Enterprise-wide disclosures offer a comprehensive view of a company's financial performance and risks beyond basic financial statements. These disclosures are crucial for investors and analysts to assess a company's health, especially in mergers, acquisitions, and complex financial structures.
Key types of enterprise-wide disclosures include segment reporting, related party transactions, interim reporting, subsequent events, and management's discussion and analysis. These provide stakeholders with detailed insights into a company's operations, financial position, and future prospects.
Types of enterprise-wide disclosures
Enterprise-wide disclosures provide stakeholders with a comprehensive view of a company's financial performance, risks, and future prospects beyond the basic financial statements
These disclosures are crucial for investors and analysts to assess the company's overall health and make informed decisions in the context of mergers, acquisitions, and complex financial structures
Key types of enterprise-wide disclosures include segment reporting, related party transactions, interim reporting, subsequent events, management's discussion and analysis (MD&A), and various other required and voluntary disclosures
Segment reporting requirements
Reportable operating segments
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Top images from around the web for Reportable operating segments
Operating Models: How Nonprofits Get from Strategy to Results | Bridgespan View original
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Accounting Information | Boundless Business View original
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Basic Accounting Procedures | OpenStax Intro to Business View original
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Operating Models: How Nonprofits Get from Strategy to Results | Bridgespan View original
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Accounting Information | Boundless Business View original
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are components of a company that engage in business activities from which they may earn revenues and incur expenses, and for which discrete financial information is available
Reportable segments are identified based on the "management approach," which aligns with how the chief operating decision maker (CODM) organizes segments internally for decision-making and performance assessment
Companies must disclose information about their reportable segments, including revenues, profits or losses, assets, and other key financial metrics
Segment reporting thresholds
To determine if an operating segment is reportable, companies apply quantitative thresholds based on revenue, profit or loss, and assets
An operating segment is considered reportable if it meets any of the following criteria:
Its revenue (including both external and intersegment sales) is 10% or more of the combined revenue of all operating segments
The absolute amount of its profit or loss is 10% or more of the greater, in absolute amount, of either the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that reported a loss
Its assets are 10% or more of the combined assets of all operating segments
Segment disclosure information
For each reportable segment, companies must disclose various financial and non-financial information
Required disclosures include:
General information, such as factors used to identify reportable segments and types of products and services offered
Information about reported segment profit or loss, including revenues from external customers and intersegment transactions, interest revenue and expense, depreciation and amortization, and other significant non-cash items
Reconciliations of total segment revenues, total segment profit or loss, total segment assets, and other segment items to corresponding consolidated amounts
Companies may also choose to disclose additional segment information voluntarily, such as geographic data or information about major customers
Related party transactions
Definition of related parties
Related parties are entities or individuals that have the ability to control, jointly control, or significantly influence the company or its management
Examples of related parties include subsidiaries, associates, joint ventures, key management personnel, and close family members of key management personnel
Transactions between the company and its related parties may not be conducted at arm's length and could potentially impact the company's financial performance and position
Types of related party transactions
Common types of related party transactions include:
Sales or purchases of goods or services between the company and a related party
Loans or other financial transactions between the company and a related party
Leases of assets between the company and a related party
Transfers of research and development or intellectual property between the company and a related party
Provision of guarantees or collateral by the company for a related party's obligations
Disclosure of related party transactions
Companies are required to disclose the nature and extent of their related party transactions in the
Disclosures should include:
The nature of the related party relationship
A description of the transactions, including amounts involved and any outstanding balances
Terms and conditions of the transactions, including whether they are conducted at arm's length
Any guarantees or commitments arising from the transactions
The purpose of these disclosures is to provide and help users of the financial statements understand the potential impact of related party transactions on the company's financial position and performance
Interim reporting
Interim reporting requirements
Publicly traded companies are required to provide interim financial reports on a quarterly basis (Form 10-Q in the United States)
Interim reports provide timely information to investors and other stakeholders about the company's financial performance and position between annual reporting periods
Interim financial statements are typically unaudited but must be reviewed by an independent auditor
Condensed financial statements
Interim financial reports typically include condensed financial statements, which are a summarized version of the full annual financial statements
Condensed financial statements include the balance sheet, income statement, statement of cash flows, and statement of changes in equity
While condensed, these statements must still comply with generally accepted accounting principles (GAAP) and provide sufficient detail for users to understand the company's financial position and performance
Form 10-Q vs 10-K
Form 10-Q is the quarterly report filed with the by publicly traded companies in the United States
Form 10-K is the annual report filed with the SEC, which includes the company's audited financial statements and a more comprehensive discussion of its business, risks, and financial condition
While both forms provide important information to investors, the 10-Q is focused on interim financial results and significant events during the quarter, while the 10-K provides a more detailed and holistic view of the company's performance and prospects
Subsequent events
Recognized vs unrecognized events
Subsequent events are events or transactions that occur after the balance sheet date but before the financial statements are issued or available to be issued
Recognized subsequent events provide additional evidence about conditions that existed at the balance sheet date and require adjustments to the financial statements (Type I events)
Unrecognized subsequent events provide evidence about conditions that did not exist at the balance sheet date but arose after that date and do not require adjustments to the financial statements (Type II events)
Disclosure of subsequent events
Companies must disclose both recognized and unrecognized subsequent events in the notes to the financial statements
For recognized subsequent events (Type I), the company should disclose the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made
For unrecognized subsequent events (Type II), the company should disclose the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made, if the event is material and non-disclosure would influence the economic decisions of users
Reissuance of financial statements
In some cases, subsequent events may be so significant that they require the reissuance of previously issued financial statements
Reissuance is necessary when the subsequent event provides evidence of conditions that existed at the balance sheet date and the impact on the financial statements is material
When financial statements are reissued, the company must disclose the reason for the reissuance, the effect of the subsequent event on the previously issued financial statements, and any other relevant information
Management's discussion and analysis (MD&A)
Purpose of MD&A
The purpose of the MD&A section is to provide investors with a narrative explanation of the company's financial performance, financial condition, and future prospects from management's perspective
MD&A complements the financial statements by providing context and insights that help users better understand the company's results and assess its future performance
MD&A is a required disclosure for public companies in their annual (10-K) and quarterly (10-Q) reports
Key elements of MD&A
MD&A typically covers the following key elements:
Overview of the company's business, including its products, services, and market segments
Discussion of the company's financial performance, including revenue growth, profitability, and cash flows
Analysis of the company's financial condition, including liquidity, capital resources, and significant balance sheet items
Description of the company's critical accounting policies and estimates that require significant judgment or assumptions
Discussion of trends, events, or uncertainties that may impact the company's future performance or financial condition
Forward-looking information in MD&A
MD&A often includes forward-looking statements that discuss management's expectations, plans, or projections for the future
Forward-looking statements may relate to topics such as expected revenue growth, anticipated costs or expenses, planned investments or acquisitions, or the impact of economic or industry trends
Companies must accompany forward-looking statements with cautionary language that identifies them as such and disclaims any obligation to update or revise them, except as required by law
Investors should be aware that forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied
Other required disclosures
Legal proceedings and contingencies
Companies must disclose information about material legal proceedings, including the nature of the proceedings, the parties involved, and the potential impact on the company's financial position or results of operations
Contingencies, such as pending lawsuits or environmental liabilities, must be disclosed if the likelihood of loss is probable or reasonably possible and the amount can be reasonably estimated
Risk factors and uncertainties
Companies must disclose the most significant risk factors that could adversely affect their business, financial condition, or results of operations
Risk factors may include industry-specific risks, competitive pressures, regulatory changes, economic conditions, or other uncertainties that could impact the company's performance or prospects
The purpose of risk factor disclosures is to help investors understand the key challenges and uncertainties facing the company and make informed decisions about investing in its securities
Off-balance sheet arrangements
Off-balance sheet arrangements are transactions, agreements, or contractual arrangements that may have a material current or future effect on the company's financial condition, but are not recorded on the balance sheet
Examples of off-balance sheet arrangements include certain leases, joint ventures, or special-purpose entities that are not consolidated in the company's financial statements
Companies must disclose the nature and purpose of their off-balance sheet arrangements, as well as the potential risks or benefits associated with these arrangements
Voluntary disclosures
Types of voluntary disclosures
Voluntary disclosures are information that companies choose to provide beyond what is required by law or regulation
Examples of voluntary disclosures include:
Non-GAAP financial measures, such as adjusted earnings or EBITDA
Supplementary financial information, such as segment data or key performance indicators
Sustainability or corporate social responsibility reports
Management forecasts or guidance about future performance
Detailed information about the company's business strategy, competitive position, or market trends
Benefits vs costs of voluntary disclosure
Voluntary disclosures can provide several benefits to companies and investors:
Reduced information asymmetry between management and investors, leading to lower cost of capital
Enhanced credibility and transparency, which can improve investor confidence and analyst coverage
Differentiation from competitors and signaling of superior performance or prospects
However, voluntary disclosures also involve costs and risks:
Preparation and dissemination costs, including time and resources required to gather and present the information
Proprietary costs, if the disclosures reveal sensitive information that could be used by competitors
Litigation risk, if the disclosures are later found to be incomplete, inaccurate, or misleading
Credibility of voluntary disclosures
The credibility of voluntary disclosures depends on several factors:
The consistency and comparability of the disclosures over time and across companies
The reliability and verifiability of the underlying data and assumptions
The presence of independent assurance or attestation, such as auditor review or third-party certification
The track record and reputation of the company and its management for providing accurate and transparent information
Investors should carefully evaluate voluntary disclosures and consider their credibility in the context of the company's overall financial reporting and disclosure practices