Full Disclosure Concept

June 11th, 2006 Comments off
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FULL DISCLOSURE CONCEPT
  •          Does not only contain only the facts but should relate to events, information and others which might be relevant to the users of the financial statement.
  •         For obvious reason, full disclosure also relates to the materiality concept wherein all significant information and events need to be disclosed so as not to mislead the investors. Trivial matters which are unimportant and does not impact any economic benefits needs not be disclosed.
  •         General acceptable accounting practice usually require as much disclosure as possible. This is to enable the investors to know more the business they have invested in and or going to invest in. Investors need well informed information, events and others to make the correct investment decision, understand the risk perception of the management and the financial performance of the business.
  •         Examples of such events – changes in accounting methods, major loss resulting from a disaster and potential litigation, acquisition of subsidiaries, material changes in shareholding after the balance sheet date but before signing off the financial statement and many others.

Illustration No 1:

Company A year end is 31st December. On January 15, company A receives a writ/summon from Company B’s lawyer for infringing its copyright . Company B is sueing Company A for $10 million.

It’s important that the management of Company A should give a full disclosure of all the material facts pertaining to this legal suit as the amount is very signficant.

Illustration No.2

Company A which is a conglomerate has a substantial investment in Brazil. Due to an earthquake, the factory in Brazil has been destroyed.

Based on the full disclosure concept, the management should give ample disclosure on this matter so as to alert the readers of its impact to its financial results in the financial statement.

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