2. (20 points) The provision of truthful, reliable and relevant information to c

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2. (20 points) The provision of truthful, reliable and relevant information to consumers is considered an important input into individual's choice decisions and for shaping consumer preferences. Use familiar economic concepts to discuss the below scenarios As part of your essay answers use graphical models to show how consumer choice and/or market outcomes are affected. Again, make sure your writing is a clear as possible and your graphical models are properly labelled and embedded into your discussion a. Explain the concept of credence attributes and the challenge they pose to consumer choice decision-making using economics of information concepts. Describe the functioning of certification and related systems in remedying the absence of or asymmetry of information in markets for consumer goods. In answering this question make sure to explain or define where possible the concepts and models you use (e.g. third-party certification) b. Use a consumer utility model and credence food attribute example of your choice to show graphically how a certified food label may affect consumer choice c. Food Safety is a key component of public health in Canada. The Canadian government therefore requires all domestic and foreign food establishments that serve the Canadian consumer market to follow HACCP protocols. However, stricter food safety standards and other product or process demands by importing countries have also been found to impede food exports by producers located in developing countries through imposing higher costs on producers. Use a three-panel trade diagram to the effects of stricter Canadian food safety standards for a product example of your choice. In your graphical model, clearly show how the exporter, trade balance and Canadian imports are affected. What are the price effects of stricter food safety in Canada and for consumers in the exporting country?

Explanation / Answer

Users of financial statements continue to emphasize the importance of informative, decision-useful disclosures. This focus often extends to the reporting of income taxes, a material component of most financial statements. Tax laws can be difficult to understand due to their complexity, compounded by the multitude of taxing jurisdictions throughout the world. Connecting the effects of those laws with financial accounting principles adds to the challenge. Numerous income tax accounting matters require the use of estimates, judgments, and other subjective information that can obscure the presentation in the financial statement accounts. Clarifying disclosures can enable users to gain a better understanding of the reporting entity’s income tax environment. Today’s financial reporting users represent a spectrum of stakeholders including investors, lenders, regulators, accounting standard setters, analysts, researchers, and legislative or public policy-making bodies around the world. The business environment and user expectations have evolved such that companies are encouraged to communicate more effectively about their income tax profile. FASB’s focus on disclosure The Financial Accounting Standards Board (FASB) has a large-scale disclosure framework project in progress. A discussion paper was issued on July 12, 2012 followed by a comment period. The FASB is currently reviewing the feedback, while developing a decision process for establishing disclosure requirements. With the framework project, the FASB hopes to improve the effectiveness of disclosures in the notes to financial statements by clearly communicating the information that is most important to users. The FASB intends the framework to promote more consistent decisions around disclosure requirements. Earlier this month, the FASB announced that it will seek further input on certain income tax areas noted in a recently completed Financial Accounting Foundation report as presenting difficulties for users. Specifically, information enabling users to analyze income tax cash flows and the effects of indefinitely reinvested foreign earnings. IASB’s focus on disclosure The International Accounting Standards Board (IASB) held a discussion forum in London earlier this year and released a paper in May 2013, Discussion Forum – Financial Reporting Disclosure Feedback Statement, outlining the initiatives they expect to undertake. The actions include steps to address materiality considerations and the challenges associated with providing effective disclosure. SEC’s focus on disclosure The Securities and Exchange Commission (SEC) recently announced its plan to hold roundtable discussions with its varying constituents on the subject of disclosure. In October 2013, Mary Jo White, Chair of the SEC, gave a speech to the National Association of Corporate Directors where she expressed the need for continued focus on disclosure requirements to ensure they are providing effective and useful information to users. At the same time, she cautioned against information overload, which can confound users. The SEC staff continues to focus on disclosures in comment letters issued to registrants. In connection with income taxes, frequent comment areas include the indefinite reinvestment of foreign earnings, effective tax rate reconciliations, the assessment of deferred tax assets, and uncertain tax positions. Lawmakers’ focus on disclosure Income tax disclosure continues to be a hot topic with lawmakers around the world. Their focus has similarly been on reported effective tax rates, countryby-country reporting transparency, uncertain tax positions, and reinvested foreign earnings. Included in the Dodd-Frank Wall Street Reform and Consumer Protection Act are certain country-by-country tax reporting provisions adopted by the SEC in August 2012. They require SEC-listed companies in the extractive sectors to disclose, on a country-by-country basis, certain payments made to governments. In early 2013, the European Union (EU) enacted EU Capital Requirements Directive IV, which includes provisions that will require all banks, other credit institutions, and certain investment firms to publish detailed financial data on a country-by-country basis. Widespread relevance Financial reporting disclosures are a key mechanism for communicating with stakeholders. Disclosures go beyond the reporting of numbers in the financial statements, providing an opportunity for a company to tell its story. While the disclosure requirements are different for non-public entities, effective disclosure can be of equal importance. In addition, entities expecting to become public, as well as regulated filers such as hedge funds, will often consider disclosure from a perspective comparable to that of public companies.

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