HA3011 Advanced Financial Accounting and IFRS

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? 

elieve that the information has gone to unmanageable levels. Therefore it is not reliable. They cannot depend on the information if they are not able to manage it in the first place. Thus it is highly unreliable. The information also at most times according to the CFO's is not reliable because it is incomplete had has errors (Li & Sougiannis, 2017).

The enhancing qualitative characteristics entails of four main components. These are comparability, verifiability, timeliness and understandability. The revised framework aims at comparability in that institutions can compare financial records. However the CFO's say that they are useless meaning they cannot do any comparisons between their financial records because they cannot use the disclosures.

The revised framework has also failed to achieve understandability. This is seen in the article where the analysts cannot be able to read the IFRS accounts because they will misinterpret them. Therefore the financial statements cannot be understood easily and misinterpretation can also lead to errors when making financial decisions. The statements according to the article can only be read by trained professionals (Haslam et al., 2016). This goes against the characteristic of timeliness because a lot of time will be spent by the institution outsourcing for professionals.

Lastly, the investors are unable to reach a main conclusion because the financial statements cannot be interpreted and if they are, they are misinterpreted. This shows that the statements are not verifiable.

The views expressed in the article are not consistent with those of corporate financial reporting because of the following reasons. First the CFO's are unable to make comparisons between financial statements because the information is useless. Therefore it is not consistent with that of corporate financial reporting that achieves comparability.

Second the financial information is often misinterpreted by analysts meaning that they are not easy to comprehend or understand. They can only be read by professionals that are trained. Third the information is not manageable therefore cannot be relied on for making informed decisions.

PART B

a. Public interest theory

The public interest theory aims at ensuring that the needs of the public are put first rather than those of the institution. In this theory regulations are set by an entity such as the government to ensure that the industries act in a manner that will be of benefit to the public. The public in most cases is the community at large or the customers. The government sets this regulations but however it is not necessary because a company is always driven by the market force (Scott, 2015). 

For instance, if an industry sells shirts that are way more expensive than they should be then they will not get any market. They may decide to conduct a survey to determine why they have no market and come to the realization that the customers feel that the prices are too high and should be reduced. The company will have to conform to the customers' demands so that they can create demand and thus supply. In this example we see that the company is driven by the market and thus their choices will be based on them (Baboukardos & Rimmel, 2016).  Therefore it is not necessary for the government to set regulations because the industry is capable of catering to the market force on its own.

b. Capture Theory

The Capture Theory Aims At Ensuring The Strategies And Objectives Of An Industry Are Met In A Way That Will Benefit The Members Of The Company. At Most Times The Agency That Sets The Regulations Is ‘Captured' By The Industry. In This Theory The Government At First, Sets Regulations That Benefit The Public At Large But With Time, The Company Captures It And Instead, Acts In The Benefit Of The Company. The Government Gives The Industry Players Guidelines On What To Follow To Ensure Maximum Profits (Wild & Van Staden, 2015).

In This Case The Industry Does Not Need Guidelines From The Government On What To Do Because They Are Capable Of Gauging The Market Force And Acting. The Industry Players Are Well Aware That Without The Market Then It Will Be Prone To Failure. Therefore They Need Consider The Demands Of The Customer So That The Company Can Profit Which In Turn Will Cause The Members To Benefit. Hence It Is Correct To Say That The Government Does Not Need To Regulate A Company Because They Will Always Put The Demands Of The Public As First Priority (Joskow, 2014).

c. Economic Interest Group Theory

The economic interest group theory aims at ensuring that a company will accomplish its goals and objectives through the regulation set. In this theory, the industries are the ones that set the regulations and the government is the supplier. These regulations are set on the basis of the interest groups which are the customers. The government needs to approve the set regulations. From this theory, we see that the industry is well capable on its own to set regulations and does not need the help of the government (Myrdal, 2017). 

An excellent example of this theory is as follows. A sporting club may set regulations that ask the government to build them a stadium. The government may conform to this and agree to build the stadium. However the public may refuse this because they believe the club has enough money to build the stadium due to their high net worth. The club will have to agree to this demand because without the fans no one will come to watch the games and this is equivalent to loss of money (Johnston & Petacchi, 2017).  Therefore in this instance we see that the club is capable of acting on the demands of the market force without any help from the governmental agency.

PART C

The FASB Statement in No 144 provides guidance on the accounting for implementation costs classified as non-current assets and that the assets are not revaluated to their fair value. The statement was issued by the FASB board to help in accounting and financial reporting.

The statement made some changes to ensure that relevance and faithful representation are achieved in the accounting process. The statement aims at expanding discontinued operations to include more transactions. This achieves relevance because all the important and required information will be included in the transactions thus allow one make informed financial decisions (Beckman, 2016).

Also the statement focuses on use of one model instead of two. This eliminates any errors that may result due to use of two models. This way they have achieved faithful representation that aims to achieve financial information that is free from errors. Also by using one model, a lot of time is saved in the accounting process. Therefore timeliness is achieved that is an aspect of faithful representation.

This statement also ensures that the financial information is neutral. This is achieved when they provide guidance on how to account for the implementation costs of non-current assets. Therefore, any decisions that will be made will be free from bias because the results will not be subjective and thus achieving faithful representation.

Lastly the statement allows for faithful information because it will provide complete information necessary for accounting and reporting. This is evident when they allow for the expansion if discontinued operations. This way they ensure that all the information that is required will be included and therefore the disclosures will be complete. This helps in making fully informed decisions. In conclusion, the FASB statement achieves relevance and faithful representation that are both important in corporate financial reporting.

PART D

a. The following are some of the factors that do not motivate directors to carry out revaluation

It is a complex process. The process of revaluation in itself is not easy and many directors do not do it because of its complexity especially in the valuation cycle.

It is still new and therefore many directors are unfamiliar with it. Most directors are not aware of revaluation and thus are less motivated to using it.

Revaluation takes a lot of time and it is also costly. The valuation cycle takes a lot of time and the process in itself is very costly. Therefore, directors are not motivated to use it because it will waste a lot of time and also it will cost them a lot (Plummer & Patton 2015).

Directors are also not motivated to revalue their plant property and equipment because it is subjective. It involves a valuer carrying out the estimates of an asset and directors feel that this may cause biasness

In revaluation correct estimates of the fair value have to be given, therefore directors find this challenging and are thus less motivated to use the model.

b. The effects of not revaluating will have the following effects on the financial statements

The statements will not be sufficient enough and thus one cannot use them to make financial decisions

The statements will not include any information on the debt requirements therefore, the company will be unable to know what debts needs to clear them and how to.

The statements will not have any increase in assets which causes not making correct adjustments to payments of interests.

 The financial statements will have less profit and thus the company will not be able to pay its investors enough dividends

c. If a company does not do revaluation on its plant, property and equipment, it will greatly affect the shareholders. This is because the return in investments will be low thus the dividends given to the shareholders will not be adequate. Also the company will not make any profits which affect the shareholders investments and the money they make (Christensen & Lee, 2015).