Ha3011 Accounting | Reporting Practices Assessment Answers

Assessment Task Part A   

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.

Required:

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 

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)

Required:

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  

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.

Required:

What implications do you think these rules have for the relevance and representational faithfulness of US corporate financial statements?

Assessment Task Part D   

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.

Required

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?

Answer:

Part A

The article entitled 'unwieldy rules useless for the investors' states the common facts as to why most of the investors across the world are having issues with their respective country's rules of accounting and the IFRS. The prime reason for most of the countries to follow the regulation of IFRS is that it helps in having a comparison which is very much equal to its peers. This has been one of the most significant reasons for all the countries across the world to apply the rules of IFRS. The prime reason for the qualitative characteristics is to make all the information relevant and useful for all the third parties and management of any organization. (Cakart, 2018)

The major qualitative characteristic regarding the IFRS in the current scenario is the problem of understandability. This has been the major concern for most of the companies and other third parties (in another countries, as well) following the rules of IFRS as many relevant parties are not being able to understand the like to like comparison for the different organizations. The issue of understandability is being considered so significant is because of the fact that many companies have been undergoing a change in order to get and be like with the regulations to be promoted by all the companies across the world.

As said by Mr. Bowen, if the regulations as stated in the IFRS are not actually effectively understood, it might create confusion in the people or any party reading those accounts or trying to infer anything from the same. The corrective measure has been taken by most of the companies across the world to make changes affectively in order to portray the results in front of the world in the best possible manner. Other than Mr. Bowen, many other fund managers and economists have been concluding the same issues of understanding the financial reports. The accounting aspect has always been an issue for most of the third parties as they are not being able to imply with the results in the effective manner, which is giving them an inconclusive aspect for their respective decisions making processes. Other than this, it should be brought to notice that; various fund managers are actually not being able to make proper investing decisions. Hence, this has been considered to be one of the most significant issues of IFRS as a drawback in its qualitative characteristics.

To give an opinion about the issue, it can be said that it is actually a very productive gesture or step taken by the world organizations. The only issue as can be seen from the whole scenario has been the fact that the execution of the same has not been up to the mark. For this particular reason, it is facing so much of criticisms across the world as many fund managers are not being able to make proper investment related decisions, creating an issue for the effective comparison for many companies.

Part B

Corporate Social Responsibility (CSR) plays an active role in the determination of the fate of any organization trying to develop its activities, in any particular region. Almost all the government has mandated CSR across the country as it leads to an effective aspect of keeping the society and the environment happy. It is basically an important duty for all the organizations in a society to make sure that the activities they are executing is not adversely affecting any class of people or the environment. Hence, this has been the sole reason as to why CSR has been given the utmost importance in almost all the countries across the world.

• Public Interest Theoryhas been a major factor for the companies to undertake the social responsibility. According to this theory, all the companies are required to file a CSR report at the end of a financial year. This public interest theory leads all the companies to maintain the economic welfare for the society leading them to be leaders in their respective industry. The more a company is involved with any form of a social activity, the more recognized; it would be in the society. This leads all the major large-scaled industry to work effectively for the society. Public interest theory has been stated to have an effective aspect for the leadership of any company, as it raises the bar for many companies, which are not willing to follow certain rules and regulations of the same. Hence, it can be mentioned that the in the wake of managing the CSR by any company, it is necessary for that company to effectively follow the public interest theory as it would aid them to have an aim towards the society’s welfare.(Gangone, 2014)
• The capture theory, on the other hand plays a very critical role in the whole process of CSR. The regulatory body, when in action, tends to give certain rules and regulations for the companies, in their respective industry. But according to this theory, the capture theory is dominated by the industry itself. It is not a viable option for any country to have this sort of a situation, where any company or the industry as a whole is effectively dominating the regulatory body for the CSR. By this, we mean that most of the laws and regulations as mentioned as per the CSR committee is as per the requirements of the companies, in some manner or the other. (Greg, 2017)
• Economic Interest Group Theory of Regulationis the theory in which, it is clearly stated that most of the activities of any company would be monitored to understand, whether it is actually not having any sort of a negative impact in the society. This, in turn, would be an innovative idea, to make sure that no company is being involved with any sort of an activity, which is not favorable for the environment. Eventually, all the companies would fall under the purview of the same, as it is affecting all the activities of the companies across the world. This theory has been considered to be one of the most significant aspects for CSR as its main focus has been kept to understanding the theory for the betterment of the society as a whole. That has been the main reason for this respective theory to have impactful affect on almost all the companies across the effectiveness for the society as a whole. Hence, it can be said that Economic interest group theory of regulation, take an active part in the determination of almost all the activities of the company across the world. (Rodríguez, 2010)

Part C

Revaluation of the assets plays an active role in preparing the financials statements of the country with all the correct information. It always takes an active part in the whole process of preparing the P&L account or the Balance Sheet. By doing so, we can actually realize the fair value of the company and hence, most of the companies allow its financial statements to be effectively managed with this sort of financial inclusion. Eventually, it makes an encouragement to all the companies as it allows them to follow the principle of faithfulness. A company will only be able to show its faithfulness, once it is directly allowed to revalue its current and non current assets. The US financial accounting, does not allow any company to do so, but the FASB makes an effort to make sure that the Impairment cost for the same asset is being charged in the P&L account of the company. For this particular reason, this issue has been raised, as it is having a negative impact on the financial statements of the book. The impairment cost is basically the cost, which is incurred in order to keep up with all the non-current assets of the company. This obviously plays an active role in determining whether a non-current asset is valuable enough for the company. Once the impairment costs are being incurred, the regulation should also allow the company to have a process of revaluation. This process for revaluation will lead the company to portray its accounts in the best possible interest for the third party affected bodies of the company. This is because the accounts of the company are not just read or analyzed by the management of the company. But also by many other third parties revelation, which in turn guide the other people who are in need for the information for the company.(Dwyer, 2015)

Revaluation and impairment costs should go hand in hand for both the current and non-current goods for any company as it plays a very critical role in the determination of the financial status of any company. For this reason, it can be said that the effectiveness for all the companies, to play an active role for the betterment of the society, the authorities should take an active part for providing certain provisions for the revaluation of the assets as well, leading them to have an effective scenario for the management and all the third parties, as it would allow them to understand its accountability and financial statements better.(FASB, 2016)

Part D

1. Property Plant and Equipment play an active role in any organization as it aids in the production and the manufacturing of any product, which would be directly sold in the market. But many organizations or directors of the company show the same in their respective cost price only and no revaluation is made on the same. Many directors do this as it allows them show a lesser value of the balance sheet. If a company wants to showcase that it is not making profits or gains, it would tend to show the same cost of the assets, as it was, at the time of purchase. It happens, when the company wishes to show fewer profits and pay lesser amount of tax to the government. Not an ethical to do, but still many companies are following the same. (Obaidullah, 2017)
2. The foremost effect would be the fact that the balance sheet of the company would be undervalued, as the appreciation in the property, would not be reflecting in the accounting of the company. This balance sheet is basically the essence of any organization and having a forged balance sheet is not at all advisable for any company, as it would lead them to provide wrongful information to the interested parties of the company. As the true picture of the organization would not come under the purview, it would create mishap in making any decisions for the company by the management or any other third party. Not only this, it would be advisable for all the companies to make sure that the effectiveness of having an updated balance sheet, would aid the management itself, in the long run.(Accounting Tools, 2018)
3. The decision not to actually revalue the property, equipment and other fixed assets affects the wealth of the stakeholders as the value of the company is being reduced or is not as per the market rate. It is negatively impacting wealth of all the stakeholders of the company and for this reason it might create an uninterested in the shares of the company. It is obvious that most of the people would want it's wealth to increase, therefore, it is always advisable for the companies to revalue its properties and equipment as per the market rate as it would add to the wealth of the stakeholders. As it is the main objective of any stakeholder is to maximize the gains from its investments and hence the revaluation of all the properties should be done by the management to provide the true picture of the company.

Bibliography

Cakart. (2018, January 9). IFRS Qualitative Characteristics Of Financial Reporting . Retrieved May 18, 2018, from www.cakart.in: https://www.cakart.in/blog/ifrs-qualitative-characteristics-of-financial-reporting/

Gangone, A. (2014, October 31). Corporate social responsibility in emerging and developing economies in Central and Eastern Europe – a measurement model from the stakeholder theory perspective. Retrieved May 18, 2018, from www.tandfonline.com: https://www.tandfonline.com/doi/full/10.1080/1331677X.2014.967535

Greg. (2017, November 2). capture theory. Retrieved May 18, 2018, from greg-accounting.blogspot.in: https://greg-accounting.blogspot.in/2012/12/capture-theory-and-regulation.html

Rodríguez, F. (2010, August). Corporate social responsibility and the classical theory of the firm: Are both theories irreconcilable? . Retrieved May 18, 2018, from www.scielo.org.co: https://www.scielo.org.co/scielo.php?script=sci_arttext&pid=S0121-50512010000200002

Dwyer, B. G. (2015). CONCEPTIONS OF CORPORATE SOCIAL RESPONSIBILITY. Retrieved May 18, 2018, from www.apira2013.org: https://www.apira2013.org/past/apira2001/papers/O'Dwyer127.pdf

Obaidullah. (2017, January). Revaluation of Fixed Assets. Retrieved May 18, 2018, from accountingexplained.com: https://accountingexplained.com/financial/non-current-assets/revaluation-of-fixed-assets

FASB. (2016, March 3). IFRS. Retrieved May 18, 2018, from www.fasb.org: https://www.fasb.org/project/cf_phase-c.shtml

Accounting Tools. (2018, March 11). The Balance Sheet. Retrieved May 18, 2018, from www.accountingtools.com: https://www.accountingtools.com/articles/what-is-a-balance-sheet.htm