The Revised Framework for Financial Reporting Standards
A lot of businesses are branching into the international market because there is high demand in these markets. These businesses are faced with challenges due to the differences that exist in the financial reporting standards. Therefore, the way the financial statements are recorded is not the same which makes it difficult for the business to read and evaluate the report. The Financial Accounting Standards Board came up with a revised framework in conjunction with the international accounting Standards Board that tries to eliminate this differences (Palmrose and Kinney 2018).
The revised framework was issued as an aim to eliminate the differences that exist in financial reporting. Global market firms can use the framework to ensure adequate financial reporting to make compare financial statements. The framework is comprised of two qualitative characteristics whose objective is to ensure that financial reporting can be as similar as possible.
According to the article, the conceptual framework does not meet the objectives of the qualitative characteristics. This is shown below:
The first qualitative characteristic is fundamental characteristic. The fundamental characteristics comprise of two groups which are relevance and faithful representation. The conceptual framework aims to achieve relevance in financial reporting. This is by ensuring that the information that is provided for financial reporting is useful and can be used to make decisions. In the article, the CFO’s believe that the financial provided is useless. In this statement, it is evident that the information that is provided is not relevant. This means that the CFO’s cannot use the information in any given circumstance because it is not applicable to the statements (Nobes and Stadler 2015).
The revised framework aims to achieve reliability in reporting to make sound decisions. A reliable report meets characteristic of faithful representation through faithful representation. The CFO has complained that the financial information has gone to levels where it can no longer be managed. In this instance, we see that the information cannot be depended on because the CFO’s cannot even handle it. For information to be reliable, it needs to be complete, neutral and free from error. The CFO’s cannot rely on the information they are provided because it does not meet these qualities.
The second qualitative characteristic is enhancing qualitative characteristic which has four qualities. First is comparability. The revised framework aims at ensuring that companies in the global market can be able to make comparisons between their financial statements because they are similar. However, the CFO’s are not able to make comparisons because the information provided is useless and therefore, they cannot achieve comparability.
Fundamental Qualitative Characteristics
Second is understandability. The framework aims at ensuring that companies can be able to read and understand their financial statements so that they can make decisions. However, in the article understandability is not achieved because the analysts are unable to interpret the reports. In cases where they can read the statements, they misinterpret them. Therefore, the framework fails to meet understandability because the IFRS accounts cannot be comprehended.
Timeliness is the third one. The revised framework aims at ensuring that all financial reporting is carried out promptly so that the reporting can be useful. In the article, the companies have to look for professionals to read the IFRS account and this consumes a lot of time. Therefore the framework does not achieve timeliness (Yurisandi and Puspitasari 2015).
Lastly is verifiability. The revised framework aims at ensuring all the parties involved in the decision-making process can reach an understanding and conclude. However, this is not achieved in accordance with the article because the analysts are not able to interpret the accounts and therefore will not be able to agree.
According to the views presented in the article, it is not consistent with those of corporate financial reporting. This is because, in corporate financial reporting, it aims at achieving comparability, understandability, and verifiability. This is not met according to the views expressed in the article.
The public interest theory from its name aims at catering to the needs and interest of the public. The public is the customers or the community at large, in other words, the demand. Therefore an organization will be regulated in a manner that it favors its customers and not the organization. The government is the one that governs the organization by setting the rules.
Organizations put their customers as their priority and respond to their demands. In this theory, the customer is always right, and therefore their needs are to be met under all circumstances. The government is not needed to regulate the company because the company has already put the customers as their priority (Aryee et al. 2015).
For instance, if the market force of certain company demand for better services because the services are inadequate, the company will need to act on this first. This is because if the customers are unhappy with the services they are receiving they will gladly leave the company and seek one with better services. Therefore it is not necessary for the government to regulate the company because they will always put their customers as the priority.
Enhancing Qualitative Characteristics
Capture theory
In the capture theory, the agency sets to regulate a company so that it caters for the interest of the public. The agency, which in this case is the government, gives the company pointers on what is hot in the market and the demands of the market force. This way the company can be able to act upon this so that they can maximize their gains and thus benefit the members of the company (Christensen 2016).
In most cases when an organization is formed, it aims to increase its demand by the expansion of the market force. The organization will have to evaluate the market to determine their needs then act on this by providing what the public wants. In this instance, we see that it is not essential for the government to give the organization pointers because they are capable of assessing the market. Therefore when they are benefitting from the surplus profits, the public is also benefitting because their needs are catered for.
In this theory, unlike the others, the company is the one that sets the regulations. The company usually sets these regulations in relation to its surrounding environment. The environment includes the market force and the customers as well. The government in this theory approves the regulations set by the organization. The organization sets the rules in a way that benefits it and the stakeholders. In this instance, we see that the organization can establish the regulations without the help of the government (Chauvey et al. 2015).
The organization aims at the maximum profit of its members, and to achieve this; they need high demand from the market. Therefore as much as they want to cater to their interests, they will have to cater to the interest of the public so that they can achieve their own. In other words, the market force is a means to achieve their set objectives and goals. Therefore the organization will as well put the interests of the market first so that they can achieve their goals. The government thus does not require to set regulations that will ensure the needs of the public are met because the organization will automatically do this.
The Financial Accounting Standards Board issued a Statement under No 144 to make financial reporting and accounting effective and efficient. The statement aimed at achieving relevance and faithful representation in accounting. These are the fundamental characteristics that ensure the differences that exist in financial reporting are eliminated or minimized.
The Public Interest Theory
Relevance is when the financial information provided in the statement is important and useful in accounting. The statement has been able to achieve relevance by allowing for the expansion of discontinued operations to include more transactions. In this instance, all the information that is relevant to accounting practice and that which is useful will be available. Therefore financial reporting can be carried out effecti AryeeAryee vely (Plummer and Patton 2015).
In faithful representation, the financial information has to be reliable. Reliable information is that which can be depended on. The statement has been able to provide reliable information by providing guidance on the costs of impairment that are classified as non- current assets. Therefore companies can use this guidance in their accounting. Also, the guidance allows for the information in the statements to be neutral. Therefore the reporting will not be subjective or biased because the companies will follow the guidelines provided.
Also in faithful representation, the financial information needs to be complete. The statement can provide comprehensive information through the expansion of the discontinued operations. This way, the information in the reports will be complete and enough to make decisions in accounting.
Lastly, in faithful representation, the financial information needs to be free from error. The statement makes this possible by allowing the use of one model. This will ensure that the financial statements will have little or no errors as compared to using more than one model.
The statement, therefore, achieves both relevance and faithful representation and allows for effective financial reporting and accounting.
Revaluation is an essential aspect of any given organization to determine the assets that they have. A company that does not revalue its plant, property, and equipment may be affected adversely. However, most directors do not carry out revaluation (Small, Smidt and Yasseen 2017). Some of the reasons that may cause this are:
- The revaluation process is costly and timely. Revaluing the plant, property, and equipment of a company costs a lot of money and directors prefer not using it to save the money. Also, the revaluing process is long and therefore takes a lot of time which directors do not have.
- Directors do not carry out revaluation because the process is tedious. The process not only takes a lot of time but also a lot of energy and therefore most directors stray away from it.
- Directors do not carry out revaluation because they are not familiar with it. The process is still new, and therefore many directors do not know it.
- Directors do not carry out revaluation because the fair value estimates are usually subjective because a valuer estimates the fair value of the assets (Mogylova 2014).
- Directors do not carry out revaluation because it involves the accurate estimates of the fair value of the assets which can be hard to accomplish.
If directors of a company do not carry out the revaluation process, then it will have an adverse effect on the company and the financial statements. The statements will be affected in the following ways
- The financial statements will not have the exact rates of the returns in investments.
- The financial statements will not have an increase in the assets that the company has acquired.
- The company will not be able to get high amounts of loan because the financial statements do not contain the fair value of fixed assets (Hu, Percy and Yao 2015).
- The financial statements will not have the fair value of assets, and therefore the company cannot lease or sell their assets.
When a company does not revalue the wealth of the company is affected which also affects the wealth of the shareholders. Without revaluation, the company is unable to decrease the ratio of debt to that of equity. Therefore with high deficits, the company is not able to pay its shareholders (Van der Velde 2016).
Also without revaluation, the company is not able to increase its assets, and therefore there are no returns on investments. This affects the wealth of the shareholders because they also do not receive any profits. This also affects the dividends that the company pays its shareholders. The dividends will be insufficient. In conclusion not revaluing a company’s plant, property and equipment affect the company which directly affects the wealth of the shareholders as well.
References
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Chauvey, J.N., Giordano-Spring, S., Cho, C.H. and Patten, D.M., 2015. The normativity and legitimacy of CSR disclosure: Evidence from France. Journal of Business Ethics, 130(4), pp.789-803.
Christensen, H.B., Nikolaev, V.V. and Wittenberg?Moerman, R.E.G.I.N.A., 2016. Accounting information in financial contracting: The incomplete contract theory perspective. Journal of accounting research, 54(2), pp.397-435.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), 930-939.
Mogylova, M., 2014. Institutional provision of agricultural fixed assets revaluation up-to-date. Accounting and Finance, (2), 167-172.
Nobes, C. W. and Stadler, C., 2015. The qualitative characteristics of financial information, and managers’ accounting decisions: evidence from IFRS policy changes. Accounting and Business Research, 45(5), 572-601.
Palmrose, Z. V. and Kinney, Jr, W. AryeeAryee R., 2018. Auditor and FASB Responsibilities for Representing Underlying Economics-What US Standards Actually Say. Accounting Horizons.
Plummer, E. and Patton, T. K., 2015. Using financial statements to provide evidence on the fiscal sustainability of the states. Journal of Public Budgeting, Accounting & Financial Management, 27(2), 225-264.
Small, R., Smidt, L. and Yasseen, Y., 2017. Revaluation of depreciable assets-benefits to organisations. Professional Accountant, 2017(30), 22-23.
Van der Velde, J., 2016. Trusts: Revaluation of assets by trustees. Bulletin (Law Society of South Australia), 38(10), 36. NobesNobes
Yurisandi, T., & Puspitasari, E. (2015). Financial Reporting Quality-Before and After IFRS Adoptio NobesNobes n Using NiCE Qualitative Characteristics Measurement. Procedia-Social and Behavioral Sciences, 211, 644-652.
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