Financial Statement Disclosures: Why Footnotes Matter in a Review?

When you hear the phrase “financial statement disclosures,” you might think it only applies to large corporations with thick, detailed audited reports. However, if you’re providing reviewed financial statements, you still need to include the appropriate disclosures—even if they’re not as extensive as those required in an audit. Why do these footnotes matter, and how much detail do you really need?

This article explains how disclosures work, why they’re essential for lenders and investors, and the role you play in making sure they’re accurate and complete.

What Are Disclosures (Footnotes)?

Simply put, disclosures are the additional explanatory notes attached to your financial statements. They clarify policies, methods, assumptions, and specific transactions, providing anyone who reads your financials with more context than the raw numbers alone.

Examples of common disclosures include:

• Accounting policies (how you recognize revenue, value inventory, or depreciate assets)
• Related-party transactions (if your business purchases services from a company owned by a family member)
• Subsequent events (major changes that happen after the statement date but before release, such as a pending legal action)

Why Disclosures Matter in a Review

1. Lender Confidence: Even if your bank or creditor only requires a reviewed statement (which provides limited assurance), they still want transparency about your business practices, commitments, and risks.
2. Investor Decision-Making: Potential investors often examine the footnotes to see if there are any hidden liabilities or major customer concentrations.
3. Comparability: Disclosures help people compare your statements to others in your industry, especially if you use different methods for estimates or valuations.
4. Limitation of the Review: A review engagement doesn’t investigate every transaction like an audit would, but it still aims to ensure there are no material modifications needed. Missing critical disclosures can lead to a modification of the CPA’s conclusion.

Management’s Responsibility

You, as management, are responsible for the accuracy and completeness of the financial statements, including footnotes. While the CPA can guide you on what’s typically required, you ultimately need to disclose:

• Unusual or significant transactions
• Changes in accounting methods
• Long-term obligations or contractual commitments
• Uncertainties about going concern or pending litigation

If the CPA believes certain disclosures are necessary for the statements not to be misleading, you’ll likely be advised to include them—but the final decision rests with you.

Common Disclosures in Reviewed Statements

1. Significant Accounting Policies: Summarize the frameworks you use (for example, U.S. GAAP) and any critical judgments you make.
2. Debt & Liabilities: Detail the terms of major loans or credit lines so banks can understand your level of leverage.
3. Revenue Recognition: If you have multiple revenue streams, clarify how each one is recognized, especially if timing or methods differ.
4. Owner or Related-Party Transactions: This might include rent paid to an entity owned by the business owner or sales to a sister company.
5. Subsequent Events: If something significant happened after year-end—like a large lawsuit or a major acquisition—make sure it appears in the notes.

Potential Consequences of Omitting Footnotes

• Modified or Withheld Review Report: If the CPA believes the statements are misleading without certain disclosures, they may modify their conclusion or, in rare instances, withdraw from the engagement.
• Stakeholder Skepticism: Lenders or investors might suspect you’re hiding something if your disclosures seem incomplete.
• Future Headaches: If you later need an audit or face regulatory scrutiny, missing or incorrect disclosures can cause bigger problems down the road.

Conclusion

In a review engagement, footnotes aren’t just an afterthought. Financial statement disclosures are vital in providing a true and fair view of your financial condition, even under limited assurance. Proper disclosures build trust among lenders, investors, and other stakeholders who rely on your statements to make decisions.

If you’re unsure which disclosures apply to your unique situation, contact G&S Accountancy for expert guidance. We can help you find the right balance—offering clarity and completeness without overwhelming your audience with unnecessary detail.

Frequently Asked Questions (FAQs)

Do smaller businesses really need formal footnotes?

If you’re preparing financials under GAAP—even for a review—you generally need footnotes. They can be shorter than those of a large public company, but the principle remains the same.

Can a review engagement be done without disclosures entirely?

While certain frameworks allow reduced disclosures under special circumstances, omitting basic disclosures usually leads to a “management-use only” scenario or a known departure from requirements. Always check with your CPA.

What if I’m not sure which disclosures are needed?

We at G&S Accountancy can help by providing a disclosure checklist or asking the right questions to ensure you cover the essentials.