond requirements such as generally accepted accounting principles and Securities and Exchange Commission rules, where the information is believed to be relevant to the decision-making of users of the company's annual reports.
Voluntary disclosures can include strategic information such as company characteristics and strategy, non-financial information such socially responsible practices, and financial information such as stock price information.
FASB classified voluntary disclosures into six categories below, while Meek, Roberts and Gray (1995) classified them into three major groups: strategic, nonfinancial and financial information.
- Business data - e.g. breakdown of market share growth and information on new products
- Analysis of business data - e.g. trend analysis and comparisons with competitors
- Forward-looking information - e.g. sales forecast breakdown and plans for expansion
- Information about management and shareholders - e.g. information on stockholders and creditors and shareholding breakdown
- Company background - e.g. product description and long-term objectives
- Information about intangible assets - e.g. research and development and customer relations.
The determinants of the extent and type of voluntary disclosures of firms have been explored in the financial reporting literature. Meek, Roberts and Gray (1995) found that the extent and type of voluntary disclosure differs by geographic region, industry, and company size, and other research has found that the extent of voluntary disclosure is affected by the firm's corporate governance structure and ownership structure.