Qualitative Characteristics Of Financial Reporting And Theories Of Regulations

Part A

Part A

From the provided situation, it can be observed that the financial statements of the business organizations that have been developed as per the standards of IFRS have failed to provide the users with the required information to analyze the financial performance as well as financial standings of those entities; but the companies have spent more than millions of dollars for the adoption of the standards of IFRS. Financial statements of the business entities fail to provide the required information when they lack the qualitative characteristics of financial information, as per the accounting conceptual framework. The following discussion sheds light on the qualitative characteristics missing from the IFRS financial accounts.

Understandability and comparability are important qualitative characteristics of financial statements. The first helps the users in gaining understanding about the financial statements and noose to them and the later helps in comparing the financial information of one company to other companies. Here, Geoff Roberts has mentioned the fact that the fund managers and analysts have not raised questions about the financial adjustments of IFRS financial statements as the largely depend on the management briefing and investor’s report to understand the financial performance and position of the business entities that shows the presence of both undesirability and comparability in the financial statements. Thus, the present financial reporting framework under IFRS lacks these qualitative characteristics (Horton, Serafeim and Serafeim 2013).

Apart from the above, the importance of verifiability as a qualitative characteristic of financial reporting cannot be ignored as this qualitative characteristic helps the users of the financial statements to apply the knowledge and observation in order to gain understanding about the financial performance and position of the entities. The statement of Terry Brown indicates towards the fact that the notes to the financial statements developed as per IFRS can mislead the financial analysts in case they try to analyze them when they are not technically trained. From this statement, it can be observed that there is a requirement of high technical knowledge for the analysts for analyzing the financial notes developed as per IFRS standards as it will not be possible to analyze them in the presence of limited technical knowledge. Hence, it can be concluded that the presence financial reporting as per IFRS does not have verifiability qualitative characteristic (Christensen et al. 2015).

Most importantly, relevance and faithful representation needs to be there in the financial statements of the business entities as they are major qualitative characteristics. Relevance helps the financial information to make a positive different in the investment decision-making process of the investors where the later ensures that the users can obtain the correct information from the financial statements of the business organizations. The statement of David Craig indicates towards the fact that the financial statements developed as per the standards of IFRS fails to provide the correct relevant information about the financial performance and financial standings of the companies and thus, the investors ignore these reports. Hence, from this discussion, it is clear that that the current financial reporting framework under IFRS lacks both relevance and faithful representation (Horton, Serafeim and Serafeim 2013).

Part B

Part B

The government of Australia took the decision of not introducing any regulation under the Corporations Act for social and environmental responsibilities. The following theories help the analysis of this decision with the help of three major theories of regulations:  

Public Interest Theory

The public interest theory indicates towards the fact that the implementation of regulations is required for the satisfaction of the needs and interest of the common people. For this reason, there is a greater need for the introduction of regulation in the market as it ensures the betterment of the common people as well as the companies (Asquer 2018). There is not any function of market forces to satisfy the needs of the common people. It is required for the government to intervene for eliminating market imperfection as well as market failure. Hence, according to principles of this theory, the government of Australia would be required to introduce the regulation in the Corporations Act for the promotion of Social as well as environmental responsibilities for the public.

Capture Theory

The rules of capture theory of regulations indicates towards the fact that there is not any need for the regulators to introduce any regulations as they can later manipulate those regulations for satisfying their own interests. After certain point of time, regulations serve for the interest of the regulators. For this reason, this theory put emphasis on the presence of market forces in order to satisfy the needs of the common people (Hodges 2015). At the same time, application of this theory helps in the identification of the affected parties with the implementation of any regulation. Hence, with the application of this theory in the present situation states that the government of Australia took the correct decision by not introducing any regulation in the Corporations Act and let the matter be solved by the market forces. In the absence of regulation, it would not be possible for the regulators to fulfill their own interest by manipulating the regulations.     

Economic Interest Group Theory of Regulation

The principle of this theory indicates towards the fact that the business industries are the developers of the regulations and the aim to develop the regulations is the welfare of both the public and the business industries. According to the principles of this regulation, at the time of the introduction of any specific regulation, the role of both demand and supply can be seen (Asquer 2018). The present situation can be analyzed with the help of the rules of this regulation. With the application of this regulation in the current situation, it can be concluded that it was required for the government of Australia to introduce the regulation in the Corporations Act for the promotion of social as well as environmental responsibilities. In this process, it would be required for the government to include both the industries and the common people in the regulation development process.     

Part C

The accounting board of Australia has the regulation for the companies not to carry out the non-current asset revaluation process but to consider the impairment associated on those non-current assets. The implication of this regulation can be seen for the relevant and faithful representation of the financial statements. They are discussed below:

• The introduction of this regulation has played a major part in the development of one single framework for the business organizations in order to carry out the revaluation process of the non-current assets. With the help of this, the users have become able to gain the relevant information about the non-current assets (Nobes 2014).
• Business organizations had to face major difficulties as well as complexities at the time of dealing with the non-current asset revaluation process. However, the introduction of this regulation puts the obligation on the companies to comply with all the required standards for the process of non-current asset revaluation. For this reason, it has been possible to faithfully represent the financial statements of the companies (Sharma and Panigrahi 2013).
• Prior to the introduction of this regulation, it used to be difficult for the users of the financial statements to make the identification of the major difference as well as similarities in the accounting process related to the revaluation of the non-current asset. However, with the introduction of this specific regulation, the users are required to only track about the impairment aspects of the non-current asset and it has made the job easier for the users (Hope, Thomas and Vyas 2013).

Part D

Requirement [a]

• The adoption of the revaluation process of the property, plant and equipment makes it obligatory for the directors to continue the revaluation process on the frequent basis. Thus, with the help of this process, it becomes possible for the directors to know about the fair value of property, plant and equipment (Francis et al.2015).
• At the time of merger and acquisition, the directors of the companies are required to know the fair value of property, plant and equipment for effective price negotiation. Thus, the adoption of asset revaluation process assists the directors by knowing the faie value.
• In the presence of the knowledge about fair value of property, plant and equipment, the directors can know the true rate of return on capital employed (Francis et al.2015).  

Requirement [b]

In case the business organizations doe not adopt the strategy of revaluation of property, plant and equipment, the value of these assets get freeze that lead to the generation of abnormal amount of profit or loss at the time to sell them. This particular aspect will contribute to the reduction of the return of the companies from these assets that will eventually decrease the earnings of the company (Warren and Jones 2018).

Requirement [c]

In case, there is reduction in the earnings of the business organizations, there will be reduction in the profitability for the companies. Hence, in the presence of reduced profitability, it will not be possible for the business entities to provide their shareholders with the expected return on their investments. As a result of this, there will be decrease in the wealth of the shareholders (Henderson et al. 2015).

References:

Asquer, A., 2018. Theories of Regulation. In Regulation of Infrastructure and Utilities (pp. 19-33). Palgrave Macmillan, Cham.

Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), pp.31-61.

Francis, B., Hasan, I., Park, J.C. and Wu, Q., 2015. Gender differences in financial reporting decision making: Evidence from accounting conservatism. Contemporary Accounting Research, 32(3), pp.1285-1318.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Hodges, C., 2015. Law and Corporate Behaviour: Integrating Theories of Regulation, Enforcement, Compliance and Ethics. Bloomsbury Publishing. 

Hope, O.K., Thomas, W.B. and Vyas, D., 2013. Financial reporting quality of US private and public firms. The Accounting Review, 88(5), pp.1715-1742.

Horton, J., Serafeim, G. and Serafeim, I., 2013. Does mandatory IFRS adoption improve the information environment?. Contemporary accounting research, 30(1), pp.388-423.

Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.

Sharma, A. and Panigrahi, P.K., 2013. A review of financial accounting fraud detection based on data mining techniques. arXiv preprint arXiv:1309.3944.

Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.