Qualitative Characteristics of Financial Reporting not satisfied by the current reporting practices pursuant to IFRS
Conceptual framework provides the accountants with a framework for accounting standards, basis to resolve accounting disputes. IFRS (International Financial Reporting Standards) is designed with the aim that accounts of company can be understood across international boundaries. Conceptual framework connects all aspects of inquiries like defining a problem, data collection, data analysis and purpose. Conceptual framework is required for development of principle based accounting standards to prepare general purpose financial reports.
Qualitative Characteristics of Financial Reporting not satisfied by the current reporting practices pursuant to IFRS (IAS Plus, 2013).
It is based on the concept of classification and presentation of information in concise and clear manner. The financial information which is not clear or understandable is of no use to the users. The information in financial reports should have supporting footnotes to clearly demonstrate the content. The conceptual framework aims to prepare the reports in user friendly manner for those who have knowledge of business and economic activities. Conceptual framework also considers that such users may also require advice to understand complex information in financial reports.
The IFRS standards are not globally accepted which makes it difficult to understand at international level. The principles are not common and are not understandable by the users. The financial statements prepared with IFRS show only desired results that may lead to profit manipulation (Accounting Tools, 2018).
Relevance is the important feature of any financial reporting to influence the user’s decision. The conceptual framework aims that financial information should be based on both predictive value and confirmatory value. Predictive value is based on predictions and confirmatory value is based on feedback of previous evaluations (Connectusfund, 2018).
Information is defined relevant if it is able to add value to decision making process by providing complete aspects of information. Confirmatory value is important aspect in making financial reports.
The financial reporting based on IFRS standards involves the use of fair value as the primary basis for measurement of assets and liabilities. This may lead to increase the volatility as the assets are reported.
It refers to the ability of the financial information to remain useful overtime and can also be compared to financial information from other sources. Comparing the financial information is important to evaluate different aspects of entity’s financial position. Conceptual framework recognises comparability that enables users in understanding the similarities and differences between the items. It considers the fact that the comparison needs two items like financial information for current year and the preceding year.
Implications of US GAAP rules for the relevance and representational faithfulness of US corporate financial statements
The financial reporting in IFRS is less detailed and complex with higher cost of implementation. The complex nature of information makes it difficult for the users to understand it and make the comparisons. The adoption of IFRS will incur the cost of training and educating the accountants’ about the principles (Wisegeek, 2018).
Public Interest Theory is an economic concept. It is related to welfare economics. The public interest theory work as a market for the organizations to survive and grow in the competitive industry. The organizations are motivated by societal interests and work to improve the social outcomes from the business activities. The business firms or other economic actors’ work for the promotion of public interest. The public interest can be defined as the optimum utilization of resources for individual and collective goods and services in society.
Government intervention to a limited extent helps in better implementation of business policies for the betterment of society and environment as the theory considers that markets are very fragile and operate for the interest of individual’s concern rather than of society.
Public interest could be served if the government makes the legislation to involve disclosure of impact of organizational activities on society and environment. The firms should be regulated to guarantee the availability of necessity goods and services.
The government should not interfere in the corporate activities to include various social and environmental responsibilities. It should be up to business themselves to define what social and environment responsibilities mean to them. It is understood that companies can create value through initiatives related to social and environmental development. Business can grow rapidly with such initiatives of considering the benefit of whole society rather than of an individual. Government is a neutral arbiter according to this theory in the social and environmental development by corporations (Open Text Books, 2016).
Capture theory states that agencies established to regulate the interest of the society but in reality these agencies work for the interest of the industry. It states that these government agencies are formed by former industry people, so these employees of industry works for the interest of industry.
The government legislation should be imposed for the formation of regulators other than the industry people and they should be trained and educated about the industry. These agencies generate an inefficient allocation of resources rather than meeting society needs.
The government should not work on making such legislations instead should go for aware programs for the customers and the organizations about the benefits of social and environmental initiatives. The business firms are aware about the impact of doing the right thing for the people it will the customer base by increasing the brand value. It will create loyal customer base as the organization is taking initiatives for the betterment of the society. The external forces like CSR (Corporate Social Responsibility) will force organizations to take part in social and environmental protection practices like pollution control etc.
Motivation of directors not to revalue property, plant and equipment and effects of the decision
Economic interest group theory of regulation
The Economic interest group theory of regulation states that regulations are driven by forces of supply and demand. It assumes that industry groups are formed to serve interest of the economic group rather than of society. It states that regulations are set by the industry with the objective to create advantage for the industry.
If the regulation is reduced in the industry it will lead to free market forces execution. And such forces will lead to generation of best possible amount of information for the development of social and environment. These forces will create organizations aware about creating value in their operations. The theory states that providing the information outside the organization is beneficiary. The legislation imposed cannot lead to accountability of business activities in relation to social and environment protection.
The organizations are also aware that if the organizations failed to look after the environment and society the people will not be willing to take the services of the organization. It will lead to reduce the customer base and reduce the sustainability of the organization in the market. For the growth the organization has to work with existing market forces (Wisegeek, 2018).
FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets replaces FASB Statement No. 121 Accounting for the impairment of long lived assets and for long lived assets to be disposed of. The objective of the issue of this statement was to develop one model for long lived assets to be disposed of by sale. It covers all long lived assets and discontinued operations (FASB, 2018).
Statement No. 144 broadens the reporting of discontinued operations distinguishing it from the ongoing operations in a disposal transaction. It benefits the entity to more clearly demonstrate the changes in the business operations resulted from the disposal of operations. It benefits the users with better understanding of the ongoing operations of the business entity (FASB, 2018).
The statement improves the presentation of discontinued operations in the financial statement. It broadens the presentation by including all the components of the business entity. It includes operations and cash flows with proper distinguished manner. It also clearly describes the components that are held for sale and the components that are disposed of.
The use of one accounting model improves the financial reporting. It does not repeat the accounting for similar events and circumstances. It removes the requirement of allocating goodwill to long lived assets tested for impairment. It deals with the objective to ensure that the assets of organization are carried at cost not more than recoverable amount. The assets are defined as impaired if its carrying amount exceeds the amount to be recovered through its sale. The entity is required to recognise the impairment loss. It also includes disclosures for impairment assets. The statement describes the profitability based cash flows of the entity. It also includes the estimation for the amount of possible future cash flows (MCA, 2018).
Public Interest Theory, Capture Theory and Economic Interest Group Theory of regulation
It includes the primary asset approach to determine the cash flow for assets and liabilities. For the relevance and representational faithfulness of US corporate financial statements impairment loss must be disclosed in the financial statements.
The rules related to Statement 144 improves the relevance and representational faithfulness of financial statements by clear description of long lived assets, assets that are impaired, situations leading towards impairment, the amount of impairment loss, determination of fair value and separate disclosure of discontinued operations and ongoing operations of an entity (Giannini, 2007).
Asset revaluation is theoretically unsound. Below are some reasons to motivate directors not to revalue the property, plant and equipment.
- Higher implementation cost
Revaluation of property, plant and equipment requires higher cost as it is a long and ongoing process. In cost model after recognition as an asset, it is carried less any depreciation and impairment losses. Significant cost is attached with this process.
- Complex
The revaluation of assets like plant, equipment and property is a complex task as it requires calculating various values like impairment of assets, depreciation on assets and scrapping value of assets (AASB, 2004).
- At first, a property is designed to the needs of corporate and can be calculated through a concept of cost. But with time according to the need the structure and construction changes making it tough to calculate on the basis of initial cost.
- In the lifecycle of property it ceases to be considered according to cost and become considered under the value concept.
- Directors face difficulties due to impact of various rates of growth. Depreciation in cost of some operational properties is being at a lesser rate than appreciation value.
- Directors face various fundamental issues between cost and value concepts.
- Life cycle of capital assets requires reflection in the financial statement.
(Parker, 2018)
Some of the effects the decision not to revalue might have on the firm’s financial statements.
- Real Value of Assets
The real value of assets is not presented in the firm’s financial statements. The real value of assets is obtained asset re-valuation and impairment.
- Reliable Value
The revaluation of property, plant and equipment helps in calculating the reliable value of assets than their historical cost. If revaluation is not done historical cost is presented in financial information that does not content the aspect of depreciation and impairment (HTK Consulting, 2018).
- Fair value determination
In process of selling or buying new firms, fair value or market value is used. Revaluation of assets presents their market value in financial reports. Fair market value of assets cannot be determined.
- Negatively affects the process of internal and external reconstruction.
- In absence of proper revaluation of fixed assets, it makes it difficult for the firm borrow loan from banks or other financial institutions based on its fixed assets.
- Rate of return on capital employed is not presented in the financial statements.
The decision not to revalue adversely affects the wealth of shareholders. The increase in book value of assets increases the total value of assets, equity and reduces the leverage ratio. The low leverage and high value of equity indicates increase in the earnings of the shareholders.
Upward revaluation of fixed assets indicates higher earnings of the shareholders. It helps in determining the Return on equity and Return on assets. The accurate calculation of return on equity gives the estimation of earnings per share (eFinancemanagement, 2018).
Revaluation of assets represents the statement of change in shareholder’s equity due to change in net income of the entity. Revaluation of fixed assets determines the value of depreciation that lead to increase in shareholder’s equity. It helps in income tax reduction. And also helps in issuing new share to existing or new shareholders increase the net wealth of the shareholders. The revaluation of fixed assets like property, plant and equipment affect the wealth of the shareholders (Accounting Explained, 2018).
References
AASB. (2004, July). Property, Plant and Equipmet. Retrieved May 15, 2018, from Aasb.gov.au:
https://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04.pdf
Accounting Explained. (2018). Statement of Changes in Shareholders Equity. Retrieved May 15, 2018, from Accountingexplained.com: https://accountingexplained.com/financial/statements/changes-in-shareholders-equity
Accounting Tools. (2018, February 11). The qualitative characteristics of financial statements. Retrieved May 15, 2018, from Accountingtools.com: https://www.accountingtools.com/articles/what-are-the-qualitative-characteristics-of-financial-statem.html
Connectusfund. (2018). Advantages and Disadvantages of Adopting IFRS. Retrieved May 15, 2018, from Connectusfund.org: https://connectusfund.org/6-advantages-and-disadvantages-of-adopting-ifrs
eFinancemanagement. (2018). Revaluation of Long-Lived Assets. Retrieved May 15, 2018, from eFinancemanagement.com: https://efinancemanagement.com/financial-accounting/revaluation-of-long-lived-assets
FASB. (2018). Statement of Financial Accounting Standards No. 144. Retrieved May 15, 2018, from Fasb.org: https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220125021&acceptedDisclaimer=true
FASB. (2018). Summary of Statement No. 144. Retrieved May 15, 2018, from Fasb.org:
https://www.fasb.org/summary/stsum144.shtml
Giannini, E. (2007, April). Impairment of Assets or Impairment of Financial Information. Retrieved May 15, 2018, from Digitalcommons.bryant.edu: https://digitalcommons.bryant.edu/cgi/viewcontent.cgi?article=1000&context=honors_accounting
HTK Consulting. (2018). Property, Plant, and Equipment: IAS 16. Retrieved May 15, 2018, from Htkconsulting.com: https://www.htkconsulting.com/HTKNotes/PMR/PPE%20-%20IFRS.pdf
IAS Plus. (2013, February 20). Conceptual Framework – Purpose and status (IASB). Retrieved May 15, 2018, from Iasplus.com: https://www.iasplus.com/en/meeting-notes/iasb/2013/february/cf-purpose-and-status
MCA. (2018). Impairment of Assets. Retrieved May 15, 2018, from Mca.gov.in: https://www.mca.gov.in/Ministry/notification/pdf/AS_28.pdf
Open Text Books. (2016, January 15). The Public Interest Theory of Regulation. Retrieved May 15, 2018, from Opentextbooks.com: https://www.opentextbooks.org.hk/ditatopic/24878
Parker, D. D. (2018). The Role of Director’s Valuations in Balance Sheet Reporting. Retrieved May 15, 2018, from Prres.net: https://www.prres.net/papers/Parker_The_Role_of_Directors.pdf
Wisegeek. (2018). What Are the Disadvantages of IFRS? Retrieved May 15, 2018, from Wisegeek.com: https://www.wisegeek.com/what-are-the-disadvantages-of-ifrs.htm
Wisegeek. (2018). What Is Economic Theory? Retrieved May 15, 2018, from Wisegeek.com: com/what-is-economic-theory.htm”>https://www.wisegeek.com/what-is-economic-theory.htm
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