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Comments concerning certain Articles of the Regulation
(EC) No 1606/2002 of the European Parliament and of the
Council of 19 July 2002 on the application of
international accounting standards and the Fourth Council
Directive 78/660/EEC of 25 July 1978 and the Seventh
Council Directive 83/349/EEC of 13 June 1983 on accounting
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The Objective of Financial
Statements
12. The objective of financial
statements is to provide information about the financial
position, performance and changes in financial position of an
enterprise that is useful to a wide range of users in making
economic decisions.
13. Financial statements prepared
for this purpose meet the common needs of most users. However,
financial statements do not provide all the information that
users may need to make economic decisions since they largely
portray the financial effects of past events and do not
necessarily provide non-financial information.
14. Financial statements also
show the results of the stewardship of management, or the
accountability of management for the resources entrusted to
it. Those users who wish to assess the stewardship or
accountability of management do so in order that they may make
economic decisions; these decisions may include, for example,
whether to hold or sell their investment in the enterprise or
whether to reappoint or replace the management.
Financial Position, Performance
and Changes in Financial Position
15. The economic decisions that
are taken by users of financial statements require an
evaluation of the ability of an enterprise to generate cash
and cash equivalents and of the timing and certainty of their
generation. This ability ultimately determines, for example,
the capacity of an enterprise to pay its employees and
suppliers, meet interest payments, repay loans and make
distributions to its owners. Users are better able to evaluate
this ability to generate cash and cash equivalents if they are
provided with information that focuses on the financial
position, performance and changes in financial position of an
enterprise.
16. The financial position of an
enterprise is affected by the economic resources it controls,
its financial structure, its liquidity and solvency, and its
capacity to adapt to changes in the environment in which it
operates. Information about the economic resources controlled
by the enterprise and its capacity in the past to modify these
resources is useful in predicting the ability of the
enterprise to generate cash and cash equivalents in the future.
Information about financial structure is useful in predicting
future borrowing needs and how future profits and cash flows
will be distributed among those with an interest in the
enterprise; it is also useful in predicting how successful the
enterprise is likely to be in raising further finance.
Information about liquidity and solvency is useful in
predicting the ability of the enterprise to meet its financial
commitments as they fall due. Liquidity refers to the
availability of cash in the near future after taking account
of financial commitments over this period. Solvency refers to
the availability of cash over the longer term to meet
financial commitments as they fall due.
17. Information about the
performance of an enterprise, in particular its profitability,
is required in order to assess potential changes in the
economic resources that it is likely to control in the future.
Information about variability of performance is important in
this respect. Information about performance is useful in
predicting the capacity of the enterprise to generate cash
flows from its existing resource base. It is also useful in
forming judgements about the effectiveness with which the
enterprise might employ additional resources.
18. Information concerning
changes in the financial position of an enterprise is useful
in order to assess its investing, financing and operating
activities during the reporting period. This information is
useful in providing the user with a basis to assess the
ability of the enterprise to generate cash and cash
equivalents and the needs of the enterprise to utilise those
cash flows. In constructing a statement of changes in
financial position, funds can be defined in various ways, such
as all financial resources, working capital, liquid assets or
cash. No attempt is made in this Framework to specify a
definition of funds.
19. Information about financial
position is primarily provided in a balance sheet. Information
about performance is primarily provided in an income statement.
Information about changes in financial position is provided in
the financial statements by means of a separate statement.
20. The component parts of the
financial statements interrelate because they reflect
different aspects of the same transactions or other events.
Although each statement provides information that is different
from the others, none is likely to serve only a single purpose
or provide all the information necessary for particular needs
of users. For example, an income statement provides an
incomplete picture of performance unless it is used in
conjunction with the balance sheet and the statement of
changes in financial position.
Notes and Supplementary Schedules
21. The financial statements also
contain notes and supplementary schedules and other
information. For example, they may contain additional
information that is relevant to the needs of users about the
items in the balance sheet and income statement. They may
include disclosures about the risks and uncertainties
affecting the enterprise and any resources and obligations not
recognised in the balance sheet (such as mineral reserves).
Information about geographical and industry segments and the
effect on the enterprise of changing prices may also be
provided in the form of supplementary information.
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