Full Disclosure And Accounting Policies Linked Accounting Essay

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

A companys accounting policies and full disclosure go hand in hand. It is extremely important for a company to fully disclose their accounting information as well as certain changes that have a "material impact" so the users can make a more informed decision (Full Disclosure Principle). Accounting policies are defined as "principles, rules and procedures selected and consistently followed, by the management of an organization (the accounting entity) in preparing and reporting the financial statements. Accounting policies deal specifically with matters such as consolidation of accounts, depreciation methods, goodwill, inventory pricing, and research and development costs" (Accounting Policies). A company can be very complex when accounting for their type of revenue so it does increase the importance of certain disclosures. Extensive disclosure and taxes and duties information provide a "better basis for estimating future cash flows, overseeing the custodial responsibilities given to the tax collecting entities, and understanding how the tax burden is shared" (FASAB). Disclosing changes in accounting policies are key to a user whether it be internal or external.

A company's accounting policies have to be reported to users in a few different locations. Anytime a company conducts accounting estimates, or any time the company initially adopts an accounting policy that will have a material impact on its financial presentation it must disclose to the users. When a company is adopting a new accounting principle they must disclose a few items such as, the impact of the adoption, the choices it had among accounting principles, why the initial adoption and lastly the accounting principle adopted and the method of applying it (SEC).

In addition, there are few more issues and changes that must be disclosed. One important factor is, if it effects the prior period a user will probably want to know about it, so therefore it will have to be disclosed, and any retrospective adjustments must be disclosed. On top of that, a company must disclose the effect of the adjustment on the change of income, or any financial statement line, but not on any subtotal or totals line that it may have affected (FASB). Disclosing information is so important because it lessens the threat of corruption within a company. Companies that are publicly owned have obligations to detailed disclosure laws, and are ordered by SEC to disclose information about their management compensation, financial condition, operating results and other areas of their business. SEC is also trying to improve the transparency of companies' financial disclosure in hopes of "enhancing the investors understanding of a company's application of critical accounting policies" (SEC).

The Securities and Exchange Commission's main goal is to protect the investors. They regulate the securities market. Only companies that are publicly traded have to fully disclose, so SEC has released a proposed rule in hopes of making companies more transparent. The proposed rule provides direct guidance on the criteria that needs to be disclosed for critical accounting principles (Holtzman). The Securities and Exchange Commission enforces and monitors the disclosure laws and regulations (SEC Disclosure Laws and Regulations). In order to help SEC perform their job they came up with the Full Disclosure System. The Goals of the full disclosure system are; "to provide investors with material information, improve the quality and timeliness of disclosure to investors, contribute to the maintenance of fair and orderly markets, faster investor confidence, reduce the costs of capital raising, and lastly inhibit fraud in the public offering, trading, voting, and tendering of securities" (SEC, Full Disclosure System). These goals are accomplished by reviewing the financial and non-financial disclosures by companies, and also interpreting and setting rules that heighten corporate disclosure. SEC requires companies to report all their critical accounting policies within the Management's Discussion and Analysis also known as the MD&A or within the notes to the financial statements. Full disclosure is required when different accounting policies are available, as with "inventory valuation, long-term contract accounting, and depreciation (SEC Disclosure Laws and Regulations)." The MD&A should be a "discussion and analysis of a company's business as seen through the eyes of those who manage the business" (SEC, Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operations).

The Securities and Exchange Commission is always trying to improve the process, and is continuously looking for the best interest of the users. The SEC in another attempt to protect users and ensure they were better informed updated their disclosure rules to include breaches. Companies that have had or have potentially had cyber incidents must disclose of them if they are "speculative or risky" (Moscaritolo). The SEC chairman, Arthur Levitt has also tried improving the "accounting framework by calling for well-detailed disclosures on the impact of changes in accruals for losses and accounting assumptions; clarification by the American Institute of CPAs of ground rules on the auditing of purchased research and development, and changes to existing rules on restructurings, acquisition write-offs and revenue recognition" (Klein). The chairman wanted to crack down on fraud and opted to take an aggressive approach and asked for new guidance on materiality.

There are three scenarios that would warrant for a detailed disclosure. Publicly owned companies must provide a detailed disclosure about their operating results, financial condition, and management compensation. Companies must prepare a form 10-k, which is an annual report for SEC that is strictly governed. On this form companies include detailed information pertaining to their financial and operating information, as well as responses to questions by the managers about the company's operations (SEC Disclosure Laws and Regulations).

In conclusion, accounting policies and disclosures go hand in hand. It is important for a company to be open and honest and divulge all information pertinent to the users' decision. It is essential that companies' financials remain transparent. The Security Exchange Commission's regulations and enforcements will continue to help in preventing another incident such as Enron from occurring.