Discuss about the Value Relevant Measurement and Asset System.
Qualitative Characteristics: Qualitative characteristics of financial reporting are those aspects that help in increasing the quality of the financial reports. Financial information having qualitative characteristics is most useful to the potential investors, lenders and other creditors for knowing the financial performance and position of the business entities. As per the rules of fundamental qualitative characteristics, financial reports must be relevant and faithfully represented in order to become useful for the users. Thus, Relevance and Faithful Representation are fundamental qualitative characteristics. At the same time, Comparability, Verifiability, Timeliness and Understandability are the enhancing qualitative characteristics that enhance the usefulness of the financial information (aasb.gov.au 2018).
Opinion of Geoff Roberts: Mr. Roberts, Former Head of Finance of AXA, has mentioned that he has never received any question from the fund manager or investment analysts related to the financial adjustments done under International Financial Reporting System (IFRS). This statement indicates towards the fact that both the fund managers and investment analysts have been able to understand all the financial information provided in the financial reports that have been developed as per the standards of IFRS (Brüggemann, Hitz and Sellhorn 2013). Thus, it is clear that this information is understandable for the fund managers as well as the investment analysts to obtain understanding about the financial performance as well as financial standings of the entities (aasb.gov.au 2018). At the same time, this information is also relevance for the investors and others users. Hence, according to the opinion of Geoff Roberts, the current financial reporting practice pursuant to IFRS appears not to satisfy two of the major qualitative characteristics; they are both understandability and relevance.
Opinion of Terry Brown: The opinion of Terry Brown, Finance Director of Wesfarmers, indicates towards another deficiency of IFRS adopted financial reports. As per him, the result of the investigation of the IFRS accounts by the financial analysts would be the misinterpretation of those accounts in the absence of effective technical knowledge in accounting and finance (Horton, Serafeim and Serafeim 2013). This situation requires to be mentioned about verifiability qualitative characteristic. In the presence of verifiability, different knowledgeable and independent observers can reach to a common agreement about the financial performance and position of the business entities when analyzing the financial statements (aasb.gov.au 2018). However, exception of this fact can be seen in the opinion of Terry Brown. According to him, financial analysts and other users can be misled while interpreting the financial statements developed as per the regulations of IFRS. Hence, this whole aspect indicates that the current reporting practice pursuant to IFRS does not satisfy the verifiability qualitative characteristic of financial reporting.
Opinion of David Craig: The opinion of David Craig, Chief Financial Officer of Commonwealth Bank, point out towards another major deficiency of the financial statements developed as per IFRS. He has mentioned in his statement that investors are now disregarding the financial information as per IFRS due to the fact that they are obscuring the financial position of the entities (Horton, Serafeim and Serafeim 2013). This aspect attracts the attention towards the fundamental qualitative characteristics; they are relevance and faithful representation. Relevant financial information is capable in making positive difference in the investment decisions of the investors by providing information about the true financial position of the entities; at the same time, faithful representation ensures that the financial information of the companies is faithfully represented (aasb.gov.au 2018). Users will not be able to judge the true financial position of the entities in the absence of these fundamental qualitative characteristics. Thus, it can be said that the current reporting practice pursuant to IFRS does not appear to satisfy the relevance as well as faithful representation characteristics.
Objective of Financial Reporting: To provide the investors, creditors and other users with the required financial information so that it can become possible for them to understand the financial performance and financial standing of those business organizations is the central objective of general purpose financial reporting (aasb.gov.au 2018). However, it needs to be mentioned that the central objective of general purpose financial reporting will not be satisfied when so many qualitative characteristics of financial reporting are not satisfied.
In the year 2006, the government of Australia has taken the decision of not adding any regulation within the Corporations Act in order to promote the environmental as well as social responsibilities as the government let the market force to manage it. This particular decision of the government can be explained with the help of three major theories; they are Public Interest Theory, Capture Theory and Economic Interest Group Theory of Regulation. The discussion is shown below:
The public interest theory supports the introduction of specific regulations for getting the solution of specific problems. This theory indicates towards the intention of the regulators of discovering the solution of the problems with the help of specific regulations (Vohs and Baumeister 2016). For this reason, government all over the world provides huge importance to the implementation of the regulations. In this context, it needs to be mentioned that the main aim of the introduction of specific regulations is to do good for the business industry as well as for the consumers. The provided situation can be analyzed with the application of this theory. The principles of public interest theory does not support the decision of the Australian government not to introduce any regulation in the Corporations Act for the inclusion of social and environmental responsibilities. It will be possible to put the obligation on the companies as well as the consumers to comply with their social as well as environmental responsibilities (Bozeman and Su 2015). The main reason for this decision is the often failure of regulations to act in the favor of both the businesses and the consumers.
The principles of capture theory can be placed at the opposite of public interest theory as this theory does not support the introduction of specific regulations in order to solve the issue in the market. According to the principles of capture theory, the regulators get the option to manipulate with the specific regulations in order to fulfill their own interest (Waldman and Jensen 2016). For this reason, regulation is considered as a major tool for satisfying the needs of the directors. One of the major advantages of capture theory is that it helps in obtaining understanding about the main reasons or intention behind the introduction of any specific regulations. Most importantly, the application of the capture theory helps to identify the group of people who will be majorly beneficial from the introduction of any regulations to solve the problems. For this reason, this theory can be applied in the present situation. Thus, the principle of capture theory supports the decision of the Australian government not to introduce any regulation in the Corporations Act for the inclusion of social as well as environmental responsibilities (Mitnick 2015). The non-inclusion of any regulation indicates shows the intention of the Australian government to let the market force tackle the problem of social and environmental responsibilities. It implies that the companies will comply with the social and environmental regulations as they do not show themselves as environmentally and socially irresponsible business organizations.
The principles of this theory support the introduction or regulations in order to get the solution of any problem. To make the business organizations beneficial is the main aim of the introduction of regulations, as per this theory. As per the principles of this theory, the government introduces the regulations so that the market can adopt them that leads to the overall welfare for both the companies and the consumers. In the current situation, it is needed for the government to introduce specific regulation in the Corporations Act related to the social and environmental responsibilities. In addition, it will lead to better result in case the government can include the consumers in the process of developing the regulations (Held 2013).
According to the Financial Accounting Standard Board (FASB) of United States (US), there is not any regulation related to the revaluation of non-current assets to the fair value, but the regulation for the business entities is to take into consideration the impairment costs associated with those non-current assets and this regulation can be found in the FASB Statement No. 144 Accounting for Impairment or Disposal of Long-Lived Assets (fasb.org 2018). In this context, it needs to be mentioned that these rules related to asset revaluation play major role for the relevance and representational faithfulness of the corporate financial statements of US. These implications are discussed below:
The presence of some of the major factors can be seen that provides motivation to the directors of the companies to do asset revaluation. In the presence of effective asset revaluation process, the directors of the entities can obtain the correct total value of the total assets of the companies (Zakaria et al. 2014). At the time of merger and acquisition, the directors of the business entities become able to do negotiation about the prices of the assets to fair value in case they have done the revaluation of their assets. Moreover, the directors must know the fair value of their assets and it can only be possible for the time to time process of asset revaluation. In case the directors know the fair value of the assets, it becomes possible for them to obtain the actual rate of return on capital employed so that effective financial strategies can be developed (Zakaria et al. 2014).
The decision of not revaluation of assets has some of the crucial effects on the financial statements of the firms. Non-revaluation of assets makes the asset values stagnant due to not decrease or increase in the asset value. For this reason, the companies have to register abnormal amount of profit of loss at the time of the sale or disposal of the assets. Moreover, the earnings of the companies gets affected by the decision of not revaluation of the assets as the overall earnings of the companies decreases. For this reason, decreased amount of assets is shown in the financial statements (Bertram 2013).
Not-revaluation of the assets have adverse effects on the shareholder’s wealth of the companies. As not-revaluation of assets decreases the total earnings of the business organizations, the shareholders are not become able to get the expected return from the investments. This total aspect affects the shareholder’s wealth by reducing it (Hu, Percy and Yao 2015).
References
Aasb.gov.au. (2018). Conceptual Framework for Financial Reporting. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf [Accessed 17 May 2018].
Bertram, G., 2013. Weak Regulation, Rising Margins, and Asset Revaluations: New Zealand’s Failing Experiment in Electricity Reform. In Evolution of Global Electricity Markets(pp. 645-677).
Bozeman, B. and Su, X., 2015. Public service motivation concepts and theory: A critique. Public Administration Review, 75(5), pp.700-710.
Brüggemann, U., Hitz, J.M. and Sellhorn, T., 2013. Intended and unintended consequences of mandatory IFRS adoption: A review of extant evidence and suggestions for future research. European Accounting Review, 22(1), pp.1-37.
Fasb.org. (2018). Summary of Statement No. 144. [online] Available at: https://www.fasb.org/summary/stsum144.shtml [Accessed 17 May 2018].
Held, D., 2013. Political theory and the modern state. John Wiley & Sons.
Horton, J., Serafeim, G. and Serafeim, I., 2013. Does mandatory IFRS adoption improve the information environment?. Contemporary accounting research, 30(1), pp.388-423.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
Huffman, A.A., 2013. Value relevant asset measurement and asset use: Evidence from IAS 41. USA: David Eccles School of Business, University of Utah.
Mitnick, B.M., 2015. Capturing” Capture”: Developing a Normative Theory of Fiducial Regulation.
Piosik, A.K., Kumor, I. and Sulik-Górecka, A., 2013. Associations between upward revaluation of property, plant and equipment with information value of financial statements. Evidence from Poland. Zeszyty Teoretyczne Rachunkowosci, 73(129).
Vohs, K.D. and Baumeister, R.F. eds., 2016. Handbook of self-regulation: Research, theory, and applications. Guilford Publications.
Waldman, D. and Jensen, E., 2016. Industrial organization: theory and practice. Routledge.
Zakaria, A., Edwards, D., Holt, G.D. and Ramachandran, V., 2014. A Review of Property, Plant and Equipment Asset Revaluation Decision Making in Indonesia: Development of a Conceptual Model. Mindanao Journal of Science and Technology, 12(2014), pp.109-128.
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