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What is the full disclosure principle in accounting?

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Chapter 24, question 2, Intermediate Accounting

What is the full disclosure principle in accounting? Why has disclosure increased substantially in the last 10 years? Explain the need for full disclosure in financial reporting. Identify possible consequences of failing to properly disclose certain items in financial statements.

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What is the full disclosure principle in accounting?

The full disclosure principle is a "catch all" principle that covers a wide range of potential and unspecified issues. It is a safety net for information that might be important but was not covered in the more standardized disclosures required, because of unique company issues, special circumstances, complexities of a transaction or particulars of an industry.

The full disclosure principle says that if there is information at might be important to a stakeholder (reader of the financial statement), then that information should be disclosed within the financial statements or the notes that accompany them.

Now, this is a very broad brush principle and does not specify exactly what is required. In fact, it is not exactly clear who is reading the statements and what they might want. And firms don't want to disclose tons of unwanted or unneeded information (since it is expensive to report and could potentially reveal information to competitors). So, it requires some judgment to decide whether or not something requires additional disclosure. Basically, the idea is that organizations should disclosure financial facts that might influence the judgment of a diligent reader.

Why has disclosure increased substantially in the last 10 years?

The climate for financial statements risk has be more sensitive since Enron and WorldCom frauds and the ensuing Sarbanes Oxley Act of 2002. Now that C-suite executives had to sign that they read and understood their own ...

Solution Summary

Your tutorial is 855 words plus three references. The discussion tells you what the full disclosure principle is, gives examples, and explains consequences of not meeting this "catch all" principle. It also discusses why there are more disclosures in the past ten years.