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Importance of Disclosures in Financial Statements

Disclosure in Financial Statements

Recently, companies depend on disclosure in order to attract many investors and know its real financial situation. Disclosure means that the company tells all the important information to the public or partners in order to let them know either the assets of the corporate and either it makes profits or losses. This new concept has raised with the new globalization in the world. That is because the economic globalization has made the world like a small village and has increased the importance of disclosure. Without disclosure, investors would be afraid to put their monies in companies either inside their countries or outside it.


Importance of Financial Disclosure:

The lack of disclosure would demolish any kind of economic globalization, which depends on foreign investments. Almost, all the scandals in most of the corporates happens because of the lack of disclosure which would lead to manipulation either by the employees or the management of the corporate. Disclosure strategy mainly depends on accounting as it is the science that transfers numbers and sums of money into records. 

Disclosure can be assured for the financial matters but for the intellectual and ethical matters, disclosure cannot be assured. The financial reports like the income statements and the balance sheets does not tell about the unethical publicity when it is used by the company. Disclosure also depend on records and provided sheets however, these sheets might be theoretical and not realistic. Many companies depend on such methods in order to not pay their taxes. 

Disclosure strategy is an inclusive term that includes the assets, the capital, the number of the workers or employees and the loans for the company or on it. Financial reporting and disclosure are interrelated things as any financial report without not disclosed would be meaningless. The new system of regulations is just a reaction to the manipulation and failure cases that happened due to the lack of disclosure (Green & Hodgkinson, 2013, P. 1).


Advantages & Criteria of Financial Disclosure:

Disclosure has many advantages for the corporate, experts and investors. For the corporate, disclosure means knowing the real performance of the corporate. This would benefit the management to know either the followed techniques and strategies good or inefficient. For the management, this would mean reforms on the strategies or enhancing the followed practices in case of making profits. For the investors, disclosure means a good decision and sound actions. The investors always seek for investing in the corporates that have much assets and that achieves high rates of profits. The role of the financial experts and analysts is simplifying the provided disclosed data in the financial statements, footnotes and reports to provide a sound counselling. Thus there is a strong relation between the disclosure strategies and the financial statements.

Financial reports are very advantageous as they are the determinant of the decision making either inside or outside the corporate. Moreover, taxations that corporate pay depend on the financial reports. The corporate disclosure has many attributes that helps its full achievement. 

The first trait is that it is endless. That is to say that it is not limited but time and it should happen forever as long as the company is working. 

The second attribute is that it should be governed by the national and international laws and regulations and this is to cope and not to contradict with any of these laws or regulations. 

The third attribute is that it should be complete. That is to say that the disclosure should be inclusive and expandable enough to include all the important sides in the corporate. 

Moreover, the financial disclosure should be flexible enough to include any changes. The financial statement system is always changing due to the problem that it faces each time. This matter makes the financial statement system is changeable and this requires the disclosure basis to be flexible to contain these changes.


Aims of Financial Disclosure:

The main aim of the financial reports is to show all the essential financial information and details in a simple and detailed way to make the clients make sound and correct decisions. This aim was not completely achieved as many corporates started to manipulate in order to hide their real financial positions. This matter has required the existence of international firms like Financial Accounting Standard Board and International accounting Standard Board whose aim is to ensure the application of disclosure in the financial statements and reports ( (Kabiru & Mwangangi, 2012, P. 1). Such organizations seek to make a basis for the financial disclosure through common standards. 

The financial disclosure should be relevant to the standards, dependable and understandable by the public. Disclosure should include the normal times and the times of risks in the corporates in order to know how the organization is administrated. When a corporate fails to expose the disclosure in the time of risks, it falls and loses the confidence of the customers.


Definition and Types of Financial Disclosure:

The financial disclosure is the disclosure of the financial situation of the corporation and the result of its activities it it made profits or losses. Such information is used by the clients in order to make sound decisions. The financial disclosure can divided into two main kinds. The first kind is an obligatory or mandatory one and it is applicated by the force of laws or regulatory. 

The second kind of disclosure is optional and it is related to the information that the corporation provides without any obligations to provide it. The financial statements should include enough information that makes them sufficient and not misleading. The basis of disclosure imposes that there is not any omission or concealment of any core information that would help in decision making process. Thus these statements should include explaining memorandums and additional lists added to the financial reports in addition to the reports of the administration and auditors’ reports about the stocks, the loans and the depreciation.


Preventive and Predictive Disclosure:

Disclosure can be either preventive or predictive. The preventive disclosure is the making the financial information does not include any sensitive information that can be used against the corporate in the future. This kind includes the accounting policies, the usage of other accounting applications and the correcting the wrong information in the financial statements. The predictive disclosure is the one that predicts the position of the corporate in the future. 

The principle of full disclosure can lead to some few problems. The first one is because of appreciating the assets, liabilities and some numbers in the budget makes the net profits inaccurate. 

Secondly, using different accounting techniques in the same corporate or in different corporates would make any comparison between the corporates unrealistic. 

Thirdly, there would be an absence of some assets and liabilities because of following different methods in appreciating the same thing or the difficulty of appreciating these assets and liabilities. In general, disclosure information would be directed the creditors, investors, employees, governmental organizations, clients and the public. 

The full and complete disclosure in the time of risks is desired and estimated by analysts and investors (Frasca & Tucker, 2005, P. 27). Financial statement can be achieved through financial reports like financial statement, footnotes, financial discussions and analysis.


Financial Footnotes Importance:

The footnotes of the financial statements are very important. These footnotes are explaining and 5removing any ambiguity in the financial statements like the budgets, income statements and balance sheets. They are a key tool of disclosure policy. The footnotes should be inclusive and and simple to make anyone who reads the financial statements and does not understand the information in able to understand it. Financial framework that is applied in the corporate determines the shape of the footnotes. These footnotes ,makes the analysts and financial experts capable of understanding the accounting policies that are applied in the corporate besides the corporate financial position. 

These footnotes includes a reference to the corporate activities and main policies. The core accounting policies of any corporate should be included in the footnotes. This is the main function of the footnotes. Thus it can be said that the footnotes are a core element of the disclosure policy in the corporate. That is because the footnotes are explanatory to the financial statements. The accounting footnotes tell and clarify the accounting policies of the corporates. This create a state of disclosure and control over the corporate either internally or externally. This would help the decision makers in the


Disclosure Lack and Economic Crisis 2008:

The lack of disclosure and transparency has caused the economic crisis of 2008. All the investors and decision makers who have relied on the financial reports had suffered form making wrong decisions and facing a severe economic problem. The economic crisis of 2008 has been followed by many problems for almost five years like the lack of confidence in the financial reports and assessments and the fear of the renewal of a new crisis of the same type. This crisis has showed the inability of the world disclosure system and organizations in providing important and significant information to the decision makers to make sound decisions. This created a need for new regulations and laws related to the disclosure principle. 

Investors started to consolidate their world investments almost until 2013. The main cause of this problem is the lack of guarantees for loans in the United States. This crisis has made the loaners unable to pay back the money they got and this led to the bankruptcy of many banks in the United States. The results of the crisis reached to Europe and to the developing countries whose economies are related to the economy of the United States and the USD. 

Disclosure has reached the lowest levels because the financial reports served the favors of banks and dismissed the favors of the homes owners and investors. After the crisis and the recovery of the world economy, the confidence of the investors on the banks did not come back and some of them were calling the banks as the black boxes (Singh & Peters, 2013, P.20).


Summary:

To sum up, there has been a need for a disclosure system that provide the investors with all the financial information that they need. The investors and customers does not find all the information that they would like to know about the corporate. Moreover, all the management of the corporates may not know the real information about the corporate from these financial reports. These financial reports includes the financial statements and reports. Besides the financial reports there should be means of communication like calls, conferences and information on the websites to tell all the corporate important information in detail. 


Importance of Disclosures in Financial Statements

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