IFRS Adoption and Qualitative Characteristics in Financial Reporting

This report analyzes the impact of adopting International Financial Reporting Standards (IFRS) on the qualitative characteristics of financial reporting. It examines how understandability and faithful representation are affected, referencing specific examples and quotations. The report discusses the government's decision regarding regulations, exploring theories like public interest, capture, and economic interest group theories. It further delves into the implications of faithful representation concerning asset valuation, impairment charges, and the non-allowance of revaluation. The report concludes by discussing the implications of not adopting a revaluation model and its impact on shareholder wealth. The analysis is supported by references to relevant literature.

ANSWERS
PART A
Qualitative Characteristics not satisfied with the adoption of IFRS
In accordance with the quotation made by each individual, Following are the qualitative
characteristics which have not been satisfied with the adoption of IFRS in the current reporting
practices:
1. Understandability – It is one of the enhancing qualitative characteristics so as to
differentiate between the more useful information and less useful information. It states
that the financial statements containing the financial information of the company shall be
presented in such a manner that even the user from the non financial background can
understand the figures reported in the financial statements as to how the same has been
valued and that too in accordance with the accounting standards and the accounting
policies as applicable to the company. The non presence of this feature has been observed
from the quote given by Terry Bown, the finance director of the Wesfarmers Limited.
2. Faithful Representation – This feature states that the financial statements shall be
presented in the manner as it is required. It further has three aspects – completeness,
neutrality and the free from error. The feature which has been found as absent as per the
quotation given by Chief Financial of Common Wealth Bank is the neutrality and the free
from error. The above two distinct features states that the financial statements shall not be
manipulated in any manner so as to influence the decision of the users of the financial
statements and secondly the financial statements shall represent the true and fair view of
the financial position and financial performance of the company (Beest, 2012).
In this manner, two distinct features have been identified as the absent in the current reporting
practices as per the quote of the individuals.
These views are not consistent with the conceptual framework of accounting and reporting in the
sense that the IFRS has ensured the presence of all the qualitative features of the financial
reporting. It has been decided only because ensuring to have the uniform practices across the
globe.

PART B
In case of each and every company, strict regulation shall be specified so as to make the
company liable and accountable for any act done by them. For this the specific regulation shall
be made which shall be applicable for each and every company. Under the following three parts
it has been discussed as to how the government has made the decision that no regulation shall be
introduced.
a) Public Interest Theory – In general words, the theory which takes into account the
welfare of the people referred to as the public interest theory. In other words, the theory
entails that the regulatory bodies shall allocate the resources which are scarce in nature to
the individuals and the society in the good and defined manner. In accordance with the
public interest theory, the regulation made by the government is treated as the way so as
to overcome the demerits which are raised from the imperfect competition, unbalanced
market operation, missing markets and results of the market which are undesirable. But it
has been criticized on the ground that the theory will fail in case where the monopoly in
the market exists or the market has been failed. In such circumstance the regulation also
does not prevail to ensure the allocation of the resources in the defined manner.
b) Capture Theory - The capture theory states that the regulations are made and manipulated
in the interest of the persons who are affected by the regulations. It further states that in
case if any regulation is made in the interest of the public for the industries the after
sometime it automatically starts benefiting the others who has been the major sufferers of
that regulation. Therefore, in this manner, the government has taken the decision as to no
specific regulation shall be introduced.
c) Economic Interest Group Theory of Regulation – This theory states that the formulation
of the regulation depends upon the demand and supply. Here the supply refers to the
government and the demand side is related to the groups which have the interest. It states
that the representative groups are involved in the preparation of the policies. It will affect
the other groups operating in the different or similar industries (Hertog, 2012)
Because of the above factors, the government has decided not to introduce the specific
regulation.

PART C
Faithful representation is referred to as the qualitative feature of the financial reporting which
entails that the financial statements shall presented in the manner as it is required. For the
Faithful representation in the financial statements of the company, the non-allowance of
revaluing the current assets of the company from the cost value to the fair value will be
considered. It is because the valuing of the noncurrent assets on account of the fair value will not
represent the actual position of the company due to which the one pillar of faithful representation
as neutral will be affected.
Charging of impairment to the statement of the profit and loss and the assets ensures the
relevance. It is because of the fact that due to impairment the users of the financial statements
will have the true and fair value of the noncurrent assets and thus will help them in taking the
refined and meaningful decision.
PARTD
a) One of the major motive to not to adopt the revaluation model is that in case the ,market
fluctuates then the revaluation so made in the value of the noncurrent assets will vary and
may lead to the collapse of the company to certain extent (Seng, 2015).
b) If the firm does not revalue the assets, the asset will be measured on the cost model and
hence will be represented on the basis of the historical costs. For the decision making
function which includes either to replace the asset or not or any other related function, the
historical cost so booked will not be considered and it will become irrelevant
(Christensen, 2012).
c) Yes, it will affect the wealth of the shareholders in the sense that the net asset value per
share will decrease and which in turn will lead to the minimization of the wealth of the
shareholders.
REFERENCES
Beest, F.V., (2012) , “Quality of Financial Reporting: measuring qualitative characteristics”,
Accounting review, 205(4), 22-26

Christensen H, (2012), “ Does Fair Value Accounting for the Non financial assets pass the
market test”, Journal of Booth School of Business, 45(2), 8-22.
Hertog J, (2012), “General Theories of Regulation”, Journal of Economic Literature, 111(2),
142-149
Seng D, (2015), “Managerial Incentives behind the Fixed Asset Revaluations : Evidence from
New Zealand Firm”, Department of Business : Working papers, 3(5), 44-67