Full Disclosure Principle

What is a Full Disclosure Principle?

The full disclosure principle refers to the situation where a company should provide all necessary information about the company in its financial statements so that its stakeholders can be aware of it from all angles.

• Full disclosure leads to better transparency and efficiency of the operations of a company in the long run. According to the full disclosure principle, all information should be there in an entity's financial statements so that it affects a reader's understanding of those statements positively.

• However, the interpretation of the full disclosure principle is highly judgmental. It is because the quantity of information that can be provided is potentially huge. Therefore, to reduce the burden of disclosure, usually, only disclose information about events is included in the full disclosure statement that is likely to have a material impact on the firm’s financial position or financial results.

• The disclosure may contain items that cannot be precisely quantified in numbers.

  For example, the outcome of an existing lawsuit or the presence of a dispute with a government entity over a tax position may be included in the disclosure.

• Disclosure is especially fruitful for investors and creditors The disclosure of facts regarding financial information helps in the decision-making of creditors and investors. The creditors and investors are interested in knowing about the financial position of the company. The information about the firm is easily available to investors and creditors as disclosure in the financial statements. In some cases, the disclosure is included as a note at the end of the financial statements.

• The full disclosure principle helps the stakeholders understand the inside story of the businesses which is usually not disclosed in public. A company usually has various stakeholders, such as creditors, suppliers, customers, investors, etc. These stakeholders need financial information for taking a stance on the course of action regarding their decisions about the business. So the stakeholders cannot understand how the business is functioning without the help of full disclosure. Therefore, the full disclosure principle is a very useful tool for stakeholders to stay aware of the firms that affect them.

Example of Full Disclosure Principle

Suppose company X had bought a vehicle for its commercial purposes and it is the owner of the vehicle now. The vehicle is fully functional and is being used by the company frequently. The vehicle meets an accident where a pedestrian has been injured seriously. The pedestrian has sued the company for negligence in driving. He is likely to win the lawsuit the next year.

Constituents of Full Disclosure Information

Some information that can be included in full disclosure information is the following.

Acknowledgments

The disclosure may reveal the acknowledgment of changes in the accounting standards and principles. This is important because any change in standards or principles may affect the profitability of the firm.

Policies

Disclosures may contain information about the policies that are followed by the firm. It helps in understanding the financial structure of a company.

Detailed report

Disclosures may also present the financial statements in detail. This is done so that the creditors and investors can readily decide whether to invest in the company or not.

Inventory levels

Disclosures may contain information on the levels of inventory with the business. This helps stakeholders have an idea of the level of the organization in terms of production.

Business relations

Disclosures also reveal the firm's relationship with other firms and organizations. This shows the level of interdependence and business association of a firm.

Non-monetary transactions

The disclosure will also contain details about the non-monetary transactions done by the company. This is important because non-monetary transactions may impact the profitability of the firm.

Goodwill impairment

The disclosure will also contain information about the circumstances that lead to the impairment of goodwill.

Asset retirement obligations

Description of asset retirement obligations

Value added tax (VAT) rates

Any future expectations of changes in Value added tax (VAT) rates

Sell of subsidiaries

If the company sells one of its subsidiaries to the spouse of one of the directors detailed material information in such cases must be provided.

It must be noted that the company laws indicate and ensure that the readers and users of full disclosures are not misled in any manner by the companies. Therefore, the information provided by the firms in disclosures must not be exaggerated or wrongful in nature.

Advantages of The Full Disclosure Principle

The advantages of the full disclosure principle are as follows.

Easier Understanding

Disclosure of information makes it easier for the stakeholders to understand the financial information in a detailed and systematic manner. Disclosures also help investors to make informed decisions more easily and readily.

Improving faith

The presentation of information increases the faith of the general public in the organization. This helps in maintaining good relationships with the stakeholders.

Easier comparison

Financial disclosures also help analysts in comparing the firms in terms of financial prowess. It also lets the stakeholders determine the strength of a firm in financial terms.

Increasing goodwill

The usage of financial disclosure helps firms to grow their goodwill. Additionally, it increases the credibility of the company in the market. As the transparency of financial performance is disclosed, the company’s goodwill factor goes up in the market.

An important document for audits and loans

The disclosure acts as an excellent document for audits and bank loan purposes. The analysts can derive the strong and weak points of the firm from disclosures which help in audits and offering business loans by the banks and other financial institutions.

Disadvantages of Full Disclosure

The following are the disadvantages of full disclosure.

Opportunity for competitors to harm the business

As important information is presented in disclosures, the competitors may use them against the business organization. This can severely harm the company.

Insider information leakage

Disclosures may lead to the leakage of insider information outside which may be a disadvantage for the company. Under the full disclosure principle, the company must disclose this information even when the financial transaction will probably take place in the next year. The probable amount to be paid and the details of transactions to be made should be provided to the stakeholders because the incident has occurred and the likely outcome is recorded.

Conclusion

Full disclosure is an important part of businesses because it helps the stakeholders understand the nature of the business and how it is being run by the management of the firm. Full disclosures are also considered to be a sign of the ethical nature of the companies.

As companies show probable financial situations via full disclosure, investors and creditors are content with the information. That is why full disclosures are considered vital for the overall performance of the companies.

FAQs

Q1. Can items that cannot be quantified be included in the full disclosure?

Ans. Yes. The items that cannot be quantified should also be included in disclosure if it is considered important for the readers and analysts.

Q2. Give three contents of the full disclosure principle.

The full disclosure principle may contain −

• Acknowledgments of adopted financial standards and policies.

• Any change in accounting standards that have been made.

• The levels of inventory with the firm, etc.

Q3. Give one disadvantage of full disclosure.

Ans. Full disclosure information may be used by competitors against the firm which is a big disadvantage for the company.