Chapter 11
Supplementary information section

The three basic financial reports list only total numbers for each category; they don’t explain the numbers or break them down. So annual reports may include a section called supplementary information to provide the details behind the numbers.

Supplementary information might be schedules of numbers for any item on the balance sheet or P&L, or it might include various financial or operational analyses.

Common balance sheet supplementary information may include details of accounts receivable by customer, aged A/R analyses, accounts payable by vendor or further details behind the fixed asset accounts. Lenders commonly request this information and may require it. Savvy credit analysts scour supplementary information for names of companies they can contact to obtain credit references on you. Lenders look for receivables from risky customers and for the vendors you use regularly. They may reason that if you deal with reputable companies that speak highly of you, then you probably are a good credit risk.

Common profit and loss supplementary information could include breakdowns of operating revenues, operating expenses, overhead expenses or other income or expenses from the P&L. Internal monthly reports often are extremely detailed.

Both P&Ls and balance sheets may be presented in “common size” — multi-year trend reports that show all balance sheet items as a percentage of total assets and all P&L items as a percentage of total revenues. Common size reports allow the reader to study trends in particular items over a period of time. A reader might want to monitor, for example, accounts receivable as a percentage of total assets or operating profit margin as a percentage of total revenues.

Operational statistics may be presented. Although most privately held trucking companies aren’t required to report operational statistics, they help readers understand trends over several years. The number of total employees, numbers of trucks owned versus leased, total miles driven or tons of freight hauled, percentage of deadhead miles or less-than-truckload, or numbers of active customers and their average revenues are key performance indicators tracked by many users of trucking company financial statements.

Financial ratios are key numbers from the balance sheet and P&L expressed as formulas and percentages and can help in comparing one company’s performance with another. Although they aren’t required disclosures, both external and certainly internal reports often contain a financial ratios page. Financial ratios may show trends in the profitability, liquidity, solvency and debt leverage of the company. Loan covenants or agreements commonly require you to maintain certain financial ratios. (Much more is explained on these items in Chapter 12.)

Graphs, diagrams or tables round out the types of supplementary information that may be presented. Although illustrations are rare in reports prepared by local or regional accounting firms, software increasingly makes it easy to present financial analyses in visual formats.

Accountants’ reports disclose limitations. If you include supplementary information with your financial statements, external independent accountants must mention it in their accountants’ report. Because managers want to show the company in the best possible light, they often provide more information than required. To save the company money, outside accountants might not subject supplementary information to the same scrutiny they give the three basic reports and the footnote disclosures. Plus, the level of detail in supplementary information is often so fine that testing and giving assurances on these numbers is simply beyond the budgets of most companies. Still, management often feels comfortable enough to include these numbers, and accountants concede, as long as they can show their reservations.

Below is a sample audit report paragraph addressing supplementary information. Note that the auditors felt comfortable enough to include the information under the audit’s umbrella. Had they not felt comfortable doing so, the report would be worded quite differently.

A review report paragraph similarly addresses supplementary information.

Compilation reports would not have a separate paragraph mentioning the supplementary information but would mention the supplementary information in passing along with the listing of the included financial statements. That’s because a compilation offers few assurances on the substance of financial statements anyway.

In Summary
Supplementary information is any information beyond the required basics of balance sheet, P&L, cash flow statement and footnote disclosures. They often enhance the user’s understanding of the company and the basic reports by giving a wide variety of additional information or analysis. If external accounting firms consent to such presentations in their reports, they must state the level of their involvement in the preparation of the presentations.