Conventions and Standards

In this article, you will learn about the rules that govern accounting. GAAP sets the rules that accounts follow when making journal entries and standardizes accounting so outside parties can make comparisons between companies. Investors, creditors, even employees count on the consistency of financial reporting to evaluate operations.

Full-Disclosure Principle

The full disclosure principle states information important enough to influence decisions of an informed user should be disclosed.


Learning Objective

  • Indicate how the full disclosure principle affects the financial statements

Key Points

  • In judging whether or not to disclose information, it is better to err on the side of too much disclosure rather than too little.
  • Depending on its nature, companies should disclose this information either in the financial statements, in notes to the financial statements, or in supplemental statements.
  • As an accountant, the full disclosure principle is important because the notes to the financial statements and other financial documents are subject to audit.
  • There is adequate disclosure of all material matters relevant to the proper presentation of the financial information subject to statutory requirements, where applicable.

Terms

  • full disclosure principle

    amount and kinds of information disclosed should be decided based on trade-off analysis, and information disclosed should be enough to make a judgment while keeping costs reasonable

  • disclosure

    The act of revealing something.

 

Principle of Full Disclosure

The full disclosure principle states that information important enough to influence the decisions of an informed user of the financial statements should be disclosed. Depending on its nature, companies should disclose this information either in the financial statements, in notes to the financial statements, or in supplemental statements. In judging whether or not to disclose information, it is better to err on the side of too much disclosure rather than too little. Many lawsuits against CPAs and their clients have resulted from inadequate or misleading disclosure of the underlying facts. A good rule to follow is – if in doubt, disclose. Another good rule is – if you are not consistent, disclose all the facts and the effect on income.

To be free from bias, information must be sufficiently complete to ensure that it validly represents underlying events and conditions. Completeness means disclosing all significant information in a way that aids understanding and does not mislead. Firms can reduce the relevance of information by omitting information that would make a difference to users.

Required disclosures may be made in (1) the body of the financial statements, (2) the notes to such statements, (3) special communications, and/or (4) the president's letter or other management reports in the annual report. Another aspect of completeness is fully disclosing all changes in accounting principles and their effects.

 

Importance of Full Disclosure Principle: Subject to Audit

As an accountant, the full disclosure principle is important because the notes to the financial statements and other financial documents are subject to audit. To obtain an unqualified (or clean) opinion, one must have an intrinsic understanding of the full disclosure principle to insure sufficient information for an unqualified opinion on the financial audit.

An opinion is said to be unqualified when the auditor concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the financial statements. An auditor gives a clean opinion or unqualified opinion when he or she does not have any significant reservation in respect of matters contained in the financial statements.

An unqualified opinion is given when:

  1. The financial statements have been prepared using the generally accepted accounting principles which have been consistently applied;
  2. There is adequate disclosure of all material matters relevant to the proper presentation of the financial information subject to statutory requirements, where applicable;
  3. Any changes in the accounting principles or in the method of their application and the effects thereof have been properly determined and disclosed in the financial statements.