Financial Statements And Investment Decision Making

Importance of financial statements in making investment decisions

The data that is revealed with the financial statements through the P/L Account, the balance sheet and the cash flow statement helps the planner and the investors to lead the investment resolution. Yet, the overall thing that is actually shown in the financial statements might not be of help to the end users and might not seem to be required for the decision making causes (Bizfluent, 2017). It is necessary to guide the users of financial statements to provide them with proper advice so that they can properly plan their investment and earn revenue. There are few minimal financial and non financial data that is required to be a part of the financials so that taking decision is easier. Few of the pre perquisites for these sort of information include:

1. Clarity:The data that is being stated and shown in the financial statements ought to be transparent and should not lead to uncertainity in the mentality of the end user. It should reflect single sense and the user should be able to make out and understand the information in a better way.It should not be ambious, fake, incorrect, inaccurate, useless, insensible, as well as needless. Here, user refers to the person having the basic understanding of accountancy, finance, and tax, and also possesses the business intellect and sagacity to study and understand the financial statements (Defond & Lennox, 2017). Incase the information that is stated in the financial statements are unambigious, the user would be able to conclude from the data stated and hold the decisions to spend or not. If any part of the financial statements has information that is difficult, then the same shall be carried on by the required notes and disclosures to escape uncertainity and misunderstanding.
2. Relevancy: The information given shall be pertinent to the end user and should be adding worth while in making decision. It should not be mentioned for the purpose of disclosure and should not be unclear and needless as it objects the only objective of the conceptual framework of accounting. The users of the financial statements should be conscious of the knowledge that the huge and much quantity of information only consists of the quality without adding worth. The information sought should be relevant as when required and need not be doubtful. It shall reflect true and fair view and shall be helpful for decision making for the investors. Hence, it should be clear, accurate, unquestionable and the user should be capable to discover out correct and exact inferences out of the same(Bae, 2017).
3. Trustworthyness: The financial accounts of any company cannot be overall independent from the mistakes and the distortion, yet, the same can be lowered so that the accounts prepared reflects the correct sight to the end user. The information shall be such that it shows its reliablility and accuracy. It should be certain and not fake. At the time of preparing the same, personal interest and favouratism should be kept apart and it should be prepared in its honest form. The users anticipate all the numerical data to reflect a true and fair view of the accounts and if, any information cannot be quantified, proper reasonning and disclosure should be mentioned in this regard. This not only enhanced the investor faith but also made the non financial information capable for decision making.
4. Equivalence: In the current time, many users believe and hold decision on the basis of the course in the financial data. It is utmost essential and pivotal to draft the data equivalent for the term, for the separate organisations in the same industry or among the divisions. The composition and manner of the financial statements should be made in such a way that it leads the user to do trend analysis, variance analysis and do analytics as against the benchmark companies. It shows how the company is operating at present, and a complete analysis of the companies performance can be done nicely. The utmost essential result of this action is that it enables the users to make out if the company is in fixed status or it is growth status(Bromwich & Scapens, 2016).

On the basis of the above discussion on the approximate attributes of the financial statements, it can be said that the present IFRS business reporting exercise do not comply to the same. This is actually due to the disclosure and reporting necessity under IFRS are actually fixed and not elastic, most of which has no sense in the context of investor. Also, the reporting and habits of accounting being complex and hard, it makes perception a far yeild thing and needs a technician to percieve and understand the same accurately. In summary, the usual investor would not be capable to make decisions on the basis of the same (Belton, 2017). Hence, Mr. Bowen can be said to be suitable and proper at the time of reciting “Once you get into the notes you have to be technically trained. If you’re not, lot of it could be misleading”. Hence, the ideas in case study are not in parity with the ideas that the financial statements gratify the main motives of finance.

The Public Interest Theory: The name of the theory itself shows that this is for the common people benefit and prosperity of the public at large. Its main motive is to resolve entire shown issues for the common people and let out manners in which the loopholes in the system can be abolished. Public interest theory main purpose is to resolve the issues of the internal as well as the external investors of the company. Internal stakeholders is inclusive of individuals like the personnels of company, the vendors and the suppliers, the investors, etc (Alexander, 2016). however the external stakeholders is inclusive of the banks and financial institutions, the tax authorities and the government, etc. The theory is based on the assumption that the imperfect markets are under the control of the government but in real sense this is not the case and businesses are being lent the chance to undertake resolution that matches the common need and the purpose of the company. Hence, it can be said that the public interest theory has not be proved in the above case where the government did not laid different laws and rules. In case the government authorities would have taken into account the disclosure of social and environmental attributes to be serious and huge at the time of reporting, they would have come up with few set standard in this regard.

Challenges due to differences in international financial reporting standards and local GAAP

Capture Theory: The theory is based on the connection among the government, the industry and businesses and the regulatory agencies held for implying and making laws. Market comprises of entire above regulators and all the resolutions are made taking them into concern. According to the given theory, the regulators of the law are required to frame the laws and regulations keeping in mind the requirements and motives of all the above stated target groups. The theory is set by the plan that few alterations and modifications can be made to match the need of all the parties impacted by it. The resolution of the government of not to make any rules and regulations shows that even this theory has not been implied. Also, where the government has not formulated any rules and laws in this contect then the question of altering it or making changes to it becomes meaningless (Visinescu, et al., 2017).

Economic interest theory and regulation: This theory is made by the thought that the laws and regulations come into force by the connection of the demand and supply forces. Usually, government and the regulatory agencies comprise the supply side, and the common people comprise the demand side of it. With this model, the laws and the code of conduct are being made by the industry and it is implied to the whole area and all the companies. In this situation, the government offers chance to all the businesses to undertake the resolution and there is no external intrusion engaged. Hence, incase the government has undertaken the resolution of not to imply any different legislation for disclosure of social and enrionmental duties being carried by the companies, it needs to apply that the same has been considered in the common people favour. The firms and businesses that meets the desires of individual will surely succeed (Vieira, et al., 2017).

When the dissimilarities in IFRS and the local GAAP is now held upon, now one of the big challenges being analysed is the adjustement of revaluation of assets. The argument is never ending on the topic provided the truth, that revaluation of assets in permitted under the IFRS standards and not under the local GAAPs.  The resolution of revaluation of the assets relies on the basis that how the accuracy and clarity of the financial statements are being impacted by considering it into account. Usually, all the shareholders and especially the investors have interest in understanding the true and the fair view of the assets present in the balance sheet and hence from management perspective, it is now mentioned in the financial statements to achieve the needs of IFRS and the conceptual idea but what is made here is relevancy and accuracy of the disclosures that are given (Dichev, 2017). This is due to the fact that it is nearly difficult to achieve at the exact worth as a number of computations and assumptions are being known and it relys on individual to individual. The realizable value is the approximate of the currenr value of future estimated cash flows and keeps on fluctuating on the basis of the variables like estimated useful life left, the efficiency of the asset and the level of uncertainity engaged. In consideration to entire above issues and loopholes, IFRS targets to remove the plan of revaluation of the non current assets. Also, it leads the impairment charges to be held into consideration necessarily and setoff the same in the worth of non cureent assets as the same can be computed with accuracy and can be easily scaled. Hence, it can be mentioned that the currently given rules targets at meeting the requirement and worthiness with regards to the financial statements (Das, 2017).

The revaluation of the assets in the financial statements is usually done base on the of size of company and its assets quantity.

1. There have been many never ending argunmens on the basis of revaluation of the fixed assets but there are few organisations that do it and few who do not. In real life case, if the asset is being valued, it results in modification of accountancy and financial statements as a whole. Revaluation of fixed assets has a direct affect on the tax liability, the future depreciation and the saved incomes(Farmer, 2018). It also may have an reverse affect on the share prices for short time. Also, it gathers along with it much difficluties and the requirement to mention the ground of the same in notes to accounts. At the time of making revaluation, the carrying amount is setoff in a way such that the whole category of the assets is being reflected at fair values. Futher, as a non cash item, it does not have any affect cash flow wise, however it engages a lot of tough ways like joining and discussing of difficult data for which professional assiatance may be needed for and that may reflect in outgoing in cash. The outcome is that the recomputed amount might yet not match with the exact market value. In case, shortening of all the above stated toughness and hard work, the management of the company usually ignores to recompute the plant and equipment  and property.
2. Financial statements are usually a segment of the annual report and it shows a sensible surity to the investors as well as the many shareholders that the same is showing a true and fair view in the accounts. This shows for that the profit and loss account and the balance sheet shall reflect the true and accurate numericals that can be assisted via computations and notes on accounts. Also, in situations where the assets are now reflected at historical cost less depreciation and not at the fair values, it may not show the accurate and correct frame and the worth may be different from the present market price. This helps in showing information in report erroneously, in the financial statements(Heminway, 2017). Another important attribute of this is that the equity is consistently being recorded at the fair value and in many cases the assets are not recorded at market values and will give the fake information to the investors and will lead in incorrect computation of the debt equity ratio.
3. The decision to revalue the assets or not depends on a number of internal as well as external factors. Not revaluing the assets certainly gives the wrong picture of the financial statements and account balances but surely its affect on the stakeholders money cannot be computed. Neither it has any imcoming or outgoing flow of money nor it has any affect on the earning capacity of the business(Goldmann, 2016). Also, it may at the end, enhance the saved revenue when the balance of the revaluation account is enhanced or lowered and may show an affect that the shareholders’ wealth is affected, but the market does not responds on such fluctuations and therefore, there is no making or destroying of worth engaged in this.

References

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Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1).

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