In the article “Unwieldy rules useless for investors”, the financial accounting standards and IFRS has been criticized and there are various reasons behind it. There are several objective of financial reporting (Weil, Schipper and Francis 2013). These are as follows:-
The qualitative characteristics of conceptual framework are as follows:-
However, in the given article, the given individuals quoted that the above qualitative characteristics of financial reporting do not appear to be satisfied by current reporting practices pursuant to IFRS. In the article, it has been mentioned that IFRS adjustments are not relevant, faithful and it is often misleading for the investors. In addition to this, the investors are not being able to compare different companies while making investments (Deegan 2013).
However, these views are consistent with the view that corporate financial reports satisfy the central objective of financial reporting as identified in the Conceptual Framework. The objectives of financial reports is to provide relevant information regarding the assets, liabilities income, expenses, equity of the respective organization to all stakeholders (Scott 2015).
Corporate financial reports needs to satisfy all the above mentioned characteristics of Conceptual Framework, in order to meet the needs and requirements of all the stakeholders of financial statements (Weygandt, Kimmel and Kieso 2015).
The given question deals with the amendments of Corporation Act to meet social and environmental responsibilities of the organizations.
Public Interest Theory
According to the Public Interest Theory, the assumption is that the economic markets are very delicate and are not operating in a manner, which they are designated to operate. They are giving more importance to the people than the society. Hence, there is a need to assess the work performed by the economic markets, and this check and balance can be provided by the government intervention. The theory of public interest was propounded by A.C.Pigou in 1932. According to the author, the development of the regulation takes place once the public raises a demand for these regulations in order to rectify the unethical malpractices. Regulations perform the important task of upholding the society’s interest more than the individual member’s interest and the regulatory body’s duty is to secure the interests of the society. The regulatory body should not indulge in the malpractice of safeguarding the regulators by passing laws in their favor. This theory reflects that the efficiency of regulations is not so significant in the society rather the private enterprises use the regulations as a tool to restrict the new competitors from entering the market. The issue with the corporate enterprises is that while they are disclosing their financial information but at the same time, they are not disclosing the other relevant non-financial details such as the impact their activities have upon the environment and the society (Berry 2015).
It is necessary that based on the public interest theory, legislation should be passed which makes it mandatory for the corporate enterprises to give entire detail about the harm, which is being afflicted upon the environment and the society due to their activities. At the same time, the corporate enterprises should be obliged to state the initiatives, which have been started by them in order to undo the harm caused by their activities. In order to assess the necessity to pass the legislation, conducting a survey by the government can be a viable option and the outcome of the survey can be published online. The Government can make the legislation easily accessible for the common people by making it available online. The people can also post their queries regarding the regulation online and the queries should be assessed by an expert’s panel and answered by them.
Capture Theory
According to the Capture Theory, the industry workers dictate the agencies of the Government and these workers are driven by the motive of safeguarding the interests of the industry. These industrial workers even go to the extent of jeopardizing the equal distribution of resources in the society and they manipulate the distribution in such a manner that the societal needs are not fulfilled. The Capture Theory is based on the nexus amongst the government agencies and the industries. The Government establishes the regulating agencies at the central, state and the local levels and entrusts them with the duty to secure the societal needs and safeguard it from the ill effects of the industrial activities. The Capture Theory states that the discrepancy occurs when the Industrial workers create a correlation with the people working in the Government Agencies. The reason why the industry is so interested in infiltrating the government agencies by bribing their employees is because the government’s regulating agencies can frame rules and regulations such as controlling the price, controlling the quality and quantity, setting the minimum standard for the operating activities and to ensure the employees’ protection standards. The need of the hour is that the regulating agencies have the people who possess expertise and profound knowledge about their area of operation (Hogg 2016).
The industry on the other hand, has people with expertise and profound knowledge working for them. If it so happens that the workers working in the government agencies have been former employees of the industry or are planning to join the industry, then they will become informers for the industry and would work in the hope of deriving some favor from the industry. This is where the government agency are said to be captured by the industrial workers. The above analysis infers that this theory is drive by market forces.
Economic Interest Group Theory Of Regulation
According to the economic interest group theory, the groups in an industry are formed with the aim to secure group’s economic interest. There are many groups in existence and these groups are competing with each other. They lure the government to pass legislations in their favor and which secures their interests. The economic groups are not concerned with the interest of the public and the regulators are only concerned with their self-interest, which is to secure their present position by being elected again. In order to be re-elected, the regulators influence the economic groups because these economic groups have the power to influence the public opinion. The economic group possessing monetary strength and influence will be able to lure the government rather than those economic groups with weak influence and less monetary strength. Thus, the economic interest group theory states that any type of legislation will not be able to hold the corporations accountable for their outright violation of environmental and social norms because the legislations are framed by the government keeping the concerns of the industry in hindsight as the government is established by the support of the industrialist (Berry and Wilcox 2018). This theory is driven by market forces and helps the organization to attain goals and objectives by doing the right thing. The operations of the organizations depends upon the existing market forces.
As per FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, the organizations are not allowed to revalue their assets, but take into account the impairment costs with the non-current assets. However, these rules have for the relevance and representational faithfulness of US corporate financial statements. The impairment costs will reduce the profits of the companies, however, it will not have any impact upon the net cash balance (Mao and Renneboog 2015). These rules provide the users of the financial statements a better picture about the ongoing activities. However, historical prospective are completely ignored in the financial statements. The total amount of depreciation on assets are adjusted every year as carrying value of the assets changes. These are the impact of US Financial Accounting Standards Board on relevance and representational faithfulness of US corporate financial statements (Weygandt, Kimmel and Kieso 2015).
Part A: Motivation behind not revaluing the assets
The process of revaluation of assets is done in order to identify the true value of assets at the current point of time. There are many reasons for revaluation. These are as follows:-
However, it has been seen that most of the companies are not in favor of revaluation of assets (property, plant and equipment). There are several reasons behind the selection of cost model of many modern companies. These are as follows:-
Due to the above reasons, the directors of the organization are motivated not to revalue their property, plant and equipment.
Part B: Effects the decision not to revalue the assets in financial statements
There will be several effects if the assets of the firm are not revalued on the basis of fair value of accounting. The financial statements would not show a true and fair value position of the firm. The rate of capital employed will not be true. The debt equity ratio of the firm will reflect a higher rate than its original value. Apart from this, rights issue to the shareholders will not take place. In addition to this, the financial statements of the firm will show inflated net profit margins, assets will be understated and it will further lead to excessive dividends (Henderson et al. 2015). These are the effects the decision not to revalue might have on the firm’s financial statements.
Part C: Effect on the wealth of the shareholders
It can be inferred share prices reflect the information available in the financial statements if capital market is not efficient (Weygandt, Kimmel and Kieso 2015). The decreasing value of assets and net asset backing per share may have an impact on the share prices. However, this may be offset by the total amount of the profit which is expected to be higher. Therefore, it can be inferred that if the capital market is efficient, then, revaluation of assets will not have any impact on stockprices and thus on the wealth of the shareholders (Scott 2015).
References
Berry, J.M. and Wilcox, C., 2018. The interest group society. Routledge.
Berry, J.M., 2015. Lobbying for the people: The political behavior of public interest groups. Princeton University Press.
Bradbury, M.E., 2016. Discussion of ‘Other comprehensive income: a review and directions for future research’. Accounting & Finance, 56(1), pp.47-58.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Hogg, M.A., 2016. Social identity theory. In Understanding peace and conflict through social identity theory (pp. 3-17). Springer, Cham.
Khan, S. and Bradbury, M.E., 2016. The volatility of comprehensive income and its association with market risk. Accounting & Finance, 56(3), pp.727-748.
Mao, Y. and Renneboog, L., 2015. Do managers manipulate earnings prior to management buyouts?. Journal of Corporate Finance, 35, pp.43-61.
Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.
Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.
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