Disclosure

1. Disclosure Derek Deonarain, Robbie Glenn, Mike Oudyk, Kyle Robinson

2. Videos • http://www.youtube.com/watch?v=kbyPL6e5eSM • http://www.youtube.com/watch?v=-uK53xe5jMo • http://www.youtube.com/watch?v=zQxHJzI5nYU&feature=plcp

3. CICA 1400General Standards of Financial Statement Presentation • Fair presentation, in accordance with GAAP for financial statements and note disclosures • Provide information on financial position, operations, and cash flows that are necessary in decision making • Information should be clear and understandable • Assess the going concern of the company • Statements should be comparative

4. CICA 1505Disclosure of Accounting Policies • To increase usefulness of accounting information policies must be disclosed in a clear and concise manner • Policies to be disclosed • Those that are significant to the companies operation • Policies where judgment has been exercised • Peculiar policies • When selecting an acceptable alternative policy

5. IFRS (IAS 1) Comparison • Both CICA 1400 and 1505 are considered under IAS 1 • IAS 1 has a few additions and changes from CICA 1400 and 1505

6. IFRS (IAS 1) Comparison – CICA 1400 • Differences are: • IAS allows departure from standards when the relevant regulatory framework permits or requires it • Statement of retained earning not required, Statement of Changes in Equity is required • Cannot omit comparative information even if considered not meaningful

7. IFRS (IAS 1) Comparison – CICA 1505 • Differences are: • Requires disclosure of judgments made in applying accounting policies • Required disclosure of assumptions on certain Canadian standards on individual financial items

8. 7 Steps for Better Disclosure

9. Increasing Investor Demands • Many people make investments through stock exchanges and rely on corporate disclosure to make their investment decisions • Disclosure must begin to provide not only quantitative data but qualitative data as well • Investors are demanding real-time value added disclosures, which puts increased responsibility on public companies Why? • Good disclosure can reduce uncertainty and improve share valuation while poor disclosure could negatively impact a companies reputation

10. The MD&A Investors rely on MD&A to learn about: • Historical and recent results • Financial conditions and future prospects, plans and opportunities • Exposures to risks and uncertainties • Past trends that are indicative of future performance

11. Current MD&A Issues • Poor performance is rarely discussed or significantly downplayed • Positive matters are overemphasized • Liquidity and capital resources are described as static elements • The future is scantily described

12. Why Issues Arise • Raising capital during recession is quite difficult – thus management is careful how to report bad news • Financial statements have become more complex and harder to understand yet many companies take a “boiler plate” (the same year to year) approach to MD&A reporting • Until recently Canada has had a limited regulatory involvement with the MD&A due to resource limitations at the OSC • The focus has been on regulatory filings however this does not guarantee the firm meets MD&A regulatory expectations

13. The Need for Better MD&A Disclosure • SEC Message: “Corporate management and Wall Street need to undergo a wholesale cultural change, rewarding those who practice greater transparency and punishing those who do not… In an attempt to meet Wall Street earnings expectations, those involved in the financial reporting process may be overriding common sense business practices” • Executives are now being held liable if flawed reporting can be attributed to any of their actions

14. 7 Steps to Better Disclosure Public companies would do well to consider the following suggestions: • Avoid Boiler Plate Disclosure • Clear Communication • Provide Forward Looking Information • Reconsider Static Disclosures • Segmented Disclosure • Ensure Accountability • Develop Proactive Processes

15. Avoid Boiler Plate Disclosure • Need for information that provides explanations not merely calculations that investors can perform themselves • It would be useful for management to provide investors with guidance as to what items will have the most significant impacts on profits and future performance • This includes identifying both market and firm specific factors that impacted performance

16. Clear Communication • Companies should not forecast only bad news and selectively disclose a few positive events • Companies should communicate events that are under their control and those that are not • If future threats are identified then contingency plans should be revealed • This should help to build confidence and credibility with shareholders

17. Provide Forward Looking Information • Companies are required to comment on known trends, commitments, events and uncertainties • A two-step analysis is required: • A determination must be made whether trend is likely to occur • Whether event would have material effect on issuer’s financial condition or results of operations

18. Provide Forward Looking Information Cont. • Often companies are reluctant to disclose forward-looking information that is required • Rather they just disclose general macro-economic forecasts that are not company specific • Company may potentially fear future litigation however omission of material info may be as costly as litigation triggered by actual disclosure

19. Provide Forward Looking Information Cont. • Companies should strive to provide well thought out, unbiased, understandable forward-looking information • To help reduce uncertainty in the market place by providing greater clarity on how management views the future • Segmented information should be provided if risks vary across business units

20. Reconsider Static Disclosures • Liquidity and capital ratios are usually revealed only at a specific point in time • Companies should consider providing discussion about trends that occurred throughout the year • There should be discussion about historical and prospective basis – both short term and long term

21. Segmented Disclosure • Must disclose each segment separately when one or more segments has a disproportionate impact on revenues, profitability or cash needs • This helps to prevent companies from lumping 2 or more segments together with different revenue profiles • Allows readers to better understand business and risks involved

22. Ensure Accountability • Ensure that the someone in the company has the final say for what is disclosed in the MD&A (usually the CFO) • This way someone can be held accountable for what is disclosed

23. Develop Proactive Processes • Ensure the CEO, board members and audit committee is familiar with the company’s disclosure philosophy, culture and the processes involved with disclosure • External auditors can provide oversight to ensure that firm policies are working as they should

24. Auditors Auditors can aid with financial reporting in the following ways: • Critique and verify that the clients MD&A reconciles to FS • Compare MD&A to the OSC and SEC requirements • Benchmark against industry trends • Recommend disclosure improvements

25. Preparation of MD&A • People who prepare MD&A information should review the board minutes for items related to future • OSC’s MD&A Guide Published 1993 • SEC MD&A Review Program

26. 7 Steps to Better Disclosure • Avoid Boiler Plate Disclosure • Clear Communication • Provide Forward Looking Information • Reconsider Static Disclosures • Segmented Disclosure • Ensure Accountability • Develop Proactive Processes Overall objective: to give investors the opportunity to look through the eyes of management, this time without rose-colored glasses

27. How investors use the MD&A • Most investors are not satisfied with MD&A disclosures • Majority believe MD&A should be audited • Generally only unsophisticated investors use the MD&A

28. Case: Selective Disclosure and Poor Segmented Reporting • Sony acquired Columbia Pictures and Guber Peters Entertainment Company and resultantly acquired $3.8 billion of goodwill • Sony combined Sony Pictures and Sony Music as one business segment – “entertainment” • Sony’s internal projections for Sony Pictures showed five years of losses after financing and goodwill write-downs • Eventually Sony incurred losses greater than projected – neither of which were disclosed to investors

29. Case: Selective Disclosure and Poor Segmented Reporting • The success of Sony Music masked the losses incurred by the Sony Pictures division • By 1993 Sony had incurred losses even before considering goodwill amortization and financing costs • In 1995, Sony announced they would change their method of goodwill accounting and was writing off $2.7 billion • The SEC reacted by taking action against Sony

30. The SEC Claimed • Sony’s disclosure prior to goodwill write-off was inadequate as they did not describe the nature and extend of net losses incurred by Sony Pictures • Sony did not explain the impact of Sony Picture’s losses on consolidated results • Sony “omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading” • Sony failed to disclose known negative results and trends, such as operating income, net income and operating cash flow

31. Other Things Sony Failed to Do • Disclose extent to which net losses of a subsidiary were reflected in Sony’s net income • Disclose a known trend reasonably expected to have material impact (requirement in Canadian MD&A requirements) • Disclose the potential write-off of a substantial portion of goodwill

32. SEC Action: • The SEC took action against not only Sony but also the general manager of Sony’s Capital Markets and Investor Relations Division • He was responsible for drafting the companies press releases and MD&A • SEC stated that he should have been aware of the losses Sony Pictures incurred and the effects on consolidated results • "The issuer's legal obligation extends not only to accurate quantitative reporting of the required items in its financial statements, but also to other information, qualitative as welt as quantitative."

33. The Result: • Sony was required to pay $1 million to the SEC and agreed to engage an independent auditor to report on it’s MD&A • Sony agreed to comply with FASB segment reporting rules and designated its CFO as the officer primarily responsible for ensuring public financial disclosures were accurate and in compliance with law

34. Article: Dissemination of information for investors at corporate website

35. Internet Financial Reporting • Prior research on Internet financial reporting looks at disclosure of financial information on corporate websites • This article researches two type of disclosure; voluntary and required • Use regression analysis to test the relationship between several variables and proxies to determine the effect on the amount of voluntary and required disclosure

36. Background • With the advancement of the internet a powerful channel for communicating financial information has emerged • Accountants have become interested in the provision of financial information via websites • Any type and amount of information can be disclosed as long as it is not fraudulent

37. Financial information contained • Financial information contained in a firms website can be material filled with SEC or in press releases • A firms website gives the firm access to a wider audience

38. Prior Research • Ashbaugh et al. 1999 is the only prior research provided on the analysis of required wed disclosures • This study extends research in two ways by looking at two things • Characteristics of firms disclosing information already reported with the SEC • Characteristics of firms disclosing other information through their website • Goal is to see if web based disclosures are motivated by same factors as traditional disclosures

39. Ashbaugh et al. 1999 • Documents internet financial reporting practices and provides preliminary evidence on why some firms disseminate SEC filings at their Web sites, while others do not • Find that firm size is the sole significant variable in a regression model explaining the dissemination of either 1) a comprehensive set of financial statements 2) a link to the annual report on the internet 3) a link to the SECs EDGAR site

40. Lang and Lundholm 1993 • Looks at a sample of up to 751 firms per year from 1985 to 1989 • Identifies six variables that explain differences in analysts rating of firms disclosure practices • Proxies for firm performance, firm size, correlation between returns and earnings and issuance of securities to the public

41. Hypothesis

42. Samples and Variables • Sample was obtained from the Association for Investment Management and Research

43. Level of Disclosure • To form the dependant variable of level of disclosure the firms were scored • Characteristics were filed as either VOL for voluntary of REQ as required • Then the sum was recorded as the value for VOL or REQ and the combined score was INDEX

46. Explanatory variables • Equity- A firms need for external capital, either one firm was a issuer of net stock or 0 otherwise • Return- The annual return for the year • LNSize- Natural logarithm of market value of common equity • Correl- The correlation between return and annual earnings

47. Aimr- overall quality of reporting score • Quality- Aimr subtract mean divided by standard deviation to get a measure of quality

48. ¾ more than half for REQ • 3/12 more than half for VOL