Footnotes to the Financial Statements: Why are they important?
- Fany Bortolin
- Sep 1, 2025
- 2 min read
Financial statements tell an important story about a company’s performance and position. But that story would be incomplete without the footnotes to the financial statements. These notes provide the context, policies, and disclosures that help investors, lenders, and stakeholders truly understand the numbers.
Below, we break down what belongs in the footnotes under US GAAP — and just as importantly, what does not.
Significant Accounting Policies
US GAAP requires companies to disclose all significant accounting policies — typically in Footnote 1 or Footnote 2.
Footnote 1 often includes a general summary.
Footnote 2 (or later notes) expand on the details.
This section is designed to make it easy for readers to locate and understand the measurement bases and accounting methods used in preparing the financial statements.
Key disclosures include:
Measurement bases (e.g., historical cost, fair value).
Specific accounting principles and methods, such as:
Depreciation and amortization methods.
Inventory valuation methods.
Fiscal year definition.
Revenue recognition policies.
Not included here:
Detailed dollar amounts.
Changes in accounting principles.
Long-term debt maturities.
Exact depreciation/amortization computations.
These items appear in later, dedicated notes. For example, the Significant Accounting Policies note may state which depreciation method is used, while the depreciation footnote provides the calculation details.
Remaining Notes to the Financial Statements
Other notes provide information not visible in the main statements but essential for decision-making.
Examples include:
Details on assets and liabilities.
Changes in stockholders’ equity.
Marketable securities disclosures.
Fair value estimates.
Contingencies, commitments, and obligations.
Pension plan information.
Segment disclosures and subsequent events.
Changes in accounting standards.
Risk and Uncertainty Disclosures
Readers must understand the risks that could impact a company’s performance. GAAP requires disclosures of material risks and uncertainties, such as:
Dependence on a key product, service, or geography.
Major operational risks.
Reliance on a single business unit.
Significant accounting estimates with inherent risk.
Significant Estimates
When estimates carry a risk of material change in the near future, they should be disclosed — along with the potential impact.
Common examples:
Deferred tax valuation allowances.
Inventory or equipment vulnerable to obsolescence.
Loan valuation allowances.
Pending litigation obligations.
The threshold: disclosure is needed if it is reasonably possible the estimate may materially change soon.
“Eggs in One Basket” — Concentration Disclosures
Concentration risk must be disclosed if:
It exists at the reporting date.
It creates vulnerability to severe adverse impact.
It is reasonably possible the risk will occur.
Examples include reliance on:
A single customer or vendor.
One major product, service, or event for revenue.
A specific geographic market.
Final Thoughts
Footnotes are not just compliance exercises — they provide clarity and transparency. They help readers understand the methods behind the numbers, the risks management is monitoring, and the assumptions shaping financial outcomes.
By preparing thorough and accessible disclosures, companies not only meet GAAP requirements but also build trust with stakeholders.