Required Disclosures in Financial Reports

Abstract

his paper considers required disclosures (the portions of audited financial reports that are not recognized) from both a standard-setting perspective and a research perspective. My intent is to describe standard-setting issues (that is, the questions faced by standard setters in establishing disclosure requirements) and research issues (that is, the questions faced by researchers in providing analytical and empirical evidence about required disclosures).I By recognition, I mean depictions in numbers with captions on the face of the financial statements; by required disclosures, I mean display in the notes and supporting schedules that accompany financial statements.2 Some disclosed items in financial reports are not recognized-and likely never will be-because they cannot be expressed in numbers or, more narrowly, in currency units. Examples include the qualitative description of accounting policies, a summary of inputs to the calculation of a recognized number, and a sensitivity analysis. While I will touch on these types of items, particularly the latter two, my primary focus will be on items that are not recognized but could be. The amount of financial reporting information that is communicated by means of required disclosures is significant, and has been increasing over time, with no sign of abatement. Despite their abundance, required disclosures are not well understood: we lack a comprehensive theory of mandatory disclosures; many questions remain as to how preparers, auditors, and users of financial reports view disclosures, particularly as compared to recognized items; and the Financial Accounting Standards Board (FASB)'s conceptual framework does not provide either a conceptual purpose for disclosures or criteria to support