A financial statement is not complete, unless if a note or footnote, as it is sometimes called, is included in it. A note to the financial statement is an integral part of the financial statement and must be included to show that the financial statement is transparent. Areas not covered in the statements are explained in the note to it.
Definition of notes to the financial statement
This is a detailed explanation and computations of most line items in a financial statement that cannot be stated in those statements but are material and may distort users’ understanding of the statement if not included in it.
It can as well be defined as additional information provided by preparers of financial statements to ensure full compliance with accounting standards.
What should you note?
A Note to the financial statement provides extra information not reported in a financial statement. That is the statement of financial position, statement of comprehensive income, statement of changes in equity and statement of cash flow.
Such information is in compliance with accounting standards. For example in IAS 8, preparers of financial statements are expected to disclose in the notes any restatement made on the financial statement.
The summary of significant accounting policies is stated in the Notes.
The notes provide additional explanations on a particular line item in any of the financial statements. For example, if there is a lease agreement, IFRS 16 requires that the method used to calculate the lease repayments should be explained in the Notes.
More to this, computations are disclosed in the Notes. Computations such as depreciation schedule, account receivables, and payables analysis are shown in the Notes.
The information provided in the footnotes are those that are material to the business. Information is said to be material, if the omission or misstatement of it may affect the decision of the users of the financial statements.
The aim of the Notes is to provide more information to the users of such a statement. It helps them make informed economic decisions based on financial statements and other environmental analyses.
In conclusion, Notes to a financial statement is very important. It can serve as a guide in understanding the statement and in making comparing with similar companies’ financials.