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Financial statement notes and management commentry

A complete set of financial statements include a balance sheet, a statement of comprehensive income, a statement of cash flows, a statement of changes in equity, and associated explanatory notes.

Notes and supplementary schedules

Notes to the financial statements are an integral part of a complete set of financial statements. They are critical for an understanding of the primary financial statements. They disclose basis of preparation, financial reporting framework (whether IFRS or US GAAP), reporting currency, level of rounding, accounting policies, methods and estimates used to prepare financial statements, financial instruments and their risks, commitments and contingencies, legal proceedings, related-party transactions, subsequent events, operating segments’ performance, etc.

Accounting standards provide management with some flexibility in choosing accounting policies and forming estimates which makes those standards relevant for a diverse range of businesses and transactions, but this impairs comparability because an analyst would typically have to convert information under one accounting policy to another.

Management discussion and analysis (MDA)

Many regulators required or recommend public companies to include a section in their annual reports wherein management discusses issues such as the nature of the business, past results, and future outlook. Even though they are very useful for an analyst, they are unaudited.

IFRS guidance identifies five content elements: nature of business, management’s objectives and strategies, the company’s significant resources, risks, and relationships, results of operations, and critical performance measures.

US SEC requires listed companies to provide information about and discuss any favorable and unfavorable trends, significant events and uncertainties regarding liquidity, capital resources, results of operations, the effect of inflation, changing prices, and other material events and uncertainties, off-balance sheet obligations, contractual commitments, critical accounting policies requiring subjective judgments.

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