Full Disclosure PrincipleDefined and Explained

Written By:
Lisa Borga

What is the Full Disclosure Principle?

The Full disclosure principle is one of the Generally Accepted Accounting Principles (GAAP).

This principle requires businesses to provide all relevant and appropriate information, whether financial or non-financial, in their financial statements.

This information may be in the financial statements themselves or the notes to the statements.

Businesses need to disclose any information necessary for people who are expected to read financial statements to understand a business’s financial position.

This may include the depreciation method a business uses, the inventory method the company uses, or other important information about the business.

An example of information a business would be expected to disclose would be a lawsuit the company expects they might lose involving a significant amount of money.

The full disclosure principle is intended to ensure that stakeholders in the business, whether investors, creditors or any other users of a company’s financial statements, have the information necessary to make informed decisions about the business.

Explaining the Full Disclosure Principle

Businesses do not need to disclose all information about their company in order to follow the full disclosure principle.

This would not be very practical and, for a lot of people, not very helpful as it would involve a huge amount of information for users of the business’s financial statements to go through.

A business only has to disclose information that could have a material impact on the financial position of the company.

Requiring businesses to disclose this information is intended to help prevent businesses from using nonpublic information for profit or making their company appear to be in a stronger financial situation than it really is.

Enron is a famous example of this.

Enron withheld important information from the users of the company’s financial statements that caused them to make decisions based on information that did not reflect the actual position of the company.

Requirements of the Full Disclosure Principle

Public companies are not required to report all information.

They only need to disclose information that may have a material effect on the financial position of the company.

Some of the more common information a business must include is:

• All audited financial statements, including footnotes
• Accounting policies used
• Material losses
• Impairment of good-will and write-down of assets
• Nature of non-monetary transactions
• Asset retirement obligations
• Current litigation
• Essential details of transactions with related parties

Some of the above items cannot be quantified with absolute assurance.

But, businesses must still disclose any item that could potentially have a material impact on the financial position of the company.

Companies also typically provide the public with forward-looking financial statements that make projections about the future financial health of the company.

Where is a Company Required to Disclose the Information?

Public companies need to disclose the information in the SEC filings that these companies are required to submit.

This includes the quarterly and annual reports a company files, which are a business’s most important filings.

These reports consist of important filings such as audited financial statements as well as notes and schedules for the statements and other important information provided by management.

Management also discloses any risks that are related to the operations of the company and presents forward-looking financial statements that give financial statement users a look at potential future decisions and activities of the company.

Full Disclosure Example

There are a number of situations in which a company may be required to disclose information because it may have a material impact on the company’s financial statements.

One example of this involves tax rates.

If a company expects that its tax rate will be changing in the near future, this company needs to disclose this information.

Another example of information a business would need to disclose is a loan to a company official.

The loan would need to be disclosed along with the relevant information about the loan, such as the amount of the loan, the duration of the loan, the interest rate for the loan, and any other pertinent details of the loan.