The financial accounting standards and the International Financial Reporting Standards have been established in order to keep a check on the different accounting statements which is prepared by various organizations and to see to it that the framework of an integral reporting system is maintained. However in the article “Unwieldy rules useless for investors”, the given statement has been criticized and it has been stated that the IFRS and other standards are not adequate.
According to Hogg (2016), the financial reporting serves the given objectives:
The different financial reporting systems are generally based on the conceptual framework which acts as a guideline. Given below are the characteristics of a conceptual framework:
If the financial statements of the organization do not possess the given characteristic features then they lose their relevance.
The given article states that although the given points stated have the adequate features and capabilities which a report must comprise of, however the IFRS Standards do not have the present capability of justifying these characteristics (Lequiller and Blades 2014). The article examines, that the adjustments present in the IFRS are not Relevant enough and often provide misleading information to the different customers. Furthermore, the reports which are being prepared under the given guideline cannot be compared easily as well.
The article agrees that it is the duty of the financial statements to provide relevant data relating to the liabilities expenses and equity of a firm to all its stakeholders.
Public Interest Theory
The economic markets whether they are the capital markets or the bond markets, are quite volatile in nature. This means that they often diverge from their designated path and this tends to lead the investors towards relying to the financial statements of the firm in order to understand what the correct share price needs to be. The capital markets do not give importance to the different society components and are based on their self-interest. For this reason, it becomes extremely important for different governmental agencies to be set up laws which tend to govern these movements. It was A.C.Pigou who established the theory of public interest back in 1932. It was stated that any government legislation can only be established when the organization shows interest and states that it wants the government to rectify against the wrong doings of the firms. Very often the governmental organizations work in the favor of the governmental agencies which should not be the scenario. Another theory which was formed by Stigler in 1972 stated that the efficiency of the government in controlling the activities of the organization is not as important as the regulation of the industries who utilize such rules in forming a barrier against the new entrants present in the given scenario (Hoyle, Schaefer and Doupnik 2015).
The main way in which this scenario takes place is the act that the organizations fail to disclose all the relevant information which is important and only disclose the ones which they feel comfortable in. Hence, based on the given public interest theory, it has been advised that a legislation must be passed which tends to stress upon the fact that the different organizations must provide adequate details about their activities that have a tendency to harm the environment and also elaborate upon the initiatives conducted by them to mitigate such harms. Once these are passed, they should be made available to the general public as well in order to ensure that they can read and understand it.
Capture Theory
The capture theory states that the different workers in the industry tend to have a captivating hold on the different workers present in the governmental organization. The workers in the industry work towards securing the different interests of the industry and they often go to the extent of making the distribution of resources misbalanced (Christensen et al. 2015). They have a manipulative impact and tend to manipulate the distribution of the resources in a manner such that the societal needs are not met with in an appropriate manner.
The capture theory talks about this given consensus among the industry workers and the governmental agencies. It states that the government in order to promote the different needs of the individuals tends to establish various rules and regulations at all the levels of the government with an aim to ensure that it is being able to protect the needs of the different customers in an organization and ensure that they are protected from the harmful practices in a business environment (Deegan 2013). For this purpose, the capture theory states that the primary discrepancy aims to take place when the people working in an industry tend to form relationships with the ones in the government organizations.
The reason why they form such relationships is because the people in the government are the ones who make the various rules and regulations and it is for this purpose that components like price control, quality control, minimum operating standards and related activities are maintained (Jorissen et al. 2013). In order to combat against this factors, it is very important for the organization to ensure that the people working in the given governmental set up have adequate skills and expertise which will help them in viewing the bigger picture. Furthermore, the people in industry already have the expertise which is essential and this leads to the lack of balance. This takes place because it may be a chance that the people in the agencies are prior employees of the industry and thus they conduct in these unethical favors. Hence, it is in this manner that the government is said to be captured by the different workers in the industry.
Economic Interest Group Theory Of Regulation
The given theory is based on the assumption that in a given industry there are different groups which are formed in order to fulfill their economic interest. These groups may often be very large in number and continuously aim to compete with one another so as to establish power. As these groups are relatively powerful in nature they tend to influence the different governmental bodies and influence them to pass legislations in the favor of the group and enable them to secure the interest in the best manner. These groups are quite selfish in nature and not concerned with the interest of the society at large (Christensen, Hail and Leuz 2013). The government on the other hand is selfish enough and to secure their interests and with the vision of being elected again they often feel that they should succumb to the given group who will later on provide them with adequate funds and resources. Hence, based on this the economic interest group theory states that these legislations which are formed by the government are unable to tap the work of these strong economic groups. These organizations as well in their power and authority tend to violate all the rules which have been stated with respect to the environmental and social aspects. This can be described as the cycle of the relationship between the two parties which is bound by the group`s power.
Although revaluation are considered to be an important aspect of an organization, according to the Accounting for the Impairment or Disposal of Long-Lived Assets, under the FASB Statement No. 144 , the different firms are not permitted to revalue their assets but to take into consideration impairment costs for this purpose (Weil, Schipper and Francis 2013). Although this may seem a burden, this given rule is important and helps in representing the true picture of the United States financial statements.
These impairment costs although tend to reduce the costs of the firm but do not have a negative impact on the cash balance. Furthermore, this tends to have different advantages as well kike providing a better picture of the organization and being true to the actual operations of the firm. As the total amount of depreciation in an organization keeps changing the value of the assets change considerably and this is crucial. Hence, these can be stated to be the impact of the US FASB on the important and representation of faithfulness of the different financial statement in the US Organizations.
1Revaluation is taken to be an essential part of an organization and it is performed in order to be able to dignify the true value of an organization in the eyes of the different customers. There may be several motivators in place for the process of revaluation (Ifac.org. 2018). These reasons have been given as follows:
Although the benefits are many in number but many companies do not want to reevaluate their assets and want to go with the cost model which is because of the following reasons:
It leads to reduction in the satisfaction of the investor. This means in the scenario where the assets are being revalued then there may be a case that the profits of the firm might be reduced. The investors may not prefer it if this is the scenario (Mao and Renneboog 2015).The assets and their values become lower than the previous year which further tends to have an impact on the net profits. This has a harmful impact on the historical perspective of the firm and may tamper its sustainability.
Furthermore, it also leads to the nature of the assets becoming highly volatile and fluctuate.
2.In case the different assets of the organization are not revalued, then this may have a huge impact on the firms which may comprise of the follows:
3.In a situation, where the capital market is not efficient enough to portray the value of the shares, then the investors may make use of the financial statements to figure out the correct price. For this reason, the decrease in the value of the assets and the net backing value may affect the prices severely. Although this may be offset by the profits which get inflated, however if the revaluation of the assets takes place and the capital market is efficient then the impact on the wealth of the shareholders shall be minimized.
References
Ahmed, A.S., Neel, M. and Wang, D., 2013. Does mandatory adoption of IFRS improve accounting quality? Preliminary evidence. Contemporary Accounting Research, 30(4), pp.1344-1372.
Ball, R., 2006. International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and business research, 36(sup1), pp.5-27.
Barth, M.E., Landsman, W.R. and Lang, M.H., 2008. International accounting standards and accounting quality. Journal of accounting research, 46(3), pp.467-498.
Bentley, K.A., Omer, T.C. and Sharp, N.Y., 2013. Business strategy, financial reporting irregularities, and audit effort. Contemporary Accounting Research, 30(2), pp.780-817.
Christensen, H.B., Hail, L. and Leuz, C., 2013. Mandatory IFRS reporting and changes in enforcement. Journal of Accounting and Economics, 56(2-3), pp.147-177.
Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), pp.31-61.
Deegan, C., 2013. Financial accounting theory. Graw-Hill Education Australia.
Hogg, M.A., 2016. Social identity theory. In Understanding peace and conflict through social identity theory (pp. 3-17). Springer, Cham.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Ifac.org. ,2018. Does IFRS Have a Future in the US? | IFAC. [online] Available at: https://www.ifac.org/global-knowledge-gateway/business-reporting/discussion/does-ifrs-have-future-us [Accessed 19 May 2018].
Jorissen, A., Lybaert, N., Orens, R. and Van der Tas, L., 2013. A geographic analysis of constituents’ formal participation in the process of international accounting standard setting: Do we have a level playing field?. Journal of Accounting and Public Policy, 32(4), pp.237-270.
Khan, S. and Bradbury, M.E., 2016. The volatility of comprehensive income and its association with market risk. Accounting & Finance, 56(3), pp.727-748.
Lequiller, F. and Blades, D., 2014. Understanding national accounts.
Mao, Y. and Renneboog, L., 2015. Do managers manipulate earnings prior to management buyouts?. Journal of Corporate Finance, 35, pp.43-61.
Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
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