In: Accounting
Keanu Caroli, corporate controller for MainStreet Inc., is trying to decide how to present "Property, plant, and equipment" in the balance sheet. He realizes that the statement of cash flows will show that the company made a significant investment in purchasing new equipment this year, but overall he knows the company's plant assets are rather old. He feels that he can disclose one figure titled "Property, plant, and equipment, net of depreciation," and the result will be a low figure. However, it will not disclose the age of the assets. If he chooses to show the cost less accumulated depreciation, the age of the assets will be apparent. He proposes the following:
Property, plant & equip., net of depr $10 million
rather than
Property, plant & equip. $50 million
Less: Accum. depr. 40 million
Net book value $10 million
Your Assignment: In your initial post, answer the following questions:
1. What are the ethical issues involved?
2. What should Caroli do?
1. Caroli has presented the Property, Plant & Equipment (PPE) in the financial statements as PPE net of depreciation instead of showing it at cost less its accumulated depreciation till date. However, disclosure in such a manner not only results in non compliance of ASC 360 under US GAAP but also results in suppression of facts of the ageing of PPE. Though the age of the assets can be calculated from the depreciation expense during the year and the depreciation method adopted, but presenting by showing the reduced figure is not a true and fair view of the financial statements as age of the PPE shows the production capacity of the asset and also to identify whether the asset is still a cash generating unit for the organisation.
2. Caroli should present the facts as they are. Thus compliance with the standards strengthens the trust of the investors. Hence Caroli should the present the PPE at cost in the balance sheet and separately reducing it by its accumulated depreciation till date to show show true and fair view of the financial statements.