Full disclosure is an accounting concept to ensure the financial statement user gets all the relevant information.
This concept requires a business to disclose all the relevant information in the financial statement. Relevant information may be in the form of numbers and some written information/explanations.
Generally, when we think about the financial statement, we think of the numbers. However, it should be noted that only numbers are not a financial statement. Instead, there are important/material/relevant off-balance sheet items that may not be presented in numbers. Hence, they need to be disclosed.
For instance, there is litigation against the company, which cannot be presented in the numbers. So, at this point, the full disclosure principle requires that full information about the business must be disclosed in the notes to the financial statement.
Further, it should be noted that full disclosure is one of the important financial accounting concepts like prudence, consistency, economic entity, money measurement, and going concerne etc.
Why is the full disclosure principle important?
The following facts make full disclosure one of the important financial accounting concepts.
- Full factual information cannot be given in numbers. And if the information is not disclosed fully, the users of the financial statement may not be able to make a decision.
- It leads to a strong understanding of the stakeholders, like creditors, investors, and shareholders. For instance, it enables them to understand applicable accounting standards, policies, and litigations, if any.
- It ensures users of the financial statement get knowledge about the business’s commitment to the banks and other parties.
Example of a full disclosure principle
Disclosure of the related party transaction is one of the most important aspects of the full disclosure accounting concept. If related party information is not disclosed in a true spirit, it might lead users of the financial statement to wrongly conclude the performance of the business.
For instance, your business has been purchasing material-A from a sister company at a price lower than the market. In this situation, the business shows a higher profit. This information can help investors to assess the performance of the business. In fact, the impact of this information may be significant for the investors because if the sister company does not continue sales at a lower rate, the business may experience a significant decline in profit. Even the profit may be converted into a loss. Hence, a piece of small off-balance sheet information can make a significant impact on the decision of the financial statement user.
Instances of information to be disclosed under the full disclosure principle
Generally, the following information is disclosed under the full disclosure principle.
- Contingent events resulting in contingent liability, contingent assets, and other relevant information, including a letter of credit.
- Nature and details of the non-monetary transactions.
- Related party transactions and transactions involving subsidized sales/purchases.
- Applicable accounting and reporting framework.
- Impairment and expected losses in the assets owned by the business.
- Expected changes in the regulatory obligations, including VAT and income taxes.
- Supportive information and explanations for the numbers and figures in a financial statement.
- Any ongoing legal proceedings against the company.
- Any losses for the inventory, like obsolete inventory, and a significant decline in the inventory value.
- Any other or off-balance sheet information that might impact the decision of the financial statement user.
The full disclosure principle requires the business to disclose all the relevant information in a financial statement that might impact the decision of a financial statement user. It’s one of the most important financial accounting concepts like prudence, going concern, consistency etc.
The purpose of this concept is to ensure off-balance sheet items are shown in the financial statement, which leads users of the financial statement to better understand the business performance. Contingent assets/liabilities and letters of credit are prime examples of the full disclosure principle.