As per the provided information, it is evident that the financial statements developed as per the standards of International Financial Reporting Standards (IFRS) fail to provide the information that can help in understanding the financial position of the business organizations in spite of the fact that there has been spending of more than hundreds of millions of dollars by the companies for the adoption of the IFRS standards to improve financial reporting. The main reason of this failure can be the absence of the major qualitative characteristics of financial reporting that are major contributors to increase the usefulness of financial information for the users like investors, creditors, lenders and others. According to the conceptual framework of Australian Accounting Standard Board (AASB), the fundamental qualitative characteristics are relevance and faithful representation; and the enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability (De George, Li and Shivakumar 2016). From the following discussion, it can be identified that which qualitative characteristics are missing in the IFRS adopted financial statements.
It is clear from the opinion of Mr. Roberts Geoff, Former Head of Finance of AXA, over many years, he has not received any single questing from the fund managers and the financial analysts related to the financial adjustments of the financial statements to get the correct financial picture of the companies that are done based on the standards of IFRS. For this reason, the fund managers and the analysts never have to face any major difficulties in comparing the financial information of different companies and gaining understanding about the financial performance and financial standings of the business organizations. All these aspects provide the necessary evidence about the fact that the financial statements of IFRS posses the required qualitative characteristics that are comparability and understandability. The presence of these two qualitative characteristics helps in increasing the usefulness of financial information of the companies. However, in the recent years, the financial statements as per IFRS are failing to provide understanding and scope of comparison of the financial statements. For these reason, the current financial reporting framework under IFRS lacks both understandability as well as comparability (De George, Li and Shivakumar 2016).
The fact is clear from the Finance Director of Wesfarmers, Terry Brown, that there is fair chance of the misinterpretation of the notes to the financial statements of the companies in case the financial analysts try to explain them in the absence of required technical knowledge about the standards of IFRS. Verifiability is considered as a major qualitative characteristic of financial reporting that helps in the enhancement of the quality of the financial reporting by providing the scope to the users to apply their financial knowledge and observation for gaining insight about the financial conditions of the entities. The analysis of the notes to the financial statements is a crucial aspect for the users to gain understanding about the financial performance of the entities. The above statement indicates towards the fact that the users are not able to analyze the content of the financial notes by applying their knowledge and observation as the financial statements of IFRS requires high technical knowledge. From the above analysis, the absence of verifiability and understandability qualitative characteristics can be seen in the financial reporting framework under IFRS (Chebaane and Othman 2014).
It is clear from the statement of Chief Financial Officer of Commonwealth Bank, David Craig, that the investors of the companies are not providing importance to the financial statements developed as per IFRS due to the fact that these statements mislead the investors about the financial performance as well as financial position of the business organizations. The financial information of the entities is required to be relevant and faithfully represented so that they can create positive impact on the investment decisions of the users. In the absence of these two characteristics, users fail to obtain the understanding about the financial situations of the entities. For this reason, it is the responsibility of the business organizations to ensure the fact that the provided financial information is relevant as well as faithfully represented. In the recent years, it has been seen that the financial information of IFRS adopted financial statements is neither relevant nor faithfully represented. For this reason, the investors are ignoring the information of these financial statements (Chebaane and Othman 2014).
Lastly, it is required to be mentioned that the general purpose financial reporting has one major objective that is to provide the users of the financial statements with the correct financial information so that they can be helpful in depicting the financial situation of the business entities along with taking effective investment decisions. As the above discussion mentions about the lack of some major qualitative characteristics, it is not possible to achieve this central objective of financial reporting.
The government of Australian took one major decision in the year 2006 related to amending the Corporations Act that there would not be any introduction of any regulation for promoting the social and environmental responsibilities. Rather than the introduction of regulations, the Australian government decided to let the market forces act in this purpose. With the assistance of three popular theories of regulation, this decision of the Australian government can be evaluated. The discussion is showing below:
The public interest theory is in the support of the introduction of regulations for the satisfaction of the demands of the public. According to the principle of this theory, the introduced regulations have a important role to play in ensuring the welfare of the common people; at the same time, the introduction of regulations also ensures that the no specific group of stakeholder become beneficial by using the regulations. Under this theory, the market forces are not provided with importance as they do not have any role to play in satisfying the needs of the common people (Asquer 2018).
The concept of this theory can be applied in the provided situation of the decision of the Australian government. As this theory supports the introduction of regulations, thus, the government of Australia should have introduced specific regulation in the Corporations Act for the promotion of social and environmental responsibilities due to the fact that the presence of regulations helps in the welfare of the common people. Apart from this, the intervention of the Australian government in the market would ensure that there would not any market imperfection or market failure. At the same time, it would be possible for the Australian government to promote the social as well as environmental responsibilities among the common people.
The concept of capture theory can be set against the concept of public interest theory due to the fact that the principle of capture theory is against the introduction of any regulations for satisfying the needs of the common people. Rather than the introduction of the regulations, this theory puts impotence to the working of the market forces for fulfilling the interests of the customers. As per the principles of capture theory, the regulators can do manipulation with the regulations in order to satisfy their own interest; thus, it is good not to have any regulation. Apart from this, the application of this theory assists in the identification of the parties that will be affected with the implementation of the regulations. For all these reasons, it is required to rely on the market forces to satisfy the needs of the common people (Martin and Clore 2013).
By applying the concept of this theory in the provided situation, it can be said that the Australian government did the correct job by not implementing any regulation for the promotion of social and environmental responsibilities in the Corporations Act. As there is not any regulation, the regulators will not get the chance to manipulate them for their own interests.
The principle of this theory states the fact that the business industries are the developers of the regulations and the main intention of the development of the regulations is to do the welfare for the business organizations along with the common people (Fonagy 2018). Thus, based on the point of view of this theory, it can be said that the Australian government should have introduced regulation in the Corporations Act for the promotion of social and environmental responsibilities due to the fact that the presence of responsibilities would create an obligation on the business organizations as well as the common people to comply with the regulations of social and environmental responsibilities.
The given scenario mentions about a specific regulation of US FASB that there is not any requirement for the US business entities to carry on the asset revaluation process, the requirement for them is to consider the impairment charges on those non-current assets. It needs to be mtnioened that this regulation of asset revaluation has some major implications on the relevance and faithful representation of the financial statements and they are discussed below:
The following discussion shows the major motivations for the directors of the companies for revaluation of property, plant and equipment:
There are some major negative effects on the financial statements of the business organizations of the decision not to make the revaluation of the property, plant and equipment. The absence of revaluation process will lead to no increase or decrease in the values of property, plant and equipment. For this reason, the companies will receive abnormal gain or loss at the time of the sale of the assets. In addition, this will lead to the decrease in the earnings of the business organizations and reduced earnings contribute to reduced profitability (Amiraslani, Iatridis and Pope 2013).
Not-revaluation of property, plant and equipment affects the wealth of the shareholders along with the earnings of the companies. In the presence of the reduction in the earnings, business entities become unable to provide the shareholders with divided as well as the promised return on investment. For these reason, there is decrease in shareholder’s wealth (Ribes 2014).
References
Aguilella Ribes, R., 2014. Fixed assets revaluation in Spain: Theoretical and practical issues.
Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a test for IFRS compliance across Europe. London, UK: Centre for Financial Analysis and Reporting Research, Cass Business School. Standards, Regulations, and Financial Reporting, pp.199-223.
Asquer, A., 2018. Theories of Regulation. In Regulation of Infrastructure and Utilities (pp. 19-33). Palgrave Macmillan, Cham.
Chebaane, S. and Othman, H.B., 2014. The impact of IFRS adoption on value relevance of earnings and book value of equity: the case of emerging markets in African and Asian regions. Procedia-Social and Behavioral Sciences, 145, pp.70-80.
De George, E.T., Li, X. and Shivakumar, L., 2016. A review of the IFRS adoption literature. Review of Accounting Studies, 21(3), pp.898-1004.
Fonagy, P., 2018. Affect regulation, mentalization and the development of the self. Routledge.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
Kozlovska, I., 2015. The impact of long-lived non-financial assets depreciation/amortization method on financial statements. Copernican Journal of Finance and Accounting, 4(2), p.91.
Martin, L.L. and Clore, G.L., 2013. Theories of mood and cognition: A user’s guidebook. Psychology Press.
Yao, D.F.T., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets and audit fees: Evidence from Australian companies. Journal of Contemporary Accounting & Economics, 11(1), pp.31-45.
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