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Electronic copy available at: http://ssrn.com/abstract=1966814
Corporate Disclosure
Concepts and Practices
Contents
Overview
Section I
Overview and Concepts
1. Role of Voluntary Disclosure and Transparency in Financial Reporting 3
Pankaj M Madhani
2. Motives for Disclosure and Non-Disclosure: A Framework and Review of the Evidence 9
Russell Lundholm and Matt Van Winkle
3. New Models for Financial Reporting in the 21st Century 23
R K Srivastava and P T Giridharan
4. Segmental Disclosures and Corporate Governance: The Road Ahead 38
Neeti Sanan
5. AS 1: Disclosure of Accounting Policies 47
Punita Ahuja
6. AS 9: Revenue Recognition and Disclosure Practices 59
A Naga Ratna
Section II
Corporate Disclosure Practices in India
7. Accounting Standards, Practices and Disclosure Policies in India: An Empirical Study 69
Sanjay J Bhayani
8. Corporate Disclosure and Firm Characteristics in India 94
M S Narasimhan and S Vijayalakshmi
9. Analysis of Factors Influencing Corporate Voluntary Disclosure Practices 114
Padmini Srinivasan
10. Corporate Voluntary Reporting Practices in India 139
Hasnan Ahmed
11. Contents of Environmental Accounting Disclosure – What Users Require from Annual
Reports? 148
M S V Prasad
Electronic copy available at: http://ssrn.com/abstract=1966814
Section III
Sectoral Practices
12. Corporate Disclosure Practices: Sectoral Studies 169
Lalit Bhalla, Shikha Sehgal and Minie Bhalla
13. Corporate Disclosure Practices in Indian Software Industry: An Empirical Study 188
Poonam Mahajan and Subhash Chander
14. Non-Mandatory Disclosure Practices of Banking Companies in India 222
Kashmir Singh
• Index 229
Overview
Financial reporting and disclosure are potentially important means for management to
communicate firm’s performance and value to outside investors. Enhanced disclosure practices
will help in reducing information gap between firm and its stakeholders, improve efficiency of
capital allocation and also reduce the cost of capital. Full disclosure practice along with
transparency in financial reporting can build climate of trust and boost confidence of investors’
community. The book emphasizes crucial role of increased corporate disclosure in current age of
information economy. Full disclosure and transparency are driving forces for the success of
businesses and sustainable performance and helps in maximization of wealth of shareholders.
The book is presented in three sections and includes fourteen articles. The first section has
articles on role of voluntary disclosure, motives for disclosure and non-disclosure, new models
for financial reporting, segmental disclosures and accounting standards AS 1 and AS 9. The
second section contains articles on empirical study on accounting standards and disclosure
practices, corporate disclosure and firm characteristics, factors influencing voluntary disclosure
practices, voluntary reporting practices and environmental accounting disclosure. The third
section discusses sectoral practices for corporate disclosures by studying ten sectors of economy
viz. FMCG, IT, banking, capital goods, power, metal products, and pharmaceuticals, oil,
automobile and telecommunications, Disclosure practices in Indian software industry and non-
mandatory disclosure practices of banking companies in India.
Section I: Overview and Concepts
The opening article of the book “Role of Voluntary Disclosure and Transparency in Financial
Reporting” written by Pankaj M Madhani discusses various factors affecting corporate voluntary
disclosure practices and highlights characteristics of voluntary disclosure. Voluntary disclosure and
transparency plays a significant role in corporate reporting practices. One major issue in voluntary
disclosure is about making publicly available firm sensitive and critical information which may
benefit competitors. Voluntary disclosure provides various benefits like increased management
credibility, Higher institutional ownership, increased liquidity, greater analyst following higher share
prices, decreased volatility, decreased bid askspread etc.
The second article is “Motives for Disclosure and Non-Disclosure: A Framework and Review of
the Evidence” written by Russell Lundholm and Matt Van Winkle and it talks about a theoretical
model that describes how some firms make disclosure choices and how other players (analysts,
investors, etc) respond to these choices. Primary goal of voluntary disclosure is reduction of
information asymmetry (between managers and investors) and thereby cost of capital. Even for
non-financial information, it is unreasonable to assume that management can bury significant
information forever. The authors organize the disclosure findings around three categories viz.
management 1) does not know of any information to disclose, 2) cannot tell information without
incurring a cost or 3) does not care about their firm’s current stock price.
The next article “New Models for Financial Reporting in the 21st Century” by R K Srivastava
and P T Giridharan describes limitations of traditional financial reporting viz. lower level of
transparency, inability to cater variety of stakeholders, exceptional focus on numerical figures
etc. There is lot of ‘information gap’ between the manager’s information about business and
information available to investors and other stakeholders. Information on non-financial
components is increasingly becoming important in financial reporting. Across the globe various
reporting models are used namely: 1) The Balanced Scorecard, 2) The Jenkins Report, 3) Value
Dynamics, 4) Global Reporting Initiative, 5) Brookings Institution, 6) Strategic Scorecard, and 7)
FASBs (The Financial Accounting Standards Board) Working Model for the Statement of
Comprehensive Income.
The fourth article “Segmental Disclosures and Corporate Governance: The Road Ahead” written
by Neeti Sanan discusses role of segmental disclosures and its impact on corporate governance.
Good corporate governance engenders good financial reporting, which results in the production
of efficient segmental reports. This, in turn, facilitates good governance. Segmental disclosures
are regarded as one of the most useful revelations of financial reporting. Quality segment
reporting inculcates confidence in the company’s performance by overseeing and assessing
management’s stewardship.
The subsequent article “AS 1: Disclosure of Accounting Policies” written by Punita Ahuja
focuses on accounting standard related to disclosure of accounting policies. The accounting
standards practice depends on various policies of the Government. In India, ICAI (The Institute
of Chartered Accountants of India) issues the accounting standards and then it will be made
mandatory for organizations. The Accounting Standard (AS) 1 issued by ICAI deals with
disclosure of accounting policies by firms. Indian AS and US GAAP related to disclosure of
accounting policies are different in many ways.
The last article of this section “AS 9: Revenue Recognition and Disclosure Practices” written by
A Naga Ratna explains the meaning of revenue, and highlights different scenarios where revenue
can’t be recognized like revenue arising from construction contracts, hire purchase, lease
agreements, Government grants and other similar subsidies. The Accounting Standard (AS) 9,
issued by ICAI, in particular, deals with the revenue recognition in the profit and loss statement
(or income and expenses statement) of an enterprise. It is difficult to establish recognition of
revenue that arises from service rendering and the use of enterprise resources by others; this
ultimately defeats the main purpose behind the disclosure made by the firms.
Section II: Corporate Disclosure Practices in India
The first article of this section “Accounting Standards, Practices and Disclosure Policies in India:
An Empirical Study”, written by Sanjay J Bhayani, highlights significance of accounting
standard and its relation with overall accounting disclosure practices. FIIs (Foreign Institutional
Investors), hedge funds and PEFs (Private Equity Funds) are required to pay attention to the AS
(Accounting Standard) and its disclosure policies from the stakeholders’ point of view before
making investment decision. The author studied the level of implementation of first fifteen
accounting standards (AS 1 to AS 15) by Indian corporates, listed on BSE 30 indices. The results
of research study indicate that among all accounting standards, AS 12 disclosures were highly
satisfactory and there is a need for an improvement in disclosure policies of the Indian
corporates.
The next article “Corporate Disclosure and Firm Characteristics in India”, written by M S
Narasimhan and S Vijayalakshmi, focuses on important regulatory initiatives related to
improving transparency and disclosure practices among Indian corporates. Various regulatory
and non-regulatory factors viz. size, ownership, profitability, liquidity, leverage, industry and
audit firm size etc. influence corporate disclosure level of firms. The research study reveals that
transparency and disclosure level of Indian firms have improved substantially. The authors also
highlight disclosure areas where non-compliance is high.
The subsequent article “Analysis of Factors Influencing Corporate Voluntary Disclosure
Practices”, written by Padmini Srinivasan examines the factors influencing the voluntary
disclosures contained in the annual report. The study also examines the size of the firm, the
nature of the industry and the ownership structures. Voluntary disclosures are disclosures in
excess of the required or mandatory disclosures. Listed companies disclose both mandatory and
voluntary information. Management of the firm, can supply additional information voluntarily to
meet the information demands of the investors. The study finds that the size of the firm affects
the disclosure levels positively and the ownership structures affect the overall disclosure levels
negatively.
The next article “Corporate Voluntary Reporting Practices in India” written by Hasnan Ahmed
reviews some of studies on the extent of voluntary disclosures, henceforth conducted in India.
The author empirically examines the voluntary reporting practices of listed non-financial
companies in India and relates the extent of voluntary reporting practices to industry type. The
research study has revealed the quantitative aspect of reporting voluntary information and shows
that the level of reporting voluntary information is low and the variability in the level of
reporting among the companies is wide. The study concludes that sector wise comparison of
voluntary reporting shows little fluctuations among the sectors that indicate a great deal of
similarity among them.
The subsequent article “Contents of Environmental Accounting Disclosure – What Users
Require from Annual Reports?” written by M S V Prasad is about the contents of environmental
accounting disclosure from the users’ point of view. There have been numerous studies, both in
India and around the world, on environmental disclosure policies of corporations and other forms
of reporting entities. There is lot of criticism against Indian companies for not complying with
environmental disclosure practices, which have been mandatory in almost all developed
countries. Users’ survey reveals that 66% respondents believe that environmental issues are
material and as much as 73% seek disclosure of environmental information in the annual report.
Section III: Sectoral Practices
The first article of this section “Corporate Disclosure Practices: Sectoral Studies”, written by
Shikha Sehgal, Lalit Bhalla and Minie Bhalla, emphasizes the increased role of sound disclosure
practices in current era of competition and globalization. The authors studied disclosure practices
of the firms in each of the following ten sectors: FMCG, IT, banking, capital goods, power,
metal products, and pharmaceuticals, oil, automobile and telecommunications. The extent of
disclosures made by the firms and relationship between disclosure index and age, RONW and
sales is also examined. The study indicates that there is a notable difference in the quantum of
disclosures of the different sectors.
The second article is “Corporate Disclosure Practices in Indian Software Industry: An Empirical
Study” written by Poonam Mahajan and Subhash Chander. The authors empirically examine the
quantum of corporate disclosure in Indian software industry and its association with corporate
attributes such as age, size, profitability, leverage, listing status, shareholding pattern, audit firm,
and residential status of a company. This study is based on a sample of 50 companies from
Indian software industry on the basis of market capitalization. Research concluded that
significant association exists among size, profitability and audit firm and disclosure level.
The last article of this section is “Non-Mandatory Disclosure Practices of Banking Companies in
India” written by Kashmir Singh. The author examines the level of non-statutory disclosure
practices covering 40 major banking companies of public and private sector. The post-
globalization period has experienced a major change in corporate financial reporting practices of
banking companies in India. The changes have occurred not only in the information content of
annual reports but also in the presentation. The result of the study shows that the level of
reporting of non-mandatory item is very low; the banking companies of both sectors show a
great deal of similarity in their reporting practices.
Corporate Disclosure: Concepts and Practices
Editor: Pankaj M Madhani
© 2008 The Icfai University Press. All rights reserved.
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First Edition: 2008
Printed in India
Published by
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ISBN:
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