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Chapter 2

Conceptual and Regulatory Framework of Corporate Disclosure


Accounting aims to provide financial information about a business
enterprise to various interested groups fur decision making. It is rhe process

of identifying, measuring and communicating economic information to permit


informed judgment and decisions by the users of information.' It is a service
activity and its function is to provide quantitative information, primarily

financial in nature, about economic entities, that is intended to be useful in


making economic decisions.' The supply of information by the corporate
entities, on their riffairs and performance, to the external users is variously

termed as 'corporate reporting', 'corporate disclosures', 'external reporting',

or 'public reporting'. Ever increasing importarrce of the corporate sector in the


national economy has necessitated a complete and analytical disclosure of
accounting inforr~lation as a whole.

The accepted form of financial reporting is the annual report. The most
important components of the annual reports are the balance sheet, which

depicts the financial position of the business at a specific point of time, and
the income statement, which depicts the performance of the same organisation over a specific period of time. Balance sheet and profit and loss account

should fully, fairly and adequately meet the informational needs of the parties
involved. Public interest in the efficient operation and conduct of corporate

enterprises has been increasing and therefore, custodian of public funds should present annual report in an appropriate manner to investors, creditors,
consumers, government, and the public at large so as to fulfil their curiosity
I

American Accounting Associatiotl. (1966). A statement of basic accounting theov. Illinois:


AAS. p. 1.

Accounting Principles Board. (1 970). Statement No.4, Busic concepts a d accounting principles rtnderlying firrancia1 srutemcnts of bitsiness enrerprises. New York: AICPA. p.6.

regarding the working and performance of the enterprise. This chapter describes the overall objectives of corporate disclosure and evaluates the co~npan y annual report as a source of information. The regulatory framework
of disclosure in corporate annual reports in India have also been discussed in

this chapter.

2.1

Concept of Corporate Disclosure


Corporate disclosure is a process through which business enterprises

communicate with external parties. It is nothing but the communication

clf

financial information of the activities of the undertaking to the interested


parties for facilitating their economic decisions. It is a system of

communication between the management and user groups of the financial


statements in order to report the results of the business aclivities of a
corporate enterprise and also to demonstrate the credibility, accountability and

reliability of its working .%ohlerer' s Dictionary for Accountants defines it as an explanation, or exhibit, attached to a financial statement, or embodied in a

report containing a fact, opinion or detail required or helpful in interpretation


of the statement or the report.4

'Corporate

Disclosure'

or

'Financial

Reporting'

conr~otes

communication of financial statements and related information from an

enterprise to third parties including shareholders, creditors, customers,


governmental agencies and the public. It is the movement of information from

the private domain (of management) into the public domain.' Corporate
disclosure is that aspect of financial reporting which has to do with the

presentation of descriptive or supplementary data as distinguished from the general form of financial statements. Thus disclosure means reporting of
M. Saeed. (1990). The theory of corporate disclosure and its applications In financial
4

reporting. I n M. Saeed (Ed.), Corporateflnancial reporling. New Delhi: Anrnol Publications. p.239. W. W. Cooper., & Y.!jiri. (Ed.) (1984).Kokler's dicriorlrdry for occnutltnnts. New Delhi: Prenticc H a 1 1 of India Pvt. Ltd. p. 176. American Accouniing Asstwiation. ( 1977). Conceptucrlfi-umewurkfor~nmcidoccauntinng unb reporting: Elcntenrs oflfinamcial starernents uad their measurement. USA :AAA. p. 19.

qualitative and quantitative information of financial and non financial nature


regarding h e reporting entity to outsiders for the purpose of their analysis and

decision- making. Hence, corporate d i s c l ~ s re u or financial reporting is a


subset of communication component of accounting.

If corporate disclosure is recognised as an information and


communication system, the elements of an information system, viz., sender, rnessage, channel, receiver and monitor, cnuld he applied to corporate

disclosure. Elements of the corporate disclosure system can be described in


the following manner:

Elements of an
Information system
Sender

Corporate disclosure

System
Entity

Message Channel
Reccivcr

Data
Annual reportsiother published statements

Users Regulatory Environment

Monitor

2.2

Major issues in Corporate Disclosure

The concept of corporate disclosure is very broad in scope and the


disclosure should be adequate, fair and full. Full disclosure essentially means

that nothing is omitted. Fair disclosure means that accounting principles have
been applied in a fair manner so as to report the true and fair view of the

results of the business. Adequacy is a qualification, which ensures that

anything which influences the decision o f the user must always be reported.

~ u z b ~ while ,' discussing these three points of disclosore, has raised the

S. L. Buzby. (1974). The nature of adequarc disclosure. The JoluurnuI ofAc.counriir~cy,13714). 311-47.

following five questions which rue considered to be the major issues in


corporate disclosure:

For whom is the information to be disclosed? i.e., the risers ojthe


corporate annual report;

ii

What is the purpose of the disclosure of information? i.e., objectives of corj~orate ddisclnsure;

111

...

How much information should be disclosed'?i.e., the ylruatzarn of


irlf~rnlution;

iv

How should the informat ion be disclosed? i.e.,ihe mode a~td~fornluf


of disclosing the infur~nutiun; and

When should the information be disclosed? i.e., timelirzes,~ of


discZosure.

2.2.1

Users of the Corporate Annual Reports


The identification of users aids the management in defining user

groups' characteristics which impinge on the specific type of information to


be presented as well as the manner of presentation. The corporate annual

reports are used by a variety of groups for diverse purposes. Users can be

direct or indirect users. One major direct user group is the shareholders, which
ranges from an ordinary investor, who neither has the authority nor the
expertise to obtain and understand financial information, to a sophisticated
investor, who has the expertise of understanding and interpreting such

information. The other direct users of financial information include the


creditors, bankers, customers, employees and labour organisations, suppliers,

tax authorities and government. The indirect users, who do not directly use the

information for themselves, but need information to help those who have
direct interest in a business enterprise or to provide financial consultancy, includes financiaVsecurity analysts, brokers, stock exchanges, financial press and reporting agencies, etc. However, the direct and indirect users are not

mutually exclusive, the same individuals, corporations or financial institutions


which supply goods on credit or loan money may also hold equity or

ownership interests. These user groups having directlindirect interests have

different objectives and diverse informational needs. The emphasis in

financial accounting has been on general purpose information which is not


intended to satisfy m y specialised needs of individual users.? Issuing separate reports for different users is not feasible, considering various factors like cost, uncertainty regarding specialised needs of a large number of uses, and the fact that it may create confusion among various users.

The dependence on general purpose information is based on the logical


assumption that a significant number of users need similar information. Special purpose reports satisfy specialised or particular needs of individual

users. Information in a special purpose report can not be expected to serve


other needs as well. For instance, financial reports prepared to obtain credit or
loans, or financial reports for managements and financial information given to
trade and industry associations, may not satisfy other users' needs and

expectations. The Accounting Principles Board (APB) has summarised the


current practices in financial accounting with respect to general purpose

reports as follows:

'

Financial accounting presents general purpose financial information


that is designed to serve the common needs of owners, creditors,

managers and other users, with primary emphasis on the needs of present and potential owners and creditors.
Various levels of user competence have been suggested as a basis for

preparing financial reports. Mautz and har rap prefer the professional
J. Lal. ( 1 985). Corporate annual reports - Theory and practice. New Delhi: Sterling Publishers Pvt Ltd. p.40. Accounting Principle Board. (1970). Statement No.4. Busic concepts and accounsing principles underlyingfinmciad stcarements ofbusiness enterprises. New York: AICPA. p.47. R. K. Mautz., & H. A. Sharaf. (1464). Thephilosophy uofuuditing. AAA's Monograph No.6. Florida: AAA

financial analyst. The Truehlood Committee recommended that an annual

report should serve primarily those users, who have lirnited authority, ability

or resources to obtain information and who rely on financial statements as


their principal source of information about an enterprise's economic

activities." ~ h e t k o v i c h "advocated that annual report should be prepared for


rt

'standard reader'. W e defines a standard reader as one who satisfies two

criteria- he should be interested to the extent that he is willing to read

carefully and he should be reasonably informed on financial matters, at least

with respect to the commonly used terminology of accounting and finance.


Regardless of the degree of coincidence of various groups' interests,

the more effective and efficient report wiIl be achieved when the dominant

group is singled out as the focal point of the report. In conclusion, the
investor (existing and potential) is the dominant and primary user of corporate

annual reports. Hence, the preparers of annual reports should give top priority
to their requirements while deciding about the items of information to be

disclosed through annual reports.


2.2.2

Objectives of Corporate Disclosure The concept of adequate disclosure involves identiQing the objectives

for which the information is to be disclosed. Many accounting bodies and

professional institutes all over the world have made attempts to define the objectives of financial statements and financia1 reporting which are vital to the
development of financial accounting theory and practice. It can be rightly said

that most of the attempts in the area of financial reporting objectives have

been made in USA and UK and accounting developments

it1

these countries

have great impact on the accounting developments and practices in other

countries of the world. The objectives of financial reporting have been


lo

!'

American Institute of Certified Public Accountants. (1973). Rrpurf ofrhe 3 r d group ~ on ~ h c objectives offinancial statements. New York: AICPA. p. 1 7. M. N.Chetkovich. (1955). Standard of disclosure and ~ h r i devclopmcn~. r ~ h ~ru u r n uoj' t Accountancy, 118(12), p. 17.

formulated by Accounting Principles Board (APB), Financial Accounting Standards Board (FASB), The Corporate Report (London), Trueblood Committee, Institute of Chartered Accountants of India (ICAT) e tc.

Accounting Principles Board (APB)


In USA, the APB Statement No. 4, Basic Concepts and Accounlirtg Pviraciples Underlying Finarrc.io1 Slatemencs o f Business Enterprises, 1970

was the first publication which formulated the objectives of financial


statements. This statement gives one particular, five general and seven

qualitative objectives.12
(1) The particular objective of financial statements is to present fairly and in

conformity with Generally Accepted Accounting Principles, the financial


position, results of operations and other changes in the financial position

of an enterprise.
(2) The general objectives of financial statements according to this

statement are:
(I)

To provide reliable information about economic resources and


obligations of a business enterprise in order to:

k
3

evaluate its strengths and weaknesses,


show its financing and investment ,

evaluates its ability to meet its commitments, and

show its resource base for growth. (ii) To provide reliable information about changes in resources resulting from a business enterprise's profit directed activities in

order to :

12

Accounting Principles Board. op. cit., 33-34.

show the investors the expected dividend return;

show the organisation's ability to pay its creditors and suppliers,


provide jobs for employees, pay taxes, and generate funds for
expansion;

provide the management with information for planning and control; and

i.

show the long - term profitability of the enterprise.

(iii) To provide financial information useful for estimating the earnings


potential of the firm.
(iv) To provide other needed information about changes in its econornic

resources and obligations.


(v) To disclose other information relevant to the needs of the users. The qualitative characteristics of financial accounting are as under:

1 Relevance, which means selecting the information most likely to aid the
users in their economic decisions.
2 Understandability, which implies not only h a t the selected information

must be intelligible but also that the users can understand it. 3 Verifiability, which implies that the accounting results may he corroborated by independent measures using the same measurement

methods.
4 Neutrality, which implies that the accounting infocrnation is directed

towwds the co~nnlonneeds of the users rather than the particular needs of
specific users.

5 Timeliness, which implies an early communioation of information to avoid


delays in economic decision making.

6 Comparability, which implies that the differences should not be the result

of different financial accounting treatments.


7 Completeness, which implies that all the information that is 'reasonably'
needed to fulfil the requirements of the other qualitative objectives should

be reported. The Trueblood Report, 1973


A study group was appointed by American Institute of Certified Public
Accountants (AICPA) under the chairmmship of Robert M TruebIood in 197 1 to develop objectives of financial statements. The study group soIicited the

views of more than 5,000 corporations, professional firms, unions, public


interest groups, national and international accounting organisations and

financial publications and submitted its report to AICPA in October, 1973.


The objectives developed in the Study Group ~ e ~ o rare t las ~ follows:

(1)

The basic objective of financia1 statements is to provide information


usefu1 for making econon~ic decisions.

( 2 ) An objective of financial statements is to serve primarily those users who have limited authority, ability or resources to obtain infor~nation and who rely on financial statements as their principal source of
information about an enterprise's economic activities.

(3) An objective of financial statements is to provide information useful to investors and creditors for predicting, comparing, and evaluating
potential cash flows to them in terms of amount, timing, and related
uncertainty .

(4) An objective of financial statements is to provide users with information

for predicting, comparing, and evaluating enterprise earning power.

13

Report ofthe AICPA study group on the objeclives of financial statements. np. cit., 6 1-66.

( 5 ) An objective of financial statements is to supply information useful in

judging management's ability to utilise enterprise resources effectively


in achieving the enterprise primary goal. (6) An objective of financial statements is to provide factual and
interpretative information about transactions md other events, which is

useful for predicting, comparing, and evaluating enterprise earning


power. Basic underlying assumptions with respect to matters subject to
interpretation, evaluation, prediction, or estimation should be disclosed. An objective is to provide a statement of financial position useful for

predicting, comparing, and evaluating enterprise earning power. The


statement should provide information concerning enterprise transactions and other events that are part of incomplete earning cycles. Current
values should also be reported when they differ significantIy froin

historical costs. Assets and liabilities should be grouped or segregated by


the

relative uncertainty of the amount and timing of prospective

realisat ion or liquidation.


(8) An objective is to provide a staternent of periodic earnings useful for

predicting, comparing, and evaluating enterprise earning power. The net


result of completed earning cycles and enterprise activities resulting in

recognisable progress towards the completion of incomplete cycles

should be reported. Changes in values reflected in successive statements


of financial position should aIso be reported, but separately, since they

differ in terms of their certainty ofrealisation.


( 9 ) An objective is to provide a statement of financial activities useful for

predicting, comparing, and evaluating enterprise earning power. ?'his


stat ernent sllould report mainly on factual aspects of enterprise

transactions having or expected to have significant cash consequences. This statement should report data that requires minimal judgement and

interpretation by the compiler.

(10) An objective of financial statements is to provide information useful for the predictive process. Financial forecasts should be provided when they

will enhance the reliability of users' predictions.


( 1 1) An objectjve of financial statements for governmental and not-for-profit

organisations is to provide information useful fn r evaluating the

effectiveness of management of resources in achieving the organisation's goals. Performance measures should be quantified in terms of identified

goals.
(12) An objective of financial statements is to report on those activities of the enterprise affecting society, which can be determined and described or

measured and which are important to the role of the enterprise in its

social environment. The Trueblood Report also presented seven qualitative characteristics which financial statement information should possess in order to satisfy the
needs of the users. These are:
1

Relevance and Materiality;

2 Substance rather than Form;

3 Reliability;
4

Freedom from Bias; Comparability;

6 Consistency; and
7 Understandability.

The Corporate Report 1975 (UK)


The Accounting Standards Steering Committee of the Institute of
Chartered Accountants in England and Wales (TCAEW) published 'The

Corporate Report' as a discussion paper to review the scope and objectives of published financial reports, public accountability of economic entities and

methods of financial reporting in the United Kingdom. The basic philosophy

of the report was that financial statements should be appropriate to their


expected use by the potential users. The report emphasised seven
characteristics, viz, relevance, understandability. reliability, completeness, objectivity, consistency and time1iness in addition tu the other fundamental objectives of annual reports. The Corporate Report suggested the need for the

following additional statements;l 4


1)

AStatementofValueAddedtoshowhowthewealthwasproduced,and
how it has been distributed among the employees, the s tatc. the providers
of capital and its reinvestment for maintenance and expansion.

2)

An employment report dealing with size and composition of the

workforce, efficiency, productivity, industrial relations, benefits earned,

etc.
3)

A statement of money exchanges with the government showing the


financial relationship between the enterprise and the state.

4)

tZ

statement of transactions in foreign currency, showing overseas

borrowings and repayment, dividends received and paid by the

government to other countries.

5)

A statement of future prospects showing forecasts of profits,


employment and investment.

6)

A statement of corporate objectives showing management poiicy and


strategies.

Finally, after assessing six ~ ~ ~ e a s u r e n ~bases e n t (historical cost,

purchasing power, replacement cost, net realisation va


and net present value) against three criteria (theor
:.
14

The Accounting Standards Steering Committee. (1976). The Curpbrate Report. London: The Institute of Chartered Accountants i n England and Wales. 1C)-17.

and practicality) the report rejected the use of historical cost in favour of

current vdue accompanied by the use of general index adjustment.

Financial Accounting Standards Board (FASB)


One of the most comprehensive statement of financial reporting

objectives is given by FASB (USA) with the issuance of Statement of


Fifiancial Accounting Concept No. 1 "Objectives of Financial Reporting by

Business Enterprises" issued in November 1978 by US Financial Accounting St'mdards Board. The objectives of financial reporting developed in this statement are the f ~ l l o w i n g : ' ~ (i) Financial reporting should provide information that is useful to the

present and potential investors, and creditors and other users in making
rational investment, credit, and similar decisions. The information
should be

comprehensible to those

who have

a reasonable

understanding of business and economic activities and are willing to study the information with reasonable diligence. (ii) Financial reporting should provide information to help present and potential investors and creditors and other users in assessing the
amounts, timing, and uncertainty of prospective cash receipts from

dividends or interest and the proceeds from the sale, redemption, or

maturity of securities or loans. Since investors' and creditors' cash


flows are related to enterprise cash flows, financial reporting should

provide information to help investors, creditors, and others, to assess the m o u n t s , timing and uncertainty of prospective net cash inflows to
the related enterprise.

(iii)

Financial reporting should provide information about the economic


resources of an enterprise, the claims to those resources (obligations of
the enterprise to transfer resources to other entities and owners'

15

Financial Accounting StnnJwds Board. ( 19781. Concept No. I by business enterprises. USA : FASB. p.19.

Ob~ective ufftnanuiul ~ reporting

equity), and the effects of transactions, events and circumstances that


change its resources and claims to those resources.

(iv)

Financial reporting should provide information about an enterprise's


financial performance during a period. Investors and creditors often use information about the past in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors'

and

creditors'

expectations

about

future enterprise

performance, these expectations are commonly based at least partly on


the evaluation of past performance.

(v)

Financial reporting should provide information about how an

enterprise obtains and spends cash, about its borrowing and repayment

of borrowing. about its capital transactions, including cash dividends


and other distributions of enterprise resources to the owners, and about

other factors that may affect an enterprise's liquidity or solvency.


(vi) Financial reporting should provide information about how the management of an enterprise has discharged
its stewardship

responsibilities to the owners (shareholders) for the use of enterprise

resources entrusted to it.


(vii)

Financial reporting should provide information that is useful to


management

and directors in making decisions in the interests of

owners.
The FASB emphasised the use of financial reporting for different classes
of users and not for the creditors and the investors only. Predictability was

also included as an element of the objectives of accounting information. It


also considered cash flows for assessing arid evaluating all accounting

information.

The Stamp Report, 1980 The Canadian Instjtu te of Chartered Account ants (CICA) published a
report in June 1980 on Curparale reporting - Itsfurure evolution, written by

Edward Stamp, popularly known as Stamp Report.


It states the following as the important objectives" of corporate
financial reporting:

I)

One of the primary objectives of pubIished corporate financial reports is


to provide

an accounting by the management

to both

equity and debt

investors, not only for the management's exercise of its stewardship

function but also of its success (or otherwise) in achieving the goal of

producing a satisfactory economic performance by the enterprise and


maintaining it in a strong and healthy financial position.
2)

It is an objective of good financial reporting to provide such information


in such a form as to minimise uncertainty about the validity of the information, and to enable the user to make his own assessment of the
risks associated with the enterprisc.

3)

It is therefore necessary that the standards governing financial reporting should have ample scope for innovation and evolution as improvements

become feasible.
4)

The objectives of financial reporting should be taken to be directed


towards the needs of users who are capable of comprehending a

complete (and necessarily sophisticated) set of financial statements or


alternatively, to the needs of experts who will be called on by the
unsophisticated users to advise them.

The Stamp report stressed the accountability of the management to


equity and debt investors. It is also emphasised that information should be
16

D. S. Ubha. (2001). Corpurote disclosure pmciizes: Text and case sfudies. New Delhi : Deep & Deep Puhlicati~ns. p.10.

given in a such a manner as to minit~use uncertainty about the validity of the information on innovation and evolutiotl of the enterprise. It should be useful
for both sophisticated and tznsophisticated users. Accounting Standards Board of ICAI also has framed the objectives of financial statements which states that financial statements should be prepared

for meeting the common needs of most users and its main objective is to
provide information about financial position, performance and cash flaws of

an enterprise.
2.2.3 Quantum of Information

After identifying the target audience a d the purpose for which information is to be used, the next issue in the corporate disclosure would be
to

determine the quantum of information to be disclosed in the annual report.

The type and amount of accounting disclosure needed in investment market


may depend upon the degree of uncertainty under which decision makers are
operating.'' The larger the uncertainty of the economic decision maker, the greater the amount of information that can be given to him. The basic determinant of the quanrity of information to be reported are primarily dependent upon a critical assessment of the information needs which are

relevant to a specific set of users. Needs and expectations of users are a part

of environment that determines the type of in forn~ationrequired of financial


accounting.

How much information should be disclosed depends upon the

following factors:1 . Legal provisions regarding disclosure contained in various statutes;

2. Requirements of stock exchange authorities regarding disclosure;

''

N.M. Bedford. (1973). Ex&ensionof nrrountir~g disclosure. New Jersey : Prentice Hall Inc.
p.350.

3. Disclosure standards as laid down by the professional accounting

bodies:
4. Informational needs of the users: and 5 . Willingness on the part of the management to disclose adequate and

relevant information.
A large nurnber of suggestions and recommendations have been given

by various writers, conunittees and accounting bodies for improving the


quantity and quality of disclosure in corporate annual reports. An AICPA

study1*states that accounting reports should disclose that which is necessary


not to make them misleading.

The Accounting Principles ~ o a r d has ' ~ suggested various disclosures


in addition to balance sheet and income statement, separate disclosure of the
important components of the financial statements, disclosure of important

components of working capital, disclosure of notes necessary for adequate


disclosure, information about measurement bases of important assets.

contingent liabilities, contingent assets, important long term commitments,

changes in accounting principles and practices, information in terms of


owner's equity and long term debt, earning per share, - disclosure of

subsequent events, and consolidated financial statements if one of the


enterprises in a group directly or indirectly owns over 50 per cent of the
outstanding voting stock of the other enterprises.

The International Accounting Standards Accounting Committee


(IASC) has stated that all material information should be disclosed that is

necessary to make the financial statements clear and understandable. The


IASC has suggested the disclosure of following items of inforrnation:

restrictions on the title to assets, security given in respect of liabilities,

'"American Institute u f Certified Public Accountants. (1 962). A fenrative b e t of broad accounting


"

prirrcipks for b.u.~iness enterprises. Ntw York : AICPA, p. 7. Accounting Principles Board. op. cit., 91-98.

pension and retirement plans, contingent assets and contingent liabilities, amounts committed for future capital expenditure, property, plant and equipment, long-term investments, long tern1 receivables, goodwill, patents,
trademarks and similar assets, expenditure carried forward such as

prelittunary expenses, deferred taxes, reorganisation expenses, current assets

like cash, marketable securities, receivables, inventories, long tern1 liabilities such as secured loans, unsecured loans, inter-company loans, loans from

associated companies, current Iiabilities such as bank loans and overdraft,

current portion of long term liabilities, payables, deferred taxes, %harecapital,


capital paid in excess of par vaIue (share premium), revaluation surplus, reserves, retained earnings, etc. Many writers have also suggested the disclosure of specific items in
the annual report. For instance, ~ e d f o r d " has suggested the disclosure of

accounting methods. chandra2' finds in formar ion concerning the income statement, earning per share, budgeting projections and forecasts more useful
to security analysts for making investment decisions. Brurnrnet, Flarnholtz and

pyle2' have recommended that tirrlls should account for their human resources in their balance sheets. Keeping in view of these arguments, i t may be pointed

out that corporate annual reports should contain only those items of information which are useful in making informed decisions and are needed by the users.
2,2.4 M o d e of Disclosure The method in which the information is presented is also important.

Adequate disclosure demands that the information should be presented in a


form which fosters understandability. The method of disclosure d eterr-rines
the usefulness of information, but the question of method is secondary to

''
I
22

N. M. Bedford. op. cit., p.350. G.Chandra. ( 1 975). Informational needs of security analysts. The Journal ofAccountancy, 138( 12), p.70. R. L. Brurnrnet., E. G . Flamholtz., & W. C. Pyle. (1968). Human resource management - A challenge for accountant$. The Accounting Review, 4.712). 2 17-224.

other three issues in corporate disclosure viz., users, objeclivzs and quantum.

The selection of method of disclosure depends on the nature of information


and its relative importance. The common methods of disclosure can be
classified as f ~ l l o w s . ~ "

(i)

form and arrangement of balance sheet and profit and loss

account;
(ii) terminology and detailed presentations;
(iii) parenthetical information;

(iv) footnotes and schedules;


(v)

supplementary i n formation;

(vi) auditors' report;

(vii) chairman's or president's letter;


(viii) the report of the board of directors; and

(ix) charts, diagrams, etc,


The suitability of any method of financial reporting in any
circumstance should only be judged by its success in furthering the objectives of the financial report. Form of presentation should be so designed as to

enhance the reader's understanding of the data and minimise the possibility of
tnisinterpretition. Investors would undoubtedly like to see accounts drawn up
it1

manner which provides the most satisfactory basis of assessing the future

prospects of a company, a quality which has been described as a "predictive

ability".'4

23

S. Chander. t 1992). Corporate reportiw~ practices in public nnd private Sectors. New Delhi : Deep and Deep Publications. p.16.

24

F.E.P. Stadilands. (1975). InfZarion accounting - Report ~ f t h e inflation


HMSO: London. p. 47.

ar~c,ounring commitfee.

2.2.5 Timeliness of Disclosure

Timeliness is an essential attribute of corporate disclosure. The value

of reported financial data for investor decisions depends upon its usefulness
and timeliness. If there is undue delay in reporting of information, it may lose
its relevance. Timely disclosure is fundamental to good investor relations. A

major consideration in timely disclosure is the responsibility of management


to report promptly and accurately any financial or non financial information which may materially influence the investor decisions. T~mely financial accounting information is (should be) communicated early enough to be used

for the economic decisions which it might influence and to avoid delays in

making these decisions. The need for timeliness in financial reports is


recognised by company law authorities as well as by the accounting

profession. The committee on Concepts and Standards Underlying Corporate


Financial Statements of the American Accounting Association ( 1 9 5 ~ ) ~ ~
recognised the importance of the timeliness in its Supplementar y statement
No. 8 and remarked that timeliness in reporting is an essential element of

disclosure. Statement No.4 of the Accounting Principles Board ( 1970P specified timeliness as one of the objectives of accounting. Delay in financial

reporting is likely to increase the level of uncertainty associated with


decisions making by the users of those information. Hence, timeliness is a
necessary condition to be satisfied if financial statements are to be useful,

2 . 3

Qualitative Characteristics of Financial Reporting Qualitative characteristics are the attributes [hat make the information

provided in the financial statements useful to users. Such attributes or characteristics denote the quality of information and hence make financial information more useful. The qualitative characteristics are closely related to

the broad ethical goals of truth, justice and fairness that are generally accepted
25

26

American Accounting Assuc ialion's committee on concepts and standards underlying Financial Statements. (1955). Standard of disclosure for published financial reports. The Accortnring Review. 20(3), p. 302. Accounting Principles Boud. op. cit., 18-19.

as desirable goals by the society as a whole. The Accounting Principle Board

of USA, the Trueblood Report and ICAI have suggested certain qualitative
requirements of

financial

reporting. The

five

princ~pal quditative

characteristics are relevance, materiality, understandability, comparability,


and reliability. These characteristics are discussed as under.

2.3.1 Relevance
Relevance implies that all those items of information should be reported that aid the users i n making predictions or decisions. Relevance is a

quality of accounting information which makes it useful to a decision maker.


Information has the quality of relevance. when it influences the economic decisions of users by helping them evaluate past, present or future events or
confirilling, or correcting, their past evaluations. The American Accounting
Association's

to Prepare A Statement of Basic Accounting

Theory defines relevance as "the primary standard and requires that


information must bear upon or be usefully associated with actions it is

designed to facilitate or results desired to be produced". The question of relevance arises after identification of the purpose for which the information

will be used. It means that information relevant for one purpose may not be
necessarily relevanc for other purposes.
Releva~~ce is the dominant criterion of taking decisions regarding

information disclosure. It follows that relevant information must be reported.

Thus it can be said that relevant infornution is that which satisfies the
itlformational needs of the users and helps them in evaluating the management

and its policies for the purpose of their decisions.


2.3.2 Materiality

Materiality determines which information should be presented in the financial statements. The concept of materiality does not depend solely on the
amount of information. It refers to the quantitative as well as qualitative
" American

Accounting Association. op. cit., p.7.

characteristics of information. Information is said to be material if its

omission or mis-statement would influence the economic decisions of users

taken on the basis of financial statements, Materiality provides a threshold or cut off point rather than being a primary qualitative characteristic which the information nlust have, if it is to useful. ~ o h l e ? defines materiality as the characteristic attaching to a statement, fact or item whereby its disclosure or
the met hod of giving it expression would be likely to influence the judgement

of a reasonable person. In deciding whether a particular presentation or


disclosure is material or not, attention is focused not only on inferences that
an average investor might draw from financial statements, but also on

interpretations that might he expected from the applications of the best


methods of financial analysis. Relevance generally refers to the nature of the
item with respect to specific or general uses of financial reports, while

materiality refers to the significance of a specific item in a specific context. Materiality places restriction on how much should be disclosed. Hence it determines an upper limit on quantum of informat ion that companies can disclose to make annual reports more informative.

2 . 3 . 3

Understandability
An essential quality of information provided in financial statements is

that it must be readily understandable by users. Information in annual reports should be presented in a way that can be understood by well-informed as well

as by sophisticated users. Understandability focuses attention on the need for


the users of information to be able to comprehend the message or messages
being communicated. The Corporate report observes:

''

Understandability does not necessarily mean simplicity , or that

information must be presented in elementary terms, for that may


not be consistent with the proper description of compIex economic
28

E.L.Kohler. (1972). A dictionary of

29

accounting, New Delhi : Prentice Hall of India Pvt. Ltd. p. 279. The Accounting Standards Steering Committee. op, cit,. 28-29.

activities. It does mean that judgement needs to be applied in

holding the balance between the need to ensure all material matters
are disclosed and the need to avoid confusing users by the

provision of too much details. Understandability calls for the provision, in the clearest form, of all the information which the
reasonably instructed reader can make use of and the parallel presentation of the main features for the use of the less

sophisticated.

The criterion of understandability requires that the users have some


understanding of the economic activities of the enterprises, the financial
accounting process and terminology used in financial statement. In deciding
the understandability of the

item of information, all relevant users' needs

should be considered. That is, accounting information shouId not be limited to

the interests of the average investor or sophisticated users, but in fact,


informatjon should serve the needs of a broad range of users.
2.3.4

Comparability
Economic decision requires making a choice among possible courses

of action. In making decisions, the decision maker will make comparisons

among alternatives, which is facilitated by financial information. ~ e n d r i k s e n ~

observes that the "primary objective of comparability should be to faciIitate


the making of predictions and financial decisions by creditors, investors and
others." He defines comparability as the quality or state having enough like

characteristics to make comparisons appropriate. Comparability enables users


to identify inter firm and inrra firm sit~lilaritiesand differences on the basis of

accounting

information. Financial

reports are not able to achieve

comparability because of differences in business operations of companies and


also because of management's viewpoints in respect of their transactions.

3rl

E. S. Hendriksen. (1977). Ac~.ouwtirrg rheury. Illinois : Richard D Irwin Inc. p.123.

With in formation that facilitate interpretation, users are able to cornpare and
assess the resul is of similar transactions and other events among enterprises.

Consistency of method over a period of time is adjunct to comparability. Consistency is an important factor within a single enterprise. The qualitative standard of fair presentation in financial statements depends, in part, on

consistency of method.

111

accounting, consistency means the use of same

accounting procedures by a single firm or accounting entity from period to

period, the use of similar measurenlent, concepts and procedures for related
items within the statement of a firm for a single period and the use of same

procedures by different firtns. Lack of consistency produces lack of

comparability. Consistency in the use of accounting procedures over a period


is a user constraint, otherwise there would be difficulty in making predictions.
If different measurement procedures are adopted, it is difficult to predict
trends in earning power or financiai position of a company.

Although comparability and consistency are important criteria in

making information disclosure decisions, it should not be a bottleneck for


bringing about improvements in accounting policies, practices and procedures- When it is found that current practices or presentation being followed are not f u l f ~ling l users' purposes, a new practice or procedure should

be adopted. However, consistency is desirable, until a need arises to improve


practices, policies and procedures.

2 . 3 . 5 Reliability
Reliability of financial infor~natjon disclosed is an important ~h.dracte~ist1~. Reliable information is required to f o r m judgements about the

earning potential and financial position of the firm. Reliability of information


is important to users because it influences their econo~llic decisions. Information is said to be reliable, when it is free from material error and bias

and can be depended upon by users to represent faithfully that which it either
purports to represent or could reasonably be expected to represent. It is the

need for reliable information that underlies the requirement that financial

reports be audited by independent auditors. Several relatively general terms


are often used as synonymous for or to cover parts of the concept of reliability. Reliability of financial statements is dependent on the following:

Faithful Representation
Most financial information is subject to some risk of being less than a faithful representation of that which it purports to portray. This is not due to
bias, but rather due to inherent difficulties either in identifying the

transactions and other events to be measured or in devising and applying measurement and presentation techniques that convey messages that

correspond to those transactions and events.

Substance over Form


If information is to represent faithfully the transactions and other

events it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely in their legal form. The substance of transactions or other events is not always consistent with that which is apparent from their legal or contrived form.

To be reliable, the information contained in financial statements must


be neutral, that is, free from bias. Financial statements are not neutral if, by the selection or presentation of information, they influence the making of a

decision or judgement in order to achieve a predetermined result or outcome.

Prudence
The preparers of financial statements have to contend with the

uncertainties that inevitably surround many events and circumstances, such as


the collectability of receivables, the probable useful life of plant and

machinery, and the warranty claims that may occur. Such uncertainties are

recognised by the disclosure of their nature and extent and by the exercise of
prudence in the preparation of the financial statements. Prudence is the

inclusion of a degree of caution in the exercise of the judgements needed in making the estimutes required under conditions of uncertainty, such that

assets or income are not overstated arid liabilities or expenses are not
understated. However, the exercise of prudence does not aIlow the creation of hidden reserves or excessive provisions, the deliberate understatement of

assets or income, or the deliberate overstatement of liabilities or expenses.

To be reliable, the information in financial statements must be


complete within bounds of materiality and cost. ,4n omission can cause to be

false or misleading information and thus unreliable and deficient in terms of

its relevance.
It is the responsibiIity of management to report reliable information in

annual reports. The goal of reliable information can be achieved by


management if it applies generally accepted accounting principles, appropriate to the enterprise's circumstances, maintains proper and effective systems of accounts and internal control and prepare adequate financial statements. If corporate managements decide to disc lose uncertainties and assumptions in
annual reports, they will increase the value of the information expressed

therein. There are many factors affecting the reliability of information. Possibility of error in measuring information and business events may create

difficulty in attaining high degree of reliability. It can be mentioned here that


the most reliable information may not be the most significant for users in making economic decisions.

The above mentioned qualitative characteristics make financial statements more useful. The qualities are based largely on the needs of the

users of the financial statements. The qualitative characteristics should be arranged in terms of their relative importance to determine the desirable trade

offs among them. Adequate disclosure in annual reports, however, requires


that users should be informed about the data Iinutations and the magnitude of
possible measurement errors.
2.4

Media of Corporate Disclosure


Corporate disclosure, as a subset of the communication component of

accounting, is the process of providing qualitative and quantitative

informat ion concerning the performance of business enterprises to a wide

variety of users by means of statements and reports. There u e many media

adopted by the companies for dissemination of information to the users. These

include:
r

Prospectus
Press releases - regular news, inspired newspaper editorials,

advertising, advertorials and special supplements.


House magazines, periodicals, booklets, brochures, leaflets. and posters.

Statutory reports, interirn reports.


Audio Visual media - presentation to financial analysts and other

investor groups, press conferences, radio, exhibitions, television, filnls,


etc.

Shareholders' Annual General Meeting.

Publications of professional and other accounting bodies.


Official reports and publications of stock exchanges. Interviews between management representatives and professional

financial analysts.
Digital media - corporate websites, public websites, CDs, etc. Published company annual reports,

Of all these media, annual report is the most significant channel of


disclosure. It is the priine medium of projecting a company at its audience and is the most effective voice in corporate coilmunication.
2.5

Annual Report as a Medium of Disclosure


The published corporate annual report is a vital source of information

in the investment market and is considered as the most important source of


information about a company's affairs. This is the most direct, Ieast

expensive, mast timely, and fairest method nf reaching all shareholders and
other present or pot en tial investors. Corporate annual reports represent the
most easily accessible and extrerneIy important source of basic information

concerning an enterprise. It is the end product of the accounting information

process and ser of accounting measurement rules. It reflects a combination of


recorded facts, accounting conventions and personal judgements of the
preparer." However, the soundness of judgements necessarily depends on the

competence and integrity of those who make them and their adherence to
generally accepted accounting principles.

There are several important reasons for treating the annual report as a valuable source of information to the shareholders and other users. Firstly, annual report, being the audited dr~cument, provides authenticated information
about the issuing entity and thus creates confidence among the public. Secondly, it is relatively more and easily accessible than any other source of

information. Thirdly, annual report is the single document, which contains,


besides financial statements, some other valuable information such as

highlights of the year, historical data, significant performance ratios,


accounting policies, price level adjusted statements, human resource

accounting, segment a1 information, company's present and future policies,


etc., which is not provided by any other single medium. Hence the annual

report is the most important document in corporate reporting to a broad rmge


31

J. Lal. up. cii., p. 14.

of users. Therefore, there is a need to make published annual reports more


informative so that the investors and other users can nlrrke sound economic

decisions.

2 . 6

Contents of Annual Reports A corporate annual report has differen1 sections dealing with different

aspects of company's affairs and performance.

A typical annual report

contains the following:


(a) Board's

Report

(b) Directors' Responsibility S taternent

(c) Managenlent Discussion and Analysis


(d) Auditors' Report

(e) Report on Corporate Governance


(f) Accounting Policies

(g) Balance Sheet

(h) Profit and Loss Account

i ) Cash flow Statement


Cj)
Seg~rlent Report

The above statements and accounts are mandatory requirements to be complied with by the management. Certain companies make voluntary disclosures Iike human resource accounting. accounting for changing prices,
value added statement, social reporting etc. The form and content of annual
reports to a great extent depends upon the corporate disclosure environment

prevailing in a country.

2.7

Regulatory Framework of Corporate Disclosure in India

The quality of financial reporting is largely determined by the


corporate discIosure environment, which may be internal or external to a company. While the internal envircln tnent is company specific, the external environment is common to the corporate sector in general. In the present study, the influence of internal or company specific environment on the quality of information reporting has been examined in the later chapters. Hence, only the external regulatory environment governing discIosures

through annual reports are explained here.


Corporate disclosure is governed by external regulatory environment
through various laws, rules, procedures and guidelines, It1 Ittdia, the following

major external environmental forces broadly regulate the information


reporting by the. companies:

The Indian Companies Act, 1956


Institute of Chartered Accountants of lndia (TCAI)

BureaulDepartment of Public Enterprises (BIDPE)


Securities and Exchange Board of India (SEBI)
Others such as reports of Ad-hoc or expen Conunittees.

These factors taken together constitute the regulatory framework of


corporate disclosure i n India.\ 2.7.1 The Indian Companies Act, 1956

In India, Companies Act governs the disclosure of information in


annual reports. Of all the elements of external reguIatory environment, statute

law is of the greatest importance. Enacted by the legislative body of the


country, legal environment provided by the statute law - the Companies Act,

1956 in India- overrides the requirements mandated by other regulatory


bodies. That is, pronouncements by other regulatory forces ought not to

contravene the statute law. In India, the first statutory Act giving a legal recognition to the preparation of balance sheet was passed in 1882, known as

the Indian Companies Act, 1882, which contained specific provisions about the preparation of balance sheet and its audit was made compulsory vide

section 74. The preparation of profit and loss account, circulation of annual
accounts, content of auditors' report, directors' report, etc. were contained in

the optional regulations 78 to 94 of Table A.

The Indian Companies Act of 19 13 made certain changes in matters


pertaining to financial reporting, especially with regard to the form of balance

sheet and disclosure of many new items in it as per section 130 to 132.
Articles 107 to 108 of Table A appended to the Act presented guidelines for preparation of profit and loss account and balance sheet and a compulsory

form of balance sheet (Form F of Schedule 111) was aIso given by law.
The provisions about disclosure were further amended by The
Conlpanies (Amendment) Act, 1936. Profit and loss account was given a

status equal to that of a balance sheet. Section 131 was newly introduced

making directors' report on accounts compulsory. Section 132(3) required


disclosure in profit and loss account of certain information of i~nportanceto
shareholders regarding remuneration to agents, directors and managers.
Section 132-A, a new section, made information on subsidiary companies

compulsory. The articles in Table A dealing with accounts were substantially


amended of which some regulations were made compulsory.

On 2gth October. 19.50, a committee under the chairmanship of C H

Bhabha, known as Bhabha Committee, was appointed to consider and report


what amendments were necessary in the existing legislation pertaining to the

companies in the light of the experience of the huge changes taking place in
the organisation and working of the joint stock companies. On the basis of

recommendations of the Bhabha Committee, the Companies Act of 1956 was


passed. This Act is a comprehensive piece of legislation, which contains a

number of sections explained below, which have significant bearing on disclosure of information in the ccrrporate annual reports.

Section 209 : Books of account should be kept only on accrual basis and
according to double entry system of accounting (effective from 15.06.1988).

Section 210 : Board of Directors of every cotnpany to lay before the


shareholders at the annual general meeting (AGM) a balance sheet and a

profit and loss account for the financial year.

Section 211(1) : Balance sheet to give a 'true and fair view' of the

state

of

affairs of the company as at the end of accounting period and to be prepared


in the form prescribed and set out in Part 1 of Schedule VI (except for an

insurance or banking company or a company engaged

it1

generation and

supply of electricity).

Section 211(2) : Profit and loss account to give a 'true and fair view' of the
profit or loss for the financial year. Information to be disclosed in Profit and
loss is prescribed and set out in Part I1 of Schedule VI. (except for an insurance or banking company or a company engaged in generation and

supply of electricity).
Section 211(6) : Information to be disclosed by way of notes and such notes
to form part of the accounts, i.e., balance sheet and profit and loss account.

Section 212 : Balance sheet, profit and loss account, auditors' report and
directors' report of the subsidiary company to be attached to the balance sheet
of the holding comp;iny.

Section 216 : Profit and loss account to be antiexed and auditors' report to be
attached to the balance sheet.

Section 217 : Directors' report to the shareholders. to be attached to the


balance sheet, should cover the following:

(a)

Stateofcompany'saffairs;

(b) Amount to be carried to reserves;


(c) (d)

Dividend recommetlded; Material changeslevents after balance sheet date insofar as they

affect the financial position of the company;


(e) Material changes in nature of business of the company and its subsidiaries; and
(f)

Conservation of energy, technology absorption. foreign exchange

earnings and outgo (effective 0 1.04.1989).

Section 227(1A) : Auditor to enquire md report adverse findings on certain


matters.
Section 227(2) : Auditor to report to the members of the company on

accounts examined by him and on every balance sheet and profit and loss
account and annexures thereto.

Section 227(3) : Contents of auditors' report.

Section 227(4A) : Auditor to report on matters under the 'Companies


(Auditor's Report) Order' (CARO) 2003 (effective from 0 1.07.03)

(substituted for the 'Manufacturing and Other Companies (Auditor's Report)


Order' (MAOCARO), 1988, effective from 01.11.1988).

Section 619 :

Accounts of Government companies to be subject to

supplementary audit by Comptroller and Auditor General of India.

Section 641 (1) : Central Government vested with powers to alter disclosure
requirements in Schedule VI.
Since its enactment. the Companies Act, 1956 has been amended
several

times in line with the growing needs of the users of information and

increasing complexities of business. In 1961, through an amendment in the

Companies Act, 1956. certain changes were made in the information requircd

to be disclosed in the balance sheet and profit and loss account. Although the

Act was amended in 1962, 1963, 1964, 1966 and 1967, no changes were brought about by them so far as the matters connected with the corporltte
disclosure were concerned. However, the Amendment Acts of 1965 and 1969 brought about some changes in the matter concerning corporate disclosure,

especially with regard to the maintenance of cost accounts and the adoption of
cost audit in specific companies.

The Companies (Amendment) Act, 1973 required the disclosure of the


following information in the financial statements.

(i) Specific details in respect of investments and profit earned or Ioss


incurred in partnership firms in which the company is a partner;

(ii) Quantities and amounts in respect of the turnover of each class of goods; (iii) Break up in quantity and value in respect of each class of raw materials
consurned or purchased;

(iv) Class wise break up of quantity and value in profit and loss account in

respect of opening and closing stock of goods manufactured or

purchased;
(v) Break up of expenditure on salary, wages and bonus in respect of

employees drawing a remuneration of Rs 3,000 p.m or more; and


(vi) Quantitative details regarding licensed capacity, installed capacity, and

actual production in respect of each class of goods manufactured. The Companies (Amendment) Act, 1988 brought drastic changes in the
provisions on disclosure contained in the Companies Act, 1956. Amendment
to sec.209 of the Act has mandated that every company should keep its books

of accounts on accrual basis (effective 15.06.1988). The following major


changes have been made in the Companies Act, 1956 through successive

amendment Acts, including amendments in 1 988 and 2000

Section 210 A Constitution of National Advisory Committee on Accounting


Standards (NACAS) for giving recommendations to the Central governinent

on accounting policies and standards (effective 3 1.10.1 998).


Section 21 1 (3A) - Every profit and loss account and balance sheet to comply
with accounting standards (effective 3 1.10.1998).
Section 211 (3B)- In the event of non -cornpIiance with the accounting

standards, inter alia, disclosure of reason and financial effect, (effective

31.10.1998).
Section 211 (3C) - Accounting standards, initially, to mean the standards of
accounting recommended by the Institute of Chartered Accountants of India

(effective 3 1.10.1998).

Section 217 (2AA)

Board's report to include a Directors' responsibility

statement indicating, inter aliu, that the annual accounts have been prepared

on a going concern basis and that applicable accounting standards have been
followed (effective 13.12.2000).

Section 224 (8) (aa) - Remuneration of auditors appointed by the C&AG of


India for the government companies to he fixed in the general meeting of the companies (effective I 3.12.2000).
Section 227 (3)(d) Auditors' report to state whether profit and loss account

and

balance

sheet comply with the accounting standards (w.r.e.f.

31.10.1998).

Section 227 (3) (e)

- Auditors' report to state in thick type or in itaIics the


Auditor to report on matters under the 'Companies

observations or comments that have any adverse effect on the functioning of

the company (effective 13.12.2000).

Section 227 (4A)

(Auditor's Report) Order' (CARO) 2003 (effective from 0 1.07.03) as amended by the Companies (Auditor's Report) (Amendment) Order, 2004.

Section 292 A

Every public company with paid up capital of Rs. 5 crore or

more to constitute an audit committee, inter ulin. to review the half yearly and

annual financial statements before their submission to the Board (effective

13.12.2000).

Part IV of Schedule VI (Balance sheet abstract and Company's General


Business profile)

Every company to annex to the balance sheet and profit

and loss account the specified qualitative and quantitative discIosures in the
prescribed format. Disclclsures required include registration details, generic

names of three principal product/services of company (as per monetary


terms), and earnings per share (effective 15.05.1995).

The Companies Act, 1956 has been amended for a number of times and

many changes have been brought ahout in the disclosure provisions, still the
legal provisions regarding disclosure fall short of the informational needs of
the investors and other users. 2.72 Disclosure and ICAI

The Irlsti tute of Chartered Accountants of India (ICAI) being the

premier professional accounting body in India, carries the mandate to regulate


and develop the financial accounting and auditing profession. Accordingly,

TCAI plays a pivotal role in regulating the disclosure practices of the companies, both in the public and the private sectors. The institute regulates
the reporting practices of companies in a variety of ways. First. members of
the

institute

certify

the

annual

accounts

of

the

conipanies

as

statutorylindependent auditors. An unqualified certifict~tion of accounts

assures the users that information contained in the annual reports is reliable.
Second, for preparation and present ation of information in the annual reports,
it issues accounting standards, guidance notes, expert opinions etc. These

pronouncements provide authentic reference materi a1 to the preparers,


auditors and users of the corporate annual reports. Last, for promoting better

standards in corporate reporting, the institute has been orgmising annual

competition for the best presented published accounts (renamed as ICAI Awards for Excellence in Financial reporting).
ICAI constituted Accounting Standards Boud (AS B) in April 1977,
with the objective of harmonising the diverse accounting policies and

practices being followed by companies in India, keeping in view the

international developments in the field of accounting. Till now, ASB has

enabled the Institute to issue 29 accounting standards dealing with various


accounting issues. Since 1998, as stated above, the accounting standards
issued by the institute are enjoying the legal support under the amended

Companies Act, 1956. According to a press note dated 07.02.06, the NACAS

(National Advisory Committee on Accounting Standards) constituted under section 2 10 A of the Companies Act, 1956, had already completed a review of all the standards issued by the ICAI till that date and had submitted its
recommendations to the government for adoption of the 25 accounting
standards.12 Besides these accounting standards the institute has also issued
some exposure drafts, guidance notes and expert opinions on various

controversial issues in accounting and reporting. Also ASB has issued a


framework, namely, 'Framework for preparatio 11and presentation of financial

statements', which sets out the concepts that underlie the preparation and
presentation of financial statements for external users.

The institute also arranges a number of seminars, workshops and


conferences covering different aspects of financial reporting every year. These

programmes are specifically conducted for the members of the institute and
the officials working in different organisations, who are related to the

preparation of the corporate annual reports.

11

Pursuant !u AS 26 becoming mandatory and the contenls of AS 8 being subsumed in AS 26. AS 8 stands withdrawn.

2.7.3

Guidelines of Bureau of Public Enterprises regarding Disclosure


The Bureau of Public Enterprises CBPE) (now, Department of Public

Enterprises) prescribes disclosure of additional information by the Central

Public Enterprises (CPEs) in their annual reports. In its continuous endeavour

to regulate disclosure of information by CPEs. BPE constituted a Committee


in June 1986 under the Chairmanship of Mr K V Ramakrishnan for regulating

disclosure of information by the public sector enterprises. The committee,


after examining various accounting standards, guidance notes, and other

pronouncements of the ICAI, recomtnended the adoption of the ICAI


pronouncements,
subject

to

modifications,

on

selected

topics.

Recommendations of the uommi ttw aimed at bringing about harmonisation

and comparability in the annual accounts of the companies.


The Bureau of Public Enterprises has laid down some guidelines with

regard to the information which should find a place in the annual reports of
public enterprises. These guidelines require the following information to be
included:
1.
A summary of financial results indicating annual turnover, profit

after depreciatiot~and interest but before tax, provision for taxation, net profit, appropriations to reserves and provisions, proposed

dividend, etc.;
2.
3.

Information about changes in capital structure; Important changes in pricing policy; Changes in accounting methods e.g., changes in the methods of

4.

charging depreciation, valuation of inventories etc .:


5.
Main events which have influenced the production and profitability
of the company under report and outlook for the forthcoming years;

General order-book position and production performance, capacities


and targets;

7.

Export achievements of foreign exchange earnings together with

future outlook;
8.

Any significant achievements in import substitution or development

of new products etc. ;


9.

Employer-employee relations, strikes, lockouts, incentive schemes,

training etc;

10. Staff welfare activities, township, education, health facilities;


1 I . New projects or expansions contemplated to increase or diversify

production and progress of the concern made so far; and

12. Changes in the board of directors and general managers.


2.7.4 Disclosure and SEBI

The Government of India has established 'Securities and Exchange


Board of Tndia (SEBI) on April 12, 1988 to promote orderly and healthy
development of the securities markets and to provide adequate investor
protection. The promulgation of the SEBI ordinance in the parliament give

statutory status to SEBl in 1992. One of the specific objectives of SEBI is to


provide a high degree of protection to the rights of investors and their interests

through adequate, accurate and authentic information and its disclosure on a

continuous basis. SEBI regulates the business in stock exchanges and other
securities market. All listed companies must follow the rules and regulations

issued by the SEBI.


A company is required to make specified disclosures at the time of

issue of securities and make continuous disclosures as long as securities are


listed on stock exchanges. The standards for these disclosures including the content, medium and time of disclosure, have been specified in the Companies

Act, Disclosure and Investor Protection guidelines. Listing Agreement,


regulations relating to insider trading and takeovers etc. These disclosures are

made through various documents such as prospectus, quarterly statements,

annual reports etc. and are disseminated through media, websites of the

company and exchanges, and through EDIFAR (Electronic Data Informatjon

Filing and Retrieval) system maintained by SEBI. These disclosures re1ate to


financial performance, shareholding pattern, trading by insiders, substantial
acquisitions, related party disclosures, audit qualifications. buy back details,
utilisation of issue proceeds, corporate governance, actions taken against

company, risk management, remuneration of directors ztc. Though accounting


is not a subject directly within the purview of the SEBI, in the interests of

investors. it prescribes additional disclosures through corporate annual reports


mainly through the indirect route of listing agreement. SEBI has made it
mandatory for listed companies to follow the accounting standards issued by
the ICAT. SEBI vide press release dated 21.02.2000 has issued guidelines for corporate governance, which have been included in the Clause 49 of the

listing agreement of stock exchanges. It has the following provisions related

to disclosure in corporate annual reports:


1. All pecuniary relationships or transactions of the non-executive directors
vis-bvis the company should be disclosed in the annual report.

2. The following disclosure on the remuneration of directors shall be made


in the corporate governance report of the annual report.

a. AII elements of remuneration package of all the directors, i.e., salary,

benefits, bonuses, stock options, pensions etc.


b. Details of fixed components and performance linked incentives along

with the performance criteria.


c. Service contracts, notice period, reverence fees.

3. In case of the appointment of a new director or reappointment of a


director, the share holders must be provided with the following
informat ion:
a. A brief resume of the director

b. Nature of his expertise in specific functional areas: and c . Name of companies in which the person also holds the directorship
and the membership of committees of the board.

4. A management discussion and analysis report should form part of the


directors' report in the annual report to the shareholders. The
management discussion

and analysis should include discussion of the

following matters within the limits set by the company's competitive


position:

a. Industry structure and developtnents


b. Opportunities and threats c. Segment wise or product wise performance

e . Risks and concerns


f. Internal control systems and their adequacy
g. Discussiotl on financial performance with respect to operational

performance.

h. Material developments in the human recourseslindustrialrelations


front, including number of people employed.

5. The company shall put on company's web-site information like quarterly


results, presentation made hy companies to analysts shall be sent in such

form, so as to enable the stock exchange on which the company is listed,

to put it on its own web-site.


6. There shall be separate section on corporate governance in the annual
reports of the company, with a detailed compliance report on corporate

governance. Non-compliance of any mandatory requirement

with

reasons thereof shall he disclosed. The following items are suggested to

be included in this report.

a. Board of directors

b. Audit committee
c. Remuneration committee

d. Shareholders Committee

e . General body meetings


f. Means o f communication

g. General shareholders information

7. A certificate obtained from the auditors of the company regarding

compliance of conditions of corporate governance shall be annexed to


he directors' report, which is sent annually to the shareholders of the

company.

The regulatory powers of SEBI were increased through the Securities


laws (Amendment) Ordinance of January 1495 which was subsequently

replaced by an Act of Parliament. The SEBI is under the overall control of the
Ministry of Finance, and has now become a very important constituent of the

financial regulatory framework of India.


2.7.5 Others :Ad-hoc and Expert Committees

The Government appoints committees, expert groups and such other


bodies from time to time to review and report on various aspects of the

functioning of the joint stock companies. Many a times, the suggestions of these cornrnittees have implications for improving the level of corporate
reporting. A short review of the recommendations by certain committees are given below:

A High Powered Expert Committee on companies and Monopolistic


and Restrictive Trade Practices (MRTP) Acts ( 1 978), popularly known as

Sachar Committee, has given certain suggestions for i nlpraving the


disclosure of information in the balance sheet, profit and loss account and the

directors' report so that annual report may provide useful information to the
shareholders and other users. The Commi [tee has recommended that the

balance sheet and profit and loss account should be prepared in vertical form

and suggested a form for preparing balance sheet in this format. The
Committee was that of the view that the directors' report should be broad

based and suggested the inclusion of the following items in it :

(i)

Arnount of deposits received from the public during the year, total
repayments during the year and outstanding with a break-up of dues within one or two years.

(ii)

Brief particulars of prosecutions which resulted in a fine of Rs 1,000

or more in any one case, or in imprisonment of any of the directors or


officers of the company,

(iii)
(iv)

Particulars of unclaimed dividend.


Details of investments in corporate bodies, firms or joint ventures

which have not yielded any return during the year and reasons
thereof, if the investments exceed 5 percent of the company's paid up
capital and free reserves.

(v)

PiiTticulars of material liability and matters adversely affectinp the profitlloss, asset and liability position since the closing of the year to
the date of adoption of accounts by the directors.

(vi)

Statement of unprovided liabilities and commitments during the year

and reasons thereof.

(vii)

Details about the company's socid activities and the future plans for
the same.

(viii) Statement indicating the loss suffered by the company in any division

of the activities, which accounts for not less than 10 percent of rhe
total turnover of the company.

(ix)

Accounting ratios such as ratio of current assets to current liabilities, inventory to sales, trade receivables to sales, net income to net sales and net worth, return on capital employed, profit before interest and
tax to total assets, net profits after tax to total assets and net profit

after tax to shareholders' equity.

(x)

Key limiting factors preventing full utilisation of installed capacity of


plant and machinery.

(xi)

Number of shares held by each director carrying not less than 20


percent of the total voting rights.

(xii)

Particulars of any contract in which directors or their spouses or dependent children have interest.

(xiii) Statement regarding compliance of statutory norms and guidelines in


respect of managerial appointment and remuneration and inter

company investment and loans. The committee felt that the inclusion of these items in the Directors'
report will make the annual reports more informative and meaningful. Though

these suggestions were not accepted in total, but these did influence the
disclosure practices of the corporate sector in India. Many companies started

disclosing these items voluntarily in their annual reports as a result of these. Also, government has implemented many of the recommendations in a piecemeal manner through various Companies (Amendments) Acts.

The Kumar Mangalam Birla Committee Report on Corporate

Governance issued in late 2000 stressed the need for accounting standards in
the areas of consolidation, segment reporting, deferred tax accounting and related party transactions.

The Department of Company Affairs (DCA) in the Ministry of Finance


and Company Affairs constituted a high powered committee- Naresh

Chandra Committee- on 21" August, 2002 to examine auditor -company

relationship, the role of independent directors, and how their independence and effectiveness can be ensured. The committee submitted its report on 23rd

December 2002 and it made very sigtlificant recommendations for changes,


inter alia, in the Companies Act. The thrust area of the recommendations of

this committee was corporate governance which in turn will have an impact
o n corpordte disclosure standards and practices of companies. The committee

recommended better coordination between Department of Cornpany Affairs

(DCA) and Securities and Exchange Board of India (SEBI) by harn~onising

the regulatory functions of DCA and SEBI.


Corporate disclosure is the process of providing quantitative and
qualitative information to a wide variety of users about the performance of business enterprises. Adequate disclosure is inevitable to help investors and creditors in making sound investment decisions and in evaluating the

stewardship function of management. There is a need of continuous


enhancement in the quality of corporate disclosure for the effectiveness of the entire economic system. Corporate reporting through annual reports is greatly

influenced by the institutional framework comprising of various bodies.

Corporate disclosure to be useful

should

meet certain qualitative

characteristics such as relevance, materiality, reliability, comparability and understandability. The adherence of Indian companies regarding the different disclosure requirements is a matter of great concern to the various interested
groups. The researcher has made an attempt to analyse the disclosure practices of Indian companies in the next chapter.