May 6, 2013
Full disclosure is needed in financial reporting to ensure that any financial facts that may influence the judgment of an informed reader are fully disclosed. The SEC requires companies disclose the nature of their contractual obligations. The benefit of full disclosure often references the accounting scandals involving Enron and World Comm. Full disclosure helps users understand how management is preparing the financial statements and full disclosure is a tool requiring companies to explain details that the financial statements may not provide.
The complexity and nature of business is changing on a daily basis, and full disclosure is necessary to assist the user in deciphering the material used to prepare financial reports. The notes to financial statements explain complex subjects such as “derivatives, leasing, business combinations, pensions, financing arrangements, revenue recognition, and deferred taxes” (Kieso, Wegandt, & Warfield, 2010). Full disclosure explains these transactions and their future effects. More recent scandals such as AIG, are the reason why more users along and the SEC are requiring full disclosure of “management compensation, off balance sheet financing arrangements, and related party transactions (Kieso, Wegandt, & Warfield, 2010). Full disclosure fulfills the need to “provide more forward-looking information, focus more on the factors that create longer term value, including nonfinancial measures, and to better align information reported externally with the information reported internally” (Kieso, Wegandt, & Warfield, 2010).
The major disclosures include inventory, property, plant, and equipment, creditor claims, equity holder claims, contingencies and commitments, fair values, deferred taxes, pensions, and leases, and changes in accounting principles. The inventory disclosure states the basis on which inventory value...