An overview of the use of corporate financial reports information disclosed in annual reports by external users in Malaysia

Abstract

The primary purpose of preparing financial statements is to provide information that will be useful for a wide range of users in making business decisions. Users of corporate financial information such as shareholders, bankers, securities brokers and governments normally use annual reports together with other sources of information to evaluate the performance or creditworthiness of a company. A financial statement is prepared in order to communicate economic measurement and information about the resources and performance of a reporting entity. According to Epstein and Freedman (1994), the usefulness of annual reports to individual shareholders is not only on the financial part, but they are also interested on certain aspects of social responsibility such as product safety, quality and environment activities. Starting from January 2006, Malaysian companies are required to implement all the Financial Reporting Standard (FRS) that have been issued by the Malaysian Accounting Standard Board (MASB) in the preparation and presentation of financial statements. The move by MASB to adopt International FRS is a reflection of Malaysia’s commitment to align with global accounting standards in order to converge to one common set of standards for the entire developed world in this age of cross-border trading (PricewaterhouseCoopers, 2005). Through convergence, financial statements will become more relevant, credible and more transparent, all of which are critical to the effectiveness of Malaysian capital markets. Since FRS is still new and in a transition process, it is expected to have many problems and issues, thus this study focused on the annual reports prepared by Malaysian listed companies to shareholders prior to FRS implementation. The annual report is seen by the accounting profession as an important device for financial communication between management and shareholders (Bartlett and Chandler, 1997). Stanton and Stanton (2001) contended that even if users of annual reports are assumed to be knowledgeable, the information itself could be in different degrees of comprehensibility. Hence, the quality of understandability is a characteristic influenced by both users and preparers of annual reports.