NIF A-3, A-4, and A-5: Financial Statement Analysis
NIF A-3: User Needs and Objectives of Financial Statements
The primary focus of NIF A-3 is to identify user needs and establish the objectives of financial statements (EF) for entities.
Objective of EF According to NIF A-3
The objective of EF is derived mainly from the needs of users in general.
Evaluating Financial Performance
EF allows users to evaluate:
- The financial and economic behavior of the entity, its stability, and vulnerability.
- The entity’s ability to maintain and optimize resources, obtain appropriate financing, and repay funding sources.
Information Provided by EF
EF must provide information on an entity’s:
- Financial status
- Operational activity
- Cash flows
- Viability as a going concern
Basic Financial Statements
The basic financial statements include:
- Balance sheet
- Income statement (or statement of activities for non-profits)
- Statement of changes in capital
- Cash flow statement
Balance Sheet Details
The balance sheet shows information on a specific date regarding:
- Resources and financial obligations of the entity
- Assets in order of their availability
- Liabilities and stockholders’ equity as of that date
Statement of Financial Position Changes
This statement indicates changes in resources and funding sources of the entity during a specific period.
Limitations of EF Use
Limitations include:
- Internal transformations and transactions involving the entity economically.
- The balance sheet showing the value of resources and obligations of the entity.
NIF A-4: Utility and Qualitative Characteristics of EF
Utility as a Key Feature
The utility of EF, as defined by NIF A-4, is the quality of meeting the needs of the common user. It is a roll-over characteristic for primary and secondary features.
Primary Qualitative Features
The primary qualitative features are:
- Reliability
- Relevance
- Understandability
- Comparability
High Qualitative Characteristics
High qualitative characteristics include:
- Faithful representation
Reliability of Financial Information
Financial information is considered reliable when its content is consistent with internal transactions and events, and users can make informed decisions based on it.
Relevance of Financial Reporting
Financial reporting is relevant when it influences the economic decision-making process. Relevant information should form the basis for predictions.
Comparability
Comparability allows users to identify and analyze similarities and differences in information from the same entity.
NIF A-5: Basic Elements of Financial Statements
Purpose and Name of NIF A-5
NIF A-5 defines the basic elements that make up financial statements to ensure uniformity in their design, analysis, and interpretation.
Elements of the Balance Sheet
The elements of the balance sheet are:
- Assets
- Liabilities
- Equity or accounting equity
Definition of Equity
Equity is the residual value of the assets of the entity after deducting all its liabilities.
Elements of the Income Statement
The elements of the income statement are:
- Revenue
- Costs
- Expenses