Using the notes to accounts

The notes to the accounts give you the backround information you need to correctly interpret the rest of the accounts. This is also where companies bury what they do not want investors to notice. It is not uncommon for the market not to notice information buried in the notes, so if you are looking for an edge in valuation it is certainly one place to look — but it is time consuming.

One way to read the notes is to read them before looking at the financial statements themselves: this is sometimes described as reading the accounts backwards. This means that you can interpret numbers and ratios in the light of complete background information, and makes it easier to spot creative accounting.

It is also important to compare the notes, and accounting policies (usually the first note) in particular, with the previous year. While previous year numbers that have changed significantly will be restated, it can be useful to see exactly what the change is, and it can also give you a clue to what may be being buried or spun.

Which notes matter most depend on the company in question, but checking the the notes relating to debt and provisions is vital. The segmental breakdown is also very important, but more information may be available in the directors report/financial review.

Copyright Graeme Pietersz © 2005-2016