Full Disclosure Principle

What is full disclosure principle?

The full disclosure principle necessitates an organization to offer the essential information so that people who are habituated to reading financial information can take regarding the firm. The necessary disclosures can be found in a number of places like management’s discussion and analysis which is including in the annual report of a public trading corporation’s to the U.S. Securities and Exchange Commission, press releases, quarterly earnings reports, press releases and other types of communications.

Applications

The first note in an organization’s financial statements will reveal the significant accounting policies on how and when revenues get recognized, how inventory and income taxes are accounted for. Other disclosures which are included in notes for financial statements including impacts of foreign currencies, leases, related party transactions, stock options etc. The explanation of the principle is quite judgmental, as the amount of information which can be offered is often massive. In order to minimize the amount of disclosure, it is usual to reveal information about events which are likely to have a material impact on the organization’s financial performance or results. It may include items that cannot be correctly quantified, such as the result of an ongoing lawsuit or dispute with any government entity over a tax position.

In full disclosure, companies also need to report present accounting policies as well as changes to these policies (this includes changes as an asset valuation method) from policies which have been stated in financials for a prior period.

Uses

Buyers who takeover small businesses usually expect sellers to be straightforward during the selling process. They need all details related to the organization to be presented to them at a point of time during the process. So, while using full disclosure principle, it is necessary to main a file with all details which a seller thinks will be important for the investor. Though investors tend to vary, most usually require tax returns, financial statements, equipment lists etc. For an accountant, full disclosure principle is necessary as notes to financial statements and documents which are subject to audit.

Depending on the nature of information, companies should reveal this information either in supplement statements, notes to the financial statements or in the financial statements. In order to obtain a clean opinion, an accountant needs to have a clear understanding of full disclosure principle in order to provide sufficient information for an unqualified opinion on financial audit.

Conclusion

Full Disclosure has a number of advantages. With it, companies can maintain a list of all outgoing payments which are due or other types of liabilities which they have to pay for. This ensures that a company’s financial standing doesn’t get affected by listing a loss once reports have not been listed on financial report. Full disclosure ensures that these items are listed, thereby preventing a company from listing a loss until after submission of reports or by putting off making a payment.

This article has been compiled by Evelyn, who is a writer on various academic topics.