You are required to explain which qualitative characteristics of financial reporting, as per the conceptual framework, do not, in the opinion of the above quoted individuals, appear to be satisfied by current reporting practices pursuant to IFRS. Also, you are required to consider whether the views are consistent with the view that corporate financial reports satisfy the central objective of financial reporting as identified in the Conceptual Framework. 

 

In 2006 the Australian Government established an inquiry into corporate social responsibilities with the aim of deciding whether the Corporations Act should be amended so as to specifically include particular social and environmental responsibilities within the Act. At the completion of the inquiry it was decided that no specific regulations would be added to the legislation, and that instead, ‘market forces’ would be relied upon to encourage companies to do the ‘right thing’ (that is, the view was expressed that if companies did not look after the environment, or did not act in a socially responsible manner, then people would not want to consume the organisations’ products, and people would not want to invest in the organisation, work for them, and so forth. Because companies were aware of such market forces they would do the ‘right thing’ even in the absence of legislation).

Required:

 

You are required to explain the decision of the government that no specific regulation be introduced from the perspective of:

(a)Public Interest Theory
(b)Capture Theory
(c)Economic Interest Group Theory of regulation

 

The US Financial Accounting Standards Board does not allow revaluation of non-current assets to fair value, but it does make it compulsory to account for the impairment costs associated with non-current assets as per FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets.

What implications do you think these rules have for the relevance and representational faithfulness of US corporate financial statements?

 

Many organisations elect not to measure their property, plant and equipment at fair value, but rather, prefer to use the ‘cost model’. This will provide lower total assets and lower measures, such as net asset backing per share.

Required

You are required to answer the following questions:

(a)What might motivate directors not to revalue the property, plant and equipment?

(b)What are some of the effects the decision not to revalue might have on the firm’s financial statements?

(c)Would the decision not to revalue adversely affect the wealth of the shareholders?

The given situation indicates towards the fact that the business organizations have spend millions of dollars for the adoption of IFRS standards so that the financial reporting can be improved, but these financial statements have majorly failed in providing the users with the correct financial pictures of the business entities and the absence of the major qualitative characteristics can be held responsible for this failure. The following discussion analyzes the provided statements so that the missing qualitative characteristics can be identified:

The former Finance Head of AXA, Geoff Roberts has mentioned that there has not be any questions from the financial analysts and the fund managers related to the quality of the notes to the financial statements developed as per IFRS for analyzing the financial situations of the business entities. This aspect indicates towards the fact that the fund managers as well as the analysts can understand the financial performance and standing of the companies from the IFRS financial reports and they become able to compare the results of the financial statements with the other companies. Thus, both understandability and comparability characteristics are there in the IFRS financial statements. However, the current financial reporting framework under IFRS is majorly failing in providing both the understandability and comparability to the users (Brochet, Jagolinzer and Riedl 2013).

The Finance Director of Wesfarmers, Terry Brown has mentioned in his statement that in the absence of effective technical knowledge in accounting, the financial analyst can misinterpret the financial conditions of the business entities from the analysis of the notes to the financial statements of IFRS adopted financial reports. In case, there is the presence of verifiability qualitative characteristic of financial reporting, the users become able in the application of their knowledge as well as observation for judging the financial performance and financial standings of the companies. This aspect makes verifiability as major characteristic. However, from the statement of Terry Brown, it can be observed that the present financial reporting framework under IFRS is barring to obtain insight about the company’s financial position in the absence of technical knowledge that indicates the absence of verifiability qualitative characteristic (Houqe, Easton and Zijl 2014).

Chief Financial Officer of Commonwealth Bank, David Craig has mentioned one crucial aspect that the financial statements developed as per the standards of IFRS are obscuring the financial position to the investors of the companies and for this reason; investors are ignoring the financial statements developed as per IFRS. This aspect indicates towards the missing of both relevance and faithful representation qualitative characteristics as the financial statements fail to provide the correct pictures of the financial performance and financial position of the companies in the absence of these two characteristics. Hence, the present financial reporting framework pursuant to IFRS lacks these two qualitative characteristics. In this context, it needs to be mentioned that the lack of these qualitative characteristics is a major barrier in achieving the central objectives of financial reporting (Ahmed, Neel and Wang 2013).       

Part B

Different theories of regulation play major part on the evaluation of various regulations and situations related to the implementation of the regulations. The detailed discussion is shown below:

Public Interest Theory

The rules of public interest theory helps in preventing the theoretical justification of any implemented regulation. It states that the main aim of the regulations is the fulfillment of the interests or the demands of the common people and hence, the regulations are provided with major importance. As per this theory, the presence of regulation ensures that any specific group of shareholder does not become beneficial from the implementation of any regulation (Asquer 2018). This particular theory of regulation does not put major importance on the market forces as they do not have any capability to fulfill the demands of the common people. This theory indicates that intervention of the government is required for diminishing the market imperfection and market failure. Thus, as per the view of this theory, the decision of the Australian government cannot be supported as market force does not have the power to promote the social as well as environmental responsibilities among the common people and companies.       

Capture Theory

The principles of capture theory presents another important aspect related to the introduction of any regulation. The major emphasis on this regulation is on the market forces for fulfilling the needs and interests of the customers as the regulations can be easily manipulated by their developers for satisfying their own interests. This theory states that after certain period of time, the introduced regulations serve for the interest of the regulators. This theory eliminates the intervention of the government for repairing the market failure as well as market imperfections as the market forces are there for doing so (Zimmerman 2013). Apart from this, the application of this theory in certain situations provides assistance in the identification of the major stakeholders which are the main reason behind the implementation of the regulations. According to the regulations of this theory, one can support the decision of the Australian government of the non-introduction of regulations in Corporations Act for the promotion of the social and environmental responsibilities. In the presence of market forces, it is possible to fulfill the interest of the public without manipulating the regulations.   

Economic Interest Group Theory of Regulation

The concept of this theory indicates towards the fact that the business industries are the main developers of the regulations as their objective is to do the welfare for both the public and the companies with the help of specific regulations. It implies that the introduction of regulations does good for both the companies and the public (Job et al. 2015). Hence, as per the principles of this regulation, it would be better for the Australian government if they introduced regulation in the Corporations Act for the social as well as environmental responsibilities.  

Part C

As per the given situation, the business entities of United States (US) are barred from carrying on the revaluation process of non-current assets, but the accounting authority puts the responsibility on them to carry on the impairment process on those non-current assets. It is required for the companies of US to present their financial statements relevantly and faithfully. For this reason, the above-mentioned regulation has some of the major implications and they are as below:

• The financial statements of the business organizations should make the users of the financial statements in understanding the major differences and similarities about the specific financial items like the revaluation of the non-current assets. The above-discussed regulations ensure that the financial statements of the companies include all the required information about the revaluation of non-current assets so that the users can gain correct understating about them (Weil, Schipper and Francis 2013).
• The presence of different types of accounting regulations can be seen for the accounting operations of the revaluations of the non-current assets and complexities as well as difficulties can be noticed from the side of the accountants to comply with all of these regulations. Thus, the previously mention revaluation regulations has developed as common way to carry on the accounting operations of non-current revaluations that helps in the reduction of complexities and difficulties for the accountants.
• Most impotently, it needs to be mentioned that the accounting authority of US has been successful in the development of one single accounting model or framework for the accounting operations of revaluation of assets. This progress has created major positive influence on the relevance as well as faithful representation of the financial statements of US (Weygandt, Kimmel and Kieso 2015).
• The accountants of the companies of US face different kind of issues at the time of dealing with the implementation of the non-current assets of the business entities. Under the operation of the above-discussed revaluation related regulation, business organizations have to make compliance with all the required regulation of the revaluation of non-current assets. This is a major positive aspect for the solution of the implementation related issues of the non-current assets.         

Part D

Requirement [a]

The process of asset revaluation is considered as specific process that the directors of the companies use in order to gain the fair value of the property, plant and equipment of their business. The presence of certain factors can be seen that provides the directors with major motivation for the revaluation of property, plant and equipment. They are mentioned below:

• The strategy of the revaluation of property, plant and equipment demands the organizations to carry on the revaluation process on a frequent basis so that the directors can obtain the fair value of property, plant and equipment. Frequent revaluation process diminishes the chance to create difference between the fare value and historical value (Beatty and Liao 2014).
• As per the above discussion, directors can gain knowledge about the fair value of property, plant and equipment with the help of revaluation process. This aspect leads to the effective price negotiation of these assets at the time of merger and acquisition that eliminates the chance of business loss (Beatty and Liao 2014).
• In the presence of the asset revaluation strategy of property, plant and equipment in the organizations, it becomes easy for the directors of the companies to gain understanding about the return from capital employees that is a crucial aspect for the financial reporting.  

Requirement [b]

Many of the business organizations take the decision of not revaluation of the property, plant and equipment. Thus, in the absence of the revaluation process, the directors of the business entities cannot obtain the fair value of these assets that affect the negotiation process at the time of merger and acquisition (Bevis 2013). Apart from this, the values of the property, plant and equipment stop moving in the absence of asset revaluation strategy that leads to the creation of abnormal loss or profit at the time of their selling. At the same time, the absence of asset revaluation process leads to the reduction in both the profitability and earnings of the entities that affect the financial statements of them.

Requirement [c]

The involvement of the wealth of the shareholders of the companies can be seen with the asset revaluation process. Business organizations become unable to provide the shareholders with their required return on investment in case there is reduction in profitability as well as earnings of the company due to the absence of revaluation process of property, plant and equipment. On the overall basis, the wealth of the shareholders decreases due to the not revaluation of property, plant and equipment (Weil, Schipper and Francis 2013).

 

References

Ahmed, A.S., Neel, M. and Wang, D., 2013. Does mandatory adoption of IFRS improve accounting quality? Preliminary evidence. Contemporary Accounting Research, 30(4), pp.1344-1372.

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

Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58(2-3), pp.339-383.

Bevis, H.W., 2013. Corporate Financial Accounting in a Competitive Economy (RLE Accounting). Routledge. 

Brochet, F., Jagolinzer, A.D. and Riedl, E.J., 2013. Mandatory IFRS adoption and financial statement comparability. Contemporary Accounting Research, 30(4), pp.1373-1400.

Houqe, M.N., Easton, S. and van Zijl, T., 2014. Does mandatory IFRS adoption improve information quality in low investor protection countries?. Journal of International Accounting, Auditing and Taxation, 23(2), pp.87-97.

Job, V., Walton, G.M., Bernecker, K. and Dweck, C.S., 2015. Implicit theories about willpower predict self-regulation and grades in everyday life. Journal of Personality and Social Psychology, 108(4), p.637.

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

Zimmerman, B.J., 2013. Theories of self-regulated learning and academic achievement: An overview and analysis. In Self-regulated learning and academic achievement (pp. 10-45). Routledge.