Financial statement disclosures are additional information included at the end of a financial statement. These addendums provide insight to governing bodies, investors, employees, and the general public. But which types of disclosures in financial statements are you required by law to include? Which ones might you consider including even if they are not required? And how can disclosure management best practices help you create the best possible financial statements and annual reports? Before we dig into these questions, let’s take a look at what makes financial disclosures and statements so important for businesses.
Role of Financial Disclosure in Corporate Governance
Financial disclosures, otherwise known as financial reports, are carefully-curated documents that present information about, you guessed it, a company’s finances. These disclosures are shared with the government, the public, and a company’s stakeholders such as investors, shareholders, and employees.
Financial disclosures not only keep a business in line with the law, but also promote a culture of transparency and accountability. Further, they can nurture trust among employees, customers, and other interested parties.
What Is a Financial Statement?
A financial statement is one specific kind of financial disclosure. There are three common types: an income statement, a balance sheet, and a statement of cash flows.
- Income Statement: Informs on sales volume and losses to show the company’s ability to generate and maintain profits.
- Balance Sheet: Informs on current funding, debt position, and liquidity.
- Statement of Cash Flows: Informs on cash receipts and cash disbursements, especially those which may not be depicted in the income statement.
Sharing all this information publicly helps entities monitor a company’s operations and address issues of concern. Credit decisions, investment decisions, union bargaining decisions, taxation, and other considerations are all informed by financial statements.
But revealing this financial information is just the beginning of what is required. As we mentioned, there are additional disclosures that must be included at the end of a financial statement.
What Are Disclosures in Financial Statements?
Disclosures come at the end of a financial statement, sharing non-financial information to provide context for the financials. This information helps investors, lenders, and others make the best possible decisions. Sometimes disclosures in a financial statement are additional data, but in many cases, financial statement disclosure examples are narrative. These might describe changes in operations or strategy, share good news or bad news, or provide insight into the company structure and chain of command.
Financial Statement Disclosure Requirements
The required disclosures at the end of a financial statement vary based on the nation where the statement is being released, as well as the specific type of statement. Generally speaking, here is some of what might be on your financial statement disclosure checklist. However, consult with a legal expert about the specific requirements for your business.
Environmental Reporting and Social Disclosures
Businesses in the US, Canada, and the EU are all required to disclose environmental risks and impacts caused by their operations, though each nation has its own unique specifications. In the EU specifically, companies with more than 500 employees are also required to disclose their diversity efforts, treatment of employees, and related information. In North America, by contrast, it may be that organizations are only required to disclose risks to profitability.
Events like bankruptcy or loss of contract, which occur between financial statements, are often required to be disclosed in a narrative. Major changes to the company structure or operations processes may also be necessary to mention.
Conflicts of Interest
Especially in cases where a brokerage firm has prepared a financial statement, the relationship between the brokerage and the company in question must be clearly disclosed. If the broker has done banking for the company or if analysts/other firm members own company stock, that isn’t necessarily a red flag. However, other parties like outside investors deserve to be aware so they can make their own analysis of the financial statements with full context.
Every financial statement will likely be accompanied by other disclaimers. These include mentions of whether the report contains forward-looking forecasts that may differ from future outcomes in reality. It should also be stated whether or not the information in the report has been checked for complete accuracy, and even whether or not it is fully intended to guide investment decisions.
As a final rule, if you are reviewing a financial statement that is not accompanied by any disclosures whatsoever, this report cannot likely be trusted. For the issuing business, this is why including disclosures in a financial statement is so important. It is a matter of compliance from a legal perspective and completeness from a public perspective.
Fluence Makes Financial Statement Disclosures Easy to Manage
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Yes, financial statements are worthy of your time and attention, but not to the extreme of annoyance or boredom. Allow our solution to make your life easier, minimize the risk of error, and give your entire business greater confidence in itself. We’re here to help. Contact us today to learn more about what we could do for you!