What is an example of a disclosure that complies with the full disclosure principle?

What is an example of a disclosure that complies with the full disclosure principle?

• A. Reporting profits from the previous year
• B. Revealing contingent liabilities in financial statements notes
• C. Offering forecasts on future revenues
• D. Describing managerial biases

Answer: (B)

The full disclosure principle in accounting mandates that all material facts that could influence the understanding of the financial statements should be disclosed. This principle ensures that users of financial statements have access to all relevant information that might impact their decision-making. Revealing contingent liabilities in the notes to financial statements aligns with this principle because contingent liabilities—potential obligations that may arise based on the outcome of uncertain future events—can significantly influence a company's financial position. By disclosing these liabilities, companies provide transparency regarding potential risks that could affect their financial stability. This allows stakeholders, such as investors and creditors, to better assess the company's financial health and make more informed decisions. The other choices, while they involve providing information, do not fully adhere to the essence of the full disclosure principle as effectively. Reporting profits from the previous year is a historical fact and does not encompass potential future risks that need disclosure. Offering forecasts on future revenues might include forward-looking statements that could be speculative and are not usually required under GAAP. Describing managerial biases might be seen as relevant in certain contexts, but it does not typically fall under the formal requirements of disclosures mandated by GAAP. Thus, revealing contingent liabilities reflects a significant aspect of transparency and materiality aligned with the full disclosure principle.

The full disclosure principle in accounting mandates that all material facts that could influence the understanding of the financial statements should be disclosed. This principle ensures that users of financial statements have access to all relevant information that might impact their decision-making.

Revealing contingent liabilities in the notes to financial statements aligns with this principle because contingent liabilities—potential obligations that may arise based on the outcome of uncertain future events—can significantly influence a company's financial position. By disclosing these liabilities, companies provide transparency regarding potential risks that could affect their financial stability. This allows stakeholders, such as investors and creditors, to better assess the company's financial health and make more informed decisions.

The other choices, while they involve providing information, do not fully adhere to the essence of the full disclosure principle as effectively. Reporting profits from the previous year is a historical fact and does not encompass potential future risks that need disclosure. Offering forecasts on future revenues might include forward-looking statements that could be speculative and are not usually required under GAAP. Describing managerial biases might be seen as relevant in certain contexts, but it does not typically fall under the formal requirements of disclosures mandated by GAAP.

Thus, revealing contingent liabilities reflects a significant aspect of transparency and materiality aligned with the full disclosure principle.