Case 3-5: International versus U.S. Standards in Ch. 3 of Financial Accounting T

Question

Case 3-5: International versus U.S. Standards in Ch. 3 of Financial Accounting Theory and Analysis 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. Required: a. 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

Explanation / Answer

The argument obiviously goes in favor of US GAAP reporting method of reporting assets at their fair value, net of accumulated depreciation. This is because, with this method, the following requirement is satisfied. First of all, it may happen that the fair value of the asset may not be its actual realisable value. The actual relialisable value may be more and it is surfaced when they are re-valued as rest of the countries. But, it would also be fair to assume that old assets either will or cannot be replaced with similar assets or for which there are no comparable or similar assets currently available for purchase as the price of replacement goes up higher that its actual depreciation of value. Upon revaluation, it may so happen that the value of the asset comes down at much lower rate that in case of US GAAP wherein the assets are reported net of accumulated depretiation. The US GAAP method holds much more relevance because it presumes that the value of the asset must be depreciated so as to make sure that the accumulated depreciation is comparable to its actual cost of replacement or very near to that. Thisis just not the case in other method othrwise. SO THIS METHOD HOLDS RELEVENCE...

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