FINANCIAL REPORTING ANALYSIS

Financial Reporting Analysis

Financial Reporting Analysis

International comparative financial accounting

International comparative financial accounting is a diverse and expanding area of accounting research. Many such studies deal with international harmonization (Emenyonu and Gray 1992; Archer, Delvaille and McLeay 1996; Roberts, Salter and Kantor 1996). These have tended to examine harmonization from the point of view of accounting treatment / measurement of specified items rather than disclosure of these items. For example, Norton (1995), Weetman and Gray (1990 and 1991) and Weetman, Jones, Adams and Gray (1998) focus on profit measurement. Pope and Rees (1992), Amir, Harris and Venuti (1993), Bandyopadhyay, Hanna and Richardson (1994), Rees (1995), Barth and Clinch (1996) and Fulkerson and Meek (1998) consider whether reconciliations of US versus non-US accounting measures have information content for the market. In relation to disclosures required in form 20-F, Adams, Weetman and Gray (1999) suggest that these be reduced to focus on more material adjustments only. Barth, Clinch and Shibano (1999) examine harmonisation and share price effects from an analytical modelling perspective.

International comparisons focussing on disclosure have mainly measured and compared levels of disclosure between countries. Meek and Gray (1989) compared voluntary disclosure by London Stock Exchange listed companies from Sweden, Netherlands, Germany and France. Disclosure requirements were exceeded suggesting, according to the authors, that competitive pressures to raise capital were important. Frost and Pownall (1994) compared disclosure in the US and UK by counting the number of documents (statutory, interim and annual reports) and extra voluntary releases (news releases in the US, Stock Exchange announcements in the UK). They found that mandatory and voluntary disclosure frequency was greater in the US and this was partly due to different disclosure rules. Frost and Ramin (1997) analysed selected disclosures of companies from five countries. They found higher disclosure levels in US and UK companies.

Adhikari and Tondkar (1995) examine harmonisation of stock exchange disclosure requirements and provide a framework for measuring disclosure harmony using a disclosure index. They find that stock exchange disclosure requirements of nine of the 11 stock exchanges examined were largely co-ordinated in terms of minimum disclosure conditions but that variation in disclosure requirements was found. The authors concluded that EC directives were targeted towards minimum rather than uniform or standard disclosure requirements.

Recognition, measurement and purposes of disclosure

Accounting laws and regulations (for example, the Accounting Standards Board's (ASB's) draft “Statement of principles for financial reporting” (ASB 1999)) are concerned with three broad areas:

• How items in the financial statements are to be recognised;

• How items in the financial statements are to be measured; and

• The amount of information to be disclosed.

Financial disclosures can be considered from a number of perspectives, including recognition, measurement in the context of disclosure, and finally purposes of disclosures. Recognition, measurement and disclosure rules may stand-alone or be complementary to each other.

Bernard and Schipper (1994) discuss the difficulty of distinguishing between disclosure and recognition because disclosure overlaps with other concepts. Classification of items in financial statements is a form ...