Why Do Some Organizations Prefer Using Cost Model Instead Of Fair Value For Property, Plant, And Equipment?

Overview of Financial Statement Quality

The Financial Statement provides those information which helps the user of financial statement to take financial decision. However, each and every financial or non-financial information included in financial statement is not necessary for decision making. There are some qualities which must be incorporated in financial statement to take best possible decision by the investors. To gain the quality result from financial statement these are the mandatory features covered in Financial Statement (Bizfluent, 2017).

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  • Understandability. All the information which is included in financial statements and its annexure and notes which is directly related to financial statement must be free from any doubts. Whatever the information prepared and disclose in financial statement in such a way that it is easy to understand from investor prospective. The investor includes the person who have basic business knowledge, ability to read and understand financial statement, and shall have general knowledge in respect of following matter like taxation, finance, law, corporate affairs, economics and capital market so that the user can easily understand the future impact of those information on financial position of company(Alexander, 2016). Quality presentation of information in financial statement helps the user to undertake and financial or investment decisions in the interest of company as well as stakeholder of company to fulfill future goals. If financial statement contains any complex and high priority matter which affect the decision of stakeholder and require additional disclosure, additional information should be highlight to give a better picture.
  • All the information contained in financial statement must be relevant which helps the decision maker decision making. The prep rarer of the financial statement should keep in their mind that mere presentation of data is not useful. There has to have some end to end relationship between which leads to meaning full conclusion. More data in report mean information in financial statement. This statement is not true. It is not quantity of data, but its relevance, which is important for user in process of decision making(Bromwich & Scapens, 2016).
  • Whatever the information presented in financial statement as a whole, cannot be completely free from errors and mistake, the reliability of the data can be measured on the basis of how much material mistake and fault are there. All the data like account balance, related party disclosure, segment reporting, liabilities and intangible assets should be free from misstatement and give true and fair view of financial statement(Belton, 2017). All the transaction should be whether it is quantifiable or not, disclose accurately. All the non-financial items, which cannot measurable in terms of money, proper justification is requirement why this cannot be measured in terms of money.
  • To compare the data of similar industry or one company with another company, or of various industry from one period to another period the information should be prepared as per the consistency principle. This comparative analysis helps the company to analyze the performance of the company on individual basis as well as the industry as a whole. It also shows the current strategic movement whether it is growth, stagnant or decline to judge the financial position of company. Furthermore, the comparability of the financial statements helps the users to perform several other analysis like the trend analysis, the variance analysis, etc.(Chron, 2017).

So from the analysis it can be concluded that above qualitative features of understanding cannot be satisfied by current reporting policies pursuant to IFRS. The areas which is focused under IFRS regime are inflexible and unadaptable. Because of all this the matter become more complex and difficult to understand and the user sometimes not able to take correct decision due to complexity. If the user of financial statement not having professional expertise in the field tax, account, law, finance and practical training, so the general public not able to understand the financial implication of data present in financial statement. Because of all this investors are not able to take significant business decisions (Defond & Lennox, 2017). Even if each and everything is disclosed in financial statement but the user is not they much technically strong to examine the financial impact, they are not able to take correct decision. From the above discussion and analysis it is clear that uniform with the view that corporate financial reports satisfy the central objective of financial reporting.

The public interest theory:  Public interest theory is an approach that seek the success and protection of general public. The main objective of this theory is to give assistance to the common mass and investor from market inefficiencies and solution of the complex matter which is not easy for the common public to understand. It is purely relating to the case of inefficient market place or firm whose overall power in the hands of government. Apart from all this concept gives a huge opportunities to firms to create massive return (Visinescu, Jones, & Sidorova, 2017). The decision of the government not to make separate set of regulation in the interest of general mass, public interest theory has become effective in that situation. With the view to safeguard the interest of general public, government, many other regulatory bodies and agencies have taken first move in making separate set of rule, regulation and policies for the betterment of common public.

 Capture Theory:  This theory is basically impart the relationship between government, regulatory authority, regulatory agencies and the industries as a whole. These all are participants of the market are which come under capture theory who take major decisions of the market. Under this theory all the rule, regulation and law are made after considering the interest of concerned group or industry all made by the regulatory authority. By analyzing this theory it has been concluded that the regulator can palpate the appeals affected by it (Trieu, 2017). By applying the above maintained theory it is concluded that not to add separate rule and regulation in the existing laws. So from the above analysis it I concluded that this theory not able to take special attention from the government. Until the government or regulatory authority has not made such type of rule and regulation which adversely affected the market or industry. Hence the question of manipulating those rules eventually in the long run does not even stand a chance.

Challenges with Existing IFRS Reporting Policies

Economic interest theory and regulation: The name itself suggest that this theory is based on rules and regulation made for the continuous interaction between demand and supply. In general terms, government and regulatory its agencies represents the supply side and general mass of public represent the demand side. The theory specifies that the regulatory authorities’ makes rules and regulation, codes of conduct for the entire market and consider the interest of companies as well as general public as a whole. External authorities not having any power to interfere in their operation (Werner, 2017). Generally government summon all their major stakeholder for any relevant decision which affect their interest. Government has not made all separate codes of conduct in the interest of general public. As all the decision has been taken after considering the impact of demand and supply only those firms would be making good who able to meet the requirement of general public.

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Apart from all other differences between IFRS and the GAAPs of different countries revaluation of considered one of the crucial topic which need extensive discussion regarding their disclosure in a proper manner. The above discussion is based on the fact that the different policies applied under both the standard regarding revaluation of assets like revaluation is considered under IFRS but no reporting has to be done in GAAPs (Das, 2017). Whether the revaluation of assets is mandatory or not it’s all depend upon the qualitative characteristics and financial impact on financial statement. So ultimately it is based on disclosure practice comply by the companies. All the financial users like stakeholder or investor want to know the fair value of all the assets appeared in the financial statement of companies. So the management of the company considering the interest of stakeholder as per the reporting requirement disclose the amount on conceptual framework however this amount is not considered for decision making because it does not show the correct and accurate figure (Goldmann, 2016). Since it is very difficult to calculate the exact fair value in any specific point of time because various analyst consider various method to calculate the amount of assets. There are some factor based on which the realizable value of assets fluctuate every time like useful life, efficiency of assets and many other. Due to all this complexity, the IFRS not consider the entire impact of revaluation of fixed assets. However, it is mandatory for all non-current assets to calculate all impairment cost and disclose the same accurately in financial statement. As it is easy to measure the amount of impairment. So from the above discussion it is clear that in the current day to achieve the objective of relevance and reliability of information disclosed in financial statements.

The decision whether it is mandatory to revalue the non-current assets or not is based on the size and business of organization as well as the quantum of Assets Company have.

  1. Amidst so much of complexity and debates, many companies after considering the factors like useful life of assets revalue the assets upside or downside. But due to this assets revaluation it will impact both financial information as well as accounting data. Because for all this revaluations the major heads of financial gets impacted like depreciation, tax liability, retained earnings and net profit of the company(Dichev, 2017). Sometimes it might have massive impact on the share price of the company. Apart from all this complexity there is a substantial degree of compliance related work like that of disclosure to be made in the financial statements. The carrying amount of the assets to be revalued needs to be adjusted in such a manner that it indicates the fair value for the entire class of the assets. Revaluation being a non-cash item, it does not have an impact on the cash flow of the business but it involves analysis and compilation of huge data for which the assistance from professional expert may be required. Even after so much of efforts, it may be that the revalued figures may not match with the actual market value as the same is subjective. Considering all the above mentioned circumstances, the management of the company may be unwilling to revalue the plant, property and equipments.
  2. Financial statements are supposed to provide the true and fair view of all the business affairs and to give the reasonable assurance to the public and the investors at large that the same can be relied upon for decision making. It is not only meeting the regulatory requirement but the balance sheet and the profit and loss account should show the realistic picture of the company which can be supported by workings, etc.(Linden & Freeman, 2017). When the assets are not being revalued and are being shown at the historical cost less depreciation, the same generally gives an unrealistic figure which will never be in line with the market values or the fair value. This is like incorrect reporting and sharing of the wrong information. Besides this, we also know that the equity is being measured and shown at the fair value whereas assets if not shown at fair value, fails to satisfy the matching concept and results in incorrect debt equity ratio which might have a direct bearing on the raising of funds from market.
  3. The impact of not revaluing the assets cannot be quantified in terms of its effect on the shareholders’ wealth as the same is affected by many internal and external factors. Firstly, the revaluation of the assets does not results in any sort of cash inflow or outflow nor it has a direct impact on the profitability of the company(Kuhn & Morris, 2016). However, it may give an impression that the retained earnings of the company has increased or decreased in case of upward or downward revaluation respectively. This hardly has any impact on the market and even if it does have, the same is temporary. Therefore, it can be said that the revaluation does not results in creation or destruction of wealth for the shareholders.


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