What is the Full Disclosure Principle?
Full disclosure principle refers to the concept that suggests that a business should report all the necessary information in their financial statements, so that the users who are able to read the financial information are in a better position to make important decisions regarding the company.
Full disclosure is especially beneficial for creditors and investors. The disclosing of financial information helps in decision making. The information is readily available to investors and creditors in the financial statements or as a note in the end of the financial statements.
A company can have various stakeholders which include creditors, suppliers, customers, investors, etc who use the financial information for deciding on the course of action to be taken regarding their stance in the business.
Since, the external users of financial information lack any kind of information on how business is run, the full disclosure principle makes it easier to determine how a company is functioning.
Components of Disclosure of Information
Following are some of the information that can be disclosed in the financial statements:
1. Acknowledging any change in accounting standards or principles.
2. Accounting policies that are followed
3. Presenting all financial statements in detail
4. Details on the level of inventory of the business.
5. The nature of relationship between the business and related party/parties of the organisation.
6. Disclosing the nature of non-monetary transactions.
7. Circumstances that lead to the impairment of goodwill.
Advantages of Full Disclosure Principle
Following are some of the advantages of the full disclosure principle:
- It makes understanding the financial information easier and assists in decision making.
- Helps in determining the usage and comparison of the financial statements much more accurately.
- Disclosure helps in improving the goodwill and credibility of the organisation in the market.
- The presenting of information is helpful for improving the faith of the general public towards the business organisation.
- It is very helpful for performing audits and for applying for loans from the bank.
Disadvantages of the Full Disclosure Principle
Following are some of the disadvantages of the full disclosure principle:
1. Competitors can use this information and use it against the business.
2. Inside information that is disclosed outside can be harmful for the business.
This concludes the topic of full disclosure principle, which is an important topic of Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.