Qualitative Characteristics, Regulation, And Non-Current Assets In Financial Reporting

Overview of the Conceptual Framework for Financial Reporting

Assessment Task Part A

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As per the conceptual framework, the qualitative characteristics of financial reporting are understandability, relevance, reliability and comparability (Bragg, 2018). These qualitative characteristics help in analysis of financial statements. As per the text of the quoted individuals, the characteristic of understandability seems to be missing from the current reporting practices as the text talks about complexity on how the information is framed in the notes. For this reason investors rely on investor reports and management briefings.

The conceptual framework helps companies in cases where no IFRS standard applies to a particular transaction (IFRS, 2018) and helps in classification of the transaction. Also, the central objective of financial statement is to provide stakeholders and investors information about the company’s financial and economic condition thereby enabling them to make investment decisions (Anon., 2018). Under current scenario, the information available in financial reports helps investors but not to a great extent due to complexity in which the information is presented.

Assessment Task Part B

The government has sought to introduce terms and activities in the regulation to make it binding on the companies to contribute to Corporate Social Responsibility activities. This is in line with the public interest theory which states that the regulations are designed to work for the benefit of public at large (Domas, 2003). But the decision not to introduce any changes in the regulation defeats the public interest theory as everything is left on the public intervention and company’s management conscience to act upon the public sentiment. Also, the public reaction is a culmination of various events over time thus helping the companies to play around and not contribute to CSR. These regulations in fact benefit the companies in short to medium term in which they might get away without CSR activities and enjoy the sluggishness in which market behave. The companies or corporates can also play upon the speed with which market behaves as they may introduce a set of CSR activities now and then to mislead the public. This decision of keeping the regulation unchanged depicts the capture theory of regulation wherein the regulations are manipulated to fit the interests of those affected or impacted by it (Anon., 2018). To justify the similarity, the unchanged regulation will help the companies and industrialists to retain the profits and contribute into CSR which are non income generating activities.

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Assessment Task Part C

AS per US financial accounting standard, non-current assets are stated at book value and not at the actual or fair value. The depreciation associated with it is depicted separately to imply the value of assets used and the remaining value of the asset. AS per US GAAP, the fixed or non-current assets are accounted for at cost and are carried forward as cost less depreciation. Any upward adjustments is prohibited (Anon., 2015). If upward adjustment is allowed, it will swell the fixed assets bringing up the valuation of the company which is non the case in true sense as the assets have been brought and used by the company so the relative value should not go up. This makes the financial statements to present an incorrect picture of the company’s financial status. Also, the current rules for impairment also allows for market corrections if the carrying value exceeds market value.

Usually, the following circumstances indicate the need for impairment (Anon., 2015):

  • Major downward changes in economic, legal or technological environment of company’s region of operation(Anon., 2015);
  • A sudden knee jerk depletion in the market value of the asset;(Anon., 2015)
  • If the asset is underperforming on a perpetual basis or there the usage of the asset has materially reduced over time(Anon., 2015);
  • If the probability of selling the asset before the previous estimated life of the asset exceeds 50%(Anon., 2015).

Assessment Task Part D

US GAAP does not allow revaluation of assets. On the other hand IFRS allow for revaluation of assets at fair value.

  1. Some organizations do not prefer revaluation of asset as any upward movement of asset will result in shareholder’s equity but will reduce the net income due to high depreciation. Any increase due to revaluation is reported in shareholder’s equity instead of income statement(Borad, 2018). Also, if there is some downward movement from the carrying value, there would be decrease in credit worthiness of the company as the overall asset size will decrease as a result of revaluation.
  2. The effects on financial statement can be judged considering the scenarios of upward and downward valuation. An upward valuation can increase the asset size thus reducing the debt to equity ratio, increase credit worthiness, increases shareholder’s wealth. Choosing not to revalue will deprive the company from all these benefits and it will play conservatively in a condition when the market is showing a boom. It can be argued that which such situation the company is trying to prevent any negative impact due to sudden knee jerk reaction in the assets value. Also, there is decrease in ROE. On the other hand with the downward valuation, the asset size decrease, there is increase in debt to equity ratio, the shareholders’ wealth decrease. The company choosing not to revalue the assets tends to save itself from such situation to present an overall goof picture of company’s financial condition. So it totally depends on the long term strategy the company has in mind to choose if it wants revaluation or not.
  3. impact of not to revalue the assets on the shareholders wealth is dependent on the outcome of the valuation. If there is upward valuation i.e. the current value of assets in books is less than the fair value as per the market conditions, the shareholders’ wealth is at low level compared to what it would have been as any impact of revaluation translates to shareholders equity. So the decision of not to revalue the assets in this situation adversely impacts shareholders’ wealth. On the other hand if there is downward valuation, the asset value in books is higher than what it should be. The decision in this case has a positive impact on shareholders’ wealth as the shareholder’s equity is higher than what it would have been if the revaluation occurs.