Full Disclosure Principle in Accounting

Full Disclosure Principle in Accounting

Full disclosure principle require the management of the company to disclose the information and figures that are relevant for the users (includes investors, lenders, shareholders etc.) but doesn’t means that each and every information about the business is needed to be disclosed as it directs the business to mention the material information that the user should know before investing in that company. 

Explanation with example

The full disclosure principle directs the company to disclose the relevant facts and material information into the accompanying footnotes of their financial statements. This principle enables the users to correctly evaluate and analyze the financial position of the business i.e. the earning capability of the business and the future growth and survival potential. 

For example, a pending lawsuit against the company which can result in the winding up of the company if the decision of the Court does not come in the favor of the company is material information that can affect the stability of the company in the future. Therefore, this is relevant information that is required to be disclosed in the food notes of the financial statements of the company. 

All the contingent assets and the liabilities are disclosed in the notes of financial statement because of the full disclosure principle. 

Advantages

The advantages of full disclosure principle are as follows: 

  1. This principle is important because it provides all the material information to the users which the users need to know because they are investing their money into the business so they have the right to know the important events that are happening in that company. 
  2. Goodwill of the organization increases with the disclosures of relevant information. 
  3. It increases the faith of the investors in the company because they get to know all the material information about the company thereby they can increase their investment in the company. 

Disadvantages

The advantages of full disclosure principle are as follows:

  1. The competitors of the company can take the advantages of the information and can try to make such Strategies and plans that can work against the company that disclosed important information about their company. 
  2. Disclosure of so much information can be time-consuming and cumbersome. 
  3. There can be error in the judgments while deciding whether information is material or not. So there are chances that the judgments of the company may be inaccurate.
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