Full Disclosure

What is the Full Disclosure Principle?

• The full disclosure concept asserts that all information relevant to a reader’s understanding of a company’s financial statements should be included
•  Because the amount of information presented is potentially huge, this principle’s interpretation is very judgmental
• It is common only to disclose information regarding occurrences that are likely to have a major impact on the entity’s financial status or financial results in order to decrease the quantity of disclosure
• This information could include things that aren’t yet quantifiable, such as the existence of a tax dispute with the government or the outcome of a current lawsuit
• The full disclosure concept also means that you should always declare existing accounting policies and any modifications to those policies (like using an alternative asset valuation method) from previous periods’ financials
• This information can be found in various areas in the financial statements, including line item explanations in the income statement or balance sheet and footnotes
• The notion of full transparency does not necessitate the public publication of all available information
• On the contrary, the regulation would be impractical at that point, as it would overwhelm analysts and investors with data
• The principle encourages sharing information that could significantly impact a company’s financial results or position
• The notion promotes financial market openness and reduces the opportunity for potentially fraudulent acts
• The importance of the full disclosure principle is growing in the wake of high-profile scandals involving accounting results manipulation and other deceptive tactics
• The Enron incident in 2001 and Bernie Madoff’s Ponzi scheme uncovered in 2008 are two of the most well-known examples
• Footnotes are always used to offer more detailed disclosures

Full Disclosure Requirements

Public firms are generally obligated to report only information that has a meaningful influence on the company’s financial results. Companies are required to disclose the following items regularly:

• Financial statements that have been audited
• Accounting policies in use and modifications to accounting policies
• Transactions that are not monetary
• Material losses
• Obligations related to asset retirement
• Details and reasons for the loss of goodwill
• Litigation that is underway

It is worth noting that not all the preceding examples can be precisely quantified. Regardless, all items that potentially have a significant impact on the company’s financials must be declared.

Furthermore, a company’s management is required to make forward-looking statements that anticipate the company’s future direction and events that may affect its financial performance.

Where is the Information Disclosed?

A public corporation must disclose the information in regulatory filings (such as SEC filings). The company’s quarterly and annual reports, which comprise audited financial statements, different notes and schedules to the accounts, and detailed comments from management, are the most crucial filings.

Management also discusses the risks connected with the company’s operations in the filings and provides forward-looking comments about future decisions and activities.

To explain the material in the reports, conference calls with the company’s management may be employed.

The beneficial owners of securities must be disclosed, and a class of securities must be withdrawn.

Components of Disclosure of Information

The following information can be disclosed in the financial statements:

• Take note of any changes in accounting principles or standards
• Adherence to accounting policies
• Providing a detailed presentation of all financial statements
• Information about the company’s inventory
• The nature of the business’s relationship with the organisation has linked party (ies)
• Making non-monetary transactions public
• Circumstances that cause goodwill to be harmed

Non Applicability of Full Disclosure Principle

The full transparency notion is not commonly adhered to for internal preparation of financial statements, when management may only want to see the basics of financial statements.

In this situation, it is assumed that management already knows everything there is to know about the items that would otherwise be divulged.

Advantages of the full disclosure principle

• Financial data becomes simple to comprehend, and users have access to all essential information
• In this competitive market, it helps to build the organisation’s goodwill
• As a result, the public will always choose a trustworthy organisation over one that hides critical data and figures, resulting in increased public trust
• It aids in the protection of investors from being duped by businesses

Disadvantages of the Full Disclosure

• There is a chance that competitors will exploit the company’s knowledge against them
• It is possible that exposing so much information will take a long time and will necessitate the engagement of an expert, which will require the payment of a large sum of professional fees
• Because no one has the time or interest to read a lot these days, too much material may bore readers

Conclusion

Creditors and investors benefit the most from full disclosure. Financial information is made public to aid decision-making. Investors and creditors can find the information in the financial statements or a note at the end of the financial statements. Various stakeholders in a business, such as creditors, suppliers, consumers, investors, and others, use financial data to determine the best course of action for their position in the organisation.

The full disclosure concept makes it easy to identify how a firm is operating because external users of financial information lack any kind of knowledge of how businesses are conducted.