In accordance with IASB (2010), there are two key qualitative characteristics in financial statement which are; relevance and faithful representation. Financial statement information is said to be relevant when it is able to make a difference in user’s decisions in the financial statement. Further, relevant information possess expected value or confirmatory. While faithful representation is referred as the information that states real-world phenomena of the economy that it assumes to represent. Both these characteristics integrate usefulness and meaningfulness in the financial statement to users (Chan and Vasarhelyi, 2018). In addition, there are some improving qualitative characteristics, acting as a compliment to these primary characteristics are understandability, comparability, timeliness and verifiability. These enhancing qualitative characteristics differentiate between beneficial information from non-beneficial information, while they enhance the usefulness in decisions of financial reporting information which is faithfully represented and relevant.
Fair value is considered to ensure a higher level of transparency in the financial reporting, leading to a higher relevance value of accounting data and better ability of the financial market to represent the true value of the firm. On the other hand, it is argued by critics that fair value of accounting is based on models which are non-reliable, thereby its causes confusion regarding the usefulness to the users.
The value based on the relevance of financial reporting as per the IAS/IFRS in Europe at the time of economic crises and its particular connection to fair value accounting is the main issue, particularly in regards with the banking sector, investigation on which is still not done completely. By considering this aspect, IASB has operation closely with the standard setters of US for a long period, to cover the requirements of IAS/IFRS and US GAAP. Consequently, currently, two accounting standard sets are extremely aligned than they were ever before (Zhang and Andrew, 2014). With this rations, the US Security Exchange Commission (SEC) has permitted non-US organizations listed on the US market to make use of IFRS. Conversely, while it is indicated by the research that accounting quality as per the IAS/IFRS usually surpasses that of domestic accounting amounts based on standards.
There is criticism based on measurements of historical costs which are; recognition of impairment losses and recovery on the same seems to lag behind capacity changes. In case the cash flow capacity of asset highly exceeds than its carrying amount, by this capacity can reduce materially prior to the non-recoverability of carrying amount and the recognition of impairment loss. Along with this, there is the accessibility of alternative depreciation methods; some of them trace reduction in the capacity to produce cash flows in a close manner as compared to others (Tayeh, Al-Jarrah and Tarhini, 2015). Recognition of impairment losses, but non-recognition of gains that take place from the assets capability to produce increases in cash flows. Measurements based on costs neglect the fact that enterprises might make a decision on selling of an asset that has value appreciation.
The reliability of measures is based on the faithfulness with its represents that it assumes to represent, integrated with a promise for the user that it represented quality information, which will be useful, reliable and relevant for the users (Ioannou and Serafeim, 2017). By this, level of reliability is also recognized. The overall concept of financial accounting is to form and integrate beneficial information for the accounting information, and they must include these qualities to be used for external financial users.
Public theory of regulation retains that regulation is supplied in regards to public demand for driving efficiency within market practices. Further, regulation is expected to benefit society as a large, instead of a specified interest based on the vest. The regulatory body is assessed to show the society interest wherein the regulatory regulate instead of the regulators’ private or own interest. It is assumed by the public theory that the economic markets are extremely fragile having a tendency to work in an ineffective manner and own concern while neglecting the significance if society. Thus, in order to monitor and control the economic markets the intervention of government is needed(Grunig, 2017). According to theory, the government regulates banking authorities making them work for the benefit and interest of society, making them eligible to deliver social interest while allocating resources in an effective manner. Public interest theory is a reason to establish the legislation which regulates and oblige for the company to reveal the impact and consequences of their regulation on society while also revealing the measures them by them to
Capture theory is an element of economic regulation. It aims to depict the reasons and reality of current government economic regulations. Particularly, it strives to consider and identify the identity and aims of the support of the establishment of new or developed regulation. This theory assumes that regulation of government is impacted to satisfy the needs for industry regulation, that is capturing of legislators are done by industry, the regulation firm would be monitored ultimately by the industry (Black, 2017). On the basis of capture theory of regulation, the construction market regulation is predominantly market by these aspects; the goal of regulatory policy should be explicit, the formation of strong forms in support of customers and the constitution of equally offset means and so on.
The economic interest theory group of regulation emphasizes that individuals create groups in order to safeguard interests within regulation through lobbying. Certain group of interest is considered regulation demanders and the legislature is stated as the regulation supplier. The work and motives of work are appropriated represented under this theory. The interest group theory appropriately showcases the situation of the real-time world in relation to regulation and will act as the best estimator of the workings of regulations (Battiston and et al., 2016). It is because it showcases the insights that regulators seek to increase their personal welfare while offsetting the various public demands simultaneously. The economic theory of regulation assumes that group is based on protecting the particular economic interest, a different group open and be in conflict will lobby the government to enact legislation to economy benefits them. The theory suggests that industry designs to the regulation for the benefits of members while the government allows allow stakeholders to make decisions. The industry concerned is allowed to make rules and regulations to achieve national economic goals.
The FASB US does not enable upward revaluation related with fixed assets to reveal fair market value. However, it is mandatory to account impairment tests and costing of fixed assets according to as per FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Upward revaluation is predominantly conducted for fixed assets like land and property who have fluctuating prices; it is considered that revaluating fixed assets by upward revaluation theory like property have not been preferred by many corporate in the US, due to the fear of higher tax on capital gains (Gordon and Hsu, 2017). Further, conservative valuation has been ensured by the provision, not in favour of upward revaluation. In general terms, assets (or disposal groups) held for sale are not depreciated, are measured at the lower of carrying amount and fair value fewer costs to sell, and are presented separately in the statement of financial position.
Revaluation not only means upward revaluation in the book values of assets, but it can also come in downward revision also knows as impairment in the assets book value. On the other hand, any downward revaluation in the assets’ book value is urgently written to the income statement. According to the IFRS, an asset is stated to be impaired and thereby written-down, in case the carrying amount is higher compared to the recoverable amount. Moreover, the recoverable amount is the higher of the value in use of the asset that means the current value of future value, or can also be stated as net realizable value.
Statement 144 needs that the long-lived assets be considered at the lower carrying amount or cost to sell deducted from fair value, if or if not reported in continued and discontinued operations (Banker, Basu and Byzalov, 2016). Further for the discontinued operations of reporting requirements will enable an enterprise to effectively communicate in the financial reporting a change in a firm that leads from a decision to do disposal of operations and thereby providing financial statement users with better information to focus on continuing activities of the enterprise.
The Statement changes make improvement in the financial statement by requiring that accounting model can be used for the assets based on long-lived for sale disposal, if or if not held and employed, and by widening the discontinued operation presentation to contain highly disposable transactions (Fischer, 2016). Thus, the accounting for same events and situation will be similar. In addition, the information of reported financial information will be enhanced, thereby resolving considerable adoption issues while improving the compliance with new requirements of the Statement. Ultimately, comparatively between enterprises and the faithful representation of financial information will be enhanced.
Asset revaluation is assessed unstable, as it disturbs the conventional standard of part cost accounting. By considering this from income context, historical cost accounting has faithful representation and show relevant property, plant, and equipment, as compared to annual asset revaluations due to the past cost gaining, are less adhered to manipulation and are highly objective(Warren Moffitt and Byrnes, 2015). The main drawback of asset revaluation is the engaged costs within this method. These costs result in increased expenditures which ultimately results in decreasing net profits and cash flows. For the purpose of accountability, holding historical cost valuation is considered as highly effective. However, their concern is not supposed to be conservative. By selecting not to consider the evaluations, there will be the understatement of assets compared to their existing values. Consequently, depreciation expenditure will be reduced thereby higher profits and a gain made on sale will be increased (Collier, 2015). Thus, a potential motivation for the director might be that by choosing not to undertake an asset revaluation, and there will be higher reported profits. Other indicators of performance, for example, return on asset, will be enhanced.
The revaluation of long-term assets has an impact on all the financial reporting and statements in these following ways:
Further, an asset revaluation is a significant decision in accounting for firms, as it can create various impacts on the financial statement, although it is not permitted as per the U.S. GAAP, the corporate following IFRS shall undertake the revaluation carefully.
IFRS enables corporations to show intangibles and tangibles with the current value in the financial statement. Further, this permits the financial statement to be represented in true and fair values in context with the items (Liu, 2018). By using this option, these can create a considerable impact on the corporate financial statement. Fair value accounting is engaged with the frequent revaluation of the assets of the organization. This enables better accounting to differentiate between the current market value and reported the value of an asset recorded by the firm, either because of the actual increase in the value of an asset or actual deprecation predicts were not appropriate, these changed might affect the funds of shareholders.
The most general reported assets that need revaluation are those regarded as property or investment. All assets in these related areas are supposed to have a possible change in value, at a time in a dramatic change, and can create effect on shareholders.
References
Banker, R.D., Basu, S. and Byzalov, D., 2016. Implications of Impairment Decisions and Assets’ Cash-Flow Horizons for Conservatism Research. The Accounting Review, 92(2), pp.41-67.
Battiston, S., Farmer, J.D., Flache, A., Garlaschelli, D., Haldane, A.G., Heesterbeek, H., Hommes, C., Jaeger, C., May, R. and Scheffer, M., 2016. Complexity theory and financial regulation. Science, 351(6275), pp.818-819.
Black, J., 2017. Critical reflections on regulation. In Crime and Regulation (pp. 15-49). Routledge.
Chan, D.Y. and Vasarhelyi, M.A., 2018. Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.
Fischer, M., 2016. 14 Brand Valuation in Accordance with GAAP and Legal Requirements. Accountable Marketing: Linking Marketing Actions to Financial Performance, p.182.
Gordon, E.A. and Hsu, H.T., 2017. Tangible Long-Lived Asset Impairments and Future Operating Cash Flows under US GAAP and IFRS. The Accounting Review, 93(1), pp.187-211.
Grunig, J.E., 2017. Symmetrical presuppositions as a framework for public relations theory. In Public relations theory(pp. 17-44). Routledge.
Ioannou, I. and Serafeim, G., 2017. The consequences of mandatory corporate sustainability reporting.
Tayeh, M., Al-Jarrah, I.M. and Tarhini, A., 2015. Accounting vs. market-based measures of firm performance related to information technology investments.
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26.
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