Essay on Importance of 10-Ks Disclosure: Accounting Standards & Relevancy

Information is viewed to be of utmost importance in every section of a business regardless of what section it is. In the 10-Ks disclosure, also called management discussion and analysis, the information provided therein could be quantitative and that which cannot be quantified in monetary terms. However, the accounting standards adhere to the latter for the quantified information. This essay will discuss the relevancy of the information supplied in 10-Ks disclosures and establish its relevancy in the 21s century.

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Understanding the nature and importance of 10-Ks disclosures is being one step ahead for anyone who reasons out its essence and its contents published in annual reports. It's a report which is filed on a yearly basis by any publicly trading company regarding its financial performance, which is sent to its shareholders before holding annual general meeting in which directors are elected, and whose presentation is a requirement of the regulatory bodies existing in the country (Loughran & McDonald, (2011). Amongst the disclosures include the company's history, the organizational culture, financial statements of the year, earnings per share, naming the subsidiaries if any exist, compensation of the executive, non-GAAP measures, and any other bit of information that is deemed to be relevant to the shareholders.

The question of disclosure and what to include in the annual reports to shareholders is an outline in the principle of full disclosure. It outlines and expressly state the nature of information that can potentially affect the reader's ability to understand the statements (AccountingCoach, 2019). However, the interpretation of the principle would highly depend on the interpreter, and therefore the information that can be potentially reported could be quite massive. It's therefore essential to report and disclose only that information which may potentially impact positively or negatively the financial results of the company, also including non-quantifiable items like law suites. Also included in the disclosure is a report of the existing accounting policies and alterations whatsoever to those policies that marks a departure from those used in the previous period.

Alongside both income statement and the balance sheet, full disclosure will involve; nature of non-monetary transactions like property transfer, nature and justification for the change in financial policies, encumbered assets and their value, description of any assets retirement obligation, and factors and circumstances behind the impairment of goodwill.

Management discussion and analysis in financial reports is inevitable and of utmost importance for all users in the 21st century. As much as one may argue that the financial statements contain all the relevant information and disclosure about the company, the data contained therein needs further and broader explanation ("SEC.gov | Effective Disclosure for the 21st Century Investor", 2019). Moreover, the provision of management and discussion analysis gives a narrative of what may not be readily discernible from the financial reports alone. The primary purpose of the management discussion and review may include; providing investors with an opportunity to see the financial statements of the company through the eyes of the management, provision of context aimed at enhancing the overall financial disclosure, provision of cash flows and other information regarding the company earnings with the sole aim of enabling investors to ascertain the likelihood of historical performance as an indicator of future performance.

With reference to "Disclosure Initiative - Principles of Disclosure" as documented by IFRS in their website, International Accounting Standard Board (IASB) affirms that when clear principles are developed, they will put necessary checks to the nature of information put up for disclosure in the reports and will have the potential ability to improve the levels of quality of information given out to the consumers of such information. Notably, the suggestions provided are; alternative methods to enhance the objectives of those disclosures and requirements in the standards of IFRS, the principles of effective communication as a guide, and fair presentation principles alongside performance measures disclosure in ensuring that the information is correct and misleading.

In this paper, I recommend that the information provided in the management discussion and analysis be sufficient enough to enable potential investors to make informed decisions. Information will be deemed to be adequate if its omission will potentially mislead the user of such information regarding the actual and apparent state of affairs of the organization. The sufficiency of the information will be determined by the management's knowledge regarding any particular happenings and dealings of the organization that needs to attract the attention of the user of such information. The chairman of the International Accounting Standards Board, Mr. Hans Hoogervorst, once said he believes at any particular time, room for improvement will always be there thus making such disclosures in the financial statements more helpful to the users (IFRS, 2019). In support of the principles underpinning the adequate disclosures mark an important step in challenging and calling out for behavioral changes that would make financial statements a tool of better communication for future usage.

Conclusion

To sum up, we have noted in several instances, which all point towards how important the 10-Ks or management discussion analysis is in the financial reports of a company. It's a requirement by the International Accounting Standards Board, and also well documented in the principle of full disclosure. Indeed, the information contained therein is critically needed by users of the 21st century for the sole purpose of making sound, informed, and well thought of decisions.

References

Bragg, S., & Bragg, S. (2019). Full disclosure principle - AccountingTools. Retrieved 18 September 2019, from https://www.accountingtools.com/articles/2017/5/14/the-full-disclosure-principle

Eccles, R. G., Krzus, M. P., Rogers, J., & Serafeim, G. (2012). The need for sectorspecific materiality and sustainability reporting standards. Journal of Applied Corporate Finance, 24(2), 65-71.

IFRS. (2019). Retrieved 18 September 2019, from https://www.ifrs.org/news-and-events/2017/03/iasb-outlines-steps-to-improve-disclosures-in-financial-statements/

Loughran, T., & McDonald, B. (2011). When is a liability not a liability? Textual analysis, dictionaries, and 10Ks. The Journal of Finance, 66(1), 35-65.

SEC.gov | Effective Disclosure for the 21st Century Investor. (2019). Retrieved 18 September 2019, from https://www.sec.gov/news/speech/022015-spchraf.html

What is the full disclosure principle? | AccountingCoach. (2019). Retrieved 18 September 2019, from https://www.accountingcoach.com/blog/what-is-the-full-disclosure-principle