The full disclosure principle is an important concept in accounting that requires companies to disclose all material information that could potentially impact the financial statements. This information includes both positive and negative information, as well as other details that can possibly affect how a reader interprets the financial statements. The full disclosure principle seeks to provide users of financial statements all the data they require to make wise decisions. Given the abundance of information available in the corporate world today, this idea is extremely vital.
Types
There are a number of different types of information that must be disclosed under the full disclosure principle. Some of the most common disclosures include information about:
- Significant accounting policies
- Off-balance sheet arrangements
- Related party transactions
- Contingent liabilities
- Going concern issues
- Significant Accounting Policies: One of the most important disclosures required by the full disclosure principle is information about a company’s significant accounting policies. These are the accounting techniques that a business use to create its financial statements, and they can significantly affect the financial statements. For instance, if a business employs the accrual method of accounting, it will record income as soon as it is produced, regardless of when the money is actually received. As a result, higher reported profits in the short-term, but can also create issues if the company is not able to collect the money owed to it.
- Off-Balance Sheet Arrangements: Another important disclosure required by the full disclosure principle is statistics about off-balance sheet arrangements. These are arrangements between a company and another party that are not reflected on the company’s balance sheet. Off-balance sheet arrangement is often used to finance capital expenditures or to enter into joint ventures. They can also be used to manage the risk. For example, a company may enter into an off-balance sheet arrangement to hedge against the risk of interest rate changes.
- Related Party Transactions: Another type of disclosure required by the full disclosure principle is information about related party transactions. These are transactions between a company and another party that is considered to be related to the company. Related parties can include affiliates, shareholders, and directors. Transactions with related parties must be disclosed because they can potentially impact the financial statements. For instance, an organization may get into a transaction with related party that results in the recognition of revenue that would not have otherwise been recognized.
- Contingent Liabilities: A fourth type of disclosure required by the full disclosure principle is information about contingent liabilities. These are potential liabilities that a company may be required to pay in the future, but which are not currently reflected on the balance sheet. Contingent liabilities can arise from a variety of different situations, such as lawsuits, product warranties, and environmental cleanup costs. For example, a company may have a contingent liability for environmental cleanup costs if it is found to be responsible for pollution at a site.
- Going Concern Issues: Finally, the full disclosure principle requires companies to disclose any going concern issues. These are issues that could potentially impact a organization’s capability to continue operating in future. Going concern issues can arise from a variety of different situations, such as financial difficulties, legal problems, or management changes. For example, a company may have a going concern issue if it is facing significant financial difficulties.