The financial accounting term notes to financial statements refers to an approach to disclosing information. Notes allow the reader of the company's financial statements to understand the effect contingencies, contracts, and agreements have on the value of assets appearing on the company's balance sheet.
Notes are one of several ways to communicate material information that is supplementary to the items appearing on a company's balance sheet. Notes are used when explanations and descriptions cannot be shown as parenthetical explanations. They are typically shown immediately following the financial report.
Notes are often used to explain obligations that exist under contracts or other financial agreements. They can be used to explain the depreciation policy used by the company, and highlight any changes in accounting principles. These disclosures are deemed necessary if the information appearing on a statement is thought to be misleading without their inclusion. For this reason, it's important that notes present essential facts and are written in a manner such that they clarify information and not confuse the reader.
Company A has entered into talks with Company B's management team. While the purchase price is still not finalized, Company A has every reason to believe it will come to agreement with Company B, and an acquisition will occur. The note following the company's balance sheet would be as follows
Note 1: Acquisitions
Company A makes acquisitions of certain businesses from time to time the Company feels align with its strategic intent with respect to growth markets and product lines. The allocation of the purchase price related to certain acquisitions, primarily Company B, is considered preliminary, largely with respect to certain acquired intangible assets and tax-related assets and liabilities.