an accounting practice that makes sure there is enough information in reports and financial statements for investors and creditors to correctly interpret and analyze a company's performance. This practice is standardized so that an investor can easily compare one company to another.
Adequate Disclosure Details
Several different organizations set accounting standards. The following organizations set the rules for corporate disclosures:
- Financial Accounting Standards Board (FASB)
- International Accounting Standards Board (IASB)
- Government Accounting Standards Board (GASB)
The Securities and Exchange Commission (SEC), which oversees the securities market, ensures investors are protected, and corporations comply with the rules. The Financial Industry Regulatory Authority (FINRA) regulates brokers and broker-dealers and the disclosure guidelines.
A company can prepare adequate disclosure reports internally if the company has the right employees. They can also be prepared externally by someone hired to help the company file the reports.
Example of Adequate Disclosure
One example of adequate disclosure would be when a company files a Form 10-K at the end of the fiscal year. The Form 10-K gives an overview of the company's financial performance in addition to audited financial statements. Companies with more than $700 million of outstanding shares have 60 days after the end of the fiscal year to submit the 10-K. Companies with $75-$700 million of outstanding shares have 75 days to file the 10-K.
AB, Inc. ends the fiscal year on December 31st. At the end of 2008, it has $100 million in outstanding shares. This means that AB, Inc. must have its 10-K submitted by March 15th, which is the 75th day of the year.
Types of Adequate Disclosure
There are several different forms and reports that a company must file. They must give enough information for an investor or creditor to evaluate how the company is doing in each of these items. Listed below are some of the forms and reports.
- Form 10-K – Must be submitted 60-75 days after the end of the fiscal year. The filing date depends on the worth of the outstanding shares the company has. This form must include an overview of the company's financial health, audited financial statements, description of the business, and listing of subsidiaries. It also includes how the company generated its revenue and information about the executive team.
- Quarterly 10-Q reports – Must be filed 40 days after the end of the quarter for companies with $75 million or more in outstanding float or shares. This report has unaudited financial statements, financial results for the past three months, and year-to-date information.
- 8K Filing – This is submitted whenever the company experiences major events. Some of these events might include the sale or disposition of assets, bankruptcy, changes in management, mergers, and acquisitions.
All of these reports are supposed to help investors and creditors know how the company is performing financially. The reports are also standardized so that an investor or creditor can compare several different companies equally. All of these reports allow investors and creditors to make well-informed decisions about companies they want to work with.