The Qualitative Characteristics of Financial Reporting under the Conceptual Framework
Qualitative Characteristics of Financial Reporting
Consistency or Comparability
To come up with essential conclusions when doing any form of financial reporting, it is very necessary to compare financial statements and reports of previous periods whether annually, biannually or whichever period the organization operates. This comparison feature of financial reporting will enable the accountant to make valid conclusion depending on the performance of the organization drawn from previous progress trends and organization’s ranking. The comparison between reports filed in last financial statements could be critical tools to the assessment of organization consistency and position in the current situation of the organization operations. To assess comparability and organization consistency, other qualitative features can be used related to comparability.
These similar characteristics must be tested over a given time span. Comparability is a fundamental principle of financial accounting when it comes to improving other financial accountability characteristics of an organization. By use of comparability, relevance is enhanced as well as reliability. This can be closely linked to the interrelationship between these financial accounting characteristics. Alteration of the comparability of an organization may be caused by a change in the standards of accounting. If this happens, it becomes necessary to put the condition and situations that caused it in the financial report. Consistency must be apparent on parameters that are related and linked to each other on the financial statement. This consistency makes it easier for the target audience to analyze the organization’s progress and ranking as per the current market standards. It becomes necessary for parameters to incorporate financial characteristics concurring with the current affairs in the industry.
Paragraph three of the extract
It is a fundamental principle in communication by use of financial reports. This qualitative characteristic seeks to provide brief, clear and precise financial statements that can be comprehended by people with basic understanding of financial accounting. Financial accounting reports must be clear and accurate to be understood by the target users (Corbin and Strauss 2008). Details and supplementary documents should be well indicated and properly organized. Illustrations become very helpful in the financial reports as they are easy to interpret as they show the information graphically. The use of bar graphs and pie charts make it easy for users to understand the trends and ranking of the organization. The information presented should, therefore, be in detail and complete. The reports should submit concise and clear information without complications. Understandability does not, however, recommend the exclusion of elaborate piece of information just because it is difficult to comprehend.
Decision not to Introduce Specific Regulations for Corporate Social Responsibilities
This kind of information must, therefore, be presented in a well-organized procedure and order to facilitate the user gets it. Events and complete transactions must be well accounted for. This part must be brought up in a way that an intelligent user understands the whole idea. Clarity of the presentation should enable users with the least of economic and business accounting knowledge to understand the report. Following the financial statement makes it relevant to the target users (Coram, Monroe and Woodliff 2009). For useful, valid economic conclusions to be drawn from the financial reports, it is therefore mandatory to be understood by users, if not so they could be forced to make decisions based on an unreliable report.
Relevance
This characteristic of financial accounting requires that the information provided in financial accounting reports directly or indirectly in one way or another affects the target users’ decisions. The users’ demands must, therefore, be addressed by the financial reports. This happens when the economic choices of the target users are immediately affected by the reports (Dhaliwal, Radhakrishnan, Tsang and Yang 2012). Reporting only relevant piece of information is one way to achieve relevance in financial reporting while the other is including some message that when excluded from the financial report could interfere with the users’ decision making. From the first paragraph of this given extract, millions of dollars have been spent trying to come up with some universal or international financial reporting standards to enable investors to make similar economic decisions. This is not likely to prosper since the users’ in this case who are the ordinary citizens are not involved in the decision making.
Reliability
The kind of message in the financial accounting report should be free of bias and just. The information passed but be very reliable to conclude from and for future reference. From the second paragraph, Geoff Roberts says that investors rely on investor reports and management briefings to understand companies’ and numbers. It is, therefore, necessary to produce reliable financial statements. These reports may trigger investment by investors and interested entrepreneurs. To make these reports more economically viable, they should not have any biasness nor should they have errors. Reports should give accurate information and not at any given time should misleading information be reported. Estimates and uncertainties must be presented in the disclosure.
It is evident that relevance and reliability of financial reports are critical characteristics in the reporting of financial accounting because the information is needed by other investors for decision making as for the case of reliability while the relevance part of the principles equips the target users’ decision-making process. The relationship between these two qualities makes it a pressing issue to address one at the expense of the other therefore they both should be balanced when writing reports of financial accounting (Cho, Roberts and Patten 2010). This way addressing financial reliability as well as financial relevance is challenging since in the beginning the information provided could seem unsure and express a lot of doubt making it less reliable. When this information gets to gain reliability with time, it becomes less relevant to the users and loses its relevance. Remarkable error, omissions, mistakes, and biasness tend to make financial reports less reliable (Georgiou and Jack 2011). The less reliable reports, in turn, lose their relevance to the target users (Global Sustainable Investment Alliance 2012).
Implications of US GAAP and IFRS Accounting Standards
a. The Public Interest Theory
This theory assumes that there is a habit for economic markets to malfunction. This is because the markets are said to be sensitive and may tend to favor a few members of the community affecting the entire society badly (Cho and Patten 2007). The government intervened to come up with regulating measures to favor the interests of its citizens as a whole. This theory was developed in 1932 by A.C Pigou. This man had a belief that rules are made in the public domain to rectify collapsing systems. These regulations are made to favor the citizens as a whole society rather than to favor the lawmakers or those in higher offices in the government.
This public interest theory seeks to heal the society and offset the burden they have to bear placed them by the regulators. The theory deals with how organizations may reveal accounting reports and progress but also revealing other nonfinancial sectors of the organization which bears an integral part of the organization. The social and environmental pressure of the organization to the society is felt. Steps were taken by the organization to clean up the mess they have done to the environment by; pollution, habitat destruction, noise pollution among other negative impacts (Hahn 2012). The mitigation measures that the organization takes by coming up with clean-up initiatives; tree planting initiatives and community involvement in the whole process. The exposure of the impacts of these impacts and the mitigation measures put in place contribute to the public interest theory (Fortanier, Kolk and Pinkse 2011).
It was concluded by the government that the company organizations in that particular country should control their operations in favor of their surrounding environment and society as they also strive to achieve their economic objectives.
b. Capture Theory
The capture theory states that these government organizations are formed by previous and expected working staff hence the staff put more effort with the aim of achieving the organization’s objectives. The organizations accrue some limited resource distribution to the society rather than meeting the society’s demands (Muralidharan, Dillistone and Shin 2011). The theory appreciates the linkage between government organizations and the companies in which they work. These government organizations were made to prioritize the protection of the society and the environment. Since the staff forms the significant part of the company’s former and expected employees, they tend to get disoriented from the government’s priority of their welfare as a society (Tost 2011).
Effects of Revaluation of Non-current Assets
The society they divert their attention to increased productivity of the company to get an increase in their pay. The members of the government organizations are getting a better pay work in the interest of the company (Reimsbach and Hahn 2013). These government organizations require technical know-how for the various industries operating in the government organizations. Some of the controlled industries are banking, transport, energy, and education and communication sectors (Manetti 2011). These government organizations work as skilled company managers thereby acquiring power. This way according to the capture theory, the controller’s industry will evade the regulations for their positive gains becoming the gainers of the regulation while the disclosure control benefits a few members of the society including the public and investors (Dhaliwal Radhakrishnan, Tsang and Yang 2012).
Economic Group Theory of Regulation
This theory assumes that the industry organizations are meant to perform specific economic benefit. The given groups are antagonistic to each other. The groups tend to feel like they can influence the authority to make rules in their favor (Hahn and Kühnen 2013). These groups do not have any common objective for the society and can, therefore, be said to be self-centered (Guidry and Patten 2012). In this incident, the controllers are also encouraged by the selfishness of these economic groups rather than the public interest (Cho 2009). The controllers also are self-centered and only think of the way they can maintain their current positions and status and how they can be re-elected into office (Hahn 2011). The more powerful of the groups will influence the government while the less powerful will suffer under the more influential groups (European Commission 2011). According to this theory, the rules imposed by the regulators can never lead to accountability for the companies’ social and environmental progress (Erickson, Weber and Segovia 2011).
Implications of the Use FASB Rules
- The rules that don’t get to accrue a positive gain from the cost-benefit analysis should be reevaluated
- The cost-benefit analysis only focuses on the net gain and profit accrued rather than how it was achieved. It is known to come up with some ideal measure of the expected set of rules.
- The legislators, in this case, tend to face a lot of challenges from the many goals they work towards attaining. According to the challenges from the trade-off, this whole process tends to favor the controllers (Castelló and Lozano 2011).
- It becomes difficult to deal with the controllers when the parties involved differ in the amount one is ready to offer or pay while the one getting paid expects a different amount.
a. Motivation To Directors
The existence of many ways of finding a discounting rate whereby the currently used methods are the rate of return on private capital and the real rate method.
b. Effects of The Decision
There is a different perception of the value of various assets and property depending on the utilization of this facility by different people
c. Impacts Of Not To Revalue
There is a tendency that the present society may not value the future benefits and a possibility of the future generation that currently may not enjoy the current situation.
Importance of Comparability, Understandability, Reliability, and Relevance in Financial Accounting
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