IntroductionThe primary users of financial statements are defined by the IASB,(2010) as present and potential investors, lenders and other creditors, each ofwhom (including their advisors) make decisions about providing resources to anentity.
The IASB acknowledge that othergroups such as employees, regulators and the general public may also consider financialstatements to be useful, but the reports are not primarily directed to theseother groups. Purpose of FinancialStatements for Primary UsersDecisions by existing and potential investors about buying, selling,or holding shares depend on their expectations of dividends and share pricegrowth. Similarly, decisions by existing and potential lenders and othercreditors about providing or settling loans or other forms of credit depend onthe principal and interest payments or other expected returns.
According to Kothari, (2010) primary user expectations about returns,depend on their assessment of future net cash inflows for an entity. Consequently,these groups need information to help them assess the prospects for future netcash inflows and to attribute a value to the entity. To make this assessment,the primary users use financial statements to obtain information about theentity’s resources, claims against the entity and entity stewardship. Suchinformation will allow these capital providers to make decisions as to how to allocatetheir resources to a particular entity and how to protect or enhance theirinterests. Primary Users: FinancialStatement Assessment FactorsPrimary users will use financial statements to assess a company’sfinancial stability and prospects. They will want to understand the valuationof business net assets as a going concern and also in a scenario where tradingceased. They will also seek assurance on business solvency i.e.
the company’s abilityto pay debts as they fall due. The effectiveness of the management in theirstewardship of the company’s resources will be considered relative to similarcompanies. Lenders and other creditors will want to understand how secure istheir debt relative to other repayment claims and their ranking. Investors will consider the amount, timingand certainty of future net cash flows, including an assessment of businessresilience and risk in order to establish a valuation of the business. TheIASB, (2010) broadened its discussion of primary user financial information toinclude changes to and claims upon economic resources.
Other User Groups and WhatThey Need from Financial StatementsManagement, Employees & Unions will want to understand whetherthe company is sustainable and will it be able to pay wages, salaries and provideemployee benefits. Information on pay structures will be of interest, as willan assessment as to whether the company will be able to provide future careeropportunities. Government/Regulators will want to understand whether there is thereany evidence of non-compliance with legal / industry regulatory requirements.The statements will also provide a useful cross-reference to confirm that thecorrect amount of tax is being computed Customers will want to confirm that the company will be able tosustain its supplies. Competitors will seek out useful information which mighthelp improve their competitive position.
Members of the public may want to usethe statement information to confirm that the company is acting in aresponsible and ethical manner. Why “Other UserGroups” Weren’t Included Within the IASB Primary User GroupThe IASB considered that without a defined group of primary users,the Conceptual Framework within which accounting standards are developed, wouldrisk becoming unduly abstract or vague. The primary user group were consideredto have the most critical and immediate need for the information in financialreports. They probably wouldn’t be able to require the entity to provide theinformation to them directly.
The IASB considered that the objective offinancial reporting is to provide financial information about the reportingentity that is useful to primary users when making decisions in relation to theprovision of capital. Information that meets the needs of the specified primaryusers is likely to meet most of the needs of other users