Full Disclosure Principle
The financial accounting term Full Disclosure Principle refers to the practice of providing information of sufficient importance such that it would influence the decision making process of an individual reading a financial statement.
In practice, the Full Disclosure Principle attempts to strike a balance between two factors: detail and understandability.
- Detail: there needs to be enough information such that the reader of a financial statement can make an informed decision as to the current state of the business.
- Understandability: companies can have an enormous amount of information on the current state of their business. This information needs to be condensed for the reader of a financial statement.
This can be a highly subjective and judgmental principle to follow. Adding to this complexity can be the non-quantifiable nature of certain information such as a pending lawsuit or tax ruling. Typically, companies will include all information that can have a material effect on the company’s financial statements.
Accountants can disclose this information in one of three ways:
- Financial Statements: if the item can be reliably measured, and is of sufficient certainty, it can be included in the company’s financial reports such as the balance sheet, income statement and statement of cash flows.
- Notes: typically used to provide a further explanation for key items appearing in financial reports; one example of such a note is a parenthetical explanation.
- Supplementary Information: includes both managements’ discussion of the information contained in the company’s financial statements, as well as information that is deemed highly relevant but lower in certainty or non-quantifiable.
The various types of information subject to the Full Disclosure Principle include:
- A change in accounting practices and principles
- A change in the relationship with major trade partners
- Leases, franchises, and stock options
- Goodwill impairment
- Pending lawsuits, mergers or acquisitions