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What Is Accounting Disclosure?

An accounting disclosure may contain graphical information that depicts the cash flow and financial stability of a company.
Accounting disclosure can be found in the notes section of the corporate annual report.
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  • Originally Written By: Joshua Nuttall
  • Revised By: C. Mitchell
  • Edited By: C. Wilborn
  • Last Modified Date: 21 October 2014
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An accounting disclosure is a statement released by a company, business, or corporation that identifies the financial strategies that are being used and reveals things like costs and profits for a certain calendar period. The main purpose of this sort of document is to inform both current and potential investors of the accounting strategies and methods used. These financial statements include, but are not limited to, the balance sheet, the statement of cash flows, the income statement, and the statement of stockholders’ equity. The full disclosure principle of most legal systems requires that any event that would have an impact on the financial statements should be revealed, and the laws of many countries set out specific guidelines for both how and when disclosures need to be made. Companies often release this sort of information in their annual reports, but there are a number of acceptable publication methods in most places.

Key Information

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Business accounting is often a really broad thing, but it’s also a thing that can be easily disguised, misinterpreted, or confused. How a company manages its finances says a lot about how it is likely to do in the future, and this information is really important to both investors and customers. A disclosure doesn’t necessarily have to set out everything about a business’ financial structure, but it usually reveals enough to let outsiders see what the main ethos is. In some ways the disclosure also forces the company to be honest with itself, which can sometimes prompt leaders to make positive changes or to fix problem areas before they really cause trouble.

The answers to many important questions are gleaned from the financial disclosure statements. For example, a statement may answer whether or not the company can afford to give its employees raises, and whether there is enough cash on hand to expand current projects. It may also reveal which products are the most profitable, and which are the least. The disclosure might also answer the question of whether a division needs to be shut down to keep the company afloat.

Basic Format

Accounting disclosures can take many forms. In the United States, this disclosure is most often found in the notes section of the corporate annual report. “Annual reports” are basically summaries of corporate progress over a calendar year; they highlight major developments and achievements, but also reveal things like cost margins and executive salaries, which are required to be public knowledge in most places.

Some companies really make their annual reports look nice and may have them professionally designed and published. Others rely simply on whatever filing the government requires. Stockholders and investors usually get a copy automatically, and interested parties can often request one, too. Companies will often also make their reports available for download on their websites, usually on the “investor relations” or related pages.

Legal Requirements

Most countries require companies that do business within their borders to file regular accounting disclosures not only with shareholders but also with the government directly. In many cases this is used as an oversight measure; government authorities often want to regulate and control things like executive spending and shareholder investments.

Each publicly held company in the US, for instance, is required by the Securities and Exchange Commission (SEC) to file an annual report with the federal government. This and many other government filings are available to the public after they are submitted to and reviewed by the SEC. Many other countries have similar requirements. Governing rules can vary tremendously from place to place, though, which can cause a lot of stress for businesses that operate in more than one place.

Impact on Stakeholders

Disclosing complete and accurate accounting information can have huge and lasting effects on the individuals, families, competitors, creditors, investors, markets, and many other groups associated with large corporate firms. Financial statements are used by both internal and external parties to plan for the future, but they can also be a means of identifying fraud and the misallocation of assets. Companies that engage in stock trading and hedge fund investing are often particularly susceptible to ethical violations and breaches of trust that can lead to enormous gains in the short term — but criminal ramifications in the long term. A disclosure statement is where the numbers must be presented honestly, which often exposes potential problems.

When reading through the financial section of the annual report, an investor may want to keep a finger in the notes section to better understand the numbers, tables, and graphs that may be presented. Disclosure statements will clarify the methods and means that were used by corporate accountants to come to the figures presented, and they are often too lengthy to include in the financial statement that it is associated with. Also, an investor should look for the auditor’s report in countries where this report is required. If an unqualified opinion is expressed, the company presented its financial statements in a fair and understandable manner.

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sunshined
Post 2

@golf07 - I understand how you feel. It can be a little overwhelming. I don't read every word, but try to focus on the areas that I understand - such as their cash flow and income statement.

Once I have looked it over and feel comfortable with what I have read, I always keep it on file in case I need it for future reference. When I receive the new report for the current year, I throw the outdated one away.

golf07
Post 1

I know it is important to read the financial statements and annual reports of companies you have invested in, or plan to invest in, but do most people really read through all of them?

The reports often look so intimidating and I feel like you would need to go to accounting school to really understand them.

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