Answer to Question 1
The Use of financial reporting standards led the companies to enjoy additional benefits. The main motive of financial statements is to provide a true and fair view of the business to the users. In addition to this, another main objective of financial statements is to provide all the necessary information to the respective users. Adaptation of financial reporting standards have increased the quality of financial statements and also helped the management of the firms to take economic and financial decisions related to the operations of the firm. The qualitative characteristics of conceptual Framework are in the form of faithful information relevancy comparability, understandability and timelines. It is of utmost importance for the firms to disclose relevant information in their financial statements. Comparability reflects that the investors can compare the financial statements of one organization with the other one. Timeliness and faithful information reflects that decisions can be taken on time based on the information (Dye, Glover and Sunder 2014).
In the given article financial accounting standards have been criticized by the users. The companies spend huge amounts in the preparation of financial statement. However it has been seen that adoption of IFRS have been negative for the organisations. However the concept of faithful information have increased complexities in the preparation of financial statements by different organizations. The factor relevance have declined the quality of information in the financial statements. The investors are unable to extract information from financial statements due to Complex nature of IFRS they are also unable to compare how various companies. The presentation of financial statements with implementation of IFRS makes it difficult for the investors to understand it effectively (Graham et al. 2017). Therefore, the qualitative factor of understandability is also not fulfilled with the implementation of IFRS. Apart from this, millions of money have been invested to adopt IFRS, which further resulted in increase of operating expenses of the organizations. This can be considered as another negative factor of IFRS and this can be a cause of concern for the modern business organizations (Kim, Shi and Zhou 2014).
Due to various disclosures the length of the financial report have increased which further made it difficult for the shareholders to interpret the report therefore it can be inferred that all the factors of conceptual Framework have increase the complexities in the financial report and does it made it difficult for the users of financial statements to interpret it (Jibril and Abubakar 2016). Due to the above reason, the implementation of IFRS has been criticized.
Answer to Question 2
The above question reflects whether Corporation Act will be amended or not and it will include various social and environmental responsibilities within the Act. In case of modern organizations, all the financial statements are prepared in accordance to the Corporation Act. This act also stats that the organizations need to abide by the qualitative points mentioned in the conceptual framework which are in the form of faithful information relevancy comparability, understandability and timelines (Kim, Shi and Zhou 2014). However, the question arises whether this act needs to be amended as there are no specific regulations would be added to the legislation. These can be further explained with the help of the following theories:-
- Public Interest Theory
- Capture Theory
- Economic Interest Group Theory of regulation
Public Interest Theory
The given theory implies that the working of the business entities needs to be directed towards the welfare of the society. This theory supports the fact that the organizations need to carry out their business operations in accordance the requirements of the society at large. However, it has been seen that the modern corporate entities are publishing their financial statements, however, they are hiding some key information from the public or society that they should be known. However, due to absence on any regulations, no steps have been taken against such matters. If any kind of legislation is implemented, then, the organizations will be forced to disclose all the necessary information about their operating activities to the public. This will have a positive impact upon the corporate social responsibilities of the organizations (Berry 2015). In addition to this, it can be also inferred that all the stakeholders of the firm will be benefitted from this.
This theory infers that all the organizations operating within the same industry will follow the same regulation structure. This further infers that all the group of companies will follow the same regulation structure of corporate social responsibility (Sunder 2016). Therefore, this theory will be regulated with the help of market forces. In addition to this, it infers that market forces’ would be relied upon to encourage companies to do the ‘right thing’ and this theory establishes the same thing. This is applicable for all the industries, be it automobile, energy, banking, etc. Therefore, if the organizations are aware of this market forces, they will follow the trend and right thing will be followed which will be further beneficial for the entire society. This can be considered as a positive sign for all the organizations (Tan 2015).
Economic Interest Group Theory of regulation
According to “Economic Interest Group Theory of regulation”, interest of any particular group needs to be taken care off. This further reflects that a particular group will be formed by various companies operating within the same industry from the society at large. The groups may be in the form of economic groups. The objective will be attain the interest of that particular group. This will further assists the organizations to carry out their CSR activities in a steady manner. This theory further reflects that the organizations are driven by market forces.
From the above analysis, it can be inferred that the activities of the organizations are driven by market forces and they are able to attain their aims and objectives with the help of such forces.
The given issue reflects that “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 in their financial statements”. However, there are several problems with the given approach. Firstly, it does not meet the requirements of e qualitative characteristics of conceptual framework. The users of financial statements gets confused about the treatments of impairment loss and thus relevancy and understandability gets hampered (Scott 2015). The given discloses of impairment profits and loss makes the financial statements more complex and it also creates chances of misstatement in the financial reports of the given organizations. Apart from this, it does not have any impact upon the net cash inflows of the firm. Only, the amount of depreciation changes as per the given carrying amount of the respective assets of that particular organizations. Therefore, it can be concluded that the norms given by FASB with refers to the treatment of non-current assets do not adhere the requirements of the conceptual framework and also confuses the users of the financial statements (Sunder 2016).
Assets not being revalued
It has been that in modern business times, the assets are not being revalued by many of the organizations. There are several possible reasons behind this approach. It can be inferred that the directors of the firm may think that revaluation will result in loss in amount of plan, property or equipment. Apart from this, revaluation also results in high liquidity in transactions of the assets. In many cases, it has been seen that the net profits of the firm gets reduced due to this. This further causes loss of investors for the organizations. In addition to this, the goodwill of the firm is badly effected as well (Kim, Shi and Zhou 2014).
Due to this reason, the directors of many organizations are not in favour of revaluation of their assets.
Effects of not revaluating the assets
There are several effects on the firm for not revaluating their assets. Firstly, their net asset backing per share will get reduced. In case of impairment gain, the net profit of the firm will increase and in case of impairment loss, the net profit of the firm will decline. In addition to this, the figures of net profit will not show a true picture of the particular organization and this may also result in the distribution of excessive dividends to the shareholders (Sunder 2016).
Impact on shareholder’s wealth
If the directors of any firm decide that they will not revalue their property, in that case, it would not have any impact upon the wealth of the shareholders. This is mainly because, the true picture of the firm will not be reflected in the financial statements. The share prices of the firm would not be affected even if net asset backing per share gets reduced (Dye, Glover and Sunder 2014). Due to this reason, it can be concluded that the shareholders wealth would not get affected if the assets are not revalued by the board of directors of that respective organizations.
Berry, J.M., 2015. Lobbying for the people: The political behavior of public interest groups. Princeton University Press.
Dye, R., Glover, J., and Sunder, S. 2014. How Can Accounting report Standards Resist Accounting-Motivated Accounting Engineering?.
Graham, A., Nandialath, A. M., Skaradzinski, D., and Rustambekov, E. 2017. Macroeconomic Determinants of International Accounting report Standards (IFRS) Adoption: Evidence from the Middle East North Africa (MENA) Region.
Jibril, M. A.,and Abubakar, M. 2016. Effect Of International Accounting report Standards (Ifrs) On Corporate Financing In Nigerian Banking Industry. In Proceedings of Economics and Finance Conferences (No. 4206880). International Institute of Social and Economic Sciences.
Kim, J. B., Shi, H., and Zhou, J. 2014. International Accounting report Standards, institutional infrastructures, and implied cost of equity capital around the world. Review of Quantitative Finance and Accounting, 42(3), 469-507.
Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Sunder, S. 2016 Rethinking accounting report: standards, norms and institutions. Foundations and Trends® in Accounting, 11(1–2), 1-118.
Tan, P., 2015. Fair Value Hierarchy Measures: Post-Implementation Evidence on IFRS 7. GSTF Business Review (GBR), 4(1), p.105.