Companies following international accounting standards can revalue fixed assets above the assets’ historical costs. Such revaluations are allowed under various countries’ standards and the standards issued by the IASB. Liberty International, a real estate company headquartered in the United Kingdom (U.K.), follows U.K. standards. In a recent year, Liberty disclosed the following information on revaluations of its tangible fixed assets. The revaluation reserve measures the amount by which tangible fixed assets are recorded above historical cost and is reported in Liberty’s stockholders’ equity.
Completed Investment Properties
Completed investment properties are professionally valued on a market value basis by external valuers at the balance sheet date. Surpluses and deficits arising during the year are reflected in the revalution reserve.
Liberty reported the following additional data. Amounts for Kimco Realty (which follows GAAP) in the same year are provided for comparison.
(pounds sterling, in thousands)
(dollars, in millions)
Average total assets
How do these companies compare on these performance measures?
Based on return on assets (ROA), Kimco is performing better than Liberty. Relative to GAAP, an argument can be made those assets and equity are overstated. ROA of Liberty increases to 3.45%.
Ratio analysis is a basic approach to assessing a company's health by examining the relationships between key financial indicators. According to many analysts, ratio analysis is the most important aspect of the analytical process.
Calculating return on asset for Liberty
Calculating return on asset for Kimc
Calculating profit margin on sales for Liberty
Calculating profit margin on sales for Kimco
Calculating Asset turnover for Liberty
Calculating Asset turnover for Kimco
Kimco is outperforming Liberty in terms of return on assets (ROA). The fundamental reason for this disparity is a profit margin that is more than three times that of Liberty. While Liberty has a larger asset turnover (.13 vs.11), the smaller profit margin leads to only a 2.2 percent return on investment (ROI).
Debit (£ )
Credit (£ )
Unrealized Gain on Revaluation
It is possible to argue that assets and equity are inflated in comparison to GAAP. The revaluation adjustment raises Liberty's asset values and equity in the item in (b) above. To make Liberty's reported figures comparable to those of a U.S. corporation like Kimco, you'd have to subtract the revaluation excess from Liberty's assets and equity.
For example, after adjusting Liberty’s assets downward by the amount of the revaluation reserve, Liberty’s ROA increases to:
This is still lower than Kimco’s ROA, but the gap is narrower after adjusting for differences in revaluation.
Note: Adjusting Kimco's assets to fair value is another technique to make Liberty and Kimco comparable. This method might be used to talk about the trade-off between relevance and accuracy in representation.
(Depreciation Computation—Addition, Change in Estimate) In 1990, Herman Moore Company completed the construction of a building at a cost of $2,000,000 and first occupied it in January 1991. It was estimated that the building will have a useful life of 40 years and a salvage value of $60,000 at the end of that time.
Early in 2001, an addition to the building was constructed at a cost of $500,000. At that time, it was estimated that the remaining life of the building would be, as originally estimated, an additional 30 years and that the addition would have a life of 30 years and a salvage value of $20,000.
In 2019, it is determined that the probable life of the building and addition will extend to the end of 2050, or 20 years beyond the original estimate.
At the end of the current year, Joshua Co. has a defined benefit obligation of $335,000 and pension plan assets with a fair value of $345,000. The amount of the vested benefits for the plan is $225,000. Joshua has a liability gain of $8,300 (beginning accumulated OCI is zero). What amount and account(s) related to its pension plan will be reported on the company’s statement of financial position?
Everly Corporation acquires a coal mine at a cost of $400,000. Intangible development costs total $100,000. After extraction has occurred, Everly must restore the property (estimated fair value of the obligation is $80,000), after which it can be sold for $160,000. Everly estimates that 4,000 tons of coal can be extracted. If 700 tons are extracted the first year, prepare the journal entry to record depletion.
(Depletion Computations—Minerals) At the beginning of 2017, Aristotle Company acquired a mine for $970,000. Of this amount, $100,000 was ascribed to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists have indicated that approximately 12,000,000 units of ore appear to be in the mine. Aristotle incurred $170,000 of development costs associated with this mine prior to any extraction of minerals. It also determined that the fair value of its obligation to prepare the land for an alternative use when all of the mineral has been removed was $40,000. During 2017, 2,500,000 units of ore were extracted and 2,100,000 of these units were sold.
Compute the following.
Electroboy Enterprises, Inc. operates several stores throughout the western United States. As part of an operational and financial reporting review in a response to a downturn in its markets, the company’s management has decided to perform an impairment test on five stores (combined). The five stores’ sales have declined due to aging facilities and competition from a rival that opened new stores in the same markets. Management has developed the following information concerning the five stores as of the end of fiscal 2016.
Original cost $36million
Accumulated depreciation $10 million
Estimated remaining useful life 4 years
Estimated expected future
annual cash flows (not discounted) $4.0 million per year
Appropriate discount rate 5 percent
Assume that you are a financial analyst and you participate in a conference call with Electroboy management in early 2017 (before Electroboy closes the books on fiscal 2016). During the conference call, you learn that management is considering selling the five stores, but the sale won’t likely be completed until the second quarter of fiscal 2017. Briefly discuss what implications this would have for Electroboy’s 2016 financial statements. Assume the same facts as in part (b) above.
Electroboy management would like to know the accounting for the impaired asset in periods subsequent to the impairment. Can the assets be written back up? Briefly discuss the conceptual arguments for this accounting.
94% of StudySmarter users get better grades.Sign up for free