Objective of General Purpose Financial Reporting

1 Statement of Accounting ConceptsSAC 2(8/90) Objective of GeneralPurpose FinancialReportingPrepared by the Public Sector Accounting Standards board ofthe Australian Accounting Research Foundation and by theAccounting Standards Review BoardIssued by the Australian Accounting Research Foundation onbehalf of Australian Society of Certified Practising Accountantsand The Institute of Chartered Accountants in Australia and by theAccounting Standards Review BoardThe Australian Accounting Research Foundation was established by theAustralian Society of Certified Practising Accountants and The Institute ofChartered Accountants in Australia and undertakes a range of technical andresearch activities on behalf of the accounting profession as a whole. Amajor responsibility of the Foundation is the development of Statements ofAccounting Concepts and Accounting Standards. The Public SectorAccounting Standards board is one of the boards of the Australian Accounting Standards board was established by section 224of the Australian Securities Commission Act 1989.

2 It has responsibility forthe development of accounting standards for application by companies, andfor the development of Statements of Accounting Concepts. When issuing aStatement of Accounting Concepts, the board carries out one of its functionsunder section 226 of that of this Statement are available for purchase from the offices of theAustralian Accounting Research Foundation, 211 Hawthorn Road, Caulfield,Victoria 3162, copying of this Statement is only permitted in certain should be directed to the offices of the Australian AccountingResearch 1035-3631- 3 -CONTENTSP aragraphsCitation ..1 Application and Operative Date ..2 INTRODUCTION ..3-4 DEFINITIONS ..5 DISCUSSIONS cope and Applicability ..6-10 Purpose of General Purpose Financial Reporting ..11-15 Users of General Purpose Financial Reports ..16 Resource providers ..17 Recipients of goods and services ..18 Parties performing a review or oversightfunction.

3 19 Managements and governing bodies ..20 Purposes for which User Groups RequireFinancial InformationResource performing a review or oversightfunction ..25 Objective of General Purpose Financial Reporting ..26-27 Types of Information Relevant to Users' Needs ..28 Performance ..29-31 Financial position ..32-37 Financing and investing ..38 Compliance ..39-40 ACCOUNTING CONCEPTSD iscussion and Definitions ..41-42 Objective of General Purpose Financial Reporting ..43 Accountability ..44 Information disclosures ..45- 4 -STATEMENT OF ACCOUNTING CONCEPTSSAC 2 Objective OF General PURPOSEFINANCIAL Reporting Citation1 This Statement may be cited as Statement of Accounting ConceptsSAC 2 " Objective of General Purpose Financial Reporting ".Application and Operative Date2 This Statement applies to each Reporting entity in relation to its firstreporting period that ends on or after 31 August 1990, and inrelation to subsequent Reporting Purpose of this Statement is to establish the Objective of generalpurpose Financial Reporting by Reporting entities in the private andpublic sectors.

4 The Statement identifies the users of General purposefinancial reports, the common information needs of such users andthe broad types of information, consistent with those needs, thatgeneral Purpose Financial reports should the specification of an Objective will have implications forthe type of information to be included in General Purpose financialreports and for the manner in which such information is to becommunicated to users, this Statement contains no conclusionsregarding the particular qualities that information should possess tomeet this Objective , the number, nature and form of the financialstatements to be prepared, and the nature and measurement of theelements of such statements. These matters are the subject of otherStatements of Accounting the purposes of this Statement:"accountability" means the responsibility to provide information toenable users to make informed judgements about the performance, Financial position, financing and investing, and compliance of thereporting entity;- 5 -"compliance" means adherence to those statutory requirements,regulations, rules, ordinances, directives or other externally-imposedrequirements in respect of which non-compliance may have, or mayhave had, a Financial effect on the Reporting entity;" Financial position" means the economic condition of a reportingentity, having regard to its control over resources, financialstructure, capacity for adaptation and solvency;"financing and investing" means those activities of a reportingentity that relate to the financing of its operations and the investmentof its resources.

5 " General Purpose Financial report" means a Financial reportintended to meet the information needs common to users who areunable to command the preparation of reports tailored so as tosatisfy, specifically, all of their information needs;"performance" means the proficiency of a Reporting entity inacquiring resources economically and using those resourcesefficiently and effectively in achieving specified objectives ; and" Reporting entity" means an entity (including an economic entity)in respect of which it is reasonable to expect the existence of usersdependent on General Purpose Financial reports for informationwhich will be useful to them for making and evaluating decisionsabout the allocation of scarce and Applicability6 The Objective specified in this Statement applies to General purposefinancial Reporting by all Reporting Purpose Financial Reporting focuses on providinginformation to meet the common information needs of users who areunable to command the preparation of reports tailored to theirparticular information needs.

6 These users must rely on theinformation communicated to them by the Reporting users have specialised needs and will possess the authority toobtain the information to meet those needs. Examples of such usersare taxation authorities, central banks and grants such users may make use of the information contained ingeneral Purpose Financial reports, because they have the authority to- 6 -command the information they require they do not need to rely oninformation provided to other groups. Special Purpose financialreports directed at the needs of such users are beyond the scope ofthis Statement encompasses General Purpose Financial Reporting bybusiness and non-business Reporting entities in the public andprivate sectors. It covers General Purpose Financial Reporting by alltypes of Reporting entities, whether legal, administrative oreconomic entities, and therefore encompasses all types ofgovernment entities, including government departments, statutoryauthorities, and, as a whole, Federal, State, Territorial and localgovernments; investor-owned entities, including companies and unittrusts; mutual co-operative entities, including building societies andcredit unions; human service entities, including churches,foundations, professional associations and charities; superannuationplans; partnerships; and sole Reporting encompasses the provision of financialstatements and related Financial and other information.

7 Financialreports, comprising Financial statements, notes, supplementaryschedules and explanatory material intended to be read with thefinancial statements, are the principal means of communicatingfinancial information about a Reporting entity to users. However,other information can best be provided, or can only be provided,outside Financial reports. Financial reports are not the only sourceof relevant information about a Reporting entity, and users offinancial reports may need to consult other sources to satisfy theirinformation needs. This Statement does not attempt to draw a cleardistinction between Financial reports and Financial Reporting , nordoes it attempt to define the boundaries of General Purpose financialreporting. Distinctions will be made and boundaries drawn, asrequired, in other Statements of Accounting Concepts and inAccounting of General Purpose Financial Reporting11 General Purpose Financial Reporting is not an end in itself, but is ameans of communicating relevant and reliable information about areporting entity to users.

8 The Objective specified in this Statementderives from the information needs of those identified as the users ofgeneral Purpose Financial reports. Those needs depend, in turn, onthe activities of Reporting entities and the decisions users make entities control resources and influence members of thecommunity through providing goods and services, levying prices,- 7 -charges, rates and taxes, and acquiring and investing resources. Thecommunity interest is best served if scarce resources controlled byreporting entities are allocated to those entities which will use themin the most efficient and effective manner in providing goods andservices. Efficient use of resources raises output, has desirablemacroeconomic effects by enhancing employment and the standardof living, and enables social policy objectives to be achieved at thelowest cost. Members of the community make resource allocationdecisions in respect of Reporting entities - that is, they makereasoned choices among alternative uses of scarce resources.

9 Forexample, investors decide whether to invest in an entity; creditorsdecide whether to lend resources to an entity; governments andparliaments decide, on behalf of constituents, whether to fundparticular programmes for delivery by an entity; taxpayers decidewho should represent them in government; donors decide whether todonate resources to an entity; individuals decide whether tocontribute to a superannuation plan; employees decide whether tosell their services to a particular entity; owners/members ofreporting entities decide whether they should contribute resources tothe entity and who should manage the entity on their behalf; andratepayers decide whether they should support the particularprogrammes of their local government and who should representthem on the local government allocation of scarce resources will be enhanced if thosewho make resource allocation decisions, such as those groupsidentified above, have the appropriate Financial information onwhich to base their decisions.

10 General Purpose Financial reportingaims to provide this Purpose Financial Reporting also provides a mechanism toenable managements and governing bodies to discharge theiraccountability. Managements and governing bodies are accountableto those who provide resources to the entity for planning andcontrolling the operations of the entity. In a broader sense, becauseof the influence Reporting entities exert on members of thecommunity at both the microeconomic and macroeconomic levels,they are accountable to the public at large. General purposefinancial Reporting provides a means by which this responsibilitycan be the subsequent discussion of users and their informationneeds at times distinguishes between business and non-businessentities, the common Objective specified in this Statement reflectsthe inherent similarities between the two types of entities. Whilebusiness entities seek to earn profits or desired rates of return andnon-business entities pursue primarily non- Financial objectives , both- 8 -types of entities provide goods and services to the community anduse scarce resources in the process; both obtain these resources fromexternal sources and are accountable to the providers of theresources or their representatives; both control stocks of resources;both incur obligations; and both must be financially viable to meettheir operating of General Purpose Financial Reports16 Many individuals and organisations base resource allocationdecisions on their relationship with and knowledge about reportingentities and are therefore potentially interested in the informationprovided in General Purpose Financial reports.