Question

The AICPA Special Committee on Financial Reporting proposed the following constraints related to financial reporting.

1. Business reporting should exclude information outside of management’s expertise or for which management is not the best source, such as information about competitors.

2. Management should not be required to report information that would significantly harm the company’s competitive position.

3. Management should not be required to provide forecasted financial statements. Rather, management should provide information that helps users forecast for themselves the company’s financial future.

4. Other than for financial statements, management need report only the information it knows. That is, management should be under no obligation to gather information it does not have, or does not need, to manage the business.

5. Companies should present certain elements of business reporting only if users and management agree they should be reported—a concept of flexible reporting.

6. Companies should not have to report forward-looking information unless there are effective deterrents to unwarranted litigation that discourages companies from doing so.

For each item, briefly discuss how the proposed constraint addresses concerns about the costs and benefits of financial reporting.

Answer 1

1. The information which the management is not clear, do not have knowledge, etc, should be left, and do not make any decisions or statements about these. Hence, this information creates more confusion to the firm rather than clarity. So, it is better to leave such kind of information related to anything, particularly related to competitors.

2. The information which can be harm to the company's competitive position, such kind of information can not or not required to report by the firm. Due to this, the company position may be collapsed in the market, and resulted in huge damage to the firm. Hence, it is better to not report by the firm.

3. Management can give inputs to the investors or public, about the future of the firm and give space to them to estimate the future of the firm. It helps the investors to analyse the firm, its performance, and progress, make decisions. Instead of this, if the firm itself announce the forecasted financial statements, it may not give room to the investors and some times the estimations are not going to be correct.

4. The obligation of any business firm is to disclose all the financial information, other than this, it can disclose the information which it has, but no need to search for information and disclose to the public or investors.