Notes to Financial

Statements
8/6/2015

Notes to the Financial

Statements
Financial Statement Disclosures
To achieve the full disclosure principle, three primary f/s are
supplemented by footnote disclosures and disclosures that appear in
related schedules.

Summary of significant accounting policies

First footnote
The principles and methods chosen by management where GAAP
allows a choice
Disclosure is required
Usually includes information such as:

Chosen depreciation method

Chosen method of valuing inventory
Securities classified as cash and cash equivalents
Basis for consolidation
Amortization policies
Revenue recognition policies

 Related Party Transactions

Companies must disclose the following information
The nature of the relationships between the related entities
Example:
A parent and its subsidiaries
A firm and its principal owners and management and members of
their immediate families
A firm and its equity-method investees
Etc.

A description of all related party transactions for the

accounting years in which an income statement is presented
The dollar amounts of the related party transactions for the
accounting years in which an income statement is presented
In relation to related parties, any receivables or payables
from or to related parties as of the date of each balance
sheet presented in the financial report

 Noncurrent liability disclosures

Companies are required to disclose the
following information about liabilities
Combined aggregate amount of maturities on
borrowings for each of the five years following
the balance sheet
Sinking fund requirements
The aggregate amount of payments for
unconditional obligations to purchase fixed or
minimum amounts of goods or services
The fair value of each financial debt instrument in
the financial statements or in the notes
The nature of the firms liabilities, interest rates,
maturity dates, conversion options, assets
pledged as collateral, and restrictions.

 Capital Structure disclosures

Required to provide the following information related
to capital structure
Rights and privileges of outstanding securities
The number of shares issued during the annual fiscal
period and any subsequent interim period presented
Liquidation preference of preferred stock
If the liquidation value of preferred stock is considerably in excess
of par value or stated value of preferred stock, this information
should be disclosed in the equity section of the balance sheet

Other preferred stock disclosures

Aggregate or per share amounts at which preferred stock can be
called or is subject to redemption through sinking fund operations
Aggregate or per share amounts of arrearages for cumulative
preferred stock

Redeemable preferred stock

For each of the 5 years following the balance sheet date, the
amount of redeeming requirements for all types of redeemable
capital stock must be disclosed in the notes to the financial
statements

 Errors and irregularities

Errors are unintentional
Irregularities are intentional
Both require footnote disclosure.
If prior year income is affected, a prior period
adjustment is recorded
Corrects beginning balance of retained earnings and
any other account affected in the year of discovery

Illegal Acts
Examples: illegal contributions and bribes
Foreign Corrupt Practices Act (FCPA)
The nature and impact of illegal acts
should be fully disclosed in the notes

Managements Discussion & Analysis (MD&A)

Narrative written by management

An important disclosure supplementing the
financial statements
Publicly held firms are required to include the MD&A in
the annual firms
Additional discussion involves managements view of
the firms financial condition, changes in financial
condition, and results of operations through analysis of
the financial statements.
Forward-looking information is provided that is not
reflected in the financial statements.

Disclosures for the Effects of

Changing Prices
Background
During times of financial instability, financial
reporting can be distorted, especially for
items measured using historical cost.
Both balance sheet and income statement items
are affected
Both inflation and specific price changes affect
the interpretation of reported amounts.

There is no such requirement although

disclosure of information on the effects of
changing prices continues to be encouraged

 General Price Level Changes

Definitions
Inflation the increase in general prices for a period of time
Deflation- the decrease in general prices
General prices a market basket of items that the typical
consumer purchases
Nominal dollars measurements in the price level in effect
at a transaction date. These measurements are not adjusted
for inflation.
Constant dollars measurements in the general price level
as of a specific date. Constant dollar measurements reflect
an adjustment or inflation and allow comparisons using
dollars with the same purchasing power.

Specific Price Changes

Definitions
Specific price change the change in price of a specific good
or service over a period of time.

 Effects of General Changes

Definitions
Purchasing power the purchasing power of an asset is
the amount of goods and services that can be obtained
by transferring the asset to another party.

Monetary and Nonmonetary Items

Monetary items: the specific price of monetary
items cannot change.
Examples: cash, most receivables, accounts payable, all
liabilities payable in fixed dollar amounts, certain
investments in debt securities

Nonmonetary items: the specific price of

nonmonetary items can change
Examples: inventory, plant assets, investments in equity
securities, unearned rent, other liabilities payable in
goods and services

 Purchasing power gains and losses

The change in a purchasing power of an item
due to a change in the general price level is
measured only for monetary items because
the specific price of nonmonetary items can
change
Purchasing power gain
Results from holding monetary assets during
deflationary times or having monetary liabilities
during inflationary times

Purchasing power loss

Results from holding monetary assets during
inflationary times or having monetary liabilities
during deflationary times