Normally, two types of disclosures are used which are footnotes to the financial statements and supplementary financial information. Footnotes are used by the accountant to explain or bring more attention to items that were presented in the main financial statements. Often, the information presented in the footnotes can be quite technical, but they still provide important and useful information for the users of the financial statements.
Often the first footnote to a company’s financial statements is used to present information about the accounting principles and methods followed by the company. These principles and methods include the depreciation method used, the amortization policies adhered to, and the inventory valuation method used by the company. This information could alternately be reported in a separate Summary of Significant Accounting Policies.
Sometimes a company has gain or loss contingencies that are not disclosed in the body of the financial statements. These could be related to a pending lawsuit or a contingent liability, among other items. A footnote schedule is normally included that discloses the composition and details of the company’s outstanding long-term debt. The details disclosed normally include interest rates and maturity dates. Basic stockholders’ equity information such as the number of shares authorized, issued, and outstanding, and the par values for each, is normally included in the body of the financial statements. It could, however, be presented in a footnote. A footnote would also disclose any outstanding stock options, convertible preferred stock, outstanding convertible debt, and any restrictions on the amount of earnings available for dividend distributions.
An executory contract is a signed contract where neither of the parties has yet performed. Some examples of these are purchase commitments, lease agreements, and pension agreements. Since these items have not been recorded, they do not appear in the financial statements. However, since the executory contracts will affect the future cash flows of the business, they must be disclosed, normally in a footnote. Related party transactions, errors, irregularities, and illegal acts are also disclosed using footnotes. For material related party transactions, the nature of the relationship, a description of the transactions, the monetary amount of the transactions, and the amounts due to and from related parties must be disclosed. Irregularities and illegal acts may result in the auditor’s report being modified, or even in a change in auditors.
Some of the supplementary information normally disclosed relates to management’s responsibilities for financial statements, disclosure of social responsibility, and management discussion and analysis. A management letter is normally included in the financial statements which states that the primary responsibility for the preparation, objectivity, and integrity of the company’s financial statements lies with the company’s management. The disclosure of social responsibility normally details the amounts spent by the company on socially aware items, such as educational institution assistance, grants to hospitals, and charitable contributions. The areas covered in the management discussion and analysis disclosure are liquidity, capital resources, and results of operations. Management is expected to identify trends, events, and uncertainties affecting these three areas.
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