ASC 235: Notes To Financial Statements
ASC 235 and the required disclosures are important for financial statement users to be aware of. This accounting policy affects how an entity supports its financial position, cash flows, and results of operations. Management must adopt principles and methods that are most appropriate in the circumstances to fairly present the company’s financials.
What is GAAP?
GAAP is a common set of accounting principles, standards, and procedures. Public companies in the United States must follow GAAP when they compile their financial statements. To that end, the Financial Accounting Standards Board (FASB) maintains GAAP. Moreover, the board issues new rules as necessary to ensure that GAAP remains up-to-date.
Where Can I Research GAAP?
FASB provides free online access to the Accounting Standards Codification, which is the only authoritative source for US GAAP. FASB and the AICPA also provide access to other authoritative literature that supplements the GAAP Hierarchy.
To access the Accounting Standards Codification, visit asc.fasb.org. Anyone can access the codes using a basic account. For more advanced features you can set up a professional account. To that end, if you work at a company subject to GAAP rules, your company likely has a professional account.
What is ASC 235?
ASC 235 is the section of GAAP that addresses notes to financial statements. In general, ASC 235 provides guidance on how an entity should disclose information about its accounting policies and other significant items in the footnotes to its financial statements.
What Are Some Examples of ASC 235 Disclosures?
Some examples of ASC 235 disclosures include:
– A description of the entity’s significant accounting policies
– Information about any changes to those accounting policies
– disclosures about items that are unusual or infrequent
– information about items that are outside the scope of other GAAP guidance (e.g., derivatives, hedging activities, etc.)
What Disclosure Techniques Are Allowed?
ASC 235 allows for the use of five disclosure techniques:
– parenthetical explanations
– notes to the financial statements
– cross-references
– valuation allowances
– supporting schedules.
Parenthetical explanations are brief disclosures that are included in the text of the financial statements themselves. Notes to the financial statements are more detailed disclosures. You can include them in a separate section of the financial statements. Similarly, accountants use cross-references to direct readers to other disclosures that provide more information about a particular item. Valuation allowances are used to adjust the carrying value of an asset or liability to its fair value. Moreover, companies use supporting schedules to provide additional information about items disclosed in the financial statements.
ASC 235 requires management to use judgment in determining which disclosure technique is most appropriate in the circumstances. To that end, the goal is to provide financial statement users with enough information to make sound economic decisions.
Why Does It Matter?
The presentation and disclosure of financial statements can have a major impact on the decisions made by users of those statements. For example, if a company or individual is considering investing in another company, the investor will want to know the total income of that company and how it may impact future returns.
ASC 235 follows the framework set by ASC 205 and requires companies to adequately disclose their accounting policies and the impact their policies have on the financial statements provided.
This section ensures that investors have enough information to make informed decisions and that companies cant mask their performance.
Let’s Recap
When following ASC 235, companies must disclose their significant accounting policies and how they may impact the financial statements. This is important for investors to be able to make sound decisions about where to invest their money. ASC 235 follows the framework set by ASC 205 and requires companies to disclose more information than what is typically found in a financial statement.
This additional information allows investors to better understand the company’s affairs and make more informed decisions. ASC 235 is important for companies to follow in order to maintain transparency and provide accurate information to their investors. Thanks for reading!
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