This clause requires one or both parties to provide audited or unaudited financial statements (such as balance sheets, income statements, and cash flow statements) at specified intervals or upon request. Financial statements are formal documents that show a company's financial position, profitability, and cash flow, typically prepared in accordance with accounting standards (such as GAAP or IFRS). This clause is critical in commercial contracts because it gives parties transparency into each other's financial condition, enabling them to assess ongoing creditworthiness, monitor compliance with financial covenants, and detect early warning signs of financial distress.
The clause typically specifies the frequency of disclosure (e.g., quarterly or annually), the type of statements required (audited vs. unaudited), the accounting standards to be used, and the deadline for submission. It may also include provisions allowing the requesting party to audit the statements or conduct financial investigations. For the disclosing party, this clause creates administrative burden and exposes confidential financial information; for the requesting party, it provides valuable insight into the other party's financial health and ability to perform. This clause is especially common in lending agreements, long-term supply contracts, and joint ventures.
If you are required to disclose financial statements, negotiate a reasonable frequency of disclosure (avoid excessive requests) and specify whether statements must be audited (which is more expensive but more reliable) or unaudited. Include clear confidentiality and non-use provisions to protect sensitive financial data from being shared with competitors or the public. If you are requesting financial statements, define objective thresholds or ratios that trigger additional scrutiny or remedial actions (e.g., if debt-to-equity ratio exceeds X, the other party must provide additional security). Ensure the clause allows for reasonable time to prepare and deliver statements.
Frequently Asked Questions
What does this clause mean in simple terms?
This clause requires one or both parties to provide audited or unaudited financial statements (such as balance sheets, income statements, and cash flow statements) at specified intervals or upon request. Financial statements are formal documents that show a company's financial position, profitability, and cash flow, typically prepared in accordance with accounting standards (such as GAAP or IFRS).
Why should I care about this clause?
This clause is critical in commercial contracts because it gives parties transparency into each other's financial condition, enabling them to assess ongoing creditworthiness, monitor compliance with financial covenants, and detect early warning signs of financial distress. The clause typically specifies the frequency of disclosure (e.g., quarterly or annually), the type of statements required (audited vs.
What are my options?
unaudited), the accounting standards to be used, and the deadline for submission. It may also include provisions allowing the requesting party to audit the statements or conduct financial investigations.
How does this affect small businesses?
For the disclosing party, this clause creates administrative burden and exposes confidential financial information; for the requesting party, it provides valuable insight into the other party's financial health and ability to perform. This clause is especially common in lending agreements, long-term supply contracts, and joint ventures.