full disclosure principle
The accounting requirement that all information material to users' understanding of financial statements must be disclosed, either in the statements or in accompanying notes.
Example
“The full disclosure principle required footnotes explaining the pending lawsuit that could materially affect future earnings.”
Memory Tip
FULL DISCLOSURE = tell investors everything material. If in doubt, disclose it.
Why It Matters
Understanding full disclosure helps you make better financial decisions when investing in stocks or bonds because companies must reveal all important information that could affect your investment. This protection ensures you are not blindsided by hidden problems or risks that management chose to keep secret from shareholders and creditors.
Common Misconception
Many people assume that full disclosure means companies must reveal every tiny detail about their operations, but it actually only requires disclosure of information that is material or significant enough to influence financial decisions. Companies do not need to disclose routine operational details or information that would not reasonably affect an investor's or creditor's choices.
In Practice
When a pharmaceutical company files its annual financial statements, it must disclose in the notes that a major drug pending FDA approval has a 70 percent failure rate in trials, even if the drug represented potential future revenue. If the company hid this information and investors later lost millions when the drug was rejected, those investors could pursue legal action for the company violating the full disclosure principle.
Etymology
FULL (complete, nothing hidden) DISCLOSURE (revealing information) PRINCIPLE. FULLY DISCLOSE all material information.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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