Disclosures constitute important data that corporate management indicates in annual reports. In essence, these disclosures shed light on operating strategies and other significant items that top leadership wants to reveal to the public. Laws, regulations and financial reporting requirements dictate disclosure levels in financial statements. Key financial statement disclosures include accounting principles, financial reporting procedures, significant items and business risks.
Accounting Compliance
Accounting compliance is at the heart of financial statement preparation. By conforming to accounting norms, firms avert various adverse operating developments, such as investor lawsuits and regulatory penalties. Key norms include generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). In addition to GAAP and IFRS, companies ensure adherence to industry practices and U.S. Securities and Exchange Commission rules. A set of corporate financial reports provides insight into a company's accounting policies and procedures, emphasizing how the policies impact corporate financial reporting.
Financial Reporting
Financial reporting procedures are essential tools that management relies on to share a company's results with the public. In fact, top leadership keeps a close eye on the procedures and often provides guidance to lower-level personnel, including accounting managers and bookkeepers. Drawing on GAAP and IFRS, financial reporting policies help firms indicate their operating results and financial status. Corporate accounting reports include statements of cash flows, statements of equity, balance sheets and statements of profit and loss.
Material Items
Material items constitute significant, relevant information about a company's operations. Important items typically concern internal and external factors, such as economic conditions and corporate business agreements. By revealing significant operating items, corporate management help investors and regulators make sense of factors that may impact a company's results. For example, material items may be a list of corporate clients who make up 80 percent of a company's revenues, long-term lease contracts and compensation arrangements for senior leadership.
Going Concern
By law, a publicly listed company must inform investors about its operating performance and ability to stay economically afloat. "Going concern ability" refers to the bankruptcy probability of a company or its subsidiaries in the short term. Granted, regulatory guidelines do not require top management to provide a detailed, comprehensive analysis of the company's solvency status. But senior leadership must provide relevant, sufficient information to investors in a clear, easy-to-understand format.
Business risks
Companies must disclose risks implicit in their businesses, focusing on exposures that may derail operating activities. In financial terminology, exposure and risk are identical terms. The most important business risks include credit and market exposures. Credit risk relates to the loss expectation resulting from client defaults. Market risk results from adverse changes in security prices on financial markets.
