Definition and Explanation

The principle of adequate disclosure demands full disclosure of all material matters that can affect financial statements and are of interest to users of accounting information.

This principle requires the disclosure of appropriate changes in financial statements that can be useful and not misleading to users.

Thus, according to this principle, all necessary facts must be disclosed to the users of financial statements (i.e., proprietors, creditors, and investors). Full disclosure may be made either in the body of the financial statements or in footnotes.

Example

This example focuses on the disclosure of contingent liabilities as a footnote after the balance sheet.

There are a large number of areas where a business is free to formulate its own accounting policies without violating any of the generally accepted accounting principles or concepts.

For example, companies are free to choose the method of computing depreciation and to select the rates of depreciation, or set the limit for what is or is not a capital expenditure.

The principle of adequate disclosure requires accountants to:

  • Present adequate information (i.e., sufficient breakdown and details) in the income statement or balance sheet, either within the body of these statements or by way of notes, that satisfies the needs of all users
  • Disclose the accounting policies and internal rules affecting accounting statements so that the users of these statements can evaluate them in a meaningful manner.

Frequently Asked Questions

What is the objective of the principle of adequate disclosure?

The main objective of adequate disclosure is to ensure that all material financial information about an organization is disclosed in its Financial Statements. This information must be disclosed in a form that will satisfy all users of these statements. The purpose is to provide consistent, accurate, meaningful and publicly available data with which users can make appropriate and meaningful evaluations.

What is the difference between an adequate disclosure and insufficient disclosure?

The concept of inadequate disclosure is the result of a lack of or insufficiency of financial disclosures in an organization's reporting policies, procedures, practices, or reporting mechanisms. For example, companies should disclose all material information in their Financial Statements.

What is the principle of adequate disclosure all about?

The principle of adequate disclosure is one of the general principles that underlie accounting standards and financial reporting. It requires organizations to disclose material (significant) matters, either within the body of an income statement or balance sheet or by providing supplementary information in the form of notes to Financial Statements.

Under what circumstances must a company abide by this principle?

The standard is applicable to all cases where users need adequate information for them to be able to make appropriate decisions about an organization's future. The term "adequate" means sufficient for the user accurately and effectively assess the potential impact of the information on their decision.

What does it require from a company?

The standard requires that a company disclose all financial information or material matters that users need for them to make informed decisions. It also requires companies to clearly distinguish between "essential" and "non-essential" disclosures. The essential disclosures convey basic, high-level information about the business and its operations.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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