called “Read The Footnotes” ran in the 2004 Kentucky Derby. He finished seventh, but if he had won, it would have
been a victory for financial literacy proponents everywhere. It’s so important to read the footnotes. The
footnotes to financial statements are packed with information. Here are some of the highlights:
accounting policies and practices – Companies are required to
disclose the accounting policies that are most important to the portrayal of the company’s financial condition
and results. These often require management’s most difficult, subjective or complex
The footnotes provide detailed information about the company’s current and deferred income taxes. The
information is broken down by level – federal, state, local and/or foreign, and the main items that affect the
company’s effective tax rate are described.
Pension plans and
other retirement programs – The footnotes discuss the
company’s pension plans and other retirement or post-employment benefit programs. The notes contain specific
information about the assets and costs of these programs, and indicate whether and by how much the plans are
over- or under-funded.
The notes also contain information about stock options granted to officers and employees, including the method
of accounting for stock-based compensation and the effect of the method on reported results.
find a narrative explanation of a company’s financial performance in a section of the quarterly or annual report
entitled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” MD&A is
management’s opportunity to provide investors with its view of the financial performance and condition of
the company. It’s management’s opportunity to tell investors what the financial statements show and do not show, as
well as important trends and risks that have shaped the past or are reasonably likely to shape the company’s
SEC’s rules governing MD&A require disclosure about trends, events or uncertainties known to management that
would have a material impact on reported financial information. The purpose of MD&A is to provide investors
with information that the company’s management believes to be necessary to an understanding of its financial
condition, changes in financial condition and results of operations. It is intended to help investors to see the
company through the eyes of management. It is also intended to provide context for the financial statements and
information about the company’s earnings and cash flows.