The qualitative characteristics will help in providing assistance when financial users are required to make a choice among regulation policies, made by auditors, financial users or standard setters (Zhang and Andrew, 2014). The qualitative characteristics of financial statement can integrate meaningfulness and usefulness in decisions; on the other hand, they are not able to identify financial reporting quality on their own. The qualitative characteristics of financial statements are understood ability, relevance, reliability and comparatively (Ioannou and Serafeim, 2017). Previously, reliability was replaced by faithful representations, due to its inability of common understanding. Further, qualitative characteristics are such aspects that aid interpretation process and utilization of accounting information in a valuable and effective way. However, IFRS are not swiftly can be complied by US companies due to change in interpretation aspects for the information users. Due to this factors, IFRS are criticized by US financial experts.
In this aspect, some of the drawbacks of IFRS discovered by critics related to interpreting issues of IFRS in the US regarding fair valuation. In addition to this; various challenges are faced by companies such as training of staff and readers mindset. However, by considering the survey, the mainstream of respondents have thought that the advantages of IFRS exceed the disadvantages of it; which lead to the support for IAS/IFRS adoption in the country (Ioannou and Serafeim, 2017). Although; still there are various contradictory interpretations for example in IAS 19. This accounting standard is addressing the accounting for curtailment, amendment, or settlement that arises at the time of accounting. However, the use of actuarial assumptions is different in US GAAP and IFRS. This creates confusion for readers in case there is a change in the standard which will lead to misinterpreting issues of financial information.
These improving qualitative characteristics help in differentiating among the useful and non-useful information; also they aid in improving value in financial statement decisions of accounting information while making sure they are reliable and faithfully represented (Nobes and Stadler, 2015). By taking this into account, IASB works with US standard setter for the long haul to take all the requirements into consideration.
There are analysis on the basis of past measurement costs; recognition and recoverable amount of impairment losses, which are not able to keep with capacity changes in US GAAP. Accounting information based on financial statement are assessed as relevant and faithfully represented if they make significant and useful changes in the decision-making process of financial statement users. The accounting information is said to be faithfully represented when it places everyday phenomenal of the economy that is expected to represent. Such qualitative characteristics put usefulness and betterment at a place in financial statements (Chen and et al., 2018). The entire concept of financial accounting is to integrate and establish positive accounting information, and these qualitative characteristics must be included to make it highly useful for financial users. Fair value is assessed to add the broad scale of transparency in the financial statement, resulting in greater relevance and reliability in accounting data with the higher capability to represent fair value.
To resolve the issues, IFRIC has been established. It is the interpretative authority of the IASB, which have a responsibility to develop, maintains and resolve issues with IFRS. This body is designed to improvise financial reporting characteristics to ensure the quality of financial information provided.
The public theory states that retains that regulators strive to look for market solutions that are effective on an economic basis while ensuring the higher accessibility of some goods and services. It refers to an economic concept that is strongly related to the welfare of economy; it offers justifications by considering theoretical aspects (Berry, 2015). It has been argued by the theory that, regulations support general well-being instead of the interest of disciplined stakeholder. On the basis of core assumptions the theory is related regarding the regulator nature, with the complete information which can ensure effective enforcement. Furthermore, regulators are encouraged by the social interest, and the market intervenes to enhance social results. Under this theory, the firm’s regulation or other actors of the economy can make a contribution towards the promotion of social interest. The public interest theory asserts that regulation must increase social welfare and further that regulation is the consequence of cost-effective analysis to identify whether the cost to develop the market operations compensates the amount of maximized social welfare. Under the public interest theory, the regulation of banking institutions is made by the government, ensuring that they work for the social interest and benefit while assuring that they are entitled to serve societal interest with assigning resources for society betterment (Rosenbloom, 2016). The rationale of this theory was to form legislation which forces and regulates corporations to disclose their operational outcomes and impact of the same on society while keeping in mind that their activities benefit society as a large.
The capture theory states that a firm can get benefit from the legislation, in a situation where it captures the regarded body of regulation. According to the theory, the regulations are influences to meet the obligations of those impacted by them. Based on capture theory of regulation, the regulation within the market is mainly operated by the explication of regulatory policy goals; establishment of solid forms on behalf of consumers and formation of equally balances methods. It is suggested by the theory that on a particular time, the best interest of the concerned industry or firm are served by the regulations. The capture theory of regulation claims that regulators in which they regulate capture the firms’ economic benefits, employees in the regulated firms are paid lower wages and regulators in which they regulate support the firm’s interest (Gans and Ryall, 2017). This theory is totally based on public wellbeing and their benefits; by taking the same into account, the Australian government has established standards and guidelines which are required to be followed by regulation to arise social benefits, while they shall continue decision-making process by considering the impacts and consequences of them on society as a whole. It is essential that all regulation is adhering to the guidelines provided for society and CSR activities.
The Economic Interest Group Theory of regulation states that individuals engaged in the regulatory body create an alliance to safeguard and support their interest in lobbying practices to the government authorities. The theory says that industry is required to develop regulation and must target the same to enjoy benefits (Berry and Wilcox, 2018). By considering this aspect, strict standards are neglected, and the power given to corporate has been offered to identify the operations to be performed for the benefits of society as a whole while taking suitable measures for the social welfare and interest. Economic theory regulations assert that the operating group aims to secure the specific economic interest, various groups are accessible and are in variance will do government lobbying to act out legislation for economic benefits. It is suggested by the theory that industry follows the regulation for securing the best interest of their members, while the government, on the other hand, enables all engaged stakeholders to make industrial decisions (Battiston and et al., 2016). The concerned industry is enabled to form rules and regulations to attain and satisfy economic goals. This theory precisely reveals the real-world situations regarding regulation to be the best predictor of the acting and actions of regulations.
Revaluation of fixed assets is an act that is needed by firms to depict the actual value of assets owned by business accurately. This must be differentiated from the proposed depreciation, wherein the recorded reduction in assets value is integrated to its useful life. The aim of revaluation is to come with a true market value of fixed assets (Collier, 2015). This is useful to make a decision on investments when a company decides to sell the assets or negotiates the price of an asset. In accordance with the GAAP, the impairment losses on the assets long useful life are considered as the amount more than fair value.
Under the US GAAP, fixed asset accounting of past cost model, initially stipulating that the non-current assets are recognized at the fair value and afterwards carried at a low value by considering impairment loss and depreciation. The upward adjustments are held due to the changing circumstances are prohibited. Moreover, the costs model allows only downward adjustments due to the impairment loss, consequently the long-term useful life and should be placed for impairment if circumstances indicate that the assets carrying amount are higher than market value (Watts and Zuo, 2016). Under the US GAAP provisions, there are certain events stating the need for impairment; considerable converse modifications on the basis of the legal, technical and economic environment. Along with this, considerable unexpected knowledge of the assets market value, reduction in material in long-term progress of asset. Another event is that there has been the likelihood that over 50% of a specific asset will be put into the sale before the assets come at the end of its working life.
The standard of evaluation manipulated by the prudence concept wherein the potential losses are required to be recorded, but accounting for potential profits are not done. On the other hand, it is not able to reveal the fair assets value wherein there is a long-term rise in the value of the assets, affecting the entire corporate valuation. Along with this, it does not showcase the actual disclosure to the shareholders. By considering this aspect, these reflect that riles have impacted the relevance and faithful representation in a partial and adverse manner for the US corporate financial system (Warren and Jones, 2018). Moreover, this impact can be balanced by offering further closure in accounting notes to serve fair information to the financial statement users.
Part A
Revaluation refers to the act of realizing a reconsideration of the non-current assets carrying amount at a specified date, but it is exclusive of the written done recovery amount as well as an impairment loss. Revaluation of fixed assets can upward or downward average ratio. d. in the upward revaluation, the fixed assets and shareholder equity value might be increased or decrease the leverage ratio. Further, the property, plant and equipment are sated as non-current assets, acquired, owned or used by the firm for the long-term period from the balance date not for the purpose of sale at the course of trading (Collier, 2015). The most significant disadvantage associated with revaluation that might motivate direct not to revalue property, plant and equipment is the involved cost. This cost can result in increased expenditure which causes a reduction in profits and cash flows.
Part B
If the firm does not revalue its assets, it can affect the financial statement by asset understatement of assets, and higher profits will result from lower depreciation. When the assets are owned or purchased by a firm, then it is recorded at its actual fair cost. Further, the asset’s market value has no stability; it can change over the period of time, it is based on the firm whether it wants to value the assets its actual costs or use the revaluation model (DeFond and et al., 2018). If revaluation is not done, then it is not possible for the firm to identify actual capital, fair market value of long-term assets, or negotiate the effective price or the assets at the time of merger or acquisition. In addition to this, the firm will not be able to get a loan from the bank through asset mortgagation.
Part C
Revaluation and shareholders are directly connected, so if revaluation is not conducted, it can adversely impact the wealth of shareholders. It is because it will not be able to reveal the fair rate of return on used capital. It is not possible to retain sufficient finance in the business. Along with this, without revaluation fair market value of assets could not be revealed. Various countries allow shareholders to write up fixed assets in case the current values are higher as compared to the carrying value (Sikalidis and Leventis, 2017). Fixed assets upward revaluation could raise the fixed assets carrying value and the reserves related to a revaluation in the equity of shareholder, however, it could fall down the future earnings and return on equity.
References
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.
Berry, J.M. and Wilcox, C., 2018. The interest group society. Routledge.
Berry, J.M., 2015. Lobbying for the people: The political behaviour of public interest groups. Princeton University Press.
Chen, C.W., Collins, D.W., Kravet, T.D. and Mergenthaler, R.D., 2018. Financial statement comparability and the efficiency of acquisition decisions. Contemporary Accounting Research, 35(1), pp.164-202.
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
DeFond, M., Hu, J., Hung, M. and Li, S., 2018. The Usefulness of Fair Value Accounting in Executive Compensation.
Gans, J. and Ryall, M.D., 2017. Value capture theory: A strategic management review. Strategic Management Journal, 38(1), pp.17-41.
Ioannou, I. and Serafeim, G., 2017. The consequences of mandatory corporate sustainability reporting.
Nobes, C.W. and Stadler, C., 2015. The qualitative characteristics of financial information, and managers’ accounting decisions: evidence from IFRS policy changes. Accounting and Business Research, 45(5), pp.572-601.
Rosenbloom, D.H., 2016. 3a. Public Administrative Theory and the Separation of Powers. In The Constitutional School of American Public Administration (pp. 78-94). Routledge.
Sikalidis, A. and Leventis, S., 2017. The impact of unrealized fair value adjustments on dividend policy. European Accounting Review, 26(2), pp.283-310.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Watts, R.L. and Zuo, L., 2016. Understanding practice and institutions: A historical perspective. Accounting Horizons, 30(3), pp.409-423.
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26
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