STEP 1Notes are the footnotes of financial statements
Like the small-print footnotes under a textbook's main text, each number in the financial statements carries a tag that says 'see Note X for details'.
Looking only at the balance sheet line 'borrowings KRW 2.1 billion', you cannot tell which bank lent it, at what interest rate, or until when. You also don't know what was pledged as collateral. The place that records these inside details is the . As you saw in Lesson 1, the notes are a formal component of the financial statements together with the balance sheet, income statement, cash flow statement, and statement of changes in equity. They are not attached reference material but part of the main body that the auditor also reviews.
The notes do two broad things. First, they break down the numbers in the main statements. They show how much of the KRW 900 million of inventories is raw materials and how much is finished goods, and on what terms the KRW 2.1 billion of borrowings is split into KRW 600 million short-term and KRW 1.5 billion long-term. Second, they give information that didn't make it into the main statements as numbers. Examples are lawsuits not yet settled, guarantees given on other companies' debts, and major events that occurred after the closing date. The second matters more to investors.
Main-statement number → note number → what's behind itNext to each line in the main financial statements is a number like 'Note 7, 12'. Follow that number and you find the breakdown and terms of that figure.
In an annual report, the notes are inside III. Financial Matters. On a consolidated basis they are 3. Notes to Consolidated Financial Statements, and on a single-company basis 5. Notes to Financial Statements (see the table of contents map in Lesson 5 and consolidated vs separate in Lesson 11). It is the longest section, so the knack is to open only the numbers you need rather than read from start to finish.
Quick checkTrade receivables on the balance sheet have grown a lot from last year. Where should you open to learn the reason and breakdown?
Follow the note number printed next to the trade receivables line. The notes show who owes the money, how much is old overdue credit, and how much allowance for doubtful accounts has been set aside for expected losses (Lesson 7).
STEP 2Eight notes you must open
Don't be scared even if there are more than 30 notes. At first you only need to look at eight places.
Note numbers and names differ a little by company, but the topics covered are almost the same. The eight topics below are the ones most often used to find hidden risks. Tap the cards one by one to see what to check and what looks like a warning sign.
Notes lookup checklist cards
The topic classification and warning-sign examples are MoneyCalcs's compilation. Actual note names differ a little by company.
Among the eight, three deserve special attention. First, and commitments. These are obligations you may have to pay 'if something happens', such as ongoing lawsuits and given for another company's debt. If the likelihood is high and the amount can be reliably estimated, they are recorded in the main statements as the you saw in Lesson 8; otherwise they appear only in the notes. Second, . These are sales, purchases, and funding transactions with major shareholders or affiliates, and if they were made on terms different from those with outsiders, profit may be inflated or company money may leak out. Third, assets pledged as . If a factory or deposit is pledged as collateral, it is the company's property on the books but cannot be freely sold or used.
Dark Cloud Electronics' hidden guarantee
Look again at the balance sheet of Dark Cloud Electronics (fictional). With assets of KRW 25 billion, liabilities of KRW 20 billion and equity of KRW 5 billion, it already received a warning in Lesson 10 for a 400% debt-to-equity ratio. But open the notes and there is more that the main statements didn't say. Tap the note cards one by one in the figure below.
Main statements vs notes: Dark Cloud Electronics (fictional)
Balance sheet, main statement (year 3)
Total assetsKRW 25 billion
· Trade receivablesKRW 7.5 billion
· InventoriesKRW 5.5 billion
Total liabilitiesKRW 20 billion
Total equityKRW 5 billion
Debt-to-equity ratio400%
All numbers are fictional teaching examples. The guarantee and lawsuit amounts do not mean the full amount will be repaid; they are viewed as 'the largest size the exposure could grow to'.
The KRW 10 billion payment guarantee for affiliates is twice the KRW 5 billion of equity. If an affiliate can't repay its debt, Dark Cloud Electronics has to repay it instead, so in the worst case equity is wiped out and more (capital impairment in Lesson 9). The fact that KRW 4 billion of the KRW 7.5 billion in trade receivables is owed by affiliates also changes the meaning of 'surging receivables' you saw in Lesson 7. If many of the credit sales were made not to outsiders but within the family, you have to question whether that revenue really came from the market.
Common misconceptions
- "If it's only in the notes, it isn't debt yet, so I can ignore it?"
- Guarantees and lawsuits are just 'not yet' debt. If the other company collapses or the company loses the lawsuit, they become liabilities all at once. If the amount is large relative to equity, you must check.
- "If there are related-party transactions, it's a bad company?"
- Groups with many affiliates also have a lot of normal transactions. The problems are when the share is excessively large, the terms differ from the market, or the amount grows rapidly every year.
- "The notes are a place only experts read?"
- You don't need to understand it all. Just skimming the table titles and totals of the eight places reveals most of the big risks.
Quick checkA company with KRW 30 billion of equity has guaranteed KRW 3 billion of an affiliate's debt. How does that differ from Dark Cloud Electronics' KRW 10 billion guarantee?
The size relative to equity is different. KRW 3 billion is 10% of equity, so it could withstand even the worst case, but Dark Cloud Electronics' KRW 10 billion is 200% of its KRW 5 billion equity. Look at a guarantee as a ratio to equity rather than the amount itself.
STEP 3Navigating a real notes index
Lay out the notes index of a real annual report and find which numbers hold the eight topics.
Find it yourself on DART
- 1Open the annual report and expand III. Financial Matters → 3. Notes to Consolidated Financial Statements in the left-hand table of contents.
- 2In the list of note numbers, look for words like 'contingent liabilities', 'related parties', 'segments' and 'events after the reporting period'.
- 3If there is a number in the main statements you are curious about, go back to the matching line of the consolidated balance sheet or income statement and check the same note number.
Notes index of the consolidated financial statements in a real annual report (redrawn from the screen)
Samsung Electronics · Annual report (Dec 2024) · III. Financial Matters › 3. Notes to Consolidated Financial Statements
Source: DART, Samsung Electronics annual report filed Mar 11, 2025 (rcpNo 20250311001085), table of contents tree, checked Oct 8, 2026. Orange marks the notes matching this lesson's eight topics. It is an example to show the structure and is not an investment solicitation.
The consolidated financial statement notes in the real report number 33, from Note 1 'General information' to Note 33 'Events after the reporting period'. The ones matching the eight topics include 2 (accounting policies), 12 (borrowings), 15 (provisions), 16 (contingent liabilities and commitments), 29 (segment reporting), 30 (related-party transactions) and 33 (events after the reporting period). Leases have no separate number in this report and are included within other notes. As the numbers and the way items are grouped differ by company, it is quicker to search by the words in the name.
Open Note 16, 'Contingent liabilities and commitments', and it says that this company has several lawsuits, disputes and regulatory investigations under way in the normal course of business, and that management judges the outcome will not have a material effect on its financial position. It goes on to give, in a table, the limits of its agreements with banks such as trade finance and loans secured by trade receivables (for example, a combined limit of KRW 23.5367 trillion with Woori Bank and 27 other banks). A limit is a 'door through which it can borrow', not money actually borrowed. So even in the same 'contingent liabilities' note, a large company's routine commitments and a guarantee worth twice equity like Dark Cloud Electronics' carry completely different weight.
Try it: reading a related-party transactions note
Of the eight topics, the one beginner investors skip most often is . This note collects transactions with parties close to the company, such as affiliates, the largest shareholder, and executives. Transactions with close parties may be priced or structured differently from the market, so if the numbers are large you must look into them. Suppose the notes of the fictional Dark Cloud Electronics look like the one below.
| Related party | Sales, etc. | Purchases, etc. | Receivables (year-end) | Payables (year-end) | Payment guarantee |
|---|
| Affiliate Cloud Trading Co. | 70 | 5 | 32 | 2 | 100 |
| Affiliate Cloud Networks Co. | 20 | 8 | 8 | 3 | — |
| Total | 90 | 13 | 40 | 5 | 100 |
Unit: KRW 100 million. Dark Cloud Electronics and the two affiliates are fictional companies in this course. Real notes too are usually divided into 'sales, etc. / purchases, etc. / receivables / payables' and 'payment guarantees / collateral' tables.
Read the table through three ratios. First, the share of sales to affiliates. Of year-3 sales of KRW 24 billion, KRW 9 billion, about 37.5%, came from affiliates. That means over a third of the customers are 'one family', so if those affiliates' circumstances worsen, sales shake with them. Second, the share of receivables from affiliates. Of KRW 7.5 billion in trade receivables, KRW 4 billion, about 53%, is money to be received from affiliates. A receivables share (53%) larger than the sales share (37.5%) is a sign that affiliates are paying later than outside customers. You can see here why the collection period in Lesson 7 stretched to 114 days. Third, combined exposure from guarantees and receivables. Adding the KRW 4 billion to be received and the KRW 10 billion guarantee that it may have to repay on others' behalf gives KRW 14 billion, 2.8 times the KRW 5 billion of equity, tied up in one group of affiliates.
If all three ratios are high and growing every year, it is worth suspecting that sales and profit may have been inflated by transactions among affiliates rather than by real business. By contrast, Robin Bakery (fictional) has no subsidiaries (except the Robin Coffee scenario in Lesson 11), so this note holds little more than executive pay. Even for the same note, the criterion for judgment is not 'what is written' but 'how large it is and how it changes year to year'.
How to use it in investing
| What you saw in the notes | How to usually read it | What to check further |
|---|
| Payment guarantees for affiliates' or others' debts are a large share of equity | Hidden debt risk | Financial condition of the guaranteed party; recalculate the debt-to-equity ratio from Lesson 10 |
| Large and rapidly rising share of related-party sales and receivables | Doubts about the quality of sales | Collection period in Lesson 7, earnings quality in Lesson 22 |
| Significant lawsuits or sanctions under way | Potentially large losses depending on the outcome | Chapter XI 'Contingent liabilities, etc.', corrected and timely disclosures |
| Change in accounting policy or estimates | Profit can differ for the same business | Explanation of the profit difference before and after the change |
| Major event after the reporting period (rights offering, large loss, etc.) | Circumstances changed after the financial statement numbers | Subsequent material event reports (Lesson 31) |
Not always. Many lawsuits or commitments in the notes are common at companies with a large business scale. The key is to compare the amounts with equity and revenue, and compare with last year's notes to see whether any items are new or have grown suddenly.
Quick checkLesson 28 said that 'how much was earned by segment' is in the notes. Which note number is it in the real index above?
Note 29, 'Segment reporting'. Looking at the revenue shares in II-2 together with the segment profit in this note shows which business earns a lot of profit despite small sales.