Debt and equity securities are generally classified in one of three categories: trading, available-for-sale, or held-to-maturity. This note will probably explain these categories and identify the types of securities the company holds, and the valuation method it uses (lower of cost or market value, for instance). If the company uses derivative financial instruments as hedges, this may also be explained here.
Inventories
This note will basically describe the inventory valuation method (lower of cost or market value) and the method used to determine cost (first-in-first-out, last-in-last-out). If the company has set up an allowance for obsolete or damaged merchandise, this may be indicated, and there could be a phrase indicating that the valuation assigned to inventories does not exceed their net realizable value. A more detailed note on the breakdown of inventories is generally included in a separate note.
Property, Plant, and Equipment
The valuation method used for fixed assets (generally acquisition or construction cost), and the depreciation method (straight-line over the estimated useful life, for instance) will be noted here. There may also be a note about the valuation of property, plant and equipment held under capital leases and leasehold improvements (stated at the present value of minimum lease payments) and their amortization (straight line over the shorter of the lease term or estimated useful life of the asset).
Intangible Assets
Here there will be a general indication of the types of intangible assets the company is reporting (patents, trademarks, deferred business development costs, pre-opening expenses), how they are valued, and how they are being amortized. There may be a reference that research and development costs are expensed as incurred, if they are not capitalized as an intangible asset.
Investments in Affiliated Companies
The method the company uses to account for, and report its investments in affiliated companies is noted here. These are generally affiliates in which the company has an equity interest, but does not consolidate them as subsidiaries. The equity method is commonly used to account for these investments – the company reports its percentage share of the affiliate’s earnings in its results. There may also be an indication of goodwill, as the excess of cost of the stock of those affiliates over the company’s share of their net assets at the acquisition date, and over what period the goodwill is being amortized.
Income Taxes
This note may indicate that the company is accruing income tax on income as it is earned, and will make a reference to any deferred taxes, or will indicate that the company does not recognize deferred taxes on its books since the timing differences are of a recurring nature and are offset in the short term. Deferred taxes generally arise as a result of temporary differences in the bases of assets and liabilities as reported for book purposes and income tax purposes. If deferred taxes are reported, this note will provide a general explanation of how they were determined, or there will be a separate note providing more disclosure on income taxes.
Reclassifications
This will probably be a general statement such as. “For better presentation of the financial statements, some figures for the year …… have been reclassified”. If there were any major changes, they should be fully disclosed in a separate note.