Qualitative characteristics of financial reports under IFRS
The issue that has been presented in the question refers to the fact that the adoption of the International Financial reporting Standards by the listed entities have led to the enjoying of the certain benefits that have resulted in the improvement of the quality of the financial report. This means that the accounting standards had been established for the purpose of establishing the fact that the corporate entities have prepared the accounting statements for the ease of the third party investors and the other stakeholders of business. The improvement of the quality of the accounting statements and the providence of a clarified image or information in regards to the particular business has helped the stakeholders in taking the potential economic decisions. However, there have been certain opinions in regards to the fact that the implications of adopting the International Financial Reporting Standards have been negative in nature. This means that the experts have been of the opinion that the financial report that has been prepared in accordance to the reporting standards established by the International Financial Reporting Standards, has resulted in the requirement of huge amounts of money especially in the preparation of the reports accounting statements per the norms established by the accounting regulatory body. Moreover, the preparers of the financial reports have also been of the opinion that the adoption of the International Financial Reporting Standards have also resulted in the unnecessary disclosures in the annual report of the corporate entity. This has lengthened the volume of the report and increased the complexity of the financial information that has been reflected in it.
The qualitative characteristics of the financial report that can be attributed in order to comply with the International Financial Reporting Standards are the qualitative characteristics of relevance, understandability, timeliness and faithful representation. It must be noted here that these are the reporting standards that have been further exploited or have resulted in the ruining of the quality of the financial report. This can be evidenced from the fact that the qualitative characteristics of faithful representation has reflected the overload of the disclosures in the annual report of the corporate entity. This has increased the complexity of the accounting statements and has resulted in the difficulty of the third party investors or the stakeholders of business in interpreting the financial information from the annual report. The qualitative characteristic of relevance has also resulted in the increase of the chances materiality or misstatement in the books of accounts. Therefore, relevance is another qualitative characteristic that have ruined the quality of the accounting statements of the corporate entities. The qualitative characteristic of understandability has also contributed to the increase in the volume of disclosures and assertions in the financial report of the company. This has unnecessarily increased the length of the report, increased its complexity and further resulted in the disclosure of the information that is not required by the third party investors and the stakeholders of business. Moreover, the compliance with the reporting standards have resulted in the engaging of a huge amount of money. This means that the compliance with the International Financial Reporting Standard has resulted in the increase in the operating cost of the corporate entity. Lastly, the qualitative characteristic of timeliness have also further increased the complexity of the accounting statements of the corporate entity. Therefore, the essentiality of the International Financial Reporting Standards have been reflected in this particular answer and it has been found out that there have been sufficient advantage to this reporting standard, however there have been certain disadvantages to which the companies must cope (Ali, Akbar, & Ormrod, 2016).
Impact of Impairment norms of FASB on financial reports
The issue that has been represented in the question reflects the fact that the accounting statements or the financial reports that are prepared by the corporate entities have been carried out in compliance with the Corporations Act. The Corporations Act reveals the major criteria that the corporate entities must be adhered to. This means that the Corporations Act states the major requirements that should be adhered by the corporate entities on the basis of the fact that the annual financial report of the companies that have been prepared reflect the major qualitative characteristics like timeliness, comparability and other essential corporate report qualities. The Corporations Act also states the regulations in accordance to the corporate social responsibilities that should be carried out by a company. The question states the fact that the investigation of the Corporations Act that had been conducted did not result in the addition of any further legislation to the Act and the verdict that had been passed was that the regulation in regards to the corporate social responsibilities of the companies would be dependent on the aspect of the market forces.
This can be further explained with the help of the theories that have been stated in the question as follows:
- Public Interest Theory – the public interest theory refers to the particular theory that reflects the fact that the working of the corporate entities should be carried out in regards to the welfare of the public. This means that the public interest theory has been prepared in support of the public and indicates the fact that the corporate entities should carry out the necessary operations for the purpose of the welfare of the public. The corporate entities should look out at the environment of the surroundings in which the companies are dealing in. Therefore, the adoption of the public interest theory will result in the automatic regulation of the corporate social responsibilities that have been adopted by a corporate entity. This is because the operations of the company will be directed towards the social welfare of the public (Kim, Shi & Zhou, 2014).
- Capture Theory – the capture theory indicates the theory that the corporate entities that have been dealing in a particular industry will result in the regulation of the operations of the industry. This means that a bulk of companies that have been dealing in the similar industry will ultimately capture the market and result in the maneuvering of the regulations that have been existing in a particular industry. For instance, the energy industry might consist of a bulk of companies that operate and carry out the similar level of corporate social responsibilities. Now, a particular regulatory standard in regards to the corporate social responsibilities might already be existing in the market, but all the companies of the similar industry carrying out the same type of corporate social responsibilities will result in the structuring of the social responsibility structure in the same way. Thus, the market forces control the regulatory capture theory. Therefore, it is totally matching with the requirement that has been presented in the question that the legislations in regards to the corporate social responsibilities will be controlled by the market forces. The regulatory capture theory will change the corporate social responsibility structure in a way that matches with the current requirements of the market thus resulting in the adherence of the market forces (Kim, Shi & Zhou, 2014).
- Economic Interest Group Theory – the economic interest group theory on the other hand is similar to the public interest theory. This means that the economic interest group theory reveals the particular way in which the operations that have been carried out by the corporate entities support the welfare and the well-being of the economic groups. The economic groups refer to the groups that are directly or indirectly affected by the working of the operations of the corporate entities. This means that the compliance with the economic interest group theory will result in the carrying out of the corporate social responsibilities that should be carried out by the companies. The economic interest group theory is adopted by the corporate entities for the purpose of the fact that the corporate social responsibilities of the companies are carried out at ease. The economic interest group theory further supports the regulation of the corporate social responsibility framework with the help of the market forces by mandating the companies to adopt the operations that will improve the condition of the environment and the economic interest groups. Therefore, it can be understood here that the companies that have been adopting the accounting regulatory theory will result in the establishment of the corporate social responsibility framework that has been regulated by the market forces (Kim, Shi & Zhou, 2014).
The issue that has been presented in the question reflects the fact that the US Financial Accounting Standards Board does not allow revaluation of non-current assets to fair value, but it does make it compulsory to account for the impairment costs associated with non-current assets as per FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets.
Furthermore, it has been asked in the question whether these mandatory norms have affected the qualitative characteristic of relevance and representational faithfulness or not. This has certainly affected the qualitative characteristics of the financial report that has been prepared by the corporate entity. This is due to the fact that the companies that have been issuing the particular standard should have also mentioned the impairment loss or gain in the financial statement of the corporate entities. Now, as the impairment method has not been mentioned in the accounting statements of the corporate entities, this confuses the users of the financial statements accounting statements because they find no basis of the impairment loss or gain. Thus, it can be evidently stated here that the qualitative characteristic of relevance has been hampered in such an action. This is because the users of the financial statements find no similarity in the disclosures in regards to the impairment loss or gain and result in the increase in the complexity of the annual report that has been prepared by the organization. Moreover, such a practice also increases the chances of occurrence of the material misstatement in the books of accounts accounting statements no particular disclosure has been provided in the annual report of the listed business entities of UK. Furthermore, it also complicates the process of preparation of the financial reports accounting statements the accountant has to adhere to the current accounting standard along with the accounting standards that has been established by the FASB. Thus, it can be evidently stated here that the qualitative characteristic of financial reporting that refers to the particular quality of representational faithfulness also has been hampered by this particular practice. Thus, it can be concluded here that the adherence to the norm established by FASB results in the non-compliance with the essential qualitative characteristics of a financial report (Tsunogaya, 2016).
Valuation of assets on Cost Basis Model
The issue that has been presented in the question refers to the fact that certain directors choose not to value the assets like plant, property and equipment at fair value and choose to value or measure the assets on the basis of the cost model. The directors do not opt for revaluing the assets like the property, plant and equipment due to the fact that the revaluing process might result in a loss that will be certainly reflected in the accounting statements of the corporate entity and will reduce the profit that has been earned by the company throughout the financial year. This will further result in the lowering of the goodwill of the firm in regards to the market in which it has been operating.
Accounting statements mentioned earlier the effect on the financial statements would be that the profit would increase in case of an impairment gain and the profit would reduce in case of an impairment loss in regards to the valuation of the asset.
The decision of not revaluing the property, plant and equipment will affect the wealth of the shareholders as the true reflection of the financial position of the corporate entity will not be reflected in the annual report of the corporate entity (Tsunogaya, 2016).
References
Ali, A., Akbar, S., & Ormrod, P. (2016, March). Impact of international accounting report standards on the profit and equity of AIM listed companies in the UK. In Accounting Forum (Vol. 40, No. 1, pp. 45-62). Elsevier.
Balsmeier, B., & Vanhaverbeke, S. (2018). International accounting report standards and private firms’ access to bank loans. European Accounting Review, 27(1), 75-104.
Dye, R., Glover, J., & Sunder, S. (2014). How Can Accounting report Standards Resist Accounting-Motivated Accounting Engineering?.
Graham, A., Nandialath, A. M., Skaradzinski, D., & Rustambekov, E. (2017). Macroeconomic Determinants of International Accounting report Standards (IFRS) Adoption: Evidence from the Middle East North Africa (MENA) Region.
Jibril, M. A., & Abubakar, M. (2016, October). Effect Of International Accounting report Standards (Ifrs) On Corporate Financing In Nigerian Banking Industry. In Proceedings of Economics and Finance Conferences (No. 4206880). International Institute of Social and Economic Sciences.
Kim, J. B., Shi, H., & Zhou, J. (2014). International Accounting report Standards, institutional infrastructures, and implied cost of equity capital around the world. Review of Quantitative Finance and Accounting, 42(3), 469-507.
Lestari, D. (2015). The Effect OF Implementation OF Convergence International Accounting report Standards (ifrs), Good Corporate Governance, And Disclosure OF Corporate Social Responsibility (csr) ON Investor Reactions (in Manufacturing Companies Listed ON Indonesia Stock Exchange Period 2011-2013).
Perkins, J. D. (2016). Discussion of “Security Returns and Volume Responses around International Accounting report Standards (IFRS) Earnings Announcements”. The International Journal of Accounting, 51(2), 266-270.
Sunder, S. (2016). Rethinking accounting report: standards, norms and institutions. Foundations and Trends® in Accounting, 11(1–2), 1-118.
Tsunogaya, N. (2016). Issues affecting decisions on mandatory adoption of International Accounting report Standards (IFRS) in Japan. Accounting, Auditing & Accountability Journal, 29(5), 828-860.
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