Exploring Financial Reporting Practices And Regulations

Assessment Task Part A – Qualitative Characteristics of Financial Reporting

ASSESSMENT PART A

Any information contained in the financial statement helps an investor or other user in the economic decision-making process. However not every and any information can be beneficial for the users of the financial statement. There are few qualities which this financial information should possess to satisfy their purpose of helping the users (Elimam, 2017).

The following are all qualitative characteristics .

• Understandability. The information must be presented in such a way that is easy to understand. This basically implies that any user who has a basic business sense and has a reasonable knowledge in the field of economic activities and finance would have the ability to easily comprehend the information present in the financial statements. The information should be clearly presented so that the user can draw conclusions. These conclusions would form the very basis of their financial and investing decisions. Additional information should also be given to provide further clarification in intense and complicated matters.
• Relevance. The information presented in the financial statements must be relevant to the objectives of the decision makers and must not be vague. It should be kept in mind that presenting a sea of data would be of no importance if they don’t lead to meaningful inferences and conclusions. Only those data can be considered relevant which influences the economic decisions of users.
• The information will be considered reliable only when the financial statements as a whole is free from any error or mistake, most importantly the material ones. The data should be free from any bias and should not be misleading. The transactions, events and balances appearing in the financial; statements should reflect a true and fair view. There should be proper disclosure for every item, especially those which cannot be assigned a numerical value, i.e. the not quantifiable amounts(Elimam, 2017).
• The information must be presented on a consistent format so as to ease the task of comparing the data of one period with another, one company with another or various companies from the same industry or related industries. Such ease of comparisons helps in establishing trends and enables the users to analytically review the performance of the enterprise or enterprises. It may also help in knowing the direction in which the company is moving in relation to growth (Maynard, 2017)

Having discussed the qualitative characteristics of financial statements, it can be concluded that in the opinion of the above quoted individuals the qualitative characteristics of understandability do not appear to be satisfied by current reporting practices pursuant to IFRS. The disclosure requirements are too rigid and complicated.  Instead of making things easier to understand and comprehend, it complicated the dictions making process. Unless an individual is possesses technical training and high professional qualification, he may not be able to decode the plethora of data presented in the financial statements.

These data confuses a normal investor or financial decision maker as it doesn’t facilitate proper and intelligent decision making. Mr. Bowen has rightly said “Once you get into the notes you have to be technically trained. If you’re not, lot of it could be misleading”. These misleading data defies the very foundation of the conceptual framework of financial reporting. It is very clear form the above mentioned points that the views are not at all consistent with the view that corporate financial reports satisfy the central objective of financial reporting (Kusolpalalert, 2018). 

Assessment Task Part B

The public interest theory:  As the name suggests, this theory believes in the concept of general welfare of the public. It aims to provide solutions to market inefficiencies with the sole objective of making things better for the public or the consumers. It is based on the belief that in the case of imperfect markets, firms and their powers can and should be controlled.  However this also gives the firms opportunity to make reasonable returns. Looking at the decision of the government with respect to no specific regulation be introduced, it is quite evident that the public interest theory has not been given due consideration. Otherwise, the government and the regulating agencies would have taken the initiative in formulating policies and statutes to safeguard the welfare of the common mass (Pape, 2017).

Capture Theory: this theory is based on the close relationship that exists between the government and the regulating authority and the industry concerned for which the decision has to be taken. Under this theory, the regulations are formed in such a manner that the needs and interests of the industry are fulfilled. This particular theory believes that regulations can be twisted and turned and manipulated to adjust to the requests of ones affected by it. Applying the above mentioned theory in the decision of the government to not to add a separate set of regulation to the existing statute, one can easily conclude that even this theory of governance has not been given due weightage. The government has not formed any rules or policies which would ultimately affect the industry or the participants thereof. Hence the question of manipulating those rules gradually, over a period of time, does not even arise. 

Assessment Task Part B – Theories of Regulation and Corporate Social Responsibility

Economic interest theory and regulation: The theory advocates that regulations are formulated on the basis of the forces of demand and supply and their interplay. On the supply side we have the government and its various agencies and on the demand side we have the vernal public. Under this theory, the industry plans the protocols to be implemented in the market. These protocols are determined s with a view to bring benefits to the .It also operates these regulations and there are no external mechanisms involved (Lubensky, 2017). The government makes sure that the stakeholders in the industry openly participate in the economic matters and take initiative in the process of decision making.

The decision of the government seems to have been taken from this perspective of economic interest theory. The administration makes it clear that the decisions would be taken by the combined forces OD demand and supply. I.e. only those firms would succeed which would perform at par with the aspirations and desires of the consumers and the general public (Ghofiqi, 2018). 

Assessment Task Part C

One of the most controversial points of differences in the IFRS and GAAPs of various countries is on the topic of the revaluation of fixed assets. This is because of the reason that revaluation is allowed under IFRSs and disallowed under the GAAPs of some countries. As the matter of revaluation is narrowly linked to the accounting concepts of relevance and reliability, it requires more consideration from the point of view of disclosure requirements. Since the fair value of the assets is required by the users of the financial statements, the management has to provide such information so that the conceptual framework of financial reporting is met (Kusolpalalert, 2018). However, concerns about the reliability of current values of fixed assets cannot be ruled out and remains a huge matter of concern.

It is almost impossible to exactly or even closely predict or determine the updated value of any asset. In the view of inability to properly quantify the life and efficiency of the assets, and in the light of underlying uncertainty the IFRS doesn’t not allow the revaluation of non-current assets. On the contrary the impairment costs of such assets are compulsorily required to be reflected in the financial statements. This is because the impairments have become certain and can be quantified appropriately. Therefore, the formulated rules, serves the purpose of achieving both relevance and faithfulness of the information present in the financial statements (Norberg, 2018). 

Assessment Task Part D

The decisions regarding revaluation of fixed assets are taken on the basis of the size of the firm and the level or amount of fixed assets that the business owns.

1. a) Even when there exist a lot of controversies and differing views on the subject of revaluation of assets, firms continue to revalue their assets, both upward and downward. The main reasons behind it can be broadly classified into political costs and debt contracting. Assets revaluation would directly alter the accounting numbers and the financial data. Revaluation, whether downward or upward, will cast a bearing on a lot of other factors like depreciation, the retained earnings and tax liability. It might bring about a positive or negative change in the share price of the firm. Revaluation also brings with itself a lot of compliance related work, especially from the point of view of disclosures(Pape, 2017).
2. The carrying amount of the fixed assets would have to be computed in such a way, that they gives reflect the fair value of the particular assets. Revaluation would not even have a direct connection with the cash flows of the firm. Sometimes, Managers tend to take decisions which directly impact the liquidity of the firm. Even the remaining useful life would have to be reassessed. All these are easier said than done. Each and every step in the process of revaluation requires intelligent forecasts, complex calculations and compilation of a diverse range of data. This costs the management a lot in terms of time and effort. Even monetary resources needs to be expended when the magnitude of assets requiring revaluation is large and professional help are seemed. After talking utmost care and exercising diligence, the revalued figure might not even be close to the real scenario. With so much of uncertainly, anticipations and mere forecasts, management may not be willing to take up the task of revaluing its assets particular property, plant and equipment, whose market is governed by a lot of dynamic forces.
3. b) Financial statements are required to be prepared in accordance with such accounting policies and procedures that make sure that the values and balances reflected therein give a true and fair picture to all the stakeholders especially the shareholders. This requires that all the individual items of the balance sheet give a clear and realistic picture. When assets are not revalued, they are presented at the carrying cost that is there historical cost less depreciation. This historical cost may not be relevant and updated with the ever happening changes in the business environment. Unfair amounts and balances would defy the very foundation of the conceptual framework of financial statement i.e. to give a fair picture. Since equity is always stated at the fair market value, not revaluing fixed assets on the same basis, would lead to misleading debt equity ratio. This in turn would adversely impact the borrowing powers of the shareholders as well as the correct decision making of the shareholders.
4. c) Whether the decision regarding revaluation would have an impact on the wealth of the shareholders depends on a lot of internal as well as external factors. These factors include, but are not limited to issues of magnitude, timing and direction. Though the decision not to revalue a particular asset or a particular class of asset will give us an unrealistic picture, their connection with the impact on shareholder’s wealth cannot be directly established. It is to be borne in mind that revaluation of any asset would not result in an actual inflow or outflow of cash and thereby the profitability of the firm would remain intact in the real sense. Revaluation reserve when added to the retained earning might give an inflated figure and trick the shareholder into believing that wealth creation has taken place.
5. This is because such an act would increase the amount of market capitalization. Similarly, the opposite would happen in case of downward revaluation of assets. This will definitely affect the shareholders and their decision. They may not accept a fall in market capitalization and valuation. However, this reaction of the market to revaluation decision has got nothing to do with wealth creation or maximization. Therefore we can conclude that the decision to not revalue the asset would not cause any adverse impact on the shareholder’s wealth. If nay such adverse effect is seen, it would be only temporary and a reflex action. 

References

Elimam, H., 2017. The Role of Small Businesses (Small Scale Economic Projects) in Alleviating the Acuity of Unemployment. International Business Research, 10(3).

Ghofiqi, M., 2018. FORMATION OF VIEWS AND INTERESTS TO THE ACCOUNTANTS PROFESSION IN MASTER OF ACCOUNTING STUDENTS OF JEMBER UNIVERSITY FORCE OF 2016 USING STRUCTURATION THEORY ANALYSIS. THE 3RD INTERNATIONAL CONFERENCE ON ECONOMICS, BUSINESS, AND ACCOUNTING STUDIES.

Kusolpalalert, A., 2018. The relationships of financial assets in financial markets during recovery period and financial crisis. AU Journal of Management, 11(1).

Lubensky, D., 2017. A model of recommended retail prices. The RAND Journal of Economics, 48(2), pp. 358-386.

Maynard, J., 2017. Financial Accounting, Reporting, and Analysis. SECOND ed. s.l.:Oxford University Press.

Norberg, P., 2018. Bankers Bashing Back: Amoral CSR Justifications. Journal of Business Ethics, 147(2), pp. 401-418.

Pape, T., 2017. Value of agreement in decision analysis: Concept, measures and application. Computers & Operations Research, Volume 80, pp. 82-93.