Full Disclosure Principle

Full-disclosure principle requires preparers of financial statements to disclose all information relevant to understanding of their financial position and performance in their general-purpose financial statements.

A company’s financial position and performance cannot be completely communicated through numbers alone on the face of primary financial statements. Most often companies need to provide additional details in the notes to the financial statements to enable users to understand how those are arrived and how they are impacted by different policy choices, etc. Since the users of general-purpose financial statements are not in a position to demand specific and tailor-made financial reports, it is imperative that accounting standards obligate preparers to disclose the minimum relevant information. Full disclosure principle helps in achieving that objective.

Full disclosure principle is related to materiality concept. Companies need to disclose only material information in the financial statements either on the face or in the notes to the financial statements. Material information is that which can be expected to influence decisions made by the users of financial statements.

Most of the accounting standards dealing with different accounting issues prescribe disclosure objectives and requirements.

Examples

  1. Preparers of financial statements must disclose the significant accounting policies and major changes therein because in their absence it would be hard to make sense of the information disclosed in the financial statements.
  2. Even though there is often no figure presented in the core financial statements related to contingent liabilities, contingent assets, legal proceedings, it is important to disclose these in the notes so as to enable analysts to conduct a what-if-analysis based on their own assessment of the probabilities involved.
  3. Significant events occurring after the date of the financial statements but before the issue of financial statements (i.e. events after the balance sheet date) need to be disclosed.
  4. Details of property, plant and equipment cannot be presented on the face of the balance sheet, but a detailed schedule outlining movement in cost and accumulated depreciation should be presented in the notes.
  5. If the tax rate is expected to change in the near future, a disclosure must be made so that a potential investor may incorporate the information into his future projections.
  6. If a draft of any new legislation that would subject the company to significant clean-up costs is presented in the legislative of the country in which the company operates, the company must disclose the information to help users see what is coming.
  7. If a company sells one of its subsidiaries to a company run by the spouse of one of its directors, the information must be disclosed to the shareholders so that they can see the potential conflict of interest and make sure that their interests are properly protected.

by Obaidullah Jan, ACA, CFA and last modified on
Studying for CFA® Program? Access notes and question bank for CFA® Level 1 authored by me at AlphaBetaPrep.com

XPLAIND.com is a free educational website; of students, by students, and for students. You are welcome to learn a range of topics from accounting, economics, finance and more. We hope you like the work that has been done, and if you have any suggestions, your feedback is highly valuable. Let's connect!

Copyright © 2010-2020 XPLAIND.com