Fundamental and Enhancing Qualitative Characteristics of Financial Reports
Discuss about the Target Revaluation After Failed Takeover Attempts.
According to the accounting conceptual framework, financial reports should have two types of qualitative characteristics; they are fundamental qualitative characteristic and enhancing qualitative characteristic. The fundamental qualitative characteristics include reliability and faithful representation; and the enhancing qualitative characteristics include comparability, verifiability, timeliness and understandability. In the presence of all these qualitative characteristic, financial reports become more useful for the users (Choudhary, Merkley and Schipper 2017). The main content of the provided article is the absence of some of the qualitative characteristics in the financial reports developed as per International Financial Reporting Standards (IFRS).
According to the opinion of former AXA head of finance Geoff Roberts, investors report and management brief are two of the major financial documents on which the investors and others users rely to obtain required financial information about the entities so that they can know the financial position of them as well as can understand their financial performance (Muda et al. 2017). It is the ‘understandability’ qualitative characteristic that makes it possible for the users. The major contribution of this qualitative characteristic can be seen in increasing the quality of the financial statements. Clear classification, characterization and presentation of the financial reports is possible in the presence of ‘understandability’ qualitative characteristic that is helpful in the determination of the financial wellbeing of the entities. There has been major violation in the simplicity of the financial statements with the introduction of the standards of IFRS and it eventually has led to the decreased understandability of the financial position of the companies. In this statement, it can be clearly understood that Geoff Roberts is against the adoption of IFRS due to its inability to provide a precise and transparent picture of the financial health of the companies to the investors and other user (Muda et al. 2017).
According to the opinion of Wesfarmers finance director Terry Bowen, there is the presence of some major complex financial explanation in the financial notes made as per IFRS standards and it leads to the misinterpretation of financial statements by the financial analysts. Thus, it can easily be observed the absence of understandability and comparability that are two of the major enhancing qualitative characteristics of financial reports (Lawrence 2013). It is needed for the investors and other users of financial statements to understand and compare the major similarities as well as differences in the financial reports; and the presence of these two qualitative characteristics makes this possible for them. From the provided opinion of Terry Bowen, it can be understood that there is a requirement of effective technical knowledge in faineance and accounting for understanding the financial reports developed as per the regulations of IFRS. Thus, the adoption of IFRS as the financial reporting tools must be followed by the process of effectively educating the users with poorer technical knowledge in finance (Lawrence 2013).
Opinions of Former AXA Head of Finance Geoff Roberts
According to the opinion of Commonwealth Bank chief financial officer David Craig, the financial reports developed as per the standards of IFRS fails in expressing the actual financial health of the businesses and this aspect has reduced the popularity of IFRS as the investors as well as the users are not paying much attention to the financial reports developed as per IFRS (Van Auken 2013). Thus, in this whole process, the absence of faithful representation of financial statements can be seen that is a major fundamental qualitative characteristic. In the absence of this qualitative characteristic that is faithful representation in the financial reports; lack of complete decryption about the financial resources of the entities can be seen. Hence, this aspect shows the inability of IFRS in providing the numerical as well as financial description of the financial statements of the business organizations. All these aspects together increase the scope for manipulation and fraudulent activities in the financial statements (Van Auken 2013).
To provide the users with all the required financial statements for the determination of the financial position as well as performance is the main objective of general purpose financial reporting; and it is not possible to fulfill this prime objective of financial reporting when so many of the qualitative characteristics of financial reports are missing (Van Auken 2013).
As per the provided case, the government has made the decision not to include any regulation in the Corporations Act for social and environmental responsibilities; and the following discussion justifies this decision with the help of three accounting theories:
The concept of public interest theory indicates towards the fact that the regulators always try to solve any specific problem with the help of available alternatives in the market due to their economically efficient nature. From this, it can be easily understood that the main aim of the establishment of this theory is to do the welfare of the people of the society with the help of effective regulations (Bös 2015). For this reason, regulations are provided with much attention and importance for their ability to solve the problem. The application of this theory in the provide context indicates towards the necessity of the governed to introduce regulation in the Corporations Act for the social as well as environmental responsibilities as the market forces may not always work efficiently for solving the issues related to the social as well as environmental responsibilities. Specific obligations can be put on both the public and the companies for the fulfillment of their social as well as environmental responsibilities with the introduction of specific regulations in the Corporations Act. Hence, it is necessary for the government to implement new regulation in the Corporations Act (Bös 2015).
Opinions of Wesfarmers Finance Director Terry Bowen
To do welfare for the people, society and the companies is the main motive for the implementation of regulations. However, the concept of capture theory aims towards the fact that the regulators have the ability manipulates the regulations for the fulfillment of their own interests after certain time. Thus, to some extent, the implemented regulations work for the regulators for their own interest (Carpenter and Moss 2013). Thus, various aspects of the capture theory help in understanding the true intention for the implementation of specific regulation. At the same time, this theory helps in the identification of the people who will be affected with the implementation of the regulations. The specific dilemma of this provided situation can be solved with the application of the capture theory. Thus, based on this theory, it can be said that it is the right decision of the government not to introduce any specific regulation in the Corporations Act for the fulfillment social as well as environmental responsibilities of the companies due to the fact that there is a scope of the manipulation of these regulations. According to this theory, with the implementation of the regulation, the regulators will get the opportunity to fulfill their own interest with the manipulation in the regulation (Carpenter and Moss 2013). Due to this, it is better to let the market forces handle the situation to fulfill the social as well as environmental responsibilities. In the presence of the market forces, the people and the companies will fulfill their social and environmental responsibilities for their own benefits.
This theory is different from the above two theories of regulation. As per the concept of this theory, the presence of different policies can be seen in the regulations; and both the forces of demand and supply have effects on them. This theory puts the government and interest group in the sides of demand and supply respectively (Berry and Wilcox 2018). To bring the benefits for the business industries is the main motive for the introduction of the regulations, as per this theory. The market is required to adopt the regulations developed by the industries. Thus, the application of this theory in the provided scenario indicates towards the fact that in order to ensure the welfare of the business industries, it is required for the government to introduce new regulation in the Corporations Act as the welfare of the industries contributes to the welfare of the common people. In addition, it is essential for the government to introduce the consumers in the decision making process of the introduction of regulations in order to make both the industry and the customers beneficial (Berry and Wilcox 2018).
Opinions of Commonwealth Bank Chief Financial Officer David Craig
The United States (US) Financial Accounting Standard Board (FASB) does not have any rule for the revaluation of non-current assets as per fair value method; but according to FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, it is the obligation on the companies to charge impairment on the non-current assets (Christensen and Nikolaev 2013). This particular regulation has an important role to play in the promotion of faithful representation of the financial reports of the business organizations in US and this regulation also helps the business organizations to improve the process of their financial reporting. For the financial accounting of the disposal of the long-lived assets, this particular report aims towards the development of one single accounting framework. These assets can be new or previously acquired or purchased (Palea 2014). With the implementation of this particular regulation, financial accountants get the option to broaden the presentation of discontinued operations in order to include mote sales or disposal related accounting transactions. This aspect contributes towards the elimination of differences in the accounting transaction of the same financial aspects. All these aspects together play an integral part in bringing improvement in the quality of the financial statements of the companies (Yao, Percy and Hu 2015).
Different types of issues related to the implementation of long-lived assets can be easily solved with the application of these particular accounting regulations. In this context, it is required to be mentioned that the introduction of this policy helps the business organizations in retaining the aspects like faithful representation and comparability in the financial statements. Thus, the above discussion indicates towards the fact that the introduction of FASB regulation is a major contractor towards the improvement of the financial reporting of the companies (Hodgson and Russell 2014).
The major motivating factors are discussed below:
- The directors of the business organizations can know the true rate of return on the capital employed with the help of the process of asset revaluation that leads to the development of effective financial strategies (Tabari and Adi 2014).
- The directors of the business organizations can ascertain the fair value of the assets of the companies by doing the revaluation of the assets of the businesses.
- Directors of the businesses get the change to make the negotiation with the asset prices at the time of merger and acquisition with the help of asset revaluation (Mogylova 2014).
- Most importantly, the directors can know the total value of the asses from the results of the revaluation of the assets.
The absence of the revaluation of the assets of the companies will lead to the non-decrease in the value of the assets in the books of the companies. The result of this aspect can be the abnormal amount of loss or profit at the time of the disposal of the assets in the fair market value. This whole aspect has negative effect on the financial position of the entities as the earnings of the entities will decrease due to the absence of asset revaluation. For this reason, the companies will have to witness drastic decrease in the amounts and values of the assets (Malmendier, Opp and Saidi 2016).
The wealth of the shareholders will be adversely affected by the decision of not revaluation of the assets. As per the above discussion, there will be reduction in the earnings of the entities due to not revocation of assets. For this reason, it will lead to less than desired return on investment for the shareholders and their wealth will be affected (Szczesny and Valentincic 2013).
References
Berry, J.M. and Wilcox, C., 2018. The interest group society. Routledge.
Bös, D., 2015. Pricing and price regulation: an economic theory for public enterprises and public utilities (Vol. 34). Elsevier.
Carpenter, D. and Moss, D.A. eds., 2013. Preventing regulatory capture: Special interest influence and how to limit it. Cambridge University Press.
Choudhary, P., Merkley, K.J. and Schipper, K., 2017. Qualitative characteristics of financial reporting errors deemed immaterial by managers.
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.
Hodgson, A. and Russell, M., 2014. Comprehending comprehensive income. Australian Accounting Review, 24(2), pp.100-110.
Lawrence, A., 2013. Individual investors and financial disclosure. Journal of Accounting and Economics, 56(1), pp.130-147. Lawrence, A., 2013. Individual investors and financial disclosure. Journal of Accounting and Economics, 56(1), pp.130-147.
Malmendier, U., Opp, M.M. and Saidi, F., 2016. Target revaluation after failed takeover attempts: Cash versus stock. Journal of Financial Economics, 119(1), pp.92-106.
Mogylova, M., 2014. Institutional provision of agricultural fixed assets revaluation up-to-date. Accounting and Finance, (2), pp.167-172.
Muda, I., Dharsuky, A., Siregar, H.S. and Sadalia, I., 2017, March. Combined Loadings and Cross-Dimensional Loadings Timeliness of Presentation of Financial Statements of Local Government. In IOP Conference Series: Materials Science and Engineering (Vol. 180, No. 1, p. 012099). IOP Publishing.
Palea, V., 2014. Fair value accounting and its usefulness to financial statement users. Journal of Financial Reporting and Accounting, 12(2), pp.102-116.
Szczesny, A. and Valentincic, A., 2013. Asset Write?offs in Private Firms–The Case of German SMEs. Journal of Business Finance & Accounting, 40(3-4), pp.285-317.
Tabari, N.Y. and Adi, M., 2014. Factors Affecting the Decision to Revaluation of Assets in Listed Companies of Tehran Stock Exchange (TSE). International Journal of Scientific Management and Development, 2(8).
Van Auken, H., 2013. Influences on frequency of preparation of financial statements among SMEs. Journal of Innovation Management, 1(1), p.143.
Yao, D.F.T., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets and audit fees: Evidence from Australian companies. Journal of Contemporary Accounting & Economics, 11(1), pp.31-45.
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