Fundamental Qualitative Characteristics
Question:
Discuss about the Advanced Financial Accounting for AXA Head of Finance.
In order to increase the usefulness of the financial information, the financial statements of the business entities are required to posses the qualitative characteristics. There are two types of qualitative characteristics of financial reporting. They are Fundamental qualitative characteristics and Enhancing qualitative characteristics. The major elements under fundamental qualitative characteristics are Relevance and Faithful Representation; and the major elements under enhancing qualitative characteristics are Comparability, Verifiability, Timeliness and Understandability (Barth 2013). In the provided article, it can be observed that different individuals have provided their opinion about the adoption of International Financial Reporting Standard (IFRS). In every statement, their opinions have pointed towards the absence of specific qualitative characteristics of financial reporting. They are discussed below:
In the provided opinion, former AXA head of finance Geoff Roberts mentioned that the investors of the companies largely rely on the investors report and the brief of the management f the companies for gaining accurate understanding about the financial position and major financial amount of the business entities. This particular aspect indicates towards a specific qualitative characteristic of financial reporting that is understandability (Huang, Teoh and Zhang 2013). Understandability is regarded as a major enhancing qualitative characteristic that helps in increasing the quality of financial reporting. In the presence of this specific qualitative characteristic, the users of the financial information become able to clearly classify, characterize and present the financial statements in order to provide greater understanding about the financial position of the business entities. It need to be mentioned that the adoption of the standards of IFRS is making some of the major financial aspects complex and fails to provide understandability for the financial statements. The opinion of Mr. Roberts indicates towards the fact that the adoption of IFRS framework is not effective in providing the investors with greater understandability about the financial reporting of the business entities through investor report and management brief (Kim, Kraft and Ryan 2013).
From the statement of Wesfarmers finance director Terry Bowen, it can be seen that the financial analysts would misinterpret the financial information of the business entities in case they try to explain the financial notes of the companies developed as per the standards of IFRS. This particular statements indicates towards the absence of two qualitative characteristic of financial reporting; they are understandably and comparability (Lawrence 2013). It needs to be mentioned that these are two enhancing qualitative characteristic of financial reporting. The presence of comparability qualitative characteristic helps the users in the identification of similarities and differences of the financial items. It implies that the users of the financial information will not be able to understands and compare the financial information of the business entities from the financial notes in the absence of proper technical knowledge (Kargin 2013). It means the users need to acquire effective technical Knowledge about different financial aspects in order to gain understanding about the IFRS adopted financial statements.
As per the opinion of Commonwealth Bank chief financial officer David Craig, the investors do not pay attention towards the financial information of IFRS adopted financial statements as it fails to covey the true financial position of the organizations (Carraher and Van Auken 2013). This particular aspects indicates towards the absence of a major qualitative characteristic that is faithful representation. It is a major fundamental qualitative characteristic of financial reporting. The absence of this particular qualitative characteristic implies that the IFRS standards fail in providing complete description of all the necessary financial items for providing the users with the relevant financial information (Palea 2013). In addition, the IFRS adopted financial statements fails in providing the numerical decryption of the economic phenomena of the business organizations. Moreover, it also indicates towards the fact that there is a large scope of doing manipulation with the financial information of the business entities in the presence of IFRS framework. For all these reasons, David Craig made this statement.
Enhancing Qualitative Characteristics
In this context, it needs to be mentioned that the main objective of financial reporting is to provide the users with the correct financial information so that they can judge the true financial position of the organizations. However, in the absence of so many fundamental as well as enhancing qualitative characteristics in IFRS reporting, it is not possible to satisfy the central objective of financial reporting (Palea 2013).
The following discussion shows the decision of the government to add no specific regulation with respect of three major theories. They are Public Interest Theory, Capture Theory and Economic Interest Group Theory of Regulation.
Public Interest Theory: According to the principles of public interest theory, the market regulators always try to find the market solutions for any problems that are economically efficient. As per this theory, regulations are provided with major importance for the solution of any problems (Oulasvirta 2014). All these factors implies that the main aim of this theory is the welfare of the public with the implementation of different kinds of regulations. With the respect of this theory, it can be said that there was a needed for the government to introduce regulations in the Corporation Act for the inclusion of social and environmental responsibilities. It implies that the market forces many not always work for the implementation of social and environmental responsibilities. The presence of specific regulations will put the obligation on both the firms and the consumers to fulfill their social and environmental responsibilities in the most correct manner (Kraakman and Hansmann 2017). Thus, for the success of this aspect, it is required to have specific regulations in the Corporations Act.
Capture Theory: The implementation of different kinds of regulations is done for the welfare of the common people. However, according to the concept of capture theory, the regulators do manipulation with the regulations in order to satisfy their own interest. It implies that the implemented regulations serve the interests of the regulators after certain period (Carpenter and Moss 2013). The main intentions of the designing the regulations are possible to know with the help of capture theory. Most importantly, the involvement of the people who will be affected by the implementation of the regulations can be identified with the help of this theory. By connecting this theory in the provided situation, it can be said that the government took the correct decision not to implement any kind of regulation for promoting social and environmental responsibilities (Potter, Olejarski and Pfister 2014). As per this theory, in the presence of any regulation in the corporation act, the regulators will start to satisfy their personal interest with the regulations after certain point of time. For this reason, it is good to have the market force as it will eliminate the scope to capture the regulations under the act.
Economic Interest Group Theory of Regulation: This particular theory is different from the above two theories. According to this theory, the regulations include different set of policies and the forces of demand and supply have effects on them. In this particular theory, the government is placed in the side of supply and interest group is placed in the demand side. It also states that the main motive behind the development of regulations is to make the industries beneficial (Berry and Wilcox 2018). Thus, it can be said that industries design the regulations and make the market to adopt them. From the point of view of this particular theory, it was needed for the government to introduce specific regulations for the welfare of the industry as the welfare of the industry can lead to the welfare of the consumers. Consumers are the major stakeholders of the business entities (Gilens and Page 2014). As per this theory, it is required for the government to include the consumers in the developing process of the regulations as this process would lead to the development of such legislation that will be beneficial for both the industry and the consumers. For this reason, it would be possible for the government to create a balance between in industry and consumers.
Views on Adoption of IFRS
From the provided situation, it can be seen that there is not any regulation for the revaluation of non-current assets based on fair value under US Financial Accounting Standard Board (FASB), but companies are required to consider the impairment cost of non-current assets as per FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (fasb.org 2018). It needs to be mentioned that these changes have various positive implications on the relevance and faithful representation of the US corporate financial statements of the business entities. These changes play an integral part to bring improvement in the financial statements of the business entities. It needs to be mentioned that change has contributed towards the development of one single accounting model for the accounting treatments of disposal or sale of the long-lived assets (fasb.org 2018). These assets can be previously held and used or they can be newly acquired. The implementation of this standard helps in broadening the presentation of discontinued operations for the inclusion of more disposal or sale related transactions. For this reason, there will not be any difference in the accounting transactions of similar events and circumstances. Most importantly, it needs to be mentioned that this aspect will be majorly helpful in bringing improvement in the process of the reporting of financial information. Apart from this, it needs to be mentioned that there are other major implications of these aspects (fasb.org 2018).
These changes will be majorly helpful in the resolution of different kinds of implementation issues that will be contributed towards the improvements in compliance with the required accounting standards and principles (fasb.org 2018). All these aspects will be majorly helpful in the promotion of comparability and faithful representation of the financial information. The implementation of these standards will be majorly helpful in the elimination of the perceived inconsistencies from having two different accounting models for the accounting treatment of long-lived assets to be disposed of by the selling process. Apart from this, it needs to be mentioned that this change in the accounting information will enable the users of the financial statements in the identification of the major similarities and differences between the two sets of economic events of the long-lived assets of the business entities (fasb.org 2018). Thus, from the above discussion, it can be seen that the above-mentioned rule of FASB helps in the overall improvement of the financial statements of the business entities by improving the accounting treatment of long-lived assets.
There are some major reasons that motivate the directors in the process of asset revaluation. They are mentioned below:
- The process of assets revaluation helps in showing he true rate of return on capital employees that helps the directors in the development of effective financial strategies.
- The process of asset revaluation helps the directors of the companies in knowing the fair value of the assets that have been considerably appreciated from the time of the purchase.
- The asset revaluation process provides the directors of the companies with the opportunity of negotiating the fair price of the assets at the time of merger and acquisition.
- The revaluation process of the assets provides the directors with the view about the total value of the resources of the firm (Christensen and Nikolaev 2013).
In the absence of the process of asset revaluation, there will not be any increase or decrease in the book value of the assets of the business entities. Due to this, the entities can face abnormal amount of loss or profit at the time of asset disposal in the fair market value. Apart from this, the absence of the strategy of asset revaluation will lead to the decrease in the earning of the companies. Most importantly, there will be decrease in the total amount of assets of the companies that will affect the financial position of the companies (Bauer 2014).
The decision not to revalue the assets has adverse effect on the shareholder’s wealth of the companies. The absence of the revaluation of assets will lead to the decrease in the earning of the company. Decrease in the earning of the company will fetch less percentage of return to the shareholders due to the decrease in earnings per share. Thus, the shareholders will be deprived fro getting higher return (Palea 2014).
References
Barth, M.E., 2013. Measurement in financial reporting: The need for concepts. Accounting Horizons, 28(2), pp.331-352.
Bauer, K., 2014. Fixed assets valuation in the condition of bankruptcy risk: the role of estimates. Journal of modern accounting and auditing, 10(6).
Berry, J.M. and Wilcox, C., 2018. The interest group society. Routledge.
Carpenter, D. and Moss, D.A. eds., 2013. Preventing regulatory capture: Special interest influence and how to limit it. Cambridge University Press.
Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship, 26(3), pp.323-336.
Christensen, H.B. and Nikolaev, V.V., 2013. Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), pp.734-775.
Fasb.org. (2018). Summary of Statement No. 144. [online] Available at: https://www.fasb.org/summary/stsum144.shtml [Accessed 14 Apr. 2018].
Gilens, M. and Page, B.I., 2014. Testing theories of American politics: Elites, interest groups, and average citizens. Perspectives on politics, 12(3), pp.564-581.
Huang, X., Teoh, S.H. and Zhang, Y., 2013. Tone management. The Accounting Review, 89(3), pp.1083-1113.
Kargin, S., 2013. The impact of IFRS on the value relevance of accounting information: Evidence from Turkish firms. International Journal of Economics and Finance, 5(4), p.71.
Kim, S., Kraft, P. and Ryan, S.G., 2013. Financial statement comparability and credit risk. Review of Accounting Studies, 18(3), pp.783-823.
Kraakman, R. and Hansmann, H., 2017. The end of history for corporate law. In Corporate Governance (pp. 49-78). Gower.
Lawrence, A., 2013. Individual investors and financial disclosure. Journal of Accounting and Economics, 56(1), pp.130-147.
Oulasvirta, L., 2014. The reluctance of a developed country to choose International Public Sector Accounting Standards of the IFAC. A critical case study. Critical Perspectives on Accounting, 25(3), pp.272-285.
Palea, V., 2013. IAS/IFRS and financial reporting quality: lessons from the European experience. China Journal of Accounting Research, 6(4), pp.247-263.
Palea, V., 2014. Fair value accounting and its usefulness to financial statement users. Journal of Financial Reporting and Accounting, 12(2), pp.102-116.
Potter, M.R., Olejarski, A.M. and Pfister, S.M., 2014. Capture theory and the public interest: Balancing competing values to ensure regulatory effectiveness. International Journal of Public Administration, 37(10), pp.638-645.
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