Read Financial Footnotes, Invest Safely

Financial footnotes are like the fine print on an aspirin label. You need to read the fine print to realize that aspirin side effects include gastrointestinal bleeding. Financials footnotes are to companies as fine print are to drugs. For companies, their labels can be found in their SEC filings. Unfortunately, businesses are a lot more complex than drugs. Therefore, their footnotes are a lot longer than a paragraph of fine print on drug labels.

As I have mentioned before, footnotes contain some of the juiciest tidbits that management must disclose about the company but wouldn’t want to include in the financial statements. This is because the financial statements receive the greatest scrutiny from investors while financial footnotes tend to get ignored. The fact that footnotes have grown to an average of 12 pages per annual report or 10-K may have a role in deterring investors’ interest in the footnotes. Despite the length and potentially convoluted language used in the footnotes, it is absolutely crucial that an investor not skip the footnotes altogether. If you are short on time, at the very least scan the footnotes.

Financial footnotes are usually found in Management Discussion and Analysis (MD & A) in 10-Ks under Summary of Significant Accounting Policies. In 10-Qs, you can find them under the heading Recently Adopted Accounting Policies. Investopedia recommends scanning the second and last sentence of every disclosure so you can decide quickly whether you should pay more attention to certain disclosures. Always read the 10-Ks because full disclosure in 10-Qs is not yet a legal requirement.

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