The Contexts of the Issues Raised by CFOs and Other Users of Information
1.You are required to explain which qualitative characteristics of financial reporting, as per the conceptual framework, do not, in the opinion of the above quoted individuals, appear to be satisfied by current reporting practices pursuant to IFRS.
2.You are required to explain the decision of the government that no specific regulation be introduced from the perspective of Public Interest Theory
3.What implications do you think these rules have for the relevance and representational faithfulness of US corporate financial statements?
4.What might motivate directors not to revalue the property, plant and equipment?
1.Task ‘A’ entails the overall understanding, application, and effect of the quality characteristics of the accounting information shared with the users of the financial statement. The content of the information is what the users of the information rely on. However, the content of information is expected to be of relevance, faithful and due diligence representation pursuant to conceptual framework 2018 of financial reporting and IAS 1&8 as well as IAS pluses.
The contexts of the issues raised by the CFO’S and other users of information revolve around the content of information i.e. whether indeed there is the substantial satisfaction of the requirement of the user’s relevancy, materiality and due diligence aspect in the information they need Scott(2015.Pg.10.) Local accounting standards are expected to guide and provide reliable information on how the preparation of these statements ought to be done and presented similarly to how it would have appeared if the IFRS are used in preparation. This is because all these regulations, conceptual frameworks, and standards do not over-ride the spectrum of IFRS’S because they all originate, use and apply the base info from failure.
Therefore fail of these internal standards per say mostly result from a mishap in presentation and preparation of the info, not the regulation itself since they have been weighed and measured before they are allowed to be used. The blame should, therefore, be to the preparers and presenters because they do not evaluate the quality characteristic of the information they dispatch to the users. I therefore disagree with the context in which the claim is done that millions of dollars have been used to see into it that IFRS’s are standardized to suit users but users still claim they are not satisfied and say it is not IFRS nor standards because they are reviewed time by time to suit users what happens is how the info is prepared and presented Macve (2015.Pg 8.)
Corporate Social Responsibility: An Obligation for Companies
The current reporting practices applied by preparers and presenters of financial information in the context seems to lack the characteristic aspect of understandability and relevancy so as to enable the users at their ambience and independence level simply read, interpret and conceptualize the report without expecting any third party to explain and delve so as to be able to make decision independently and without duress or out of ill motive Schipper (2007.Pg.21.) This aspect is achievable by ensuring that all supporting notes and additional information are too presented in the information so as to help the user understand where the information originates from. Reported numbers should be simple and understandable without ado. It should be precise to the extent of not involving 3rd party for clarity.
There has to be relevant to the information shared so as to avoid the criticism like the one raised by the CFO of useless info being issued. Relevancy provision is only applicable upon reporting all the relevant information whose omission or misstatement haunts and costs the decision of the users. This is exercised only be ensuring that information reporting is done in line with IAS 1 on materiality principle. Likewise, we expect to have the faithful representation of information i.e. that which the users of information will not doubt its authenticity since it is complete, neutral, error free as well as legal aspect fulfillment. A report that is faithful in representation will not have a misinterpretation of numbers, misleading information and finally will uphold and display the true position of the firm’s status Dichev (2016.Pg.30)
The views raised in the context is partly inconsistent with the expectation of the conceptual frame on qualitative characteristics of the information because if indeed they were the exercised, complain relating to the true position of the institution would not have occurred because faithful representation could have curbed the situation. Similarly to this if there was understandability, materiality and relevancy in financial report representation the issue of misinterpretation of numbers, involving third party i.e. management reports to understand the concept, the issue of terming the disclosure of information useless would not have occurred. Therefore the presenters and preparers overlooked these characteristics.
2.Corporate Social Responsibility is an obligation that firms are expected to willing partakes to help the community and its surroundings at large Schwartz (2017.Pg.16.) Activities involving development and growth of a region help the community around as well as environmental conservation for better tomorrow Frederick (2008.Pg.10.)
Public Interest Theory in Relation to Corporate Responsibility
Public Interest Theory;
The regulation on not to amend or introduce the regulation by the government to control and task companies to participate in solving particular social and corporate responsibility to my opinion I deem it uncaring and selfish mind by the government. The state is always deemed to be the eye of its citizen hence this act of not pushing for the introduction of the regulation shows how the state has disowned and neglected its citizens Tai (2014.Pg.117)
Ideally, the law states that the interest and welfare of the people are always paramount and supreme to a specific regulation and should always come first as outlined in Latin phrase “Salus populi suprema lex too. “It this that denounces the care the government has on the issue in question. At all cost and circumstance, it is expected to see the government consider the public interest aspect in making its decision.
Public interest aspect, in this case, should work out for its citizen mainly because whatever occurrence that may occur whether in presence of market forces or not the person on the ground who feel the pinch is the common citizen Banerjee(2008.Pg.70.)
Likewise it is in the best interest of the citizen to see that the firms around them to whom they boost them economically by buying products or offering services from them at least appreciate and mind them in their day to day activities thus creating a good environment and rapport for them to relate thus controlling conflict between firms and the resident of that area.
It is irrational to allow the market forces determine what the firms around are to do to the environment and community at large because I do not believe the selfish state and interest of individuals in the firm may mind about the citizens around in case of an external force, this is because to them they think that spending more on factors that do not contribute to the objective of their firm which is profit generation is not an obligation to them since it is not part of their budget.
The use of negative opportunity per say of not cheeping in to control issues affecting the community leads to death, disaster, suffering and calamity because everybody is waiting for market forces to take place so as to act whereas some even do not mind about the market forces and if they do they are only concerned up to the levels it affects their firm. Economic need and interest bars firms from minding about the community around because they will just be thinking of optimizing their return under the expense of the citizens hence not ready to spend anything on any activity relating to corporate social responsibility.
The Importance of Faithful Representation in Financial Reporting
The government has likewise messed by failing to push this regulation because it gives the firm and companies around the discretion of doing what they feel better for them but not the surrounding society. This at the time cost the government since the firms have their own regulation on how to attend to matter corporate and at some point to change this is not possible.
Likewise, the legislation and act depict that the power of a state lies with the people now this shifts to the firms to the extent that they demean and not mind about the people who facilitated the existence of the Cap Act that make them operate. Capture theory degrades the interest of the minority to the extent of getting involved in activities that harm, disowns and deteriorates life of the surrounding people and environment at large.
I therefore conclude on the matter by challenging the government to revive back the motion to the best interest of the public, minority parties and the environment at large so as to task the firm to be responsible during operation as well as creating a good environment for working that may cost the taxes being paid to it by the firm and the worst of all the cry of its citizens Crowther (2008.Pg. 5)
3.Faithfulness of the information presented to the users of financial information is an aspect no firm can run from especially during reporting. This is what giving the trust to the users of information. The US Financial Accounting Standard Board rule on not allowing assets to be revalued at fair value to me is an aspect that assumes that asset does not lose value which according to IFRS regulation this is deemed in practical Kieso (2010.Pg 11.)Ideally, the situation of overstating the value of a non-current asset affects the asset ratio factor used in leveraging and borrowing. This likewise does not show the real picture and position of the non-current assets thus giving the wrong impression to the users of information concerning how effective the firm non-current asset is in contributing to the revenue. The regulation is likewise averse to the allowance is given on failing to account for the impairment cost because the actual netbook that is the face value of the asset is not presented. This is the further wrong representation of profit or loss that does not capture the non-cash items of impairment that in way record high profit for tax purposes more than expected.
Directors’ Motivation for Not Revaluing Assets
4.Directors are motivated not to revalue assets because they perceive that by reporting and accounting for assets at historical cost their representation will seem efficient unlike when they report it at revalue state Chiapello (2015.Pg 27.)
Likewise, they believe that by revaluing assets their market condition tend to lower their value especially at the point of selling these assets hence preferring not to revalue the asset as referenced by Tay (2009.Pg.23)
The outcome of not revaluing assets by the management is that they tend to subject these assets to understatement and undervaluation, thus lowering their depreciation an aspect that increases the profit hence a leeway for claiming bonuses and perks in the name of good performance and growth. Similarly to the above outcome is that the return on assets is seen to improve since the asset base appears lower as the profit levels are highly reported.
The firm’s financial statements are adversely affected because at some point they won’t show the real position of the firm. For instance, the profit or loss statement will be overstated because the depreciation part will not have been captured or if it will at a lower value Cairns (2012.Pg.30.)
On the other hand, the assets in the financial position will be valued at a lower historical cost hence a factor that will be contrary to the firms market condition as referenced by Bragg (2017.Pg 19.) The profit or loss account will likewise be affected positively or negatively at the point of disposing of the asset since the loss or gain might be under or overstated, either way, contrary to what would have happened Paik (2009.Pg.73.)
Statement of the changes in equity is likewise going to be affected because the revaluation part containing increase or decrease in value is not affected as explained by Etzioni (2009.Pg.321.)
Finally, the shareholder’s wealth is affected because the portion of the false increase in profit is going to be carried forward as part of retained earnings and due to this increase the presence of dividends payment is seen to apply an overall adverse effect.
References:
Banerjee, S.B., 2008. Corporate social responsibility: The good, the bad and the ugly. Critical sociology, 34(1), pp.51-79.
Bragg, S.M., 2017. Fixed Asset Accounting. AccountingTools LLC.
Cairns, D., 2012. The use of fair value in IFRS. In The Routledge Companion to Fair Value and Financial Reporting (pp. 25-39). Routledge.
Chiapello, E., 2015. Financialisation of valuation. Human Studies, 38(1), pp.13-35.
Crowther, D., 2008. Corporate social responsibility. Bookboon.
Dichev, I., Graham, J., Harvey, C.R. and Rajgopal, S., 2016. The misrepresentation of earnings. Financial Analysts Journal, 72(1), pp.22-35.
Etzioni, A., 2009. The capture theory of regulations—Revisited. Society, 46(4), pp.319-323.
Frederick, W.C., 2008. Corporate social responsibility. In The Oxford handbook of corporate social responsibility.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2010. Intermediate accounting: IFRS edition (Vol. 2). John Wiley & Sons.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
Paik, G., 2009. The value relevance of fixed asset revaluation reserves in international accounting. International Management Review, 5(2), p.73.
Schipper, K., 2007. Required disclosures in financial reports. The Accounting Review, 82(2), pp.301-326.
Schwartz, M.S., 2017. Corporate social responsibility. Routledge.
Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Tai, F.M. and Chuang, S.H., 2014. Corporate social responsibility. Ibusiness, 6(03), p.117.
Tay, I.C., 2009. Fixed asset revaluation: management incentives and market reactions (Doctoral dissertation, Lincoln University).
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