In many professional documentation scenarios, footnotes are basically an afterthought. They disclose ancillary information that’s less important by definition, and while the information they contain may be significant, it does tend to have a lower level of priority.
Not in the financial accounting world, though, and especially not when it comes to the ASC 842 standard. Under the terms of this standard, which has undergone several significant revisions during the past few years, disclosure requirements are more complicated than they used to be.
The devil is often in the details when it comes to footnote disclosures, so it’s important to know the ins and outs of footnotes, how they’ve changed, and why they’re important.
At iLeasePro, we know footnotes and how they apply to the leasing aspect of your business, so we’re the ideal company to help you understand them, stay within the guidelines, and take advantage of the financial opportunities they offer.
Footnote Disclosures: A Definition
One of the biggest misunderstandings when it comes to footnote disclosures is how comprehensive they are.
How so? They explain how companies and organizations define and calculate the numbers in their financial statements, including the balance sheet, their cash flow statements, and their income statement, with this last also being known as a statement of activities.
These explanations reveal a wealth of information about a company’s accounting methods and how they may have changed since the adoption of ASC 842.
They also give both internal and external investors a snapshot and an in-depth look at the financial well-being of the company, both short and long-term.
Finally, some things about the way these disclosures are made are mandated by law. There are financial specifics that have to be included and spelled out, from future contingencies and commitments to contractual obligations that have to be fulfilled.
Footnotes provide this information, which must be done according to the letter and the spirit of the law. They can be valuable to the companies that produce them in several ways, most importantly their bottom lines.
Footnote Disclosure Changes Under ASC 842
Before the ASC 842 changes that began in 2020, footnote disclosure requirements were much less rigorous—so much so that many companies could actually manage their leases through spreadsheets.
But the changes in ASC 842 have shifted the accounting process so extensively that they’ve actually been a game changer, and spreadsheets are no longer used to manage leases and track updates. Instead, much of this tracking now occurs in footnote disclosures.
Let’s take a simple example.
When ASC 840 was the universal standard, finance leases—which are also called capital leases—had to be recorded on an organization’s balance sheet. Operating leases didn’t, however; instead, they were listed in the footnote disclosures.
This “on the books vs off the books” split was eliminated under ASC 842. Now, both operating lease assets and liabilities have to be on the books and recorded in the balance sheet, which impacts the ratios used by external investors and internal financial personnel to measure a company’s financial health.
To make this evaluation process as clear and consistent as possible, all of this has to be explained clearly in the operating lease footnote disclosures. Failure to do so can hurt companies in many ways, from outside perceptions in the financial world at large to internal procedures that are adopted and optimized based on the material being presented.
Why It’s Important to Get Your Footnotes Right
Leases are complex contracts that come in many forms, shapes, and sizes, and companies that have a large number of them as part of their business formula know how complex they can be.
When it comes to keeping track of them, the devil is once again in the details. If footnote disclosures aren’t itemized, recorded, and managed properly, they can cause considerable financial risk that can easily be avoided with an effective, accurate footnote disclosure process.
Inaccurate disclosures can also be costly. They can waste the time of the accounting professionals who have the job of tracking and managing them, and if that isn’t done properly the information in financial statements can damage an organization’s reputation and credibility, not mention its ability to operate properly.
Even worse, unclear or disorganized footnotes can hide or even completely bury important financial information. This can lead to gross inaccuracies on financial statements and the documents related to them, and the longer those inaccuracies are perpetuated, the worse the damage becomes.
How to Simplify the Footnote Disclosure Process
The problems associated with improper or inaccurate footnote disclosures can seem insurmountable and overwhelming, but fortunately, the solution to these problems is actually simple.
Simply put, it’s having the right software tool. That tool needs to be both comprehensive and meticulous, and it also has to be robust enough to record, track and organize data from different sources within the company and from the various entities that are part of ongoing leases.
What can a tool like that do? In addition to accurate recording, these software tools can generate journal entries and disclosures that can stand up to a meticulous audit.
They can also generate reports that will help you comply with not just ASC 842, but the IFRS 16 and GASB 87 lease accounting standards as well.
These tools will help you with your statements as well. They can make them more accurate, which means you’ll be able to generate higher-quality reports that make it easier to find important insights related to both your company’s finances and operating procedures.
That means more efficiency, greater money savings, spotting opportunities sooner, and increasing the bottom line.
Get All the Benefits of Footnote Disclosures
So how do you get these benefits? Fortunately, that’s simple to do, too. To let us use our expertise to help you, you can call iLeasePro at 888-351-4605, or you can go to iLeasePro.com and access our excellent information about our software products and our process to find out how it all works.
Try it today and see for yourself how easy it is to use! View our pricing and Schedule A Demo Now to learn more and see how iLeasePro can work for you.