What Disclosures Are Required for All Financial Statements?
The importance of disclosures in financial statements cannot be understated. Public, private, and non-profit organizations alike all use disclosures in their financial statements to deliver critical information to stakeholders like:
- Internal Stakeholders:
- Board members
- Internal departments
- External Stakeholders:
- Regulatory bodies
Disclosures offer transparent insight into an organization’s overall financial health and prevent ethical and legal issues from occurring. This transparency also keeps all leaders, influencers, and stakeholders informed, allowing them to make more targeted and beneficial decisions on behalf of the organization.
Additionally, proper disclosure management allows organizations to avoid serious negative impacts such as damaged investor confidence, fines, and time-consuming restatements. It’s obvious that financial statements and disclosures are necessary if a business is to perform lawfully and maximize efficiency. But how does it all work?
In this blog, we will examine a few types of disclosures in financial statements, and provide some examples of what mandatory disclosures in financial statements can look like in different situations.
What Are the Types of Disclosures?
Although the precise information in a financial disclosure varies widely depending on the organization’s national regulations and other influences, there are some commonalities. In this section, we will discuss the disclosure guidelines as described by the International Financial Reporting Standards (IFRS), and the United States Generally Accepted Accounting Principles (GAAP). We will also provide examples of common disclosure statements from the United States, Canada, and the European Union.
What Disclosures Are Required by IFRS?
The IFRS 7 international financial reporting standard, officially named “Financial Instruments: Disclosures'', instructs organizations to provide specific disclosures relating to financial statements and instruments. Currently, two main categories of disclosures are required by IFRS 7:
- Information regarding the significance of financial instruments used by the participating organization.
- Information regarding the nature and extent of risks arising from the established financial instruments.
You can read the specific details related to each of these categories here.
What Disclosures Are Required by GAAP?
The GAAP Financial Statement Disclosures Manual functions as a comprehensive guide to financial statement disclosures and establishes accounting best practices for organizations based in the United States. This guide offers hundreds of realistic samples of disclosures for financial reviews, compilation engagements, audits, and many more scenarios.
Although you cannot view these specific disclosure guidelines online, you may purchase the updated GAAP disclosure guidelines from many book sellers.
As we mentioned above, disclosure practices differ depending on where an organization is located. To illustrate, here are a few examples of regulatory reporting entities that govern standards for financial disclosures for multiple nations:
- European Single Electronic Format (ESMA/ESEF) for various European countries
- Securities and Exchange Commission (SEC) for the United States of America
- Her Majesty's Revenue and Customs (HMRC) for the United Kingdom
- Companies and Intellectual Property Commission (CIPC) for South Africa
To provide a clearer picture, we have outlined a few examples of the most common types of disclosures used in various countries throughout the world.
The United States of America (USA):
- 10-K: 10-Ks are annual reports that are meant to offer an organization’s shareholders information regarding the organization’s current financial stance and future-facing goals. These reports often include the following: the organization’s financial history, organizational structure, financial statements, earnings per share, subsidiaries, and executive compensation.
- Environmental, Social, and Governance (ESG) Disclosure: In the US, organizations are instructed to complete ESG Disclosures to provide transparency regarding their sustainability performance. These disclosures are intended to help investors fully understand the organization’s overall environmental, social, and governance impact. This gives investors the chance to make more informed decisions and allows them to hold organizations accountable.
- Environmental Reporting: Similar to the US’ ESG Disclosure, Canada requires its organizations to provide disclosures detailing how their operations impact the environment. For example, a business may have chosen to install solar panels in their new factories to embrace renewable energy technologies. On the other side, a company could have built a new factory location to expand their operations, harming natural habitats. Both instances would be recorded in an environmental report for stakeholders.
- Form 58-101F: Canada’s 58-101F form is designed to inform shareholders of various corporate governance practices. This allows shareholders to understand the scope of their involvement with an organization fully. For example, section B of this form states that organizations are required to “Disclose the identity of directors who are not independent, and describe the basis for that determination.”
The European Union (EU):
- Environmental and Social Disclosure: For all countries in the European Union, organizations with over 500 employees are required to disclose information regarding their environmental impact and adherence to social/human rights regulations. This includes measures against corruption, employee treatment, and sustainability efforts.
- Annual Financial Statements: Following IFRS standards, organizations in the EU are required to provide consolidated financial statements that offer a comprehensive insight into their overall financial performance. This requires organizations to prepare a balance sheet, profit and loss accounts, and a certain number of notes to each financial statement.
Disclosure Management is Complicated—Fluence Can Help You Simplify
It’s no secret that disclosure management is difficult. Because disclosures are required legally and are critical to inform any organization’s decision-making process, accuracy is of the utmost importance. However, given the large-scale and time-consuming nature of financial reporting, errors often plague financial statements. This causes teams to complete labor-intensive restatements and can even result in legal trouble.
Fortunately, disclosure management systems like Fluence allow organizations to save time and reduce the risk of error in their financial statements. Our disclosure management system allows our users to:
- Combine data coming from different sources in the same document
- Work concurrently on different parts of a single document
- Check the consistency of data across different documents
- Automatically update data across multiple databases
With Fluence by your side, you can cast your worries away and focus on your organization’s success. Contact us today, and we will walk you through our Collaborative Disclosure Management process and inverse design.