Financial Statement Notes

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April 4, 2018

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.

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
helps the analysts project the valuation of a company in the coming future.

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

Disadvantages

Complexity
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.

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List of Financial Statement Notes and Disclosures

Basis of Presentation
It explains the basis for preparing and presenting the financial statements.

Accounting Policies
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.

Subsequent Events

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.

Related Parties
Transaction carried out with related parties along with the methods and policies used for
pricing or valuing the transactions are mentioned.

Intangible Assets
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

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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.

Contingencies
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.

Debt Reporting
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.

Non-monetary transactions

Fair Value

Cash

Business Combinations

Receivables

Investments

Goodwill

Segment Data

Revenue Recognition etc.1–3

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