Qualitative Characteristics Of Financial Reporting And Australian Government Inquiry Into Corporate Social Responsibility

Usefulness of IFRS for investors

Qualitative characteristics of financial reporting

Primary users of financial reporting can be classified as either present or potential investors, lenders as well as creditors. They listed groups of people technically use the information presented in financial reporting to make decisions that have to do with buying or selling or even holding debt instruments or equity, providing or settling diverse forms of credit such as loans and even exercising rights to influence economic management actions (Horton 2018). IFRS framework in this context notes that general purpose financial reports are not enough to extensively provide all the needed information to make economic decisions. In relation, it is generally equally important to consider pertinent information from other sources.

Also, IFSR framework also acknowledges the fact that other parties, an inclusive of prudential and market regulators may in some cases find the information provided by the framework useful (Cascino, et al. 2017). However, the fact remains that these are not general purpose financial reports are not exclusively directed to regulators. In this case, the fundamental qualitative characteristics of financial reporting that do not appear to be satisfied by the reporting practices pursuant to IFRS include relevance and faithful representation (Chen and Tang 2017). Relevancy is considered practical if the financial information can influence the decisions of the key users. On the other hand, faithful representation lacks in this context. Subsequently, this is because the financial information is most of the time not complete, lack neutrality and also is characterized by numerous errors. In summary of this main point, this aspect violates the main intent of financial reporting, which is, to offer key and useful information for decision making.

The views presented here are not consistent with the ideology that corporate financial reports satisfy the central objective of financial reporting. Because a key component in corporate reporting is its ability to present a comprehensive report that is intended to give adequate and relevant information to shareholders about an institution’s financial performance, this aspect has greatly lacked. There is a growing concern that corporate reporting does not adequately issue investors with sufficient and crucial information needed in decision making. The main problem, therefore, remains how this can be rectified and who are the main stakeholders in ensuring that this is achieved (Palmrose and Kinney 2018).

Many people agree that corporate reports are characterized by being too long and that additionally, financial information is also extensively becoming too complex for normal understanding. Subsequently, this means that the growing problem is doing more damage than what most people may anticipate. Several stakeholders are working on numerous projects designed to address the complexity as well as the information overload aspect of the problem. Such projects include the International Accounting Standards Board’s (IASB) Disclosure Initiative (Scott 2015). Another strategy is to attempt to standardize the increasing volume of what can be termed as non-financial information that is provided by firms. Additionally, one option that is directly related to the IFSR is the option of IASB to change in that it widens its remit beyond financial reporting (Scott, 2015). Generally, it is safe to argue that the trustees of the IFSR foundation are reconsidering the role of IASB in the development of wider corporate reporting.

Decision of the Australian Government not to amend the Corporations Act

Public Interest Theory 

The Australian government is technically justified in its argument that no specific regulations should be added to the legislation. On the contrary, the market forces are extensively more important and more influential in advocating for companies to do the right thing (Mansbridge, 2018). In the same perspective, the public interest theory affirms the same claims made by the government. Relatively, the theory is an economic concept that is strongly associated with Welfare economics. The theory basically provides theoretical justifications for regulations. The market, in this case, is characterized by certain features, including externalities, imperfect competition, and asymmetric information (Berry and Wilcox 2018).

Regulators, in this case, are motivated by societal interests. In relation, they intervene in the market to improve social outcomes related to the same. With the interest of the society at heart, it is most likely that institutions will engage in environmentally friendly projects as well as programs that work towards the benefit of the entire society. The government or even policies in the form of regulations will not, therefore, act as the watchdog appointed to ensure that companies do the right thing. On the contrary, firms will be self-directed hence will act as a very important institution in public development which in turn is very essential (Grunig 2017).  

Capture Theory

Capture theory in financial regulation is another very significant and essential topic. In the same measure, capture theory and regulation point out that regulations are manipulated to fit the expectations as well as requirements of those who are directly affected by the said regulations. The theory was first pinned by Hertog, a political scientist (Henderson 2017). The primary advantage of this theory, by the case study, is the fact that it clearly explains the main motive behind designing regulations. In this case, there will be the extensive participation of all the involved stakeholders, stretching from the consumers, the companies involved and even, there is an adequate representation of politicians as well as other interest groups (Gans and Ryall 2017). Subsequently, this is because the needs of the consumers dictate the modes of operations for firms.  

The central ideology behind this theory is that regulations are set of policies that are enacted and driven by the forces of supply and demand. The practice behind Economic Interest Group Theory of regulation enables the government to strengthen its efforts at bringing more transparency as well as the availability of vital as well as critical information when it comes to social and environmental costs made by big companies. In relation, in the long run, this results in the discriminatory positive policy as well as the regulatory response from the government (Mizutani and Nakamura 2017). Additionally, it also ensures as well as protects the rights of the large numbers of small players like the general public. However, it is equally important to point out the fact that although the interest of the small players is equally important, the discriminatory attitude, as well as rules, end up causing severe problems for the big players, and hence it becomes difficult to sustain their businesses, yet there is a very limited market.  

Impact of financial reporting rules on the relevance and representational faithfulness of US corporate financial statements

Implications of the Use FASB Rules on relevance and representational faithfulness of US corporate financial statements

The principal goal of financial reporting has always been to make available high-quality financial reporting information. The information in this case touch on economic entities that are financial in nature which in the long run is useful for economic decision making. Consequently, the provision of high quality financial reporting is imperative credited to the fact that it will in a positive way influence the lives of people such as capital providers as well as other relevant stakeholders when making crucial investments decisions, credit and other alike resource allocation decisions (Hodder, Hopkins and Schipper 2014). Subsequently, this is expected to enhance overall market efficiency. Despite the fact that both FASB as well as IASB stress on the crucially of high-quality financial reports, the most challenging problem has been how to measure this quality. Considering the fact that diverse users will have dissimilar preferences, perceived quality is held as one that deviates among constituents.

In order to address this problematic situation, many researchers have settled on measuring the quality of financial reporting indirectly. Subsequently, this is achieved through shifting more focus on attributes that influence the quality of financial reports like, financial restatements, earnings management, as well as timeliness. In all honesty, to pose the question of whether financial statements should be “fairly” or be “relevant”, especially in the dimensions of the listed FASB rules gives a picture of the political dimension of the trade-off that exists between reliability and relevance (Hashim, Li and O’Hanlon 2016). These two characteristics of financial reporting are not considered to be conflicting by the IASC/IASB conceptual framework. Simply put, these rules have numerous and diverse implications for the relevance and representational faithfulness of US corporate financial statements.

The compatibility of the two listed characteristics is not in any dimension challenged by the IASB’s conceptual framework. In order to draw the relation more closely and hence adequately respond to the question, the initiatives by FASB are directed towards impairment costs. Essentially, these impairment costs are associated with non-current assets that are accounted for. Non-current assets in this case are not evaluated to the fair value. Subsequently, such initiatives are expected to result in the value of information for financial reporting to improve (Khan, Ryan, and Varma 2017). Consequently, this can be credited to the provision and availability of relevant information. Therefore, this model allows financial information to be of the needed credibility in terms of relevancy hence can be used in critical decision-making decisions the investors. The key lesson in terms of the underlying ideology in this case is the argument that a comprehensive measurement tool should be based on the quality of financial reporting in terms of its qualitative characteristics, that is: relevance and faithful representation. In addition, it is equally important to enhance qualitative characteristics such as: verifiability, comparability, understandability and timeliness because that is where the power lies.  

Factors the motivate directors not to revalue the property, plant, and equipment

This section will examine one crucial factor that has been termed as a primary driving force which motivate directors not to revalue property, plant, and equipment. Revaluation simply puts means the act of recognizing a reassessment of the carrying amount of an asset that can be considered as non-current to its fair value at a given date. However, this is an exclusion of recoverable amount write-downs as well as impairment losses (Islam, Nusrat, and Karim 2016). Revaluation of fixed assets can be classified as either upward or downward. In this sense, upward revaluation increases the value of fixed assets as well as shareholder equity or also, has the potential to reduce financial leverage ratios. In connection, property, plant, as well as equipment, is categorized as Non-current assets. Generally, one of the most significant drawbacks of revaluation includes the cost involved in the process of revaluation. Ultimately, these costs result in an increase in expenses which eventually leads to reduced cash flow as well as fall in net profits.

Effects the decision not to revalue on the firm’s financial statements

Revaluation of assets is considered very crucial in finance because it is used to compute the true values of assets owned by a firm. It is therefore considered very important to acknowledge the fact that the decisions not to revalue have devastating effects on a firm’s financial statement (Malmendier, Opp, and Saidi 2016). Long-lived assets can be categorized into three: tangible assets like plant, property and equipment, identifiable assets such as license and non-identifiable intangible assets like goodwill of the company. Failing to revalue therefore means failing to determine the actual rate of return on capital, failure to determine the fair market value following a huge appreciation since the initial purchase, as well as the lack of the ability to negotiate proper pricing for an asset in the event of a merger or acquisition. Simply put, revaluation affects financial statements in the following listed ways:

• Increase in book value of the asset, reducing net income
• The decreasein the carrying amount resulting in the decline of ROA and ROE
• In a downwardrevaluation, credited to lower total assets as well as equity, profitability tends to increase in future years.

In summary of this main point. Revaluation is a crucial accounting decision in any firm because it impacts numerous financial statements. Firms that follow IFRS should, therefore, undergo revaluation diligently.  

The effects of the decision of not to revalue

The decision not to revalue will adversely affect the wealth of the shareholders in the long run credited to some of the factors listed above. The central argument remains the fact that revaluation models provide companies with a realistic presentation of their financial statement (Gray, Jorge, and Rodriguez 2015). Subsequently, this is because it allows for the presentation of tangible and well as intangible fixed assets together with their current values. Sufficient evidence has been presented therefore to support the argument that the process presents numerous benefits when it comes to the provision of financial statements. Setting the foundation through which assets are assessed and presented to the stakeholders enables them to make sufficient and adequate decisions that will have adverse effects on the future of the company.    

References

Berry, J.M. and Wilcox, C., 2018. The interest group society. Routledge.

Cascino, S., Clatworthy, M., Garcia Osma, B., Gassen, J. and Imam, S., 2017. The Usefulness of Financial Accounting Information: Evidence from the Field.

Chen, K.C. and Tang, F., 2017. Post?IFRS Revaluation Adjustments and Executive Compensation. Contemporary Accounting Research, 34(2).

Gans, J. and Ryall, M.D., 2017. Value capture theory: A strategic management review. Strategic Management Journal, 38(1).

Gray, D., Jorge, M. and Rodriguez, L., 2015. Goodwill Accounting Alternative: Private Versus Non-private Companies. Journal of Social Science Studies, 3(1).

Grunig, J.E., 2017. Symmetrical presuppositions as a framework for public relations theory. In Public relations theory(pp. 17-44). Routledge.

Hashim, N., Li, W. and O’Hanlon, J., 2016. Expected-loss-based accounting for impairment of financial instruments: The FASB and IASB proposals 2009–2016. Accounting in Europe, 13(2).

Henderson, K., 2017. Capture Theory & State Regulation of Animal Cruelty.

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Horton, J. (2018). Advanced Financial Accounting and Reporting: Theory, Practice and Evidence. Routledge.

Islam, M., Nusrat, F. and Karim, A.K.M., 2016. Revaluation of Property, Plant and Equipment (PPE) in Bangladesh: Motivations, Value R

Khan, U., Ryan, S. and Varma, A., 2017. Fair Value versus Amortized Cost Measurement and the Timeliness of Other-than-Temporary Impairments: Evidence from the Insurance Industry.

Malmendier, U., Opp, M.M. and Saidi, F., 2016. Target revaluation after failed takeover attempts: Cash versus stock. Journal of Financial Economics, 119(1).

Mansbridge, J. J., 2018. A deliberative theory of interest representation. In The politics of interests (pp. 32-57). Routledge.

Mizutani, F. and Nakamura, E., 2017. Regulation, public interest, and private interest: an empirical investigation of firms in Japan. Empirical Economics, 1-22.

Palmrose, Z. V. and Kinney, Jr, W. R., 2018. Auditor and FASB Responsibilities for Representing Underlying Economics-What US Standards Actually Say. Accounting Horizons.

Scott, W. R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.