ACCOUNTING NOTES: FEATURES AND EXAMPLES - DUDAS - 2025

The accounting notes are backup information is generally provided along with the final financial statements of a company. They are also known as notes to the financial statements, footnotes, and explanatory notes.

They provide additional information about the operations and financial position of a company and are considered an integral part of the financial statements. These notes are required by the principle of full disclosure.

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They act as the complementary information that is given together with the final accounts of a company. They can be very large, depending on the company, the accounting framework, and the nature of the business. The information provided depends on the accounting standards used.

Many of these notes must be provided by law, including details related to provisions, reserves, depreciation, investments, inventory, capital stock, employee benefits, contingencies, etc.

Accounting notes help those who use accounting information to understand the current financial situation of a company. They act as a support for estimated future performance.

characteristics

They are required because not all relevant financial information can be communicated through the amounts shown (or not shown) in the statement of financial statements.

They communicate additional details that are outside of the main financial statements, such as the balance sheet, the income statement and the cash flow statement.

This is done primarily for clarity reasons, as these notes can be quite long. If they were included in the main text, they would cloud the data reported in the financial statement.

Its use allows the overall flow of a document to remain appropriate, by providing a way for the reader to access additional information only if deemed necessary.

Likewise, it allows an easily accessible place to explain definitions or complex calculations, in case the reader wishes to obtain additional information.

They contain important information on items such as the accounting methodologies used to record transactions. Also information on stock options.

They also explain in detail why any irregular or unusual activity has occurred, such as a one-time expense, and what its impact could be on future profitability.

Types

Footnotes can include more details on items used for reference, clarify policies that apply, adjustments made to certain figures, or provide a variety of required explanations.

Although much of the information can be considered mandatory in nature, giving all the information within the body of the statement can overload the document, making it difficult for those who receive it to read and interpret it.

It is important to note that a company must declare the accounting methodology used, if it has changed significantly with respect to the previous year, and if the elements should be interpreted in a way other than the conventional one.

For example, the accounting notes will explain how a company calculated its earnings per share, how it accounted for diluted shares, and shares outstanding.

They can also include information about future activities that are anticipated to have a significant impact on the business or activities.

They will often refer to large-scale events, both positive and negative. For example, you can include descriptions of upcoming new product launches, as well as issues about a possible product recall.

Examples

Show basis for presentation

In such notes, the company gives a miniature sketch of the company. Common topics of discussion include what the company is and does in business and how it does that job. For example, does the company make the product or buy it?

Accounting policies / changes

They show all the impactful accounting principles that are being used and the significant changes, if any.

Information on accounting policies helps financial readers to better interpret a company's financial statements, resulting in a fairer presentation of financial statements.

Acquisitions and mergers

Any transaction related to an acquisition or merger, including all acquired assets, liabilities, goodwill, etc.

Contingencies and litigation

There is a contingent liability when some existing circumstance may cause a loss in the future, depending on other events that have not yet occurred and may never occur.

For example, the company may be involved in an income tax complaint.

It is a requirement to disclose this contingent liability if the company owes a substantial amount for tax penalties if the still unresolved litigation ends in favor of the government.

Depreciation

The depreciation method adopted for fixed assets, capitalized interest and impairment is disclosed.

The method a company chooses to use for depreciation expense can cause fluctuations in the asset amounts shown on the balance sheet. Also in the amount of net income shown in the income statement.

The user should know what method is used to compare the figures in the financial statements with the figures of another company.

Exceptional themes

Any exceptional content, such as a large loss, an unexpected increase in expenses, etc.

Inventories

Companies have two inventory topics that must be disclosed: the basis on which the company establishes inventory (least cost or market) and the method that is used to determine its cost.

Debt report

Creditors' claims against company assets must be disclosed. The note shows how the company is financing present and future costs.

It also provides a look at future cash flows, which could affect the payment of dividends.

Explanation of intangibles

Intangible assets are not physical in nature. Two common examples are patents and trademarks.

In addition to explaining the different intangible assets that are owned, it should be explained how the value of the intangible asset shown in the balance sheet has been determined.

Consolidation of financial statements

Consolidation refers to the sum of the financial statements of the group companies as a consolidated whole. In this section, the company confirms that the consolidated financial statements contain the financial information of all its subsidiaries.

Employee benefits

Employee benefit plans provide benefits for both employees and former employees. An example is the health and wellness benefit plan, which provides medical, dental, vision, and vacation benefits.

Risks and possibilities

Any likely risks that may affect the company in the future, such as a government policy. The technological advance that is expected is also anticipated.

References

1. Accounting Capital (2019). What are Notes to Accounts? Taken from: accountingcapital.com.
2. Harold Averkamp (2019). Notes to financial statements definition. Accounting Coach. Taken from: accountingcoach.com.
3. Harold Averkamp (2019). What are the notes to the financial statements? Accounting Coach. Taken from: accountingcoach.com.
4. Maire Loughran (2019). Have Common Notes to the Financial Statements. Dummies. Taken from: dummies.com.
5. Alicia Tuovila (2019). Footnotes To The Financial Statements. Taken from: investopedia.com.