Annual financial statements
The document of which the notes are an integral part.
OpenBusinesses · Financial statements
Notes to the financial statements
It is the part of the financial statements nobody reads until it is needed, and then it becomes the only part that matters: when a bank assesses a credit line, when a new shareholder comes in, when someone challenges a valuation.
01 · The purpose
What the notes to the financial statements are for
The balance sheet and the profit and loss account give you figures. The nota integrativa (the notes to the financial statements) explains how those figures were put together and what lies behind them: which valuation criteria were adopted, how the balances moved during the year, which commitments and risks do not appear in the accounts.
It is not an attachment: it is an integral part of the financial statements in every respect, and if it is missing or incomplete, the financial statements are incomplete.
The guiding criterion is a true and fair view. If the information required by law is not enough to give one, the notes must provide more. It is a catch-all rule that is routinely forgotten.
02 · The obligations
Who must prepare the notes and who can omit them
The obligation depends on the format of financial statements that applies, which in turn depends on whether certain size limits are exceeded for two consecutive financial years.
| Financial statements format | Notes | Other documents |
|---|---|---|
| Ordinary | Required, in full | Cash flow statement and directors' report |
| Abridged | Required, in reduced form | Directors' report can be omitted, under conditions |
| Micro-entities | Can be omitted, under conditions | Minimum information at the foot of the balance sheet |
Even a micro-entity that omits the notes must still give certain minimum information at the foot of the balance sheet, including commitments and security given, directors' pay and transactions with related parties. The omission is not total.
03 · What it must say
The information required
The Italian Civil Code lists the contents item by item. In the practice of a small company, these are the items that always come up.
- Valuation criteria applied to each item, stating any departures and the reasons for them.
- Movements in fixed assets: historical cost, additions, disposals, depreciation, write-downs.
- Breakdown of receivables and payables by due date, separating those falling due after the following year.
- Accruals and deferrals of significant amount, with their nature.
- Movements in equity and whether each reserve is available and distributable.
- Commitments, security given and contingent liabilities not shown in the balance sheet.
- Fees due to directors and to the board of statutory auditors.
- Average number of employees by category.
- Transactions with related parties, when significant and not carried out on normal market terms.
- Significant events after the end of the financial year.
- Proposed allocation of the result for the year.
04 · The delicate point
Going concern
Financial statements are prepared on the assumption that the business will continue. When that assumption is in doubt, the notes are where the question has to be addressed explicitly.
- If there are significant uncertainties about going concern, they must be described together with the actions planned to deal with them.
- If the financial statements are prepared on a going concern basis despite the warning signs, the reasoning must be set out and be defensible.
- If the business is not a going concern, the valuation criteria change, and the notes must explain this.
- The information gathered through adequate organisational structures is the basis on which this assessment rests.
The signs that need a comment
When they are present, silence in the notes is a problem in itself.
- Repeated losses eroding equity
- Significant overdue tax or social security debts
- Dependence on a single customer or a single bank credit line
- A structural mismatch between the due dates of receivables and payables
05 · Filing
The notes to the financial statements in XBRL format
Filing with the Registro Imprese (the Companies Register) takes place in a machine-readable electronic format. The notes also follow a structured taxonomy, and this affects the way they have to be written.
A fixed structure
Information goes into sections predefined by the taxonomy: it is not free text to lay out as you please.
Coded tables
Movements in fixed assets, equity and payables follow standard table formats.
Narrative sections
There is still room for free-text comments, and that is where the quality of the document is decided.
Formal checks
The system runs consistency checks: mismatches between the statements and the notes block the filing.
The technical constraint must not become an excuse. The taxonomy structures the document but does not dictate its content: the quality of the information depends on the person writing it.
06 · What to avoid
The mistakes we see most often
Almost all of them have the same cause: the notes are treated as a formality to be finished in a hurry.
- Copying the previous year's notes without updating them: criteria no longer applied and amounts no longer true stay in.
- Leaving out commitments and security given: this is some of the most relevant information for anyone reading the accounts from outside.
- Not stating whether reserves are distributable, which is decisive information before resolving to pay dividends.
- Keeping quiet about overdue tax debts or instalment plans in progress.
- Not commenting on significant changes compared with the previous year: a figure that doubles with no explanation is an objection waiting to happen.
- Inconsistencies between the notes and the statements: they block the filing and, when they get through, remain visible to anyone who reads them.
Frequently asked
The questions that keep coming up
Can my micro-entity really skip the notes?
It can omit the notes if it stays within the size limits for two consecutive financial years and gives the required minimum information at the foot of the balance sheet.
It is worth assessing case by case: if the company deals with banks or outside shareholders, notes prepared even when not required are often an investment, not a cost.
Who signs them?
The notes are part of the financial statements, which are prepared by the directors and signed by the person who has legal representation of the company.
The professional who handles the technical preparation does not sign them: responsibility for the document stays with the board of directors.
What happens if there are mistakes?
Formal inconsistencies block the filing and must be corrected before submission. Substantive errors that emerge after approval need to be assessed case by case, which can go as far as a new approval.
Significant omissions expose the directors to liability towards shareholders and third parties who relied on the financial statements.
Does the bank really read them?
Anyone assessing creditworthiness reads the notes before the statements, because that is where the information the figures do not give is found: security given, due dates of debts, related-party transactions, litigation.
Thin notes are not neutral: they are read as a lack of transparency, and that shows in the assessment.
Let's talk
Well-written notes tell the story of the company
Copying last year's version is the shortcut that produces the most frequent objections. The difference shows when someone actually reads them.