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The Disclosure Principle

The objective of financial reporting is to provide useful financial information to primary users; that is, the general purpose financial information provided by financial reporting must be useful to investors, lenders and other creditors who need this information to make resource allocation decisions.

There are four elements of financial reporting: (1) recognition (when items should be incorproated into the financial statements), (2) measurement (what value items should be recognized at), (3) presentation (how items are agreggated and presented on the financial statements) and disclosure (what information that isn't included on the financial statements is relevant and reliable enough to warrant disclosing it in the notes to the financial statements?).

The full disclosure principle states that any information that is material, but is not reported in the financial statements, must be disclosed in the notes to the financial statements. It is because of this principle that often many pages of notes are included with a companies financial statements. Information that is material is any information that is capable in making a difference in the decisions made by the users of the financial statements (see: The Materiality Principle). 

Examples of things that must be disclosed include the significant accounting policies that the firm uses,1 and information about related party transactions, default, liens, and the like according to S-X Rule 4-08, General Notes to the Financial Statements.2


References:

1. FASB ASC 235-10-50-4
2. FASB ASC 235-10-S99-1

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