Primary users of general purpose financial reports – IAS 1 9 defines the purpose of financial statements as follows: ‘……The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the management’s stewardship of the resources entrusted to it…..’
This wide range of users is narrowed in the conceptual Framework 2018 (1.2) to primary users of general purpose financial reports that are existing and potential investors, lenders and other creditors who use that information to make decisions about buying, selling or holding equity or debt instruments, providing or settling loans or other forms of credit, or exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources. Primary users of general purpose financial reports
The primary users need information about the resources of the entity not only to assess an entity’s prospects for future net cash inflows but also how effectively and efficiently management has discharged their responsibilities to use the entity’s existing resources (i.e., stewardship). [1.3-1.4] Primary users of general purpose financial reports
The IFRS Framework notes that general purpose financial reports cannot provide all the information that users may need to make economic decisions. They will need to consider pertinent information from other sources as well. [1.6] Primary users of general purpose financial reports
The IFRS Framework notes that other parties, including prudential and market regulators, may find general purpose financial reports useful. However, these are not considered a primary user and general purpose financial reports are not primarily directed to regulators or other parties. [1.10]
Who Uses Financial Accounting Information?
The users of managerial accounting information are pretty easy to identify—basically, they’re a firm’s managers. We need to look a little more closely, however, at the users of financial accounting information, and we also need to know a little more about what they do with the information that accountants provide them. Primary users of general purpose financial reports
Owners and Managers
In summarizing the outcomes of a company’s financial activities over a specified period of time, financial statements are, in effect, report cards for owners and managers. They show, for example, whether the company did or didn’t make a profit and furnish other information about the firm’s financial condition. They also provide information that managers and owners can use in order to take corrective action. Primary users of general purpose financial reports
Investors and Creditors
If you loaned money to a friend to start a business, wouldn’t you want to know how the business was doing? Investors and creditors furnish the money that a company needs to operate, and not surprisingly, they feel the same way. Because they know that it’s impossible to make smart investment and loan decisions without accurate reports on an organization’s financial health, they study financial statements to assess a company’s performance and to make decisions about continued investment.
According to the world’s most successful investor (and third-richest individual), Warren Buffett, the best way to prepare yourself to be an investor is to learn all the accounting you can. Buffett, chairman and CEO of Berkshire Hathaway, a company that invests in other companies, turned an original investment of $10,000 into a net worth of $35 billion in four decades, and he did it, in large part, by paying close attention to financial accounting reports. John Price, “The Return of the Buffetteers,” Investor Journal, August 1998 Primary users of general purpose financial reports
Businesses are required to furnish financial information to a number of government agencies. Publicly owned companies, for example—the ones whose shares are traded on a stock exchange—must provide annual financial reports to the Securities and Exchange Commission (SEC), a federal agency that regulates stock trades. Companies must also provide financial information to local, state, and federal taxing agencies, including the Internal Revenue Service. Primary users of general purpose financial reports
A number of other external users have an interest in a company’s financial statements. Suppliers, for example, need to know if the company to which they sell their goods is having trouble paying its bills or may even be at risk of going under. Employees and labor unions are interested because salaries and other forms of compensation are dependent on an employer’s performance.
How are primary users included in IFRS?
Materiality (October 2018)
Old definition Primary users of general purpose financial reports
Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements.
New definition Primary users of general purpose financial reports
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. Primary users of general purpose financial reports
By including the concept of ‘obscuring information’ in this new definition, the amendments specify that information is obscured if it is communicated in a way that would have a similar effect as omitting or misstating the information. In order to avoid situations in which information is not capable of influencing the decisions of primary users is required to be included in the financial statements, the amendments also introduce a new threshold in the definition of material by by changing ‘could influence’ to ‘could reasonably be expected to influence’. This is expected to alleviate the problem of information overload in financial reports by narrowing the pool of information that could be disclosed. Primary users of general purpose financial reports
The amendments include the following five examples of ways in which material information can be obscured: Primary users of general purpose financial reports
- If the language regarding a material item, transaction or other event is vague or unclear; Primary users of general purpose financial reports
- If information regarding a material item, transaction or other event is scattered in different places in the financial statements;
- If dissimilar items, transactions or other events are inappropriately aggregated; Primary users of general purpose financial reports
- If similar items, transactions or other events are inappropriately disaggregated; and Primary users of general purpose financial reports
- If material information is hidden by immaterial information to the extent that a primary user of the financial statements is unable to determine what information is material;
Some stakeholders raised concerns that the superseded definition of materiality could encourage preparers to make irrelevant and immaterial disclosures in their financial statements. The inclusion of the word ‘obscuring’ in the new definition emphasises that obscuring information can have the same effect on decisions made by the users of financial statements as omitting or misstating information.
‘Users’ has been upgraded to ‘primary users’, clarifying that only primary users (and not all users) need to be considered when deciding if information is material. Primary users are described as those ‘existing and potential investors, lenders and other creditors that cannot require reporting entities to provide information directly to them and must rely on general purpose financial statements for much of the financial information they need.’ Primary users of general purpose financial reports
The amendments are effective for annual reporting periods beginning on or after 1 January 2020. Primary users of general purpose financial reports
Primary users discussion
It is generally argued that investors, lenders and their advisors are the primary users of financial statements. However, as the debate on the simplification of financial statements intensifies, the capital providers are being viewed as the primary users of financial statements, as large creditors, such as banks and the tax authorities, do have the right to more specific and tailored information.
Reporting entity not a legal entity
A reporting entity does not necessarily have to be a legal entity and can comprise more than one entity or a portion of an entity. Therefore, it is important to determine the boundaries of a reporting entity. The Conceptual Framework does this by stating that, when a reporting entity is not a legal entity or is not comprised of only legal entities connected by a parent subsidiary relationship, the boundary is determined by the information needs of the financial statements’ primary users.
To achieve this:
- the boundary of a reporting entity does not include arbitrary or incomplete information
- the set of economic activities within the boundary of a reporting entity includes neutral information
- an explanation is provided as to how the boundary was determined and what constitutes the reporting entity.
The Conceptual Framework further sets out concepts on consolidated and unconsolidated financial statements. Whether an entity prepares consolidated or unconsolidated financial statements depends on whether one entity has control over another entity (a parent subsidiary relationship).
Should an entity consist of more than one entity without those entities being linked through a parent-subsidiary relationship, then its financial statements are combined financial statements. As IFRS Standards focus mainly on consolidated financial statements, it is no surprise that the Conceptual Framework does not provide guidance on when or how entities could prepare combined financial statements.
IFRS 7 Financial instruments: Disclosures
Prescribes disclosures to help the primary users of the financial statements evaluate the significance of financial instruments to the entity, the nature and extent of their risks and how the entity manages those risks.
See also: The Conceptual Framework 2018
Primary users of general purpose financial reports
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