Australia decided to replace its accounting standards with the International Accounting Standards Board (IASB) win 2002 with an aim of enhancing the flow of Australian business in the global market. However, some Australian accountant and financial experts have criticised the use of IFRS as captured by Agnes King in her article entitled ‘Unwieldy rules useless for investors’ (Albu & Albu, 2012, p. 45). According to the critics, IFRS is too complicated to be understood by investors and can easily mislead their sections making. This part analyses the criticism against IFRS while seeking to defend the importance of IFRS to investors and other stakeholders who rely on financial statements for decision making (Bayerlein & Farooque, 2012, p. 112).
First critics hold that investors do not read the IFRS financial statements simply because they do not understand the accounting standards. The claim by critics is based on the fact that analysts and investors never ask questions about the financial statements. However, the IFRS was prepared by an independent board to provide timely and consistent information to the investors. The financial statements prepared using IFRS are detailed which is why investors do not seek explanation from company executives. Good disclosure of information by IFRS do not require elaborative explanation from investors (Shamrock, 2012, p. 51).
Second, since its adoption in Australia, IFRS has remained relevant and lived true to the intended purpose. IFRS was adopted to fill several gaps in the Australian Accounting Standards (AAS) (Shamrock, 2012, p. 76). Some of the gaps in AAS were accounting for the cost of employer-sponsored superannuation, the recognition and measurement of financial instruments, impairment of non-financial assets and accounting for share-based payments. These issues had significant impact on disclosing the true financial position of any company. Since full adoption of IFRS by Australian companies in 2005, financial statements have become richer and comprehensive of information for analysts and investors compared to before (Opperman, 2009, p. 33).
It is difficult for financial experts and accountant to explain why they are uncomfortable with IFRS. According to a survey conducted by the PWC found out that investors highly rely on more regulated financial statements that have been prepared using IFRS for investment decision making. Instead of not asking questions when financial statements are not clear, Investors would choose not to invest in the company (Hilton & O’Brien, 2009, p. 181).
This section uses the three theories, that is, (Public Interest Theory, Capture Theory and Economic Interest Group Theory of regulation to explaining the decision by the Australian government not to enact legislation that require corporations to engage in Corporate Social Responsibility (CSR) and let market forces determine the right cause of action for the companies (Baker, 2005, p. 699).
a) Public Interest Theory and CSR
The Public Interest Theory states that regulations should always seek to benefit and protect the general public. Public interest theory give the government the responsibility of protecting the welfare of its citizens. Even a free market where actions taken by business are guided by the market forces, government reserves the right to intervene when corporations are taking advantage of the public. Public interest theory hold that the actions taken by companies should in line with the public interest while focusing on wealth maximisation. Therefore, the government should take necessary measures in ensuring that corporates take part in CSR (Baker, 2005, p. 702).
b) Capture Theory
According to the Capture theory the agencies that are put in place by the government to protect the rights of the public end up protecting the rights of the industrial players instead. In other words, the government might introduce regulations which benefit its own interest instead of benefiting the citizens (Power, 2010, p. 76). For example, the government might come up with regulations aimed at protecting the environment. With the introduction of such regulations, companies might be subjected to high fines which end up limiting production. In such a situation, employees are likely to lose their jobs. On the basis of capture theory of regulations, allowing the government to introduce new laws would lead to interference with the operations of companies. On this basis, the government should not be involved in imposing CSR on companies (Cheong, 2010, p. 133
c) Economic Interest Group Theory of regulation
This theory states that introduction of regulations governing corporates’ involvement in CSR activities should be driven by the forces of demand and supply. The government is placed on the demand side while the corporates are placed in the supply side (Sherry, 2009, p. 59). The economic Interest group theory of regulation states that both sides should strike a balance and come up with regulations that support both sides of the equalisation. The regulations developed by the government should protect the rights of the public while giving companies an opportunity to operate freely (Arya & Reinstein, 2010, p. 71). In short, economic interest theory tend to balance between public-interest and self-interest theories.
Revaluation of non-current assets refers to determining the true value of fixed assets after taking into account inflation and other changes that might have led to reduction of an asset price from the acquisition or purchase value. On the other hand, impairment of non-current assets decreasing the value of an asset when its current value exceeds the book value.
When it comes to revaluation and impairment of fixed assets, the U.S GAAP is a conservative approach which focuses on increasing profit and reducing the loss for business owners. On the other hand, IFRS is principle-based which focuses on using balance sheet to present a fair value of a company (Pozen, 2009, p. 41).
The main purpose of preparing financial information is not only to present important events but to disclose the most accurate information. Therefore, information must be neutral, free from error and complete. The issue of the historical value is that is does not take care of the impact of inflation.
However, avoiding revaluation of fixed assets by the US Financial Accounting Standards Board is aimed at maintaining the faithfulness of financial information in presenting the true and fair value of a company. On the other hand, company administrator might use revaluation models that give them an ability to inflate revenue hence increasing the company financial value (Beatty, A & Weber, 2006, p. 264).
Yes, FASB Statement No. 144 on Accounting for the Impairment or Disposal of Long-Lived Assets, allows faithful presentation of a company value.
a. What might motivate directors not to revalue the property, plant, and equipment?
There are some reasons why firms choose not to re-evaluate their fixed assets. First, directors do not want to incur extra cost associated with revaluation. Some of the costs involved in revaluation of fixed assets include revaluation fees, time consumed in reviewing records, and figures and the auditors fees. In some countries such as the U.S, revaluation is outlawed because the financial information generated after revaluation of fixed assets might not be reliable for decision making (Beatty, A & Weber, 2006, p. 286).
b. What are some of the effects the decision not to revalue might have on the firm’s financial statements?
Revaluation of fixed assets has direct impact on the value of fixed assets, shareholders equity and financial liquidity ratio. Upward revaluation lead to increased value of non-current asset, increased shareholders’ wealth and reduced liquidity ratios. The decision not to revalue assets means that there are recorded at their historical cost. Likewise, choosing not to revalue fixed assets means that companies do not incur extra expenses (Shamrock, 2012, p. 73).
c. Would the decision not to revalue adversely affect the wealth of the shareholders?
Upward revaluation leads to increased shareholders’ wealth. On the other hand, downward revaluation leads to decreases shareholders’ wealth. Choosing not to revalue fixed assets means such assets are valued at their historical cost (Bayerlein & Farooque, 2012, p. 117). Therefore, a decision not to revalue assets have no direct adverse impact on shareholders’ wealth.
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