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Qualitative Characteristics of Financial Reporting

In an article entitled ‘Unwieldy rules useless for investors’ that appeared in the Australian Financial Review on 6 February 2012 (by Agnes King), the following extract appeared. Read the extract and then answer the question that follows. 

Millions of dollars have been spent adopting international financial reporting standards to help investors make like-for-like comparisons between companies in global capital markets. But CFOs say they are useless and have driven financial disclosures to unmanageable levels. The criticism comes as the United States, the world’s largest capital market, decides whether to retire its domestic accounting standard (US GAAP) and adopt IFRS. 

“In seven years I never got one question from fund managers or investment analysts about IFRS adjustments,” former AXA head of finance Geoff Roberts said. “Investors...rely on investor reports and management briefings to understand companies’ numbers.”

If analysts did delve into IFRS accounts, they would most probably misinterpret them, according to Wesfarmers finance director Terry Bowen. “Once you get into the notes you have to be technically trained. If you’re not, lot of it could be misleading,” Mr Bowen said. 

Commonwealth Bank chief financial officer David Craig said IFRS numbers were disregarded by investors because they could actually obscure an institution’s true position.


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.  

Assessment Task Part B           (6 Marks)

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).


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 

Assessment Task Part C           (4 Marks)

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? 

Assessment Task Part D          (4 Marks)

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.


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?

Qualitative Characteristics of Financial Reporting

Assessment Part A

According to Karadag (2015), the financial reporting comprises of various objectives which include points like Providing useful data to make sound investment decisions, analyzing the future cash flows in order to understand the depth of these decisions, changes in the business structure to be accessed by the investors and other related parties.

The conceptual framework comprises of other sets of rules which is necessary for all financial statements to possess (Brooks 2015). These aspects of the conceptual framework have been given as follows: The report should be representing faithful information to the different stakeholders in the organization. It is the duty of the statement to be such that they present a fair statement of the various happenings and the financial positioning in an organization.

The reports need to comprise of relevant information so as to ensure that they do not lead to wastage of time and other efforts (Finkler et al. 2016).The statements need to be easily comparable in nature and the various stakeholder can hold the power to compare the results of the organization with its past years performance along with other companies in the same industry.

They should possess clarity and the different details present in the given statement should be easily understood by all the investors whose investment decisions are based on the financial statements (Brigham et al 2016).

The information must have the capability of being present on time when the investor is actually required to use the given information. 

In the article, `Unwieldy rules useless for investors`, it has been stated that the different  characteristic that are required to be present in the financial reporting standards are acutely not present in the reports presented by the organizations in the United States (Cangiano, Curristine and Lazare 2013). The present IFRS rules do not comprise of procedures and frameworks which help in satisfaction of the given points. It has been stated that in the article, IFRS adjustments are not relevant enough and do not present the true picture of an organization. The investors are not being able to understand what would help them to make critical decisions using this statement. Furthermore, they are not comparable in nature as well.

The views stated in the article agree to it that the financial reports are required to fulfill all the criteria’s that are present in the Conceptual Framework but in reality they are not being able to do so.  It is extremely important for the financial statements to cover the Conceptual Framework points but in reality, they are unable to do so and the fact with supporting articles has been provided in the article.

Governmental Decision-Making on Corporate Social Responsibility

Assessment Part B

Public interest theory

The public interest theory states that the economical markets are quite delicate in nature and do not operate properly in a manner in which they are actually required to cooperate. The mere motivate of the economical market should be such that they should be giving considerable importance to the public at large however, in reality this is not the case and the market works in self motive fundamentals (Scott 2015). Hence, due to the given scenario there exists a need to examine the activities in the financial market and see to it that they act in the interest of the society. However, very often this is not the case and in such a scenario, the government is required to intervene and ensure that all appropriate measures are taken and there is a body which helps to understand and rectify the malpractices which take place in an organization and may harm the public.

This theory was brought into light by Pigou and he stated that the development of the theory can take place when the public demands for it. However, another theory by Stigler developed in 1972 was an opposite of the present theory and stated that the main focus should be on efficient distribution of the resources. He also stated that the primary focus needs to be on the use of the private enterprises of these tools in order to restrict the existing competition in the market. According to his theory, the primary problem is that the enterprises just display the monetary information in place of disclosing the non-financial ones as well (Hogg2016).

Hence, the primary jest of the public interest theory is that a proper legislation needs to be passed which allows the firms to display and provide the entire details about the harm which they have will face to the environment and what initiatives have they taken to undo the harm (Khan and Bradbury  2016). An online portal may be formed which may provide details to the public about the same.

Capture Theory

The Capture Theory states that the relationship between the industries and the society needs to be evaluated. The governmental organizations are often formed with a motive to safeguard the needs of the different people present in the society but the industrial workers often go to the extent of jeopardizing the equal distribution of resources which take place in a society and have a manipulative impact on the society and its aspects. Hence, this relationship between the government agencies and the different industries may form a barrier and induce them to form policies and other regulations in a manner such that it tends to have a harmful impact on the society but tends to have a positive impact on the industrial activities.

Implications of US Financial Accounting Standards Board Rules

The individual workers also tend to have a major impact on the workings as they have associations with the government workers and act as informers (Saunders 2014). Hence, even if strict rules have been formed, it has little or no impact on the regulation of activities. Hence, it is in this manner, the governmental agency are said to be in a captive hold of the workers in the industry.

Economic interest group theory of regulation

The economic interest group theory states that the different groups in an industry act to enhance the group`s economy interest and that there are various groups in existence and these groups are in a fierce competition with one another. They tend to be very strong and ask the government to pass the different legislations in their favor which comes in the place of the interest of the public in general (Mao and Renneboog 2014).The self-interest plays a great role and in order to be able to come into power again, the government as well comes into interest and does what is being asked. Hence, the economic interest theory highlights that any kind of legislation will not be able to stop the government from acting in favor of the private industrialists and thus they will do anything which seeks to improve their profit.

Assessment Part C

The FASB, statement no. 144 which comprises of the Accounting for the Impairment or Disposal of Long-Lived Assets, states that the different organza toons do not have the permission to revalue their assets accordingly but to take into account the different impairment costs which may occur. Although these rules tend to upset the major users of the sickness they help in presening the true value of the financial statements. It is believed that the impairment costs tend to have a negative impact on the firm`s assets and the cash balance but in reality it does not have any impact on the net cash flow. This goes a long way in heling the organizations to take into consideration the historical concept and ensure that the depreciation every year is called accordingly. Hence, the given was the impact of FASB on the faithfulness of the financial statements in the United Sates.

Assessment Part D

Motivation behind not revaluing the assets

It is a well-known fact that the revaluation of assets takes place due to various reasons like reflecting the fair value of the assets, portraying current rate of return, selling an asset, negotiating deals and lastly  to ensure that the debt equity ratio of the firm does well.

However many companies do not vote in the favor of this and the reasons are as follows.

  • Revaluation tends to reduce the satisfaction to the investor
  • The historical cost perspective is lost
  • There exists higher liquidity in the asset value and hence, the firm does not prefer to use the method.

Effects the decision not to revalue the assets in financial statements

The harmful effects which would take place in case the firm does not revalue its assets are as follows:

  • The statements will not reflect on a fair and true value proposition
  • The rate of capital so obtained will not be true (Deegan 2016).
  • The debt equity ratio will be higher than the usual and thus eventually the investor will not be able to obtain the right kind of information.

Effect on the wealth of the shareholders

In scenarios where the capital market is not sufficient enough to reflect on the information which might be useful to the investors with respect to the reflection of the share prices, it can be stated that they are not sufficient enough. The asset values tend to impact the share prices effectively. Hence, in case the capital market is efficient, the revaluation takes place effectually and has low impact on the share prices.


Brigham, E. F., Ehrhardt, M. C., Nason, R. R and Gessaroli, J., 2016. Financial Managment: Theory And Practice, Canadian Edition. Nelson Education.

Brooks, R. ,2015. Financial management: core concepts. Pearson.

Cangiano, M. M., Curristine, M. T. R. and Lazare, M. M. ,2013. Public financial management and its emerging architecture. International Monetary Fund.

Deegan, C., ,2016.  Australian Financial Accounting, 8th edition, North Ryde: McGraw-Hill. ISBN: 9781743764022 (pbk)

Finkler, S. A., Smith, D. L., Calabrese, T. D and Purtell, R. M. ,2016. Financial management for public, health, and not-for-profit organizations. CQ Press.

Hogg, M.A., 2016. Social identity theory. In Understanding peace and conflict through social identity theory (pp. 3-17). Springer, Cham.

Karadag, H., 2015. Financial management challenges in small and medium-sized enterprises: A strategic management approach. Emerging Markets Journal, 5(1), 26.

Khan, S. and Bradbury, M.E., 2016. The volatility of comprehensive income and its association with market risk. Accounting & Finance, 56(3), pp.727-748.

Mao, Y. and Renneboog, L., 2015. Do managers manipulate earnings prior to management buyouts?. Journal of Corporate Finance, 35, pp.43-61.

Saunders, A. ,2014. Financial markets and institutions. McGraw-Hill Higher Education.

Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

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