According to International Accounting Standard (IAS)1, General purpose financial statements (also referred to as ‘financial statements’) are those intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs.
There are various users of accounting information. These users wants financial reports to meet their particular needs. For example, an entity that want to request for a loan from a bank will be required by the bank to produce some certain financial reports such as: a cashflow statement, the entity budget and a business plan.
For a general purpose financial statement, an entity prepares it’s financial statements to meet the needs of all users of financial statement. However, a financial statement, always meets the needs of equity shareholders or owners of an entity.
Why? You might asked. But the answer is not farfetched. You can not abadan the facts that equity shareholders and owners of various entities are the primary risk beares. They deserved therefore, to be more favoured in a general purpose financial statement
If an entity liquidate, equity holders will be the last to be settled. They will end up receiving little or nothing of the amount they invested in the entity.
Also, equity shareholders and owners are known to be interested in whether the entity make profit or loss. If an entity makes profit, they will expect dividend from the directors.
Furthermore, an equity holder or owner want to know the financial position of the entity. Can the entity continues for the next accounting periods and beyond.
Another important user of a general purpose financial statements is the debenture holder. A holder of debenture is not interested in collecting dividend but interest. It is a known fact that these persons are paid their interest before the profit or loss of the entity is determined.
A holder of debenture bears little or no risk of the entity. This is true. The holder will not be affected whether the business makes profit or not. He or she must be paid interest. If the entity liquidate, the holder must be paid back it’s principal sum that is the amount giving to the entity as debenture.
The debenture may also be secured on a specific asset(s) of the entity. In such a case during liquidation the holder will be paid it’s principal sum from the proceeds from such asset.
A third user in the hierarchy is the government. But why do i chose government? We can never forget the fact that government set various policies that may affect the entity positively or negatively. In addition, they provide an enabling environment for the entity to strive. If government changes it policies or there is political instability in a country or state then the entity is certainly fail.
Government collect tax from the entity and it is a source of revenue to them. Government can increase the tax rate or give tax incentives to an entity. An entity may fall under those that is refer to as pioneer businesses and may be exempted for tax for a particular numbers of years.
Government also bears little or no risk to an entity. When compared with other sources of revenue to the government, an entity tax payment is infinitismal.
Instead, when a firm falls to pay tax or invade tax. Such entity should be ready to face the wrath from government. They will bounce back on the entity in such a way that the entity will regret that it ever tries to invade them.
There are many other users of a general purpose financial statements. What are they? An article will be dedicated to it sometime in the future.