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Financial Statement Footnote Disclosures-Purposes, Subject and Number: The Hong Kong Experience

Article excerpt

ABSTRACT

International financial markets are rapidly becoming a single global market. For these markets, most large institutional users are not satisfied with the existing levels of disclosures by multinational firms. One purpose of this research study was to investigate existing footnote disclosure practices for companies in Hong Kong. This study classified, summarised and analysed financial statement disclosures for Hong Kong companies. In a recent US study, Barth and Murphy (1994) developed a framework to analyse the required footnotes for companies in the United States. This study uses a similar approach to examine the situation in Hong Kong. However, there are some significant differences. The Barth and Murphy study is extended to include the review of actual disclosures in Hong Kong financial statements. In this way, this project attempts to determine if existing disclosures for Hong Kong companies can be classified according to the purposes identified in the US study and by a review of Hong Kong standards. Descriptive statistics are provided for all disclosures. The results indicate that similar purposes have been met for Hong Kong companies traded on the Hong Kong Stock Exchange.

Keywords: footnote disclosures, Hong Kong accounting practices

PURPOSE

The purpose of this research study was to investigate existing footnote disclosure practices for financial statements in Hong Kong to determine if the existing disclosure requirements are comparable to the requirements in the US. This project is an attempt at helping to establish a conceptual framework to help evaluate any proposed disclosure requirements. The study classified, summarized and analyzed the footnote disclosures for a sample of Hong Kong companies. In an US study, Barth and Murphy (1994) developed a framework to analyze the required footnotes for companies in the United States. This study uses a similar approach to examine the situation in Hong Kong. However, there are some significant differences. The Barth and Murphy study is extended to include the review of actual disclosures in financial statements. In this way, this project attempts to determine if existing disclosures for Hong Kong companies can be classified according to the purposes identified in the US study and by a review of Hong Kong standards. A general comparison between the results for this study and the Barth and Murphy US study will be conducted as part of this project. No other similar study was identified during the literature search. A brief discussion of the IASC requirements is included in the international experience section.

BACKGROUND

International financial markets are rapidly becoming a single global market. For these markets, most large institutional users are not satisfied with the existing levels of disclosures by multinational firms (Taylor, 1995). In Hong Kong, different groups are concerned about disclosure issues. Ms. Cha, Securities and Futures Commission (SFC) executive director, has stated it was important to adopt international standards as part of the SFC and stock exchange's commitment to maintaining Hong Kong's competitiveness (Ibison, 1995). Also, a committee of the Hong Kong Society of Accountants announced a proposal that was submitted to the society's council in 1996 that included changes in corporate governance disclosure practices for implementation. For example, some are not happy about company disclosure reporting practices related to boards of directors. The Stock exchange listing division chief has criticized Hong Kong company board of directors for failing to disclose connected transactions as required by listing rules. He stated ignorance of the rules is not a valid excuse and the stock exchange is investigating some companies for not disclosing transactions with related parties. In most cases, the related party deals were not uncovered until public accountants did their audit (Tsang and Parwani, 1998).

Others in different countries have also suggested that there is a need to consider changes in current disclosure requirements. …