Fundamental Qualitative Characteristics and Enhancing Qualitative Features of Financial Reports

Discuss about the Qualitative characteristics in financial reporting as per the conceptual framework.

A conceptual framework is a problem-saving tool with a distinctive form of a situation that can be used to organize ideas that are real. This is systems of principles required as systematic standards that give maximum value in financial accounting statements. A conceptual framework considers the qualitative characteristics in financial reports which are divided into two, and that is fundamental qualitative which entails relevance and faithfulness representation while enhancing qualitative features involves comparability, timelessness verifiability, and understandability that will be used in decision making in a financial statement

This means that other sources or a third party can verify the accounting system. The financial statements can be audited, and information that is found should be same as listed in the financial reporting system. For information to be verified it should give the right information in the financial statements; this information should be accurately be presented so that it may assist the individual in all the facts that they require in need. This can make the report to be easily audited without difficulties. Verifiability enables companies to communicate on their economic state in the businesses. A financial statement should be objective since it’s easier to verify while personal information can never be verified hence difficult for users to understand it at all cost.

A financial report should enable to compare entities from within or across bodies. If we compare the information from within, we compare one financial accounting period with another, but when we compare information across entities, this is we can check analyses, the similarities and the difference of the financial statements and see whether the company has achieved something or not. These comparisons between companies or periodic yearly will enable us to reach the right decision making and see whether we achieved the correct standards in the company. For companies to compare their entities, they should choose the correct standards as needed by the FASB to bring about neutrality. If using the same method am not bringing neutrality we can take the chance and use other styles so to achieve reliability and relevance. This comparability enables users to identify the trends in how a company is performing and its financial positions it these entries .all financial statements should be comparable in all the states and companies. Comparability brings about consistency in a financial statement; in this, we can get the predictive and the feedback value in financial reports. In the first paragraphs, we see companies compare the financial statements see whether they are neutral or if they have to look for another standard way. If the information is comparable, it will bring about the strengths and weaknesses and also prospects for the futu

Importance of Verifiability and Comparability in Financial Reporting

Relevant information can make a difference in the decision made by the users, and this information needs to be related to the economic decision, or this information becomes useless in a company.  A financial statement should r be very relevant where the information is true and faithful so as not to affect the economic decision of a company. The financial statement should either be predictive or a confirmatory value.  These values can predict the future activities and economic state of a company. In relevance, we should also consider the materiality which assists in decision making. In relevance, we understand that an item can be a material and immaterial in one company and not in another company in one year and not in another year depending on its economic value. Materiality is seen in the size, nature, period, and estimates this will be to make you want brings value in a company and what does not in a company. From the first paragraph, we see how millions of money is spent to get the right standards to bring about decision making in companies.

A financial report should be achieved in time. This is to help balance the timely reporting and bringing up the reliable information as to when a statement is made in the time it enables decision making in different aspects. This says that financial statements should not be delayed. In the article Terry Bowen says that ones they get the notes they have to train the analyst so that it will not lead to poor decision making. For this training to take place, the information should be brought on time the accountants to verify and train their users to come up with the correct decision making. Timeliness works close with relevance

The financial statements should record all the entities that occurred. This information should be correct and non-information should be omitted in writing the statements either to benefit the company to gain profit or improve the stewardship of the companies. This information should be accurate, fair and free from misstatements. Faithfully represented information should be complete, neutral and lack any errors and this will be achieved if the financial statements do not affect the economic phenomena of a company and the process used should be according to the required standards FASB. A faithfully represented financial statement is easy to audit. In the article we see the investors depending on the management briefings to understand the company’s number hence this statement should be faithfully represented by the accountants making the statements.

Relevance and Materiality in Financial Reporting

This requires the financial information to be understandable by the users with knowledge of business and economics. The data should be written in a simple language; it should also be precise, clear and concise so as not to mislead the people in decision making. The users should understand the information to any given user and even comprehend it as provided in the financial statement. A financial statement should provide a summary of all the details in it this will help the user to understand all the intricate parts (De Franco, Kothari and Verdi 2011). The financial statement can also consider using an illustration that is the bar graph, line graph, or pie charts; this can be used to explain the trends in a report. One can use this illustration to compare their statements even from one company to another, and this will tell us all the happenings in a company in the economic and the accounting of that company (Van Gunsteren 2018). Complex statements should not be neglected, but one should ensure that they are well organized and the procedures are thoroughly explained to ease its work and help the user to understand the information thoroughly. The problem to understand cans either Bethe user’s inability to comprehend the statement or the information itself. The information should be complete and very detailed to bring about understanding (Tokunaga and Epstein 2014). For companies to understand each other financial statement you should ensure that you use the correct standards so it will be easy to understand all the across entities in businesses .financial statements should bring not only understanding but also avoid wrong interpretation of the financial statement. Understandability should also bring the consistency in the reports

A financial report should lack biasness or objectivity; the standards should be relevant and reliable to all the users. The financial reports should not tend to favor one side, but it should look at the interests of all the users to be neutral all information should faithfully, and the purpose of the report should be revealed in the financial report (Chen et al.  2018).

The above-mentioned characteristics make financial reporting very important to the users they are commonly needed by the users; however, problems are achieving these qualitative characteristics and that are the conflict of objectives, environmental influence and lack of understandability. Where one characteristic may differ the other, and other may work together to bring about the best financial statements. For the information to be using the financial report should use this characteristics minimum to bring the best decision making (Wang 2014).

Timeliness and Understandability in Financial Reporting

This theory is related to the economic welfare of persons. It talks about the government interventions in the market and the rules that are associated with either the market failure or imperfections. This theory was to bring about the general welfare and not interests of well-organized individuals (Mansbridge 2018). These rules are to lower the prices in the market but increase the output in any market and all the firms should be regulated so as to ensure that certain goods and services are provided. This regulation also protects the firm from certain externalities such as pollution. Without these rules and regulations firms may not also bring about proper allocation of resources since it will be unevenly distributed. Public interest theory is a way to ensure competition, impact externalities, stabilize the economy (Dur and van Lent 2018). 

It was concluded that the government should not bring about those rules because the [public interest theory is defined by the procedural terms and not the substantive terms because of its description has failed to promote the public interest but the stakeholders are the ones that benefit. These regulations will reduce to provide quality goods or services. This theory is more normative than a positive theory. This theory does not correct the market failure and also improve social welfare and this theory is not theoretically explained to bring its importance to the society

Where the regulatory agencies comes to be dominated by the industry themselves. The firms have to take control because they have a lot of stake to this regulation, the public also has a lot of stake but they will not form laws that will assist the firms. These regulatory agencies become nominated because even the regulators leave their jobs to come and get involved with industries where they seek employment. All regulated industries compete against each other in the political areas as to increase their productivity and incomes so as to achieve this they have to create regulations that will tend to favor them and will serve their own interests and not the company’s interest. These regulations benefit only a certain group. . The regulars might impose low rates they will gain political support and those regulated firms will gain lots of profit which will be good deal to these firms (Kim, Kraft and Ryan 2013)

The government should not enact this regulations since they don’t identify the new regulatory systems in the environment and social regulations. The theory only looks on the demand side of regulation. This theory is not complete since it does not explain how a regulatory agency will become dominate with the regulated industry (Berger 2018).

Objectivity and Biasness in Financial Reporting

Also known as the private interest theory of regulation and the regulations are driven by the supply and demand where the government is the supply while the interest groups are in the supply (Chan and Vasarhelyi 2018). This theory was introduced to increase the social welfare.

The government could not allow the regulation to be established because the theory doesn’t state whether these rules should only occur when there is a market failure this will inflict the interest groups. In competitive market or monopolies, some regulation will tend to favor only one group but not all. The regulations will tender to benefit the small groups than big groups since they are weak and will not bring any advantage to the regulators. The regulators also gain power and strength.

Implications of the US FASB rules

There will be no faithful representation in the financial report since the asset was not given the fair value but the cost value was written

It will lead to misallocation of capital this is the company will achieve lots of profit hence many people will want to invest in those companies’

It will be difficult to improve future performance since the company will have exaggerated   profits

This might distract the company’s future expectations in case of economic and technology changes

Motivation to directors not to revalue the property

There will be a good performance in the company so there will be no need to revalue the property and revaluing it is very expensive

Effect of the decision

There will be an exaggerated amount of profit in the future hence will reduce the productivity of the company

Impacts of not revaluing

The productivity of the company will drop hence create problems in the future

References

Berger, T.M.M., 2018. Ipsas Explained: A Summary of Standards and Principles of International Public Sector Accounting Standards. John Wiley & Sons.

Chan, D.Y. and Vasarhelyi, M.A., 2018. Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.

Chen, C.W., Collins, D.W., Kravet, T.D. and Mergenthaler, R.D., 2018. Financial statement comparability and the efficiency of acquisition decisions. Contemporary Accounting Research, 35(1), pp.164-202.

De Franco, G., Kothari, S.P. and Verdi, R.S., 2011. The benefits of financial statement comparability. Journal of Accounting Research, 49(4), pp.895-931.

Dur, R. And van Lent, M., 2018. Serving the public interest in several ways: Theory and empirics. Labour Economics, 51, pp.13-24.

Kim, S., Kraft, P. and Ryan, S.G., 2013. Financial statement comparability and credit risk. Review of Accounting Studies, 18(3), pp.783-823.

Mansbridge, J.J., 2018. A deliberative theory of interest representation. In The politics of interests (pp. 32-57). Routledge.

Tokunaga, J. and Epstein, G., 2014. The endogenous finance of global dollar-based financial fragility in the 2000s: A Minskian approach. University of Massachusetts Amherst, Political Economy Research Institute Working Paper Series, (340).

Van Gunsteren, H.R., 2018. A theory of citizenship: Organizing plurality in contemporary democracies. Routledge.

Wang, C., 2014. Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4), pp.955-992.