To Improve Financial Reporting, We Need to Disclose More Relevant Information

Abstract

The goal of financial reporting is to provide useful information for decision makers. Effective financial reporting is essential for efficient financial markets and provides transparency and accountability. Globally, there are two primary financial reporting systems. The United States, uses generally accepted accounting principles (U.S. GAAP). Outside the United States, the rest of the world uses international financial reporting standards (IFRS). Both systems require both financial and non-financial disclosures for companies that issue financial statements.

One required disclosure for both GAAP and IFRS is for companies to calculate earnings per share (EPS). This is an important financial ratio, but it is not the only important financial ratio. However, it is currently the only financial ratio that is required in company annual reports both in GAAP and in IFRS. In this paper, we recommend additional financial disclosures including a recommended set of financial ratios. These additional disclosures would be inexpensive but would provide relevant additional information to investors and thus would improve the quality of financial reporting.

Keywords: GAAP, IFRS, financial reporting, financial ratios, required disclosures

JEL Classification: M41, G14, G32