“The accompanying notes are an integral part of these statements” is a phrase you will see at the bottom of the financial statements. This means that reading the notes in conjunction with the financial statements will provide a more complete picture of the company’s financial position and the results of its operations. The notes serve to explain, clarify, and expand upon the figures presented in the financial statements, and provide some additional information as well.
The notes to the financial statements provide explanations of the principles of accounting applied, and the methods used to determine the amounts reported in the financial statements. The notes also provide breakdowns and analyses of certain accounts, and in that sense are a source of more detailed information. And there are also disclosures in the notes that are not in the financial statements. This makes it worthwhile to take the time to get some insights into the company’s financial status, and the potential consequences or effects of certain events.
While there is no standard format for the notes to the financial statements, there are some general categories of information and disclosures that can generally be found. The form and content of the notes will vary from one company to the next, and if you are looking at financial statements of a non-U.S. company, you may find disclosures that apply in that particular company’s circumstances. For example, inflation accounting is used in many countries, tax regulations will vary between countries, and there may be required disclosures in one country that are not applicable in another.
Much work has been done to make financial reporting comparable across international borders. International accounting standards are really not much different from generally accepted accounting principles (GAAP) and reporting standards in the U.S., and in many cases, foreign companies may provide pro forma statements presented in accordance with U.S. GAAP, or may provide additional disclosures in the notes to point out the differences. This will be especially true with multinational companies with operations throughout the world.
The following are presented as examples of some of the types of explanations, information, and disclosures you can expect to find in the notes to the financial statements. This is not intended to be a comprehensive listing, but rather a sample of the types of information you could look for in the notes.