Reliability of information contained in the financial statements is achieved only if complete financial information is provided relevant to the business and financial decision making needs of the users. Therefore, information must be complete in all material respects.
Incomplete information reduces not only the relevance of the financial statements, it also decreases its reliability since users will be basing their decisions on information which only presents a partial view of the affairs of the entity.
Test Your Understanding
Under which of the following circumstances will the completeness of information contained in financial statements be compromised?
Although the probability of court decision against the company is low, the nature of litigation and potential liability in the event of an adverse verdict must be disclosed in the financial statements to enable users to assess the possible impact of the contingent event on the company's future profitability and stability.
Completeness of information must be considered in the context of materiality. Presenting income from sale of fixed assets amounting only $10,000 separately from sales revenue is unlikely to facilitate users in making better financial decisions. Therefore, the completeness of information will not be affected in the circumstances.
Even though sales to the related party had been made at commercial prices, such information must be disclosed in the financial statements as it may help users to determine the impact of such transactions on the performance of the entity. For instance, sales to the subsidiary may have taken place because of the absence of any other buyer in the market. Hence, disclosure of transactions with related parties is essential in order to present complete information to users of the financial statements.