This is to ensure that the users of financial information are not misled by the lack of information. The idea behind the Full Disclosure Principle is that management might try not to disclose any information that could impair the entity’s financial statements as well as its reputation as a whole.
In doing so, the financial statements still look good and healthy so that all of the stakeholders still happy about the company.
Full Disclosure Principle requires the entity to disclose both, Financial Related Information and No Financial Information Related to the company.
This kind of non-financial information including major changed in the business, contracts, related parties transactions, and any other significant information.
Example of Full Disclosure:
The entity might lose large contracts with its customers to its competitor. And the subsequent loss of contract could turn the entity into bankruptcy. In such a case, management probably doesn’t want outsiders, especially investors to know the real situation of an entity.
And base on the Full Disclosure Principle, the entity is required to disclose such a situation in its financial statements.
Another example is related to the full disclosure of contingency. It can be contingent assets or contingent liabilities. For example, the company is facing the lawsuit as the result of disposing poison material into the water and it going to be a large penalty.
Based on the Full Disclosure Principle, the entity required to fully disclose this information in its Financial Statements. Once the users of Financial Statements noted this information, they will understand what are the current contingent liabilities of the entity.
Related: Best know Accounting Principle
But, how do we know if the entity complies with the Full Disclosure Principle?
Well, basically, to ensure that whether the entity complies with the Full Disclosure Principle or not, the entity should go to the standard that they are following. Remember, Full Disclosure is just the principle to help entity especially accountant in prepare and present financial statements.
In practice, you are highly recommended to see the specific requirement of each accounting standard. For example, in IFRS, each standard has the requirement of disclosing accounting transactions or even that entity deal with and do so US GAAP.
Different accounting standard has different requirement of disclosure. IFRS is the kind of principle base and the requirement still based on the judgment of the practitioner. However, US GAAP is the role base where the disclosures are the must.
If your Financial Statements us IFRS, IAS 1 Presentation of Financial Statement should be applied. Here is the general disclosure that the financial statements of an entity are required to have.
Full Disclosure Principle Check List:
- Full Financial Statements. Generally, Statement of Financial Position, Income Statements, Statement of Change in Equity, Statements of Cash Flow and Noted to Financial Statements
- Significant Accounting Policies: State the basis and accounting policies of each significant accounting policies. For example, Revenue Recognition, Depreciation, Asset Measurement and Recognition…etc
- Accounting Standard use to prepare financial statements. For example, IFRS, US GAAP or other local GAAP.
- Nature of business
- The significant event happens in the business
- Going Concern Assumption
- Changes in accounting estimates
Full Disclosure Principle simply mean disclose all information that requires by an accounting standard, and the best way to check this is going to the specific standard.