Qualitative Features In Financial Statements And Opinions On IFRS Standards

Fundamental qualitative features and enhancing qualitative features

Discuss about the Advanced Financial Accounting for AXA Finance.

Qualitative features are needed to be present in the financial statements of the organisations in order to enhance the usefulness of overall financial information. These characteristics primarily constitute of fundamental qualitative features and enhancing qualitative features. The major components listed under fundamental qualitative features comprise of relevance and faithful representation. Similarly, certain components are inherent in enhancing qualitative features and they are comparability, verifiability, timeliness and understandability (Arnold and Kyle 2017). The given article sheds light on the opinions of the different individuals about enforcing the “International Financial Reporting Standards (IFRS)”. All the statements lay stress on the fact that certain components of the qualitative characteristics laid out in financial reporting are not inherent, as per the individual judgements. They are summarised as follows:

Geoff Roberts, the former chief of AXA Finance, has opined that no questions are received from the financial analysts and the fund managers for adjusting the financial statements in order to have accurate financial picture of the organisations, which are conducted depending on the IFRS norms. Due to this, they have not encountered any issues while contrasting the financial statements of different organisations along with obtaining knowledge regarding their financial standing in the market. Hence, essential evidences are provided through these aspects, which imply that financial statements prepared in accordance with IFRS have understandability and comparability. Thus, these two qualitative features enable to enhance the value of financial information of the business organisations. However, it has been observed currently that the IFRS-developed financial statements do not provide detailed understanding and scope of comparison in them. Due to this, deficiency could be observed in IFRS in terms of comparability and understandability (Beatty and Liao 2014).

According to the opinion of Terry Brown, the finance director of Wesfarmers Limited, the financial statement notes of the organisations might be misinterpreted, if the financial analysts aim to explain them when they have no technical knowledge regarding the IFRS standard. Verifiability is another significant qualitative feature of financial reporting, which increases the financial reporting quality by providing scope to the users in applying their financial observations and knowledge to obtain overview about the financial positions of the organisations. The assessment of the footnotes to the financial statements is a vital aspect in the context of the users to understand the financial performances of the business organisations. This denotes the ability of the users to evaluate the content described in the notes through application of their observation and knowledge, as the financial statements prepared under IFRS needs greater technical knowledge. Based on the above assessment, verifiability and understandability aspects of the qualitative features are not present in the IFRS reporting framework (Cascino et al. 2017).

Opinion of Geoff Roberts

In accordance with the viewpoint of David Craig, the CFO of Commonwealth Bank, the investors do not pay adequate attention to IFRS-developed financial statements, as they are of the notion that such statements might provide falsified information regarding the financial performances and financial positions of the corporate entities. It is necessary to ensure relevancy and faithful representation of the financial information disclosed in the annual reports of the organisations in order to create positive effects, so that the investment decisions could be undertaken appropriately. If these features are not present, no understanding regarding the financial conditions of the organisations could be obtained. At present, it has been identified that the organisations representing the financial information by preparing the financial statements in accordance with IFRS standards seem to lack in relevancy and faithful representation. Due to this reason, the investors do not consider the information represented in the financial statements (Ghanbari and Sarfia 2016).

Finally, it is noteworthy to mention that financial reporting intends to deliver the users of the financial statements with accurate financial information that would be valuable in signifying the financial conditions of the business organisations along with undertaking suitable investment decisions. The discussion above signifies the absence of some significant qualitative features, which limits the objective of financial reporting.

The Australian government undertook an important decision in 2006 associated with amendments in the Corporations Act 2001, in which any introduction of regulation to promote the environmental or social responsibilities is absent. Instead of the initiation of regulations, the government of Australia has allowed the market forces to serve in this purpose. By assisting three popular regulation theories, the Australian government decision could be analysed. The detailed discussion is represented as follows:

This theory supports the initiation of regulations for meeting the overall public demand. In accordance with the principle of the theory, the initiated norms have a significant role to assure the welfare of the public. At the same time, the enforcement of regulations assures that they do not benefit only one group of stakeholders. In accordance with this theory, adequate importance is not provided sufficient significance, since their role is not important in meeting the needs of the public (Ghani and Muhammad 2016).

This theory could be applied in the provided situation of the decision related to the Australian government. Since this theory provides support to the initiation of regulations, the Australian government could have enforced particular regulations in the Corporations Act to ensure environmental and social responsibilities. This is because when such regulations are present, the common good of the public could be ensured. Besides, if the Australian government intervenes in the market, no market imperfection or failure could be ensured. Thus, the Australian government could enhance environmental and social responsibilities among the public.

Opinion of Terry Brown

Capture theory is just the reverse of the public interest theory because according to this principle, no regulations are needed for ensuring the welfare of the common individuals. Instead of introducing regulations, this theory lays emphasis on the functioning of the market forces in order to satisfy the overall interests of the customers. Moreover, the principles of this theory suggest that the regulators could manipulate with the regulations for assuring their self-interest; hence, regulations would not be appropriate. Besides, with the help of this theory, those parties could be identified on which the enforcement of the regulations would have direct influence. Due to all these reasons, adequate reliance needs to be placed on the market forces so that the requirements of the common individuals are met (Gomes 2017).

When the concept of this theory is applied in the provided situation, the right step is taken on the part of the Australian government by not enforcing regulations for promoting environmental and social responsibilities in the Corporations Act. Since regulations are not there, there is no chance for the regulators to manipulate the same for meeting their self-interests.

One of the fundamental principles of this theory is that industries are the creators of regulations and the motive for which such regulations are formulated is to enhance the growth of both the business enterprises and the common individuals (Hoyle, Schaefer and Doupnik 2015). Hence, from the perspective of this theory, it is evident that the government of Australia could have initiated regulations in the Corporations Act in order to promote environmental and social responsibilities. The reason is that when responsibilities are transferred to the business organisations and the common individuals, they are obliged to adhere to the norms laid down in environmental as well as social responsibilities.

After careful assessment of the provided scenario, there is a certain regulation present in the US “Financial Accounting Standards Board (FASB)”. According to this regulation, there is no need for the business organisations in US to perform the procedure of asset revaluation. Instead, they are needed to take into account those impairment charges associated with their non-current assets. In this respect, it is noteworthy to mention that some significant implications are inherent on faithful representation and relevance of the financial reports due to the asset revaluation regulation, which are elucidated briefly as follows:

• The FASB regulation for non-current asset revaluation has assisted immensely in the formulation of a single framework in relation to the accounting functions of the revaluation of non-current assets. Such aspect assures in maintain relevance of the financial reports (Huang 2014).
• When the accounting functions are associated with the enforcement of the revaluation of non-current assets, the accountants of the business organisations encounter few particular issues and such issues have resulted in inappropriate representation of the financial reports of the organisations. However, in the presence of FASB regulation, the business enterprises are obliged to adhere to all the needed regulations and norms related to revaluation of fixed assets. As a result, it helps in making contributions towards the faithful representation of the values of fixed assets in the financial statements (Kahng 2015).
• There are diverse models of accounting, which could be associated with the revaluation of fixed assets leading to complexities and difficulties for the business enterprises in order to account for revaluation of fixed assets. However, the existing FASB regulation has fetched a single framework in order to revalue the fixed assets, which is immensely valuable in minimising the accounting issues (Martin and Roychowdhury 2015).
• All the financial statement users like stockholders, creditors, suppliers, customers and others are required to have some understanding of the accounting treatments. One such aspect is to find out the significant similarities and differences in the accounting treatments needed for revaluing the fixed assets, which could be ensured with the help of the new FASB regulation (Maynard 2017).

There are a number of reasons for which the motivation of the directors of the organisations increases in order to revalue property, plant and equipment and they are represented as follows:

• During the revaluation procedure of this fixed asset, it is necessary for the directors to revalue this asset frequently. Such revaluation would enable the directors to have proper knowledge of all the fair values of the assets (Robertson 2015).
• Adequate knowledge about the fair value of property, plant and equipment helps the directors to negotiate prices of such assets during merger and acquisition. This is because such knowledge is of immense importance for the directors, as the process of merger and acquisition is smoothened.
• Finally, the procedure of asset revaluation would enable the directors to gain an insight regarding the actual return on capital employed, which would help them in undertaking funding decisions (Scott 2015).

Opinion of David Craig

If the business organisations are not involved in undertaking the decision of revaluing their property, plant and equipment, the impact would be drastic on their financial statements. When the procedure of revaluation is not present, property, plant and equipment are expected to increase or decline and hence, they might not be valued accurately. Due to this reason, there would be realisation of abnormal gain or loss when the assets would be sold at a later point of time in future (Weygandt, Kimmel and Kieso 2015). Moreover, the business organisations could expect to experience decline in their overall earnings. With the fall in the level of earnings, impact would be on profit level as well and thus, the financial performance of the organisations might not be desirable or favourable.

The capital market efficiency assists in driving the decision related to revaluation. In case, there is lack of efficiency in the market, the stock prices would denote the information, which is disclosed in the annual reports of the business organisations. The reduced asset per share could be held in the prices of the stocks. However, the higher reported income might help in offsetting the minimised share price (Randolph 2016). The decision of abstaining from asset revaluation has negative repercussions on the shareholders’ wealth of the business organisations. At the time there is non-revaluation of these assets, profit level of the organisations are expected to decline massively. As the organisations start to experience fall in their profits, the share return would be reduced due to the decline in price per stock of the organisation. Hence, it would limit the overall rate of return on investments for the shareholders of the business organisations ultimately leading to decrease in the wealth of the shareholders (Richardson 2017).

References:

Arnold, G. and Kyle, S., 2017. Intermediate Financial Accounting Volume 2. Lyryx.

Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58(2-3), pp.339-383.

Cascino, S., Clatworthy, M., Garcia Osma, B., Gassen, J. and Imam, S., 2017. The Usefulness of Financial Accounting Information: Evidence from the Field.

Ghanbari, M. and Sarfia, E., 2016. Journal of Advanced Research In Accounting And Auditing. Journal of Advanced Research In Accounting And Auditing, 1, pp.8-15.

Ghani, E.K. and Muhammad, K., 2016. The Effect of Freemind on Students’ Performance in an Advanced Financial Accounting Course. International Journal of Academic Research in Business and Social Sciences, 6(7), pp.262-275.

Gomes, D., 2017. Book review: Accounting by the First Public Company: The Pursuit of Supremacy.

Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.

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Kahng, L., 2015. Perspectives on the Relationship between Tax and Financial Accounting.

Martin, X. and Roychowdhury, S., 2015. Do financial market developments influence accounting practices? Credit default swaps and borrowers? reporting conservatism. Journal of Accounting and Economics, 59(1), pp.80-104.

Maynard, J., 2017. Financial Accounting, Reporting, and Analysis. Oxford University Press.

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Richardson, A.J., 2017. The Relationship between Management and Financial Accounting as Professions and Technologies of Practice. The Role of the Management Accountant: Local Variations and Global Influences.

Robertson, C., 2015. CfE Advanced Higher Accounting: Financial Accounting. Heriot-Watt University.

Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.