Earn your certification as a Financial Modeling & Valuation Analyst (FMVA)®. Register today!

Full Disclosure Principle

The release of material information about a company’s financial results or financial position

What is the Full Disclosure Principle?

The full disclosure principle is a principle that requires public companies to release and make available information regarding the company that can be used to make an informed decision.

 

Full Disclosure Principle

 

The principle is crucial to ensure that there is a limited information asymmetry between the company’s management and its current shareholders. Besides, it principle provides information to outsiders such as stock analysts or prospective investors.

 

Breaking down the full disclosure principle

The full disclosure principle does not require the release of all available information to the public. On the contrary, the rule would be impractical as it would dump a huge volume of information on analysts and investors. The principle urges the disclosure of information that can have a material impact on the company’s financial results or financial position.

The principle helps foster transparency in financial markets and limits the opportunities for potentially fraudulent activities. The importance of the full disclosure principle continues to grow amid the high-profile scandals that involved the manipulation of accounting results and other deceptive practices. The most notable examples are the Enron scandal in 2001 and a gigantic Madoff’s Ponzi scheme discovered in 2008.

In addition, the full disclosure principle can be used in contractual law. In such a case, the parties in a business transaction must disclose to each other all material information that is related to the execution of a transaction.

 

Full disclosure requirements

Generally, public companies are required to disclose only information that can have the material impact on the financial results of the company. The most common items that the companies must report include the following:

  • Audited financial statements
  • Employed accounting policies and changes in the accounting policies
  • Non-monetary transactions
  • Material losses
  • Asset retirement obligations
  • Details and reasons of the goodwill impairment
  • Existing litigations

 

Note that not all of the examples above can be quantified with certainty. However, despite such fact, all items may have a material impact on the company’s financials.

In addition, the company’s management generally provides forward-looking statements anticipating the future direction of the company and the events that can influence its financial performance.

 

Where is the information disclosed?

The information is disclosed in the regulatory filings (e.g., SEC filings) that a public company must submit. The most important filings include the company’s quarterly and annual reports, which contain audited financial statements, various footnotes, and schedules to the statements, as well as descriptive guidance from the management.

In the filings, the management also discusses the risks associated with the company’s operations and provides forward-looking statements concerning future decisions and activities.

Conference calls with the company’s management may be used to clarify the information provided in the reports.

Some other filings include the disclosure of the beneficial owners of securities and notification of the withdrawal of a class of securities.

 

Video Explanation of the Full Disclosure Principle

Watch this quick video that explains the concept of the Full Disclosure Principle. The video is a small excerpt from the Reading Financial Statements Course.

 

The video is part of theReading Financial Statements Course

 

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • 10-K
  • Audited Financial Statements
  • EDGAR
  • SEC Filings

Free Accounting Courses

Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.
These courses will give the confidence you need to perform world-class financial analyst work. Start now!

 

Building confidence in your accounting skills is easy with CFI courses! Enroll now for FREE to start advancing your career!