Hi Lisa. Excellent response! You’ve made some very good points related to disclo

Question

Hi Lisa. Excellent response! You’ve made some very good points related to disclosure. When we talk about presentation and disclosure, we often suggest clarity and transparency as though they are simple, easy things to accomplish. Unfortunately, that’s not always the case, especially when we are dealing with complex topics.

Class, with that being said, how simple and transparent should the disclosures be? Should it be worked in a way so that an average person would understand? Or should the disclosure be geared towards a reasonably knowledgeable business person? Why?

Explanation / Answer

Disclosures are additional information that are attached to a company’s financial statements and the disclosures serve the purpose of providing an ample and appropriate explanation for those activities that have had a significant influence on the financial results of that company.

Companies are required to adhere to the full disclosure principle. As per this principle a company has to provide all the necessary information that will enable the users of the financial statements of the company to make informed decisions with regards to the company.

Keeping the above in mind it is not always possible for companies to keep the language of their disclosures to be simple. While the disclosures have to be transparent in cases of complex accounting principles and policies the wordings of the disclosure can sometimes be technical. Thus the focus of accounting disclosures is to ensure that transparency is maintained and all required and relevant information is communicated and provided to users of financial statements. The company should strive and make reasonable efforts to keep the language as simple as possible. The ultimate objective is to ensure that the disclosures enable the users of financial statements to make informed decisions. The users can be suppliers of the company, stockholders of the company, institutional investors etc. Hence keeping in mind the interest of these users the disclosure should not be geared towards a reasonably knowledgeable business person.

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