October 30, 2020

Notes to Financial Statements

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Notes to Financial Statements

Definition

Financial statements are an overview of the results of the company’s work for the whole year. Therefore, the company should pay close attention to the presentation of these results to users of reports. Despite the fact that preparing financial statements does not cause special problems for companies, the preparation of high-quality and complete notes, also known as footnotes, that accompany them and provide additional important information is more difficult. 

Purpose

The notes, as an integral part of the financial statements, serve several important functions:

  • description or detailing of financial statement indicators;
  • disclosure of information on items not subject to recognition in the reporting;
  • presentation of information that is not directly contained in the financial statements, but which is important for users to make decisions about the company;
  • disclosure of information about the main accounting principles and policies that the company followed when preparing these statements, inventory valuation, asset depreciation, etc.;
  • disclosure of information about the decisions of the company’s management that are relevant to these statements;
  • presentation to users of information about the company and its activities, which is important for users of reports from the point of view of company management.

Preparation

Preparing notes for reports is a painstaking work that takes no less, if not more, time than the preparation of the financial statements themselves. Therefore, it is necessary to start work on the formation of notes in advance. By this time, the company will have at its disposal most of the information necessary to prepare the notes to the statements. 

By the end of the financial year, it is desirable to complete all notes to the statements. In this case, after drawing up the financial statements, the accounting department would only include in the notes specific data of financial indicators and their meaning and make the necessary additions. In the process of preparing notes, one should keep in the following points.

Notes to Financial Statements

Define user profile

The very first step in generating notes is defining a user profile for the company’s financial statements. If an accountant has a clear understanding of who it is reporting to, it will be easier to determine what information and in what form should be disclosed in the notes. Is it a party that will provide financing? Is it shareholder? The more accurately the user profile is determined, the more understandable the reports will be to all interested parties.

The composition and format of notes in each company will vary depending on the profile of the users of the statements, since the composition of users, their level of knowledge or understanding of the specifics of the business are important in the formation of notes to the statements. 

Notes to Financial Statements

Remember presentation rules

Regardless of the user profile, you must remember the basic rules for presenting the information.

  • Accessibility for understanding. Many of the users are not specialists in the field of finance or the field of your company. Therefore, information must be presented in a form in which it will be understandable to everyone. 
  • Presentation of information in the format “from general to specific”. There may be people who do not yet know anything about the company. Based on the notes accompanying the financial statements, they must first form a correct opinion about the specifics of the business, the structure of the company, its plans for the future, the principles used in accounting, and only then learn about individual indicators of the organization’s performance and its financial position.
  • Organization of the text. For better information perception, all notes should be separated by headings and subheadings. All related data must be included in one section and arranged in a logical sequence.

Determine the required notes

All notes to financial statements can be divided into two groups: mandatory and optional. Let’s take a closer look at each disclosure group.

  • Required notes. In the notes, the company must provide the information that is required to be disclosed by IFRS/GAAP. Therefore, the first step is to carefully read these requirements and study all other standards applicable to the company. Based on these requirements, you can create a list of notes that are required for your company.
  • Optional notes. In addition to the disclosures required by the standards, the company may include in the notes any other information it deems necessary. 

 

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Author: Charles Lutwidge

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