Question

The US Financial Accounting Standards Board does not allow revaluation of non-current assets to fair value, but it does make it compulsory to account for the impairment costs associated with non-current assets as per FASB Statement No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets.

Required:

What implications do you think these rules have for the relevance and representational faithfulness of US corporate financial statements??

Answer 1

Asset revaluation can trigger different signals to investors depending upon

company type, asset intensity and category and investors’ expectations. In the same

time, motivations behind asset revaluation decisions are diverse, being influenced

by management incentives, credit covenants, faithful representation and various

other reasons

In upward revaluation

leverage ratios and solvency can improve, leading to a better position in relation to

credit covenants. Equity is also positively affected. Alternatively, a decrease of

assets’ value will be reflected in a negative manner upon these indicators, which

might be a serious reason for a company to not revaluate, thus not preserving the

true and fair value of assets in the financial statements

So, we can say that the US GAAP follows the conservative approach for accountingof fixed assets

and the users can have more faithfulness on the accounts. However, the financial statements

doesnot show the true picture of the company

Note-

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