The Framework’s goal is to accommodate IASB towards developing and reconsidering IFRS which further includes steady ideas, for preparing to develop reliable bookkeeping arrangements varied regions (Schroeder, Clark & Cathey, 2011). The sole purpose is to cater to places which does not encompasses standard or where there arises decision of accounting policy, for the purpose of all gatherings to assimilate and translate IFRS. Without prevalence of Standards that can particularly apply to a transaction, administration must utilize its judgment in creating and applying accounting policies that provide adequate reliable information. In order to arrive at a decision making, IAS 8.11 provides that the administration need to consider various definitions, acknowledgment criteria, and estimation ideas for assets, liabilities, incomes and expenses according to the Framework. This aspect was added to the Framework in the 2003 while making amendments to IAS 8. The Conceptual Framework does not abrogate a particular IFRS. In case the IASB chooses to issue another or reconsidered proclamation that is not in accordance with the Framework. The IASB must feature the reality and clarify the explanations behind the reason for conclusions.
The qualitative attributes of financial reporting reviews varied types of data which probabilistically going to be appreciated to clients. Thus, in settling on choices about the reporting entities based on data in financial report various data and information needs to be considered. The subjective characteristics apply similarly to financial data in every financial report and additionally to financial data in different ways (Cotter, 2012). Financial data is helpful when it is applicable and provides details that it is supposed to represent. The financial data usefulness is upgraded in case it can be practically identical, undeniable, convenient and justifiable. Qualitative characteristics are generally pertinent and dependable portrayal is the crucial subjective qualities of valuable financial information.
The Board in order to retain faithful representation as being a primary qualitative characteristic had to undertake the characteristics of reliability as have been outlined in the current Framework. Faithful representation was assumed by the Board members to constitute back door to full fair value measurement hence it was decided to object to it. Faithful representation acts as a back door to full fair value measurement and therefore object to it. The Board cleared its intentions by making it explicit that it did not want to include such fair value measurements. Providing the economic substance with the underlying phenomenon without taking into consideration its form or neutrality and completeness were regarded as necessary conditions for representation of being faithful (Gebhardt, Mora & Wagenhofer, 2014). Qualitative characteristics of financial information accommodate relevance, faithful representation, comparability, verifiability, timeliness and understandibility. Earlier conceptual framework had a more predictive role along with confirming role that allows for essential decision making. Meaning investors and other stakeholders could easily read that information and make fruitful decisions related to their investments or other decision making criteria’s. However, meaning of relevance in previous framework and those supported by current framework will largely vary. Current adoption of IFRS will have predictive role to play along with confirming role however financial analysis using footnotes are stated in technical terms that often is difficult for layman to analyse. Reliability qualitative framework that existed earlier provided for credible presentation in a completed form. The structure provided essence to be more integral compared to form. It provided a more cautious and completed approach. In the light of the new framework that has been accommodated comparability along with intelligibility was considered avoiding cautious approach. Therefore the entire presentation or conception differed from the old approach to the new approach. Intelligibility and comparability in earlier approach was space and time bound, which was replaced with Fair Presentation. Fair presentation included ascertaining value in a neutral and complete manner avoiding scope for material mistakes. The new framework also came to include verifiability and timeliness. Therefore IFRS 1980 framework was way different to current 2010 Framework. As the new framework needed adequate financial knowledge and skills to be able to interpret information correctly.
The central and core objective of financial reporting that has been identified by the Conceptual Framework is to develop principle-based standards. Corporate financial reports that are built in accordance to current IFRS recommendations have accommodated improvised Conceptual Framework (Zhang & Andrew, 2014). The newly devised framework is supposed to be based upon fundamental economic concepts compared to collected arbitrary set of conventions. The Conceptual Framework provides a project arising from overall convergence from efforts that has been designated by the Board. The Board revised set of standards and results by replacing the existing FASB and IASB. It has allowed setting up of common set of standards that will help overcoming risks of arriving at varied conclusion regarding identical issues. The core objective of financial reporting has been basically adopted as the foundation for formation of Conceptual Framework.
The Corporation Act of the Commonwealth of Australia highlights businesses dealings within state and federal level. The Act primarily deals with entities such as companies, partnerships, managed investment schemes (Bath, 2012). The Act has been revised several times but in 2006 the Australia Government inquired regarding corporate social responsibility aspects that could form a part of the Act. However post the inquiry session getting over, no specific regulations were ascertained and it was decided that market forces would encourage companies to act in the right manner. Corporate social responsibilities were left to be decided by the market, where participants would not consume a company’s product which did not contribute positively towards the environment, society or community or would not like to work for it. Therefore, market forces would be acting in an appropriate manner in absence of regulations. The decision of the government can be justified from the point of view of Public Interest Theory, Capture Theory and Economic Interest Group Theory of regulation. The Government in Australia along with CPA makes clear distinction between the concept of corporate social responsibility and legal responsibilities of company directors, along with their interaction with company stakeholders. The legal framework prevalent that allows decision-makers opportunity to allow positive interests of stakeholders has become a contradiction. Moreover the notion that business operates for the sole purpose of profit maximization has lost its practicality in contemporary businesses. Directors who pursue bona-fide interests of the business must not solely focus on profit maximisation, they need to consider the needs of other stakeholders as well. An integral stakeholder of the Company, which is customer, serves long term interests of the Company providing its sustainability. It is thus the issue of sustainability that needs to be catered to by the directors’ by catering to consideration of the employees, consumers and other stakeholder groups.
The Public Interest Theory of regulation analyses that regulation includes protecting and benefiting of the public at large. According to this theory Government will seek to intervene and control the economy (Rosenbloom, 2016). The theory of public interests has its concepts grounded in welfare economics. According to this theory’s assumption markets are characterised by certain aspects such as imperfect competition, Asymmetric information, externalities which leads to their inefficiencies. All these inefficiencies can lead to market failure that can be corrected by means of applying regulations on the market. According to this theory it is believed that regulators have full information pertaining to the market, they can intervene in the market to get desired outcomes and they have a motive for social improvement. Therefore regulating firms can contribute to the promotion of welfare interests of the public. According to adoption of decision by the Government in Australia to exclude aspects of CSR, it is clearly understood that this theory cannot be applied. As clearly stated the base and focus of this theory is that markets operate in an inefficient manner, whereas the government assumes that markets in Australia operate effectively. The role of the Government in this theory is assumed to be critical to be acting as a neutral arbiter, this means that in absence of the Government to introduce basic rules into Corporations Act, companies operating in the country will not apply CSR norms or include environmental responsibilities (Feintuck, 2010). Which is not the case here, in this case it is clearly understood that markets operate efficiently and that consumers and other stakeholders have access to all possible information hence they will not purchase from a place that does not accommodates CSR norms
Evaluation of the decision made by the Government in Australia as per the Capture theory as proposed by George Stigler, Nobel Laureate reflects that the same cannot be applied (Carpenter & Moss, 2013). According to this theory, regulatory agencies dominate the industry for greater benefit of the public. Regulatory agency is basically formed according to this theory for generating sole benefits for the public interests. This act is developed on the belief that profit seekers would generally expect regulatory environment that is favourable to them especially when they can influence politicians or regulators. The theory assumes that over period of time regulatory agencies can subvert to pressure applied from bribes and influences. Formation of capture takes place in case of government failure, which gives rise to special regulatory agencies. These regulatory agencies dominate interests of an industry as per the demands of public interests. Thus, it can be clearly understood from this theory as well that it cannot have affected government’s decision to not to accommodate CSR in Corporation Act. The Federal Government in Australia is highly effective and caters to interests of the public in all possible manners (Boyer & Ponce, 2012). It has also incorporated all possible regulations that can best serve the interests of the public.
According to Economic Interest Theory and Regulations there are a set of policies that are conducted by forces of demand and supply (Baldwin, Cave & Lodge, 2012). In this theory government is said to occupy the supply side whereas interest group consists of the demand side. This theory suggests that regulations are developed by the industry and such regulations are aimed at creating advantages for the concerned industry. It can be understood from the basis of this act that the government’s impending decision was undertaken to provide benefits to the industry. Not adopting of a regulation was not a suggestion within the framework of this theory. Therefore it can be ascertained that the government had not taken any decision keeping in mind any components from this theory (McCormick & Tollison, 2012). CPA Australia though wants certain subtle reforms to be made in the Corporations Act that are able to cater sufficient to community concerns. There needs to be regulations that encourage or prohibit specific social or environmental practices encompassing environmental and labour laws. Situations of clear abuse of limited liability meant towards evading obligations might unduly impinge on the broader business community.
Faithfulness representation as per its recent accommodation in the financial statements provide that financial information has to be furnished in an accurate manner for reflecting true condition of the business (Lee, 2011). According to the FASB, US Financial Accounting Standard Board for the purpose of revaluating its non-current assets does not take into consideration fair value. According to faithfulness, concepts has to be extended across all financial statements that encompasses results of operations, cash flows, financial position of the reporting entity. In order for a business to reflect on these attributes of faithfulness, certain considerations need to be taken into account. Completeness of the information that is provided by financial statements, which reflects clearly various aspects of the financial position of the Company is relevant. Error-free is another aspect that needs to be accommodated as financial statements cannot have any form of errors in information contained in them. Every aspect of the organization must represent fair value such that financial statements can lead to a certain direction for the firm and its stakeholders. Moreover in order to be faithful, financial statements has to represent actual state of the organization without amplifying any aspect of the result.
Valuing fixed assets has provided a contradictory issue for various accounting boards and standard setters. When accounting for fixed assets at fair values more relevant information is reflected to its users (Marsh & Fischer, 2013). In case of accounting for fixed assets at historical costs there are reduced chances of manipulation. In US GAAP regulations pertaining to initial measurement post which forming subsequent accounts for fixed assets represents a fair deal of challenge when compared to its impact on faithfulness. At a particular period of time non-current assets are used as tangibles in production or in supply of goods or services. Property of non-current assets is that they have physical existence and can be touched. Fixed assets within a business comprise of property, machinery and equipment, plant and equipment typically consist of land, buildings, as well as furniture and fixtures. As per US GAAP regulations, all non-current assets are accounted for using the historical cost model, which stipulates that non-current assets are initially recorded at cost. Post which they are treated at cost less accumulated depreciation and cumulative impairment losses. Generally any changing circumstances which can lead to upward adjustments are avoided. It often leads an impact that the condition of the organization is far worse than it actually is or far better. As depreciation is set aside creating a provision for the non-current assets, profits might be reflected which are not real in nature. Therefore it is an impact on the faithfulness of the financial statement.
According to FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, the cost model allows impairment losses to be adjusted in a downward manner (Barua, Lin & Sbaraglia, 2010). In this case long-lived assets are tested for impairment in case there is an indication that their carrying amount exceeds their market value. The adjusted carrying amount of a fixed asset becomes its new cost, in case an impairment loss is recognized. This loss is depreciated over the remaining useful life of that asset. The regulation prohibits restoration of a previously recognized impairment loss. This is again a procedure where true value for an asset might not get recognised. Profits or losses which are actual will not get reflected through this manner. This might lead to biasness creeping within the financial statements.
(a)What might motivate directors not to revalue the property, plant and equipment?
Directors of several companies might not want to revalue their property, plant and equipment at fair value. Most organization prefer using historical cost model in which assets that are listed in financial statements of the company often gets recorded at the price at which they are purchased (Damodaran, 2012). According to US GAAP historical cost principle implies recording of an asset at a price for the amount of which capital has been spent on it. It makes use of the Company’s past transaction hence is considered a reliable and conservative method used for the purpose of calculating cost of an asset. This model sums up to lower costs of assets and lower measurement which further leads to lower backing of shares. Therefore, in order to not reflect fair value of assets and furnish complete picture of a firm’s financial position these methods is often used.
(b)What are some of the effects the decision not to revalue might have on the firm’s financial statements?
In case the directors and financial heads of the company ascertains not to revalue assets of the Company at an appropriate price, then the financial statement will not reflect true picture for the firm (Christensen & Nikolaev, 2013). The firm’s financial information will not be faithful in nature. Meaning that the values furnished cannot be depended upon or reliable that can be used by investors or shareholders for the purpose of making their financial judgements.
(c)Would the decision not to revalue adversely affect the wealth of the shareholders?
The decision not to revalue assets as per fair value can adversely affect the wealth of the shareholders (Power, 2010). As depreciation and other aspects will not be charged to the asset, reflection of backing of shares will be limited. In case of liquidation, the shareholders will be able to raise fewer claims as opposed to real picture depicted by the Company. Unfair financial statements will be provided by the company that does not indicate true financial information.
Reference Lists
Baldwin, R., Cave, M. and Lodge, M., 2012. Understanding regulation: theory, strategy, and practice. Oxford University Press on Demand.
Bath, V., 2012. Foreign investment, the national interest and national security-foreign direct investment in Australia and China. Sydney L. Rev., 34, p.5.
Boyer, P.C. and Ponce, J., 2012. Regulatory capture and banking supervision reform. Journal of Financial Stability, 8(3), pp.206-217.
Carpenter, D. and Moss, D.A. eds., 2013. Preventing regulatory capture: Special interest influence and how to limit it. Cambridge University Press.
Cotter, D., 2012. Advanced financial reporting: A complete guide to IFRS. Financial Times/Prentice Hall.
Feintuck, M., 2010. Regulatory rationales beyond the economic: in search of the public interest. In The Oxford handbook of regulation.
Gebhardt, G., Mora, A. and Wagenhofer, A., 2014. Revisiting the fundamental concepts of IFRS. Abacus, 50(1), pp.107-116.
McCormick, R.E. and Tollison, R.D., 2012. Politicians, legislation, and the economy: An inquiry into the interest-group theory of government (Vol. 3). Springer Science & Business Media.
Rosenbloom, D.H., 2016. 3a. Public Administrative Theory and the Separation of Powers. In The Constitutional School of American Public Administration (pp. 78-94). Routledge.
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2011. Financial accounting theory and analysis: text and cases. John Wiley and Sons.
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26.
Lee, C., 2011. The effect of SFAS 142 on the ability of goodwill to predict future cash flows. Journal of accounting and public policy, 30(3), pp.236-255.
Barua, A., Lin, S. and Sbaraglia, A.M., 2010. Earnings management using discontinued operations. The Accounting Review, 85(5), pp.1485-1509.
Marsh, T. and Fischer, M., 2013. Accounting for agricultural products: US versus IFRS GAAP. Journal of Business & Economics Research (Online), 11(2), p.79.
Power, M., 2010. Fair value accounting, financial economics and the transformation of reliability. Accounting and Business Research, 40(3), pp.197-210.
Christensen, H.B. and Nikolaev, V.V., 2013. Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), pp.734-775.
Damodaran, A., 2012. Investment valuation: Tools and techniques for determining the value of any asset (Vol. 666). John Wiley & Sons.
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