The main purpose of financial accounting is to
provide information that will be useful in the making of economic decisions.
The IASB identifies the main users of financial statements to be present and potential
investors, lenders and other creditors (Iasplus.com, 2010). However, although
these may be the main users of the statements there are also other groups that
use the financial statements.
Current and potential investors use financial
statements to assess the risk and return on their investment in the company. They
will look at various figures within the statements such as net profit and sales
in order to be able to see the profitability and growth of a business and see
its trend over a period of time (to see if the firm’s profits are volatile for
example). The cash-flow statement is very important for current and potential
investors as it shows them if the business has the ability to deal with any
problems and capitalize on new opportunities as well as be able to pay
potential dividends (The Balance, 2017). If the
investor took a short-term view on a business he would be interested in the
dividends whereas a more long-term approach is to look at future earnings.
Lenders are often referred to as the loan creditor group and
includes all long, short and medium-term lenders of money. Lenders main aim is
to make sure that they will get their money back. They review the financial accounts to assess
liquidity, cash flow, leverage and overall solvency of a business in the short-term. The Banks make up a lot
of this grouping and are also interested in the net realisable value of the
assets. Medium and long-term lenders will also look at the future cash flow
potential and profitability of the business.
Creditors are often the
suppliers of the business and they would be interested in the financial
stability of the firm in terms of the ability of the business to pay its
short-term liabilities and its cash flow. Creditors will often also have an
interest in the current and future profitability of the business and how they
fit in with the firm’s long-term strategy.
Examples of Other users
of the statements that aren’t identified by the IASB include employees, the
government, grant makers, customers, other stakeholders, educational
institutions, and the public.
Employees require the
information from the financial statements for two main reasons, one being for
wage and salary negotiations and the other for assessing the current and future
opportunity in terms of employment. They would be interested in the current
financial stability and the longer-term viability of the business. Some
companies actually produce a separate employees report so that the information
is in a clear and understandable form.
The government requires
financial information from businesses for taxation purposes – both company tax
and VAT. The current financial statements will also be used as a base in
economic models for assessing the future performance of firms.
Customers of the business
have an interest in the financial statements as they wish to know if the
company is financially stable and its ability to supply high quality goods and
services. Some customers may also have an interest in the environmental policy
of the business.
Finally, the public,
often seen as the ‘shareholders’ of the business have an interest in the
statements, such as employment and the environment policy of the business.
In my opinion, the
reason these users of the financial statements aren’t included within the
IASB’s list of user groups is because the statements aren’t directly tailored
to the needs of these groups. For example, the government and regulators can
get all of the information they require from the firm anyway without the
statements. The IASB create the standards for the purpose of the main users
identified and are comfortable that addressing the needs of the majority of
users will also serve the minority.