The Objective of General Purpose Financial Reporting

The Objective of General Purpose Financial Reporting  is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.

“Financial Reporting is a practical exercise in communication not a theoretical or academic construct. We should not lose sight of the importance of financial statements as a tool for communication; currently we are losing the audience as they are becoming too complex.” – The Hundred Group of Finance Directors, UK, 2006.

A company being a large body of shareholders is managed by a Board compris­ing of executive and non-executive directors. The Board of Directors acts as a trustee of the investors who have provided capital to the company, lenders and other stakeholders. The Objective of General Purpose Financial Reporting

The Board of Directors provide financial reports in discharge of its stewardship role and keep the various stakeholders informed about the past and expected performance of the company, its financial position, cash flows etc. Financial reporting is a channel to communicate financial information of an entity to its various stakeholders.

These reports may be general purpose reports which contain general information without any targeted stakeholders group, whereas special purpose financial reports are directed to satisfy special informa­tion need of a user-group. For example, a major lender of the company may seek confidential financial report about the budget of the company.

Financial statements are general purpose financial report. They are structured form of financial report designed to provide general financial information to aid decision making of all user-groups.

Financial statements are presented normally on an annual basis. Of course, some companies present interim financial statements (on half-yearly or quarterly basis). The listed companies release quarterly financial information in accor­dance with the listing agreements. The Objective of General Purpose Financial Reporting

The Objective of General Purpose Financial Reporting is the basis of the Conceptual Framework

In addition the 2018 revised Conceptual Framework sets out:

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Financial Statements are a relative simple model to represent as accurate as possible the financial outcome of a business model operated by the reporting entity’s management and governing board.

General purpose financial reports are a central component of, and support and enhance, transparent financial reporting by governments and other public sector entities. general purpose financial reports are financial reports intended to meet the information needs of users who are unable to require the preparation of financial reports tailored to meet their specific information needs.

The Objective of General Purpose Financial Reporting
Carroll’s Four-part Pyramid (1991)

However, general purpose financial reports do not and cannot provide all of the information that existing and potential investors, lenders and other creditors need. Those users need to consider pertinent information from other sources, for example, general economic conditions and expectations, political events and political climate, and industry and company outlooks.

To a large extent, financial reports are based on estimates, judgments and models rather than exact depictions. The Conceptual Framework establishes the concepts that underlie those estimates, judgments and models. The concepts are the goal towards which the IASB and preparers of financial reports strive.

As with most goals, the Conceptual Framework’s vision of ideal financial reporting is unlikely to be achieved in full, at least not in the short term, because it takes time to understand, accept and implement new ways of analysing transactions and other events. Nevertheless, establishing a goal towards which to strive is essential if financial reporting is to evolve so as to improve its usefulness. The Objective of General Purpose Financial Reporting

General purpose financial reports provide information about the financial position of a reporting entity, which is information about the entity’s economic resources (i.e. the assets owned by the reporting entity at a certain moment in time captured in the Financial Position) and the claims against the reporting entity (i.e. the liabilities (long term and short term) payable by the reporting entity at a certain moment in time also captured in the Financial Position).

Financial reports also provide information about the effects of transactions and other events that change a reporting entity’s economic resources and claims (i.e. revenue generated and expenses incurred reflected by accrual accounting resulting in a net income or net loss for a specific period of time captured in the Income Statement and cash generated and expended resulting in an increase or decrease of net cash during a specific period of time captured in the Statement of Cash Flows ). Both types of information provide useful input for decisions relating to providing resources to an entity.

The other events that change a reporting entity’s economic resources and claims also comprise change for reasons other than financial performance, such as issuing debt or equity instruments. Information about this type of change is necessary to give users a complete understanding of why the reporting entity’s economic resources and claims changed and the implications of those changes for its future financial performance. These changes are captured in the Statement of Changes in Equity and in the Statement of Cash flows (investing activities and financing activities) and in disclosures to the Financial Statements.

Sections general purpose financial reports

Following this reasoning general purpose financial reports are considered to consist of at least the following sections.The Objective of General Purpose Financial Reporting

Financial Statements: The Objective of General Purpose Financial Reporting

  • Balance Sheet/Statement of Financial Position The Objective of General Purpose Financial Reporting
  • Statement of Income and/or (Comprehensive) Income The Objective of General Purpose Financial Reporting
  • Statement of Changes in Equity The Objective of General Purpose Financial Reporting
  • Statement of Cash Flows The Objective of General Purpose Financial Reporting
  • Notes to the Financial Statements The Objective of General Purpose Financial Reporting

The order of Balance Sheet/Statement of Income etcetera is not prescribed by the Conceptual Framework or IFRS standards, many reporting entities start with the Statement of Income and/or (Comprehensive) Income wanting to focus attention of users on the performance of the reporting entity.

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Balance Sheet/Statement of Financial Position

The balance sheet a summary of the company position on one day at a certain point in time. The balance sheet lists the assets, liabilities, and owners’ equity on one specific date. In a sense, the balance sheet is a picture of the company on that date. Investors and creditors can use the balance sheet to analyze how companies are funding capital assets and operations as well as current investor information. The Objective of General Purpose Financial Reporting

Combined with consistent comparative information (the balance sheet of the previous financial year-end) it serves as a starting point to analyse the financial condition of the company from the previous balance sheet to the current balance sheet. Have certain asset categories increased or decreased? Do either the Management Report or the Notes to the Financial Statements explain the reason for this? Have certain liabilities increased or decreased? Have long-term liabilities been redeemed in line with the contractual arrangement with (external) investors or banks?

Statement of Income and/or (Comprehensive) Income

The income statement shows the revenue and expenses of the company over a period of time. Most companies issue an annual income statement, but quarterly and semi-annual income statements are also common. Users can analyze the income statement to see if companies are operating efficiently and producing enough profit to fund their current operations and growth.

Combined with consistent comparative information (the income statement of the previous financial period) it serves as a starting point to analyse the financial performance of the company from the previous period to the current period of reporting. Has revenue increased compared to prior year? Is this increase in line with expectations provided by management in communications with the ‘world’? Have expenses increased or not? What is the reason behind this? The Objective of General Purpose Financial Reporting

Statement of Changes in Equity

The statement of changes in equity explains the changes in a company’s Share Capital, accumulated reserves and retained earnings over the reporting period. It breaks down changes in the owners’ interest in the organization, and in the application of retained profit or surplus from one accounting period to the next.

Line items typically include profits or losses from operations, dividends paid, issue or redemption of shares, revaluation reserve and any other items charged or credited to accumulated other comprehensive income. The Objective of General Purpose Financial Reporting

It also includes the Non-Controlling Interest attributable to other individuals and organisations. Except for disclosing transactions with the owners of an entity it shows profit or loss, other comprehensive income and total comprehensive income for the period and foreign exchange translations from foreign currency operations.

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Statement of Cash FlowsThe Objective of General Purpose Financial Reporting

The statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. The Objective of General Purpose Financial Reporting

It is also complimentary to the income statement in that cash flows form operating activities is a performance indicator, if profit or loss (net income) has increased compared to the previous reporting period but cash flows from operating activities has decreased to the previous reporting period this might be a mixed message. Has performance really improved, then where has the cash gone, it is not on the bank account. Has growth been realised by extending credit terms to customers?

Also cash flows are cash flows, independent from the choices made in the selection of accounting policies but largely dependent on management actions on for example working capital management (cash receivables quickly, pay liabilities slower). The Objective of General Purpose Financial Reporting

Notes to the Financial Statement

The notes to the financial statements (or footnotes) provide the additional disclosures to financial reporting lines in the above mentioned four main statements in the financial statements and (more) general disclosures such as: The Objective of General Purpose Financial Reporting

  • Basis of preparation, The Objective of General Purpose Financial Reporting
  • Critical accounting estimates and judgements, The Objective of General Purpose Financial Reporting
  • Significant accounting policies, The Objective of General Purpose Financial Reporting
  • Risk management, The Objective of General Purpose Financial Reporting
  • Segment information, The Objective of General Purpose Financial Reporting
  • Discontinued operations, The Objective of General Purpose Financial Reporting
  • Earnings per share, The Objective of General Purpose Financial Reporting
  • Dividends, The Objective of General Purpose Financial Reporting
  • Derivative financial instruments, The Objective of General Purpose Financial Reporting
  • Share-based payment, The Objective of General Purpose Financial Reporting
  • Business combinations during the period, The Objective of General Purpose Financial Reporting
  • Business combinations completed in prior periods, The Objective of General Purpose Financial Reporting
  • Related party transactions, The Objective of General Purpose Financial Reporting
  • Contingent liabilities, The Objective of General Purpose Financial Reporting
  • Events after the reporting date. The Objective of General Purpose Financial Reporting

The Objective of General Purpose Financial Reporting

The Objective of General Purpose Financial Reporting

 

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

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