Notes to the (financial statements) accounts explained

The financial statements of a company are accompanied by notes to the accounts. The notes are additional information explaining each line item in those statements. One importance of it is that it helps reduce the bulkiness of each financial statement in an annual report.

1. What are the notes to accounts

The notes to the financial statement is an explanatory note that shows in detail the line items that are presented in those statements. It explains each line item including what they are made up of, the basis of preparations and the accounting standards applied. 

This explanatory note must comply with the International Financial Reporting Standards (IFRS). When reading IFRS standards, some sections state information that must be disclosed in the notes to the financial statements. This is usually referred to as disclosure requirements in those IFRS. 

Financial statements include statements of profit or loss and other comprehensive income, statements of financial position, statements of changes in equity, and statements of cash flow. Usually, these statements contain a summary of transactions that occur in the entity. 

For example, revenue in the statement of profit or lossstatement of profit or loss is a summary figure of the different revenue streams of the entity. The notes to the account will provide more details about this summarized revenue, stating the various revenue sources and, in some cases, the regions/markets that provide them.

Notes to the accounts may contain additional statements that are required in local laws. For example, in Nigeria, the notes to the financial statement of a company must contain a statement of value added and a five-year financial summary. 

2. Sections on the notes to the financial statements

The following are sections you can find in the notes to the financial statements. Some annual reports may contain more information. 

2.1 Basis of preparation

This states the basis for the preparation of the financial statements as a whole. Generally, the accrual basis is used in preparing financial statements. However, an entity can use other bases such as the breakup basis. Other bases of preparation must be stated here.

2.2 Statement of Significant Accounting Policies

The policies in specific accounting standards or IFRS are stated under this heading. Some IFRS policies that are stated here include IFRS 1 if the entity is adopting the standard for the first time, IAS 2, explains the policy used on inventory, and IAS 16 shows the policy used for property, plants, and equipment as well as their depreciation methods.

2.3 Risk Management

This aspect shows the risks inherent to the business and how they are managed. Banks provide detailed reports regarding the risks of financial instruments they own and owe to other individuals and entities. This is explained in detail under the risk management section to the notes to the financial statements as well as the IFRS 9 application.

2.4 Information presented in the financial statements

Each line item in the financial statements is explained in detail under these sections. For example, the transactions that make up operating expenses in the financial statements are shown in detail and may include rent, office expenses, fuel, maintenance, audit fees, bank charges, and so on. 

2.5 Related party disclosure 

Refers to individuals or entities that have a relationship with the senior management and directors of the entity. Their dealings with the entity must be disclosed under the notes. Related party disclosure information does not affect the financial statements as a whole, but some transactions with those parties may be done not at their fair value as a result, will have an impact on those statements. 

2.6 Contingencies

These are events that occur during the financial year, but the impact on the statement is unknown at the time of preparation and presentation of those statements. They are mostly legal cases in the current year in which judgement hasn't been decided by the court. Therefore, an estimate of the amount that the entity may lose to the court case will be stated under the notes to the accounts.

2.7 Events after the reporting date

Non-adjusting events at year-end are usually reported here. These events can be favorable or unfavorable and will help users of financial statements understand the statements better. Note that contingencies are also part of non-adjusting events.

2.8 Statement of Value Added

This is not a requirement of IFRS but is required by Nigerian company law. Therefore, it is included in the notes to the accounts.

2.9 Five-year financial summary

A five-year financial summary is required by the Companies and Allied Matters Act (CAMA) for Nigerian companies. It shows the summary of the statement of profit or loss and financial position for a period of five years.