Table of Contents
- 1 Financial Statement Notes / Footnotes
- 2 Importance / Benefits of Financial Statement Notes
- 3 Disadvantages
- 4 List of Financial Statement Notes and Disclosures
- 4.1 Basis of Presentation
- 4.2 Accounting Policies
- 4.3 Changes in Accounting Policies
- 4.4 Depreciation of Assets
- 4.5 Valuation of Inventory
- 4.6 Subsequent Events
- 4.7 Related Parties
- 4.8 Intangible Assets
- 4.9 Consolidation of Financial Statements
- 4.10 Benefits to Employees
- 4.11 Contingencies
- 4.12 Debt Reporting
- 4.13 Risk and Uncertainties
- 4.14 Other Notes and Disclosures
Financial Statement Notes / Footnotes
Financial statement notes are the additional important information apart from the basic 3 financial statements. These notes to financial statements give due clarity to the users in right interpretation of the financial statements. The presentation totally depends upon what standardized accounting principles are followed (GAAP or IFRS)? Yes, you are right, they will be different in each country. It depends on the disclosure requirements in the respective country’s standards or law.
Importance / Benefits of Financial Statement Notes
If we look at financial statements, they are just numbers and numbers. The 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 level 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.
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 helps the analysts project the valuation of a company in the coming future.
These notes help shareholders understand the real performance of the company in last year as well as project the growth in the coming years.
The notes and disclosure requirements are so complex in big sized companies that a layman 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 that requires expert knowledge.
List of Financial Statement Notes and Disclosures
Basis of Presentation
It explains the basis for preparing and presenting the financial statements.
It specifies the accounting policies that are 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, change in accounting policy is 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 previous year is highlighted.
Valuation of Inventory
This note mentions the policy adopted for valuation of inventory in the books. Specific identification, weighted average, and FIFO are allowed in GAAP. Last in first out (LIFO) is not allowed.
Type I and Type II events are specified in 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.
Transaction carried out with related parties along with the methods and policies used for pricing or valuing the transactions are mentioned.
A company needs to mention what 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 consolidation of accounts with other subsidiary companies is mentioned here.
Benefits to Employees
This note mentions the benefits that a company offers to its employees both during the job and post-retirement. These benefits may be medical, other fringe benefits etc.
This note primarily deals with contingent liabilities. The liabilities which may or may not occur in 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.
This note presents information on debts of the company. The primary information about each loan like interest rates, maturities over 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 following as well depending on the company and its business.
Revenue Recognition etc.1–3