Discuss abou-t the Advanced Financial Accounting for Framework.
In today’s world, a lot of businesses and organizations are branching into the global market to expand their businesses by reaching more markets. However, there have been challenges that the investors and business owners have had to face due to this problem. One of the major ones is the difference in the financial reports. This problem is evident because each country has their way of reporting financial statements. This results in the inability to compare the financial reports because they are not alike (IFRS, 2010).
The Financial Accounting Standards Board (FASB) joined hands with the International Accounting Standards Board and came up with a Conceptual Framework that was aimed at solving this problem. The aim of the boards was so that companies in the global market can achieve comparability by eliminating the differences as much as possible. The Conceptual Framework contains some qualitative characteristics that are aimed at achieving similar financial reporting in the global market (Cheng, 2014).
However, some of these qualitative characteristics do not meet the set objectives as shown below:
The qualitative characteristics are divided into two broad categories. We have the fundamental characteristics and the enhancing qualitative characteristics. The fundamental characteristics consist of two groups which are relevance and faithful representation. In relevance, the framework aimed to ensure that the process of financial reporting should be useful to its users. Most of the CFO’s said that the financial information given for financial reporting was useless (Adams, 2015). This shows that it was unnecessary information that was not relevant and did not help them incomparability between reports.
Faithful representation, on the other hand, aims at ensuring that the financial information can be relied on for financial reporting. Also, the CFO’s that the disclosures were too much and could not be managed therefore they were not able to build on them for financial reporting. Investors found that the disclosures could not be relied on because the information contained had too many errors and was not complete at times (Macve, 2015). This went against the characteristic for faithful representation that states that for the information to be reliable it had to be complete, free from error and free from bias (neutral).
The enhancing characteristics consist of four categories which are timeliness, comparability, verifiability, and understandability. The CFO’s attest that the disclosures are useless meaning they can still not compare financial records between branches of their companies. This is not in line with the aim of the IFRS that want to eliminate the differences in financial reporting so that they can achieve comparability. Thus the characteristic of comparability is not met.
In the article, business managers are saying that their analysts are unable to interpret the financial statements with IFRS accounts. This does not achieve understandability because they are not able to read and understand the statements to compare them with those in other branches. The Conceptual Framework, therefore, is not able to provide comprehension of financial statements. The article further states that only qualified personnel can understand the disclosures. This again does not achieve the characteristic of understandability because not everyone will be able to compare financial statements unless they know them.
Analysts not being able to understand the financial records can cause waste of time. This is because the company will have to outsource to professionals, which are the time that would have been saved if the statements could be interpreted by anyone in the organization. Thus the revised Framework does not achieve timeliness. Lastly, the framework is not verifiable because the shareholders cannot reach an agreement on what actions to take since they cannot comprehend the statement.
According to the views presented they believe that the revised framework does not meet the needs for financial reporting thus is not consistent with it. They think that the revised framework has not helped in reducing or eliminating the differences that exist between financial statements.
In this theory, a company or organization will set regulations in a manner that the public is the one that benefits. The regulations are set so that they are in favor of the public rather than the organization. The public interest theory is of interest to the customers of accompany and the community surrounding it. It has the notion that for a company to succeed it has to put its customers or its surrounding environment as its number one priority (Deegan, 2013).
The regulations, in this case, are set by the government to ensure that the society’s interests are met. However, the government does not need to set these regulations because the industry is capable enough of putting the interest of the public first. This is because if a company does not have any customers or clients, then it cannot make any profits and can cause it to fail.
For instance, if a company is producing toxic water as waste to the environment, then the community in that environment will complain to the company to rectify this. If they do not, the members of the community ought not to buy the products or services of the company because it is affecting their health and also spread the word to other customers. This will cause a bad reputation of the company and in the end lose business (Levi-Faur, 2017).
Therefore, the company will have to go with the demands of the market forces so that they can still be in business. It is thus not necessary for the government to set the rules because the company will favor its customers on its own.
In this theory, a body that is set to regulate a company to favor the community at large is ‘captured’ by the company and favors it instead. In this case, the government will always update the company on what to do and when to do it so that they can benefit (Black, 2017). The government can also provide disclosures for this company that will be useful for their success. The government aims at ensuring that members of the company such as the shareholders will benefit at large.
However, each company that is set can assess its market and now what actions to take to increase their supply. For instance, a company that sells earphones may have competition from another company that also sells headsets. The other company sales are higher because of their low price. The company will have to assess the market forces to find a way to bring the demand to them without decreasing their cost. They may decide to include packages such as free coupons and others which will drive the market force their way (Quirk, 2017).
Therefore the company will not need any guidance on the regulations set by the government to satisfy their customers which in turn also benefits the company.
The economic interest group theory is where a company is the one that sets the regulation and then the government approves them. These regulations are set based on demand and supply whereby the demand is from the market force, and the supply is by the government. The company will set the regulations in a manner that will benefit its members and shareholders. From the beginning, we see that the company is capable of setting its rules and thus do not need any assistance from the government (Becker, 2017).
The industry’s regulations are driven by the market force because the rules set are based on the demand from the customers. The production focuses on its environment and what it needs, and thus the standards set will be in favor of both the customers (public) and industry.
For example, a hospital may set regulations that the government build for them more wards. The government may approve this and commence the building. However, the customers may be against this because the bills they pay are very high and thus the hospital has enough money to build their wards. The hospital will have to cave into the customers because they do not want to lose them. Therefore the government does not need to set up regulations for companies (Mansbridge, 2018).
The FASB statement in No. 144 wishes to accomplish the following. First, it wants to ensure that implementation costs are accounted for especially those that are classified as non-current assets and also the non-revaluation of the non-current assets. Second, they want to implement the use of one accounting model for long-lived assets that can be disposed of by sale. These changes are made to improve the value of information for financial reporting. Lastly, to expand discontinued operations so that they include more transactions.
The FASB statement ensures relevance is achieved because all the necessary information will be included in the disclosures after expansion. Therefore the investors will have information that is relevant, and that can be used in the financial reporting process (FASB, n.d).
The statement allows for faithful representation in that investors will have complete information on their financial statements. This is due to the expansion of discontinued information which will ensure that all the information needed is provided to make efficient decisions. Also, the Statement ensures that reports are free from error. This is accomplished by use of one model therefore there cannot be any mistakes made as compared to using two models. Using one model is more efficient and effective in financial reporting.
The statement, as mentioned earlier, outlines the requirements for accounting for the impairment costs of non-current assets. These instructions ensure that any information regarding this is neutral. Therefore it eliminates the possibilities of the being biasness in the financial reporting and accounting. Consequently, the statement achieves both relevance and faithful representation in corporate financial reporting.
Directors at most times prefer the cost model to the revaluation model due to some factors. Some of the factors that encourage directors not to use the revaluation model are:
Some of the effects of not revaluing the plant, property, and equipment are:
The decision of the directors not to revalue will affect the wealth of its shareholders adversely. This is because there will not be increased assets in the company which in turn will cause the gains in assets to reduce. The shareholders’ dividends will, therefore, have to be reduced so that the company can be stable. Also, the model ensures a substantial return on investments which also results in the shareholders getting more returns and not using it will affect this (IAS 16 Property, Plant, and Equipment, 2013).
Through revaluation, the company will succeed through the profits made in assets, and if they fail to use the model, then the shareholders’ returns will be affected because the gains will not be made.
References
Adams, C. A. (2015). The international integrated reporting council: a call to action. Critical Perspectives on Accounting, 27, 23-28.
Becker, G. S. (2017). Economic theory. Routledge.
Black, J. (2017). Critical reflections on regulation. In Crime and Regulation (pp. 15-49). Routledge.
BSP Annual report. (2013). Retrieved May 8, 2014, from South Pacific Stock Exchange: https://www.pomsox.com.pg/dimages/company_pdfs/29_2206.pdf
Cheng, M., Green, W., Conradie, P., Konishi, N., & Romi, A. (2014). The international integrated reporting framework: key issues and future research opportunities. Journal of International Financial Management & Accounting, 25(1), 90-119.
Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.
Deegan, C. M. (n.d.). An overview of accounting for assets and depreciation. In Australan Financial Accounting (p. 159). Sydney: Rosemary Noble.
FASB. (n.d). Summary of Statement No 144. Retrieved from https://www.fasb.org/summary/stsum144.shtml
IAS 16 Property, Plant and Equipment. (2013, January 1). Retrieved May 1, 2014, from IFRS: https://www.ifrs.org/IFRSs/IFRS-technical-summaries/Documents
IFRS. (2010). Conceptual Framework: Objectives and qualitative characteristics. Retrieved from https://www.ey.com/Publication/vwLUAssets/Supplement_86_GL_IFRS/$File/Supplement_86_GL_IFRS.pdf
l Fraser, M. (2012). The management accountant and non-financial information. The New Zealand Institute of Charted Accountants.7
Levi-Faur, D. (2017). Regulatory capitalism. Regulatory Theory, 28
Macve, R. (2015). A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
Mansbridge, J. J. (2018). A deliberative theory of interest representation. In The politics of interests (pp. 32-57). Routledge.
Quirk, P. J. (2017). Preventing Regulatory Capture: Special Interest Influence and How to Limit It. Edited by Carpenter Daniel and Moss David A.. New York: Cambridge University Press, 2013. 530p. $77.00 cloth, $27.99 paper. Perspectives on Politics, 15(1), 235-236.
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