Question

Fair value accounting is used to report asset valuations for many assets on the balance sheet but not fixed assets, at least not yet. Instead we employ asset impairment to test fixed assets, intangibles and natural resources to determine if the underlying value of the asset is expected to be less than the carrying value. But is this really the same as reporting fair value?

Answer the following questions:

In your opinion, why do you think we don't use fair value accounting for fixed assets?

Do you think that fixed asset impairment approximates fair value accounting for fixed assets? Why or why not? Are there any key differences?

Based on the advantages and disadvantages of fair value accounting, would you recommend that fair value accounting be adopted for reporting fixed assets? Why or why not

Answer 1

I think IFRSs mostly insist on Fair value where feasible.
US GAAP allows for both FV or cost ... but once you choose a specific method you cannot change it.

Cost has the "advantage" of reporting lesser depreciation since there is no upward revaluation.
Fair valuation leads to increase in Equity by increasing the revaluation reserve, but this increase in equity does not show in P&L (for obvious reasons). It also leads to an "increased" depreciation expense for the future - which unfortunately does show in the P&L. You are allowed to release fair value reserves to Retained Earnings to cancel the impact of increased depreciation, but this release does not appear in the P&L statement ... only in the changes and movements in equity statement.
So a not so careful analyst may think better of a company that has assets at cost instead of at fair value.
Also the FV method increases your asset base and all of a sudden your asset turnover looks "bad" compared to your competitors who may be recording their assets at cost anf not doing any fair valuation/ revaluation.
I admire the logic behind the FV concept, though the execution is a bit messy. For e.g. - apart from the above problems, tax allowed depreciation usually is always at cost, so using FV leads to reconciliation issues between financial and tax books.

Other long term assets like investments in subs, associates etc (in the stand-alone balance sheet) can also be shown at fair value or held at cost.

For example

Company A bought a truck for $100 and will depreciate it on a five year straight line basis.

Year 1 - Truck will be listed at $100 on your BS on the cost basis. It's also possible that if it's a new truck, FV and book value or cost are the same.

In year two, asset will be listed at $80. Accumulated Depreciation will be $20.

Now when you sell the truck at a fair value, say in year 2 at $120, then that fair value will be used to determine your gain. In this case, since the book value is $80 ($100-$20) and the fair value sell price is $120, then $40 is your gain.

I hope above explanation clears your all doubts.