Qualitative Characteristics of Financial Statements
Discuss about the Conceptual Framework of Australian Accounting Standard Board.
According to the Conceptual Framework of Australian Accounting Standard Board (AASB), relevance and faithful representation are the fundamental qualitative characteristics; and understandability, comparability, timeliness and verifiability are the enhancing qualitative characteristic (Scott 2015). The presence of all of these qualitative characteristic makes the financial statements more useful for the users of financial statements like investors, creditors, lenders and others. The following discussion shows the qualitative characteristic missing in the financial reporting framework as per IFRS.
It is essential for the financial statements to possess the qualitative characteristic of ‘understandability’ as the presence of this characteristic helps to increase the quality of the financial statements; at the same time, the presence of this qualitative characteristic makes the users of the financial statements to classify, characterize and present the financial statements so that they can obtain information of the entities to understand their financial performance and standings (Scott 2015). According to the statements of AXA head of finance, Geoff Roberts, the users of the financial statements like investors largely depend on the report for investors and the management brief in order to obtain sufficient underatsding about the financial performance as well as financial standings of them. Thus, as per his opinion, the ‘understandability’ characteristic is missing in the IFRS financial statements of the companies. The main reason is the complexity in the financial statements that the adoption of IFRS standards has brought and this aspect fails in providing the required understandability about the financial statements. This situation implies that as most of the business entities have adopted the standards of IFRS for the development of financial statements, the investors are not able to gain proper understanding about the financial performance and situation from investors report and management brief (Scott 2015).
Apart from understandability, it is essential for the financial statements to possess the qualitative characteristic of comparability that is one of the enhancing qualitative characteristic. The users of the financial statements of the companies can identify the similarities and differences in the major financial substances of the entities in the presence of this qualitative characteristic (Hoyle, Schaefer and Doupnik 2015). Terry Brown, the finance director of Wesfarmers, talks about the difficulty for the analysts to analyse the notes to the financial statements of IFRS as they can misinterpret if there is lack of technical knowledge. This situation implies that the users of the financial statements need to have effective technical knowledge in accounting in order to correctly interpret the notes to the financial statements as pet IFRS. Thus, the IFRS financial statements and notes lack both understandability and comparability.
Importance of Understandability
One of the most important qualitative characteristic of financial statements is faithful representation of the financial information. This is a major fundamental qualitative characteristic that ensures the compliance of the financial statements with the required accounting standards and principles (Hoyle, Schaefer and Doupnik 2015). According to the statement of chief financial officer of Commonwealth Bank, David Craig, the financial statements developed as per the standards of IFRS fails to provide the true picture of the financial position of the companies and this is one reason why the investors do not pay attention to these statements for gaining financial information. It shows the absence of the qualitative characteristic of faithful representation as the absence of compliances fails to provide information about the financial position of the companies. Apart from this, the absence of this characteristic indicates towards the lack of numerical description of many economic phenomena of financial statements. All these aspects together increase the scope of financial manipulation or fraud.
The central objective of the general purpose financial statements is to deliver the correct financial information to the users of financial statements so that they can ascertain the correct financial performance and position of the companies. This objective will not be fulfilled in the absence of the above-discussed qualitative characteristics of accounting information.
Australian government’s decision of not including any regulation in the Corporations Act can be analysed with the help of the following theories of regulations:
The aspects of public interest theory put emphasis on the fulfilment of the demand and interests of the public with the help of the introduction of regulations. This theory is considered as majorly helpful in providing the theoretical justification of any regulation that is presented for the public. Due to this reason, the introduction of regulations plays an integral part for solving any market issue (May 2013). Hence, according to this theory, the market regulators try to do welfare for the public with the introduction of specific regulation. The application of the concept of this theory indicates towards the necessity of the government to introduce regulation in the Corporations Act for social and environmental responsibilities. The introduction of regulation shows the weakness of market forces as they are not always helpful to create awareness about the social and environmental responsibilities. The implementation of specific regulation in the Corporations Act will put the obligation on the business entities and the consumers to perform their responsibilities towards the society and the environment in the most effective way. Thus, the above discussion properly justifies the decision of the Australian government about the Corporations Act.
Importance of Comparability
As per the above discussion, the main aim of the introduction of regulations is to do welfare for the firms and consumers, but the concept of capture theory differs with the principles of public interest theory (May 2013). After certain period of time, the implemented regulations serve to satisfy the interest of the regulators. The application of capture theory helps in the identification of the major intention for introducing regulations. Apart from this, the application of this theory also assists in the identification of the main group for whom the regulations are being introduced. According to the principles of capture theory, it can be said that the government has taken in correct decision not to introduce any regulation in the Corporations Act in order to promote social and environmental responsibilities. It implies that the business entities would do the right thing even in the absence of any regulation as they are aware of the market forces. Thus, in the absence of any specific regulation in the Corporations Act, the regulators will not get any option to satisfy their interest with the help of regulations. For all these reason, the government should allow the market forces work for the promotion of social as well as environmental responsibilities.
As per this theory, there is a connection between the regulations and the implemented policies; and the forces of demand and supply have their effects on them. In the concept of this theory, the government is considered as the supply group and the interest group is considered as the demand group (Weygandt, Kimmel and Kieso 2015). For this reason, to do the welfare of both the business industries and consumers is the main aim of the introduction of regulations. The government introduces the regulations in such a manner so that the industries can adopt them. Hence, the application of this theory states that it is needed for the government to introduce regulation in the Corporations Act for the introduction of social and environmental responsibilities as it will do the welfare of both the industries and consumers. Moreover, the government can allow both the industries and consumers in taking participation in the regulation development process as this process will lead to maintain a balance between the industry and the consumers.
As per the given scenario, there is not any obligation on the US companies to carry on the asset revaluation process at fair value of the non-current assets, but the obligation is to take into consideration the impairments of these accounts of non-current assets as per FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. This particular regulation related to the revaluation of non-current assets ensures the faithful representation of the financial statements of the US business entities as this rule in majorly helpful to improve the financial reporting of the non-current assets. With the help of this regulation, US FASB has been able in the introduction of a single accounting model or accounting framework for the accounting treatment of the sales or disposal of the long-lived assets and these assets can be previously acquired or purchased. The introduction of this regulation helps to include more accounting transactions related to disposal or sales of non-current assets that contributes to effective presentation of discontinued operations (Weygandt, Kimmel and Kieso 2015). This aspect will lead to the improvement of financial reporting by diminishing the differences in the accounting transactions of same accounting events.
Importance of Faithful Representation
Apart from this, this specific regulation plays an integral part in getting the solution of the major accounting issues related to the implementation of non-current assets and this whole aspect contributes towards the compliance of the business entities with the required accounting standards and regulations (Weygandt, Kimmel and Kieso 2015). All these above-mentioned aspects have major positive effects on the faithful representation and comparability of the financial information. The perceived inconsistencies that have been developed from two different accounting frameworks for the accounting treatment of the long-lived non-current assets can be eliminated with the help of this regulation of FASB. The introduction of this regulation from FASB helps the business entities in understanding the major differences and similarities in different sets of accounting events involved with the long-lived non-current assets. Hence, based on the above discussion, it can be said that the particular regulation of FASB ensures the improvement of the financial statements with the help of the improvement in the accounting for long-lived assets.
Requirement (a)
It needs to be mentioned that there are certain reason that provides motivation to the directors for the revaluation of the assets. The process of asset revaluation is majorly helpful to provide the directors with the true rate of return on the capital employed and it assists the directors in the development of feasible accounting strategies (Beams, Brozovsky and Shoulders 2017). After that, the asset revaluation process is another major helpful tool for the directors to ascertain the fair of the assets as the values of the assets continuously appreciates since the time to purchase. In the presence of effective asset revaluation process, the directors of the business organizations get the opportunity for negotiating about the fair prices of the assets while the merger and acquisition takes place. Most importantly, the directors can obtain the total value of the resources of the entities in the presence of revaluation of assets.
Requirement (b)
Book value of the business entities will not increase or decrease in the absence of the asset revaluation process (Beams, Brozovsky and Shoulders 2017). For this reason, there can be unusual profit or loss from the sale of these assets. This whole aspect has negative effect on the financial situation of the company as the earnings of the company will decrease due to this. The absence of asset revaluation will indirectly contribute towards the decrease in the amount of the assets and it has negative effect on the financial standing of the company.
Requirement (c)
Non-revaluation of assets have major effects on the shareholder’s wealth. As per the earlier discussion, there will be decrease in the earnings of the company due to the absence of asset revaluation. In the presence of decreased earnings of the company, it will not be possible for the companies to provide the investors with their required return on investment. Thus, all these aspects will affect the wealth of the shareholders.
References
Beams, F.A., Brozovsky, J.A. and Shoulders, C.D., 2017. Advanced accounting. Pearson.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
May, G.O., 2013. Financial accounting. Read Books Ltd.
Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.
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