The Full Disclosure Principle
The full disclosure principle states that you should include in an entity's financial statements all information that would affect a reader's understanding of those statements. The interpretation of this principle is highly judgmental, since the amount of information that can be provided is potentially massive. To reduce the amount of disclosure, it is customary to only disclose information about events that are likely to have a material impact on the entity's financial position or financial results.
This disclosure may include items that cannot yet be precisely quantified, such as the presence of a dispute with a government entity over a tax position, or the outcome of an existing lawsuit. Full disclosure also means that you should always report existing accounting policies, as well as any changes to those policies (such as changing an asset valuation method) from the policies stated in the financials for a prior period.
Several examples of full disclosure are:
- The nature and justification of a change in accounting principle
- The nature of a non-monetary transaction
- The nature of a relationship with a related party with which the business has significant transaction volume
- The amount of encumbered assets
- The amount of material losses caused by the lower of cost or market rule
- A description of any asset retirement obligations
- The facts and circumstances causing goodwill impairment
You can include this information in a variety of places in the financial statements, such as within the line item descriptions in the income statement or balance sheet, or in the accompanying disclosures.
The full disclosure concept is not usually followed for internally-generated financial statements, where management may only want to read the "bare bones" financial statements.
The full disclosure principle is also known as the disclosure principle.