IntroductionThe primary users of financial statements defined by the IASB,(2010) as: · Present and Potential Investors· Lenders · Other Creditors Each of whom (including their advisors) make decisions about providingresources to an entity.
The IASB acknowledge that other groups such as employees,regulators and the general public may also consider financial statements to beuseful, but the reports are not primarily directed to these other groups. Purpose of FinancialStatements for Primary UsersDecisions by existing and potentialinvestors about buying, selling, or holding shares depend on theirexpectations of dividends and share price growth. Similarly, decisions byexisting and potential lendersand other creditors aboutproviding or settling loans or other forms of credit depend on the principaland interest payments or other expected returns. According to Kothari, (2010)these primary user expectations about returns, depend on their assessment offuture net cash inflows for an entity. Consequently, these groups needinformation to help them assess the prospects for future net cash inflows andto attribute a value to the entity. To make this assessment, the primary usersuse financial statements to obtain information about the entity’s resources,claims against the entity and entity stewardship. Such information will allowthese capital providers to make decisions as to how to allocate their resourcesto a particular entity and how to protect or enhance their interests. Primary Users: FinancialStatement Assessment Factors· Financial stability: o Asset valuation: What is valueof net assets (as a going concern and if trading ceased)?o Solvency: Does entity have theability to pay its debts as they fall due? · Quality of stewardshipo How effective has themanagement been in their stewardship of the entity’s resources relative toother similar entities?o Is there evidence of aresilient, growing and sustainable business? · Claims against the entityo How secure is my debt relativeto total claims and in relation to its order of ranking when it comes torepayment? · Future net cash inflows: o How do the above factorsconvert into an assessment of the amount, timing and certainty of future netcash flows?o Taking all of the above intoaccount, what is the valuation of the business based on expected future netcash flows? OtherUser Groups and What They Need from Financial Statements· Management/Employees/Unions: o Is the company sustainable andwill it be able to pay wages, salaries and provide employee benefits?o What does the company pay itscurrent senior management team?o Information on pay structures,settlements and average pay?o Is this company likely to beable to provide career development opportunities? · Government/Regulatorso Is there any evidence ofnon-compliance with legal / industry regulatory requirements?o Useful cross-reference toconfirm that the correct amount of tax is being computed? · Customerso Will the company be able tosustain its supplies to me or my business? · Competitorso Useful information which mighthelp improve their competitive position versus the company providing thestatements? · Publico Is the company acting in aresponsible and ethical manner? Why the “Other UserGroups” Weren’t Included Within the IASC Primary User Group· The IASC considered thatwithout a defined group of primary users, the Conceptual Framework within whichaccounting standards are developed, would risk becoming unduly abstract orvague.· The primary users wereconsidered to have the most critical and immediate need for the information infinancial reports and probably wouldn’t be able to require the entity toprovide the information to them directly.· The IASB considered that theobjective of financial reporting is to provide financial information about thereporting entity that is useful to present and potential investors, lenders andother creditors when making decisions in relation to the provision of capital.· Information that meets the needs of thespecified primary users is likely to meet most of the needs of other users