Essay On Government Decision, US Financial Reporting, And Property Valuation Implications.

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.

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: The qualitative characteristics of financial reports are the major contributors towards the improvements of the financial reporting as the helps the users of the financial statements in making effective investment decisions. There are both the fundamental as well as enhancing qualitative characteristics. The fundamental qualitative characteristics are relevance and faithful representation (aasb.gov.au 2018). On the other hand, the enhancing qualitative characteristics are comparability, verifiability, timelines and understandability.

Opinion of Geoff Roberts: According to the statement of Mr. Roberts, Former Head of Finance of AXA, there has not been any question from the fund managers and investment analysts for the IFRS adopted financial adjustments. It implies that they do not face any problem in understanding the financial adjustments as per IFRS in order to ascertain the financial performance and position of the business organizations. It also implies that the adoption of IFRS helps the users in gaining the required understandability on the financial information of the organizations. Thus, the above discussion shows the dissatisfaction of ‘understandability’ characteristic by IFRS reporting framework (Chen et al. 2018).       

Opinion of Terry Brown: According to the opinion of Terry Brown, Finance Director of Wesfarmers, the result would be the misinterpretation of the financial statements of the companies in case the analysts try to analyze the IFRS adopted financial statements in the absence of proper technical knowledge. This situation can be relate to the verifiability characteristics of financial reporting as this characteristics helps to understand various financial aspects of the companies with the help of sufficient knowledge and independent observation. It can be seen that the absence of technical knowledge will contribute towards the misinterpretation of financial statements. It indicates towards the dissatisfaction of verifiability characteristic by the IFRS adopted financial reporting (Chen et al. 2018).      

Opinion of David Craig: The opinion of David Craig, Chief Financial Officer of Commonwealth Bank, indicates towards the fact that the inventors are not putting attention towards the financial information of the IFRS adopted financial statements due to their failure in expressing the true financial position of the entities. This particular situation is created when there is lack of relevance and faithful representation of the financial information in order to increase the usefulness of the financial statements. Hence, the IFRS adopted financial statements fails to satisfy these two fundamental qualitative characteristics (Juárez 2013).  

Objective of Financial Reporting: It needs to be mention that the main objective of the general purpose financial reporting is to provide the users with the required financial information so that the users can judge the financial performance as well as the financial position of the companies with the help of this information (aasb.gov.au 2018). Thus, in the absence of these major qualitative characteristics, it is not possible to satisfy the main objective of general purpose financial reporting.              

Part B

The following discussion explains the decision of the Australian government not to introduce any regulation in the Corporations Act for social and environmental responsibilities with the help of three major theories:

From the name, it can be understood that the public interest theory supports the betterment of the public with the help of introduced regulations. For this reason, government put major emphasis on the introduction of new regulations for solving various issues. The main objective of the introduction of regulation is to maintain a balance between both the industry and the consumers so that it can be possible to fulfill the interests of both these groups. The introduction of regulation ensures the solution of any specific problem (Bös 2014). According to this theory, it was required for the Australian government to introduce specific regulation in order to promote the environmental and social responsibilities among the business entities as it is not possible for the market forces to work in the favor of both the groups. The introduction of regulation in the Corporations Act would put the obligation on the business entities to comply with the social and environmental responsibilities for the promotion of their business acuities.   

The main aim of this theory is to capture the regulations that are used by the regulators to satisfy their own interest. For this reason, this theory does not support the introduction of any regulation for solving the issues. As per this theory, market forces are required to be allowed to make the balances between these issues (Fischer, Mauer and Brettel 2018). As per this situation, the Australian government took the right decision not to introduce any regulation in the Corporations Act for social and environmental responsibilities. Moreover, according to this theory, the absence of any regulation will eliminate the scope for the regulations to be manipulated for the interests of the regulators. In case the companies do not comply with these regulations, there will be reduction in their business opportunities and reputation.  

According to this theory, there must be regulations in the market in order to maintain a balance between the demands of the businesses and the consumers. The application of this theory in the provided situation would put the obligation on the government of Australia to introduce specific regulation in the Corporations Act for the introduction of social and environmental responsibilities for both the companies and the consumers. Apart from this, it is required for the government of Australia to invite both the consumers and companies in the decision making process of the regulations (Przeworski 2014).  

Part C

As per FASB Statement No. 144 Accounting for Impairment or Disposal of Long-Lived Assets, the US business entities are not required to do the revaluation of non-current assets, but they are required to take into consideration the impairment charges associated with these non-current assets (fasb.org 2018). This rule has major contribution for establishing relevance and faithful representation of the US corporate financial statements and they are discussed below:

1. The introduction of this regulation related to non-current asset revaluation has been major helpful in developing a single accounting model for carry on the accounting operations related to sale or disposal of non-current assets that can be previously held or currently acquired. This aspect make the presentation of financial statements more boarder as the companies become able to deal with more number of sale of disposal of non-current asset related accenting transactions (Islam, Nusrat and Karim 2016).
2. The introduction of this specific regulation of asset revaluation has been majorly helpful for the business organizations of US to solve different types of implementation related issues as this regulation puts the obligation on the companies to comply with the standards and principles of financial reporting (Khan, Bradbury, and Courtenay 2014).
3. The accountants have to face major inconsistencies in the presence of two accounting model for the accounting treatments of sale or disposal of the non-current assets. However, the introduction of this regulation of FASB has been majorly helpful in solving this solution by providing one single accounting model for the sale or disposal of the non-current assets (Khan, Bradbury, and Courtenay 2014).
4. With the introduction of this rule of FASB for the revaluation of the non-current assets provides the opportunity to the users of financial statements to identify the major differences and similarities in the accounting treatment and other aspects associated with the revaluation of the non-current assets of the entities (Islam, Nusrat and Karim 2016).

In the business organizations, there are certain factors that motivate the directors of the business entities to revalue the property, plant and machinery. The ascertainment of the total values of the property, plant and equipment is possible by the directors in the presence of the strategy of asset revaluation. In addition, the directors can do effective negotiation of the value of these assets at fair value in case they have already done the asset revaluation. Thus, it can be observed that the directors of the business entities can obtain the fair value of their property, plant and equipment with the help of asset revaluation. At the same time, the directors of the companies become able to know the actual rate of return on capital employed with the assistance from asset revaluation (Hu, Percy and Yao 2015).  

At the same time, the decision not to do the revaluation of property, plant and equipment has some major negative effects on the financial statements of the companies. There is not any increase or decrease in the value of property, plant and equipment in the absence of asset revaluation. For this reason, the companies can gain abnormal profit or loss while selling or disposing of these assets. Apart from this, there is decrease in the overall earnings of the entities in the absence of asset revulsion that affects the profitability position of the entities. Lastly, companies have to record decrease value of their assets in the financial statements (Drew and Dollery 2015).   

The shareholders of the business entities have to suffer from the decision of not to revalue the assets as decrease in the overall wealth of the shareholders can be seen. It can be seen from the above discussion that there is decrease in the earnings of the companies in the absence of non-revaluation of assets.  For this reason, it become not possible the companies to provide the shareholders with their expected return on investments. Thus, the shareholder’s wealth is affected (Rajput 2014).

References

Aasb.gov.au. (2018). Conceptual Framework for Financial Reporting. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf [Accessed 17 May 2018].

Bös, D., 2014. Public enterprise economics: theory and application (Vol. 23). Elsevier.

Chen, C.W., Collins, D.W., Kravet, T.D. and Mergenthaler, R.D., 2018. Financial statement comparability and the efficiency of acquisition decisions. Contemporary Accounting Research, 35(1), pp.164-202.

Drew, J. and Dollery, B., 2015. Inconsistent depreciation practice and public policymaking: Local government reform in New South Wales. Australian Accounting Review, 25(1), pp.28-37.

Fasb.org. (2018). Summary of Statement No. 144. [online] Available at: https://www.fasb.org/summary/stsum144.shtml [Accessed 17 May 2018].

Fischer, D., Mauer, R. and Brettel, M., 2018. Regulatory focus theory and sustainable entrepreneurship. International Journal of Entrepreneurial Behavior & Research, 24(2), pp.408-428.

Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.

Islam, M., Nusrat, F. and Karim, A.K.M., 2016. Revaluation of Property, Plant and Equipment (PPE) in Bangladesh: Motivations, Value Relevance, and Effects on Audit Fees.

Juárez, F., 2013. Chaos and complexity in financial statements. In Chaos and complexity theory for management: Nonlinear Dynamics (pp. 1-33). IGI Global.

Khan, S., Bradbury, M.E. and Courtenay, S., 2014. Value Relevance of Comprehensive Income. Australian Accounting Review.

Przeworski, A., 2014. The state and the economy under capitalism. Routledge.

Rajput, M.S., 2014. Creative accounting: some aspects. International Journal of Business and Administration Research Review, 2(4), pp.193-199.