Preparing explanatory notes to financial statements is a mandatory process to clarify the figures on the Balance Sheet or Income Statement. According to data from the General Department of Taxation, more than 351 businesses were fined for unclear or inaccurate explanatory notes.
Based on Article 116 Circular 200/2014/TT-BTCThe explanatory notes to the financial statements are an integral part of the financial statements. They serve as the legal basis for tax authorities and auditors to assess the accuracy of a company's financial situation. Let's explore the detailed steps to protect your company's rights.
What is a financial statement explanatory note? Refer to current legislation.
Before we delve into how to write an explanatory note... financial reportsAccountants need to have a thorough understanding of the governing legal framework. The explanatory notes are used to analyze data in detail and provide additional information that other report forms cannot fully convey.
The preparation of this report must strictly adhere to the following documents:
- Accounting Law No. 88/2015/QH13.
- Circular 200/2014/TT-BTC (for all economic sectors).
- Circular 133/2016/TT-BTC (small and medium-sized enterprises).
- Vietnamese Accounting Standard No. 21.
Failure to comply with regulations regarding the preparation of financial statement disclosures can lead to the risk of penalties. Decree 41/2018/ND-CP in the field of accounting, independent audit.
The core purpose of preparing financial statement disclosures.
Why is it important to pay attention to the way financial statement notes are prepared? A high-quality note helps readers understand the accounting policies, revenue recognition methods, and important financial commitments of the entity.
For tax authorities, the disclosure helps verify the validity of provisions, depreciation, and related-party transactions. For investors, it is a document that assesses the going concern capacity of the economic entity.
How to prepare explanatory notes to financial statements: Data preparation steps
The process of preparing financial statement disclosures requires meticulous attention to detail when gathering information from detailed ledgers.
Collect data from relevant reports.
To prepare the explanatory notes to the financial statements, you will need:
- Balance sheet (B01-DN).
- Business Performance Report (B02-DN).
- Cash flow statement (B03-DN).
- Detailed account ledgers (materials, accounts payable, fixed assets, etc.).
Verify the accuracy of the beginning and ending figures.
A common mistake in preparing financial statement notes is that the opening balances do not match the closing balances of the previous year. Accountants must ensure absolute consistency between periods to avoid suspicion from auditors.
Structure and detailed instructions on how to prepare the explanatory notes to the financial statements (Form B09-DN)
This is the core content on how to prepare explanatory notes to financial statements based on the standard form provided by the Ministry of Finance.
Part 1: Characteristics of Business Operations
In this section of the financial statement disclosures, the enterprise clearly presents the form of capital ownership and the main business activities. In addition, it is necessary to specify the normal production and business cycle and the structure of associated subsidiaries.
Part 2: Accounting Period, Currency Used in Accounting
Accountants must clearly state the accounting period (usually from January 1st to December 31st) and the currency unit as Vietnamese Dong. If using foreign currency, the legal basis and the exchange rate applied must be clearly explained.
Part 3: Accounting Standards and Applicable Accounting System
Clearly state whether the business is applying Circular 200 or Circular 133. This is a crucial step in preparing financial statement disclosures because each regime has a different chart of accounts and accounting methods.
Part 4: Applicable Accounting Policies
This is a crucial aspect of preparing financial statement disclosures. Businesses must disclose their cash recognition principles, inventory valuation methods, and fixed asset depreciation methods (straight-line or declining balance).
| Policy targets | Common methods | Notes for narration |
| Inventory | Weighted average | Consistency is required throughout the fiscal year. |
| Depreciation of fixed assets | straight line | According to the timeframe in Circular 45/2013/TT-BTC |
| Provision for bad debts | According to age of debt | A debt reconciliation statement is required. |
| Corporate Income Tax | 20% | Explain any tax incentives, if applicable. |
How to prepare explanatory notes for financial statements, specifically for the detailed data explanation section.
This section requires accountants to conduct a thorough analysis of aggregated figures so that readers can understand the financial nature of the situation.
Details of cash and cash equivalents
The explanatory notes to financial statements require the separation of cash, bank deposits, and short-term investments (under 3 months). This helps stakeholders accurately assess the entity's immediate liquidity.
Analysis of accounts receivable and accounts payable
You must list customers or suppliers whose balances exceed the total balance of 10%. Providing this detail in the financial statement notes is mandatory for credit risk management.
Changes in equity
Why is a change in equity statement necessary? In the preparation of financial statements, this statement shows changes in contributed capital, capital surplus, and retained earnings. This is sensitive information for shareholders.
Common mistakes and special considerations when preparing financial statement notes.
Many accountants still make mistakes when preparing financial statement notes, even those with experience.
- Missing link information: According to Decree 132/2020/ND-CP, related-party transactions must be transparent. If the disclosure is inadequate, businesses are easily subject to tax assessments.
- Omitting events after the end of the accounting period: Key events that occurred before the report's release must still be included. How to prepare explanatory notes to financial statements.
- Errors in asset classification: Confusing short-term and long-term liquidity ratios distorts a company's quick ratio.
Applying technology and software in the preparation of financial statement explanations.
Current accounting software automates the process of preparing financial statement notes. However, the written explanations still require human review to ensure their logical consistency.
Using Excel to create tables comparing data for three consecutive years is an advanced technique in preparing financial statements. It helps managers clearly see the sustainable development trends of the business.
The importance of auditing in the preparation of financial statement disclosures.
The explanatory notes require independent verification from an auditing firm. They will review whether the financial statement notes conceal any potential liabilities or significant legal risks.
Hiring auditing services helps businesses conduct regular financial health checks. Experts will advise on how to prepare the most optimal financial statement disclosures from the perspective of tax authorities and investors.
Detailed analysis of the illustrative data in the explanation.
Below is an example illustrating the inventory table in the preparation of financial statement notes.
| Inventory type | Beginning of the year (VND) | Year-end number (VND) | Provision for price reduction |
| Raw materials | 1.200.000.000 | 1.500.000.000 | 50.000.000 |
| Work-in-progress production costs | 800.000.000 | 1.100.000.000 | 0 |
| finished product | 2.500.000.000 | 1.900.000.000 | 120.000.000 |
| Total | 4.500.000.000 | 4.500.000.000 | 170.000.000 |
The table above shows that businesses manage inventory well when the total value remains stable but finished goods decrease, indicating that the rate of goods consumption is growing positively.
Conclude
The way financial statements are prepared reflects the transparency and credibility of a business. Mastering regulations and analytical techniques helps accountants confidently finalize accounts and minimize unfortunate legal risks.
If your business needs data standardization or independent verification of how financial statements are prepared, please contact us. MAN – Master Accountant NetworkWe offer auditing services Professionalism helps protect business value during tax audits.
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Content production by: Mr. Le Hoang Tuyen – Founder & CEO MAN – Master Accountant Network, Vietnamese CPA Auditor with over 30 years of experience in Accounting, Auditing and Financial Consulting.
Frequently Asked Questions about How to Prepare Notes to Financial Statements
Do micro-enterprises need to provide disclosure?
According to Circular 132/2018/TT-BTC, micro-enterprises are allowed to simplify reporting but are still required to provide explanations of debts and taxes if requested. Providing basic disclosures is encouraged to ensure transparency of data.
Is it permissible to change accounting methods midway through the process?
The consistency principle does not permit changes to policies within a fiscal year. If a change is necessary, the reasons and its impact on profits must be clearly explained in the financial statement notes.
What's different about the business description for a new company?
Attention should be paid to establishment costs, actual capital contributions, and unfinished projects (account 241) when preparing the explanatory notes to the financial statements for a new entity.
