Full Disclosure Principle: Understanding Public Company Financial Reporting

The Full Disclosure Principle states that all relevant and necessary information for the understanding of a company’s financial statements must be included in public company filingsPublic Company FilingsPublic company filings are an important source of data and information for financial analysts.  Knowing where to find this information is a critical first step in performing financial analysis and financial modeling. This guide will outline the most common sources of public company filings.. For example, financial analysts who read financial statements need to know what inventory valuationInventory ValuationInventory valuation refers to the practice of accounting for the value of a business' inventory. Business inventories refer to all the method has been used, if there have been any significant write-downs, how depreciationDepreciation MethodsThe most common types of depreciation methods include straight-line, double declining balance, units of production, and sum of years digits. is being calculated, and other critical information for the understanding of the financial statements.

The full disclosure principle is crucial to ensuring that there is limited information asymmetry between the company’s management and its current shareholders, debtors, or other third parties.

To learn more on reading financial statements check out CFI’s FREE Reading Financial Statements Course! 

Explaining the Full Disclosure Principle

The full disclosure principle does not require the release of every piece of available information to the public. On the contrary, the rule would be impractical then, 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 scandalsTop Accounting ScandalsThe last two decades saw some of the worst accounting scandals in history. Billions of dollars were lost as a result of these financial disasters. In this that involved the manipulation of accounting results and other deceptive practices. The most notable examples are the Enron scandal in 2001 and 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 a 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 for goodwill impairmentGoodwill Impairment AccountingGoodwill is acquired and recorded on the books when an entity purchases another entity for more than the fair market value of its assets.
• Existing litigation

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

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

Where is the Information Disclosed?

The information is disclosed in the regulatory filings (e.g., SEC filingsTypes of SEC FilingsThe US SEC makes it mandatory for publicly traded companies to submit different types of SEC filings, forms include 10-K, 10-Q, S-1, S-4, see examples. If you are a serious investor or finance professional, knowing and being able to interpret the various types of SEC filings will help you in making informed investment decisions.) that a public company must submit. The most important filings include the company’s quarterly and annual reports, which contain audited financial statements, various notes and schedules to the statements, as well as descriptive guidance from the management.

In the filings, 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 a quick video below that explains the concept of the Full Disclosure Principle. The video is a small excerpt from our Reading Financial Statements Course.

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)®Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• 10-K10-KForm 10-K is a detailed annual report that is required to be submitted to the U.S. Securities and Exchange Commission (SEC). The filing provides a comprehensive summary of a company’s performance for the year. It is more detailed than the annual report that is sent to shareholders
• Audited Financial StatementsAudited Financial StatementsPublic companies are obligated by law to ensure that their financial statements are audited by a registered CPA. The purpose of the
• EDGARUS - EDGAREDGAR is a database where U.S. public companies file regulatory documents such as annual reports, quarterly reports, 10-K, 10-Q, prospectus
• SEC FilingsSEC FilingsSEC filings are financial statements, periodic reports, and other formal documents that public companies, broker-dealers, and insiders are required to submit to the U.S. Securities and Exchange Commission (SEC). The SEC was created in the 1930s with an aim to curb stock manipulation and fraud