Define Full Disclosure: Everything You Need to Know
To define full disclosure, it's important to examine its purpose or function in different areas.3 min read
To define full disclosure, it's important to examine its purpose or function in different areas:
- In accounting, full disclosure is the ethical standard that requires the complete exposure of every material fact that can make a financial statement unclear and misleading.
- In patenting, full disclosure is the ground on which a patent is granted. Therefore, a total exposure of material information in the application of the patent is required. Failure to comply can invalidate the patent.
- In business, at the B2B (Business to Business) level, full disclosure is the complete provision of relevant information to the target audience of a company to enable them to make informed decisions regarding the company.
- In business, at the B2C (Business to Consumer) level, full disclosure is also the need for the whole truth to be told before a buyer makes a purchase or a party signs a contract. That way, the buyer or signer will be completely aware of the implications of his or her decision.
- In stock exchange and investment, full disclosure is the requirements of the U.S. Securities and Exchange Commission (SEC) that are released by publicly traded companies to provide a complete and free exchange of information relevant to continuing business operations.
- It is also the general requirement for all parties to open up about any issue concerning their transaction with honesty.
Various Media and Formats of Full Disclosure
Full disclosure can be found in a number of places in various formats, including:
- A financial statement with additional notes, footnotes, and schedules.
- An annual report on the management of a company with all discussions and analysis.
- A quarterly report.
- A press release.
In real estate, there's usually a form for full disclosure the seller signs, which can potentially have legal penalties if the seller knowingly provides misleading information or holds back important information. The foremost note or footnote in the financial statement of a company discloses its important accounting policies, such as:
- How revenues are recognized.
- When revenues are recognized.
- How income taxes and inventories are accounted for.
- How to tell the depreciation of property.
How Much Information Needs Disclosure?
Full disclosure, as a principle, requires a complete uncovering of all the information that would influence a reader's understanding of the financial statement of an entity. However, discretion should be employed in determining how much information should be disclosed.
For instance, in 1980, big U.S. corporations were requested to report the effects of inflation and changing prices on their inventory and property as supplementary information, including how much sales and depreciation expense they had.
After a number of years, the disclosure request was no longer compulsory because providing the required information cost more than the benefits. Therefore, interpreting the principle of full disclosure is highly subject to the decision and opinions of entities. This is because the amount of information that can be potentially exposed is large.
However, to decrease the amount of disclosure, it is usual to disclose only information about things that are likely to affect the entity's financial results or position materially. Full disclosure is typically not required for financial statements that are internally generated for management to skim through.
A Brief History of Full Disclosure Law
The full disclosure law originated with the Securities Act of 1933, followed by the Securities Exchange Act of 1934. The Securities and Exchange Commission (SEC) combines these acts and subsequent ones by enforcing connected regulations.
Other Shapes of Full Disclosure
Full disclosure might include things that can't yet be accurately measured, such as the result of a dispute with a government body over taxation, or the result of an ongoing legal action. It is also full disclosure to always report accounting policies in existence, as well as changes to such policies (such as a change in the evaluation method of an asset) previously stated in a financial report for a period.
Full Disclosure and Congress
Congress and the U.S. Securities and Exchange Commission acknowledge that full disclosure laws ought not to increase the difficulty of companies raising capital by offering securities and stock to the public. As a result of registration needs and continuous reporting needs being more burdensome for smaller companies and stock issues than larger ones, over the years, Congress raised the limit on the small-issue exemption.
The exemption in 1933 went from $100,000 to $5 million in 1982. Therefore, securities issued up to $5 million aren't subject to the registration requirements of the SEC.
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