FASB Concepts Statement No. 8, Chapter 1 (as amended), identifies the primary users for whom general purpose financial reporting is prepared. Which group is explicitly named as a primary user under this objective?
- Company management, because they are best positioned to use the information to run day-to-day operations
- Financial statement auditors, because they must have the information to form an opinion
- Industry regulators, because they require the information to enforce compliance
- Existing and potential investors, lenders, and other creditors, because they must rely on general purpose financial reports for much of the financial information they need
Why D? And why not the others?
Correct answer: D. Existing and potential investors, lenders, and other creditors, because they must rely on general purpose financial reports for much of the financial information they need
Chapter 1 of FASB Concepts Statement No. 8 states that the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity, because those parties cannot require the entity to provide information directly to them and must rely on general purpose reports for much of the financial information they need. The option describing company management is wrong because management can obtain whatever additional internal information it needs directly and does not depend on general purpose external reports, so the framework does not treat management as a primary user. The option describing auditors is wrong because auditors use the reports to perform their engagement but are not the party the reporting objective is designed to serve; their access to information is not limited to general purpose reports. The option describing regulators is wrong for the same reason: regulators can often compel entities to provide additional information beyond general purpose financial reports, so the framework does not classify them as primary users either.
Source: FASB Concepts Statement No. 8, Chapter 1, The Objective of General Purpose Financial Reporting (as amended)