The Conceptual Framework was issued by Financial Accounting Standards Board to help companies in financial reporting. The revised framework was aimed at ensuring that companies in the global market can eliminate the differences that exist between the reporting of financial statements. The revised framework is part of the International Financial Reporting Standards that are a single set of accounting standards. The revised framework thus has made some changes that aim at ensuring financial reporting and accounting is efficient and effective. The revised framework is made up of two characteristics that are aimed at efficient financial reporting (Adams 2015).
These two qualitative characteristics are fundamental characteristics and qualitative enhancing characteristics. The fundamental characteristics comprise of two aspects which are relevance and faithful representation.
In relevance, the conceptual framework ensures that all the information contained in financial records and statements are relevant to the company (Black, 2017). The CFO’s, on the other hand, believe that the information provided is useless and therefore it is not relevant. What this means is that most of the information contained in the financial statements is of no use in helping to make a financial decision (Choudhary, Merkley and Schipper 2017).
In faithful representation, the conceptual framework ensures that all the information provided in accounting can be relied on. The CFO’s say that the information has gone to levels that are unmanageable. If the CFO’s cannot manage the information provided, then they cannot use it to make financial decisions thus cannot rely on it. Faithful representation focuses on three aspects that are the information should be: complete, free from error and neutral. The CFO’s cannot rely on the information provided because they feel that the information contains a lot of errors.
On the other hand, the enhancing qualitative characteristics ensure that the financial information meets the following aspects: understandability, comparability, verifiability, and timeliness. In understandability, the conceptual framework ensures that the financial information provided can be read and comprehended for making informed decisions. However, when analysts take a look at the IFRS accounts, they are not able to understand them and most often than not, misinterpret them. This means that the information provided cannot be easily understood.
The CFO’s have to outsource for professionally trained people to look at the IFRS accounts and interpret them. This does not meet the characteristic of timeliness that the board wants to achieve because a lot of time is spent in hiring professions every time the company wants to have a look at their IFRS accounts (Choudhary, Merkley and Schipper 2017).
In comparability, the conceptual framework ensures that companies, especially those in the global market, can make comparisons between their financial statements. The CFO’s believe that the information provided in the statements is useless meaning they cannot achieve comparability. If they cannot use the information given, then they can also not compare it to other statements.
Verifiability is the last one. In verifiability, the conceptual framework ensures that all the parties involved in the financial statements can able to reach an agreement. In this case, however, the parties are not able to reach an agreement because they do understand the financial statements, and also they misinterpret them thus every person has their version of what they understood.
It is correct to say that the views expressed above are not consistent with that of corporate financial reporting. This is seen in the following. First, corporate financial reporting aims at comparability by eliminating the differences in reporting. However, the CFO’s are unable to compare their financial statements because the information provided is useless (Haslam et al. 2016).
Second, in corporate financial reporting, the information provided can be relied on while in the views it cannot. This is because the information is not manageable thus cannot be used. Lastly, in corporate financial reporting, the information provided is understandable whereas, in the article, the information provided is often misinterpreted by analysts.
The government usually sets regulations that ensure the needs and demands of the public are achieved. The public which is generally the market sets the basis for the regulations in terms of what they prefer or what they want. Therefore in the public interest theory, the government regulates all entities so that they meet the interest of the public first. The government at most times does not need to control these entities because most of them are formed on the basis of the needs of the surrounding environment (Johnston and Petacchi 2017).
For example, if it is the rainy season, then most people are likely going to wear warm clothes if there is a company that produces shirts only they will have to reset their objectives and strategies. The market force demands warm clothing. Therefore, the entity will have to cater to this by producing warm clothes. In this instance, we see that the company has replied to the demands of the public without the interference of the government. Hence the government does not need to set any regulations because any entity will act in a manner that benefits the society.
The government sets the regulations for companies that ensure they meet the needs of the public. However, in this theory, the government becomes ‘captured’ by the entity in a way that it now serves the interest of the entity. The government will give the entity pointers on what to do and when to do it so that the entity can benefit and also the members of the company can also benefit. However, the government does not need to do this.
When a company is formed the main aim is to make profits and significant returns on investments. Therefore when they are setting their goals and strategies, they will do so in a manner that maximizes its benefits. This can only be achieved if the customers and clients are fully satisfied and therefore will always want more, which keeps the market steady. Therefore it is simple logic always to meet the needs of the customer because they contribute massively to the company. Thus the government does not need to set up any regulations because all companies are capable of evaluating the market force and responding to the demands.
Governments are the agencies that always set up the regulations, but in this theory, the industry is the one that sets them. The entity sets the regulations after evaluating the demand from interest groups (customers). The role of the government in this theory is to supply by approving the regulations. In most cases the industry wants its members to benefit profusely and thus will set regulations that enable them to meet their objectives. Already in this theory, the sectors are the regulation setters, and therefore the government is not needed to make the regulations (Macve 2015).
Also for the company’s members to benefit they will have to satisfy their customers. If the customers are unhappy in any given instances of the products or services the company offers then it will lose its customers which negatively affect the company. An excellent example of this theory is when companies ask the government to fund something that they can fund for themselves. The customers of the company may strongly disapprove this because they believe the company has enough money that it wants to divide among them. Therefore the customers feel like they are paying through their taxes for the company to carry out its projects instead of using the money that they already have.
In this instance, the company will have to cater to the needs of the public because without doing so they are at liberty of losing their customers. It is therefore not necessary for the government to set regulations because the industries are at most times, driven by the demands of the public. Thus the companies will always cater to the interests of the market force.
The statement No 144 that the FASB issued aims at effective and efficient financial accounting. The statement addresses several issues that achieve relevance and faithful representation in financial accounting.
First, the statement provides guidelines for how to account for the implementation costs that are classified as non-current assets. In this case, it achieves faithful representation in that the information provided will be neutral. Neutral is an aspect of faithful representation where it ensures that all accounting for financial information is free from bias and not subjective. Therefore by the statement providing guidance, then entities will only be required to follow the guidance thus the information will be neutral (Small, Smidt and Yasseen 2017).
Second, the statement has expanded the operations that are discontinued so that they include more transactions. In this case, it achieves relevance. In relevance, the statement ensures that all the required and useful information in accounting are provided. Therefore by the expansion, it gives this. Also in this instance, the information provided is complete which an aspect of faithful representation is. All the information for the discontinued operations will be provided which ensure that decisions are made based on complete information.
Lastly, the statement applies the use of one model for the accounting of implementation costs. In this case, the information provided will be free from error which is an aspect of faithful representation as well. Use of more than one model can leave room for a lot of mistakes which will affect the financial decisions made because they will not be accurate. Therefore by using one model, all the errors that may arise will be eliminated (Wild and van Staden 2015).
In conclusion, the FASB statement does fulfill relevance and faithful representation by providing information that is useful, complete, free from error and also neutral. Therefore it enables institutions to have effective and efficient financial statements.
a. The revaluation of plant, property, and equipment of a company is significant. However, most directors do not revalue their property because of some reasons. These include
b. When a company does not revalue their plant, property, and equipment, they are significantly affected, and the following are the effects on the financial statements.
c. When a company does not revalue, the shareholders are also significantly affected by it in the following ways. Since the company has no increased assets, then they are not able to make any returns on investments. The shareholders, therefore, are not able to also make returns because the company itself is not making any gains.
Also, the company is not able to make any profits when it does not revalue its plant, property, and equipment and therefore the shareholders will not receive sufficient dividends because the company is not able to afford it.
Without revaluation, the company faces enormous losses, or if there are any profits they are minimal, and this also reflects in the shareholders in terms of dividends and investments.
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