The Revised Framework for Multinational Companies
A lot of companies are diverging into the international market, and this has prompted the Financial Accounting Standards Board to take action so that it can minimise the differences that are present in the reporting of financial practices. The board decided to come up with the revised framework that ensured the differences that were present in the financial reporting of multi-national companies were eliminated. The revised framework also known as the conceptual framework is a framework that has two qualitative characteristics which contribute to effective and efficient financial reporting. The qualitative characteristics ensure that companies in the international market can carry out financial reporting in a similar manner so that they can conclude (Giner et al. 2016).
The two qualitative characteristics in the revised framework are fundamental and enhancing qualitative characteristics. The fundamental characteristics are made up of two main components which are relevance and faithful representation. The revised framework ensures that the information in the financial statements is relevant to the companies or branches involved and that they can find it useful to make decisions (Picker et al. 2017). The CFO’s, however, say that the information in the statements is useless. This means that the information is not relevant to their set objectives or goals and also it does not help them to do anything. In this instance, the information cannot be used for comparisons because it does not provide any necessary information. Therefore, the CFO’s believe that the conceptual framework does not achieve relevance.
In fundamental characteristics, we also have faithful representation where the information provided in the statements has to meet three aspects that are neutral, complete and free from error. If information has all these three aspects, then the CFO’s can rely on it to make decisions. However, the CFO’s said that the information was a lot and it had gone to levels where it could no longer be managed. In this instance, we see that the CFO’s were not able to depend on the financial information. Hence the information was unreliable, and the CFO’s believe that it did not meet the three aspects of being neutral, complete and free from error (Singh 2017).
The second qualitative characteristics are the enhancing characteristics. This characteristic aims at accomplishing four main objectives as listed below. The first is comparability. In comparability, the revised framework ensures that companies in the international market can be able to compare their financial statements in the different branches (Chan and Vasarhelyi 2018). This has not been possible since the CFO’s say that the information is unmanageable meaning they cannot use it to make comparisons between different companies.
The Qualitative Characteristics of Effective and Efficient Financial Reporting
The second objective is understandability. The revised framework ensures that the information provided in the financial statements can be understood by anyone who wants to read the statements. However, when analysts try to read the reports they cannot comprehend them and more often than not, misinterpret them. In this instance, we see that the companies are unable to understand the financial statements and misinterpret them when they try. This does not meet the quality of understandability that the framework ensures (Zhang and Andrew 2014).
The third objective is timeliness. The framework ensures that information is provided on time so that the companies can work efficiently. In this case, the companies have to outsource for people that are trained professionally to read the statements. This will waste a lot of time that would have been saved if the company was able to read the statements on their own. The last objective is verifiability, and here the framework ensures that companies can be able to agree upon a decision after reading the reports. However, the companies cannot comprehend the statements meaning they cannot conclude (Gummer and Mandinach 2015).
In this instance, we see that the views presented in the article are not consistent with that of financial reporting because they are unable to make comparisons, understand the statements and also rely on them.
The objective of this theory is to ensure that at all times the needs and interest of the public are put first. The government usually sets the regulation and ensures that all companies are at purr with the regulations. The government, therefore, regulates the organisation. The public is essential to the success of a company because they form the demand of the company. Without this market then the company will not be able to supply its products or services causing it to fail (Mizutani and Nakamura 2017).
The government does not need to regulate a company because it blindly puts the customers first. If there is a demand for a particular product in the market, a company will do its best to supply the demand because this will benefit them in terms of the profits earned. This also applies to when the market force is unhappy with a service or product, and they ask the company to change this. The company would be forced to do so even if it was not in their objectives or strategies. From this, we see that an organisation has to conform to the interests of the market forces regardless of their policy because they do not want to lose the demand. Therefore, the government does not need to set any rules for regulation.
Companies Compliance with the Revised Framework
The objective of this theory is that the needs and interest of a company are put first. The body that regulates the organisation becomes captured by it so that it regulates in favour of the company. The body is usually the government. In this instance, we see that the organisation puts their interest and needs first, but they will not be able to achieve these needs without the market force. The company needs to ensure that their market force is supplied to appropriately so that they can, in turn, achieve their interest (Cohen and Sundararajan 2015).
If a company, for example, wants to increase their profit earnings, they will have to increase their sales by an increase in demand. If they do not meet the needs of the market force, then there will be no demand which affects the supply which affects the profits. Therefore as much as the company wants to put their needs first, to fulfil these needs, they need to first cater to the market force. Thus the government does not need to set up regulations because the organisation can regulate itself (Holcombe and Boudreaux 2015).
The objective of this theory is to ensure that an organisation and its members benefit the most. The government normally sets the regulation, but in this theory, it is the industry that sets them. The work of the government is to approve the regulations established by the industry. The organisation usually conducts surveillance on the environment before setting the regulations. The environment consists of the demand which is the customers (Black 2017).
The company still wants to benefit but to do so; they have to know what the demand is in public. The organisation is aware that they have to address the interests and needs of those in the public before catering to their own. The government usually approves the set regulation, but this is also not needed because the demand in the market will drive whatever regulations that would be set. Therefore the organisation will always adhere to the interests and needs of those in the market force.
The Financial Accounting Standards Board came up with the Statement under section no 144 to improve financial reporting among multinational companies. The statement ensures that it meets the needs of relevance and faithful representation which are qualitative characteristics in the conceptual framework for corporate financial reporting.
In relevance, the statement ensures that all the information provided for financial reporting is useful and it can be used in making decisions. This is evident in the statement when they allow for the expansion of discontinued operations. This they do so that it can include more transactions, therefore, provide all the relevant information that will be needed in the reporting.
Regulatory Theories in the Context of Financial Reporting
In faithful representation, on the other hand, the statement ensures to achieve by meeting the three aspects of this characteristic which are neutral, complete and free from error. The statement ensures that information provided is complete through the expansion of the discontinued operations to include more transactions. This way the information that an organisation needs will all be there and therefore will be complete (Chen et al. 2015).
The statement also ensures that the information provided is neutral meaning that the information will not have any bias. This they do by providing instructions on how to account for the costs of upfront activities. The instructions will allow users to follow what to do without having to carry out the financial reporting in a subjective manner. Therefore the statement accomplishes the aspect of being neutral.
The statement also ensures that all the financial reporting is free from errors. The statement allows only for one model to be used by customers in reporting. This way the statements will have minimal to zero errors because there is no use of more than one model. Use of more than one model also brings a lot of confusion which the statement successfully avoids.
(a)What might motivate directors not to revalue the property, plant and equipment?
It is never an easy task to work out feasible inspiration for the approach adopted. The rationale given by most directors is that the assets’ sale under various market condition could lead to a much lower among of the valuations suggest. Further, they could believe that, for the accountability, retention of historical cost valuations remains more effective and efficient. However, their strategy seems not be conservative. By choosing never to undertake revaluations, the assets shall be understood concerning their respective present values. Consequently, the expenses from depreciation will remain lower may that by choosing never to revaluate and the profits reported would also be higher. This implies it is quite challenging to know whether this is the inspiration of management in question. Returns on assets will further increase due to higher profit alongside decreased asset base. A decision not to revaluate the non-current assets, to the extent that management will receive bonuses anchored on profits, could culminate in significant gain to the managers (Islam, Nusrat and Karim 2016).
(b)What are some of the effects the decision not to revalue might have on the firm’s financial statements?
Failure to revaluate the PPP will mean that the financial statements are never an accurate reflection of the excellent image of the firm. Historical cost-oriented accounting regards the as PPP as being recorded at the initial acquisition value. Nonetheless, as the time passes by, the assets will either appreciate or depreciate. Hence, it becomes a necessity that PPP assets need to be weighed against the market value to make the desired adjustment for asset revaluation. Lack of revaluation makes the information in a financial statement to mislead, and hence investors will make unsound decisions. The financial statement of a company will henceforth become useless when the firms go for merger and acquisition where current market price is used in the purchase consideration computation (Chaudhry et al. 2015).
Necessity of Government Regulation in Financial Reporting
(c)Would the decision not to revalue adversely affect the wealth of the shareholders?
This response is given partly by the level of efficiency it is we believe the capital markets. Where we believe that the market is never efficient, then we might believe that the prices of share will simply/mechanically depict the information that financial statement display. Lower assets, and hence, lower net asset baking a share, might be impounded in the prices of the share. Nevertheless, a given level of this decrease in share price could be balanced off by higher profit reported triggered by lower depreciation expenses. Nonetheless, if it is believed that capital market stays efficient, it subsequently does not a concern whether the balance sheet is an accurate depiction of the current value of assets, provided there is specific information which is accessible to the public relating to the present market value of the assets of the company. Because such information is available in the financial statements’ notes, a proponent of market efficiency would indeed argue that the accounting treatment of the firm will have least or even no impact on the price of shares (Botelho et al. 2015).
References
Black, J., 2017. Critical reflections on regulation. In Crime and Regulation (pp. 15-49). Routledge.
Botelho, R., Azevedo, G., Costa, A. and Oliveira, J., 2015. Property, Plant and Equipment disclosure requirements and firm characteristics: the Portuguese Accounting Standardization System. International Journal of Academic Research in Accounting, Finance and Management Sciences, 5(1), pp.58-71.
Chan, D.Y. and Vasarhelyi, M.A., 2018. Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.
Chaudhry, A., Coetsee, D., Bakker, E., Varughese, S., McIlwaine, S., Fuller, C., Rands, E., de Vos, N., Longmore, S. and Balasubramanian, T.V., 2015. Property, Plant, and Equipment. 2015 Interpretation and Application of International Financial Reporting Standards, pp.151-186.
Chen, C.W., Collins, D.W., Kravet, T.D. and Mergenthaler, R.D., 2018. Financial statement comparability and the efficiency of acquisition decisions. Contemporary Accounting Research, 35(1), pp.164-202.
Cohen, M. and Sundararajan, A., 2015. Self-regulation and innovation in the peer-to-peer sharing economy. U. Chi. L. Rev. Dialogue, 82, p.116.
Giner, B., Hellman, N., Jorissen, A., Quagli, A. and Taleb, A., 2016. On the ‘Review of Structure and Effectiveness of the IFRS Foundation’: the EAA’s Financial Reporting Standards Committee’s View. Accounting in Europe, 13(2), pp.285-294.
Gummer, E. and Mandinach, E., 2015. Building a Conceptual Framework for Data Literacy. Teachers College Record, 117(4), p.n4.
Holcombe, R.G. and Boudreaux, C.J., 2015. Regulation and corruption. Public Choice, 164(1-2), pp.75-85.
Islam, M., Nusrat, F. and Karim, A.K.M., 2016. Revaluation of Property, Plant and Equipment (PPE) in Bangladesh: Motivations, Value Relevance, and Effects on Audit Fees.
Mizutani, F. and Nakamura, E., 2017. Regulation, public interest, and private interest: an empirical investigation of firms in Japan. Empirical Economics, pp.1-22.
Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and Van Der Tas, L., 2016. Applying IFRS Standards. John Wiley & Sons.
Singh, R., 2017. The wiley 2017 interpretation and application of ifrs standards. Delhi Business Review, 18(2), pp.115-116.
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
