The primary users of the general purpose financial reporting are the present and the potential investor and creditors, who uses the information in making decisions regarding buying, selling which basically impacts the economic resources. The framework adopted in IFRS denotes that the financial reporting system cannot share all information that users may need for economic decision making. They will have to look for such information from pertinent sources. The conceptual framework is a coherent system of the interrelated objectives and fundamental which can lead to a consistent standard and that illustrates the nature and limits of accounting statements. A conceptual framework is necessary for financial accounting for following reasons (AASB, 2015; IAS Plus, 2018).
Qualitative characteristics
Qualitative characteristics of accounting are considered as the characteristics that directly contributes to the quality of the financial report. Such characteristics of IFRS apply equally to financial reporting.
Fundamental Qualitative characterizes
Relevance and faithfulness are the two main fundamental qualitative characteristics of the financial reporting (AASB, 2015; IAS Plus, 2018).
Relevance: Relevance is a factor which is capable of bringing differences in the decisions which are being made by users. The information of finance in reports has this capability only if it as predictive values
Faithfulness: Financial reports explains figures and words in long. To be of usefulness, the information need to be relevant and should reveal faithfulness. In case of faithfulness margin of completeness and freedom of error increases. The complete information includes the information relevant for a user to understand the varied phenomena being depicted, including the necessary descriptions and explanations. For instance, a complete depiction of the group of assets would comprise of, at a minimum, a description of the nature of assets in the group and an illustration of what the numerical depiction shows. For some of the items, a complete illustration may also entail the explanation of the significant factors regarding eth quality and nature. To be perfect in faithful representation, financial reporting need to have three characteristics. It should be complete, neutral and fee form the errors. Of course, the perfection is seldom if not achievable (Van Beest, 2009).
Measurement Uncertainty: One factor which affects the relevance of financial information is the level of the uncertainty measurement. this factor arises when a measure of the asset or the liability cannot be observed directly and must instead be estimated. The use of estimates is an important part of the reparation of the financial information and does not undermine the relevance, but the estimates need to be described in a proper manner
The views are consistent with the view that corporate financial reports satisfy the main goal of financial reporting (Pearsoned, 2010). The framework of financial reporting illustrates the main goal of the financial reporting as offering information regarding the company that is useful in making some economic decisions. The Financial statements prepared for such purpose will meet the needs of the most of the end users. Users generally want information regarding a company’s financial performance, financial position and the ability to adapt to the changes in the economic environment in which it basically operates (AASB, 2015; IAS Plus, 2018).
Public interest theory: The argument around the requirement for more or less regulation center in where is a need for government to protect the public interest. Public interest in association with corporate social responsibility holds that the regulations utilized by the government in order to promote the social welfare or in response to market failures, or in crisis. For instance, it is commonly considered that in many countries employment legislations prevent companies from being able to hire and fire at will and are needed to offer adequate compensations for losses of employment. Similarly, firms are compelled to deliver to consumer products that meet certain standards and the performance in this is monitored by the regulatory agencies. In the original formulation of the public interest theory, the regulators are assumed to be independent and neutral. The government has taken the decision of not inducing more laws in corporate social responsibility activities as they wish the companies to have self-governing corporate responsibility. This form of corporate responsibility is at the sole discretion of the company but it does not act as an alternative to government in offering social benefits. Rather government being fully aware and supportive of the corporate contributions but chooses not to interfere in the activities. Government wishes that the companies recognize the strategic importance of the actions as a way for addressing the certain gaps in jurisdiction’s legal and institutional frameworks. In understanding such type of activities they need to basically establish the social license for operating not only with the local community but with the government. Such actions by companies will offer positive benefits for sustainable developments (Lappalainen, 2015).
Capture Theory: It has been observed that the mix of post 9/11 worries, a go-it-alone sentiment in countries and the rise in anti-globalization efforts has grown a cocktail of public discontent with profound consequences. Whatever might be the private wish, the government has always been bound to regulate the frameworks of market capitalization. Corporate social responsibility is a thin reed in the face of such type of uncertainty and political pressure. Even with the inevitable rough and tumbling capitalistic activities, it is presumed that they are at minimum levels of behaviors below which public faiths in the whole system are undermined (May et al., 2007).
The main focus of the government is regulation and its relationship with corporate social responsibility. In general, the public expects the government people to write some rule to constrain the institution’s improper impulses, mainly for-profit companies. However one of the powers of the regulation is that it is the actors on notice that they are subjected to behavioral standards. The very presence of the regulation itself is meant to constrain in many ways the otherwise discretionary activities of those to whom it basically applies. The government has taken the decision of not inspiring any more rules in the corporate responsibility act, as it considers that as a practical political matter, laws to constrain companies are usually shaped with the input and influence from the companies only. This phenomenon is considered as capture theory. For instance, Ortho Pharma company sought approval from the US food and drug administration for the manufacturing of the new drug. The physicians declined the approval for reasons of safety and ethics. Ortho company forced the physician and argued that the FDA could itself protect the public’s interest. The supreme court upheld the firing. The government, therefore, thinks that as the management of the law and legislative process has become a tool of competitive strategy and companies have resources to monitor regulatory processes so there is no need for any extra rules.
Economic Interest Group Theory of regulation: This theory shows that the rules are considered as the set of the policies which are basically driven by the supply forces and the demand side. The government is placed at the side of supply while the group of interest on the demand side. The government has taken the decision of not adding any more rules in the CSR act in compilation of the economic interest group. This has been done as it is the industry that designs the regulations which are to be adopted by the market. The industry needs to set rules for benefit of the people. The government has allowed the stakeholders in the industry to participate in the decisions which are concerned with the matters of society. The theory says that the interest groups in the government need to be very small in size so as to decrease the running cots. The industries associated with the CSR act need to make their own rules. The government, in this case, will be utilizing the regulations for achieving economic goals (Greg-accounting, 2015); (Standard, 2018).
In GAAP. for the noncurrent asset, a value adjustment is recognized in the profit and loss account only if it is considered by the management. Exceptional value adjustments are allowed where they are necessary on the basis f the reasonable commercial assessments prevent that the valuation of those items needs to be modified in the coming future because of the fluctuations in the value. The section 144 mainly looks after the three areas which are related with the impairment of long term assets, classification of the assets that are to be sold and representation of the discontinued operations. The impairment of long term assets are to be held and used in the areas in which there are differences in IFRS and GAAP (Sanahuja, 2012; KPMG, 2015; Ernst and Young, 2011). Under the case of SFAS long term assets which are to be exchanged with similar assets cannot be considered for sale. They are considered to be dropsied. This is because that exchange of such type of assets are accounted for the amount which is based on carrying amount of assets and not at fair value (Hkicpa, 2016; PwC, 2013; IAS Plus, 2018).
References
AASB (2015) Conceptual Framework for Financial Reporting [online]. Available from: https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15)pdf [Accessed 20 May 2018].
Brown, G. (2017) The Disadvantages of Historical Cost Accounting [online]. Available from: https://bizfluent.com/info-12022810-disadvantages-historical-cost-accounting.html [Accessed 21 May 2018].
eFinancemanagement (2018) Revaluation of Long-Lived Assets [online]. Available from: https://efinancemanagement.com/financial-accounting/revaluation-of-long-lived-assets [Accessed 21 May 2018].
Ernst and Young (2011) US GAAP versus IFRS [online]. Available from: https://www.ey.com/Publication/vwLUAssets/EY-US-GAAP-vs-IFRS-the-basics-2013/$FILE/EY-US-GAAP-vs-IFRS-the-basics-2013.pdf [Accessed 20 May 2018].
Greg-accounting (2015) Economic Interest Theory and Regulation [online]. Available from: https://greg-accounting.blogspot.in/2013/01/economic-interest-theory-and-regulation.html [Accessed 20 May 2018].
Hkicpa (2016) Non-current Assets Held for Sale and Discontinued Operations [online]. Available from: https://app1.hkicpa.org.hk/ebook/HKSA_Members_Handbook_Master/volumeII/hkfrs5)pdf [Accessed 20 May 2018].
Hu, F., Percy, M. & Yao, D. (2015) Asset Revaluations and Earnings Management: Evidence from Australian Companies [online]. Available from: https://eprints.qut.edu.au/91943/9/91943.pdf [Accessed 21 May 2018].
IAS Plus (2018) Conceptual Framework for Financial Reporting 2018 [online]. Available from: https://www.iasplus.com/en/standards/other/framework [Accessed 20 May 2018].
IAS Plus (2018) IFRS 5 — Non-current Assets Held for Sale and Discontinued Operations [online]. Available from: https://www.iasplus.com/en/standards/ifrs/ifrs5 [Accessed 21 May 2018].
KPMG (2015) Fair Value Measurement [online]. Available from: https://home.kpmg.com/content/dam/kpmg/pdf/2015/12/fair-value-qa-2015)pdf [Accessed 20 May 2018].
Lappalainen, P. (2015) Views of corporate social responsibility [online]. Available from: https://aaltodoc.aalto.fi/bitstream/handle/123456789/10963/isbn9789526000374.pdf?sequence=1&isAllowed=y [Accessed 20 May 2018].
May, S.K., Cheney, G. & Roper, J. (2007) The Debate over Corporate Social Responsibility. Oxford University Press.
Pearsoned (2010) Conceptual framework for financial reporting [online]. Available from: https://catalogue.pearsoned.co.uk/assets/hip/gb/hip_gb_pearsonhighered/samplechapter/KothariCh2.pdf [Accessed 21 May 2018].
PwC (2013. Similarities and Differences [online]. Available from: https://pwc.blogs.com/finance_and_treasury/files/simsdiffs_ifrsusuk_aug05)pdf [Accessed 21 May 2018].
Sanahuja, A.M.N. (2012) Fair value versus historical cost valuation for non financial fixed assets : how is financial information affected? [Online] Available at: https://repositori.uji.es/xmlui/bitstream/handle/10234/109761/TFG_Nebot_Sanahuja_Adri%C3%A1n.pdf [Accessed 20 May 2018].
Standard (2018) Economic interest theory [online]. Available from: https://www.standard.com/en/document/deakin-university/accounting/summaries/capture-theory-and-regulation/1106536/view [Accessed 20 May 2018].
Van Beest, F. (2009) Quality of Financial Reporting: measuring qualitative characteristics. [Online] Radboud University Nijmegen Available at: https://www.ru.nl/publish/pages/516298/nice_09108)pdf [Accessed 20 May 2018].
Yuet-ngo, A.M. & Tai-wai, D.L. (2018) The Cost Model and the Revaluation Model under HKAS 16 “Property, Plant and Equipment” [online]. Available from: https://www.hkiaat.org/images/uploads/articles/AAT_Paper_7_Cost_Model_Full.pdf [Accessed 21 May 2018].
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