Notes to the Financial Statements

Definition

The notes are an integral part of the financial statements. They describe the reporting entity, the basis of presentation, significant accounting policies, and the detail behind summary line items on the face of the primary statements. A reader should be able to understand the financial position and performance of the corporation only after reading the statements together with the notes.

Key rules

ASPE Section 1505 requires disclosure of significant accounting policies in a single note, usually Note 2. Typical notes for a small CCPC include:

1. Nature of operations
2. Significant accounting policies (revenue, cash equivalents, receivables, inventory, property and equipment amortization, income taxes, measurement uncertainty)
3. Property and equipment (cost, accumulated amortization, net book value by class)
4. Long-term debt
5. Share capital (authorized and issued)
6. Income taxes (reconciliation of statutory to effective rate)
7. Related-party transactions (ASPE 3840)
8. Commitments and contingencies (ASPE 3280, 3290)
9. Economic dependence (ASPE 3841), for example one client over 10% of revenue
10. Subsequent events (ASPE 3820)

Example

Extract from a typical policy note for a service CCPC:

2. Significant accounting policies

(a) Basis of presentation
These financial statements have been prepared in accordance with
Accounting Standards for Private Enterprises (ASPE).

(b) Cash and cash equivalents
Cash and cash equivalents include cash on deposit and short-term
investments with original maturities of three months or less.

(c) Revenue recognition
Consulting revenue is recognized as services are rendered, when
the amount can be reliably measured and collection is reasonably
assured.

(d) Property and equipment
Property and equipment are recorded at cost. Amortization is
provided on a declining-balance basis at rates designed to
approximate the useful lives of the assets:
  Computer equipment         55% declining balance
  Office furniture           20% declining balance

(e) Income taxes
The corporation uses the taxes-payable method. No deferred tax
assets or liabilities are recognized (ASPE 3465 policy choice).

Common mistakes

• Copying last year's policy note without updating it for new transactions (for example, a first-year lease under ASPE 3065).
• Omitting the economic dependence note when one customer is clearly dominant.
• Failing to disclose shareholder loan terms: interest rate, repayment schedule, security.
• Forgetting the subsequent events note entirely. If nothing material happened, say so explicitly.
• Using boilerplate "future income taxes" language when the corporation has elected the taxes-payable method.

Related concepts

Every primary statement references the notes. Accounting policies are the bridge between high-level ASPE standards and the numbers on the balance sheet and income statement. Comparative disclosure requirements follow ASPE 1400.24.