Importance of Financial Reporting Standards and Their Characteristics

This article discusses the importance of financial reporting standards and their characteristics. It also covers different theories of regulation and their impact on financial reporting. The article also talks about revaluation of assets and its benefits and drawbacks. Subject: Finance, Course Code: NA, Course Name: NA, College/University: NA

Running head: FINANCE
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Name of the Student
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Author Note

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Table of Contents
Answer to Question 1......................................................................................................................2
Answer to Question 2......................................................................................................................4
Answer to Question 3......................................................................................................................7
Answer to Question 4......................................................................................................................7
References......................................................................................................................................10

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Answer to Question 1
The financial accounting standards and the International Financial Reporting Standards
have been established in order to keep a check on the different accounting statements which is
prepared by various organizations and to see to it that the framework of an integral reporting
system is maintained. However in the article “Unwieldy rules useless for investors”, the given
statement has been criticized and it has been stated that the IFRS and other standards are not
adequate.
According to Hogg (2016), the financial reporting serves the given objectives:
1. Provides useful information to the investors and guides them in the decision making
process
2. The cash flows which may be received by the organization in the future can be analyzed
3. If an organization goes through any major change in its business domain, then even that
can be analyzed easily using the financial statements (Barth et al. 2008).
The different financial reporting systems are generally based on the conceptual
framework which acts as a guideline. Given below are the characteristics of a conceptual
framework:
 The report must have adequate relevancy. This means that the report must be based on
relevant information which is actually useful to the decision makers and assist them in
their decision making activities (Ahmed, Neel and Wang 2013). If the financial statement
is not relevant, then the primary purpose of the organization may go for a toll.

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 The financial statements need to be prepared in a manner such that they are easily
comparable in nature, this means that they are to follow a set format which will assist
them in ensuring that the performance of the different years can be viewed at once or
between different companies are easily accessible.
 They should be providing a true picture of the organization and its activities. This means
that the financial statement must possess the capability of ensuring that they are easily
able to represent the correct financial position of the firm and not hide any aspect which
may be crucial to an investor`s decision making (Bentley, Omer and Sharp 2013).
 The financial statements need to be presented on time. This means that they should have
the capability of being available at the right time and in the right manner so that they can
be utilized.
 They should be clearly understood in nature and must possess the capability of
possessing clarity.
If the financial statements of the organization do not possess the given characteristic features
then they lose their relevance.
The given article states that although the given points stated have the adequate features
and capabilities which a report must comprise of, however the IFRS Standards do not have the
present capability of justifying these characteristics (Lequiller and Blades 2014). The article
examines, that the adjustments present in the IFRS are not Relevant enough and often provide
misleading information to the different customers. Furthermore, the reports which are being
prepared under the given guideline cannot be compared easily as well.

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The article agrees that it is the duty of the financial statements to provide relevant data
relating to the liabilities expenses and equity of a firm to all its stakeholders.
Answer to Question 2
PUBLIC INTEREST THEORY
The economic markets whether they are the capital markets or the bond markets, are
quite volatile in nature. This means that they often diverge from their designated path and this
tends to lead the investors towards relying to the financial statements of the firm in order to
understand what the correct share price needs to be. The capital markets do not give importance
to the different society components and are based on their self-interest. For this reason, it
becomes extremely important for different governmental agencies to be set up laws which tend
to govern these movements. It was A.C.Pigou who established the theory of public interest back
in 1932. It was stated that any government legislation can only be established when the
organization shows interest and states that it wants the government to rectify against the wrong
doings of the firms. Very often the governmental organizations work in the favor of the
governmental agencies which should not be the scenario. Another theory which was formed by
Stigler in 1972 stated that the efficiency of the government in controlling the activities of the
organization is not as important as the regulation of the industries who utilize such rules in
forming a barrier against the new entrants present in the given scenario (Hoyle, Schaefer and
Doupnik 2015).

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The main way in which this scenario takes place is the act that the organizations fail to
disclose all the relevant information which is important and only disclose the ones which they
feel comfortable in. Hence, based on the given public interest theory, it has been advised that a
legislation must be passed which tends to stress upon the fact that the different organizations
must provide adequate details about their activities that have a tendency to harm the environment
and also elaborate upon the initiatives conducted by them to mitigate such harms. Once these are
passed, they should be made available to the general public as well in order to ensure that they
can read and understand it.
CAPTURE THEORY
The capture theory states that the different workers in the industry tend to have a
captivating hold on the different workers present in the governmental organization. The workers
in the industry work towards securing the different interests of the industry and they often go to
the extent of making the distribution of resources misbalanced (Christensen et al. 2015). They
have a manipulative impact and tend to manipulate the distribution of the resources in a manner
such that the societal needs are not met with in an appropriate manner.
The capture theory talks about this given consensus among the industry workers and the
governmental agencies. It states that the government in order to promote the different needs of
the individuals tends to establish various rules and regulations at all the levels of the government
with an aim to ensure that it is being able to protect the needs of the different customers in an
organization and ensure that they are protected from the harmful practices in a business
environment (Deegan 2013). For this purpose, the capture theory states that the primary

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discrepancy aims to take place when the people working in an industry tend to form relationships
with the ones in the government organizations.
The reason why they form such relationships is because the people in the government are
the ones who make the various rules and regulations and it is for this purpose that components
like price control, quality control, minimum operating standards and related activities are
maintained (Jorissen et al. 2013). In order to combat against this factors, it is very important for
the organization to ensure that the people working in the given governmental set up have
adequate skills and expertise which will help them in viewing the bigger picture. Furthermore,
the people in industry already have the expertise which is essential and this leads to the lack of
balance. This takes place because it may be a chance that the people in the agencies are prior
employees of the industry and thus they conduct in these unethical favors. Hence, it is in this
manner that the government is said to be captured by the different workers in the industry.
ECONOMIC INTEREST GROUP THEORY OF REGULATION
The given theory is based on the assumption that in a given industry there are different
groups which are formed in order to fulfill their economic interest. These groups may often be
very large in number and continuously aim to compete with one another so as to establish power.
As these groups are relatively powerful in nature they tend to influence the different
governmental bodies and influence them to pass legislations in the favor of the group and enable
them to secure the interest in the best manner. These groups are quite selfish in nature and not
concerned with the interest of the society at large (Christensen, Hail and Leuz 2013). The
government on the other hand is selfish enough and to secure their interests and with the vision
of being elected again they often feel that they should succumb to the given group who will later

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on provide them with adequate funds and resources. Hence, based on this the economic interest
group theory states that these legislations which are formed by the government are unable to tap
the work of these strong economic groups. These organizations as well in their power and
authority tend to violate all the rules which have been stated with respect to the environmental
and social aspects. This can be described as the cycle of the relationship between the two parties
which is bound by the group`s power.
Answer to Question 3
Although revaluation are considered to be an important aspect of an organization,
according to the Accounting for the Impairment or Disposal of Long-Lived Assets, under the
FASB Statement No. 144 , the different firms are not permitted to revalue their assets but to take
into consideration impairment costs for this purpose (Weil, Schipper and Francis 2013).
Although this may seem a burden, this given rule is important and helps in representing the true
picture of the United States financial statements.
These impairment costs although tend to reduce the costs of the firm but do not have a
negative impact on the cash balance. Furthermore, this tends to have different advantages as well
kike providing a better picture of the organization and being true to the actual operations of the
firm. As the total amount of depreciation in an organization keeps changing the value of the
assets change considerably and this is crucial. Hence, these can be stated to be the impact of the
US FASB on the important and representation of faithfulness of the different financial statement
in the US Organizations.

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Answer to Question 4
Part 1
Revaluation is taken to be an essential part of an organization and it is performed in order
to be able to dignify the true value of an organization in the eyes of the different customers.
There may be several motivators in place for the process of revaluation (Ifac.org. 2018). These
reasons have been given as follows:
1. It helps in identification of the correct and true value of the different assets
2. It portrays the present rate of return of capital which is employed by the organization
3. Assists during the merger and acquisition process of an organization (Scott 2015).
4. Comes useful during the sales made by a particular asset
5. Helps in decreasing the debt equity ratio of the organization.
Although the benefits are many in number but many companies do not want to reevaluate
their assets and want to go with the cost model which is because of the following reasons:
It leads to reduction in the satisfaction of the investor. This means in the scenario where
the assets are being revalued then there may be a case that the profits of the firm might be
reduced. The investors may not prefer it if this is the scenario (Mao and Renneboog 2015).The
assets and their values become lower than the previous year which further tends to have an
impact on the net profits. This has a harmful impact on the historical perspective of the firm and
may tamper its sustainability.
Furthermore, it also leads to the nature of the assets becoming highly volatile and
fluctuate.

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Part 2
In case the different assets of the organization are not revalued, then this may have a huge
impact on the firms which may comprise of the follows:
1. The financial statements of the organization may not reflect the true and fair value of the
organization (Ball 2006).
2. The rate of capital which may be applied may also be incorrect
3. The debt equity ratio of the organization also tends to increase (Khan and Bradbury
2016).
4. Furthermore, the shareholders will not be able to exercise their rights,
5. Additionally, as the financial statements of the organization will reflect extra profits, due
to this the firm will be required to pay extra dividends.
Part 3
In a situation, where the capital market is not efficient enough to portray the value of the
shares, then the investors may make use of the financial statements to figure out the correct price.
For this reason, the decrease in the value of the assets and the net backing value may affect the
prices severely. Although this may be offset by the profits which get inflated, however if the
revaluation of the assets takes place and the capital market is efficient then the impact on the
wealth of the shareholders shall be minimized.

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References
Ahmed, A.S., Neel, M. and Wang, D., 2013. Does mandatory adoption of IFRS improve
accounting quality? Preliminary evidence. Contemporary Accounting Research, 30(4), pp.1344-
1372.
Ball, R., 2006. International Financial Reporting Standards (IFRS): pros and cons for
investors. Accounting and business research, 36(sup1), pp.5-27.
Barth, M.E., Landsman, W.R. and Lang, M.H., 2008. International accounting standards and
accounting quality. Journal of accounting research, 46(3), pp.467-498.
Bentley, K.A., Omer, T.C. and Sharp, N.Y., 2013. Business strategy, financial reporting
irregularities, and audit effort. Contemporary Accounting Research, 30(2), pp.780-817.
Christensen, H.B., Hail, L. and Leuz, C., 2013. Mandatory IFRS reporting and changes in
enforcement. Journal of Accounting and Economics, 56(2-3), pp.147-177.
Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What
determines accounting quality changes around IFRS adoption?. European Accounting
Review, 24(1), pp.31-61.
Deegan, C., 2013. Financial accounting theory. Graw-Hill Education Australia.
Hogg, M.A., 2016. Social identity theory. In Understanding peace and conflict through social
identity theory (pp. 3-17). Springer, Cham.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.

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Ifac.org. ,2018. Does IFRS Have a Future in the US? | IFAC. [online] Available at:
https://www.ifac.org/global-knowledge-gateway/business-reporting/discussion/does-ifrs-have-
future-us [Accessed 19 May 2018].
Jorissen, A., Lybaert, N., Orens, R. and Van der Tas, L., 2013. A geographic analysis of
constituents’ formal participation in the process of international accounting standard setting: Do
we have a level playing field?. Journal of Accounting and Public Policy, 32(4), pp.237-270.
Khan, S. and Bradbury, M.E., 2016. The volatility of comprehensive income and its association
with market risk. Accounting & Finance, 56(3), pp.727-748.
Lequiller, F. and Blades, D., 2014. Understanding national accounts.
Mao, Y. and Renneboog, L., 2015. Do managers manipulate earnings prior to management
buyouts?. Journal of Corporate Finance, 35, pp.43-61.
Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.