Question

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1. Real estate companies would encourage the current value of property and equipment being disclosed because as a company they help sell and list various pieces of property. Real estate companies make a good amount of revenue from selling and listing property so therefore they understand the importance of disclosing the amounts.

2. Hidden reserves are company's funds not placed into an account on the balance sheet. Hidden reserves are created by underestimating the assets or by over accounting the liabilities to have a lower taxable income. The advantage of having hidden reserves is the company will not have to pay so much in taxes. I believe the company disclosed their hidden reserves due to the IASB standards coming part of the Germany accounting methods.

3. Historical cost is based on the original value it was when first purchased. An appraisal value is based on the current fair market value. I feel companies use appraisal value when the purchase used assets. If it was that case I wouldn't mind auditing financial statements with appraisal values. For the most part I would much rather audit financial statements with historical cost because I can trace the numbers back to an invoice rather than relying on a persons opinion.

Answer 1

.1. In my opinion, real estate companies would prefer showing the value of assets at the currernt market price, however, this may be misleading for the stakeholders as the value of company will be appreciated with no actual booked profit. All such profits shall be non-realiseable.

The management would like to follow this kind of approach in order to enhance the net worth of the company, but this is surely not the right way to go for the following reasons:

-> Enhancement of net worth of the company without any actual booked profit.

-> The price of property as shown in the financial statements may vary each year without any sale or purchase.

-> The management can manipulate the prices of assets in order to show growth and for their own personal benefits as funds may be raised over such assets where the price may not actually be the same..

2. The companies management sometimes in order to avoid tax payments may underestimate their assets or over value their liabilities as this leads to reduction in their net profit during the year. Such adjustment is shown as a hidden reserve.  

IASB or the International Accounting Standards Board has been working on new accounting standards to be brought into place in Germany in order to bring full disclosure on accounting and provide a framework for accounting governance.

3. Historical Cost principle is like a backbone for our accounting. It simply states that any asset purchased shall be accounted at the cost of such asset, irrespective of its market price.

However, in the given scenario, if a used asset is purchased, then it shall be recorded at the price at which it is further purchased and not at its original cost. For accounting purposes, it is safe to say that we can use the value at which we purchased the used asset as its purchase cost or the cost of asset in order to record its book value.