Disclosure-notes

This chapter explains the role and importance of disclosure notes as an essential part of financial statements. It also guides you in drafting disclosure notes for non-current assets, provisions, events after the reporting period, and inventories. The primary financial statements present summarised figures. The disclosure notes add the context, detail, and transparency users need to understand and interpret those figures.

Learning objectives

By the end of this subchapter, you should be able to:

• Explain the purpose of notes to the financial statements (disclosure notes)
• Draft the following disclosure notes:
  • Non-current assets, including tangible and intangible assets
  • Provisions
  • Events after the reporting period
  • Inventories

Definitions

Disclosure notes (notes to the financial statements)

These are supplementary explanations and details that accompany the primary financial statements (Statement of Financial Position, Statement of Profit or Loss, Statement of Changes in Equity, and Statement of Cash Flows).

Purpose of disclosure notes

Disclosure notes are an integral part of the financial statements. They explain and expand on the figures in the main statements so users can understand what those figures mean and how they were determined. Notes also support transparency, accountability, and compliance with IFRS and other relevant accounting standards.

Under IFRS 18 Presentation and Disclosure in Financial Statements, which replaced IAS 1, notes are explicitly required as part of a complete set of financial statements. This means financial statements presented without adequate notes would not be considered compliant with IFRS, regardless of how accurately the primary statements have been prepared.

Specifically, disclosure notes provide:

• Explanation of accounting policies and methods applied.
• A breakdown of summarised figures.
• Disclosure of contingencies, commitments, or uncertainties.
• Comparability and full compliance with standards.

Disclosure notes for non-current assets

Non-current assets, including property, plant and equipment (PPE) and intangible assets, often represent significant investments. Users need more than a single total in the statement of financial position to understand:

• what the assets are,
• how they are measured,
• and how their carrying amounts change over time.

For example, knowing the depreciation method and useful life assumptions applied to a major class of assets helps users assess whether the carrying amounts are reasonable and how much of the asset’s economic life remains. Without this information, the figures in the statement of financial position are difficult to interpret.

For each class of PPE, IAS 16 requires:

• the measurement basis used (cost model or revaluation model),
• the depreciation method, useful lives, or depreciation rates applied,
• a reconciliation of the carrying amount: cost or valuation and accumulated depreciation at the start of the year, then additions, disposals, revaluations, and the depreciation charge, reconciled to the closing balances.

Where a class of assets is revalued, the notes must also disclose the date of the revaluation, whether an independent valuer was involved, and the carrying amount that would have been recognised under the cost model.

Pitfall: A revaluation increase is recognised in other comprehensive income and accumulated in the revaluation surplus - it does not pass through profit or loss. Only a revaluation decrease beyond any previous surplus for the same asset is charged to profit or loss.

For intangible assets, IAS 38 requires similar disclosures: whether useful lives are finite or indefinite, the amortisation methods and rates used for finite-life intangibles, and a reconciliation of the carrying amount similar to that required for PPE.

This was treated in more detail in an earlier chapter.

Example: PPE disclosure note (extract)

	Land and buildings	Plant and machinery	Total
Cost or valuation, 1 Jan	$500,000	$300,000	$800,000
Additions	-	$40,000	$40,000
Disposals	-	$(20,000)	$(20,000)
Cost or valuation, 31 Dec	$500,000	$320,000	$820,000
Accumulated depreciation, 1 Jan	$120,000	$150,000	$270,000
Depreciation charge for the year	$20,000	$30,000	$50,000
Disposals	-	$(15,000)	$(15,000)
Accumulated depreciation, 31 Dec	$140,000	$165,000	$305,000
Carrying amount, 31 Dec	$360,000	$155,000	$515,000

Answer: The carrying amount of $515,000 (land and buildings $360,000 plus plant and machinery $155,000) is the figure reported in the statement of financial position; the note above shows how it was built up.

Disclosure notes for provisions

Provisions are liabilities of uncertain timing or amount. Because recognising and measuring provisions involves significant management judgement, detailed disclosures help users understand the assumptions and estimates behind the recognised amounts.

Disclosure of provisions should include:

• A reconciliation of the carrying amount, showing the opening balance, additions, amounts used, reversals, any unwinding of discount, and the closing balance.
• It should also provide a description and nature of the obligation, including timing, uncertainties, and expected cash outflows.
• Disclose the key assumptions and estimates made about future events and any expected reimbursements.

The reconciliation of the carrying amount is useful because it shows how the provision moved during the period - whether it increased due to new obligations, was utilised as expected, or was reversed because the liability no longer exists.

Example: Provisions reconciliation

	$
Opening balance	80,000
Additional provision	25,000
Utilised during the year	(30,000)
Unused amounts reversed	(10,000)
Closing balance	65,000

Answer: The closing balance of $65,000 is the amount carried forward and reported as a provision in the statement of financial position.

Disclosure notes for events after the reporting period

Events after the reporting period can significantly affect how users understand the financial statements. Proper disclosure helps ensure users are not misled about the entity’s circumstances.

Events after the reporting period are classified as either adjusting or non-adjusting:

• Adjusting events provide evidence of conditions that existed at the reporting date. They require amendments to the figures in the financial statements.
• Non-adjusting events relate to conditions that arose after the reporting date. They do not change the figures, but if they are material, they must be disclosed in the notes so users understand their potential impact.

For each material non-adjusting event, the notes should disclose:

1. Nature of the event: A clear description of what occurred after the reporting period.
2. Financial effect: An estimate of the financial impact, or a statement that such an estimate cannot be made.

IAS 10 separately requires every set of financial statements to disclose the date they were authorised for issue and who gave that authorisation, since that date establishes the cut-off for which events after the reporting period must be considered.

Examples of material non-adjusting events that would require disclosure include the announcement of a plan to discontinue a major business segment, a major acquisition or disposal of assets after the reporting date, or the destruction of a significant production facility by fire. In each case, users need to know about these developments even though they do not alter the reported figures.

Disclosure notes for inventories

Inventories often represent a significant current asset. Users need information about measurement methods, write-downs, and inventory risks to assess working capital management and profitability.

Under IAS 2 Inventories, the required disclosures are designed to give users a clear picture of how inventory has been valued and how it has changed during the period. This matters because the choice of cost formula (FIFO or weighted average) can materially affect reported profit and asset values, especially when prices are changing.

The notes should disclose:

1. Accounting policies: The measurement basis (lower of cost and net realisable value), cost formula used (FIFO or weighted average), and costs included in inventory valuation.
2. Carrying amount by category: Break down inventory carrying amounts into raw materials, work in progress, finished goods, and merchandise (for retailers).
3. Inventory recognised as expense: State the amount of inventory recognised as cost of sales during the period.
4. Write-downs and reversals: The amount of any write-down to net realisable value, any reversal of write-downs, and the circumstances leading to such reversals.
5. Pledged inventory: The carrying amount of inventories pledged as security for liabilities.

The requirement to disclose write-downs and their reversals matters because a large write-down may signal obsolete inventory or deteriorating market conditions, while a reversal may indicate that earlier estimates were overly prudent.