Full disclosure principle requires that all material information should be disclosed in the financial statements. Usually, the financial statements contain explanatory notes as well, so such material information can either be disclosed in the statements itself or in the explanatory notes to the financial statements. This principle is linked with materiality which is an important concept in the context of financial reporting. By material information, it is meant that such information is important for the users of financial statements and its non-disclosure can affect their decisions.
Let’s take a look at some of the examples related to full disclosure principle.
- Information about an entity’s nature of business and its geographical presence is important for users, so such information is often disclosed in the first note to the financial statements.
- Significant accounting policies applied by an entity in preparing and presenting the financial statements are also relevant and important to understand the basis of accounting, so these policies are also usually disclosed in the opening notes to the financial statements.
- Areas where significant estimates are required by the management are also disclosed in the notes to the financial statements.
- Details of any open lawsuits, litigations and other material contingencies are disclosed in the financial statements as they can have a material impact on the business in future and are therefore important for the users of the financial statements.
- Details of amounts such as revenues, fixed assets, loans etc. are given in the notes to explain all material information to the users. For example, in case of a loan, if there is any collateral or security given, it is disclosed. Further, interest rates and summarized information about repayment schedule is also usually given in the notes.
- Significant events happening after the reporting date but before the issuance of financial statements are also disclosed as they have an impact on the business and are material to the decision-making needs of the users of the financial statements.