When it comes to financial performance, revenue, profits and cash flow only tell part of the story. Footnotes at the end of reviewed or audited financial statements provide critical insight into a company’s accounting policies, unusual transactions, contingent liabilities and post-reporting events, fostering trust and adding context for strategic decision-making.

Read on for more about complying with the disclosure requirements under U.S. Generally Accepted Accounting Principles (GAAP) and why it matters.

What Are Footnote Disclosures? 

Footnote disclosures are notes intended to explain items presented in the main body of financial statements. They offer readers the clarity needed to assess risks and financial viability. The level of disclosure varies depending on the level of assurance provided.

Footnotes aren’t exclusive to audited financial statements. Under the American Institute of Certified Public Accountants’ (AICPA) Statements on Standards for Accounting and Review Services, full footnote disclosures are also required for reviewed financial statements under GAAP.

Footnotes aren’t required for compiled financial statements unless management requests them. Upon request of full disclosure, a CPA assists in drafting footnotes based on management’s representations. If footnotes are omitted, compiled financial statements must clearly communicate that management accepts responsibility for the omission.

Who’s Responsible for the Disclosures?

While the CPA who prepares a company’s financial statements plays a critical role in drafting and reviewing footnotes and ensuring they comply with applicable accounting frameworks, management provides the financial data and is ultimately responsible for the content of footnotes. 

For audited and reviewed statements, the CPA helps translate management’s data into clear, accurate disclosures that comply with GAAP or other applicable standards. When preparing compiled financials, the CPA drafts them only when they’re requested and approved by management. 

Why Do Footnotes Matter? 

Footnote disclosures help stakeholders “read between the lines,” offering crucial information not readily apparent in the core financial statements and highlighting hidden risks. Consider the following examples:

• Going-concern issues. Financial statements are prepared under the general assumption that the business is a viable going-concern entity expected to continue operating for the foreseeable future. If management or the CPA believes the company may not survive the next 12 months, disclosures are required. For example, a footnote might say, “Management has evaluated the company’s ability to continue as a going concern and determined that recurring operating losses and negative cash flows raise substantial doubt about its ability to continue operations beyond Dec. 31, 2026. Management plans to secure additional funding to address this risk.”
• Related-party transactions. Since companies may give preferential treatment to, or receive it from, individuals or entities with close ties to management, footnotes must disclose such related-party transactions to ensure users are aware of any favorable or non-arm’s-length arrangements. If these disclosures are omitted, the financial results may be misleading, especially if such arrangements are temporary or subject to change. For example, if a company rents property from the owner’s relatives at a below-market rate and fails to disclose this, the business could appear more profitable than it truly is.
• Accounting changes. Any switch in accounting methods must be disclosed, including the rationale and financial impact. While such changes may be required due to regulatory shifts, they can also be used to manipulate results. Transparent footnotes ensure stakeholders can discern whether changes are justified or opportunistic.
• Contingent and unreported liabilities. Not all obligations show up on the balance sheet. Footnotes should disclose contingent liabilities, such as pending lawsuits, IRS inquiries and warranty obligations. Auditors often confirm contingent liabilities by reviewing legal correspondence and contracts, and proper disclosure helps prevent surprises that could derail financial performance.
• Subsequent events. Significant events occurring after the balance sheet date but before financial statement issuance—such as a major customer loss or regulatory enforcement action—must be disclosed if they could materially affect the business. For instance, a company’s 2024 financial statement footnotes might say, “On February 20, 2025, the company’s largest customer filed for bankruptcy. The outstanding accounts receivable balance of $180,000 has been written off as uncollectible.” Such disclosures help users assess the company’s performance and avoid being blindsided by sudden downturns.

Transparency Equals Trust

Clear, tailored footnotes—free from boilerplate language—demonstrate that a business isn’t hiding anything, fostering trust and credibility with external stakeholders, such as investors, lenders and regulators, while equipping management with vital context to make strategic decisions. 

In today’s high-risk marketplace, transparency isn’t just good practice; it can provide a competitive advantage. Trust the accounting pros at Doeren Mayhew to help refine your footnote disclosures, evaluate those of potential partners or competitors and position your business for better decision-making.