What do users of private company financial statements want? Financial statements' primary purpose is to serve the needs of users. But there is a quandary as to who is a "user" and what users need, particularly for private companies. Financial Executives Research Foundation (FERF) examines these needs, from both the preparer and user perspectives.

• Author: de Mesa Graziano, Cheryl
• Position: Private companies

Most, if not all, would agree that perhaps the primary objective of financial reporting is serving the needs of users. Broadly speaking, users of financial statements can be categorized as internal and external. Internal users can include company management, owners or directors. External users can be further categorized into two groups. The first includes commercial bankers, vendors/suppliers, rating agencies and others concerned with the company's collateral and/or credit-worthiness. The second category, external shareholders and equity-oriented investors, may be more concerned about share values, dividends and future earnings.

But, while the users of public company financial statements are more easily identifiable, the definition of "user" to a privately held company may vary. As a result, their needs may differ.

One type of user could read financial statements to evaluate business risks and profitability in order to determine a company's viability. Another may focus on a company's ability to generate cash flows and whether or not they are sufficient to meet its obligations.

Still another user may use components of the financial statements as inputs for models used to value collateral or determine liquidity and/or return on investment. Longer-term users may want to determine whether or not a company's ownership and succession plans ensure its long-term sustainability.

For private companies, then, who exactly uses financial statements and other relevant information? What are these users' needs? And, once needs are identified, how do they drive demands for financial information? In a series of interviews, Financial Executives Research Foundation (FERF) examines the answers to these questions from both the user and preparer perspective.

PinnOak Resources: Keeping It Simple

At PinnOak Resources LLC, a privately held coal producer, Vice President and Controller H. Richard Howie divides the company's financial statement users into four categories: investors, banks, insurance companies and all others. The latter groups are considered to be "standard" users and request the annual audited financial statements. Though the company does not always provide financials to all parties that request them, its insurers do receive its generally accepted accounting principles (GAAP) statements. "They are mainly interested in the financial strength of the company and how it may affect rates," Howie says.

The major users, Howie notes, are the company's outside investors, and they want monthly operational data, in addition to what is provided by the financials. Since the outside investor group owns 46.5 percent of the company, its primary focus is on how the company is meeting its financial goals. Consequently, it looks more closely at trend lines and year-over-year comparisons.

"Management prepares a PowerPoint presentation with graphs for the investors," Howie says. "The investors are...