Chapter 1—The objective of general purpose financial reporting

Objective, usefulness and limitations of general purpose financial reporting

1.2

The objective of general purpose financial reporting[1] is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity.[2] Those decisions involve decisions about:

(a)            buying, selling or holding equity and debt instruments;

(b)            providing or settling loans and other forms of credit; or

(c)            exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources.

1

Throughout the Conceptual Framework, the terms ‘financial reports’ and ‘financial reporting’ refer to general purpose financial reports and general purpose financial reporting unless specifically indicated otherwise.

2

Throughout the Conceptual Framework, the term ‘entity’ refers to the reporting entity unless specifically indicated otherwise.

1.3

The decisions described in paragraph 1.2 depend on the returns that existing and potential investors, lenders and other creditors expect, for example, dividends, principal and interest payments or market price increases. Investors’, lenders’ and other creditors’ expectations about returns depend on their assessment of the amount, timing and uncertainty of (the prospects for) future net cash inflows to the entity and on their assessment of management’s stewardship of the entity’s economic resources. Existing and potential investors, lenders and other creditors need information to help them make those assessments.

1.4

To make the assessments described in paragraph 1.3, existing and potential investors, lenders and other creditors need information about:

(a)            the economic resources of the entity, claims against the entity and changes in those resources and claims (see paragraphs 1.12–1.21); and

(b)           how efficiently and effectively the entity’s management and governing board[3] have discharged their responsibilities to use the entity’s economic resources (see paragraphs 1.22–1.23).       

3

Throughout the Conceptual Framework, the term ‘management’ refers to management and the governing board of an entity unless specifically indicated otherwise.

1.5

Many existing and potential investors, lenders and other creditors cannot require reporting entities to provide information directly to them and must rely on general purpose financial reports for much of the financial information they need. Consequently, they are the primary users to whom general purpose financial reports are directed.[4]        

4

Throughout the Conceptual Framework, the terms ‘primary users’ and ‘users’ refer to those existing and potential investors, lenders and other creditors who must rely on general purpose financial reports for much of the financial information they need.

Changes in economic resources and claims

1.15

Changes in a reporting entity’s economic resources and claims result from that entity’s financial performance (see paragraphs 1.17–1.20) and from other events or transactions such as issuing debt or equity instruments (see paragraph 1.21). To properly assess both the prospects for future net cash inflows to the reporting entity and management’s stewardship of the entity’s economic resources, users need to be able to identify those two types of changes.

1.18

Information about a reporting entity’s financial performance during a period, reflected by changes in its economic resources and claims other than by obtaining additional resources directly from investors and creditors (see paragraph 1.21), is useful in assessing the entity’s past and future ability to generate net cash inflows. That information indicates the extent to which the reporting entity has increased its available economic resources, and thus its capacity for generating net cash inflows through its operations rather than by obtaining additional resources directly from investors and creditors. Information about a reporting entity’s financial performance during a period can also help users to assess management’s stewardship of the entity’s economic resources.