The qualitative characteristics of financial reporting have to be there in the financial statements of the business entities for increasing their usefulness. Relevance and Faithful Representation are the fundamental qualitative characteristics where Comparability, Verifiability, Timeliness and Understandability are the enhancing qualitative characteristics (Choudhary, Merkley and Schipper 2017)
The statement of former AXA Head, Roberts Geoff indicates towards the dependency of the investors and other users on the financial information so that they can gain insight about the financial position of the entities. The investors do this in order to gain understandability about the financial position that is a major qualitative characteristic. The quality of financial reporting can be enhanced in the presence of understanding characteristic. The presence of ‘understanding’ qualitative characteristic helps the investors in classifying, characterizing and presenting the financial reports that leads to the correct ascertainment of the financial standing of the business entities. It can be seen that the adoption of the standards of IFRS has brought complexity in financial reporting that contributes to less understanding of financial situation. According to the opinion of Geoff Roberts, ineffectiveness is there in the adoption of IFRS that fails in providing greater understandability to the investors regarding the financial position and performance of the entities from the investors report and management brief (Verriest, Gaeremynck and Thornton 2013).
The financial analysts can end up in the misinterpretation of the financial statements of the companies when trying to get necessary explanation from the notes to the financial statements that are prepared with accordance to the principles of IFRS and Terry Brown, the finance director of Wesfarmers, has mentioned this fact. This statement indicates towards the lack of understandably and comparability that are two qualitative characteristic of financial reporting. The investors and other users can identify the similarities and difference in the financial aspects in the presence of ‘comparability’ qualitative characteristic. It implies that the users of the financial statements are required to have technical financial knowledge in order to understand and compare the facts from the notes to the financial statements prepared as per IFRS. The absence of adequate technical knowledge will lead to the misinterpretation of notes of the financial statements (Barth and Israeli 2013). Hence, it can be said that IFRS adopted financial statements requires adequate technical knowledge to be understood.
In the recent years, it can be observed that the investors are not paying attention to the financial statements that are developed as per the standards of IFRS due to their inability to express the correct financial position of the business entities and this fact can be found in the statement of David Craig, the chief financial officer of Commonwealth Bank. As per this particular viewpoint, the absence of faithful representation can be seen that is a fundamental qualitative characteristic of financial reporting. It needs to be mentioned that the absence of faithful representation leads to the failure to provide the required information and description of the financial elements to the investors and other users. Thus, this particular aspects indicates towards the failure of the financial statements developed as per IFRS provide the numerical description of the financial elements (Firth and Gounopoulos 2017). The absence of faithful representation of the financial statements increases the scope of manipulation and fraud in the financial accounting.
The main objective of financial reporting involves in providing required true financial information to the investors and other users so that they can know the financial performance and position of the entities. However, it is not possible to fulfill the above-mentioned objective of financial reporting in the absence of these major fundamental as well as enhancing qualitative characteristic (Choudhary, Merkley and Schipper 2017). Thus, the business entities are required to adopt the correct financial reporting framework in order to avoid these issues.
The following discussion shows the application of Public Interest Theory, Capture Theory and Economic Interest Group Theory of Regulation to explain the decision of the government not to add any specific regulation in the Corporations Act.
Public Interest Theory: The concept of this theory states that the regulators put major emphasis on the specific problems (Koopman, Mitchell and Thierer 2014). Thus, in this context, it needs to be mentioned that the main objective of public interest theory is to ensure the betterment of the people of community by implementing the necessary regulations. By applying the concept of this theory in the provided situation, it can be mentioned that it is the requirement for the government to amend the Corporations Act with a new regulation that will include both social and environmental responsibilities. It implies that the market force may not always function for the correct implementation of environmental and social responsibilities (Bös 2015). The implementation of this regulation in the Corporations Act will make the companies as well as the common people to follow the social as well as environmental responsibilities. For this reason, the government would be required to introduce the regulation.
Capture Theory: The main objective of the implementation of various regulations is the overall betterment of public. As per capture theory, the regulators manipulate with the implemented regulations for the own benefits; after specific period, the implemented regulations serve the interests of the regulators. The application of capture theory helps in the identification of the main intention behind the implementation of regulations. Moreover, one can identify the affected stakeholders from the implementation of regulations with this theory. More specifically, with the application of this principle, the government of the countries can identify the people or the group of people for which it will be good to introduce any specific regulation for their betterment. The application of the concept of capture theory in the provided situation justifies the decision of the government not to introduce any specific regulation for the promotion of social as well as environmental responsibilities as it is a correct decision. As per this theory, the application of any regulation in the corporations act will increase the scope to make the regulators beneficial after certain point. In this scenario, the government should let the market forces to handle the situation and it will also reduce the scope to capture the regulation (Olson 2015).
Economic Interest Group Theory of Regulation: There are differences between the Economic Interest Group Theory of regulation with the above-discussed theories. As per the concept of this theory, different set of policies can be seen within the policies; and the forces of demand and supply have effects on them (Gilens and Page 2014). According to the concept of this theory, the main aim of the introduction of different regulations and legislations is to provide benefits to the industries. For this reason, it is the responsibility of the industries for the designing of regulations and makes the market to adopt them. The application of this theory in the given situation shows the fact that it would be required for the Australian government to introduce regulation in Corporations Act so that the interest and betterment of the common people can be ensured. Hence, the major requirement for the government is to include the consumers in the process of regulation development as this process will make both the government and the consumers beneficial. This process will contribute towards maintaining balance between the consumers and industries (Black 2017).
There is not any regulation for the revaluation of the non-current assets for the US business entities. However, as per FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, it is needed for the business entities for the consideration of impairment of non-current assets. Some of the major positive implications are there of this regulation on the relevance and faithful representation of the financial statements of the US business entities. In addition, these changes in the regulation have major positive part in improving the quality of financial statements for the business entities. This regulation helps in the development of a single accounting model for the accounting operation related to revaluation of non-current assets (Amiraslani, Iatridis and Pope 2013). These assets can be newly acquired or they can be previously held or used. This particular standard assists to broaden the area of presenting the discontinuing operations so that more sale or disposal related transactions can be included. All these aspects together play an important part for improving the quality of financial reporting of the required information.
With the implementation of this particukr regulation, it becomes possible for the US business entities to solve different kinds of implementation related issues that will lead to the better compliance with the required accounting standards. Most importantly, these rules assist the business entities to promote both comparability and faithful representation of the financial statements. The implementation of these standards ensure that the companies follow only one accounting model for the accounting of long-lived assets and eliminate the scope of inconsistencies to have two accounting framework for the accounting of long-lived assets. Moreover, with the help of these regulations, the users of financial information become able to ascertain the major similarities and differences of two sets of economic events for the accounting of long-lived assets. Hence, on the basis of the above discussion, it can be observed that the regulations of FASB ensure the overall improvement of financial statements by bringing improvement in the accounting treatment of long-lived assets (Amiraslani, Iatridis and Pope 2013).
The following discussion shows the major factors motive the directors for asset revaluation:
The decision of not revaluation of the assets has some of the major effects on the financial statements. The book value of the assets will not show any decrease or increase in their values in the absence of asset revaluation process. This aspect can lead to the creation of abnormal loss or abnormal profit at the time of asset disposal in the fair value. Apart from this, there will be decrease in the earnings of the business entities in the absence of asset revaluation. Moreover, the absence of asset revaluation will lead to the decrease in the total value of assets that will negatively affect the financial standings of the business entities (Yao, Percy and Hu 2013).
The wealth of the shareholders tends to decrease due to the decision of not revaluation of the non-current assets and there are some of the major reasons that lead to the decrease in the wealth of the shareholders. The major effects of the non-valuation of assets will end up in decreasing the earnings of the business entities. For this reason, the shareholders will not be able to get the expected return from their investment as a result of the decrease in the earnings of the entities (Brief and Peasnell 2013). Apart from this, the profitability of the business organizations decreases due to the absence of revaluation of the non-current assets. Due to the decrease in profitability, the shareholders do not prefer to re-invest in those companies. This is also a negative effect on the wealth of the shareholders.
References
Barth, M.E. and Israeli, D., 2013. Disentangling mandatory IFRS reporting and changes in enforcement. Journal of Accounting and Economics, 56(2-3), pp.178-188.
Beams, F.A., Brozovsky, J.A. and Shoulders, C.D., 2017. Advanced accounting. Pearson.
Black, J., 2017. Critical reflections on regulation. In Crime and Regulation (pp. 15-49). Routledge.
Brief, R.P. and Peasnell, K.V. eds., 2013. Clean surplus: A link between accounting and finance. Routledge.
Choudhary, P., Merkley, K.J. and Schipper, K., 2017. Qualitative characteristics of financial reporting errors deemed immaterial by managers.
Firth, M. and Gounopoulos, D., 2017. IFRS adoption and management earnings forecasts of Australian IPOs.
Gilens, M. and Page, B.I., 2014. Testing theories of American politics: Elites, interest groups, and average citizens. Perspectives on politics, 12(3), pp.564-581.
Koopman, C., Mitchell, M. and Thierer, A., 2014. The sharing economy and consumer protection regulation: The case for policy change. J. Bus. Entrepreneurship & L., 8, p.529.
Olson, M.H., 2015. An introduction to theories of learning. Psychology Press.
Verriest, A., Gaeremynck, A. and Thornton, D.B., 2013. The impact of corporate governance on IFRS adoption choices. European accounting review, 22(1), pp.39-77.
Yao, D.F., Percy, M. and Hu, F., 2013. Fair values and audit fees: Evidence from asset revaluations in Australia.
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