The purpose of financial reporting is to provide a true picture of the organization in front off its stakeholders. The objectives of the financial are many and as follows:
- Helps in the assessment of the business structure of an organization.
- Helps in future assessment of the cash flow of the future (Ahmed, Neel and Wang 2013).
- Provides useful information to support different investing decisions.
It is important that the primary conceptual framework of any organization’s statement comprises of the following:
- The information provided needs to be comparable in nature. This means that they can be easily compared with other elements in the same year or could be compared with other values during different years.
- The statements must have the capability of faithfully representing the actual information of the given organization. This means that the data needs to be free, completeness, neutral in nature. The statement also needs to be prudent in nature so that the judgements are made carefully (Deegan 2013).
- The information available must be in context of the decision which need to be made at present and also should be available whenever required.
- The information present needs to be clearly portrayed and must be understood carefully by the users. It should not have an impact on the investor’s decision making.
It is a fact that if these information are not present, the purpose of financial statement goes for a toll.
However, in the given article, `Unwieldly rules useless for investors` it has been recorded that the different requirements and statements of essential components which has been stated does not appear to be satisfied by the current reporting practices, which have been undertaken by the IFRS practices. The article critically analysis the current practices and states that the current adjustments are not faithful and relevant and tends to lead to misleading information. Furthermore, due to this they are not being able to compare the different companies and make sound investments.
The views stated in the article state that it is very important for the financial reports to satisfy the requirements in the conceptual framework and that it is the duty of the statements to provide useful information with regard to liabilities assets, incomes and equity (Christensen et al. 2015). It is important for the financial reports to satisfy all the characteristics of the framework and the article provided a critical analysis of how they were unable to do so and that the requirements of all stakeholders were not being met.
Answer to Question 2
Public interest theory
The Public Interest Theory states that the economic markets are quite delicate and thus it is the duty of the market to convey information about the security and share prices. However, they do not operate in a manner in which they are supposed to be operating and this leads to a misbalance. The industry gives more importance to the people and economic entities rather than the society. Hence, due to this misbalance it is important that the economic markets and their operations are assessed through government intervention (Hoyle, Schaefer and Doupnik 2015).
The given theory was developed by A.C.Pigou in 1932. The author stated that it is the public needs to raise their voice and also ensure that the development of the regulation takes place so that the activities of the market are kept in check. It is the regulations which contribute well and tend to ensure that in a given society, the interest of the public is greater than that of the individual and the government needs to contribute effectively to this. The government enterprises are bodies of trust and it is their duty to see to it that they do not engage in mal practices. The regulations tend to uphold the society’s interest and they should secure this interest.
Another economist, Stigler in the year 1972 stated that it is the duty of the public to ensure that the resources are distributed equally and that they must insist that the information relevant to their investment is disclosed to them in an efficient manner.
Hence, based on the legislation theory, various legislations must be passed so that the corporate houses disclose all necessary information about their work and that they are provided with all relevant details and the various harms which they put on the society.
The enterprises also need to oblige by this and ensure that the interest of the society is upheld and they do not engage in harmful activities. To gain public support, organizations need to ensure that they are able to publish the information online where the people can read and pass comments as well. The experts shall clear their view on the given requirements as well. This initiative assures that the government engages in transparent activities and that the public is made to be aware about the activities of the firm at large.
The Capture theory states that there exists a relationship between the industry workers and the factory workers is a deep one. Hence, they have the power to dictate the different agencies of the Government and tend to mislead them in order to ensure that they work in the interests of the industry. They tend to destroy the equal distribution of resources in the given society and change the relationships in such a manner that the needs of the society go deployed. The given theory talks about the nexus which takes over the government agencies and the different industries (Hogg 2016).
The government has establishes various centers in the local, state and regional level and they have the duty if looking after the needs of the individuals, however, there takes place a discrepancy when the industry workers tend to strengthen their relation with the governmental agencies. The employees in the government are bribed in order to make different rules with respect to the pricing, control and quality (Christensen, Hail and Leuz 2013). The agencies which have people with expertise in order to ensure they have sufficient interest of the given area of operation.
In a different light, the people in the industry have people with expertise and when the people in the agencies have prior experience in the industry or have future intentions to join, they become the informers for the industry and conduct operations in their favor. Hence, the government agency has been captured in this manner (Weil, Schipper and Francis 2013).
Economic interest group theory of regulation
The economy interest group theory of regulation underlines the fact that in a given industry there exists various groups and investors who work in their own interest and tend to serve in their interest only. The groups are competitive in nature and due to the majority they are able to enforce their pressure on the government so that they are able to enforce laws which are beneficial for them and which tend to act in their favor (Brown, Preiato and Tarca 2014). The main purpose of the group is to gain the group`s economic interest, however, these groups are not concerned with the society at large and are primarily just concerned with their interest and the government as well tends to support these people in order to remain in power and get reflected easily.
These groups tend to overpower the interest of the society and as these groups have monetary as well as social influence, they can lure the government easily. Hence, the theory states that any legislation cannot hold the corporation easily for the outright of various laws which are environmental and social oriented because the government looks after the interest of these groups in their support (Weygandt, Kimmel and Kieso 2015).
Answer to Question 3
The FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets is a developed in order to provide a set of guidelines to the users of the system in order to guide them and help them to take into account the fact that their assets in the organization cannot undergo revaluation but they need to be impaired (Scott 2015). They are required to take into consideration the impairment costs and in this case, these impairment costs are reflected in the financial statements of the organization. The given rules hold relevance and represent faithfulness of financial statements in the United States corporations.
Although this helps in representation of faithfulness, this tends to have a negative impact on the organization`s profits and tends to make it lower than the actual amount. This discourages the various investors of the company and they lose trust and interest in the organization. However, this does not impact the net cash balance in any way (Berry and Wilcox 2018). This also helps in portraying a better picture of the organization with respect to the current activities of the firm. One negative aspect about this is that the historical prospective undergoes a change and due to the depreciation of the financial assets, their value keeps changing throughout. Hence, it is relatively important to adjust impairment costs and the above stated were the impacts of the United States FASB on the concept of representational and relevant faithfulness of the financial statements.
Answer to Question 4
Many believe that the revaluation of the assets does not hold any relevance, however this is not the case and the process of revaluation of the assets needs to be conducted in order to understand the fair and actual value of the assets at the given point of time. There exists various reasons why the revaluation of the assets is important to conduct (Mao and Renneboog 2015). These reason are as follows:
- It helps in reflection of fair and actual value of the assets
- It helps in reflecting the present rate of return with respect to capital which is employed
- It comes in useful when the sales of a particular asset takes place (Ball 2006).
- It contributes towards the reduction of the debt equity ratio of the given organization
- In case any merger or acquisition takes place, it helps in the concerned negotiation.
Although the given method is quite beneficial, however, it is not adopted with the different companies and they tend to adopt the cost model of the modern companies. This is because of the following reasons:
It helps in reduced satisfaction of the different investors of the firm. In case the assets are revalued in the current scenario, then the profits of the firms takes a new low and this tends to disappoint the investors as their decision is based on the profits which the organization earns (Khan and Bradbury 2016.)
When the assets are impaired it leads to further reduction in the value of the assets which further contributes towards the reduction of profits (Bradbury 2016). The sustainability of the firm takes a toll and the organization is affected in the given scenario.
As the assets are highly liquid in nature it can be a scenario where the value of the assets are affected severally and they fluctuate to larger amounts. The firm may then achieve the wrong information in such a scenario. In such a case, the various decision makers of the firm tend not revalue their properties which comprise of plant, equipment and other such assets.
When an organization decides to not revalue their assets, this has several consequences in the business organization. The consequences may be as follows:
- The financial statements may fail to present a true picture of the organizations accounting system.
- The financial statements will reflect a higher debt to equity rate than the actual one.
- There will exist a faulty rate of capital
- The rights which the shareholders have will not be effective.
- Lastly, the net profit margin reflected in the paper will be inflated and the assets will show an understated value which shall reflect excessive dividends
If the assets are not valued then the information which is available in the financial statements are not efficient enough. They reflected inflated profits and lowered value of the assets. Hence, this decreased value of the assets and the low asset backing impacts the share prices in a negative manner. As stated earlier, although this gets balanced by the profit which is expected to be higher, but the bottom line is that the true value of the organization is not portrayed. This can lead to faulty information to the various customers.
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