Short notes: full disclosure and the cost concept

(i) Convention of full disclosure. Financial statements should disclose every material fact: an item is material if knowledge of it might influence the decisions of a user of the statements: so that the accounts present a true and fair view and nothing that a reader would reasonably want to know is withheld. Insignificant items may be dealt with in the most convenient way, but anything whose omission or misstatement could mislead a user must be shown, whether on the face of the statements or by way of a note.

(ii) Cost concept. Closely tied to the going-concern assumption, the cost concept records an asset in the books at the price paid to acquire it, and that historical cost becomes the basis for all subsequent accounting for the asset (for example, depreciation is charged on cost). The books therefore do not normally reflect what an asset is currently worth to an outside buyer; a purchaser is presumed to be prudent and to pay no more than the asset is worth, so historical cost is taken to equal fair value at the moment of purchase. Later changes in market value are ordinarily ignored (fixed assets stay at cost less depreciation), which makes the figures objective and verifiable.