Notes to the Financial Statements
Encyclopedia
Notes to financial statements are additional notes and information added to the end of financial statement
s to supplement the reader with more information. Notes to financial statements help the computation of specific items in the financial statements
as well as provide a more comprehensive assessment of a company's financial condition. Notes to financial statements can include information on debt
, going concern
, accounts, contingent liabilities
, or contextual information explaining the financial numbers (e.g. to indicate a lawsuit).
The information contained within the notes not only supplement financial statement information, but they clarify line-items that are part of the financial statements. For example, if a company lists a loss on a fixed asset impairment in their income statement, notes to financial statements could serve to corroborate the reason for the impairment by providing specific information relative to how the asset became impaired. Notes to financial statements are also used to explain the method of accounting used to prepare the financial statements (all publicly traded companies are required to use accrual basis accounting for financial reporting purposes as mandated by the SEC
), and they provide valuations for how particular accounts have been represented.
In consolidated financial statements, all subsidiaries should be listed as well as the amount of ownership (controlling interest
) that the parent company
has in the subsidiary companies. Any items within the financial statements that are valuated by estimation should be part of the notes to financial statements if a substantial difference exists between the amount of the estimate previously reported and the amount of the actual results. Full disclosure of the effects of the differences between the estimate and the actual results should be in the note.
Financial statement
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
s to supplement the reader with more information. Notes to financial statements help the computation of specific items in the financial statements
Financial statements
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
as well as provide a more comprehensive assessment of a company's financial condition. Notes to financial statements can include information on debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
, going concern
Going concern
A going concern is a business that functions without the threat of liquidation for the foreseeable future, usually regarded as at least within 12 months.-Definition of the 'going concern' concept:...
, accounts, contingent liabilities
Contingent Liabilities
Contingent liabilities are liabilities that may or may not be incurred by an entity depending on the outcome of a future event such as a court case. These liabilities are recorded in a company's accounts and shown in the balance sheet when both probable and reasonably estimable. A footnote to the...
, or contextual information explaining the financial numbers (e.g. to indicate a lawsuit).
The information contained within the notes not only supplement financial statement information, but they clarify line-items that are part of the financial statements. For example, if a company lists a loss on a fixed asset impairment in their income statement, notes to financial statements could serve to corroborate the reason for the impairment by providing specific information relative to how the asset became impaired. Notes to financial statements are also used to explain the method of accounting used to prepare the financial statements (all publicly traded companies are required to use accrual basis accounting for financial reporting purposes as mandated by the SEC
United States Securities and Exchange Commission
The U.S. Securities and Exchange Commission is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States...
), and they provide valuations for how particular accounts have been represented.
In consolidated financial statements, all subsidiaries should be listed as well as the amount of ownership (controlling interest
Controlling interest
Controlling interest in a corporation means to have control of a large enough block of voting stock shares in a company such that no one stock holder or coalition of stock holders can successfully oppose a motion...
) that the parent company
Parent company
A parent company is a company that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors; the second company being deemed as a subsidiary of the parent company...
has in the subsidiary companies. Any items within the financial statements that are valuated by estimation should be part of the notes to financial statements if a substantial difference exists between the amount of the estimate previously reported and the amount of the actual results. Full disclosure of the effects of the differences between the estimate and the actual results should be in the note.
External links
- Fundamental Analysis: Notes To The Financial Statements by Investopedia.comInvestopedia.comInvestopedia is one of the Internet's largest sites devoted entirely to investing education. The site was started by Cory Janssen and Cory Wagner in June 1999 at the height of the internet stock boom as an unbiased source to learn about investing. Based in the city of Edmonton in Alberta, Canada,...
- The Notes to the Financial Statements May Be Worth Noting by Googobits.com