Full disclosure principle - What is the full disclosure principle?
The full disclosure principle is a concept that requires a business to report all necessary information about their financial statements and other relevant information to any persons who are accustomed to reading this information.
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As a business, there are a number of accounting principles you are required to follow and oblige, including the full disclosure principle.
Importance of the full disclosure principle
According to GAAP, the full disclosure principle ensures that the readers and users of a business’s financial information are not mislead by any lack of information. This way you assure stakeholders such as creditors and investors that they are aware of the any relevant information and are fully informed about the company when making business decisions concerning the company.
The main purpose behind the full disclosure principle is to avoid managers or accountants not disclosing any information that could be of great importance and affect the businesses financial situation. The reason for not disclosing information could be to manipulate their financial statements to look stronger than the business actually is.
For businesses, the full disclosure principle means sharing your internal financial information with the outside world. This information can be anything from transactions that have already occured, to future events or expenses anticipated. In other words, the financial statements should be transparent and include any information that could potentially influence the judgement of an outsider on or about the company.
Information to be disclosed
Information that should be disclosed could include any of the following:
- Accounting policies followed
- Acknowledgement of any change in accounting system or principles, and justification
- All financial statements (including footnotes or any supplementary notes)
- Inventory losses (due to demand decrease, obsoleteness, or damage)
- Nature of non-monetary transactions
- Description of asset retirement obligations
- Any future expectations of changes in VAT rates
- Detailed material information in cases where a company sells one if their subsidiaries to the spouse of one of the directors (for example)
- Nature of relationship between the business and another party if a transaction has significant value
- Contingent [liabilities(/dictionary/liabilities), contingent assets, legal proceedings etc.
Example of the full disclosure principle
Company X purchased a piece of property, and are now the current owners. A passing pedestrian had a terrible fall on the property and got badly injured. This pedestrian is now suing Company X for a significant amount of money for negligence. The pedestrian is likely to win the lawsuit in the following year.
Under the full disclosure principle, Company X should disclose the anticipated losses from the lawsuit in the footnotes of their financial statement, even though the loss has not been confirmed or finalised yet.