Objective of General Purpose Financial Reporting
According to the Conceptual Framework for Financial Reporting, the primary objective of general purpose financial reporting is to provide financial information that is useful to existing and potential investors, lenders, and other creditors. These users require financial information to make decisions regarding the provision of resources to an entity.
Financial information helps users decide whether they should buy, sell, or hold equity and debt instruments of an entity. It also helps them in making decisions regarding the exercise of their voting rights on management’s actions, particularly when such actions affect the use of the entity’s economic resources.
Therefore, general purpose financial reporting mainly focuses on providing useful information to persons and organizations that provide or may provide financial resources to an entity.
Assessment of Expected Returns
Existing and potential investors, lenders, and other creditors use financial information to form expectations about the returns they may receive from the entity. Their expectations depend mainly on their assessment of the entity’s future financial position and the manner in which management uses available economic resources.
Users assess the amount, timing, and uncertainty of future net cash inflows to the entity. This assessment helps them understand how much cash the entity may generate in the future, when such cash inflows may occur, and the level of uncertainty associated with those cash flows.
Users also evaluate management’s stewardship of the entity’s economic resources. Stewardship refers to how effectively and responsibly management uses and manages the resources available to the entity. Financial information enables investors, lenders, and other creditors to assess management’s actions relating to the use of these economic resources.
Key Points
The primary objective of general purpose financial reporting is to provide useful financial information to existing and potential investors, lenders, and other creditors for making decisions about providing resources to an entity.
Such decisions include buying, selling, or holding equity and debt instruments and exercising voting rights regarding management’s actions affecting economic resources.
Users assess expected returns mainly on the basis of the amount, timing, and uncertainty of future net cash inflows and management’s stewardship of the entity’s economic resources.