Part A:
The conceptual framework laid out in “Australian Accounting Standards Board (AASB)” stats there are two qualitative characteristics of financial reporting, which are fundamental and enhancing. The fundamental qualitative characteristics are faithful representation and relevance, while the enhancing qualitative characteristics comprise of comparability, timeliness, verifiability and understandability (Barth 2018). The value of financial statements is increased in the presence of the stated qualitative characteristics for the financial statement users. The major users of such statements are investors, borrowers, creditors and others. The below-stated discussion represents the absence of the qualitative characteristics in the financial reporting framework laid down in IFRS.
All the financial statements are needed to have the necessary qualitative feature of understandability, since this feature would enhance the overall financial statement quality. Moreover, when this characteristic is present in the financial statements, it becomes easy for the users to classify the provided financial information, as depiction is made in such a manner that information regarding the current financial standings of the business organisations is provided to them (Beck, Glendening and Hogan 2016).
From the statement of head of finance of AXA, Geoff Roberts, the investors of the business organisations heavily rely on the management report for gaining adequate understanding of the financial conditions. Hence, the individual has opined there is no understandability aspect present in the financial statements of the organisations prepared in accordance with IFRS. The complexity in the financial statements could be identified as the primary reason behind the implementation of IFRS; however, it fails to provide the desired understandability aspect in the financial statements. Based on the provided scenario, it could be stated that majority of the business organisations have enforced IFRS in order to prepare its financial statements due to which adequate insight regarding the financial position and performance from the reports of the organisation could not be developed (Cañibano 2017).
Besides understandability, the financial statements are required to have the qualitative feature of comparability and it is considered as a part of enhancing qualitative characteristics. The role of this aspect is to enable the users in identifying those similarities and dissimilarities in the financial statements of the organisations (Cascino and Gassen 2016). As per the opinion of the finance director of Wesfarmers Limited, Terry Brown, the financial analysts face difficulties in evaluating the financial notes disclosed in the annual reports of the business entities, since they could misinterpret them due to absence of sufficient technical knowledge. The scenario depicts that the financial statement users are required to possess considerable technical knowledge in financial accounting so that the financial notes prepared in accordance with IFRS could be interpreted accurately. Therefore, it could be stated comparability as well as understandability is missing in the financial statements prepared under IFRS.
Faithful representation is considered as a significant qualitative characteristic, as it helps in delivering the useful financial information to the users of the financial statements. More, this particular characteristic assures the conformance to the financial statements with the needed standards and principles of accounting (Christensen, Liu and Maffett 2017). As per the opinion of David Craig, the CFO of Commonwealth Bank, the accurate overview of the actual financial conditions of the organisations could not be provided with the help of the financial statements prepared in accordance with IFRS. This has been the primary reason that the investors do not make adequate consideration of these financial statements for gathering valuable information in order to undertake investment decisions. This clearly highlights the fact that faithful representation is not ensured in the financial statements of the entities, since the absence of compliance does not provide sufficient insight regarding the financial conditions of the entities. Besides, when this characteristic is not present, it denotes that numerical descriptions are not adequate in relation to various economic phenomena of the financial statements. These aspects help in raising the scope of fraud or financial manipulation.
As per the primary objective of the AASB conceptual framework, accurate financial information needs to be delivered to the financial statement users for determining the accurate financial positions and performances of the business organisations. This objective would not be met when the qualitative features of accounting information are not present.
Part B:
The decision of the Australian government to not include regulations in the Corporations Act could be dissected through the below-stated regulation theories:
Public interest theory:
One of the fundamental principles of the public interest theory is to place reliance on meeting the public demand and interest by introducing the regulations. This theory is of immense importance to provide theoretical justification of any regulation, which is disclosed for the common people. This reason contributes towards the initiation of regulations in playing a significant part to resolve any market issue (Dye 2017). Hence, depending on this theory, the market forces aim to ensure the public welfare by initiating some specific regulations. The application of this theoretical concept signifies towards the governmental necessity for initiating regulations in the Corporations Act in relation to social and environmental duties.
If any regulation is introduced, it denotes that the market regulations are not strong enough to generate awareness regarding the social and environmental duties. By implementing particular regulation within the Corporations Act, both the firms and the common people would be obliged to carry out their duties for protecting the society and the overall environmental in the most appropriate fashion. Hence, this discussion provides effective justification about the Australian governmental decision regarding the Corporations Act (Flower 2016).
Capture theory:
This theory suggests that the regulations are initiated with the intent to ensure benefits for both the organisations and the common people; however, the principles of this theory do not match with those of the public interest theory (Hoyle, Schaefer and Doupnik 2015). After a stipulated timeframe, the enforced regulations begin to meet the overall interest of the regulators. The applicability of this theory could be related to the motive of initiating the regulations. Besides, when this theory is applied, the primary group could be identified for which the introduction of regulations is made. The principle of capture theory suggests that the Australian government has undertaken the correct decision to abstain from introducing any regulation in the Corporations Act for boosting social and environmental accountabilities.
This signifies that business organisations would carry out their work with honesty and due diligence even when the regulations are not present, since they are fully conscious of the market forces. Hence, this would limit the chances of the regulators to accomplish their self-interest, as no particular regulation is included in the Corporations Act. Due to all these causes, it is necessary for the government to permit the market forces to act independently in order to promote environmental and social accountabilities (Johnston and Petacchi 2017).
Economic interest group theory of regulation:
This theory believes that the regulations and the enforced polices are tied up to each other and the demand and supply forces have considerable impact on them. In relation to the provided case, the demand forces include the interest group, while the supply forces include the government (Leuz and Wysocki 2015). Hence, the regulations are introduced with the intent to ensure welfare of the common people and the industries. The regulations are initiated in a manner that makes it easy for the industries to adopt the same. Therefore, the application of this theory denotes that the government could initiate regulations in the Corporations Act to ensure environmental and social accountabilities that would benefit both the common people and industries. In addition to this, it is possible for the government to enable both the common people and the industries to participate in the process of developing regulations, as it would allow in striking a balance between the common people and the industries (Loughran and McDonald 2016).
Part C:
The provided scenario states that the US firms are not obliged to conduct the procedure of asset revaluation at fair values of fixed assets. However, consideration needs to be made regarding the impairments of the accounts of fixed assets in compliance with the “FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets”. This specific regulation pertaining to the revaluation of fixed assets assures that the financial statements are depicted with adequate information of the US business organisations. Thus, the regulation provides adequate importance in enhancing the financial reporting of fixed assets. By introducing this regulation, it has helped the US FASB to formulate a single reporting framework to carry the accounting valuation of disposal or sales related to fixed assets contributing to appropriate representation of the discontinued operations (Martínez?Ferrero, Garcia?Sanchez and Cuadrado?Ballesteros 2015). As a result, the financial reporting quality could be enhanced by minimising the variations in the accounting transactions of identical accounting events.
Besides this, the particular regulation plays a major role in obtaining the solution of the main accounting issues associated with the enforcement of fixed assets and the overall aspect assists towards the conformance of the business organisations with the necessary accounting regulations and standards (Nobes 2014). These aspects are deemed to have positive impact on comparability and faithful representation of the provided financial information. Several inconsistencies have been present in the two different frameworks of accounting to conduct the accounting valuation of fixed assets and it is possible to remove such inconsistencies by applying this FASB regulation. Thus, the significant similarities and differences could be identified in relation to various sets of accounting events associated with fixed assets. Therefore, in relation to the above discussion, it could be stated that the specific FASB regulation assures the enhancement of the financial statements by enhancing the reporting quality of fixed assets.
Part D:
Requirement a:
The directors are motivated to revalue their business assets due to a wide variety of reasons. The asset revaluation procedure is highly beneficial for providing the directors with the actual rate on return on capital employed. Thus, it provides assistance to the directors so that they could formulate feasible strategies of accounting (Scott 2015). As soon as the strategies are formulated, the process of asset revaluation is another beneficial tool for the directors for ascertaining the fair asset values, since the asset values are involved in continual appreciation from the date of acquisition. Moreover, when such effective process is present, an opportunity is provided to the business directors for grabbing the opportunity to negotiate regarding the fair prices of the fixed assets at the time of merger and acquisition. More precisely, it could be said that the directors could collect the overall resource values of the organisations when the revaluation of assets is present.
Requirement b:
If the process of asset revaluation is not present, there would not be any rise or decline in the book values of various classes of assets for the business organisations (Walz et al. 2016). Due to this reason, there could not be any unusual gain or loss obtained after these assets are sold. This entire aspect has negative repercussions on the financial conditions of the business entities, since the earnings of the organisations are expected to decline due to this aspect. Thus, asset revaluation process is extremely significant, as in its absence, the asset values would decline considerably and negative impact on the financial standing of the organisations would be inherent.
Requirement c:
The wealth of the shareholders could be affected considerably by the non-revaluation of assets. In accordance with the previous discussion, it could be observed that the earnings of the organisation are expected to decrease in the absence of the process of asset revaluation. Moreover, when the earnings of the organisation tend to decline, it would not be possible for the business organisations to deliver the investors with the expected return. Hence, all such aspects would have significant impact on the overall wealth of the shareholders (Weetman 2017).
References:
Barth, M.E., 2018. The Future of Financial Reporting: Insights from Research. Abacus, 54(1), pp.66-78.
Beck, M.J., Glendening, M. and Hogan, C.E., 2016. Financial Statement Disaggregation, Auditor Effort and Financial Reporting Quality. working paper, Michigan State University.
Cañibano, L., 2017. Accounting and intangibles.
Cascino, S. and Gassen, J., 2016. Have unified standards made financial reporting more comparable?. LSE Business Review.
Christensen, H.B., Liu, L.Y. and Maffett, M.G., 2017. Proactive Financial Reporting Enforcement and Shareholder Wealth.
Dye, R.A., 2017. Some recent advances in the theory of financial reporting and disclosures. Accounting Horizons, 31(3), pp.39-54.
Flower, J., 2016. European financial reporting: adapting to a changing world. Springer.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Johnston, R. and Petacchi, R., 2017. Regulatory oversight of financial reporting: Securities and Exchange Commission comment letters. Contemporary Accounting Research, 34(2), pp.1128-1155.
Leuz, C. and Wysocki, P., 2015. The economics of disclosure and financial reporting regulation: Evidence and suggestions for. Unpublished Results.
Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A survey. Journal of Accounting Research, 54(4), pp.1187-1230.
Martínez?Ferrero, J., Garcia?Sanchez, I.M. and Cuadrado?Ballesteros, B., 2015. Effect of financial reporting quality on sustainability information disclosure. Corporate Social Responsibility and Environmental Management, 22(1), pp.45-64.
Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.
Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Walz, S., Welte, J., Zeisberger, F., Kenntner, J., Cramer, C., Himmighoefer, P. and Dopf, G., Sap Se, 2016. Financial Reporting System Integrating Market Segment Attributes and Accounting Data. U.S. Patent Application 14/711,372.
Weetman, P., 2017. Financial reporting in Europe: Prospects for research. European Management Journal.
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