Financial Statement Notes

Financial Statement Notes / Footnotes

Financial statement notes are the additional important information apart from the basic three financial statements. These notes to financial statements clarify the users in the correct interpretation of the financial statements. Does the presentation totally depend upon what standardized accounting principles (GAAP or IFRS) are followed? Yes, you are right, they will be different in each country. It depends on the disclosure requirements in the respective country’s standards or the law.

Importance / Benefits of Financial Statement Notes

If we look at financial statements, they are just numbers and numbers. A true understanding of the state of affairs is not possible until you understand how those numbers arrive. Let’s look at it from the opposite angle. If these notes were mixed with the financial statements, wouldn’t it create clutter in the annual report? To avoid such clutter, notes to financial statements are separated from financial statements. Also, it facilitates ease to a different levels of users. For example, a user who is just interested in how much dividend is declared can only go to the required section and find out. If the user is an analyst, he will not only read the financial statements but will do an in-depth analysis of the footnotes also.

Overall, with financial statement notes, the annual report of a company is organized for efficient and appropriate use.

Ease of Accessibility

Easy access saves the time of a user. Users have the most important things highlighted in the financial statements. They may or may not refer or may selectively refer to notes as per his requirements.

Helps Auditors

Financial auditors are required to furnish their opinion on the financial statements. These notes help auditors in forming their opinion about the financial statements.

Helps Financial Analysts

A financial analyst refers to financial statements for analysis and information on future events to help the analysts project the valuation of a company in the coming future.

Helps Shareholders

These notes help shareholders understand the real performance of the company last year as well as project the growth in the coming years.

Financial Statement Notes

Disadvantages

Complexity

The notes and disclosure requirements are so complex in big-sized companies that a non-specialist cannot understand them till they have a fair knowledge of accounting practices.

Real Information Misplaced

In pursuit of better clarity, a lot of important information is hidden. The quantum of notes is too heavy. So, finding the important information out of these becomes a herculean task and requires expert knowledge.

List of Financial Statements Notes and Disclosures

Basis of Presentation

It explains the basis for preparing and presenting financial statements.

Accounting Policies

It specifies the accounting policies used while constructing the financial statements like depreciation method, inventory valuation method, etc.

Changes in Accounting Policies

Accounting policy seldom changes. If, for the sake of better presentation, changes in accounting policies are required, it is specifically mentioned in the notes.

Depreciation of Assets

This note mentions the method adopted for depreciating the assets. Any change compared to the previous year is highlighted.

Valuation of Inventory

This note mentions the policy adopted for inventory valuation in the books. Specific identification, weighted average, and FIFO are allowed in GAAP. Last in, first-out (LIFO) is not allowed. There are various methods for the management of inventory.

Subsequent Events

Type I and Type II events are specified in the required details. These are events that have occurred after the completion of the financial year. Type I events are those which can affect the financial statements, whereas Type II events do have any impact on the financial statements under audit.

Transactions carried out with related parties, and the methods and policies used for pricing or valuing the transactions are mentioned.

Intangible Assets

A company needs to mention all intangible assets it owns. They also have to explain how the value of those intangible assets is determined.

Consolidation of Financial Statements

The basis for consolidating accounts with other subsidiary companies is mentioned here.

Benefits to Employees

This note mentions the benefits that a company offers to its employees during the job and post-retirement. These benefits may be medical, other fringe benefits, etc.

Contingencies

This note primarily deals with contingent liabilities—the liabilities which may or may not occur in the future. For example, a court case by a big customer for claiming the refund of his money on account of quality issues. If the court case is lost, the company may come under a big liability.

Debt Reporting

This note presents information on the debts of the company. The primary information about each loan, like interest rates, maturities over the next 5 years, etc., are given here.

Risk and Uncertainties

This note presents the various risks and uncertainties that a company or its business faces.

Other Notes and Disclosures

Above is not an exclusive list of notes; there can be notes on the following depending on the company and its business.



Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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