Stakeholders' Needs

Objective A: Identify Users of Financial Statements and Differentiate Their Information Needs

Financial statements serve a wide range of users, each with distinct reasons for examining the financial information of a business. The ACCA FA syllabus requires you to identify these users and explain what specific information each group needs and why.

The primary users identified by the IFRS Conceptual Framework are existing and potential investors, lenders, and other creditors. These are the users that general purpose financial statements are primarily designed to serve, because they cannot demand customised reports and must rely on published financial statements.

However, the broader set of users includes employees, suppliers and trade creditors, customers, governments and their agencies, and the public. Each group has a different relationship with the business and therefore different information needs.

Investors (Existing and Potential)

Investors provide risk capital to the business. They need information to assess the return they are earning on their investment (through dividends and share price appreciation) and the risk associated with that investment. Specifically, investors look at profitability, earnings per share, dividend history, and the financial stability of the business. Potential investors use the same information to decide whether to buy shares.

Lenders (Banks and Other Debt Providers)

Lenders provide loans and credit facilities. Their primary concern is whether the business can repay the principal and pay interest on time. They focus on cash flow, liquidity ratios, gearing (the proportion of debt to equity), and the availability of assets that could serve as security. A bank considering a £500,000 loan to a manufacturing company will scrutinise the company's cash flow statement and debt covenants.

Employees and Trade Unions

Employees need information about the stability and profitability of their employer. They want to know whether the business can continue to provide employment, pay wages, and fund pension obligations. Trade unions may use financial statements during wage negotiations to argue that a profitable company can afford higher pay.

Suppliers and Trade Creditors

Suppliers extend credit to the business (e.g., 30-day payment terms). They need to assess whether the business will pay its debts when they fall due. A supplier considering offering £50,000 of goods on credit will examine the business's liquidity position and payment history.

Customers

Customers, particularly those with long-term contracts or warranties, need assurance that the business will continue operating long enough to honour its commitments. A construction company's client, for example, needs confidence that the contractor will still be in business to complete a two-year building project.

Government and Regulatory Agencies

Governments use financial statements to assess tax liabilities, compile national economic statistics, and regulate industries. Tax authorities need accurate revenue and expense figures to calculate the correct tax charge. Regulators may monitor financial health to protect consumers or maintain market stability.

The Public

The general public may be interested in a business's contribution to the local economy, its environmental impact, and its employment practices. Large employers in small communities, for example, have a significant impact on local prosperity.