This section of the notes will indicate the accounting principles and policies applied in preparing the financial statements, and will generally include mention of valuation and other methods applied in determining the amounts to be reported for certain accounts or classes of accounts.
Basis of Accounting and Presentation
This note generally indicates that the financial statements have been prepared in accordance with generally accepted accounting principles (GAAP). This may be GAAP in the United States or in the country in which the company is headquartered. Reference may also be made to international accounting standards, if these are the basis of accounting and reporting. If the financial statements are presented in accordance with any specific governmental, regulatory, or other reporting requirements, this should also be mentioned here.
Basis of Consolidation
If the financial statements include subsidiary or affiliated companies that have been consolidated, this is reported here, with a specific identification of the companies that are consolidated. The percentage of ownership that the parent company has in each subsidiary, and an indication of who exercises administrative and managerial control over each subsidiary may also be indicated. And there will probably be a phrase indicating that significant intercompany transactions and balances have been eliminated in the consolidation and that the unrealized results of those transactions have also been eliminated., which is a normal accounting practice for consolidated reporting.
Conversion Basis
In a company with operations in different countries, or in consolidated financial statements that include subsidiaries in other countries, the basis upon which foreign currencies have been converted to the reporting currency should be indicated. Reference is generally made here to the local currency and functional currency, the rates of exchange used to translate assets and liabilities at year-end, and the rates used to translate results of operations. There should also be an indication of how the gains and losses from these currency translations are reported in the financial statements (as a separate component of stockholders’ equity, for example).