Fundamental Qualitative Characteristic Evident in the GPFS of Infosys

The conceptual framework for financial reporting is formulated with the intent to assist “International Accounting Standards Board (IASB)” in developing effective accounting policies for areas, which are not covered on the part of standards or in which there is accounting policy choice for better interpretation of information (Zhang & Andrew, 2014). The current assignment would focus on selecting a stock functioning in a recognised Stock Exchange to assess its conformance to the qualitative characteristics as laid down in the conceptual framework. Hence, Infosys has been selected, which is an IT company, operating in the Indian Stock Exchange. More precisely, it would intend to determine one fundamental characteristic that is evident in the financial statements of GPFS and two qualitative characteristics not evident in the financial statements of the organisation. Finally, the assignment would shed light on the effects of the absence of those characteristics on the decision-making process and the ways through which such adverse effects could be mitigated.

The fundamental qualitative characteristic, which is evident in the GPFS of Infosys, is relevance. According to Gordon et al., (2015, p. 96), ‘the implied purpose of disaggregation to help in estimation is to assure that the financial statements and their related footnotes signify the qualitative characteristic of relevance’. Infosys has conformed to all the principles of the Companies Act 2013 and International Financial Reporting Standards (IFRS)’. Moreover, it has taken into consideration the current rates associated with depreciation, tax and others (Infosys.com, 2018). Relevant information could be found about the treatment of impairment from the annual report of the organisation. In case of revenues, the management of Infosys recognises them at the sale point after tax deduction, which could be found Page 36 of the Annual Report. 

On the other hand, the expenses of the organisation mainly comprise of selling and marketing expenses along with general and administration expenses. Both the expenses are charged at certain percentage of the overall amount of revenue and any increase in professional and consultancy charges are offset by minimisation in repair expenses and minimisation in impairment losses realised on financial assets, which could be observed from Page 94 of the Annual Report.

Along with this, property, plant and equipment are assessed for recoverability at the time changes or events in circumstances signify that the carrying values might not be recoverable. ‘In order to conduct impairment testing, the recoverable amount is ascertained based on individual asset unless there is generation of cash flows of the assets, which are largely independent from the cash flows generated by other assets’ (Banker, Basu & Byzalov, 2016, p. 41).This could be observed from Page 154 of the Annual Report.

Two Qualitative Characteristics Not Evident in the GPFS of Infosys

Finally, Infosys has made relevant tax disclosures in India and overseas. According to the corporate statutory tax rate in India, Infosys applies the rate of 34.61% from its income before taxes to arrive at the final outcome in accordance with the “Income Tax Act, 1961”. This could be found from Page 95 of the Annual Report.

After careful assessment of the annual report of Infosys in 2018, it could be stated that the two enhancing qualitative characteristics that are not evident in the GPFS of the organisation include timeliness and verifiability. Recently, there has been accusation on Infosys that it has not filed Form 20F document that is necessary to be filed every year. ‘In addition, in its 37^th Annual General Meeting, the shareholders having American Depository Receipts (ADR) have been made to vote on financial statements without having adequate information about the financial status of the organisation’ (Thehindubusinessline.com, 2018).

Form 20F is a significant document that the SEC has mandated for the organisations for disclosure of major risks and internal control effectiveness. This is considered extremely significant by the shareholders holding American Depository Receipts for approval of the financial information. It is necessary to document this file within six months of the fiscal year end of the organisation. ‘The sensitivity of earnings to returns of an organisation helps in measuring the aspect of timeliness’ (Nobes & Stadler, 2015, p. 11). In case of Infosys, no disclosure has been made regarding the filing of Form 20F document and hence, timeliness aspect is not present in its annual report.

Recently Infosys has acquired Panaya, an Israeli firm, in which dispute could be observed between propriety and valuation of the deal. The organisation has recognised an impairment loss of $18 million for Panaya and Skava and the assets and liabilities of the organisation have been re-categorised and presented as held for sale. This information was not disclosed in the annual report of the organisation in 2018 and hence, the shareholders could not verify the actual financial condition of the organisation. Thus, Infosys has not conformed to the verifiability characteristic of GPFS.

As stated by Hussey (2014, p. 76), ‘the timeliness of the accounting information is referred as the provision of the information provided to the users which allow them to take quick action’. It is regarded as one of the crucial five elements of the decision-making process. ‘It needs to be further observed that if there is unavailability of information when required or information is accessible after reporting events, there would be lack of relevance as well’ (Isiavwe, Adetiloye & Eriabie, 2017, pp. 5-6). In case, a person is unable to make a decision in a timely manner it may lead to loss of customer as well as the overall business of Infosys. In case the information is not reported within time in a company like Infosys, it becomes useless and obsolete. The timeliness factor is usually responsible to specify the important aspect of the statute for preparation and presentation of the financial reports. ‘In case there is any delay in the retrieval of financial data, it may even lead to incorrect presentation of information, as timeliness is associated with cost of equity capital’ (Persakis & Iatridis, 2017, p. 13).

Effects of Absence of Qualitative Characteristics on the Decision-Making Process

Secondly, the verifiability aspect ensures that the information is represented faithfully in economic phenomena, which states the purpose of the report. In case, verifiability aspect is absent, the decision-making process by the independent accountants could not ensure that a specific depiction is a faithful representation (Scott, 2018). Similar to the timeliness aspect the verifiability aspect is seen to be having a significant impact on the financial statement of a company like Infosys. The absence of verifiability aspect further affects the reliability and accuracy of the information. The main decision which may get affected in the absence of these characteristics is also depicted with incorrect evaluation of informal data.

The verifiability aspect in an organization such as Infosys can be maintained with the adherence to the various types of the policies pertaining to the practice of objectivity. This will allow the company to evaluate the financial statements in terms of the various types of the measures which are seen to be associated with the uniformity and reliability aspects. In addition to this, the management accountant needs to ensure that the information with the top-level management. The management accountants need to be ensured that the facilitated information does not contain alterations and it is relevant to the accurate decision making. ‘For such assurance, it is necessary to carry out direct verification like direct observations and indirect verifications like checking inputs to any model along with recomputing the outputs with similar methodology’ (Aasb.gov.au, 2018).

In order to avoid the problem of verifiability the decision maker needs to ensure that the facilitated information is coming from a reliable source. The verifiability of the accounting information in a company like Infosys may be implemented both the direct and the indirect methodology. In case the company is seen to be following the direct method of the verifiability of the information, the cash is counted on the end of each year. In addition to this, if the company is depicted to follow the direct verification, the cash in hand will be counted at the end of each year. In case the company is depicted to be following the method of the direct verification the main process of the verifiability aspect needs to be ensured with the following of a trend of recalculation of the value of the of the inventory has been able to confirm the various types of the factors to confirm the implication of the various types of the valuation methods. The disclosure pertaining to the pending cases also needs to be verified as per the different types of tenure of thee cases. Some of the important considerations which the management needs to be take are also seen to be related to the verifying the information from beforehand. ‘It is the duty of the top management in ensuring the reliability of accumulated information’ (Bellandi, 2017, p.29).

Conclusion:

It can be concluded verifiability and the timeliness are seen as the main aspects which the company does not follow. Secondly, the relevance aspect of the company is maintained by Infosys. The important effect on the decision making related to the verifiability aspect is seen to be based on the various types of the factors which are seen with the delay in the processing of the financial information. In addition to this, if verifiability aspect is not maintained by the company this may lead to several inconsistencies in the accounting information. The decision making as per the verifiability can be ensured with the policies pertaining to the practice of objectivity. This will be able to ensure that the main implication on the evaluating the financial statements in terms of the various types of the measures which are seen to associated with the uniformity and reliability aspects.

References:

Bellandi, F. (2017). Materiality in Financial Reporting: An Integrative Perspective. Emerald Group Publishing.

Hussey, R. (2014). MBA Accounting. Macmillan International Higher Education.

Scott, P. (2018). Introduction to Accounting. Oxford University Press.

Banker, R. D., Basu, S., & Byzalov, D. (2016). Implications of Impairment Decisions and Assets’ Cash-Flow Horizons for Conservatism Research. The Accounting Review, 92(2), 41-67.

Gordon, E. A., Bischof, J., Daske, H., Munter, P., Saka, C., Smith, K. J., & Venter, E. R. (2015). The IASB’s discussion paper on the Conceptual framework for financial reporting: a commentary and research review. Journal of International Financial Management & Accounting, 26(1), 72-110.

Isiavwe, D. T., Adetiloye, K. A., & Eriabie, S. O. (2017). FINANCIAL REPORTS AND SHAREHOLDERS’DECISION MAKING IN NIGERIA: ANY CONNECTEDNESS?. Journal of Internet Banking and Commerce, 22(8), 1-14.

Nobes, C. W., & Stadler, C. (2015). The qualitative characteristics of financial information, and managers’ accounting decisions: evidence from IFRS policy changes. Accounting and Business Research, 45(5), 1-51.

Persakis, A., & Iatridis, G. E. (2017). The joint effect of investor protection, IFRS and earnings quality on cost of capital: An international study. Journal of International Financial Markets, Institutions and Money, 46, 1-29.

Aasb.gov.au. (2018). Retrieved 9 August 2018, from https://www.aasb.gov.au/admin/file/content105/c9/AASB_CF_2013-1_12-13.pdf

Infosys.com. (2018). Retrieved 5 August 2018, from https://www.infosys.com/investors/reports-filings/annual-report/annual/Documents/infosys-ar-18.pdf

Thehindubusinessline.com. (2018). Retrieved 5 August 2018, from https://www.thehindubusinessline.com/info-tech/whistleblower-accuses-infosys-of-not-making-adequate-disclosures/article24255527.ece