Full disclosure principle dictates that entity must disclose all the transactions, events and circumstances in the financial statements that are material to the users of financial statements.
In simple words, management is required to include every financial information in the financial statements that can affect the economic decision making of the users. An important fact to understand here is that it is only the material information that needs to be disclosed and not every information regarding entity’s operations.
Reason to have this principle emphasized by major accounting framework is that not every information is quantifiable yet material to the users in which case management may be reluctant to be descriptive about events and circumstances. Therefore, full disclosure principle dictates accountants and management to not exclude such information. For example contingencies. Management will have to disclose the situation entity is facing with uncertain unfavourable outcomes.
Notes to the accounts are not the only set of disclosures. Even the figures mentioned in the financial statements are disclosures of quantified nature made by the entity.
In GAAPs and IFRSs especially, every standard has detailed list of disclosures that entity has to make to accompany financial statements for better understanding of the users.
Some of the examples where entity must provide disclosures are:
- extremely rare circumstances where entity has concluded that complying with standards will mislead user and have adopted an alternative in the light of accounting framework in which entity must provide name of the ifrs departed, nature of departure, treatment ifrs required, reason of departure and alternative treatment followed.
- present current and non-current assets separately in the financial statements and if not then assets should be reported in the order of liquidity only if this order is more relevant and reliable.
- impairment losses on inventory and non-current asset revaluation and any reversal of such impairments.
- discontinued operations, any profit or loss reported separately and status of it.
- any ongoing lawsuit with unfavourable outcome quantified for expected losses and probability of occurrence if possible. Also any adjustment to existing contingent assets or liabilities.
- instruments such convertible debentures that can dilute earning per share with diluted earning per share even if instruments are not convertible in current period.
- change in accounting policy required by the standards or in management’s opinion can provide better financial information.
- Assumptions related to estimates for example discount rates.
- Non-adjusting events that are material to the users