FULL DISCLOSURE PRINCIPLE

What is full disclosure principle

The full disclosure principle states that all relevant and necessary information for the understanding of a
financial statement should be included on a set of financial statements for public company fillings. A
financial analyst who read financial statement needs to know what inventory valuations methods has
been used, if there have been any significant write-down, how depreciation is being calculated, an any
other critical information for the understanding of the financial statements.

The principle is crucial to ensure that there is limited information asymmetry and its current
shareholders.

Explaining 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 then, as it would dump a huge volume of information that can
have a material impact on the company's financial results.

The principle helps to foster transparency in the financial markets and limit the opportunity for
potentially fraudulent activities. The importance of full disclosure principle continues to grow amid the
high profile scandals that involves the manipulation of accounting results and other deceptive practices.

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