Updated July 20, 2023
Definition of Full Disclosure Principle
Full Disclosure Principle requires every company’s management to disclose the relevant material information that can be both monetary and non-monetary in the financial statements of the company if that information can impact the investors’ or users’ investment decisions in the company but it does not mean that all the information should be disclosed because that would be impossible or would be very difficult for companies to mention and the readers/ users to evaluate.
Full disclosure principle requires the management of any business organization to give full disclosure of all the material and important information that may affect the investor’s understanding of that organizations financial statement. Management has to decide what all business related information should be known to investors.
For example change in the board of directors; change in the fiscal year of the company is the material information that is needed to be disclosed. Although the information related to directors and fiscal year is non-monetary the same can have a relevant impact on the investment decisions of the investors.
- There is a company named Clothing incorporation that deals with the manufacturing of clothes. There was another firm named Lavishfabrics who is the main customer of Clothing Information. In the year 2019, Lavish fabrics found another supplier who provides more better quality products so the management of Lavish fabrics decided to switch all their buying to that new vendor thereby cancelling all the upcoming orders that were pending with Clothing Incorporation. Now this news will have a great impact on the investor’s decision as the result of this cancellation the major revenue of the clothing incorporation will be lost so this is material information that the clothing incorporation has to disclose in the notes of financial statements.
- All the contingent assets and the contingent liabilities are needed to be disclosed in the notes to financial statements. For example, a law suit pending against any company that can result in the heavy penalties should be disclosed as a contingent liability.
Full Disclosure Principle Requirement
Full disclosure principle requires every company and organization where there is any public interest then such business organizations should disclose all the material or necessary information in the notes to the financial statements.
This is considered as the right of the investor to know all the positives and negatives of the business before investing their money into such a business. The information so disclosed should be in such format that it is easily readable and understandable by the users of the financial statements.
It is the business management choice to disclose the information in the footnotes of the financial statements or to issue the information as supplement information that consists of extra information that the company wants the readers, users or investors to know. This principle should not be misinterpreted as the principle that requires all the information to be disclosed. This principle just guides the business to disclose material facts about their business.
Applications of Full Disclosure Principle
The various applications of the Full Disclosure Principle are as follows:
- Every company is required to follow the Full Disclosure Principle which requires them to disclose the accounting policies followed and if there is any change in the accounting policies of the company.
- If there is any change in the company’s accounting system, fiscal year or other principles then they are also needed to be disclosed.
- The losses of inventory because of the obsoleteness decrease in the demand of a product or any other factors including a defect in the finished goods should be disclosed.
- The transactions with the related parties of business should be disclosed separately.
- Pending law suits of the large value should be disclosed.
- Sale of an undertaking or division of the business is material information that is to be provided to the investors.
Importance of Full Disclosure Principle
The Full Disclosure Principle is important because it provides the investor with all material facts about a business in which he wishes to invest his money. So because of Full Disclosure Principle, it is ensured that the business organizations are not misleading any group of investors by providing only the positive information to them.
Full Disclosure Principle is also important because it reduces the chance of getting the financial statements manipulated. As if there was no such principle then the potential businesses will show only the information that will make their business to look more strong and growing than it actually is
The advantages of Full Disclosure Principle are as follows:
- The financial information becomes easily understandable and the all the relevant facts are then available to the users.
- It helps to improve the goodwill of the organization in this competitive market.
- This results in building public trust as the public will always choose a loyal organization over the one that hides the relevant facts and figures.
- It helps in saving the investors from getting misled by the companies
The limitations of full disclosure principle are as follows:
- There are chances that the competitors will use the information disclosed by the company against them.
- Sometimes disclosing so much information could be time consuming and may require the hiring of an expert that will require payment of the huge amount as professional fees.
- So much information may sometimes make the readers to lose their interest as nobody has the time and interest to read a lot these days
Thus, full disclosure principle requires every business organization to mention the relevant business information into the notes of the financial statements so that the investors can know that information before investing their funds in that business. Material information can be financial or non-financial but it is always material that can influence users business decisions. Full Disclosure Principle helps in inculcating faith over the business organizations which is beneficial for the company and the overall economy in the long run as it helps the investors to evaluate the financial viability of the business before making investment decisions in such business.
This is a guide to Full Disclosure Principle. Here we also discuss the introduction to full disclosure principle and applications along with advantages and disadvantages. you may also have a look at the following articles to learn more –