Preface to International Financial Reporting Standards

Chapter 2 – The IFRS Framework Page 22 9 The Framework for the Preparation and Presentation of Financial Statements The Framework sets out the concepts that underlie the preparation and presentation of financial statements. Such concepts are the foundation on which financial statements are constructed and provide a platform from which standards are developed. The Framework is important because it [Framework 1]:  assists the IASB in the development of new standards and the revision of existing standards;  provides a rationale for reducing the number of alternative accounting treatments and promoting harmonisation of accounting standards and regulations;  assists national standard setters in developing their national standards on a basis consistent with international principles;  assists preparers of financial statements in applying IFRS and general principles;  assists auditors in forming an opinion on whether financial statements conform with IFRS;  assists users of financial statements in their interpretation of financial statements; and  provides information on the work carried out by the IASB. The Framework is not an accounting standard and it does not contain detailed requirements on how financial statements should be prepared or presented. Specific references to the Framework can be found, however, in individual accounting standards dealt with in later chapters.

9.1 Users and their information needs

9.1.1 Economic decisions

The content and presentation of financial statements are influenced by the use to which the financial statements are to be put, for example:  an investor deciding when to buy, hold, or sell shares;  employees assessing an entity’s ability to provide benefits to them;  investors assessing an entity’s ability to pay dividends and therefore the likely return that they will achieve on their investment; and  debt providers assessing the level of security for amounts lent to the entity.

9.1.2 Users and specific needs

The Framework identifies users of financial statements and their specific information needs as set out in the illustration below. [Framework 9] Chapter 2 – The IFRS Framework Page 23 Illustration 2 Users of financial information and why the information is of interest to them: 1. Investors Investors require information on risk and return on investment and hence an entity’s ability to pay dividends. 2. Employees Employees assess an entity’s stability and profitability. They are interested in their employers ability to provide remuneration, employment opportunities and retirement and other benefits. 3. Lenders Lenders assess whether an entity is able to repay loans and its ability to pay the related interest when it falls due. 4. Suppliers and other trade payables Suppliers assess the likelihood of an entity being able to pay them as amounts fall due. 5. Customers Customers assess whether an entity will continue in existence. This is especially important where customers have a long-term involvement with, or are dependent on, an entity, for example where product warranties exist or where specialist parts may be needed. 6. Governments and their agencies Government bodies assess the general allocation of resources and therefore activities of entities. In addition information is needed to determine future taxation policy and to provide national statistics. 7. The public The financial statements provide the public with information on trends and recent developments. This may be of particular importance where an entity makes a substantial contribution to a local economy by providing employment and using local suppliers.

9.2 Accountability of management

Management is accountable for the safekeeping of the entity’s resources and for their proper, efficient and profitable use. Shareholders are interested in information that helps them to assess how effectively management has fulfilled this role, as this is relevant to the decisions concerning their investment and the reappointment or replacement of management. Financial reporting helps management to meet its need to be accountable to shareholders and also to other stakeholders such as employees or lenders, by providing information that is useful to the users in making economic decisions.

9.3 Financial position, performance and changes in financial position

All economic decisions should be based on an evaluation of an entity’s ability to generate cash and the timing and certainty of its generation. Information about the entity’s financial position, performance and changes in its financial position provides information to support such decisions. [Framework 12] Information about an entity’s financial position is provided in a statement of financial position, previously known as a balance sheet, as outlined in Chapter 3.