Assessment Task Part A
The article “Unwieldy rules useless for investors” focuses on criticising the standards of financial accounting as well as IFRS also. There are several evident factors behind this criticism. In financial reporting, there are various key factors. They are:
- Putting in useful and relevant data that aids in taking investment decisions.
- These decision also directly influences the assessment of pro forma cash flows.
- Any transitions in the structure of business might also be assessed
The conceptual framework incorporates the following qualitative characteristics:
1. Relevancy
Relevant and appropriate information that might help to influence the investment decisions of major investors is of primary importance in financial reporting (Acharya and Ryan, 2016).
2. Comparability
The information provided, should be comparable in context of similar entities in lieu of the same Fiscal Year (Ang, 2018). Hence, the characteristics might be u8seful for investors to realise the likeliness and unlikeliness within various items.
3. Faithful Representation
It is immensely necessary to provide correct information of the financial statements to the stakeholders. The faithfulness of the information is based upon the inherent qualities like completeness, neutrality or error-free. Other than that, judgement making should during uncertainty should be prudent (Berry, 2015).
4. Timeliness
The provided information should be readily available and promptly on time. This would prove to be useful for investors as they would be able to take relevant and timely decisions with the help of these information.
5. Prominence
In order to help the users to understand the information, it needs to be prominent. None if the information should be misleading. Otherwise, the financial reporting would be blind eyed.
Nevertheless, in the article under consideration, listed individuals informed that some specific qualitative features pertaining to financial reporting are not be met by the currently employed reporting procedures pursued by the IFRS. As per this article, the adjustments incorporated by the IFRS, are irrelevant, and also do not fulfil the criteria of faithfulness correctness (Bhaktavatchalam & Somasekhara, 2017). Hence, the investors might be misled as a result of such fraudulent financial reporting. Other than that the investors are facing issues while comparing various companies while making investments, owing to the misleading data and statistics of the financial accounts.
Moreover, these views also imply that corporate financial reporting satisfies the primary goal of financial reporting as evident in Conceptual Framework. The prime motive of financial reports is providing relevant information about the assets, expenses and equity of the organisation in focus to the stakeholders (both internal and external) (Bonsall et al. 2017).
Corporate Finance reports requires to meet all of the above stated requirements according to the characteristics detailed in the Conceptual Framework. This is necessary for meeting the criteria of the stakeholders to whom the financial statements may concern.
Assessment Task Part B
The Theory of Public Interest
The theory of Public Interest assumes that economic markets are very delicate and do not operate in the way they should do. The markets emphasize more on the people than society in whole (Gans & Ryall, 2017). Hence, it is immensely important to assess the performance of the economic market and the process of evaluation can be facilitated by government intervention. In the year 1932, A C Pigou, promulgated this theory.
The author is of the opinion that alterations in the regulations occur on raise of prompt public demand for introduction of these of these regulations. The public deems these regulations necessary for rectification of certain unethical malpractices. Such regulations are projected to preserve the society’s interest in a higher position than the interest of the individual member and the duty of the regulatory authority is securing the larger interest of the major part of the society (Khan & Bradbury, 2016). However, in this regard, it is notewo9rthsy that the regulators should not mould the laws in such a way that they safeguard their personal interest against the interests of the society. In contrast, Stigler’s Theory propounded in 1972, opposes many of the ideas of the Public Interest theory. In this context, Stigler opined that the regulations do not hold much value for the society.
On the contrary, the private companies use the regulations as a shield to restrict the entrance of new competitors in the market. One ambiguity existing in the financial information shared by the private enterprises is that various important and relevant non-financial details are not included in the financial accounts (Leuz & Wysocki, 2016). The financial information shared by the, do not shed light on the impact of the external business envir0onment including the MACRO environmental factors on their business activities, and the ways in which their business model impact the environment and society as a whole.
According to the specifications of the theory of public interest, legislations are required to be passed that would make it compulsory on the part of the private corporate enterprises to give descriptive detail on the ways in which the their business activities impact the external environment and the kind of impact they have on the society (Lin, 2015). On the other hand, the corporate companies should mandatorily also indicate the approaches that they have followed to nullify the adverse effects of their business activities on the society.
Assessment Task Part C
The Government can run a survey to realise the urgency of passing the legislation. The survey results might be published online. This would make the things clear. Besides, the legislation framed as a response can be published online so that the common people can access it also. In case if individuals have any query regarding the regulations, they can post the same online and an expert’s panel can be formed who would answer the queries or address the grievances (LoPucki, 2018).
The Capture Theory
This theory lays down that industry workers influence the agencies in the government highly. These industrial workers, in turn attempt to safeguard the interests of their own industry. In order to do so, they can even jeopardise the even distribution of the resources all over the society and the distribution process is manipulated in such a matter that the society’s needs are not fulfilled (Philippon, 2015). The Government employs the regulatory authorities in three tiers namely, at the central level, at the state level and the regional level with the objective of safeguarding the societal needs from the adverse impact of the activities of the corporate industry.
The Capture Theory further lays down that corruption creeps in when the industrial agents establishes illicit relations with the workers of the government agencies. There are acute reasons why the representatives of the corporate companies are excited to manoeuvre the government agencies by paying bribes (Scott, 2015). Their ulterior motive is to influence the government agencies to make rules for controlling prices, or putting a check on the quantity and quality, or setting a minimal standard for the operational activities that would help ensure protection standards of the employees. At the present hour, it is immensely important that the regulatory authorities employ people who are in possession of professional expertise and have subtle knowledge about their area of operation.
On the contrary, the people in the corporate industry have the profound knowledge that the officials of the government agencies should possess. In fact on certain instances it might happen that the government officials are former employees of the industry or they are planning to quit their posit6ion to join the corporate industry (TSAI, 2018). They can act as advisors for the industry in order to draw favour for the industrial activities of the corporate companies. This is a specimen of how the government agencies are influenced by the workers of the industry.
Assessment Task Part D
Economic Interest group theory of regulation
This theory states that various groups in the industry care operating with the aim of securing the economic interest of the group. These groups are in constant strife among themselves. The ulterior motive of these groups is to influence the government by any means to pass laws in their favour. They completely disregard the greater interest of the public in general. The culture of bribery have aggravated this culture of external influence on the government agencies. The economic sects that have higher monetary strength are able to make the government agencies lean to their side. Hence, this theory expresses that none of the regulations of the government agencies are able to detect the outright violation of the environmental and societal standards by these industries (Weil, Schipper & Francis, 2013). Therefore according to the terms of this theory it can be said that providing support to the industrialist is the subtle motive of the workers of these government agencies. This is undoubtedly a vicious co-operation.
According to Statement 114 of the FASB, the organisations are not sanctioned to mske revaluation of their assets, rather incorporate the impairment expenses along with the cost of the noncurrent assets. However, such governmental regulations are relevant to the representational faithfulness in the financial statements in the US corporate industry. The cost of the impairments bring down the profit level of the companies, without modifying the real cash balance. These rules would be able to provide a better and clearer picture to the users of financials accounts of the companies. Nevertheless, it is evident that the historical prospects of the companies are totally disregarded in the financial statements. The depreciation value of the assets are modified annually with a change in the carrying value of the assets. This is how United States Corporate financial accounting standards impact the relevance, faith, correctness and originality of the corporate financial companies (Weygandt, Kimmel & Kieso, 2015).
Part 1
Idea behind non-revaluation of the assets
Assets’ revaluation is carried out for identifying the correct value of the assets in the real time. The other underlying reasons are:
- Reflecting fair value of industrial assets
- Pointing out the present return rate of the capital employed
- Negotiation of the asset pricing prior to any merger or acquisition
- Selling of any particular asset
- Reduction of the debt equity ratio of the corporate agency
However the real fact is that majority of the companies do not favour revaluating their assets. Moreover, the companies choose their cost model based on several factors. These are:
1. Reducing the satisfaction level of the investor.
Assets revaluation of corporate companies have lowered the net profit within the financial year. Hence the adverse effect of this falls on the firm’s sustainability (Scott, 2015). Again, this in turn impacts the historical prospects of the company in focus
2. Loss of Historical Perspective
The asset value of some of the companies have been lowered, that has led to the further decrease in the net profits. This in turn impacts the sustainability of the company and thus the historical perspective is impacted.
Liquidity of the asset value
Asset value of any organisations have been found to be highly volatile. The amounts are seen to fluctuate in high amounts (LoPucki, 2018). Hence, this leads to misleading income and losses incurred by the organisation in that financial year.
Part B
Impact of the decision of not revaluating the assets in the financial accounts
There would be severe impacts in case if the assets are not revalued based on the correct value of accounting. Such financial statements do not exhibit correct value position of the company. Again, the debt to equity ratio of the company would reflect a greater value than the original. Moreover, the original issue of the stakeholders would not be addressed. The net profit values that would be displayed on the balance sheets as an outcome, would include high inflations. Lastly, the assets of the company would be understated resulting to excessive dividends.
Part C
Impact of wealth on stakeholders
It can be concluded that share prices are a reflection of the information incorporated in the financial accounts in case if the capital market is not capacitive. The diminishing asset value and the per share net asset backing directly influence the share prices. However, it can be marginalised by the total profit value which is expectedly higher (Gans, & Ryall, 2017). Hence, it can be finally commented that if the capital market remains stable, asset revaluation will have minimum impact on the share prices and more importantly on the stakeholders’ wealth.
Reference List
Acharya, V.V. and Ryan, S.G., 2016. Banks’ financial reporting and financial system stability. Journal of Accounting Research, 54(2), pp.277-340.
Ang, J.S., 2018. Toward a Corporate Finance Theory for the Entrepreneurial Firm.
Berry, J.M., 2015. Lobbying for the people: The political behavior of public interest groups. Princeton University Press.
Bhaktavatchalam, M. and Somasekhara, M., 2017. IFRS-THE CONCEPTUAL FRAME WORK: THE IMPETUS TO HAVE AN ENHANCEMENT IN IFRS FINANCIAL STATEMENTS. International Journal of Research in Management & Social Science, p.73.
Bonsall IV, S.B., Leone, A.J., Miller, B.P. and Rennekamp, K., 2017. A plain English measure of financial reporting readability. Journal of Accounting and Economics, 63(2-3), pp.329-357.
Fong, M., 2016. The Misconceived One-Child Policy Lives On. Current History, 115(782), p.240.
Gans, J. and Ryall, M.D., 2017. Value capture theory: A strategic management review. Strategic Management Journal, 38(1), pp.17-41.
Khan, S. and Bradbury, M.E., 2016. The volatility of comprehensive income and its association with market risk. Accounting & Finance, 56(3), pp.727-748.
Leuz, C. and Wysocki, P.D., 2016. The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2), pp.525-622.
Lin, C., 2015. How China Has Attempted to Guide a New and Unwieldy Housing Market. China: An International Journal, 13(3), pp.114-128.
LoPucki, L.M., 2018. A Rule-Based Method for Comparing Corporate Laws.
Mao, Y. and Renneboog, L., 2015. Do managers manipulate earnings prior to management buyouts?. Journal of Corporate Finance, 35, pp.43-61.
Philippon, T., 2015. Has the US finance industry become less efficient? On the theory and measurement of financial intermediation. American Economic Review, 105(4), pp.1408-38.
Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
TSAI, C.H.R., 2018. Choosing Among Authorities for Consumer Financial Protection in Taiwan: A Legal-Theory-Of-Finance Perspective.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons
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