Users of financial statements and accounting standards

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Introduction to Accounting


Part 1

Task 1: Users of Financial Statements

Task 2. Requirements of IAS 1

Part 2

Task 1: Qualitative Characteristics


Part 1

Task 1: Users of Financial Statements

The seven users of the financial statements as identified by the IASB in the framework for the Preparation and Presentation of the Financial Statements are:

  • Investors
  • Employees
  • Lenders
  • Suppliers
  • Trade Creditors
  • Customers
  • Government
  • Public (Alexander, and Archer, 2009)

Now we shall explain each of them one by one:

1. Investors

The financial position and the performance of the company are helpful for the investor as they help the investor to determine and analyse whether it is significant to invest. The investors need the financial information in order to determine the financial position of the company in order to make their investment decision (Sahaf, 2009). Furthermore, the financial performance and the financial position help the investors such as the partners, shareholders, and the investors to make appropriate decisions while entering into the existing or the potential market.

Moreover, the potential investors are interested to know whether to invest or not to invest in the business, and the current investors are interested in the return on investment (Griff, 2014). Hence, the stockholders of the corporation need the financial information in order to help them in making decision on the investments such as in the stock investment for holding, selling, and buying more, the prospective investors, however need the information in order to access the potential for profitability and success of the company. Similarly, the owners of the small business require the financial information in order to determine the profitability of the business, so that they become able to analyse that they will continue with the business, improve, or discontinue.

2. Employees

The performance and the financial position of the company assist the employees in order to make agreements of collective bargaining. The employees need the performance and the company’s financial position in order to discuss their rankings, their promotion matters, and the increase in salary (Tulsian, 2002). This is because the employees can analyse the company’s condition through the performance of the company and the financial position of the company. Hence, the employees are interested in the performance and the position of the company in order to assess the company’s possibility of expanding, and the career opportunities.

3. Lenders

With the help of the performance and the financial position of the company, the lenders can make the decisions for lending their money. The lenders need the information in order to make sure that the company is capable of returning the debts on time in case they lend the money to companies (Narayanaswamy, 2011). This can be analysed from the example that the lender can analyse the previous records of the company relating to the recovery of debt or the repayment of debt and then judge the reliability of the company. Further, the lenders of the funds such as the banks as well as other financial institutions are, however, interested in the ability of the company to pay the liabilities upon the solvency or maturity of the company.

4. Suppliers

The suppliers require the information and are concerned with the reliability of the company, in a way, that the company is trustworthy to supply on credit, and also the suppliers may be prepared in order to deal with the company as a going concern. The suppliers are also interested in the capability of the company to pay the obligations when they are due. Further, they are particularly interested in the liquidity of the company, i.e., Its ability in order to pay the short term obligations.

5. Trade Creditors

The trade creditors need the information that is helpful for them in making the decision, and to access the probability and the likelihood that the amount owed to them will, however, be paid when it is due.

6. Customers

The customers are, however, concern with the company’s going concern, guarantees, and the warranties. The financial position and the performance of the company can assist the consumers in letting them know whether it is good and safe for them to purchase the company’s products, or to invest in an investment firm or in a commercial bank. When there is a contract or the long term involvement between the customers and the company, then the customers are interested in the ability of the company to continue its stability and the existence of the operations. Further, this need is heightened when the customers depend on the entity. Considering an example, a reseller or a distributor, and the customer, are dependent on the manufacturing company from where it buys the products and resell it.

7. Government and Public

The Government comprises of all the Government institutions, and the agencies of the state such as the Central Bank. The government needs the financial statements in order to ensure the compliance. They are used for the representation of the company’s financial position, and the standards relating to the accounting. The government then needs this information in the national statistics such as the Gross Domestic Product.

Moreover, the state governing bodies, particularly the tax authorities, is, however, interested in the financial information of the entity for the regulatory objectives and taxation (El-Ayouty, Ford, and Davies, 2000). Further, the taxes are calculated on the basis of the results of the operation, as well as the tax bases. Generally, the state would also like to get the knowledge about the tax that is due. The company’s performance also exerts its influence on the public, which include the lobby group taxing the entity being a corporate citizen. The analysts, researchers, and students etc, which are outside the company, are, however, interested in the company’s financial statement for some compulsory and valid reasons.

Task 2. Requirements of IAS 1

The requirements of IAS 1, Presentation of Financial Statement includes the fair presentation, and compliance of the entity’s financial statements with IFRS (Lee, 2006). IAS 1 also requires that the management should prepare an assessment of the entity’s ability in order to continue as a going concern, the entity should prepare its financial statements with the exception of the cash flow statements by utilizing the accrual basis of accounting. Further, there should be a consistency of the presentation, the similar items should be presented separately in the financial statements, and the dissimilar items should be aggregated if they are separately immaterial, and there is no need for offsetting the assets, liabilities, income, and the expense, unless required by the IFRS.

Moreover, IAS 1 requires that the comparative information should be disclosed considering the previous period for all the amounts that are reported in the financial statements. An entity should, however, present at least two of the primary statements, which include the statement of the profit or loss, and comprehensive income, statement of financial position, independent statement of the profit or loss, the statement of cash flows, the statement of changes inequity, and the notes that relate to these statements.

IAS 1 also requires that an entity should identify the financial statements that should be distinct from the other information, which is published in the document, financial statement, and the note of the financial statement. Additionally, IAS 1 also requires that the minimum line items should be included in the profit or loss statement, the minimum line items include the tax expense, a single amount of the discounted items, financial cost, losses and gains from the de-recognition of the financial assets, which are measured as the financial cost, and the amortised cost, and finally the losses and gains that are associated with the reclassification of the financial assets.

Part 2

Task 1: Qualitative Characteristics

The usefulness of the financial information is enhanced if it is comparable, verifiable, timely, an understandable.


Comparability represents the quality of the information, which enables the users, i.e., Lenders, creditors, and the investors to identify the similarities as well as the differences prevailing in different financial phenomena. The concentration of the decision making is to choose between the available alternatives (Wiecek, and Young, 2009). However, the information is more significant if it can be compared easily with the similar information of same entity, and similar information of other entities. According to the IASB framework, the comparability is the qualitative characteristic, which has the same importance as the faithful and relevant representation. FASB, however, concludes that the comparison is an appealing qualitative characteristic because irrespective of the comparability of the information, it is not beneficial if it is irrelevant to the decisions of the users, and does not indicate the economic phenomenon authentically. Comparability does not signify uniformity, in the comparable information the similar things must look similar, and the different things must look different.

The comparative information allows the comparisons across and within the entities, and when the comparison is made within the entity, the information is considered and compared from one accounting period to the other. Considering an example that the income is compared for 2012, 2013, and 2014, the comparability of the information across the entities, however, enables the analysis of the differences and similarities between different companies.


Verifiability is the quality of the information, which is helpful in assuring the users that the information truly represents the financial statements that it claims to represent. However, with the verifiability of the information, the independent and the knowledgeable observers can arrive at a general consensus. However, the verifiability of the information emphasizes on the fact whether the method of measurement and recognition is applied correctly or not. The verification can, however, be direct as well as indirect (Needles, and Powers, 2007).

The IASB Framework does not consider verifiability as an overt and an explicit aspect, but FASB considers it as an explicit element. Further, FASB has described that the information that is represented faithfully, may not be necessarily verified. So, the information that is verifiable is, usually, more advantageous and useful. Hence, FASB has concluded that the verifiability is an additional, enhancing and appealing qualitative characteristic. So, the verifiability assists in order to assure the faithfulness of the information. The financial information is, however, supported by the evidence, and the individuals can check them in order to see that the information is represented faithfully, and the information is also verifiable in case it is audited.


Timeliness indicate the information that is available to the decision makers prior to the loss of its capacity to influence the decisions. Further, a timeliness, lack, can, however, strip the information of its probable usefulness. However, the IASB framework considers the timeliness as a constraint that can hold up the relevant information. However, the FASB has concluded that the reporting of the information in an effective and timely manner can increase the faithful and the relevant representation of the information as the information can, however, be reported in a timely manner, but contains no relevance, and delays in the reporting of the information.

Hence, the timeliness provides the information to the decision makers at the required time, and has a capability to influence their decisions; however, it should be considered that provision of the information should not be delayed as it will have little or no value then (Rich, Jones, Mowen, and Hansen, 2011).


The understandability enables the user to comprehend the meaning of the information (Kolitz, Quinn, and McAllister, 2009). Additionally, when the information is characterized, presented clearly and concisely, and classified then the understandability of the information is increased. The reporting information should be understandable, and the users of the financial statements should analyse and review the information with diligence because the users are expected to have reasonable information and knowledge of the economic and business activities, and are capable of reading the financial report. The enhancement of the qualitative characteristics, however, also enhances the usefulness of the financial information, and maximize to the possible extent. Further, in the case, the information is irrelevant and is not represented faithfully; the enhancing characteristics are unable to make the information helpful for the decision. However, the application of the understandability is an iterative process that does not have a prescribed order.

So, understandability, however, requires that the financial information should be comprehensive and understandable to the users with the reasonable business knowledge, as well as economic activities. In order to make the information understandable, the information should be presented concisely and clearly. Further, it is inappropriate to exclude the complex elements merely to make the report understandable and simple.


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