Critical Thinking

Introduction by existing and potential investors about buying,

Introduction

The primary users of financial statements defined by the IASB,
(2010) as: 

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·      
Present and Potential Investors

·      
Lenders

·      
Other Creditors

 

Each of whom (including their advisors) make decisions about providing
resources to an entity. The IASB acknowledge that other groups such as employees,
regulators and the general public may also consider financial statements to be
useful, but the reports are not primarily directed to these other groups.

                                                                                                                                                                          

Purpose of Financial
Statements for Primary Users

Decisions by existing and potential
investors about buying, selling, or holding shares depend on their
expectations of dividends and share price growth. Similarly, decisions by
existing and potential lenders
and other creditors about
providing or settling loans or other forms of credit depend on the principal
and interest payments or other expected returns.

 

 According to Kothari, (2010)
these 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 net cash inflows and
to attribute a value to the entity. To make this assessment, the primary users
use financial statements to obtain information about the entity’s resources,
claims against the entity and entity stewardship. Such information will allow
these capital providers to make decisions as to how to allocate their resources
to a particular entity and how to protect or enhance their interests.

 

Primary Users: Financial
Statement Assessment Factors

·      
Financial stability:

o  
Asset valuation: What is value
of net assets (as a going concern and if trading ceased)?

o  
Solvency: Does entity have the
ability to pay its debts as they fall due?

                                   

·      
Quality of stewardship

o  
How effective has the
management been in their stewardship of the entity’s resources relative to
other similar entities?

o  
Is there evidence of a
resilient, growing and sustainable business?

                 

·      
Claims against the entity

o  
How secure is my debt relative
to total claims and in relation to its order of ranking when it comes to
repayment?

 

·      
Future net cash inflows: 

o  
How do the above factors
convert into an assessment of the amount, timing and certainty of future net
cash flows?

o  
Taking all of the above into
account, what is the valuation of the business based on expected future net
cash flows?

 

Other
User Groups and What They Need from Financial Statements

·      
Management/Employees/Unions:

o  
Is the company sustainable and
will it be able to pay wages, salaries and provide employee benefits?

o  
What does the company pay its
current senior management team?

o  
Information on pay structures,
settlements and average pay?

o  
Is this company likely to be
able to provide career development opportunities?

 

·      
Government/Regulators

o  
Is there any evidence of
non-compliance with legal / industry regulatory requirements?

o  
Useful cross-reference to
confirm that the correct amount of tax is being computed?

 

·      
Customers

o  
Will the company be able to
sustain its supplies to me or my business?

                 

·      
Competitors

o  
Useful information which might
help improve their competitive position versus the company providing the
statements?

 

·      
Public

o  
Is the company acting in a
responsible and ethical manner?

 

 

Why the “Other User
Groups” Weren’t Included Within the IASC Primary User Group

·      
The IASC considered that
without a defined group of primary users, the Conceptual Framework within which
accounting standards are developed, would risk becoming unduly abstract or
vague.

·      
The primary users were
considered to have the most critical and immediate need for the information in
financial reports and probably wouldn’t be able to require the entity to
provide the information to them directly.

·      
The IASB considered that the
objective of financial reporting is to provide financial information about the
reporting entity that is useful to present and potential investors, lenders and
other creditors when making decisions in relation to the provision of capital.

·      
 Information that meets the needs of the
specified primary users is likely to meet most of the needs of other users

 

 

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