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The convention of full disclosure requires that all important and relevant facts related to financial statements be fully revealed.
This means providing a comprehensive, fair, and sufficient presentation of accounting information. "Adequate" means giving enough information, "fair" means treating all users equally, and "full" means offering detailed and complete information.
Thus, this convention ensures that every financial statement discloses all relevant details thoroughly.
Application to Business
Businesses provide financial information to various interested parties, such as investors, lenders, creditors, and shareholders, each with different needs. For example, shareholders want to know about a company's profitability, while creditors are interested in its solvency. Full disclosure ensures that financial statements meet these diverse needs by presenting all relevant information comprehensively, fairly, and adequately.
Example:
Imagine a scenario where net sales are reported as ₹4,50,000. Stakeholders would also need to know the gross sales, which might be ₹5,00,000, and the sales returns, which could be ₹50,000. Knowing that 10% of sales were returned gives a clearer picture of the actual sales situation. Therefore, all available details must be honestly provided. Additional information should also be included in financial statements. For example, a balance sheet should clearly state how assets are valued (such as investments, inventories, and land and buildings). Any changes in accounting policies, such as methods of depreciation, provisions for bad debts, or the creation of reserves, must also be clearly disclosed.
Legal and Regulatory Framework:
To ensure proper disclosure of important accounting information, the Companies Act, 2013 under Schedule III, prescribes a format for preparing Profit and Loss accounts and Balance Sheets for companies.
Every company must follow this format. Additionally, regulatory bodies like the SEBI, IRDA etc require registered companies to make complete disclosures.
The significance of the Convention of Full Disclosure includes:
Facilitates meaningful comparisons of financial statements across different business units.
Allows for the comparison of financial statements over different years within the same business unit.
Helps investors and shareholders make informed investment decisions.
Ensures the information presented is reliable.
In conclusion, the convention of full disclosure is essential for providing transparent, reliable, and comprehensive financial information that meets the diverse needs of various stakeholders.
Read the next article to learn more about the next Convention of Materiality.