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HA 3011 Advanced Financial Accounting

Assessment item 2 — Assignment

Due date: 11.59 pm Friday Week 10

Weighting: 20%

Assessment Task Part A (6 Marks)

In an article entitled ‘Unwieldy rules useless for investors’ that appeared in the Australian
Financial Review on 6 February 2012 (by Agnes King), the following extract appeared. Read
the extract and then answer the question that follows.

Millions of dollars have been spent adopting international financial reporting standards to help
investors make like-for-like comparisons between companies in global capital markets. But
CFOs say they are useless and have driven financial disclosures to unmanageable levels. The
criticism comes as the United States, the world’s largest capital market, decides whether to
retire its domestic accounting standard (US GAAP) and adopt IFRS.

“In seven years I never got one question from fund managers or investment analysts about
IFRS adjustments,” former AXA head of finance Geoff Roberts said. “Investors...rely on
investor reports and management briefings to understand companies’ numbers.”

If analysts did delve into IFRS accounts, they would most probably misinterpret them,
according to Wesfarmers finance director Terry Bowen. “Once you get into the notes you have
to be technically trained. If you’re not, lot of it could be misleading,” Mr Bowen said.

Commonwealth Bank chief financial officer David Craig said IFRS numbers were disregarded
by investors because they could actually obscure an institution’s true position.

Required:

You are required to explain which qualitative characteristics of financial reporting, as per the
conceptual framework, do not, in the opinion of the above quoted individuals, appear to be
satisfied by current reporting practices pursuant to IFRS. Also, you are required to consider
whether the views are consistent with the view that corporate financial reports satisfy the
central objective of financial reporting as identified in the Conceptual Framework.

Assessment Task Part B (6 Marks)

In 2006 the Australian Government established an inquiry into corporate social responsibilities
with the aim of deciding whether the Corporations Act should be amended so as to specifically
include particular social and environmental responsibilities within the Act. At the completion
of the inquiry it was decided that no specific regulations would be added to the legislation, and
that instead, ‘market forces’ would be relied upon to encourage companies to do the ‘right
thing’ (that is, the view was expressed that if companies did not look after the environment, or
did not act in a socially responsible manner, then people would not want to consume the
organisations’ products, and people would not want to invest in the organisation, work for
them, and so forth. Because companies were aware of such market forces they would do the
‘right thing’ even in the absence of legislation).

Required:
You are required to explain the decision of the government that no specific regulation be
introduced from the perspective of:

(a)Public Interest Theory


(b)Capture Theory
(c)Economic Interest Group Theory of regulation

Assessment Task Part C (4 Marks)

The US Financial Accounting Standards Board does not allow revaluation of non-current assets
to fair value, but it does make it compulsory to account for the impairment costs associated
with non-current assets as per FASB Statement No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets.

Required:

What implications do you think these rules have for the relevance and representational
faithfulness of US corporate financial statements?

Assessment Task Part D (4 Marks)

Many organisations elect not to measure their property, plant and equipment at fair value, but
rather, prefer to use the ‘cost model’. This will provide lower total assets and lower measures,
such as net asset backing per share.

Required

You are required to answer the following questions:

(a)What might motivate directors not to revalue the property, plant and equipment?

(b)What are some of the effects the decision not to revalue might have on the firm’s financial
statements?

(c)Would the decision not to revalue adversely affect the wealth of the shareholders?