Notes to Financial Statements

What is Notes to Financial Statements?

IAS 1.112 sets the minimum scope: accounting policies, disaggregation of amounts in the primary statements, information required by other IFRSs that is not presented elsewhere, and any additional information relevant to understanding the financial statements. The ordering follows IAS 1.114, which suggests (but does not mandate) a sequence starting with a statement of compliance, then significant accounting policies, supporting detail for each line item in the order the items appear, and finally other disclosures such as contingencies and commitments.

Two disclosure categories matter more than the rest. IAS 1.122 requires disclosure of judgments (other than estimation uncertainty) that management made in applying accounting policies and that most significantly affect the amounts recognised. IAS 1.125 then requires disclosure of estimation uncertainty, covering assumptions about the future that carry a significant risk of causing a material adjustment within the next twelve months. The auditor evaluates both categories under ISA 540.13(a) when assessing whether management's disclosures faithfully represent the degree of uncertainty in the accounting estimates.

IFRS 18 rewrites the organisational logic. Instead of encouraging a standard-by-standard note structure, IFRS 18.68 requires entities to group disclosures so that information about related items appears together, making notes readable rather than mechanically compliant. Entities reporting under IFRS from 2027 will need to restructure their note templates during 2026, because IFRS 18 requires retrospective application with comparative restatement.

Worked example: Dupont Ingenierie S.A.S.

Client: French engineering services company, FY2025, revenue €92M, IFRS reporter. The engagement team is reviewing the completeness and quality of the notes to the financial statements as part of the disclosure checklist procedures.

Step 1 — Map required disclosures against IAS 1.112

The team prepares a disclosure checklist covering IAS 1 general requirements plus each applicable IFRS (IFRS 15 for revenue, IFRS 16 for leases, IAS 19 for employee benefits, IAS 12 for income taxes, among others). Dupont's draft notes contain 38 individual notes. The team cross-references each note to its governing paragraph.

Step 2 — Assess accounting policy disclosures for materiality

IAS 1.117A (as amended in February 2021) requires disclosure of material accounting policy information rather than merely significant policies. The team identifies that Dupont's notes include a boilerplate policy for borrowing costs, although the entity has no borrowings. The team requests removal of this immaterial policy disclosure and confirms that the revenue recognition policy (percentage-of-completion for long-term contracts) includes entity-specific detail, not just a restatement of IFRS 15.

Step 3 — Evaluate judgment and estimation uncertainty disclosures

Dupont recognises €14M in contract assets from percentage-of-completion accounting on four multi-year engineering contracts. IAS 1.122 requires disclosure of the judgment involved in determining the stage of completion. IAS 1.125 requires disclosure of the estimation uncertainty around cost-to-complete assumptions, because a 10% overrun on the largest contract (€38M total value) would reduce the contract asset by €1.9M. The team checks that both the judgment disclosure and the sensitivity disclosure appear in the notes.

Step 4 — Test IFRS 18 readiness of note structure

Dupont's current notes follow a standard-by-standard sequence. Under IFRS 18.68, the entity will need to regroup disclosures by topic (for example, combining the revenue note, contract asset note, and contract liability note into a single "Revenue from contracts with customers" section). The team documents the restructuring required for 2027 adoption.

Conclusion: Dupont's notes are complete after removal of the immaterial borrowing costs policy and addition of the cost-to-complete sensitivity disclosure, and the structure is defensible under IAS 1.114 pending the IFRS 18 transition in 2027.

Why it matters in practice

• The FRC's 2022/23 Annual Review of Corporate Reporting identified boilerplate accounting policy disclosures as a persistent deficiency, particularly where entities copied standard wording without tailoring it to their actual transactions. The February 2021 amendments to IAS 1.117A shifted the test from "significant" to "material" accounting policies, and firms that have not updated their disclosure templates since 2022 continue to include policies for transactions the entity does not have.
• Teams frequently treat the IAS 1.122 judgment disclosure and the IAS 1.125 estimation uncertainty disclosure as interchangeable. They are not. A judgment disclosure explains a binary or classification decision (for example, whether a contract contains a lease). An estimation uncertainty disclosure quantifies the range of outcomes for a measurement (for example, the sensitivity of a provision to changes in discount rate assumptions). Collapsing both into a single note obscures the nature of each and violates the distinct disclosure objectives of IAS 1.122 and IAS 1.125.

Notes to the financial statements vs. accounting policies

Accounting policies sit inside the notes. The distinction matters because audit teams sometimes complete the policy review and treat the note disclosure review as finished. The policy check covers only one of the four categories in IAS 1.112. The remaining three (disaggregation, other IFRS requirements, and additional information for understanding) require separate procedures.

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