What is Adequate Disclosure
Adequate disclosure is an accounting concept confirming that all essential information is included in financial statements for an investor or creditor to rely on. Adequate disclosure refers to the ability for financial statements, footnotes and supplemental schedules to provide a comprehensive and clear description of a company's financial position.
BREAKING DOWN Adequate Disclosure
Adequate disclosure in accounting practices mandates that all readers of a financial statement have access to pertinent data that would be deemed essential to understanding an entity's financial position. Regulatory bodies such as the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) and standards-setting organizations such as the Financial Accounting Standards Board (FASB), International Accounting Standards Board (IASB) and Government Accounting Standards Board (GASB) all have adequate disclosure guidelines and rules.
Internal and external parties work to ensure that a reporting entity, whether a private-sector company, nonprofit organization or government agency, provides adequate disclosure for investors, creditors, donors, taxpayers or other constituents depending on how the information is used. Internally at a company, for instance, accountants and record keepers would gather transactional details throughout a period and then work with an in-house financial auditor(s) to organize the reports. If there is no in-house auditor for this function, the company would hire an external auditor to organize the books. An internal audit group (not to be confused with a financial auditor) would double-check the integrity of the financial statement compilation process. If it is discovered there is inadequate disclosure in any area, the deficiency would be rectified.
Key to any set of financial statements with respect to adequate disclosure is a description typically entitled "Summary of Significant Accounting Policies." In this section, located at the beginning of the notes to financial statements, a company will discuss its basis of presentation (e.g., U.S. GAAP), principles of consolidation, revenue recognition policy, PP&E valuation methods, goodwill and other intangible asset valuation tests, income tax treatment, investment valuation methods and many other facets of accounting policies that help the reader understand and analyze the financial statements.