Discuss and answer the question regarding the case listed below in detail: Asset

Question

Discuss and answer the question regarding the case listed below in detail:

Asset Write-Ups

Rouse Company, a real estate developer, is well known as one of the few U.S. companies to have reported the current value of property and equipment in its financial statements. IAS 16 permits the inclusion of upward asset revaluations, based on appraisals, in the financial statements. And IAS 40 allows real estate companies to both record investment property in the balance sheet at its fair value and include the associated unrealized gains in the income statement.

In Germany, as in the U.S., upward revaluations are not allowed. In fact, before being replaced by IASB standards, German rules were seen as encouraging write-downs, resulting in the creation of so-called hidden reserves, which constitute a systematic understatement of assets. In March 1993, Daimler-Benz disclosed that it had hidden reserves of $2.45 billion.

1. Why might real estate companies be among the leaders in encouraging the disclosure of the current value of property and equipment?

2. If German companies have “hidden reserves,” why do you think Daimler-Benz chose to reveal the magnitude of its hidden reserves in March 1993? What is the advantage of having hidden reserves?

3. As an auditor, how would you feel about auditing the financial statements of a company that uses appraisal values instead of historical costs?

Explanation / Answer

1. Real estate companies have the most to gain/lose if the figures vary. Since they are selling one large item, it is important the amounts are as current as they can be because real estate tends to always increase in value overtime. Since real estate appreciates in value, the most current value would be the ideal value to use.

2.
Daimler-Benz chose to reveal its reserves because once it is revealed, they are able to be listed on the New York Stock Exchange The advantage of having hidden reserves is that they are able to use those funds to balance out years where income was not as expected.

3. Appraisal figures are often inflated in comparison to historical costs. The amounts also can vary depending on who is appraising. I would feel more comfortable if I knew the appraiser. Historical cost would at least give what figures were the trends from the past.

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