Voluntary disclosures in
the Annual Report signal
success
Stephen Wong Siu Kei (50184032)
Tony Chan Sai Chung (50183940)
Voluntary disclosures in
the Annual Report DO
signal success
Agenda
Definition of voluntary disclosure
Meaning of success
Types of voluntary disclosure
Study findings
Major benefits of voluntary disclosure
Real life Examples & Enron’s Case
Conclusion
Definition of voluntary disclosure
 mandatory
describes disclosures, primarily outside
the financial statements, that is not
explicitly required by GAAP or an SEC
rule
Meaning of success
From Company’s view:
1) Financial aspect
- cost of capital is lower
- profit & share price 
2) Non-Financial aspect
- better internal management
- growth e.g. market share 
Meaning of success
From investor’s view:
3) increase transparency
- helpful to investors for making investment
decisions
- satisfy the objective of disclosures
Types of voluntary disclosure
FASB study classifies 6 categories:
1st five categories: included in the AICPA
Special
Committee
on
Financial
Reporting’s comprehensive business report
model.
6th category: intangible assets
- increasing importance to companies and
investors
Types of voluntary disclosure
1) Business data
e.g. high-level operating data
2) Management’s analysis of business
data
e.g. reasons for changes in the operating and
performance-related data
Types of voluntary disclosure
3) Forward-looking information
e.g. opportunities and risks including those
resulting from key trends
4) Information about management and
shareholders
e.g. directors, management, major shareholders
Types of voluntary disclosure
5) Background about the company
e.g. broad objective and strategies
6) Information about intangible assets
e.g. R&D, human resources, customer relations
Study findings
1) FASB study “Improving Business Reporting:
Insights into Enhancing Voluntary Disclosures”
- support voluntary disclosure
2) “Disclosure Redundancy in Annual Reports”
- “there is no persuasive evidence that annual
report redundant voluntary disclosure is a
problem requiring intervention by professional
accounting or regulatory authorities”
Major benefits of voluntary
disclosure
1) Enhance transparency & credibility
- provide more information:
Good News + Disappointments
 lower risk and uncertainty
 cost of capital & required rate of return 
 attract more investment
Major benefits of voluntary
disclosure
e.g. If a company disclosed nothing, its
cost of capital, if any was available
would be very expensive. However,
informative disclosures that help
investors
interpret
companies’
economic prospects are believed to
reduce the cost of capital.
Major benefits of voluntary
disclosure
2) Prevent information asymmetry
-
different level of information between
management and investors
-  different level of information
- investors can know if there are shirking &
insider trading by management
Major benefits of voluntary
disclosure
3) Innovative business environment
- manifest an increasing and changing demand
for business information and a larger role for
voluntary disclosures
- setting or changing a new standard require
much time & discussion
 the existing regulatory and standard-setting
system may not be fast enough to keep up
with the changes
Different Companies do have Different
Important Aspects to Disclose
4) Different aspects to disclose
Each single company has different factors
and aspects that are especially important
to its success
Information about those factors and
aspects for the company will be especially
useful to investors
Different Companies do have Different
Important Aspects to Disclose
Examples
R & D activities appear to be important for
companies that manufacture and sell
medicines
The qualities of pop stars appear to be
important for entertainment companies
Different Companies do have Different
Important Aspects to Disclose
Can accounting standards determine a
definitive list of all important aspects to
disclose in any particular industry?
No. That’s Impossible
Why?
Different Companies do have Different
Important Aspects to Disclose
The reasons are:
Different companies have different views on
their own important aspects & factors
Different companies compete with each
other by employing different strategies in a
same industry
Different Companies do have Different
Important Aspects to Disclose
In summary:
Each company is unique
A one-size-fit-all accounting standard approach will
not work for all companies’ disclosure demands
Accounting standards can just rule all companies to
disclose some common owned information – cash,
liabilities, amount of expenses, etc.
Different Companies do have Different
Important Aspects to Disclose
Voluntary disclosures provide a good way for
companies to disclose their own important aspects
to investors
E.g. Medicines Company will disclose more
information about its R & D activities while
Entertainment Company will disclose more
information about its contracted Stars
Investors will have more relevant information for
making a better investment decision
Companies will be successful by attracting more
investors
Unrecognized Intangible Assets
are also Important
5) Unrecognized Intangible Assets
Accounting standards only allow a few
kinds of intangible assets to be stated
in balance sheets
For Example: Internally generated
goodwill is not allowed to disclose in
any financial statements
Unrecognized Intangible Assets
are also Important
However in some companies, the value of
their intangible assets are definitely more
valuable than tangible assets
It is very unfair to those companies if their
valuable intangible assets are not allowed
to disclose
Result  Unlikely to attract investors &
may mislead users’ decisions
Unrecognized Intangible Assets
are also Important
Example:
It is one of the Hong Kong famous media
and entertainment companies to provide
multimedia content and lifestyle information
to the global Chinese community
Unrecognized Intangible
Assets are also Important
What are the most important assets of
StarEastnet Company?
ALL POP STARS 

Unrecognized Intangible
Assets are also Important
However, all Pop Stars are not included in
the company’s balance sheet
GAAP prohibits the inclusion of human
assets in any financial statements
Investors would miss this important
information if they only investigate the
company’s balance sheet
Unrecognized Intangible
Assets are also Important
Extracted from Stareastnet’s annual
report:
“The celebrity element is what makes
the Group unique……the Group has
contracted with over 200
artistes……Leon Lai…..Jackie
Chan…… Kelly Chan…………….”
Corporate Governance
Best Hong Kong Corporate Governance
Disclosure Award 2001 organized by HKSA
Winners are all successful companies e.g. HSBC
All winners did a lot effective voluntary
disclosures in their annual reports
Annual Reports  Good transparency &
accountability
Prove that successful companies do make a lot
of voluntary disclosures and more voluntary
disclosures signal better corporate governance
Real Life Examples
Well Performed companies like HKBC &
Hutchison Whampoa Ltd, they do have
a lot of voluntary disclosures
Increase Transparency & Attract More
Investors
Bad Performed companies are not the
same
Less voluntary disclosures
Real Life Examples
Successful companies do disclose more
Further Supported by the Study
“Disclosure Redundancy in Annual
Reports”
“ t-tests indicate that large, profitable, low
risk companies disclose significantly more
than smaller, less profitable and high risk
companies”
Enron’s Case
Implication After the figures in financial
statements were audited, investors have
to trust and they do not have other means
to judge the correctness of the figures
After the collapse of Enron, investors
become more vigilant than before and
look deeper into companies and demand
full disclosures
Enron’s Case
Voluntary disclosures provide an extra way
for investors to judge a company’s
performance
Only successful companies are confident to
disclose more information voluntarily as to
increase transparency and attract more
investments
Conclusion
We stress that effective voluntary disclosures
do signal success
In company’s view, voluntary disclosures
increase transparency, reduce information
asymmetry & disclose more intangible assets
Success  Lower cost of capital, attract
more investments, more credibility &
enhance corporate governance
Conclusion
In Investor’s view, voluntary disclosures
provide extra information
Success  Able to make better
investment decisions & better capital
allocations