Limitations of the Current Reporting Framework Pursuant to IFRS
The information presented in any financial statements through balance sheet, profit & loss account, cash flow statement helps the investor and stakeholder to take major business and investment decision. However all the information disclosed in financial statement may not be relevant and useful for decision making purpose (Bae, 2017). So in the interest of company as well as stakeholder some financial and non-financial information must be included in financial statement which helps the investor to take best possible business decision. To gain the quality information the financial statement must have below maintained features.
- UnderstandabilityThe preparer of the financial statement should keep in mind that all the information disclosed in financial statement must be free from confusion. The information presented in such a manner that it can be easily understand by one person. Here person includes who has basic understanding in the field of finance, accounts, taxation and law and who has ability to read and understand the financial impact of information included in financial statement (Alexander, 2016). True and fair view of financial statement helps the investor and stakeholder to take business and investment decision. Sometimes the information is presented in financial statement in such a complex manner which is not understandable by common people, so to avoid complexity supporting document related to those information much be attach with financial statement in order to get qualitative information.
- Relevance. The information disclosed in financial statement must not be imprecise and must be helpful to decision maker to take all future decisions. Mere representation of data is useless for decision maker unless it provides meaningful conclusion. More data means more information is misconception. The information must be relevant which affects the decision of decision maker(Belton, 2017).
- After considering many factor it is concluded that it is impossible that the financial statement is wholly free from any error or mistake. The information disclosed in financial statement should not be misleading due to personal prejudice. All the ledger balance, transaction appearing in the financial statement should be reliable from view point of company(Bizfluent, 2017). All the information whether financial or non-financial data if it affect the decision of stakeholder and investor must be disclosed in financial statement. If it is not possible to measure any item in monetary term, proper justification is required why the item is not measured in financial terms.
- To get the best possible result now a day user do trend analysis, variance analysis of financial data of one company with another company or various companies from the same industry or different industries. It helps the user to analyze the individual as well as overall performance of company and determine the strategic line in which company moving whether in downside, upside or stagnant(Choy, 2018).
From the above discussion and analysis it is concluded that the above qualitative feature are not able to meet by current reporting framework pursuant to IFRS. The reporting practices under IFRS is rigid and inflexible. Due to this inflexibility the things become more complicated to understand and take decision on the basis of those information. If the user and stakeholder not possesses expertise knowledge and practice experience in the field of taxation, finance, accounts and law, sometimes they may not able to understand the financial implication of information disclose in financial statements (Bromwich & Scapens, 2016). Hence the user not able to take best possible business and future decision. In the absence of knowledge even after the accurate and fair reporting of all information as per finance reporting framework the user not able to take the advantage to all information disclosed in financial statement. From the above analysis it is concluded that the views are not at all acceptable that corporate financial reports satisfy the central objective of financial reporting.
The Public Interest Theory:
The public interest theory has been built for the good and welfare of public. As the name suggests, it delves for the prosperity of the general masses. It aims to solve the general issues of public and help them with the solution which is productive for the masses. There can be stakeholders who are either internal or external to the company and both their needs must be kept in mind while formulating a theory or taking any decision. Internal stakeholders can be in the form of employees of the company, the debtors and the creditors, the investors and the management of the company at large (Werner, 2017). On the other hand, the external stakeholders can be in the form of prospective investors, the banks and financial institutions, the government and the taxation authorities. The theory assumes that the government is the institution which controls the imperfect market but it is not so and it gives ample opportunities to the companies to take business decision, etc. The public interest theory can be said to be disregarded in this case as the government did not define ant separate rules or laws. If the government would have considered it critical for public disclosure, it would have come out with the law.
Comparison of IFRS and Local GAAP
Capture Theory:
This theory assumes the relationship between the industry, the businesses, the regulatory agencies and the government. Under this, the decision is generally being taken for market and the same impacts all the above mentioned market participants. Regulators take the decisions in such a manner that it is aimed to satisfy the needs of all the stakeholders. As per the capture theory, modifications can be done in the decisions to make it suitable for the parties affected by it. Therefore, it can be concluded that even this theory has been disregarded by the government by not bringing in any change to the existing statute (Visinescu, et al., 2017). Furthermore, since the government has not made any rules affecting the industry and its participants as a whole w.r.t. the given subject, therefore, there is no question of bringing about a change in it.
Economic interest theory and regulation:
This theory works on the concept that the regulations and laws are being framed and implemented by the interaction of the forces like demand and supply. On the demand side, lies the general public whereas on the supply side, lies the government and the various regulatory agencies. As per this model, most of the rules and regulations are being framed by the industry and the same is applicable to all the companies (Vieira, et al., 2017). It is in the common welfare of the companies and there is no involvement of external interference. The government invites all the stakeholders to take all the necessary decisions and actions. The decision not to implement any new law has been taken in the public interest and the government has made it very clear that those companies which will satisfy the expectations of the general public will thrive in the long run.
There is a huge difference between the reporting Framework of IFRS of Local GAAP. We have discussed here One of the complex topic which have a huge impact on financial statement that is revaluation of fixed assets. The major difference between these two reporting framework that revaluation of fixed assets is allowed under the IFRS but not allowed in GAAP in many countries. The revaluation of assets impact the reliability and relevance of financial statement (Das, 2017). Hence at the time of taking decision whether the non-current assets require to revalue or not and how to show the revaluation of assets in financial statement. Every investor and stakeholder want to know the true and fair value of non-current assets hence the management of the company bound to fulfill the requirement of the user of financial statement by disclosing the revaluation of fixed assets in financial statement. However it is very difficult to calculate the correct value of non-current assets and remains a huge matter of distress. This is actually impossible to calculate real value of assets because the realizable value of assets keep on fluctuating each and every point of time and the preparer and analyst consider various assumption and expectation to calculate the fair value of assets. There are many element which affect the realizable value of assets are like useful life of assets, efficiency of non-current assets and the degree of uncertainty involved. Due to all this complexity and shortcomings IFRS eliminate the practice to revaluation of non-current assets and consider the substantial effect of impairment cost and adjust the difference in value of non-current assets which can be measured with certainty and disclose in monetary terms (Dichev, 2017). Therefore it serves the purpose of achieving both relevance and correctness of the information present in the financial statements.
The decision of whether it is important to revalue the non-current assets or not depends on many factor like size and nature of business as well as the quantum of fixed assets company possesses.
- Even when there exist lots of discussion and debates on the topic of revaluation of the fixed assets some company consider the impact of revaluation of non-current assets and some are not follow the same. In practical approach, whenever the fixed assets is being revaluation it will impact financial as well as accounting data. Revaluation of fixed assets has a direct impact on tax liability, retained earnings, depreciation as well as profit of the company(Sithole, et al., 2017). It also might have positive or adverse impact on the share prices of the company. If any complexity that need to be disclosed in notes of accounts attached with financial statement. While doing revaluation, the carrying amount of assets presented in such a manner that the whole group of assets is being shown at fair value of assets. As the revaluation is non cash item, it does not even have a direct impact on the cash flow of company. The Board tends to take decisions which directly impact the liquidity of the Company. Even the remaining life of assets also impacted due to revaluation and we need to reassess the effective useful life of assets. The Entire procedure of revaluation require expertise in forecasting, complex calculation to calculate the correct carrying amount of assets, compilation of financial data of company. If the revaluation is done for large quantum monetary resources might be impacted we need to allocate them accordingly. Even after comply with all the rule and regulation and carrying out due diligence, the revalued figure of non- current assets may be not tallied with actual figure. Hence, after considering all this complexity and shortcomings management is considering that not to take up the impact of revaluation in case of real estate property, plant and machinery whose market is fluctuating every moment due to several factor.
- The preparer of financial statement always keep in mind that the financial statement should be prepared after considering all the accounting policies and procedures, rule and regulation. All the ledger balances and information shown in financial statement must be true and fair(Raiborn, et al., 2016). All the item of balance sheet give an accurate picture of financial position of company. If the assets is not revalued it is presented at books after deducting depreciation from book value. It is actually impossible to calculate accurate carrying cost of assets due to market fluctuation. Hence unfair and misleading reporting of amount impact the true and view of financial statement. Since equity is always presented at the fair market value however the same practice we can’t apply in case of fixed assets as it affects the debt equity ratio.
- The revaluation decision of non-current assets have a huge impact on shareholders wealth. Even if sometimes due to not revaluating a particular asset or class of assets not give a unrealistic result, their impact on shareholder wealth not apparently seen since the revaluation of assets have not effect on cash flow statement. There have no direct impact on profitability of company. Revaluation reserve is part of retained earnings and shareholder consider this increment as revenue(Sonu, et al., 2017). Hence it will impact the shareholders decision but market will not impacted due to this fluctuation. Therefore from the above discussion it is concluded that if the assets is not revalued it would not cause any adverse impact on shareholders wealth even if it is seen at any time, it would be for short period of time.
References
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Werner, M., 2017. Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.
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