Key Takeaways
- Notes are not optional appendices; IAS 1.10 (e) lists them as a required component of a complete set of financial statements.
- IAS 1.122 requires disclosure of judgments that have the most significant effect on recognised amounts, separate from estimation uncertainty disclosures.
- IFRS 18 (effective 1 January 2027) replaces IAS 1 's note structure with tighter rules on grouping disclosures by topic rather than by standard.
- Inspection bodies consistently flag boilerplate accounting policy disclosures as the single most common note-level deficiency.
What are notes to financial statements?
On about half the engagements we review, the notes are the last section the engagement team looks at and the first section the inspection reviewer flags. Preparers treat them as a SALY exercise: copy last year's file, update the numbers, move on. What survives is boilerplate policies for transactions the entity no longer has, missing sensitivity disclosures for the estimates that actually matter, judgment notes that read like textbook definitions, and estimation uncertainty disclosures that do not quantify the range of possible outcomes.
IAS 1.112 sets the minimum scope: accounting policies, disaggregation of amounts in the primary statements, information required by other IFRSs that is not presented elsewhere, and any additional information relevant to understanding the financial statements (FS). IAS 1.114 suggests (but does not mandate) a sequence starting with a statement of compliance, then material accounting policies, supporting detail for each line item in the order the items appear, then other disclosures such as contingencies and commitments.
Two disclosure categories matter more than the rest. IAS 1.122 requires disclosure of judgments (other than estimation uncertainty) that management made in applying accounting policies and that most significantly affect the amounts recognised. IAS 1.125 then requires disclosure of estimation uncertainty, covering assumptions about the future that carry a significant risk of causing a material adjustment within the next twelve months. In practice, teams collapse both into a single note and lose the distinction. ISA 540.13 (a) requires the auditor to evaluate both categories when assessing whether management's disclosures faithfully represent the degree of uncertainty in the accounting estimates.
IFRS 18 rewrites the organisational logic. Instead of encouraging a standard-by-standard note structure, IFRS 18.68 requires entities to group disclosures so that information about related items appears together, making notes readable rather than mechanically compliant. Entities reporting under IFRS from 2027 will need to restructure their note templates during 2026, because IFRS 18 requires retrospective application with comparative restatement.
Worked example: Dupont Ingenierie S.A.S.
Client: French engineering services company, FY2025, revenue €92M, IFRS reporter. Our engagement team is reviewing the completeness and quality of the notes to the FS as part of the disclosure checklist procedures.
Step 1 — Map required disclosures against IAS 1.112
We prepare a disclosure checklist covering IAS 1 general requirements plus each applicable IFRS ( IFRS 15 for revenue, IFRS 16 for leases, IAS 19 for employee benefits, IAS 12 for income taxes). Dupont's draft FS contain 38 individual notes. We cross-reference each note to its governing paragraph. This is ticking and bashing at its purest, but skipping it is how gaps survive into the review file.
Step 2 — Assess accounting policy disclosures for materiality
IAS 1 .117A (as amended in February 2021) requires disclosure of material accounting policy information rather than merely significant policies. We identify that Dupont's notes include a boilerplate policy for borrowing costs, although the entity has no borrowings. We request removal of this immaterial policy disclosure and confirm that the revenue recognition policy (percentage-of-completion for long-term contracts) includes entity-specific detail, not just a restatement of IFRS 15 .
Step 3 — Evaluate judgment and estimation uncertainty disclosures
Dupont recognises €14M in contract assets from percentage-of-completion accounting on four multi-year engineering contracts. IAS 1.122 requires disclosure of the judgment involved in determining the stage of completion. IAS 1.125 requires disclosure of the estimation uncertainty around cost-to-complete assumptions, because a 10% overrun on the largest contract (€38M total value) would reduce the contract asset by €1.9M. We check that both the judgment disclosure and the sensitivity disclosure appear in the notes.
Step 4 — Test IFRS 18 readiness of note structure
Dupont's current notes follow a standard-by-standard sequence. Under IFRS 18.68 , the entity will need to regroup disclosures by topic (for example, combining the revenue note, contract asset note, contract liability note, and related policy into a single "Revenue from contracts with customers" section). We document the restructuring required for 2027 adoption.
Conclusion: Dupont's notes are complete after removal of the immaterial borrowing costs policy and addition of the cost-to-complete sensitivity disclosure. The structure is defensible under IAS 1.114 pending the IFRS 18 transition in 2027.
Why it matters in practice
- The FRC's 2022/23 Annual Review of Corporate Reporting identified boilerplate accounting policy disclosures as a persistent deficiency, particularly where entities copied standard wording without tailoring it to their actual transactions. The February 2021 amendments to IAS 1 .117A shifted the test from "significant" to "material" accounting policies. Firms that have not updated their disclosure templates since 2022 continue to include policies for transactions the entity does not have. This is the finding that generates the most review notes on our files.
- Teams frequently treat the IAS 1.122 judgment disclosure and the IAS 1.125 estimation uncertainty disclosure as interchangeable. They are not. A judgment disclosure explains a binary or classification decision (for example, whether a contract contains a lease). An estimation uncertainty disclosure quantifies the range of outcomes for a measurement (for example, the sensitivity of a provision to changes in discount rate assumptions). Collapsing both into a single note obscures the nature of each and violates the distinct disclosure objectives of IAS 1.122 and IAS 1.125 .
Notes to the financial statements vs. accounting policies
| Dimension | Notes to financial statements | Accounting policy disclosures |
|---|---|---|
| Scope | All supporting disclosures, including policies, disaggregation, judgments, estimates, and risk information ( IAS 1.112 ) | A subset of the notes covering the entity's specific application of IFRS recognition, measurement, presentation, and disclosure rules ( IAS 1.117 ) |
| Materiality filter | Each note tested against general materiality; immaterial notes can be omitted ( IAS 1.31 ) | Since February 2021, only material accounting policy information is disclosed ( IAS 1 .117A) |
| Audit focus | Completeness of the full note package against the disclosure checklist | Whether each policy is entity-specific, current, free of boilerplate language, and aligned with actual transactions |
| Common deficiency | Missing disaggregation or sensitivity disclosures for material line items | Inclusion of policies for transactions the entity does not engage in |
Accounting policies sit inside the notes. That distinction matters because audit teams sometimes complete the policy review and treat the note disclosure review as finished. The policy check covers only one of the four categories in IAS 1.112 . The remaining categories (disaggregation, other IFRS requirements, additional information for understanding, and cross-references to the primary statements) each require separate procedures. The file should tell a story about why each note is there, not just that someone ticked it off a checklist.
Related terms
Related reading
Frequently asked questions
What must the notes to financial statements include under IFRS?
IAS 1.112 requires four categories: a statement of IFRS compliance, material accounting policies, disaggregation of amounts presented in the primary statements, and other information needed to understand those amounts (such as contingencies, commitments, and non-financial disclosures required by specific IFRSs). Each applicable standard adds its own disclosure requirements on top of this baseline.
How do I audit the notes to the financial statements?
The auditor runs a disclosure checklist against every applicable IFRS, then evaluates completeness under ISA 700.13(e), which requires the opinion to cover whether the financial statements (including the notes) give a true and fair view. For estimation uncertainty disclosures, ISA 540.20 requires the auditor to evaluate whether the disclosures adequately reflect the degree of uncertainty. Judgment disclosures under IAS 1.122 are assessed against the auditor's own understanding of the entity's policy choices.
Does IFRS 18 change what goes into the notes?
IFRS 18 does not materially change what must be disclosed. It changes how disclosures are organised. IFRS 18.68 requires entities to group related information together by topic rather than listing notes in standard-by-standard order. The content requirements from individual IFRSs remain, but the presentation wrapper changes from 1 January 2027.