Question

The following information was described in a note of Canon Packing Co.

“During August, Holland Products Corporation purchased 311,003 shares of the Company’s common stock which constitutes approximately 35% of the stock outstanding. Holland has since obtained representation on the Board of Directors.”

“An affiliate of Holland Products Corporation acts as a food broker for Canon Packing in the greater New York City marketing area. The commissions for such services after August amounted to approximately $20,000.”

Why is this information disclosed?

Short answer

There is a material effect by Holland Products Corporation that needs to be disclosed.

Step-by-step solution

Meaning of Disclosure of Principle

The full disclosure principle is meant to share critical and material budgetary data with the outside world. Since outsiders do not know the points of interest of the company's business deals, contracts, and advances, it is difficult to estimate the substance.

Explaining the reason for the disclosure  

Transactions between related parties are disclosed to guarantee that clients of financial statements understand the fundamental nature of certain exchanges. Since it is routinely difficult to legitimately separate financial material from related party transactions, disclosure is widely used in this area.

The disclosure is required by Holland to propose the purchase of a substantial portion of the company's common stock as well as the use of a Holland affiliate to act as a nutrition broker.