The information available in any financial statement facilitates the economic and financial decision making of an investor. However, it cannot be concluded that each and every information contained in such financial statements is of immense use to the users. In order to satisfy their primary objective of helping an investor to take sound decision, there are few qualities which serve as prerequisites (Bromwich & Scapens, 2016). The financial statements have got to necessarily possess the below mentioned qualities, if it wants to help the users.
- Understandability. All the information presented in the financial statements and its annexures should be free from any sort of confusion. The data shall be prepared and offered in such a way that it fosters easy understanding. This essentially involves that any user who has basic business intelligence, financial wisdom and has a reasonable amount of knowledge in the field of economics, finance and taxation would be in a position to easily comprehend the information present in the financial statements. In cases where the balance sheet and profit and loss contains amounts and transactions that is apparently complex, additional information should also be provided so that any sort of confusion can be cleared and a better picture be provided(Belton, 2017).
- Relevance. The information presented in the financial statements must not be vague and must be compatible with respect to the relevance to the objectives of the decision makers. The persons responsible for preparation of financial statements should keep in mind that mere presentation of a plethora of data would be of no use to the decision makers if those data do not lead to meaningful inferences and conclusions. To be considered relevant, the data has to have some connection with the option under consideration(Kangarluie & Aalizadeh, 2017).
- Reliability .While it is quite evident that the financial statements as a whole cannot be totally free from any error or mistake, the reliability depends on the extent to which the material mistakes and errors are kept at bay. To be reliable the data should be free from any sort of biasedness and personal prejudice(Alexander, 2016). There should be proper and appropriate disclosure for every item, especially those which not quantifiable. For non-financial items, the reasons should be specified as to why an amount cannot be assigned to them.
Comparability.To ease the task of comparing the data of one period with another, one company with another company or various companies from the same industry or related industries, the information must be presented on a consistent format .Such ease of comparisons helps in the establishment of trends and aids the analytical study of the performance of the company as a standalone entity and also the industry as a whole. It also helps to determine the strategic direction in which the company is moving, i.e. growth, stagnant or decline(Linden & Freeman, 2017).
Having thrown light into the qualitative characteristics of financial statements, it can be concluded that in the opinion of the above quoted individuals the qualitative characteristics of understandability do not appear to be satisfied by current reporting practices pursuant to IFRS. The disclosure requirements under the IFRS regime are too inelastic and intricate. Instead of making things easier to understand and grasp, it further complicates the decision making process. Such an overflow of data puzzles a normal investor or financial choice maker as it doesn’t assist proper and smart decision making. Mr. Bowen has rightly said “Once you get into the notes you have to be technically trained. If you’re not, lot of it could be misleading”. These ambiguous data challenges the very foundation of the conceptual framework of financial reporting. It is very clear form the above mentioned points that the views are not at all consistent with the view that corporate financial reports satisfy the central objective of financial reporting.
The public interest theory: As the name suggests, this theory believes in the idea of prosperity of the general public. It targets to offer solutions to the issues of market inefficiencies with the only objective of making things better for the common mass or the consumers. It is based on the notion that in the case of imperfect markets, the government controls the firms and their powers (Visinescu, et al., 2017). However under this concept, firms are given all the opportunities to generate satisfactory returns. Looking at the decision of the government whereby it chooses not to make provisions for a separate set of regulation, it is quite evident that the public interest theory has been defied in the given situation. Had the public interest theory be given due regard, the government and the regulating agencies would have taken the initiative in formulating a separate set of policies and decrees to safeguard the welfare of the general public.
Capture Theory: This theory is based on the foundation of the close relationship that exists between the government and the regulating authority and the industry concerned. All the above mentioned participants belong to the market area for which the decision has to be taken. Under this theory, the regulators make laws in such a way that the needs and interests of the concerned industry are fully met. This particular theory believes that regulations can be twisted and manipulated to adjust to the appeals of the ones affected by it. Applying the above mentioned theory in the decision of the government to not to add a separate set of regulation to the existing statute, one can easily conclude that even this theory of governance has not been given due consideration (Vieira, et al., 2017). The government has not formulated any rules or regulations which would ultimately affect the industry or the participants thereof. Hence the question of manipulating those rules eventually in the long run does not even stand a chance.
Economic interest theory and regulation: The theory advocates that regulations are framed on the basis of the forces of demand and supply and their continuous interaction. On the supply side we have the government and its various agencies and on the demand side we have the general public. Under this model, the industry plans the code of behavior to be implemented in the market. These protocols are determined with a view to bring benefits to the various companies. It also operates these regulations and there are no external mechanisms involved (Sithole, et al., 2017). The government ensures participation of all the stakeholders in matters involving a decision. The decision of the government whereby it chooses not to implement a separate legislature seems to have been taken from the perspective of economic interest theory. The administration makes it clear that the decisions would be taken by the combined forces of demand and supply i.e. only those firms would succeed which would perform at par with the hopes and requirements of the consumers and the general public.
One of the most debatable points of dissimilarities in the IFRS and GAAPs of countries across the globe is on the topic of the revaluation of fixed assets. This stems primarily from the fact that revaluation of fixed assets is allowed under the IFRSs regime and is disallowed under the GAAPs of some countries. The matter of revaluation is directly linked to the concepts of relevance and reliability in accounting. Therefore the decision whether to revalue or not to revalue requires more consideration from the point of view of disclosure requirements (Goldmann, 2016). The users of the financial statements require the fair value of the assets, and thus the management is compelled to provide such information so that the conceptual framework of financial reporting is met. However, apprehensions about the reliability of current values of fixed assets cannot be ruled out and remains a huge matter of distress. It is almost impossible to accurately or even closely predict or determine the updated value of any asset. This is because the realizable value keeps changing almost every day. In the view of incapacity to attach a proper quantifiable value to the life and efficiency of the fixed assets, and the degree of uncertainty involved, the IFRS altogether eliminates the very idea of revaluation of non-current assets (Heminway, 2017). To the contrary the impairment costs of such assets are mandatorily required to be revealed in the financial statements. This is because the impairments have become quite certain and can be quantified suitably. Therefore, the framed rules, serves the purpose of achieving both relevance and faithfulness of the information present in the financial statements.
The decisions regarding revaluation of fixed assets are taken on the basis of the size of the firm and the magnitude or amount of fixed assets that the business possesses.
a) Even when there exist a lot of controversies and contradictory views on the subject of revaluation of assets, firms continue to revalue their assets, both upward and downward. The main reasons behind it can be categorized into two heads, namely political costs and debt contracting costs(Das, 2017). Assets revaluation would directly modify the accounting figures and the financial data. Revaluation, whether done upward or downward, will cast a bearing on a number of other variables like depreciation, retained earnings and tax liability. This may result in a positive or negative alteration in the share price of the entity. Revaluation also brings with itself a lot of compliance related tasks, especially with respect to the disclosures to be made. The carrying amount of the fixed assets would have to be calculated in a manner so that the fair value of the particular assets or class of assets is reproduced. Since revaluation is a non-cash item, it does not even have a direct linkage with the cash flows of the firm. Quite often, the Board tends to take decisions which have a direct impact on the liquidity of the firm. Even the remaining useful life of the asset would have to be assessed again. Each and every step in the process of revaluation requires intelligent forecasts, complex calculations and compilation of a diverse range of data. Even monetary resources needs to be allocated when the magnitude of assets requiring revaluation is large and professional help are opted for. After exercising utmost care and carrying out due diligence, the revalued figure derived may be immensely different from the real figure(Raiborn, et al., 2016). With the presence of so much uncertainty, management is unwilling to take up the task of revaluing its assets particularly real estate property, plant and machinery, whose market is characterized by a number of diverse factors.
b) Financial statements are required to be prepared so that they pay adherence to the accounting policies and procedures. This is done to make sure that the values and balances reflected therein give a true and fair picture. This essentially holds that all the items of the balance sheet give a clear and realistic picture. When assets are not revalued, they are presented at their historical cost less depreciation. This carrying cost may not be up to date with the fluctuations in the business environment. Unfair amounts and balances would disobey the very base of the conceptual framework of financial statement i.e. to give a fair picture. Since equity is always stated at the fair market value, not revaluing fixed assets on the same basis, would lead to distorted debt equity ratio(Gooley, 2016). This in turn would poorly impact the borrowing powers of the shareholders.
c) The impact of revaluation decision on the wealth of the shareholders depends to a large extent on internal as well as external factors. These factors include matters of magnitude, timing and direction. Though the decision not to revalue a particular asset or a particular class of asset is bound to give an unrealistic picture, their connection with the shareholder’s wealth cannot be directly proven. It is to be borne in mind that revaluation of any asset would not result in an actual inflow or outflow of cash. The profitability of the firm would therefore remain the same. Revaluation reserves are generally added to the retained earnings and this might give an inflated figure. The shareholders may be trapped into believing that wealth creation has occurred. Similarly, the opposite would happen in case of downward revaluation of assets. This will definitely affect the shareholders and their decision. They may not accept a fall in market capitalization and valuation(Dichev, 2017). However, this reaction of the market to revaluation decision has got nothing to do with wealth creation or maximization. Therefore we can conclude that the decision to not revalue the asset would not cause any adverse impact on the shareholder’s wealth. If any such adverse effect is seen, it would only be temporary.
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