This particular requirement seeks to address benefits that are enjoyed by reporting entities by the adoption of international financial reporting standard which have the consequence of improving financial reporting quality. It is indicative of the fact that the establishment of accounting standards intends to ease the process of preparation of financial report and thereby facilitating the comparison between the reporting standards and financial performance of reporting entities to investors or any third parties. Stakeholders have been assisted by the adoption of such standards in terms of making economic decisions by way of providing a clarified image of organization improving the accounting statements quality as presented in the report. However, some of the implications resulting from implementation of the International Financial Reporting Standards might results in negative consequence. This is so because it is required by reporting entities to incur huge amount of money in preparing the financial statements in accordance with the established norms and rules outlined in the International Financial Reporting Standards. Furthermore, it is also opined by many experts and preparer of financial statements that organization is making some unnecessary disclosures. Such unnecessary disclosure of information has increased the complexities of financial information presented in the report and has lengthened the volume (Belousov et al. 2017).
Some of the qualitative characteristics that are attributable in light of conceptual framework of financial reporting that seek to satisfy the reporting practices of IFRS include timelines, faithfulness, relevance and understandability. It is noteworthy to mention that the quality of financial reporting have been ruined or exploited by the adoption of such international reporting standards. This particular fact is reflected in the over loading of the disclosures in the financial report resulting from the qualitative characteristics of faithful representation. Such representation has led to some misinterpretation of the financial information presented in the annual report along with increasing complexities (Chaudhry et al. 2015). In addition to this, there is increased probability of materiality and misstatement in the books of accounts resulting from relevance qualitative characteristics. Therefore, it can be inferred from above discussion that quality of disclosure of financial statements has been exploited by the qualitative characteristics such as relevance and faithful representation. Moreover, there is also increased volume of assertions and disclosure in the information presented in the financial report due to qualitative nature of understandability. Such increased disclosure and assertions have resulted in complexities and lengthen the report by presenting information that is not sought by investors, stakeholders or any other third party (Christensen et al. 2016). Moreover, the reporting entities are required to invest considerable amount of money when they intend to prepare their financial statement according to the practice of international reporting standard. This is so because the increased compliance with the reporting standard has resulted in increasing the operating cost of the entities. The last qualitative characteristics that have contributed to increasing the complexities of accounting treatment and disclosure of information in the financial report are due to timeliness factor. Therefore, in this particular requirement, the factor that is reflected is the International Financial Reporting Standards essentiality. From the analysis, it has been ascertained that the reporting standard have attributed considerable advantage to the reporting entities along with certain drawbacks in terms of increased volume of disclosures and complexities in dealing with the assessment financial information (Detzen et al. 2016).
In this particular requirement, it is asked to explain the government decision and the preparation of financial report by corporate entities and assessing whether they comply with the Corporation act. Some of the major criteria which are require by organization to be adhered to while preparing the financial statements have been laid down in the Corporation Act. Hence, it is indicated by the Corporation act that complying and adhering with the requirement criteria listed would reflect some of the major qualitative characteristics such as timeliness and comparability along with some other essential qualitative characteristics and ensuring that that company should carry out their financial reporting practices while being socially responsible. It is ascertained from the investigation of the corporation act that no further legislation for enhancing the disclosure requirement has been added by the act (Small et al. 2017). However, the judgment that have been passed in relation to the legislation for incorporating the factor of corporate socially responsible is made by taking into account some of the identified market forces.
Below listed theories would help in explaining the facts discussed and they are as follows:
Public interest theory- According to this theory, the corporate entities working should be well aligned with the public welfare. This is indicative of the fact the activities of corporation should be done by being socially responsible. Therefore, the theory depicts that public and their welfare is one of the most important factors when carrying out the activities and the operations should account for public welfare. It is required by organization to consider the surrounding environment where the companies are dealing. Organizations adopting the public interest theory would automatically regulate the fact of becoming corporate socially responsible as the operations of company will be aligned with the public welfare (Ion and Man 2017).
Capture theory- According to the capture theory, it is indicated that entities are operating in the industry that will regulate the operations. It means that the entire market will be captured by companies operating in the same industry and would manipulate the regulations governing the existing industry. For example, the companies operating in energy industry might be operating on same level of being corporate socially responsible. However, the same level of corporate social responsible activities are carried out by such companies and a particular regulatory standard might be there for corporate socially responsible in the existing market. This would lead to structuring of the being socially responsible in same way (Chen and Tang 2017). Therefore, the capture theory helps in controlling the market forces. Reporting by organization will be adhered to the market forces as the capture theory changes the structure of corporate socially responsible by aligning with the current market requirements.
Economic interest group theory- As per this theory, the operations of organization is carried out in a way that aligns with the well being and welfare of economic groups. Economic group refers to the persons who are indirectly or directly impacted or influenced by the operations of corporate entities. It is indicated by this particular theory that organization complying or adopting to theory of economic interest group would be carrying out their operations by being socially responsible. Reporting entities adapt to this particular theory for ensuring that their activities are carried out with ease. Moreover, the regulations of corporate reporting framework are supported by the theory. It mandates the companies to carry out their operations being socially responsible along with taking into account accounting market factors. This would help in improving the conditions of economic interest group and situation of environment. It can therefore be inferred that market forces is also responsible for establishing the framework of corporate social responsible when the organization adapts to this particular accounting regulatory theory (Sellhorn and Stier 2017).
In this particular requirement, the issue of rules of US Financial Accounting Standards Board has been presented. Such rule mandates accounting for impairment cost associated with noncurrent assets; however, it does not call for revaluation of assets at fair value. The accounting standard to be analyzed in this section is FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (Bragg 2017).
It is required to analyze whether the qualitative characteristics of representational faithfulness and relevance is impacted by the mandatory norms of the standard. Certainly, the qualitative characteristic of financial reporting has been impacted by such standard. This is so because the impairment loss or gain arising from the impairment of assets in the financial statements has been issued by the standard. The users of financial statements have to deal with the confusion as there is no mentioning of the method of impairment in the financial statement of the annual report as there are no basis for realized impairment gains and losses (Nejad and Ahmad 2017). It can therefore be evidently stated that the relevance qualitative characteristics are hampered under this standard. This is because in regard to impairment loss or gain, no disclosures in the similarity have been identified by the financial statements users and thereby resulting in the financial information complexities. In addition to this, the probability of occurrence of material misstatement in the accounting treatment and books of accounts increases due to such practice and for the entities reported on the London stock exchange does not make any disclosure regarding this. Moreover, the process of preparation of financial statements becomes complicated as they are required to adhere to the accounting standards issued by FASB along with the current reporting standard. Therefore, it can be concluded from this discussion that such accounting standard have hampered the faithful representation qualitative characteristics of financial reporting. This particular practice hampers the qualitative characteristics of financial reporting and increases the complexities of understanding the accounting treatment in relation to impairment of assets. It can therefore be concluded that there is a non compliance of organization or reporting entities in reference to the norms that are established by FASB and thereby hampering the financial reporting qualitative characteristics (Bozeman and Su 2015)
This particular requirement seeks to address the revaluation of assets such as plant, equipment and property using cost model or fair value model. Analysis has been done regarding the fact that whether the shareholders are adversely impacted by such revaluation. Revaluation of assets like plant, equipment and property are not opted by directors because of the fact that such revaluation might result in occurrence of loss that would have considerable impact on the financial statements prepared by repotting entities and has the likelihood of reducing profits that has been earned by entity in a particular reporting period. This would have ultimate impact on lowering of the goodwill value in the market where the business is carrying out their operations (Macve 2015).
The effect of accounting treatment in relation to impairment have been mentioned earlier that event of impairment loss on asset revaluation would lead to occurrence of loss. Impairment gain on other hand resulting from assets revaluation would lead to increase in profits reported by entity. If the assets of organization are not revalued by the reporting entity, this might lead to overstatement of the values of such state and over state the assets side on the balance sheet. There is no direct impact on cash flow of organization due to the revaluation of assets. If the reporting entities do not revalue the assets during the time of slowing economic growth and uncertain economic conditions, there would be decrease in the leverage by such entities as they have not revalued the assets for increasing their value in relation to fixed assets. However, the decision of organization not to revalue their assets would not be noticeable in the current year, this would impact the accounting statement of later year when investors seeks to make investment or organization intends to sale such assets (Crawford 2016).
The wealth of shareholders is significantly impacted by the decision of management regarding the revaluation of property, equipment and plant. This is so because the true reflection of financial position of reporting entities will not be reflected in the financial statements if the revaluation of assets is not done. If the assets are not revalued then depending upon the market conditions and business scenario, there would be under or over valuation of the assets (Marti and Scherer 2016). In both the situation, shareholders of company would be misleading about the true and actual worth of such assets.
References list:
Belousov, A.I., Shelukhina, E.A., Rumachik, N.A. and Shchemelev, A.N., 2017. Adaptation of Balance Theories to the Assessment of Sustainable Economic Development of Business Units. European Research Studies, 20(3B), p.76.
Bozeman, B. and Su, X., 2015. Public service motivation concepts and theory: A critique. Public Administration Review, 75(5), pp.700-710.
Bragg, S.M., 2017. Fixed Asset Accounting. AccountingTools LLC.
Chaudhry, A., Coetsee, D., Bakker, E., Varughese, S., McIlwaine, S., Fuller, C., Rands, E., de Vos, N., Longmore, S. and Balasubramanian, T.V., 2015. Property, Plant, and Equipment. 2015 Interpretation and Application of International Financial Reporting Standards, pp.151-186.
Chen, K.C. and Tang, F., 2017. Post?IFRS Revaluation Adjustments and Executive Compensation. Contemporary Accounting Research, 34(2), pp.1210-1231.
Christensen, H.B., Nikolaev, V.V. and WITTENBERG?MOERMAN, R.E.G.I.N.A., 2016. Accounting information in financial contracting: The incomplete contract theory perspective. Journal of accounting research, 54(2), pp.397-435.
Crawford, C.W., 2016. ACTG 201.05: Principles of Financial Accounting.
Detzen, D., Stork genannt Wersborg, T. and Zülch, H., 2016. Impairment of Goodwill and Deferred Taxes Under IFRS. Australian Accounting Review, 26(3), pp.301-311.
Ion, E.I. and Man, M., 2017. ASSESSMENT OF THE COMPANY’S PERFORMANCE IN TERMS OF GAINS AND LOSSES FROM REVALUATION OF FIXED ASSETS RECORDED IN EQUITY. Revista Economica, 69(2).
Leuz, C., 2018. Evidence-Based Policymaking: Promise, Challenges and Opportunities for Accounting and Financial Markets Research (No. w24535). National Bureau of Economic Research.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
Marti, E. and Scherer, A.G., 2016. Financial regulation and social welfare: The critical contribution of management theory. Academy of Management Review, 41(2), pp.298-323.
Nejad, M.Y. and Ahmad, A., 2017. Value Relevance of available-for-sale financial instruments (AFS) and revaluation surplus of PPE (REV) components of other comprehensive income. In SHS Web of Conferences (Vol. 34). EDP Sciences.
Sellhorn, T. and Stier, C., 2017. Fair Value Measurement for Long-Lived Operating Assets: Research Evidence.
Small, R., Smidt, L. and Yasseen, Y., 2017. Revaluation of depreciable assets-benefits to organisations. Professional Accountant, 2017(30), pp.22-23.
Wali, S., 2015. Mechanisms of corporate governance and fixed asset revaluation. International Journal of Accounting and Finance, 5(1), pp.82-97.
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