Financial Accounting · Disclosure notes

Purpose and Structure of Notes to Financial Statements

Updated 11 October 2026 · Fact-checked

Notes to the financial statements give extra information that the primary statements cannot show. Under IAS 1 they present the basis of preparation and accounting policies, disclose information required by IFRS Standards but shown nowhere else, and add relevant information. They are presented in a systematic order, and each item is cross-referenced.

Understand Purpose and Structure of Notes to Financial Statements

The primary statements (financial position, profit or loss and OCI, changes in equity, cash flows) show only totals and short line items. A reader cannot tell from 'Property, plant and equipment $500,000' how it was measured, what it contains or what could change it. The notes fill that gap.

IAS 1 gives the notes three jobs. First, they present information about the basis of preparation and the specific accounting policies used. Second, they disclose information required by IFRS Standards that is not presented on the face of the statements. Third, they provide extra information that is relevant to understanding any of the statements.

IAS 1 requires notes to be presented in a systematic manner, as far as practicable. Each item on the face of the statements is cross-referenced to its note. A common order is: a statement of compliance with IFRS Standards, then significant accounting policies, then supporting information for the face items in the order the statements and lines appear, then other disclosures such as contingent liabilities and events after the reporting period. IAS 1 allows an entity to vary the order where that suits it.

Two disclosures matter most. The entity must disclose its significant accounting policies, meaning the measurement bases used (for example cost or revaluation, FIFO or AVCO) and other policies relevant to understanding the statements. It must also disclose the judgements management made in applying policies that most affect the amounts recognised, and the main sources of estimation uncertainty that carry a significant risk of causing a material adjustment within the next year.

The notes are part of the financial statements. They do not fix wrong figures: a disclosure cannot rescue an incorrect accounting treatment. Disclosure is also subject to materiality. An entity need not give a specific disclosure if the information is not material.

Key formulas to remember

Three purposes of the notes (IAS 1): Basis of preparation and policies + information required by IFRS but not shown on the face + other relevant information; Use this list for any 'purpose of the notes' question.
Typical order of the notes: Compliance statement → significant accounting policies → supporting notes in face order → other disclosures; IAS 1 asks for a systematic order, as far as practicable, with cross-references from the face statements.
Judgements versus estimates: Judgements in applying policies + sources of estimation uncertainty; Estimation uncertainty is disclosed where there is a significant risk of material adjustment to carrying amounts within the next financial year.
Materiality rule: No specific disclosure required if the information is immaterial; This applies to disclosures required by IFRS Standards, not to correcting misstatements.

How to solve Purpose and Structure of Notes to Financial Statements questions

Most exam questions ask what the notes are for, where something belongs, or whether an item must be disclosed. Use this method.

1Read the question and decide what is asked: purpose, order, policy, judgement, estimate or a specific disclosure.
2Ask whether the information is on the face of a primary statement or in the notes. Totals and line items go on the face; detail and explanation go in the notes.
3For a policy item, ask whether it describes how an amount was measured or recognised. If so, it belongs in the significant accounting policies note.
4For a judgement versus estimate item, ask: did management choose how to apply a policy (judgement), or is a figure uncertain because of future outcomes (estimation uncertainty)?
5Check materiality. If an item is immaterial, a specific disclosure may be omitted.
6Match your answer to the IAS 1 wording and eliminate options that confuse notes with the primary statements or with the directors' report.
7For number entry, take the figure from the note or workings and check the units and sign.

Quickest way: Four-question filter

When to use it: Use this for multiple choice and multiple response questions where you have under two minutes.

Is it a total or line item? Then it is the face of the statements.
Is it how or why an amount was measured? Then it is accounting policies.
Is it management's choice or an uncertain future outcome? Then it is a judgement or estimation uncertainty.
Is it required by an IFRS Standard but not on the face? Then it is a note disclosure, if material.

Common mistakes in Purpose and Structure of Notes to Financial Statements

Saying the notes are optional extras that are not part of the financial statements.
Students think the primary statements are the whole set because they hold the main numbers.
Fix: Remember the notes are an integral part of the financial statements and are covered by the auditor's opinion.
Confusing a judgement with an estimate.
Both involve management opinion, so they look alike.
Fix: A judgement is a choice in applying a policy (for example whether a lease is a lease). An estimate relates to an uncertain amount (for example useful life or receivable recoverability).
Believing disclosure in the notes can correct a wrong treatment.
Students assume more detail makes up for a wrong figure.
Fix: A misstated amount stays misstated. Disclosure supports correct recognition and measurement; it does not replace it.
Placing the accounting policies note anywhere or leaving out cross-references.
Students think notes have no required organisation.
Fix: Recall IAS 1 asks for a systematic order, as far as practicable, with each face item cross-referenced to its note.
Listing every possible disclosure as mandatory regardless of size.
Students overlook materiality.
Fix: State that an entity need not give a specific IFRS disclosure if the information is immaterial.

Worked examples

Example 1

Which TWO of the following are purposes of the notes to the financial statements under IAS 1? (A) To disclose the accounting policies used (B) To correct errors in the primary statements (C) To provide information required by IFRS Standards that is not presented on the face of the statements (D) To report the directors' remuneration policy to shareholders

Show the solution

Recall the three IAS 1 purposes: basis of preparation and policies; information required by IFRS but not on the face; other relevant information.
Option A matches the first purpose.
Option C matches the second purpose.
Option B is wrong: notes do not correct errors.
Option D is wrong: a remuneration policy is a governance or directors' report matter, not a note purpose under IAS 1.

Answer: A and C

Example 2

A company's notes state: 'Management concluded that it controls Entity X although it holds 45% of the voting rights, because of its power to direct the relevant activities.' Another note says: 'The recoverable amount of a cash-generating unit depends on forecast cash flows over the next five years, which are uncertain.' Classify each as a judgement or estimation uncertainty.

Show the solution

The first statement describes a choice made when applying a policy (consolidation of a subsidiary). It is a management judgement.
The second statement describes an amount that depends on uncertain future outcomes. It is a source of estimation uncertainty.
Estimation uncertainty is disclosed where there is a significant risk of a material adjustment to carrying amounts within the next financial year.

Answer: The first is a judgement made in applying accounting policies; the second is a source of estimation uncertainty.

Exam tips

Learn the three purposes of the notes as a short list; they are tested directly.
In multiple response questions, count the options you must select and do not choose more than stated.
Separate judgements from estimates carefully. Examiners often give a scenario and ask you to classify it.
Watch for distractors that put face-statement items or directors' report content into the notes.
Remember materiality: if an option says a disclosure is always required whatever its size, treat it with suspicion.

Practice questions from Disclosure notes

Purpose and Structure of Notes to Financial Statements in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Purpose and Structure of Notes to Financial Statements: frequently asked questions

What is the purpose of notes to the financial statements?

The notes explain the basis of preparation and accounting policies, give information required by IFRS Standards that is not on the face of the statements, and add other relevant information. They help users understand and rely on the primary statements.

In what order must the notes be presented under IAS 1?

IAS 1 requires a systematic order, as far as practicable, with each item on the face cross-referenced to its note. A common order is compliance statement, accounting policies, supporting notes in face order, then other disclosures. The Standard allows flexibility.

What is the difference between accounting policies and estimates in the notes?

Accounting policies are the specific principles and bases an entity applies, such as FIFO or the cost model. Estimates are uncertain amounts, such as useful lives or bad debt allowances. Both can be disclosed, but they are different things.

Are the notes part of the financial statements?

Yes. The notes are an integral part of a complete set of financial statements under IAS 1. They are covered by the same compliance statement and audit opinion as the primary statements.