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The Effect of Accounting Disclosure on The Financial Statements and Its

Relationship to Making Investment Decisions

Preprint  in  PalArch's Journal of Archaeology of Egypt/ Egyptology · October 2020

DOI: 10.13140/RG.2.2.19891.96805

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THE EFFECT OF ACCOUNTING DISCLOSURE ON THE FINANCIAL STATEMENTS AND ITS RELATIONSHIP TO MAKING INVESTMENT DECISIONS(AN
EXPLORATORY STUDY ON ASIA CELL AND AL KHATIM TELECOM GROUP) PJAEE, 17 (7) (2020)

THE EFFECT OF ACCOUNTING DISCLOSURE ON THE FINANCIAL

STATEMENTS AND ITS RELATIONSHIP TO MAKING INVESTMENT
DECISIONS (AN EXPLORATORY STUDY ON ASIA CELL AND AL
KHATIM TELECOM GROUP)

Jasim Idan Barrak 1Abdulrasool Abaulabbas Sahib2 Mohammed Hussein Ali3

1,2,3
Department of Accounting, college of Administration & Economics, university of Kerbala,
Iraq.
Email: 1jasim.i@uokerbala.edu.iq

Jasim Idan Barrak ,Abdulrasool Abaulabbas Sahib, Mohammed Hussein Ali. The
Effect Of Accounting Disclosure On The Financial Statements And Its Relationship
To Making Investment Decisions(An Exploratory Study On Asia Cell And Al Khatim
Telecom Group)--Palarch’s Journal Of Archaeology Of Egypt/Egyptology 17(7),
13998-14010. ISSN 1567-214x

Keywords: Accounting Disclosure, Investment Decisions, Investors, Projected Cash

Flow Volume.

ABSTRACT:
This research deals with studying the impact of accounting disclosure on investment
decision-making in the Iraq Stock Exchange, being one of the most important indicators that
investors can rely on when making their investment decisions in the financial markets. As the
research sought to achieve several objectives, including the effect of disclosure in the
published financial statements on investors ’decisions.At the end of the study, the researcher
reached the following: There are other factors that investors rely on in making their
investment decisions in the Iraqi Stock Exchange market much more than its reliance on
measures derived from the list of cash flows, such as net profit and studying the evolution of
stock prices based on technical analysis, as there is importance Great for the accounting
disclosure included in the financial statements on the decisions of prospective investors in the
Iraq Stock Exchange, and most investment decisions during the years of the study sample
were taken in light of the information obtained by the financial statements prepared by the
external audit offices.

Keywords: accounting disclosure, investment decisions, investors, projected cash flow

volume.

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Research problem
Related to how to identify the effect of accounting disclosure in the financial
statements on making investment decisions, in a way that leads to obtaining
the largest share of investors who wish to invest in the stock market, as well as
attracting direct and indirect foreign investment, because the lack of
transparency in the accounting disclosure contributes significantly to
Significant weakness in the companies' ability to provide a suitable investment
climate.

Importance of research
The research seeks to shed light on the effect of accounting disclosure in the
financial statements on investor decisions, and its importance in attracting new
investors or influencing their investment decisions. The greater the scope of
the accounting disclosure, the more investors have confidence in the
information provided to them by companies listed on the stock market.

The aim of the research

Researchers seek to achieve the following goals:
1- A statement of the effect of disclosure in the published financial
statements on investors ’decisions.
2- Clarify the importance of disclosure in the data and information
published in the investment decision-making.
3- Enhancing confidence and raising the efficiency of the stock market
through the commitment of companies to provide disclosure and transparency
that contribute to influencing the decisions of new investors.

Research hypothesis
In line with the research objectives in adhering to accounting disclosure when
publishing financial statements to assist investors in making their decisions, by
evaluating and disclosing profits and the level of liquidity, so the assumptions
were formulated as follows:
1- There is a significant impact on the evaluation and disclosure of profits
on the investor's decision in the Iraq Stock Exchange
2- There is a significant impact on assessing and disclosing future
liquidity in the investor’s decision in the Iraq Stock Exchange.
- The concept of accounting disclosure, its requirements, levels and
types
Accounting disclosure is the essence of accounting theory and the interest of
scientific and professional bodies in accounting affairs has increased, in
particular after the emergence of business establishments, and this
development has been associated with the financial statements that are outputs
of the results of the activities of these establishments, and the data,
information and measurement foundations they contain that can be used by the
users of this information , Which becomes - later on - the basis on which they
depend in making decisions, for this reason, providing information is one of
the main objectives of the financial statements (1). the viewpoints regarding
the concept of disclosure and its limits differ from the information that should
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be available in the financial statements, and this difference stems mainly from
the different interests of the parties related to the companies. The view of the
party responsible for preparing the financial statements regarding the level of
disclosure (2) may not necessarily coincide with the view of those expressing
an opinion. In this data, nor with the view of the investors and other
beneficiaries who use it, just as the view of the two parties may not coincide
with the view of the supervisory and supervisory authorities. Therefore, it is
difficult to present a general and unified concept of disclosure (3), which
includes knowing the level of disclosure that each of these parties fulfills its
desires. Full in this area.

Definition of accounting disclosure

1- The establishment discloses the accounting policies and methods used
in preparing its financial statements, and the current variables on them.
Disclosure is included in the financial statements (4).
2- Disclosure also defines the provision of external multiple parties as
well as providing the economic unit’s management with useful and necessary
information about this unit and its activity and the results of this activity, in a
timely manner, and in a manner that does not affect the activity of this unit,
and in a way that serves the interest of these parties at the present time and in
the future. (5).
3- The disclosure was defined as providing equal opportunities for
investors to obtain information, which in turn provides a suitable investment
climate and increases the opportunity for market growth and prosperity (6(
4- Accordingly, the accounting disclosure is to provide appropriate
information for decision-making.

Types of disclosure
Most of the accounting writers agreed on three types of accounting disclosure.
It is important that the financial statements or any of its appendices include
one of these types, and they are as follows:

Comprehensive disclosure
A- It means the comprehensiveness of the financial statements on all the
necessary information that helps in giving a clear and correct picture of the
facility, and this concept is based on four basic assumptions (8) :
1- The five financial statements (financial position list + income
statement + cash flows list + changes in equity + statement of distributed
profits(
2- The inclusion of the financial statements on appropriate information
about the income and wealth of the owners.
3- The financial statements should include the management's view of the
future.
4- The report of the external auditor.

Preventive disclosure
It aims to protect the financial community, especially the average investor who
has a limited ability to use financial information, and therefore the financial
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information must be disclosed with the highest possible degree of objectivity,

impartiality and fairness. The preventive disclosure requires disclosure of the
following matters: (9)
Accounting policies
1- Changes in accounting policies
2- Correcting errors in the financial statements
3- The change in the nature of the economic unit
4- Potential gains and losses
5- Financial engagements
6- Subsequent events

Educational disclosure
This concept emerged as a result of the increasing importance of relevance as
one of the qualitative characteristics of accounting information, and therefore
it reflects the contemporary trend of accounting disclosure. Examples of
educational or informational disclosure are the disclosure of financial
forecasts, the separation between ordinary and extraordinary elements in the
financial statements, the disclosure of the components of fixed assets. And the
commodity stock, the disclosure of the current and planned capital expenditure
and its sources of financing and earnings per share, the historical development
of activities, the management plans and objectives in the future (4). It is clear
from the foregoing that the scope of disclosure is no longer limited to a mere
disclaimer of the management or auditor's responsibility, but also includes
information that needs a greater degree of know-how and experience in its use,
especially those needed by financial analysts and investment brokers, and for
this reason and to avoid the financial corruption that has occurred. In
publishing financial information before the January 25 revolution, the
Financial Supervisory Authority issued forms for accounting disclosure
(attached within the appendices) that companies whose securities are listed in
the Stock Exchange are committed to publish when publishing their financial
statements to guide users of the financial statements about all their needs.
Consequently, the scope of disclosure has expanded to include any relevant
information that is characterized by a relatively high degree of personal
judgment and judgment According to what has been amended by International
Accounting Standard No. (1) related to the preparation and presentation of
financial statements, the standard has been designed to ensure the
improvement of the quality of the presented financial statements, by ensuring
that the published financial statements have been prepared through the
application of international accounting standards as they are in compliance
with all A standard that applies to them, including all disclosure requirements,
in addition to providing instructions regarding the structure of the financial
statements, including the minimum requirements for each basic list,
accounting policies and clarifications, and the question that the researcher asks
for himself and for everyone about the extent to which the financial statements
can include explanations represented in forecasting With the results of the
business for the following year and the strategic plan for the business of the
establishment (including the data on which it relied) so that the users of the

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financial statements, especially the investors, can make their decisions in the
light of those disclosed data (10).

Disclosure levels:
The disclosure in accounting is concerned with everything related to the
financial statements in terms of their content of items and quantitative or
descriptive information, the manner of presenting these items and their style
and the information within each list, as well as the accounting policies that are
followed in the measurement to determine the value of each item, to help the
users of these lists in Take appropriate decisions and reduce their uncertainty
about future economic events. The financial statements represent the main
aspect of the contents of the financial reports. However, the levels of
disclosure are (11)

1- Sufficient Disclosure: The most common used and refers to the

minimum amount of information that must be disclosed and which must be
included in the financial statements, so as not to mislead the reader when
making an investment decision.

2- Fair disclosure: It provides information that meets the needs of the

concerned parties on an equal footing to the users of the financial statements,
that is, it includes equal treatment for all users.

3- Full disclosure: according to this, the financial statements are

comprehensive, including the information needed for honest expression, and
enable the users of these statements to be given a clear and correct picture of
the economic unit in the sense of the comprehensiveness of the financial
statements to present all the appropriate information to the users of the
financial statements (12).

Adequate disclosure is the most commonly used concept because of its impact
on investor decisions and contributes to publicly bearing the burdens of social
responsibility on the entity, but it presupposes the minimum information that
must be disclosed that makes the financial statements not misleading (13) .
While fair disclosure implies an ethical goal to achieve equal treatment for all
readers of the financial statements, complete disclosure assumes all the
appropriate information is presented, and it may be seen that it means
displaying excess information. It does more harm than good and makes
financial reports difficult to interpret and lengthy to the point of being boring
(14) .

The laws and legislations prevailing in the economic unit environment play an
important and effective role in the field of disclosure
The laws and legal legislations prevailing in the economic unit environment
are one of the factors that play an important and influential role in the field of
local disclosure at the local level, the most important of which are the
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Egyptian accounting standards and the Public Authority for Financial

Supervision (3). As for the factors affecting the international level, they are
represented by the Standards Committee International Accounting Association
(IASC) and the International Federation of Accountants (IFAC) and
international standards of transparency and integrity issued by Transparency
International and publications of the International Organization of Supreme
Audit Institutions (affiliation), as the purpose behind this is to create a kind of
homogeneity in preparing and publishing financial statements as an important
service for users at the level Domestic and international (15)

Financial statements and their impact on investment decision-makers

The financial statements represent the final and basic product of the
accounting work in any economic unit, and they arise as a result of a set of
accounting treatments on the data for the purpose of presenting them in an
aggregate and summarized form to all parties that can benefit from them in
making various decisions, and the accounting rule No. (6) has defined the
data. Financial therefore: - (16)

General Budget or Financial Position Statement: -

It shows information on the economic resources of the unit and the obligations
on those resources at a specific point in time. The budget contributes to the
financial reporting process by providing a basis for calculating rates of return,
evaluating the unit’s capital structure, estimating the degree of liquidity and
financial flexibility in the economic unit. To judge the degree of risk to which
the economic unit is exposed and estimate its future cash flows, the budget
must be analyzed and the extent of liquidity determined. Unity and its
financial resilience.

Account production, trade, profits and losses, and a list of current

operations- :
This list measures the success of the unit’s operations during a specific
accounting period and in determining the unit’s profitability, investment value,
and creditworthiness. The importance of this list is evident in that it provides
investors and creditors with information that helps them predict the timing and
degree of uncertainty associated with future cash flows for investors in
estimating the added value of the unit, and it also helps creditors determine the
probability of recovering their rights from the economic unit (17)

Statement of distribution of net income : -

This list displays the changes that occurred during the accounting period
ending on the items relating to profits and losses realized during the period, as
well as the assessed dividends (5).
This list shows changes in the components of paid-up capital as well as
changes in total retained earnings. This list may include preference shares,
physical shares, statutory reserves, voluntary reserves, share premium, etc.
(18).

Statement of cash flow, or disclosure of sources and uses of funds:-

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Where this list summarizes all cash inflows (inflows) and cash outflows
(outflows) for the unit during a certain period of time (6) .
This list focuses on monetary changes and not just changes in financial
position that focus on working capital only. As the presence of some elements
of working capital, such as debt and goods, does not protect the unit from
bankruptcy in cases of economic recession, and it represents an evolution of
the list of changes in the financial position, which was concerned with changes
in working capital, and this list is usually classified on the basis of divide the
unit's operations into operating, investment, and financing activities.
Main objectives of financial statements:

The general objective of the financial statements is determined by the general

objective of accounting by providing the necessary and useful data and
information to many entities that have a (direct or indirect) relationship with
companies in order to take various decisions in their light, through: (9)

1- Clarify and define the result of operations and activities carried out by the
economic unit during a specific financial period (from profit or loss)

2- Clarify the strength of the financial position of the economic unit at a point
in time represented at the end of the financial period.The financial statements
are prepared at the end of the financial period that is customary to represent a
fiscal year beginning on 1/1 and ending on December 31, and they are
presented to a group of entities that have a direct or indirect relationship with
companies, whether they are from within the economic unit Such as: owners,
management (with its various levels), workers in the economic unit, or from
outside the economic unit such as: shareholders, investors, banks and other
financial institutions, creditors and lenders, various state agencies (such as the
competent ministry, the Ministry of Planning, the General Tax Authority, ...
Etc.), where many decisions are taken in light of the data contained in the
financial statements (2).

In order to achieve the general objective of the financial statements, there are a
set of sub-goals that must be taken into account when preparing the financial
statements, the most important of which are the following: (13)

A The data contained in the financial statements should help in providing

useful information to many bodies (internal and external) that have a
relationship with companies in order to make various decisions, and what
means the necessity.Ensure that information is provided to those users who do
not have the authority, ability or capabilities to request information directly
from the economic unit as well as from the users within the economic unit.

B. The need to take into account the different needs of data and information
needed by different parties, which means that the financial statements must be
prepared in light of the objectives that are expected to benefit the needs of
multiple users, whether in planning, control or performance evaluation
processes ... etc.
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C. The data included in the financial statements must clarify the possibility of
comparison with the data of a previous financial period (or periods) in order to
help provide data and information appropriate to make decisions related to
performance evaluation and future decision-making or planning, as well as
making various comparisons.

Dr.. Providing the necessary information regarding how the economic unit
practiced its various activities by analyzing those activities and clarifying how
to secure its funds (obtain them) and the areas in which those funds were used
(5).

E. The necessity to provide the necessary data on the non-profit areas that the
economic unit has made or contributed to, especially with regard to providing
data on the social role (social responsibility) as well as providing data related
to the environment, given that these activities have a clear impact (direct or
indirect) on society. Within which the economic unit operates.
And the. Taking into consideration the different capacities to use and
understand the data contained in the financial statements by multiple
(potential) users in terms of the degree of their managerial and accounting
culture and their experience in dealing with that data during a previous period
or periods of time (1).

Investment decisions:
A- Definition of investment decision:
B- The investment decision is
represented in the total decisions related to the acquisition of capital assets
such as securities such as stocks and bonds. These decisions are concerned
with aspects of expenditure in which the return obtained from them exceeds
one year. (20)

The investment decision is represented in decisions that include planning to

utilize the financial resources that the investors have in investment projects
with a duration of more than one year. (21(

- From the foregoing, it can be said that investment decisions are a

decision taken by the current or potential investor to take decisions to exploit
the financial resources he has in order to develop these resources.

Investment decisions:
1- Definition of investment decision:
A- The investment decision is represented in the total decisions related to
the acquisition of capital assets such as securities such as stocks and bonds.
These decisions are concerned with aspects of expenditure in which the return
obtained from them exceeds one year. (20(
B- The investment decision is represented in decisions that include
planning to utilize the financial resources that the investors have in investment
projects with a duration of more than one year. (21)
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C- From the foregoing, it can be said that investment decisions are a

decision taken by the current or potential investor to take decisions to exploit
the financial resources he has in order to develop these resources.

Principles upon which the investment decision is based :

A rational investor must take into account the following principles and rules
during the investment decision-making stage, before taking it to reach a
rational decision, which are as follows: (7)
1- The principle of selection: the rational investor must be characterized by the
ability to make a logical choice among the available opportunities instead of
rushing in his decision towards the first opportunity and ignoring the rest of
the opportunities, and the stock market must be competent to achieve this
principle.

2- The principle of comparison: When the available opportunities are multiple

and differing in terms of type, risk, size of returns, and periods of time for
investment, then in this case the use of analysis and evaluation tools must be
used to identify and limit the appropriate alternative to his desires and
investment capabilities that characterize him.

3- The principle of appropriateness: Every investor is distinguished by its own

characteristics represented in age, income, and desires. These elements form a
preference pattern for the investor that determines the degree of interest in the
basic elements of the investment decision represented in the following: the
rate of return on investment, the degree of risk that he is characterized by, the
level of liquidity that he enjoys Every investor has it.

4-The principle of diversification: The securities differ in terms of the degree

of risk and the returns they generate, and accordingly, the sound investment
decision should be based on diversification of these securities, in order to
reduce risk and increase returns.The practical aspect is to explain the impact of
disclosure on investment decisions first: The mechanisms for indicating the
impact of disclosure on investment decisions the main objective of explaining
the impact of accounting disclosure is to provide useful information to
investment decision-makers on the inflows and outflows of cash flows, as they
are based on the cash basis, as it shows the monetary impact of all activities
that the company engages in during a particular financial period. A cash flow
into the company or a cash outflow from it, which helps in making upcoming
investment decisions The accounting disclosure included in the financial.
statements, these statements play the two main roles, which are the historical
analysis of the company's financial conditions, and the second is the
estimation of the company's future financial position.Financial statement
information can be used to provide information to investment decision-makers
by providing an assessment of the following:

1- Profit evaluation and disclosure:

2- The earnings evaluation expresses the continuity of the company's cash
flows for the current year and the coming years, as the accounting disclosure
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of current profits and projected profits for the coming years contributes to the
starting point for investment decisions.

3- Expected profits = Current year's profits - Last year's profits / Total

profits for the two years * 100%

4- Evaluating and disclosing future liquidity:

It expresses the company's ability to provide sufficient cash amounts for
specific purposes, where the strength or weakness of the company's liquidity is
related to the availability of net cash flow from operating activities, as well as
the financial liquidity ratios measure the company's ability to fulfill its current
(short-term) obligations.

Future Liquidity = Net Operating Cash Flow for the Current Year - Net Cash
Flow for the Previous Year / Total Operating Profit for the Two Years * 100%

Study variables
The study population consists of 2 mobile phone companies listed in the Iraq
Stock Exchange.

Research steps:
The first step: The financial reports of the two companies were collected, the
research sample, which includes the list of financial position, income list,
financial statements and explanations attached to the lists, and trading
bulletins were obtained, in order to know the trading volumes, for a period
extending from 2016 to 2019. Where it was obtained This data is through the
website of the Iraq Stock Exchange.

Search variables:
The study variables are divided into two types:
1- Dependent variable, which represents the trading volume for the period (t)
of the company (I) share (Yet)
2- Independent variables, which are three variables. (1) The ratio of net
cash flow from operating activities / net income (X1). (2) The ratio of net cash
flows from financing to cash inflows (2X(
Table No. (1) study data
Ratio of net
Ratio of net
cash flows
cash flow from
The Company's from Volume
the year operating
name financing to Share Yet
activities / net
cash inflows
income (x1)
(2X)
2016 0.21 0.18 8964
The company 2017 0.19 0.16 15980
Asia Cell 2018 0.27 0.22 19842
2019 0.24 0.20 24098
the group 2016 0.14 0.11 4765
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Al Khatim 2017 0.14 0.13 9871

Telecom 2018 0.17 0.21 12727
2019 0.16 0.29 23657

Analysis of the results:

- The first hypothesis: There is a significant impact on the evaluation
and disclosure of profits on the investor’s decision in the Iraq Stock
Exchange. Table No. (2) shows the results of the first hypothesis test.
- The results of the simple linear regression analysis of the independent
variable (x1)
Table No. (2)
Determi
Indicati
Depende Pearson R nation
on
nt correlation coefficie F b 
level
variable coefficient nt
Sig
R2
6..6 104356.1
Yet 0.2.6 0.0.0 0.01 62986.243
5 54

It is evident from the data of the previous table that there is an effect of the
measure of the quality of financial liquidity represented by the ratio of cash
coverage to debts in circulation in the investor’s decision in the Iraq Stock
Exchange. This is shown by the significance level of (0.01), which is smaller
than the significance level specified by the researcher (0.05). However, this
effect is very weak, as the correlation coefficient reached (0.246), and the
determination coefficient reached (7.3%), meaning that (7.3%) of the factors
that affect the investor's decision are attributed to the measure of financial
liquidity, and (92.8%) are attributed to Other reasons have nothing to do with
this scale. So we accept the first hypothesis, which states that there is a
significant effect of the measure of the quality of financial liquidity in the
decision of the investor in the Iraq Stock Exchange.The third hypothesis:
There is a significant impact on assessing and disclosing future liquidity in the
investor’s decision in the Iraq Stock Exchange.

- Table No. (0) shows the results of the third hypothesis test.
The results of the simple linear regression analysis of the independent variable
(x3)-
Table No. (3)
Pearson R Determination Indication
Dependent
correlation coefficient F level b 
variable
coefficient R2 Sig
Yet 0.266 0.006 2.004 0.167 40043.501 665..4.5.6

We note from the data of the previous table that the significance level is
(0.216), which is greater than the significance level specified by the researcher
(0.05). This means that there is no effect of the ratio of net cash flows from
financing to cash inflows, which represent the measure of financing policy
evaluation in an investor's decision. Thus, we reject the alternative hypothesis
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and accept the null hypothesis, which states that there is no significant effect
of the financing policy evaluation scale on the investor's decision.

CONCLUSIONS AND RECOMMENDATIONS

First: the conclusions
We conclude from the previous analysis the following:
1- There is a moral impact on the evaluation and disclosure of profits on
the decision of the investor in the Iraq Stock Exchange.
2- There is no significant impact for each of the measures of profit quality
and evaluation of the financing policy on the investor’s decision in the Iraq
Stock Exchange, and this indicates that investors in the Iraq Stock Exchange
do not care much about the financial statements.
3- There are other factors that investors rely on in making their
investment decisions in the Iraq Stock Exchange much more than its reliance
on measures derived from the cash flow list, such as net profit and studying
the evolution of stock prices based on technical analysis.
4- There is great importance for the accounting disclosure included in the
financial statements on the decisions of prospective investors in the Iraq Stock
Exchange.
5- Most of the investment decisions during the years of the study sample
were taken in light of the information obtained by the financial statements
prepared by the external audit offices.

Second: Recommendations
And based on the researcher's findings, there are a set of recommendations
that must be referred to, and they can be summarized as follows:
1- Conducting seminars to increase investor awareness of the importance
of financial statements and their ability to give important measures to
decision-makers, whether they are current or potential investors, financial
analysts, or any of the entities that use financial companies' lists.
2- Conducting more studies that look at other variables derived from the
financial statements that affect the investor’s decision in the Iraq Stock
Exchange, and link them to other factors that affect the investor’s decision
other than cash flows.
3- Using official media to indicate the amount of invested money and the
size of the return on investment.
4- Opening the door for investment using currencies other than the Iraqi
dinar and the US dollar.
5- Shedding light on the audit procedures that have been followed by the
external audit offices, and the governmental measures taken against offices
that prove failure to provide information to investors.

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