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The footnotes to your company\u2019s financial statements give investors and lenders insight into account balances, accounting practices and potential risk factors \u2014 knowledge that\u2019s vital to making well-informed business and investment decisions. Here are four important issues that you should cover in your footnote disclosures.<\/p>\n
1. Unreported or contingent liabilities<\/strong><\/p>\n A company\u2019s balance sheet might not reflect all future obligations. Detailed footnotes may reveal, for example, a potentially damaging lawsuit, an IRS inquiry or an environmental claim.<\/p>\n Footnotes also spell out the details of loan terms, warranties, contingent liabilities and leases. Unscrupulous managers may attempt to downplay liabilities to avoid violating loan agreements or admitting financial problems to stakeholders.<\/p>\n 2. Related-party transactions<\/strong><\/p>\n Companies may employ friends and relatives \u2014 or give preferential treatment to, or receive it from, related parties. It\u2019s important that footnotes disclose all related parties with whom the company and its management team conduct business.<\/p>\n For example, say, a dress boutique rents retail space from the owner\u2019s uncle at below-market rents, saving roughly $120,000 each year. If the retailer doesn\u2019t disclose that this favorable related-party deal exists, its lenders may mistakenly believe that the business is more profitable than it really is. When the owner\u2019s uncle unexpectedly dies \u2014 and the owner\u2019s cousin, who inherits the real estate, raises the rent \u2014 the retailer could fall on hard times and the stakeholders could be blindsided by the undisclosed related-party risk.<\/p>\n 3. Accounting changes<\/strong><\/p>\n Footnotes disclose the nature and justification for a change in accounting principle, as well as how that change affects the financial statements. Valid reasons exist to change an accounting method, such as a regulatory mandate. But dishonest managers also can use accounting changes in, say, depreciation or inventory reporting methods to manipulate financial results.<\/p>\n 4. Significant events<\/strong><\/p>\n Disclosures may forewarn stakeholders that a company recently lost a major customer or will be subject to stricter regulatory oversight in the coming year. Footnotes disclose significant events that could materially impact future earnings or impair business value. But dishonest managers may overlook or downplay significant events to preserve the company\u2019s credit standing.<\/p>\n Too much, too little or just right?<\/strong><\/p>\n In recent years, the Financial Accounting Standards Board has been eliminating and simplifying footnote disclosures. While disclosure \u201coverload\u201d can be burdensome, it\u2019s important that companies don\u2019t cut back too much. Transparency is key to effective corporate governance.<\/p>\n \u00a9 2021<\/em><\/p>\n <\/body> The footnotes to your company\u2019s financial statements give investors and lenders insight into account balances, accounting practices and potential risk factors \u2014 knowledge that\u2019s vital to making well-informed business and investment decisions. Here are four important issues that you should cover in your footnote disclosures. 1. Unreported or contingent liabilities A company\u2019s balance sheet might […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13,7,10],"tags":[8,11,12],"class_list":["post-15277","post","type-post","status-publish","format-standard","hentry","category-aa","category-articles","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15277","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=15277"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15277\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=15277"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=15277"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=15277"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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