Learning Outcomes
- Describe the full disclosure principle
As one of the principles in GAAP, the full disclosure principle definition requires that all situations, circumstances, and events that are relevant to financial statement users have to be disclosed. In other words, all of a company’s financial records and transactions have to be available for viewing.
Financial statements normally provide information about a company’s past performance. However, pending lawsuits, incomplete transactions, or other conditions may have imminent and significant effects on the company’s financial status. The full disclosure principle requires that financial statements include disclosure of such information. Accordingly, financial statements use footnotes to convey this information and to describe any policies the company uses to record and report business transactions.
General Electric’s 2019 Annual Report
For instance, the following footnotes are excerpts from the General Electric annual report (including the Form 10-K to the SEC) for the year ended December 31, 2019:
NOTE 13. POSTRETIREMENT BENEFIT PLANS
PENSION BENEFITS AND RETIREE HEALTH AND LIFE BENEFITS.
We sponsor a number of pension and retiree health and life insurance benefit plans that we present in three categories, principal pension plans, other pension plans and principal retiree benefit plans. Smaller pension plans with pension assets or obligations less than $50 million and other retiree benefit plans are not presented. https://www.ge.com/investor-relations/sites/default/files/GE_AR19_AnnualReport.pdf, page 89
NOTE 23. COMMITMENTS, GUARANTEES, PRODUCT WARRANTIES AND OTHER LOSS CONTINGENCIES
SEC investigation. In late November 2017, staff of the Boston office of the U.S. Securities & Exchange Commission (SEC) notified us that they are conducting an investigation of GE’s revenue recognition practices…We are providing documents and other information requested by the SEC staff, and we are cooperating with the ongoing investigation. Staff from the DOJ are also investigating these matters, and we are providing them with requested documents and information as well.[1]
The SEC has the right to penalize violations of the full disclosure rule. For example, in June 2002, an audit of WorldCom revealed that it had overstated its assets by over $11 billion. The SEC fined WorldCom $750 million, the largest penalty assessed to that date. Even so, investors lost over $2 billion due to the stock devaluation that followed the financial fraud.
Practice Question
