Advanced Financial Accounting

This article discusses the qualitative characteristics of financial reporting under IFRS and their impact on the usefulness of financial information for users. It also evaluates the decision of the Australian government to not introduce regulations for promoting social and environmental responsibilities and the implications of US FASB regulation on non-current asset revaluation. Lastly, it explores the motivations for directors to revalue property, plant and equipment and the negative effects of not doing so on financial statements and shareholder wealth.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student
Name of the University
Author’s Note

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Part A
As per the provided information, it is evident that the financial statements developed as
per the standards of International Financial Reporting Standards (IFRS) fail to provide the
information that can help in understanding the financial position of the business organizations in
spite of the fact that there has been spending of more than hundreds of millions of dollars by the
companies for the adoption of the IFRS standards to improve financial reporting. The main
reason of this failure can be the absence of the major qualitative characteristics of financial
reporting that are major contributors to increase the usefulness of financial information for the
users like investors, creditors, lenders and others. According to the conceptual framework of
Australian Accounting Standard Board (AASB), the fundamental qualitative characteristics are
relevance and faithful representation; and the enhancing qualitative characteristics are
comparability, verifiability, timeliness and understandability (De George, Li and Shivakumar
2016). From the following discussion, it can be identified that which qualitative characteristics
are missing in the IFRS adopted financial statements.
It is clear from the opinion of Mr. Roberts Geoff, Former Head of Finance of AXA, over
many years, he has not received any single questing from the fund managers and the financial
analysts related to the financial adjustments of the financial statements to get the correct financial
picture of the companies that are done based on the standards of IFRS. For this reason, the fund
managers and the analysts never have to face any major difficulties in comparing the financial
information of different companies and gaining understanding about the financial performance
and financial standings of the business organizations. All these aspects provide the necessary
evidence about the fact that the financial statements of IFRS posses the required qualitative

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characteristics that are comparability and understandability. The presence of these two
qualitative characteristics helps in increasing the usefulness of financial information of the
companies. However, in the recent years, the financial statements as per IFRS are failing to
provide understanding and scope of comparison of the financial statements. For these reason, the
current financial reporting framework under IFRS lacks both understandability as well as
comparability (De George, Li and Shivakumar 2016).
The fact is clear from the Finance Director of Wesfarmers, Terry Brown, that there is fair
chance of the misinterpretation of the notes to the financial statements of the companies in case
the financial analysts try to explain them in the absence of required technical knowledge about
the standards of IFRS. Verifiability is considered as a major qualitative characteristic of financial
reporting that helps in the enhancement of the quality of the financial reporting by providing the
scope to the users to apply their financial knowledge and observation for gaining insight about
the financial conditions of the entities. The analysis of the notes to the financial statements is a
crucial aspect for the users to gain understanding about the financial performance of the entities.
The above statement indicates towards the fact that the users are not able to analyze the content
of the financial notes by applying their knowledge and observation as the financial statements of
IFRS requires high technical knowledge. From the above analysis, the absence of verifiability
and understandability qualitative characteristics can be seen in the financial reporting framework
under IFRS (Chebaane and Othman 2014).
It is clear from the statement of Chief Financial Officer of Commonwealth Bank, David
Craig, that the investors of the companies are not providing importance to the financial
statements developed as per IFRS due to the fact that these statements mislead the investors
about the financial performance as well as financial position of the business organizations. The

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financial information of the entities is required to be relevant and faithfully represented so that
they can create positive impact on the investment decisions of the users. In the absence of these
two characteristics, users fail to obtain the understanding about the financial situations of the
entities. For this reason, it is the responsibility of the business organizations to ensure the fact
that the provided financial information is relevant as well as faithfully represented. In the recent
years, it has been seen that the financial information of IFRS adopted financial statements is
neither relevant nor faithfully represented. For this reason, the investors are ignoring the
information of these financial statements (Chebaane and Othman 2014).
Lastly, it is required to be mentioned that the general purpose financial reporting has one
major objective that is to provide the users of the financial statements with the correct financial
information so that they can be helpful in depicting the financial situation of the business entities
along with taking effective investment decisions. As the above discussion mentions about the
lack of some major qualitative characteristics, it is not possible to achieve this central objective
of financial reporting.
Part B
The government of Australian took one major decision in the year 2006 related to
amending the Corporations Act that there would not be any introduction of any regulation for
promoting the social and environmental responsibilities. Rather than the introduction of
regulations, the Australian government decided to let the market forces act in this purpose. With
the assistance of three popular theories of regulation, this decision of the Australian government
can be evaluated. The discussion is showing below:

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Public Interest Theory
The public interest theory is in the support of the introduction of regulations for the
satisfaction of the demands of the public. According to the principle of this theory, the
introduced regulations have a important role to play in ensuring the welfare of the common
people; at the same time, the introduction of regulations also ensures that the no specific group of
stakeholder become beneficial by using the regulations. Under this theory, the market forces are
not provided with importance as they do not have any role to play in satisfying the needs of the
common people (Asquer 2018).
The concept of this theory can be applied in the provided situation of the decision of the
Australian government. As this theory supports the introduction of regulations, thus, the
government of Australia should have introduced specific regulation in the Corporations Act for
the promotion of social and environmental responsibilities due to the fact that the presence of
regulations helps in the welfare of the common people. Apart from this, the intervention of the
Australian government in the market would ensure that there would not any market imperfection
or market failure. At the same time, it would be possible for the Australian government to
promote the social as well as environmental responsibilities among the common people.
Capture Theory
The concept of capture theory can be set against the concept of public interest theory due
to the fact that the principle of capture theory is against the introduction of any regulations for
satisfying the needs of the common people. Rather than the introduction of the regulations, this
theory puts impotence to the working of the market forces for fulfilling the interests of the
customers. As per the principles of capture theory, the regulators can do manipulation with the
regulations in order to satisfy their own interest; thus, it is good not to have any regulation. Apart

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from this, the application of this theory assists in the identification of the parties that will be
affected with the implementation of the regulations. For all these reasons, it is required to rely on
the market forces to satisfy the needs of the common people (Martin and Clore 2013).
By applying the concept of this theory in the provided situation, it can be said that the
Australian government did the correct job by not implementing any regulation for the promotion
of social and environmental responsibilities in the Corporations Act. As there is not any
regulation, the regulators will not get the chance to manipulate them for their own interests.
Economic Interest Group Theory of Regulation
The principle of this theory states the fact that the business industries are the developers
of the regulations and the main intention of the development of the regulations is to do the
welfare for the business organizations along with the common people (Fonagy 2018). Thus,
based on the point of view of this theory, it can be said that the Australian government should
have introduced regulation in the Corporations Act for the promotion of social and
environmental responsibilities due to the fact that the presence of responsibilities would create an
obligation on the business organizations as well as the common people to comply with the
regulations of social and environmental responsibilities.
Part C
The given scenario mentions about a specific regulation of US FASB that there is not any
requirement for the US business entities to carry on the asset revaluation process, the
requirement for them is to consider the impairment charges on those non-current assets. It needs
to be mtnioened that this regulation of asset revaluation has some major implications on the
relevance and faithful representation of the financial statements and they are discussed below:

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1. This particular regulation of FASB for non-current asset revaluation has majorly helped
in the development of a single framework for the accounting works of non-current asset
revaluation. This aspect ensures to retain relevance of the financial statements (Yao,
Percy and Hu 2015).
2. At the time of the accounting work related to the implementation of the non-current
assets, the accountants of the companies face some specific issues and these issues lead to
the misrepresentation of the financial statements of the companies. However, in the
presence of this regulation of FASB, the obligation of the business organizations is to
comply with all the required standards and regulations of non- current asset revaluation
that contributes towards the faithful representation of the value of the non-current assets
in the financial statements.
3. The presence of various accounting models can be seen related to the revaluation of the
non-current assets that create difficulties as well as complexities for the business
organizations for the accounting of non-current revaluation. However, the current
regulation of FASB has provided one single framework for the revaluation of non-current
assets that is majorly helpful in the reduction of these accounting complexities (Hu, Percy
and Yao 2015).
4. It is required for the users of financial statements like creditors, shareholders and others
to understand the major differences and similarities in the accounting treatments related
to the revaluation of non-current asset and the new regulation of FASB has ensured this
aspect.

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Part D
Requirement [a]
The following discussion shows the major motivations for the directors of the companies
for revaluation of property, plant and equipment:
1. In the process of revaluation of property, plant and equipment, the directors are required
to revalue their property, plant and equipment on a frequent basis. This aspect makes the
directors aware of the fair value of these assets (Kozlovska 2015).
2. When the directors have the idea about the fair value of their property, plant and
equipment, it helps them in price negotiating of these non-current assets at the time of
merger and acquisition. In case the directors of the companies knows about the fair value
of their property, plant and equipment, they become able to correctly carry out the
process of merger and acquisition (Kozlovska 2015).
3. Apart from the above, with the help of the asset revaluation process, the directors can
gain insight about the actual rate of return on capital employed.
Requirement [b]
There are some major negative effects on the financial statements of the business
organizations of the decision not to make the revaluation of the property, plant and equipment.
The absence of revaluation process will lead to no increase or decrease in the values of property,
plant and equipment. For this reason, the companies will receive abnormal gain or loss at the
time of the sale of the assets. In addition, this will lead to the decrease in the earnings of the
business organizations and reduced earnings contribute to reduced profitability (Amiraslani,
Iatridis and Pope 2013).

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Requirement [c]
Not-revaluation of property, plant and equipment affects the wealth of the shareholders
along with the earnings of the companies. In the presence of the reduction in the earnings,
business entities become unable to provide the shareholders with divided as well as the promised
return on investment. For these reason, there is decrease in shareholder’s wealth (Ribes 2014).

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References
Aguilella Ribes, R., 2014. Fixed assets revaluation in Spain: Theoretical and practical issues.
Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a test for
IFRS compliance across Europe. London, UK: Centre for Financial Analysis and Reporting
Research, Cass Business School. Standards, Regulations, and Financial Reporting, pp.199-223.
Asquer, A., 2018. Theories of Regulation. In Regulation of Infrastructure and Utilities (pp. 19-
33). Palgrave Macmillan, Cham.
Chebaane, S. and Othman, H.B., 2014. The impact of IFRS adoption on value relevance of
earnings and book value of equity: the case of emerging markets in African and Asian
regions. Procedia-Social and Behavioral Sciences, 145, pp.70-80.
De George, E.T., Li, X. and Shivakumar, L., 2016. A review of the IFRS adoption
literature. Review of Accounting Studies, 21(3), pp.898-1004.
Fonagy, P., 2018. Affect regulation, mentalization and the development of the self. Routledge.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence
from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
Kozlovska, I., 2015. The impact of long-lived non-financial assets depreciation/amortization
method on financial statements. Copernican Journal of Finance and Accounting, 4(2), p.91.
Martin, L.L. and Clore, G.L., 2013. Theories of mood and cognition: A user's guidebook.
Psychology Press.

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Yao, D.F.T., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets and audit
fees: Evidence from Australian companies. Journal of Contemporary Accounting &
Economics, 11(1), pp.31-45.