What are Financial Statement Footnotes?
Footnotes on financial statements provide additional information that helps analysts understand how a company arrived at its numbers. It helps to explain changes from one year to the next, and also will give detail of the company’s accounting policies.
Footnotes are explanatory and supplementary notes that provide clarity to analysts and reveal underlying issues about a company’s financial status. Analysts deem footnotes to be an essential component of analyzing financial statements since they give investors much more detailed information than the financial statements about the company’s financial position.
The nature of footnotes varies since it depends on the accounting framework (US GAAP or IFRS) used to compile financial statements. Securities and Exchange Commission requires an extensive set of footnotes from public enterprises when they submit their financial statements.
Key Learning Points
- Financial statement footnotes include additional information and supporting calculations on line items in a company’s financial statements
- Detailed footnotes to the income statement are a great source for the identification of non-recurring items which help analysts calculate EBIT (Earnings, Before Interest and Taxes)
- Pay attention to dates when reading footnotes since they provide a vital clue as to the nature of the information being discussed
Types of Financial Statement Footnotes
A list of all the notes a company could report is comprehensive, so we will highlight some of the most common:
- Accounting policies – describes the key principles followed.
- Acquisitions and divestitures – details of any acquisitions or divestitures during the year.
- More detail on important line items in the company’s financial statements. Important ones include:
- Detail on financial investments – stipulates the fair value and unrealized losses and unrealized gains on investments, also any hedging activity.
- Detail on financial liabilities – provides insight into the maturity of debt, repayment profile and interest rates on each debt issue.
- Property plant and equipment – consists of a breakdown of depreciation and any purchases and sales.
- Intangibles – usually includes a breakdown of goodwill and identifiable intangibles.
- Commitments and contingencies – includes short-term and long-term contractual obligations, capital expenditure commitment and non-cancelable operating leases.
- Stock-based compensation plans – including information about the company’s stock option, restricted stock units and performance stock units plans.
- Pensions and post-retirement liabilities – information about under or overfunded pension or Other Post Employment Benefits (OPEBs).
- Taxes – provides details of deferred taxes and a breakdown of the difference between the marginal and effective tax rate.
- Operating segment information – details the key income statement line items broken down by operation segments.
- Stockholders’ equity – stipulates the terms of convertible equity, reconcile changes in equity and report dividends in arrears.
- Subsequent events – nature of subsequent events and an estimate of their financial impact.
Some of the other footnotes include goodwill, accounts receivables, inventories, debt, pensions, revenue recognition, liabilities, property, plant and equipment, and non-monetary transactions.
Below are extracts from notes of The Hershey Company Financial Statements at December 31, 2019. These provide more detail about key line items found in the company’s financial statements.