Full disclosure principle definition
/What is the Full Disclosure Principle?
The full disclosure principle states that all information should be included in an entity's financial statements 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.
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 footnotes. More substantial disclosures are always included in the footnotes.
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When the Full Disclosure Principle Does Not Apply
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. In this situation, management is assumed to already have full knowledge of the items that would otherwise have been disclosed.
Examples of the Full Disclosure Principle
Several examples of full disclosure involve the following items:
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
Terms Similar to Full Disclosure Principle
The full disclosure principle is also known as the disclosure principle.