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What is the Full Disclosure Principle?​

November 24, 2015

Questions about GAAP:

What is the full disclosure principle and why is it important?

Facts:

The full disclosure principle states that companies should include all information in the financial statements that would affect a reader’s understanding or interpretation.

Discussion:

The consistency principle is one of the Generally Accepted Accounting Principles (GAAP). GAAP is basically the rule book that accountants follow for preparing financial statements. Full disclosure is information that is disclosed on the notes of the financial statements. A corporation usually lists its significant accounting policies as the first note to its financial statements. The disclosure should report the existing accounting policies as well as any changes to the accounting policies. Other examples of notes disclosed in the financial statements are:

  • Details of property, plant and equipment
  • Nature of transactions of related parties
  • Write-down of assets and impairment of goodwill
  • Details of long term debt and repayment schedule
 

For example, the corporation may disclose notes on events that have not occurred yet known as contingent liabilities or the outcome of an existing lawsuit. When the financial statements are prepared, it may not be clear whether the corporation will win or lose the lawsuit. There should still be a disclosure on the notes of the financial statements for details of the lawsuit and the potential loss if it is significant. Although notes to financial statements are not required for Notice to Reader engagements, they can be useful to the readers. Notes to financial statements are mandatory for review engagements and audits. When full disclosure is provided for the financial information, it is useful to managers, investors and bankers to make important decisions. GAAP allows the readers of the financial statements to review meaningful and comparable information.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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