Full Disclosure Principle

In deciding what information to report, companies follow the general practice of providing
information that is of sufficient importance to influence the judgment and decisions
of an informed user. Often referred to as the full disclosure principle, it recognizes
that the nature and amount of information included in financial reports
reflects a series of judgmental trade-offs. These trade-offs strive for (1) sufficient detail
to disclose matters that make a difference to users, yet (2) sufficient condensation
to make the information understandable, keeping in mind costs of preparing
and using it.
Users find information about financial position, income, cash flows, and investments
in one of three places: (1) within the main body of financial statements, (2) in
the notes to those statements, or (3) as supplementary information.
As discussed in Chapter 1, the financial statements are the balance sheet, income
statement, statement of cash flows, and statement of owners’ equity. They are a structured
means of communicating financial information. To be recognized in the main
body of financial statements, an item should meet the definition of a basic element,
be measurable with sufficient certainty, and be relevant and reliable.14
Disclosure is not a substitute for proper accounting. As a former chief accountant
of the SEC noted, “Good disclosure does not cure bad accounting any more than an
adjective or adverb can be used without, or in place of, a noun or verb.” Thus, for example,
cash-basis accounting for cost of goods sold is misleading, even if a company
discloses accrual-basis amounts in the notes to the financial statements.
The notes to financial statements generally amplify or explain the items presented
in the main body of the statements. If the main body of the financial statements gives
an incomplete picture of the performance and position of the company, the notes should
provide the additional information needed. Information in the notes does not have to
be quantifiable, nor does it need to qualify as an element. Notes can be partially or totally
narrative. Examples of notes include descriptions of the accounting policies and
methods used in measuring the elements reported in the statements, explanations of
uncertainties and contingencies, and statistics and details too voluminous for inclusion
in the statements. The notes can be essential to understanding the company’s performance
and position.
Supplementary information may include details or amounts that present a different
perspective from that adopted in the financial statements. It may be quantifiable
information that is high in relevance but low in reliability. For example, oil and gas
companies typically provide information on proven reserves as well as the related discounted
cash flows.
Supplementary information may also include management’s explanation of the financial
information and its discussion of the significance of that information. For example,
many business combinations have produced financing arrangements that demand
new accounting and reporting practices and principles. In each of these situations,
the same problem must be faced: making sure the company presents enough information
to ensure that the reasonably prudent investor will not be misled.