Although a company’s management exercises full control of the operations of the company, it still operates on behalf of shareholders. Accordingly, it must disclose to them all essential information in the business. Therefore, proper communication of financial information is paramount for the success of the business. Although it is important to disclose this information, there is always a dilemma on the amount of information that should be disclosed. The disclosure of more than the legal threshold of the required information may give a business the opportunity to inform investors of the company’s future plans. On the contrary, too much disclosure may limit a company’s competitiveness since it would expose its strategies to competitors.
According to Bettis, the disclosure of additional financial information positively influences the valuation of a company (406-415). Since in the valuation of a company’s securities using capital asset pricing model CAPM, all financial information for the business is needed to determine the price of stocks, therefore, the disclosure of additional information leads to a proper valuation of the company. While disclosure of financial information has positive returns, especially at the beginning, disclosing this information beyond a given threshold leads to exposure of a company’s strategies, which leads to a compromise on its business strategies and competitiveness.
Recognizing the importance of disclosure of financial information, the securities exchange commission (SEC) has issued guidelines on how this information should be presented, and the minimum level of disclosure. Similarly, the UK government recognizes the importance of this disclosure and follows the stipulated guidelines issued by IFRS and UK-GAAP. In this paper, Tate & Lyle’s business is used in the evaluation of how businesses communicate and disclose various information to their stakeholders.
Proper communication of financial information is paramount in enabling a company’s management to communicate essential information with their stakeholders. Generally, the information that the management provides has the potential of influencing the valuation of the company and the shareholders’ willingness to invest in the business. Nonetheless, too much disclosure of this information also exposes the company to risks of competition from rival companies. In light of this, the management is always charged with a duty of evaluating the amount of information that they should disclose in order to comply with the legal authority and still attract investors and improve the company’s value while not exposing its vital strategies.
Summary of the Arguments Regarding the Disclosure of Information on Corporate Strategy
Recently, many organizations have been issuing more information than the legal threshold needed in the disclosure of financial information. Besides using the annual reports, organizations make additional disclosures through conference calls, internet websites, press releases, exhibitions, mission statements, and various other tactics. Although it is important to disclose relevant financial information on the performance of a company and its strategies, there is always the need to release this information cautiously so that it does not lead to the unplanned disclosure of a company’s strategies to competitors. The risk of disclosing financial information to competitors notwithstanding, managers must ensure that the information on businesses strategies is relayed in a manner that will enable investors to form sound judgments on the viability of investments that it is undertaking.
According to Ferreira and Rezende, the financial information disclosed by managers is usually soft and cannot be verified (2-3). This information is normally forward-looking, formed based on the management’s private information, and is usually issued to a selected group of persons. In light of the aforementioned, it is essential to identify the reasons why managers decide to disclose certain information on the company’s strategies. In general, a disclosure of strategies aims at influencing investors or reducing uncertainties.
Reason for Additional Disclosure
Modern financial theories posit that disclosing additional financial information about a company’s strategy or projects has the overall effect of influencing the value of the firm. Since the price of stocks is determined almost instantly and changes regularly, therefore, the available facts on the business future objectives and strategies are essential for proper valuation of a firm (Bagheri and Nakajima 507-530). Generally, the price of a stock is affected by systemic and un-systemic risks. Therefore, market fluctuations, as well as unique occurrences in the business, have the effect of determining the price of a given stock (Palmer and Schwarz 521-541). In practice, an investor observes the stocks expected returns in order to determine the suitability of a particular stock, therefore, managers must always keep in mind that the information they disclose directly influences the value of their company (Saxton, Kuo, and Ho 1051-1072). Due to this phenomenon on the trend in shares, Bettis opines that disclosing additional information on a firm’s strategy positively affect the value of a firm (406-415).
In practice, every information on stocks is continuously and almost instantly analyzed by professionals, which ensures there is no undiscovered value. Therefore, the value of stocks usually reflects the performance, opinions, and expectations of investors based on all available disclosed information. Although all information has an impact on the value of a company, publicly disclosed information have a greater impact on the valuation of a company (Ken and Jen, 1979; Finnerty, 1976, and Davies and Canes, 1978). Since nonobligatory information are formed by the management, the release of this information has the impact of enabling investors to make decisions with greater accuracy (Levine and Smith 33-77). To elaborate, financial theorists argue that adequate disclosure of financial information may result in more accurate cash flow predictability, which can reduce uncertainty and in turn lower the discount rate on projected future cash flows. Further, in the capital asset pricing model (CAPM), the available financial information is used in determining the price of a stock. In the strong form analysis of financial information, investors espouse that all information including the privileged information is reflected in the price of a stock (Bettis 406-415).
Reason for Caution in Additional Disclosure
Inasmuch as the release of essential corporate information increases the firm’s competitive position, the exposure of this information to competitors may reduce a business’ competitive position. As a result, it may reduce the valuation of a company’s stocks. In light of this, wealth-maximizing corporations must conceal information, which if exposed would damage the company’s future cash flow streams (Donoher, Reed, and Storrud-Barnes 547-569). Simply, the release of non-obligatory information has positive returns at the start of a business, however, disclosing this information beyond a given threshold relinquished the competitive advantage of a business (Bettis 406-415). In general, the release of more sensitive information concerning a business results in deterioration of company’s value (Bruton, Sacco, and Didlake 165-169).
Sec Guidelines in Financial Disclosure
The US Securities and Exchange Commission (SEC) requires all organizations to disclose their information in four parts in the form 10K. The issues that SEC requires be disclosed are listed as below:
- Description of the products the business offers
- Properties owned by the business
- Legal proceedings (Hawkins, Manning, and Bryan 60-64).
- Type and nature of securities in the business
- Financial information relating to the business
- Management disclosures in the business
- Audited financial statements in the company
- Information on the management process in the company such as code of ethics and members of various committees
- Internal control procedures in the company
- Executives compensation
- Ownership of securities in the company
- Related party transactions
- Fees paid to accountants and auditors
- Exhibits of the company’s financial performance (SEC, 2016)
Review of the Regulations on the Information Firms Should Disclose About Strategy and Value Creation When Presenting Their Annual Results
The UK government has established clear policies and guidelines on how financial information must be disclosed in a company. Generally, these policies aim at ensuring the interest of all stakeholders in a company are protected through proper disclosure of relevant information (FRC, 2016). The UK’s disclosure and transparency rules are clearly indicated in the FCA book, and they are implemented through various European governments’ directives.
UK Guidelines on Financial Disclosure
Generally, the transparency obligations directive sets out regulations on the periodic notification on interest on shares as well as the disclosures to be made in the financial statements. The market abuse directive on its part sets regulations that prevent abuse of the market through acts of insider information and disclosure of sensitive information such as dealings on shares. In addition, it also sets regulations on corporate governance and regulations requiring for the establishments of audit committees (Deloitte, 2016a).
At a minimum, all organizations are expected to prepare annual financial statements within the first four months of a financial year. These documents must be available to the public for at least ten years. These financial statements must comply with EU-IFRS or the UK accounting standards. In addition, there must be a management report that provides a fair review if the issuer’s business and any uncertainty that it is facing. There must also be a responsibility statement that indicates whether the financial statements provide a true and fair view of the company according to the management. Finally, there must be a listing rule which indicates the additional guidelines that are followed by businesses that have closed-ended investment companies (Deloitte, 2016a).
All businesses that have issued shares are required to prepare half year financial reports within three months after the elapse of the half year. Generally, the half-year financial statements must be prepared according to IAS 34 or UK’s standards. Finally, there must be a responsibility statement as well as an interim management report that has important information on the events that have occurred in the given financial period (Deloitte, 2016a).
Businesses that have public shares are required to issue an interim management statement in the first and the sixth month of a financial year. However, businesses that do not issue shares as well as those that publish quarterly financial reports do not need to prepare the stated interim management statements (IMS). In general, the IMS provides explanations on the material events that have occurred in a given financial period. The IMS must be prepared ten weeks after the start of a financial period and at least 6 weeks before the end of the period (Deloitte, 2016a).
UK Adherence to IAS Law
Since the UK adheres to the International Financial Reporting Standards (IFRS), then, it also follows the International Accounting Standards (IAS) that are made by IFRS. IAS 1 gives the minimum requirements for the presentation of financial statements by a company. Simply, these requirements are of the going concern, accrual basis of accounting, and the current and non-current distinctions of assets and liabilities. Further, IAS 1 also requires that presentation of financial statements is composed of statements of financial position, statements of comprehensive income, statement of the changes in equity, and a statement of cash flows.
IAS 1 (2007) sets the regulations on how financial statements must be prepared so that they are comparable with those of previous periods as well as those of other entities. Generally, this guideline provides information on the structure, presentation, and minimum requirements of contents of various financial statements. IAS 1 also provides information on the scope of the financial statements. In addition, IAS 1.9 provides guidelines on how to present information on an entity’s assets, liabilities, equity, income and expenses, cash flows, and contributions to owners. Further, the IAS requires fair presentation of financial statements. Fair presentation requires a faithful presentation of the results of financial transactions on the income statement. The use of additional disclosures ensures that financial statements are presented in a fair manner (Deloitte, 2016b).
Generally, financial statements are prepared with the assumption that the entity is a going concern. Simply, this assumption is based on the belief that the entity will be in existence in the near future. Therefore, if the management realizes that the entity will not be in existence in the near future, these statements should not be prepared on a going concern basis. IAS 1.27 requires all financial statements except the cash flow statement to be presented using an accrual basis of accounting. In order to ensure comparability, IAS 1.45 requires that once a particular presentation and disclosure format has been used, it should be retained for ease in comparability. In order to ensure proper aggregation and classification of items based on materiality, IAS 1.29 provides that material items of a similar class may be presented separately in the financial statements. In addition, this guideline also recommends that immaterial items of dissimilar classes may be aggregated. Finally, IAS 1 provides guidelines on the structure of financial statements as well as on regulations that require a proper indication of the reporting period of an entity (Deloitte, 2016b).
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