Strategies to Increase the Quality of Financial Reporting

This report explores methods to enhance the quality of financial reporting, focusing on the impact of IFRS adoption, government regulations, and valuation models. It analyzes investor perspectives and the implications of restricting fair value models in corporate financial statements. The report also examines the motivations behind directors' choices in asset valuation and the effects on stakeholders. Ultimately, it recommends a balanced approach considering market mechanisms, investor needs, regulatory frameworks, and company interests to achieve high-quality financial reporting. The report concludes that while IFRS offers potential benefits, the practical challenges and potential misinterpretations highlight the need for careful implementation and investor education. The study emphasizes the importance of comparability, relevance, and reliability in financial reporting and suggests that a cost model for asset valuation may better protect shareholder wealth under certain conditions. Desklib provides access to this and other solved assignments.

HOW TO INCREASE THE QUALITY OF FINANCIAL REPORTING
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5/25/2018

Contents
EXECUTIVE SUMMARY.................................................................................................................................2
INTRODUCTION...........................................................................................................................................3
TASK A.........................................................................................................................................................3
TASK B.........................................................................................................................................................4
TASK C.........................................................................................................................................................5
TASK D.........................................................................................................................................................6
CONCLUSION AND RECOMMENDATION.....................................................................................................7
REFERENCES................................................................................................................................................8
EXECUTIVE SUMMARY
Investors are the major driver of the working of the company as they control the financial
reporting to some extent. It is due to the fact that the government agencies forms the rules and
regulations only after considering the needs and the requirements of the investors otherwise the
financial reporting will not serve any purpose and the company will soon run out of the industry.
Therefore, it is the investors only on the premise of which the financial statements are made
available for analysis. Through this study, the focus has been diverted into different parts each
belonging to different manner. The study has made the first focus on how the investors will think
in case the IFRS framework is adopted by the companies. Along with this the comment has been
made on the feature of the financial reporting. Second focus has been made towards the reasons
as to why and in what situations the regulations be not form by the Government. Out of these
three concepts relating to regulation has been detailed. The third focus has been on the analysis
of the situation where the companies are restricted to follow the IFRS framework and how does
it affect the quality of the reporting made by the company. The fourth and the last focus have
been on the valuation model as followed and accepted by the directors of the company.
These focuses have led to prepare the report on the analysis of each focus as to how the same
will have different effects in the presentation of the financial statements of the company.

INTRODUCTION
Company can survive in the market and the industry only when it satisfies the needs and the
requirements of the investors. The investors are the persons who make the business of the
company to run as it creates the reputation in the market of the company. It is worthy to mention
that it’s not only the company which considers the interest of the investors but also the
government considers their interest and that is why the government has come up with the new
auditing standard on Auditing and new disclosure scheme after the global crisis that has
happened in the year of 2007. In this report, the financial reporting has been discussed in detail
with regard to the features and how the same will cater to the needs of the investors.
The report has been divided into five broad sections. First section is related to the thorough
analysis of the quotations given by some persons and in what ways the same has led to the belief
that the financial reporting being made by the companies has lost their features which maintains
its quality. The second section has dealt with the deep understanding as to what are the factors
which will avoid the government agencies to formulate the regulations and the same has been
detailed with reference to the various theories and majorly of the regulations. The third section
has been from the area of the United States reporting practices and deals with the deep analysis
of the restriction made by the United States Financial Accounting Standards Board. The fourth
section has then helped in analyzing the various reasons which have discouraged the directors
from following the fair value method of valuation of the noncurrent assets and the corresponding
effect that the investors will face from it has been mentioned. The fifth and the last section is
related to the concluding paragraph of the overall report and ends with the appropriate
recommendation for improving the quality of the financial reporting.

TASK A
With the introduction of the IFRS, many investors and the company top most officials have
expressed different views as to how the IFRS framework will work and how the companies and
the investors will react to it and so on. All these have been explained only in relation to the
financial statements of the company and majorly about their quality of the reporting.
With respect to the different understandings of the persons with their quotes, following has been
identified as the features which have been sacrificed:
- First feature that has been sacrificed is the understandability. It is related to the fact that with
the adoption of the IFRS the investors will not be able to understand the financial statements
of the company and which in turn will make them to take the incorrect decision. They have
to be trained in order to know the ins and outs of the company in relation to the financial
reporting.
- It has also been mentioned that the investor have to rely on the investor report of the
company and the details if any given by the company along with the briefings of the
numbers. It means that the feature of the reliability has also been sacrificed.
Thus, the feature of the understandability and the reliability has been seems to be sacrificed with
the adoption of the IFRS (Beest, 2012).
But if the conceptual framework in the financial reporting is considered then it cannot be said
that the above are consistent with the central objective of financial reporting and hence IFRS
maintains the quality of the financial reporting.
.

TASK B
The statement that the government has decided not to provide the regulation as detailed by the
inquiry submitted in the year of 2001 has been the very debatable area which has created the
wave in the industry and the market.
The statement has been made by the government in regard with the following theories which
have been mentioned as the theories of regulation.
 The first premise of the statement is the theory of the public interest. It provides that the
regulations made by the government will fail because of the changing market conditions.
The major example of the market conditions is of the monopoly under which the demand
and the supply do not function and the regulation thereon also does not perform well.
Second is the situation where there has been the case of the worse competition (Hertog,
2012).
 The second premise is the theory of the capture which in future becomes useless and
starts serving the interest of those persons who have been originally considers as the most
affected persons of the regulation.
 The third premise has been on the theory of economic interest of the representative
groups. This theory has detailed that the regulations are made by those people who are
the representative groups of the industry for which the regulation is being made and in
that case the interest of that particular representative groups will only be considered and
hence the purpose of making the regulation by the government will fails as it works on
their own.
Therefore, the government has made the statement that they will not formulate any of the
regulation.

TASK C
In the Corporate financial statements of the United States, it has been restricted to follow the fair
value model and has been made compulsory to follow the impairment of the assets. This
statement and the regulation have led to the following implications:
- The first implication which has been inferred is that there will be the loss of
comparability feature in the financial reporting. It is due to the fact that the fair value
model has been prescribed by the IFRS and if the same has not been followed by the
company operating in the United States then the financial statements of those companies
cannot be compared and hence it will not be possible to implement the IFRS across the
globe and have the comparability feature working across all the companies operating in
the World.
- Apart from the comparability, the reliability and the relevancy of the financial
information has also been implied from the non adoption of the fair value method. It is
because of the fact that the investors will not feel the financial information relevant and
reliable and hence will not be able take an effective decision.
- The next implication is identified as the relevant and is related to the charging of the
impairment amount to the assets. The impairment is very necessary in the current
scenario because of the changing market conditions and the regulatory mechanisms
which lead to the sudden reduction in the value of the assets of the company.
Thus, in this manner comparability, relevancy and reliability has been implied from the United
States corporate reporting practices.
TASK D
a) Revaluation model for the valuation of the property plant and equipment has not been
still adopted by the directors of the organization. It is because of the following reasons:
- There always been the changes in the market conditions on the frequent basis. These
changes have led to the companies to wipe off their assets as standing in the balance sheet
on one day. This can majorly affect not only the financial position and the net worth of
the company but also affects the decision of the investor that they have taken earlier.

- Second factor is related with the incapability of the directors of the organization to have
the identification of the fair value of the asset because of the fact that many times the
market value of then asset is not made available due to the severe market conditions.
- Third factor that has motivated the directors is that the historical cost will be more
reliable than the fair value. It is due to the fact that the directors at times to serve their
own group interest manipulate the market value and thus is less reliable (Seng, 2015).
- Last factor that has motivated the directors is the gross reduction in the value of the
property plant and equipment which in turn will reduce the net worth of the company and
also will result in the loss of wealth of the stakeholders of the company.
Thus, in this manner the directors have the motivation to adopt the cost model only.
b) Following are the effects of not revaluing the asset will have on the financial statements:
- The company will not be able take management decision for the replacement of the asset
and other related decision. As such decision ignores the historical cost which has been
incurred in the past.
- The company’s financial statements will not be able to be compared with the financial
statements of the other entities (Christensen, 2012).
c) The effect on the earnings of the shareholder of the company will be very good. It is
because by following the revaluation model, the earning price and net asset value per
share can be decreased with drastic amount due to change in the market conditions which
otherwise will not be there if the cost model has been followed. Thus, the shareholders
wealth will not be affected.
CONCLUSION AND RECOMMENDATION
Throughout the report, the investors and the market mechanisms have been revolved and have
been explained as to how the same can affect the presentation of the financial statements and
thus can have the material impact on the financial reporting of the company. Three major pillar
of the financial reporting are market, investors, regulators and the company. If any of this is
taken out then the financial reporting with good quality cannot be achieved. Four tasks have been

discussed. First task concludes that the quotations of the persons are not reliable and relevant.
Second task concludes that the government shall not made regulation due to market mechanisms.
The third task concludes that the United States shall adopt the IFRS framework at its best
otherwise the financial reporting made by the companies operating in the United States will lack
the comparability across the globe. The fourth task has concluded with the cost model as the best
way for the valuation of the noncurrent assets of the company as it will not affect the earnings of
the shareholder. In order to summarize, the report has detailed the importance of the financial
reporting and regulations and that too keeping in view the interest of the investors.
With this conclusion, it is strongly recommended that the financial reporting quality shall be
maintained by the companies in every manner and the rules and regulations shall be formulated
by the government.
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