Disclosure Of Financial Instruments Research Articles

New CfD disclosure regime comes into force on June 1, 2009

PurposeThe purpose of this paper is to explain changes to Chapter 5 of the UK Disclosure and Transparency Rules (DTR 5), introducing new disclosure requirements relating to holdings of financial instruments that have a similar economic effect to shares, such as CfDs, that took effect on June 1, 2009.Design/methodology/approachThe paper explains the principles behind the extended disclosure regime and summarizes questions and answers from the FSA to assist market participants' understanding of that regime, covering issues such as domicile of the issuer, instruments covered, how a disclosable holding is calculated, the inclusion of financial instruments relating to unissued shares, treatment of holdings acquired before June 1, 2009, potential double counting, how the regime applies to intra‐group movements of holdings and delta‐adjusted reporting, and exemptions for client‐serving intermediaries, market timing, trading books, and investment management.FindingsQualifiying financial instruments give a legal right to acquire (on the holder's own initiative) shares already in issue and with voting rights attached. The policy behind the new regime is to require the disclosure of financial instruments with similar economic effect to qualifying financial instruments which are used to build stakes in companies.Originality/valueThe paper presents practical guidance from experienced financial institution and securities lawyers.

Influences of proprietary and political costs on voluntary disclosure relating to financial instruments before and after mandatory requirements

The study examines whether the introduction of an accounting standard relating to the disclosure of financial instruments affects voluntary corporate disclosure, and the impact of proprietary and political costs on such disclosure decisions. Using the annual reports of 70 Australian listed companies over a period of 6 years giving 420 firm-year observations, this study investigates the comparative impacts of proprietary and political information costs on management’s voluntary disclosure decisions relating to financial instruments. The regulatory disclosure environment, the impact of proprietary costs (proxy by a firm’s investment growth opportunities) and political costs (proxy by a firm’s probability of financial distress, size of a company and negative media attention) relating to the voluntary disclosure of financial instruments were investigated. Results of this study provide evidence that the mandatory disclosure of non-proprietary information relating to financial instruments has resulted in an increase in the voluntary disclosure of related proprietary information. For the effects of proprietary and political costs, findings from the study suggest that a firm’s growth opportunities are significant in limiting voluntary disclosure of proprietary information in the period prior to regulation. Consistent with political cost hypothesis, legitimacy theory and media agenda-setting theory, the size of a company and high negative media attention are significantly positively related to voluntary corporate disclosure. However, financial distress has no effect on the voluntary disclosure of financial instruments-related information.

Determinant of Financial Instruments Disclosure Quality Among Listed Firms in Malaysia

A lack of proper reporting guidelines on the reporting of the market value of financial instruments may lead to poor disclosure of the value of firms' financial instruments (and net worth). This poor disclosure may subsequently mislead the investors in making their investment decisions. This paper investigates the disclosure quality of financial instruments disclosure of Malaysian firms listed in the Bursa Malaysia. In this paper we explore the association between the disclosure quality of financial instruments information and the firm characteristics. We measure disclosure quality based on a disclosure index which is based on seven categories of information required in Malaysian Accounting Standards Board (MASB) 24 Financial Instruments: Disclosure and Presentation. Our results indicate that on average the disclosure quality among Malaysian firms is low. However, the level of disclosure is increasing, especially in the period immediately after the issuance of MASB 24. We find that firm size, debt to total assets, and risk management committee are associated with disclosure quality of financial instruments. Further, we also find that post period is highly related with disclosure quality. This indicates that the implementation of financial instruments disclosure standards does influence firms to provide high quality of reporting.

Corporate governance determinants on Australian resource companies' financial instrument disclosure practices

PurposeThis paper seeks to investigate the corporate governance determinants of financial instrument disclosure (FID) practices of Australian listed resource firms in their annual reports for the 2005 financial year. This is an important time period to explain FID patterns for Australian resource companies leading up to formal adoption of the Australian equivalents to the International Financial Reporting Standards (IFRS).Design/methodology/approachThe extent of FID was measured using a Financial Instrument Disclosure Index (FIDI) comprised of 120 items of both mandatory and discretionary financial instrument information. Hypothesis testing used empirical data from a representative sample of Australian listed resource firms.Research limitations/implicationsThe results of regression analysis demonstrate that corporate governance characteristics of firms are significant determinants of FID patterns. Univariate and multivariate results showed that FIDs were significantly and positively associated with strength of corporate governance structure and the control variables – leverage, firm size and industry.Originality/valueThis paper contributes to an emerging paradigm that emphasises the link between firms' governance structures and their disclosure responses to financial instruments and in particular, financial derivatives.

Recognition, Measurement And Disclosure Of Financial Instruments According To International Financial Reporting Standards (IFRS)

Recognition, Measurement And Disclosure Of Financial Instruments According To International Financial Reporting Standards (IFRS)

The transparency of derivative disclosures by Australian firms in the extractive industries

This paper investigates the transparency of derivative disclosures of Australian firms in the extractive industries using 1998 to 2001 financial reports. The quality of financial reporting has become a major corporate governance issue since the collapse of prominent companies such as Enron in the United States, HIH Insurance in Australia, and, of particular relevance here, Barings PLC in the United Kingdom, where the losses were caused by derivative instruments. Disclosure transparency is an important component of the quality of financial reporting. We measure transparency based on a disclosure index developed from AASB 1033 Presentation and Disclosure of Financial Instruments. We examine the relationship between transparency and firm characteristics represented by size, performance, growth opportunities, auditor and type of extractive firm. The results indicate that the transparency of derivative disclosures among firms in the extractive industries has increased over the period. However, there is still evidence of non-compliance with the disclosure requirements, especially in relation to net fair value. We find that firm size, price-earnings ratio and debt-to-equity ratio, and to a lesser extent, market-to-book ratio and profitability are associated with disclosure transparency.

Historical cost versus fair value accounting in banking: Implications for supervision, provisioning, financial reporting and market discipline

The issue of historical cost accounting (HCA) versus fair value accounting (FVA) is a fruitful area for research, when examined under the prism of the intersection between bank capital and bank risk management, and the regulators' and the standard setters' approach towards the purposes of HCA and FVA. This paper debates the applicability and enforceability of two diametrically opposite approaches to bank accounting, their effects on transparency, reliability and the associated regulatory (official) discipline. It analyses the usefulness, relevance and reliability of these two contrasting accounting frameworks for the measurement, recognition and disclosure of bank financial instruments in the banking books (particularly loans and loan-loss provisions). It touches upon the benefits and costs associated with the application of these accounting frameworks. It suggests that the principled advantages of turning to full FVA (FFVA) for banks are outweighed by the pragmatic and practical difficulties in operationalising such an accounting treatment.

Reputation costs: the impetus for voluntary derivative financial instrument reporting

The purpose of this study is to investigate managers’ responses to derivative financial instrument disclosure requirements proposed by the Australian accounting standard setting bodies and the Australian Society of Corporate Treasurers (ASCT). Confronted with societal pressures to make derivative activities more transparent, managers responded in a manner that can be explained by legitimacy and institutional theories and the maintenance of the managers’ and their firms’ financial reporting reputations. Discretionary reporting is predicted to be positively related to the magnitude of reputation costs confronting managers and firms. While the desire for legitimacy is unobservable, financial reporting reputation is proxied by the following attributes—ASCT, auditor, and Group of 100 (G100) affiliations. With the exception of auditor affiliation, results from the analysis are consistent with the hypotheses. Alternative explanations of the results may be possible. However, the consistency and significance of the results implies that legitimacy and institutional theories provide a plausible explanation as to what impulse prompted managers’ responses. (The plausible explanations provided are morally based [ Louch (1966). Explanation and human action. Berkeley: University of California Press].) We are grateful to an anonymous referee for this insight into our explanation). Further research to investigate managers’ reporting incentives is recommended.

Fair‐value accounting: examining the consequences

The Joint Working Group proposals on fair value disclosure of financial instruments have provoked controversy. Here the author looks at how the proposals would impact on banks’ risk management, lending policies and pricing.