Full Disclosure Principle

It states that the business should share all necessary and relevant information in their financial statements

The Full Disclosure Principle states that the business should share all necessary and relevant information in their financial statements, which helps the users of the financial information to make crucial decisions for the company. 

The users of the financial statements are owners, internal management, creditors, employees, investors, Government, and customers. 

This principle is an accounting concept supported by GAAP (Generally Accepted Accounting Principles) and IFRS 7 (International Financial Reporting Standards).

This disclosure of the information is essential to share with the shareholder, creditor, and investor who depends on this information to make decisions for the company. 

This principle ensures that the users do not make wrong decisions due to a lack of information. 

Hence, all relevant information must be disclosed in the company's financial statements. However, this principle does not mean sharing all information about the company. This would provide a massive volume of information to the users creating chaos.

Explaining the full disclosure principle

This principle states that companies must share the relevant information in their financial statements with their users. Relevant information is the information that would change the decisions of the users about the company. 

Comparing data

Under this principle, the company must disclose financial and non-financial information in its financial statements. 

This principle does not mean to disclose every piece of information but to disclose the information which is significant to the owners, investors, and creditors. 

According to the journal by Azhar Susanto, Meiryani, it is stated that full disclosure is proper and detailed disclosure of company information regarding financial information and management, which the general public must be aware of. 

Without transparent, proper, and honest reporting of financial information, the market will not be able to function correctly. It is also essential for investors or other interested people to read and understand the financial information to make better decisions. 

Disclosures can include things that cannot be accurately calculated, such as tax disputes with the Government or litigation with other parties." 

Components to disclose under this principle 

The components to disclose :

  • Accounting standards and policies followed
  • Any changes in the accounting standards and policies 
  • Detailed financial statements
  • Non-monetary transactions
  • Goodwill impairment
  • Inventory level of the company
  • Any tax rebates 
  • Loans with interest payments

Importance

This principle promotes transparency in the company and reduces opportunities for fraudulent activities.

This principle is becoming significant against manipulation of accounts and dishonest behavior. This principle also helps the firm, especially the accountant, prepare and present the financial statements according to the standards and disclose all relevant information.

pen, paper, and calculator

It is essential to disclose information to the shareholders, investors, or any other stakeholder who depends on this information for making future decisions. 

Advantages of the Full Disclosure Principle

Several advantages of the principle include: 

  • It makes financial information easy to understand and interpret
  • It helps the users to make decisions for the company
  • Enhances transparency among the company and the users
  • Accurate results and comparison of the financial statements
  • Helpful in auditing 
  • Change the decisions of the external users regarding the company
  • It prevents any legal problems
  • Enhances confidence of the investors in the company
  • Enhances customer's confidence 
  • No relevance of any accusations regarding fraud and misrepresenting the information

Disadvantages of the Full Disclosure Principle

Sometimes, disclosing information about the company may be harmful to itself. Revealing a lot of information may also be a bad idea, as the users will find loads of data as a burden and create a chaotic environment. In addition, competitors may use the disclosed information against the company and take a competitive advantage in the market. 

Several disadvantages of the principle include:

  • The information is available to competitors, who may misuse it.
  • The relevant information disclosed to the users may be harmful to the company.

Does this principle matter?

Yes, this principle matters as the users may feel cheated and take you to court, which could lead to heavy fines, penalties, and imprisonment.

If there is no disclosure of information, investors and the owners may be unable to make the right and informed decisions with the limited news.

Also, the users would be clueless about the company's finances if there is any concealment of facts. Concealing information from the users may also lead investors and customers to lose trust in the accuracy of the financial statements of the company. 

This principle matters while investing as this principle provides relevant information about the company, which may influence the decision of the stakeholders or the investors whether to deal in the company's shares or not. 

This can lead to 2 outcomes, one with a positive impact and the second would be a negative impact on the financial health of the business. 

Entire disclosure matters in an organization to develop faith and trust in the other employees and work together to achieve organizational goals. 

The company must be honest with its users to ensure correct, timely, and informed decisions for the company's welfare, society, and management.

Examples

The following are some examples where the principle of full disclosure plays an important role and determines its significance for the business and the users of the accounting information. 

1. Assuming changes in the company's accounting policies, the company needs to disclose this in notes of the financial statements.
2. Assuming the company faces user issues can lead to hefty penalties or court cases. Thus, the company needs to disclose this information to the users. 
3. Assuming the company lost a contract and could go bankrupt anytime in the future, this information would not be favored by the management to be shared outside the firm. But, due to this principle, the company must disclose this information to the users.

4. Loss or damage to goods due to a fire in the factory needs to be disclosed to the users as it may impact them and the business.
5. If the company merges with another company or acquires the other company, then this information should be disclosed to the users of the accounting information as not disclosing such information would lead to violating the entire disclosure principle.  
6. Any loans or debt taken from banks or other creditors should be disclosed to the investors to get a better picture of the company's finances.
7. The details of the assets like property, plant, and equipment should be mentioned with their accumulated depreciation value in the financial statements and not just with their face values.

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Researched and authored by Vanshika Nakul | LinkedIn

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