Paper, Order, or Assignment Requirements
Answer the follow attached 6 questions
Case 3-5 International versus U.S. Standards
Under U.S. GAAP, property, plant, and equipment are reported at historical cost net of accumulated depreciation. These assets are written down to fair value when it is determined that they have been impaired. A number of other countries, including Australia, Brazil, England, Mexico, and Singapore, permit the revaluation of property, plant, and equipment to their current cost as of the balance sheet date. The primary argument favoring revaluation is that the historical cost of assets purchased ten, twenty, or more years ago is not meaningful.
A primary argument against revaluation is the lack of objectivity in arriving at current cost estimates, particularly for old assets that either will or cannot be replaced with similar assets or for which no comparable or similar assets are currently available for purchase.
- Discuss the qualitative concept of comparability. In your opinion, would the financial statements of companies operating in one of the foreign countries listed above be comparable to a U.S. company’s financial statements?
- Discuss the concept of reliability. In your opinion, would the amounts reported by U.S. companies for property, plant, and equipment be more or less reliable than the current cost amounts reported by companies in England, Mexico, or elsewhere?
- Discuss the concept of relevance. In your opinion, would the amounts reported by U.S. companies for property, plant, and equipment be more or less relevant than the current cost amounts reported by companies in England, Mexico, or elsewhere?
Current accounting for leases requires that certain leases be capitalized. For capital leases, an asset and the associated liability are recorded. Whether or not the lease is capitalized, the cash flows are the same. The rental payments are set by contract and are paid over time at equal interval.
- If one of the objectives of financial reporting is to enable investors, creditors, and the other users to project future cash flows, what difference does it make whether we report the lease as a liability or simply describe its term in footnotes? Discuss
- The efficient market hypothesis states that all available information is impounded in security prices. In an efficient capital market, would it make a difference whether the lease is reported as a liability or simply described in footnotes? Explain
- When there are debt covenants that restrict a company’s debt-to-equity ratio and when debt levels rise relative to equity, management may be motivated to structure leasing agreements so that they are not recorded as capital leases. Discuss this motivation in terms of agency theory