Accounting For Dummies®, 4th Edition

13.5. Frolicking Through the Footnotes

Reading the footnotes in annual financial reports is no walk in the park. The investment pros read them because in providing consultation to their clients they are required to comply with due diligence standards — or because of their legal duties and responsibilities of managing other peoples' money. When I was an accounting professor, I had to stay on top of financial reporting; every year I read a sample of annual financial reports to keep up with current practices. But beyond the group of people who get paid to read financial reports, does anyone read footnotes?

For a company you've invested in (or are considering investing in), I suggest that you do a quick read-through of the footnotes and identify the ones that seem to have the most significance. Generally, the most important footnotes are those dealing with the following matters:

• Stock options awarded by the business to its executives: The additional stock shares issued under stock options dilute (thin out) the earnings per share of the business, which in turn puts downside pressure on the market value of its stock shares, assuming everything else remains the same.

• Pending lawsuits, litigation, and investigations by government agencies: These intrusions into the normal affairs of the business can have enormous consequences.

• Employee retirement and other post-retirement benefit plans: Your main concerns here should be whether these future obligations of the business are seriously underfunded. ...