Where the numbers are really made.
The same business can report different profits depending on the accounting choices it makes. The policies section tells you which choices were made; the notes give the detail behind every headline number. Professionals spend as much time here as on the statements themselves. Policies that most affect the numbers Revenue recognition When a sale is booked. Aggressive early recognition inflates current profit. Depreciation method How fast assets are written down. Slower depreciation flatters short-term profit. Inventory valuation FIFO vs weighted average changes cost of goods and profit. Provisions & impairments Judgment calls on likely losses; under-provisioning flatters profit. Asset valuation Cost vs fair value for investments and property changes equity and profit. Watch for policy changes year to year. A change that conveniently boosts profit deserves scrutiny. The notes must explain it and quantify the effect. The notes also hold things the face of the statements hides: contingent liabilities (possible future obligations), related-party transactions (dealings with insiders), and the maturity profile of debt. These are where risk often lives.
Part of Learn NEPSE Investing, a free course on reading Nepali company accounts and charts. Section: The Annual Report.