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Notes To The Financial Statements Are Additional Notes and Information Added To The End of The
Notes To The Financial Statements Are Additional Notes and Information Added To The End of The
Notes To The Financial Statements Are Additional Notes and Information Added To The End of The
financial statements to supplement the reader with more information. Notes to Financial
Statements help explain the computation of specific items in the financial statements as well as
provide a more comprehensive assessment of a company's financial condition. Notes to Financial
Statements can include information on debt, going concern, accounts, contingent liabilities, or
contextual information explaining the financial numbers (e.g. to indicate a lawsuit).
The information contained within the notes not only supplement financial statement information,
but they clarify line-items that are part of the financial statements. For example, if a company
lists a loss on a fixed asset impairment in their income statement, Notes to Financial Statements
could serve to corroborate the reason for the impairment by providing specific information
relative to how the asset became impaired. Notes to the Financial Statements are also used to
explain the method of accounting used to prepare the financial statements (all publicly traded
companies are required to use accrual basis accounting for financial reporting purposes as
mandated by the SEC), and they provide valuations for how particular accounts have been
represented. In consolidated financial statements, all subsidiaries should be listed as well as the
amount of ownership (controlling interest) that the parent company has in the subsidiary
companies. Any items within the financial statements that are valuated by estimation should be
part of the Notes to Financial Statements if a substantial difference exists between the amount of
the estimate previously reported and the amount of the actual results. Full disclosure of the
effects of the differences between the estimate and the actual results should be in the note.
FINANCIAL STATEMENT: A financial statement (or financial report) is a formal record of the
financial activities of a business, person, or other entity. In British English—including United
Kingdom company law—a financial statement is often referred to as an account, although the
term financial statement is also used, particularly by accountants.
For a business enterprise, all the relevant financial information, presented in a structured manner
and in a form easy to understand, are called the financial statements. They typically include four
basic financial statements, accompanied by a management discussion and analysis:[1]
For large corporations, these statements are often complex and may include an extensive set of
notes to the financial statements and management discussion and analysis. The notes typically
describe each item on the balance sheet, income statement and cash flow statement in further
detail. Notes to financial statements are considered an integral part of the financial statements.
Financial statements are intended to be understandable by readers who have "a reasonable
knowledge of business and economic activities and accounting and who are willing to study the
information diligently."[2] Financial statements may be used by users for different purposes:
Owners and managers require financial statements to make important business decisions
that affect its continued operations. Financial analysis is then performed on these
statements to provide management with a more detailed understanding of the figures.
These statements are also used as part of management's annual report to the stockholders.
Employees also need these reports in making collective bargaining agreements (CBA)
with the management, in the case of labor unions or for individuals in discussing their
compensation, promotion and rankings.
Prospective investors make use of financial statements to assess the viability of investing
in a business. Financial analyses are often used by investors and are prepared by
professionals (financial analysts), thus providing them with the basis for making
investment decisions.
Financial institutions (banks and other lending companies) use them to decide whether to
grant a company with fresh working capital or extend debt securities (such as a long-term
bank loan or debentures) to finance expansion and other significant expenditures.
Government entities (tax authorities) need financial statements to ascertain the propriety
and accuracy of taxes and other duties declared and paid by a company.
Vendors who extend credit to a business require financial statements to assess the
creditworthiness of the business.
Media and the general public are also interested in financial statements for a variety of
reasons.
Audit and legal implications: Although laws differ from country to country, an
audit of the financial statements of a public company is usually required for investment,
financing, and tax purposes. These are usually performed by independent accountants or auditing
firms. Results of the audit are summarized in an audit report that either provide an unqualified
opinion on the financial statements or qualifications as to its fairness and accuracy. The audit
opinion on the financial statements is usually included in the annual report.
There has been much legal debate over who an auditor is liable to. Since audit reports tend to be
addressed to the current shareholders, it is commonly thought that they owe a legal duty of care
to them. But this may not be the case as determined by common law precedent. In Canada,
auditors are liable only to investors using a prospectus to buy shares in the primary market. In the
United Kingdom, they have been held liable to potential investors when the auditor was aware of
the potential investor and how they would use the information in the financial statements.
Nowadays auditors tend to include in their report liability restricting language, discouraging
anyone other than the addressees of their report from relying on it. Liability is an important
issue: in the UK, for example, auditors have unlimited liability.
In the United States, especially in the post-Enron era there has been substantial concern about the
accuracy of financial statements. Corporate officers (the chief executive officer (CEO) and chief
financial officer (CFO)) are personally liable for attesting that financial statements "do not
contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by th[e] report." Making or certifying misleading
financial statements exposes the people involved to substantial civil and criminal liability. For
example Bernie Ebbers (former CEO of WorldCom) was sentenced to 25 years in federal prison
for allowing WorldCom's revenues to be overstated by $11 billion over five years.
In the United States, prior to the advent of the internet, the annual report was considered the most
effective way for corporations to communicate with individual shareholders. Blue chip
companies went to great expense to produce and mail out attractive annual reports to every
shareholder. The annual report was often prepared in the style of a coffee table book.
References:
1. ^ "Presentation of Financial Statements" Standard IAS 1, International Accounting Standards
Board. Accessed 24 June 2007.
2. ^ a b "The Framework for the Preparation and Presentation of Financial Statements" International
Accounting Standards Board. Accessed 24 June 2007.
Stakeholder (corporate)
A corporate stakeholder is a party that can affect or be affected by the actions of the business as
a whole. The stakeholder concept was first used in a 1963 internal memorandum at the Stanford
Research institute. It defined stakeholders as "those groups without whose support the
organization would cease to exist."[1] The theory was later developed and championed by R.
Edward Freeman in the 1980s. Since then it has gained wide acceptance in business practice and
in theorizing relating to strategic management, corporate governance, business purpose and
corporate social responsibility (CSR).
The term has been broadened to include anyone who has an interest in a matter.
providers of products and services used in the end product for the customer,
Suppliers
equitable business opportunities
Types of stakeholders
People who will be affected by an endeavor and can influence it but who are not directly
involved with doing the work.
In the private sector, People who are (or might be) affected by any action taken by an
organization or group. Examples are parents, children, customers, owners, employees,
associates, partners, contractors, suppliers, people that are related or located near by. Any
group or individual who can affect or who is affected by achievement of a group's objectives.
Any organization, governmental entity, or individual that has a stake in or may be impacted by a
given approach to environmental regulation, pollution prevention, energy conservation, etc.
Market (or Primary) Stakeholders - usually internal stakeholders, are those that engage in
economic transactions with the business. (For example stockholders, customers, suppliers,
creditors, and employees)
Non-Market (or Secondary) Stakeholders - usually external stakeholders, are those who -
although they do not engage in direct economic exchange with the business - are affected by or
can affect its actions. (For example the general public, communities,activist groups, business
support groups, and the media)
Employees
Communities
Shareholders
Creditors
Investors
Government
Customers
Suppliers
Labor unions
Professional associations
Prospective employees
Prospective customers
Local communities
National communities
Competitors
Schools
Future generations
Alumni (Ex-employees)
Research centers
Each Person
In management
In the last decades of the 20th century, the word "stakeholder" has become more commonly used
to mean a person or organization that has a legitimate interest in a project or entity. In discussing
the decision-making process for institutions—including large business corporations, government
agencies, and non-profit organizations -- the concept has been broadened to include everyone
with an interest (or "stake") in what the entity does. This includes not only its vendors,
employees, and customers, but even members of a community where its offices or factory may
affect the local economy or environment. In this context, "stakeholder" includes not only the
directors or trustees on its governing board (who are stakeholders in the traditional sense of the
word) but also all persons who "paid in" the figurative stake and the persons to whom it may be
"paid out" (in the sense of a "payoff" in game theory, meaning the outcome of the transaction).
Example
For example, in the case of a professional landlord undertaking the refurbishment of some
rented housing that is occupied while the work is being carried out, key stakeholders would be
the residents, neighbors (for whom the work is a nuisance), and the tenancy management team
and housing maintenance team employed by the landlord. Other stakeholders would be funders
and the design and construction team.
The holders of each separate kind of interest in the entity's affairs are called a constituency, so
there may be a constituency of stockholders, a constituency of adjoining property owners, a
constituency of banks the entity owes money to, and so on. In that usage, "constituent" is a
synonym for "stakeholder."[2]
In corporate responsibility
In the field of corporate governance and corporate responsibility, a major debate is ongoing
about whether the firm or company should be managed for stakeholders, stockholders
(shareholders), or customers. Proponents in favour of stakeholders may base their arguments on
the following four key assertions:
1) Value can best be created by trying to maximize joint outcomes. For example, according to
this thinking, programs that satisfy both employees' needs and stockholders' wants are doubly
valuable because they address two legitimate sets of stakeholders at the same time. There is even
evidence that the combined effects of such a policy are not only additive but even multiplicative.
For instance, by simultaneously addressing customer wishes in addition to employee and
stockholder interests, both of the latter two groups also benefit from increased sales.
2) Supporters also take issue with the preeminent role given to stockholders by many business
thinkers, especially in the past. The argument is that debt holders, employees, and suppliers also
make contributions and take risks in creating a successful firm.
3) These normative arguments would matter little if stockholders (shareholders) had complete
control in guiding the firm. However, many believe that due to certain kinds of board of directors
structures, top managers like CEOs are mostly in control of the firm.
4) The greatest value of a company is its image and brand. By attempting to fulfill the needs and
wants of many different people ranging from the local population and customers to their own
employees and owners, companies can prevent damage to their image and brand, prevent losing
large amounts of sales and disgruntled customers, and prevent costly legal expenses. While the
stakeholder view has an increased cost, many firms have decided that the concept improves their
image, increases sales, reduces the risks of liability for corporate negligence, and makes them
less likely to be targeted by pressure groups, campaigning groups and NGOs.
References
1. ^ Stockholders and Stakeholders: A new perspective on Corporate Governance. By: Freeman, R.
Edward; Reed, David L.. California Management Review, Spring83, Vol. 25 Issue 3, p88-106
2. ^ Shiller R. (2003), “From Efficient Markets Theory to Behavioral Finance”, Journal of
Economic Perspectives, vol. 17, n. 1,
3. ^ "Why do councils love jargon?". BBC.co.uk. 2008-02-08.
http://news.bbc.co.uk/1/hi/magazine/7234435.stm. Retrieved 2009-11-04.
5. ^ White, Roland (2009-06-14). "One nation under jargon". London: Times Online.
http://www.timesonline.co.uk/tol/news/politics/article6493420.ece. Retrieved 2009-11-04.