What is the full disclosure principle in accounting? Why has disclosure increased substantially in the last 10 years? Include an explanation of the need for full disclosure in financial reporting and identify possible consequences of failing to properly disclose certain items in financial statements.
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Updated Definition (May 8, 2009).
1. What is the full disclosure principle in accounting?
General Accepted Accounting Principles (GAAP) is founded on the basic accounting principles and guidelines, and the full disclosure principle is one of these principles, which is explained as follows:
"If certain information is important to an investor or lender using the financial statements, that information should be disclosed within the statement or in the notes to the statement. It is because of this basic accounting principle that numerous pages of "footnotes" are often attached to financial statements. As an example, let's say a company is named in a lawsuit that demands a significant amount of money. When the financial statements are prepared it is not clear whether the company will be able to defend itself or whether it might lose the lawsuit. As a result of these conditions and because of the full disclosure principle the lawsuit will be described in the notes to the financial statements. A company usually lists its significant accounting policies as the first note to its financial statements" (http://www.accountingcoach.com/online-accounting-course/09Xpg01.html).
The accounting profession has adopted a full disclosure principle which:
"calls for financial reporting of any financial facts significant enough to influence the judgment of an informed reader. In some situations, the benefits of disclosure may be apparent but the costs uncertain. In other instances, the costs may be certain but the benefits of disclosure not as apparent. For example, the SEC increased the amount of information financial institutions
must disclose about their foreign lending practices. With some foreign countries in economic straits, the benefits of increased disclosure about the risk of uncollectibility are fairly obvious to the investing public. The exact costs of disclosure in these situations cannot be quantified, though they would appear to be relatively small " (http://higheredbcs.wiley.com/legacy/college/kieso/0471072087/book_pdf/ch24.pdf).
See informative diagrams at http://higheredbcs.wiley.com/legacy/college/kieso/0471072087/book_pdf/ch24.pdf, pp. 1272-1273).
2. Why has disclosure increased substantially in the last 10 years?
Disclosure requirements have increased substantially. One survey ...
This solution explains the full disclosure principle in accounting, and why disclosure has increased substantially in the last 10 years. It includes an explanation of the need for full disclosure in financial reporting and also identifies possible consequences of failing to properly disclose certain items in financial statements.