Qualitative Characteristics of Financial Reporting and Views on Current Reporting Practices Pursuant to IFRS
The information which is being disclosed through the financial statements via the profit and loss account, the balance sheet and the cash flow statement enables the decision maker and the investors to take the investment decisions. However, the entire thing which is being disclosed in the financial statements may not be of use to the end users and may not prove to be relevant for the decision making purposes (Bizfluent, 2017). However, there are some minimum financial and non financial information which needs to be a part of the financials so that decision making becomes easy. Some of the pre perquisites for these type of information include:
- Understandability: The information which is being disclosed and presented in the financial statements should be clear and should not create confusion in the minds of the end user. It should have one meaning and the user should be able to understand and interpret the information better. Here, user means the person having the basic knowledge of finance, accounting and taxation and has the business intelligence and wisdom to read and understand the financial statements(Defond & Lennox, 2017). Only if the information being disclosed in the financial statements are free from ambiguity, the user would be able to draw conclusion from the information given and take the decisions to invest or not. In case any portion of the financial statements is having information that is complex, then the same should be supported by the necessary notes and disclosures to avoid confusion and misunderstanding.
- Relevance: The information disclosed should be relevant to the user and should be adding value while decision making. It should not be disclosed for the sake of disclosure and should not be vague and redundant as it defeats the very objective of the conceptual framework of accounting. The preparers of the financial statements should be aware of the fact that the enormous and vast quantum of data only compromises with the quality without adding value. Thus, it should be conclusive and the user must be able to find out meaningful inferences out of the same(Bae, 2017).
- Reliability: The financial acocunts of any entity cannot be completely free from the errors and the misstatements, however, the same can be minimised so that the accounts prepared gives the accurate view to the user. While preparing the same, personal prejudice and biasness should be kept aside and it should be shown in its truest form. The users expects all the quantifiable information to give a true and fair view of the accounts and in case, any information is not quantifiable, reasonable justification and disclosure should be given in that regard. This not only increases the investor confidence but also makes the non financial information worthy for decision making.
- Comparability: In the present era, most of the users rely and take decision based on the trend in the financial data. It is very important and crucial to make the data comparable for the period, for the different companies in the same industry or in between the segments. The preparation and presentation of the financial statements should be done in such a manner that enables the user to do trend analysis, variance analysis and do analytics as against the benchmark companies. The most important outcome of this activity is it helps the user to understand whether the company is in stagnant position or it is growing (Bromwich & Scapens, 2016).
Covering the above discussion on the qualitative characteristics of the financial statements, it can be concluded that the current IFRS business reporting practices do not adhere to the same. This is primarily because the disclosure and reporting requirements under IFRS are quite rigid and inelastic, most of which is meaningless in the investor’s context. Furthermore, the reporting and practices of accounting being intricate and difficult, it makes understanding a far fetched thing and requires a technician to understand and interpret the same correctly. In short, the normal investor would not be able to make decisions based on same (Belton, 2017). Therefore, Mr. Bowen can be said to be apt and appropriate while quoting “Once you get into the notes you have to be technically trained. If you’re not, lot of it could be misleading”. Therefore, the views in case study are not in line with the view that the financial statements satisfy the central objectives of finance.
ASSESSMENT PART B
The Public Interest Theory: The name of the theory itself suggests that the this is for the general public interest and properity of the public at large. It main objectives is to solve all the given problems for the general public and bring out ways in which the inefficiencies in the system can be removed. Public interest theory aims to solve the problems of both the internal as well as the external stakeholders of the company. Internal stakeholders include people like the employees of company, the debtors and the creditors, the investors, etc (Alexander, 2016).
whereas the external stakeholders include the banks and financial institutions, the tax authorities and the government, etc. The theory assumed that the imperfect markets are being controlled by the government but in actual this is not so and businesses are being given the opportunity to take decisions that meet the general requirement and the objectives of the company. Therefore, it can be said that the public interest theory has not be justified in the given case where the government did not define separate laws and rules. In case the government authorities would have considered the disclosure of social and environmental factors to be critical and significant while reporting, they would have come out with the some standard setting in this regard.
Decision of the Australian Government on Social and Environmental Responsibilities within the Corporations Act
Capture Theory: The theory focuses on the relationship between the government, the industry and businesses and the regulatory agencies reponsible for setting and making laws. Market constitutes of all the above participants and all the decisions are made keeping them into consideration. As per the given theory, the regulators of the law are framing the laws and regulations keeping in mind the needs and objectives of all the above mentioned target groups. The theory is driven by the idea that slight modifications and changes can be done to meet the requirements of all the parties affected by it. The decision of the government not to frame any rules and regulations implies that even this theory has not been applied. Furthermore, since the government has not made any rules and laws in this regard then the question of modifying it or making changes to it becomes redundant (Visinescu, et al., 2017).
Economic interest theory and regulation: This theory is driven by the idea that that the laws are regulations come into existence by the interaction of the demand and supply forces. Generally, government and the regulatory agencies constitute the supply side where as the general public constitutes the demand side of it. Under this model, the laws and the code of conduct are being framed by the industry and it is applicable to the entire market and all the businesses. In this , the government gives opportunity to all the businesses to take the decisions and there is no external interference involved. Therefore, if the government has taken the decision not to implement any separate legislation for disclosure of social and enrionmental responsibilities being performed by the businesses, it wants to imply that the same has been taken in the public interest. The firms and businesses meeting expectations of public would automatically succeed (Vieira, et al., 2017).
ASSESSMENT PART C
When the differences in IFRS and the local GAAP is being touched upon, one of the major differences being discussed is the treatment of revaluation of assets. The debate is never eneding on the given topic given the fact that revaluation of assets in allowed under the IFRS standards and not under the local GAAPs. The decision of revaluing the assets depends on the facts that how the relevance and reability of the financial statements are being affected by taking it into account. Generally, all the stakeholders and particularly the investors are interested in knowing the true or the fair value of the assets lying in the balance sheet and therefore from management perse it is being provided in the financial statements to meet the requirements of IFRS and the conceptua framework but what is compromised here is reliability and correctness of the disclosures being made (Dichev, 2017).
Perspectives of Public Interest Theory, Capture Theory and Economic Interest Group Theory of Regulation
This is because it is almost impossible to reach at the correct value as a number of estimations and assumptions are being considered and it depends on person to person. The realizable value is the estimate of the present value of future estimated cash flows and keeps om changing depending on the variables like estimated useful life left, the efficiency of the asset and the level of uncertainity involved. Considering all the above problems and shortcomings, IFRS aims to eliminate the idea of revaluation of the non current assets, However, it makes the impairment cost to be taken into consideration mandatorily and adjust the same in the values of non cureent assets as the same can be measured with certainity and can be easily quantified. Therefore, kit can be said that the presently laid down rules aims at achieving the relevance and faithfulness with respect to the financial statements (Das, 2017).
ASSESSMENT PART D
The revaluation of the assets in the financial statements is generally taken on basis of size of organization and its assets quantum.
- There have been continuous debates on the topic of revaluation of the fixed assets but there are some companies who do so and some who do not. In practical scenario, when the asset is being revalued, it leads to modification of accounting and financial statements as a whole. Revaluation of fixed assets has a direct impact on the tax liability, the prospective depreciation and the retained earnings(Farmer, 2018). It also might have an indirect impact on the share prices temporarily. Furthermore, it brings along with it many complexities and the need to disclose the basis of the same in notes to accounts. While doing revaluation, the carrying amount is adjusted in a manner such that the entire class of the assets is being shown at fair values. Being a non cash item, it does not have any impact cash flow wise but involves many critical steps like compilation and analysis of complex data for which professional help might be sought for and that may result in outflow of cash. The result is that the revalued figure may still not reconcile with the actual market value. In order to cut short all the above mentioned difficulties and complexities, the management of the company generally avoids to revalue the property, plant and equipment.
- Financial statements are generally a part of the annual report and it gives a reasonable assurance to the investors as well as the multiple stakeholders that the same is giving a true and fair view of the accounts. This asks for that the profit and loss account and the balance sheet should represent the true and realistic numbers which can be supported through workings and notes on accounts. However, when the assets are being shown at historical cost less depreciation and not at the fair values, it might not give the correct and right picture and the values may differ from the current market price. This results in reporting of the erroneous information in the financial statements(Heminway, 2017). One more aspect of this is that the equity is always being shown at the fair value and in case the assets are not shown at market values will give the distorted information to the investors and will result in wrong calculation of the debt equity ratio.
- The decision to revalue the assets or not depends on a number of internal as well as external factors. Not revaluing the assets certainly gives the wrong picture of the financial statements and account balances but certainly its impact on the shareholders’ wealth cannot be calculated. Neither it has any inflow or outflow of cash nor it has any impact on the profitability of the business(Goldmann, 2016). However, it might result in the increase of retained earnings when the balance of the revaluation account is increased or decreased and might give an impression that the shareholders’ wealth is impacted, but the market does not reacts on such changes and hence there is no creation or destruction of value involved in this.
References
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Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.
Defond, M. & Lennox, C., 2017. Do PCAOB Inspections Improve the Quality of Internal Control Audits?. Journal of Accounting Research, 55(3), pp. 591-627.
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Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35.
Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1).
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.
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