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UBC Theses and Dissertations

A descriptive study of the notes to financial statements in the annual reports of 75 selected Canadian public companies, 1938-1963 Goh, Soo Siah

Abstract

Much has been discussed and written on the need for full disclosure in the Annual Report. Various devices are available to meet this objective. The use of notes to financial statements is one such method. The potentiality of notes as a vehicle for attaining full disclosure has not been fully recognized nor exploited; the literature on the use of notes as a disclosure device, is extremely limited and sketchy. It is towards the collection of information on the content, format and use of notes that this study is undertaken. An historical perspective is provided by observing the changing form, content and use of notes over the years 1938 through 1963. A stratified random sample of 75 Canadian companies was drawn from the- 610 companies listed on the various Canadian Stock Exchanges as at December 1963. The Annual Reports of these companies for five specific years formed the basic material for the study. Stratification of the sample was along industrial lines in an attempt to uncover practices unique to particular industries. The notes were analysed by their informational content and their format. 25% of the 802 financial statements examined contained footnotes while 16% had notes inserted within the financial statements. Ninety-nine of the 304 Annual Reports studied contained statements of notes. In the aggregate, 1207 notes were analysed. Significant trends revealed by the study included the following: increasing use of notes, the growing practice of footnoting the financial statements and of enclosing the statement of notes in the Annual Reports, increasing length of notes, decline in notes with descriptive titles, captions, or formal headings and also with cross references and the growing practice of keying the notes. Examination of the content of the notes indicated that the notes were largely financial, recurrent and quantitative; and predominantly pertained to the current fiscal period. Analysis of the format of the notes suggested that typically the notes were not indented from the left margin, were short, were without descriptive titles, were not keyed, and did not contain cross references and were presented in the form of a running discourse. The study also indicated that the type of industry had some influence on the content of the information provided by the notes as well as on the format of the notes. However, this influence was not strong. The basic conclusion of this study is that specific improvements on the current use, content, and format of notes are needed. Proposals for the proper use, judicious location, and a more systematic presentation of the notes are suggested. Seen in the light of current practices these requirements may appear stringent. They are, however, necessary, if notes are to be effectively used as a vehicle for attaining full disclosure. The present neglect of notes has to be replaced by continuous and vigorous study of notes in conjunction with the other disclosure devices, if full disclosure is to be achieved. The adoption and implementation of the guidelines suggested above is only the first step towards attaining this objective.

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