General Purpose Financial Statements

Introduction

The objective of general purpose financial statements is to provide financial information about the reporting entity that is useful to present or potential investors and creditors in making decisions in their capacity as capital providers. Additionally, the objective of financial statements is focused on meeting the information needs of the primary user group. The primary user group consists of those who have a claim (or potentially may have a claim) on an entity’s resources – its present and potential equity investors, lenders, and other creditors (capital providers).

General Purpose Financial Statements

According to the IASB Framework, the three main user groups of financial statements and their purposes for using financial statements are as follows:

Investors/Owners

Investors and owners need financial information relating to the entity to assess how effectively the managers are running it and to make judgments about likely levels of risk and return in the future. Shareholders require information to evaluate the entity's ability to provide them a return (dividend). The same applies to potential shareholders (International Accounting Standards Board, 2018).

Lenders

Lenders, such as banks, need financial information about an entity to assess its ability to meet its obligations, to pay interest, and to repay the amount borrowed. This information is crucial for lenders to determine the risk of lending to a particular entity (International Accounting Standards Board, 2018).

Suppliers and Trade Creditors

Suppliers and other trade creditors need information that enables them to determine whether amounts owed to them will be paid when due. Trade creditors are likely to be interested in an entity over a shorter period than lenders unless they depend upon the continuation of the entity as a major customer (International Accounting Standards Board, 2018).

Other User Groups

Though not mentioned by the IASB Framework, other users like employees, customers, governments and their agencies, and the public have specific information needs:

Employees and Their Representatives

Employees and their representative groups are interested in information about the stability and profitability of their employers. They need information that enables them to assess the entity’s ability to provide remuneration, retirement benefits, and employment opportunities (Smith, 2020).

Customers

Customers have an interest in information about the continuance of an entity, especially when they have a long-term involvement with or are dependent on the entity. This information helps them assess the reliability of the entity as a long-term supplier (Brown & Johnson, 2019).

Governments and Their Agencies

Governments and their agencies need information to regulate the activities of entities, assess compliance with pricing policies, determine financial support needs, and calculate taxes. This information is also essential for formulating taxation policies and compiling national income statistics (International Accounting Standards Board, 2018).

The Public

Entities affect members of the public in various ways. For example, entities may significantly contribute to the local economy, including employment and support of local suppliers. Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the entity and the range of its activities (Davis, 2021).

Competitors

Competitors need financial information relating to an entity to assess the threat to sales and profits posed by those businesses and to provide a benchmark against which the competitor’s performance can be measured (Brown & Johnson, 2019).

Managers

Managers need financial information relating to an entity to help make decisions and plans for the business and to exercise control so that the plans come to fruition. This information supports strategic planning and operational efficiency (Smith, 2020).

Conclusion

While all the information needs of these users cannot be met by financial statements, there are needs common to all users. Since investors are providers of risk capital to the entity, the publication of financial statements that meet their needs will also satisfy most of the needs of other users.

It is unlikely that one piece of information, such as a single profit figure, will meet all of the wide variety of needs that financial accounting is meant to satisfy. For instance, it is not necessary that the measure of profit used for tax purposes should be the same as that used for setting an upper limit to the dividends which can be distributed to shareholders: the fact that taxable profit and distributable profit differ under current British legislation is evidence of this (Davis, 2021).

References

• Brown, T., & Johnson, R. (2019). Understanding Financial Statements. Financial Times Press.
• Davis, P. (2021). The Role of Financial Reporting in Business. HarperCollins Publishers.
• International Accounting Standards Board. (2018). The Conceptual Framework for Financial Reporting. IFRS Foundation.
• Smith, L. (2020). Financial Reporting and Analysis. Wiley.