Notes to the financial statements

What it means

The notes are the third part of the financial statements, alongside the balance sheet and the income statement. They explain how the figures arose and what sits behind them.

They cover accounting policies, the composition of assets and liabilities, related party information, headcount, post-balance-sheet events and risk disclosures.

The notes are not the annual report. The notes form part of the financial statements and explain their figures at the balance sheet date. The annual report is a separate document that only some entities must prepare, describing the company’s development, risks and plans.

How it works in practice

The scope follows the size class of the reporting entity. A micro entity fills in a short prescribed table; a large one writes extensive text with numerical annexes.

The notes are filed with the statements in the register and are public. Banks, customers and competitors read them, so they are written carefully rather than casually.

To prepare the notes we need information from the client that the books do not hold: guarantees given, lawsuits, contracts with future commitments and events after the reporting date. Some of it is kept in off-balance-sheet records; the rest we collect with a short questionnaire before the close.

What to watch out for

Empty or copy-pasted notes are the most common formal defect in a filing. Missing related-party disclosures in particular open the door straight to transfer pricing questions.

Figures in the notes must agree with the statements. A mismatch between the asset movement table and the balance sheet, or a headcount different from payroll, is the first thing a bank reviewing a loan or an auditor will notice. Such an error undermines trust in the whole set of accounts even if the statements themselves are right.