Qualitative Characteristics Of Financial Reporting And Government Regulations

Qualitative Characteristics of Financial Reporting

In order to cope up with the everyday challenges in the market which is happening all over the world, the regulatory bodies are required to ensure that the proper regulations and the laws will come into place so as to enable the companies to work in the future and thus benefiting the shareholders and the stakeholders of the company for the future years to come. The regulations made by these regulatory bodies may be encouraging or discouraging depending upon the needs of the company and the stakeholders. As the title suggests, the report has been framed and has revolved around the features of the financial reporting and how the same has been carried forward by the regulatory bodies. At first the instances have been discussed with regard to the presentation of the financial statements in accordance with the IFRS framework and how the same has not been understood by the investors of the company and which of the qualitative feature have been affected with regard to the understanding of the investors. Then the different theories have been detailed as to how these theories have restricted the government regulatory bodies in making the rules and regulations. Then the financial reporting of the US corporate has been discussed with regard to the adoption of the fair value method of valuation and the impairment of assets. It has also detailed as to which of the qualitative feature of financial report will be considered. The last task is dealt with the analysis of the reasons and the effects of manager’s decision as not to revalue the assets of the company. With these four different tasks but focusing on the qualitative features of the financial reporting, the report has been prepared and has ended with the overall conclusion and the recommendation thereon for the regulatory bodies and for the companies.

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Under this heading, mainly the qualitative features of the financial reporting has been detailed and described as to how the same seems not to be satisfied due to the references of the quotation made by the different individuals. Further it has been detailed as to whether the views are in consonance with the conceptual framework of financial reporting.  

In the first quotation it has been detailed that the investors of the company only have the reliance on the figures reported by the financial statements and the report for the investors and also the investors purports to have the detail of the same through the company. Further in the second quotation, it has been mentioned that these IFRS related adjustments are not in such a manner that the normal lay man or the investor who does not have any knowledge of the finance will never be able to understand the financial statements.

Government Regulations and Corporate Social Responsibilities

With these considerations, the feature of the understandability, comparability and the faithful representation is seems to be sacrificed.

It is in the sense that the investors will not be able to understand the financial statements as the numbers as mentioned through the IFRS will be difficult for them to understand and interpreting the result thereon will be more difficult. Therefore, for having the better understanding the investors or any other shall have undergone the requisite training. Comparability will also be affected as the investor will not be able to understand the company’s own financial statements and therefore will not able to compare the results with the other entity. Faithful representation is that the company can manipulate the figures and provide the unfair view and untrue picture of the financial position of the company.

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But in actual scenario, it does not happen that’s why it has been analysed that the above sacrifices are not in consonance with the features of the conceptual framework of accounting and hence in this way it will worthy to mention that the IFRS also maintains the quality of financial reporting (Beest, 2012).

Under this part three theories have been highlighted and discussed as to how the decision of the government as not to make any regulation is justifiable.

  • The theory of public interest has been chosen first. It states that the government shall make regulation in such a manner that it ensures there will be optimal allocation to the public of the resources which are further very scarce in nature. But it fails as in case of the market situation of the monopoly of the case of having the imperfect competition where there can be no match of the demand and supply and these are thus driven by the market mechanisms only.
  • The theory of the capture has been at second place and it states that if any regulation is prepared for the persons than fir few years it will work accordingly but after some time it gets into the hands of those affected persons and hence the regulation shall not be made.
  • The theory of the economic interest has been at third place which states that the regulations are formed by the representative groups and only for the benefit of that group members and thus to avoid the situation of having such situation, the government shall not made the regulation  (Hertog, 2012).

Thus, in regard to the above theories, the regulation shall not be made by government rather believe to have the regulations through the market forces.

The IFRS framework requires the adoption of the fair value method for the valuation of the noncurrent assets and the same as been restricted by the US Financial Accounting Standards Board and accordingly the same has been discussed with regard to the presence of the qualitative features of the financial reporting. Two concepts have been considered. One is the valuation of the assets through model other than revaluation model and other is the impairment that is charged on the noncurrent assets.

Following are the major implications from the aforesaid adoption of the policies:

  • The restriction for the adoption of the fair value method will lead to the loss of the comparability. It is because as per the IFRS framework, the fair value method is needs to be incorporated and the companies of the United States will lack the comparability in terms of the financial position and the financial performance of the company with the other company. Secondly, the same will also results in the lack of the reliability of the financial results from the view of the stakeholders as the companies will still be following the old method of the valuation of the assets.  
  • The second implication is that with the implementation of the impairment testing and calculation and charging thereon the financial statements will be relevant. It is because of the reason that there have been many assets which have been long lived and still no major charge has been made so as to bring down the value to the correct value and hence it is necessary to have the impairment in order to give correct value of noncurrent assets.

There are two methods prescribed for the valuation of the noncurrent assets. One is the revaluation model and the other is the cost model. Both these models have been prescribed by the regulatory bodies. Under this part the manager’s perspective has been discussed with regard to the adoption of the cost model for the valuation of the assets and rejecting the fair value model.

  1. Director of the company has refused to adopt the fair value model on the ground of the four major factors. First factor is the frequent changes in the market which can lead the company to write off the assets in one single go because of the drop in the value of the assets. The second factor is related to the inability of the managers to identify the value of the asset because of the reason that in some cases the market information is not available.  The third factor is that the fair value will be less reliable then the historical cost. It is because of the major reason that the managers uses their own discretions combined with the market value as to what value the asset shall appear on the day of the reporting period and the last factor is of the reduction in the book value of the assets which happens due to sudden decrease in the value of the assets. Thus, these are the factors which motivate the directors of the company to not to adopt the revaluation model (Seng, 2015).  
  2. There will be two major effects from the decision as to not to revalue the assets of the company. The first effect will be on the decision making power of the company as the historical cost will not be basis for taking any decision like that of replacing the assets of the company. The second major effect will be on the comparability of the financial position and the financial performance of the company with the other as the fair value adoption can be adopted by the other companies. (Christensen, 2012).
  3. By following the cost model, it is false that it will have the adverse impact on the shareholders wealth as the price that the shareholders receive will not be affected by adoption of the cost model rather it will be as per the actual position and will not have the effect of the changing market conditions.

Conclusion And Recommendation

The presentation of the financial statements in the defined manner has the very important role in the industry. It is because of the reason that the decision of the stakeholder depends only on the presentation of the financial statements of the company and the report has detailed throughout the four tasks the importance of the same with respect to the qualitative features of the financial reporting. With the IFRS adopting, no ambiguity in any manner has come into place for the investors rather it has increased the level of the enhanced features of the financial reporting including the comparability and understandability. The theories have detailed about the non preparation of the regulations by the bodies and hence have detailed with respect to the different theories. The US corporate practices have also been detailed and again the features of the financial reporting have been detailed. Lastly the manager’s incentive has been detailed for no valuing the assets. To sum up the report, all the perspectives have been detailed with respect to the presentation of the financial statements and each task has been identified useful for the investors.    

On the basis of the above analysis it is recommended for the regulatory bodies to prepare the regulations keeping in consideration all the matters and the for the companies to follow all of the regulations in the manner as detailed and for the investors to understand each and every situation and then take the decision.

References

Beest, F.V, ‘Quality of Financial Reporting: measuring qualitative characteristics’ (2012) 205 AR 22

Christensen H, ‘Does Fair Value Accounting for the Non financial assets pass the market test’ (2012) 45 JBB 8

Hertog J, ‘General Theories of Regulation’ (2012) 111 JEL142

 Seng D, ‘Managerial Incentives behind the Fixed Asset Revaluations: Evidence from New Zealand Firm’ (2015) 3 DOB 44