What Are Financial Statement Disclosures?

Financial statement disclosures are secondary information provided by companies to clarify or interpret certain published financial information. Disclosures are designed to assist outside reviewers of financial information for the purpose of making investments in the business. Management also use disclosures to attest to the accuracy and validity of reported financial information as required by the Securities and Exchange Commission (SEC).

The Facts

Financial statement disclosures are comments and explanations listed in a company's financial reports or public filings that explain certain aspects of the company's procedures. Disclosures are governed by Generally Accepted Accounting Principles (GAAP) and the SEC for publicly traded companies. While most disclosure requirements are similar for all publicly traded companies, some industries are required to provide more specific disclosures based on the operations of a business.

Mandatory Disclosures

Disclosures are required by GAAP for certain items in a financial statement, such as accounting changes or errors, asset retirement and insurance contract modifications. By requiring disclosures for these technical items, investors will have a clearer picture of the financial health of the company. Additionally, future expenses can be calculated so investors can determine long-term growth opportunities and projected cash outflows for a business.

Voluntary Disclosures

The Financial Accounting Standards Board (FASB) recently noted that several companies were including voluntary disclosures regarding their businesses in financial reports. Overall company health, management's analysis of company data and forward-looking statements are some of the important voluntary disclosures found by FASB. This information is disclosed for those outside the company to gauge how the company will perform in future years. This helps to draw more investors than using only mandatory financial statement disclosures.

SEC Guidelines

Publicly traded companies are required to make more financial statement disclosure (compared to privately held companies) for the benefit of outside investors. Since the accounting scandals of Enron and Worldcom, the SEC has focused on companies disclosing information about the relationship with their public audit firm to determine proper independence. Several guidelines were reviewed and published in an SEC bulletin released in 2001 outlining the importance of these non-financial disclosures.

SOX Disclosures

When the Sarbanes-Oxley Act of 2002 (SOX) was passed, the SEC added additional non-financial disclosures for publicly traded companies. The majority of these disclosures required companies to state the role of management in the business and to declare if they are considered "financial experts." Companies are also required to issue a report stating that management finds the financial information to have adequate internal controls, ensuring accurate reporting.

References

• SEC Disclosure Requirements
• Financial Accounting Standards Board
• SOX Disclosure Requirements

Resources

• Voluntary Disclosure Report