Full Disclosure Principle

Full disclosure principle requires that financial statement must disclose all the material information whether on the face or in notes to the accounts. This concept is very closely related to the materiality concept of accounting. The purpose for this is to avoid anything from the users of the financial statements because they make their decisions over the information available from financial statements.

Example

1. Normally, accounting policies are included as the 1st disclosure in the notes to the financial statements. This includes policies for depreciation method, the methods for inventory valuation etc.
2. Related party transactions disclosure is mandatory.
3. Effect of foreign currency should be disclosed if the company is engaged in foreign operations as well,
4. Disclosure of finance leases showing liabilities for 1 years, 2 to 5 years and more than 5 years as required by accounting standard,
5. Details of legal proceedings should also be disclosed in the notes.

Example

Zine is engaged in electronic media industry. He has been in the business since 20 years. The Board of Directors has decided to further expand its operations and for this, planned to invest in more advanced technology which requires heavy investment. Currently, the gearing of Zine is very low. So FD has suggested taking bank loan to expand the operations. The Board of directors has voted in favor. But the bank has asked for a collateral security for a loan of 05 years $50 million @ interest rate of 12 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} per annum. The Board of directors has agreed to provide a warehouse land as collateral security. Suggest the accountant as how to present this transaction into the accounts of Zine.

Solution

It is a good idea to use the available gearing to finance the future operations. As all directors are in favor, there is a good chance of success and there is a congruence of goals at every level of managements.

When Zine will obtain bank loan, it will have to show this amount as a liability. The liability needs to be disclosed into two portions, that is, current portion of the liability and the long portion. Further, there is a need to disclose the collateral security given to the bank for obtaining such a loan.

If Zine accounting period ends on every 31^st December, then:

Current portion of liability (due within next 12 months) = $ 8,161/-

Long term portion of liability (due over 12 months) = $ 38,716/-

In order to better disclose the financial data, the following schedule may be used: