This is to ensure that the lack of information does not mislead the users of financial 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 and its reputation as a whole.
In doing so, the financial statements still look good and healthy so that all of the stakeholders are still happy about the company.
The full Disclosure Principle requires the entity to disclose both Financial Related Information and No Financial Information Related.
This non-financial information includes significant changes in the business, contracts, related parties’ transactions, and any other essential details.
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 a lawsuit resulting from disposing of poison material into the water, and it will be a large penalty.
Based on the Full Disclosure Principle, the entity is required to disclose this information in its Financial Statements fully. Once the users of Financial Statements note this information, they will understand the entity’s current contingent liabilities are.
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 an entity, especially an accountant, 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 is 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 use 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 policy. 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 means disclosing all information required by an accounting standard, and the best way to check this is going to the specific standard.