Question

Under U.S. GAAP, long-lived assets, such as real estate are reported on the balance sheet at the original purchase price of the asset. In the event that the value of a real estate becomes “impaired”—that is, the current market value of the real estate falls below its original purchase price and is unlikely to recover the lost value in the foreseeable future—the asset’s book value is written down to the lower current value and a loss is recorded on the firm’s income statement. Under no circumstances, however, can a firm write up the value of its real estate assets in the vent that current market value exceeds original purchase price. Discuss whether U.S. GAAP should be changed to allow a symmetric treatment of asset value increases and decreases. What are the implications of this asymmetry in the accounting treatment of assets (such as real estate) for U.S. financial statement users?

Answer 1

As per U.S GAAP

All fixed assets should be valued at its historical cost follwed by accumulated depreciation and impairment losses if any.

So this model named as Cost model which often used in U.S GAAP this can be explained by the following example

Building purchased for $20,000 and its useful life is 10 years. Then its writen down value after three year would be $14,000 ($20,000-6000(2000*3)). And after three year current market value of building is $12,000 only then the Net realisable value to be taken into the books of accounts would be $12,000. Because as per cost model fixed assets should be valued at cost or net realisable value whichever is lower. And the impairment loss of $2,000 should be debited to income statement.

So the Revaluation(increase) in the value of fixed asset should not be accounted in the books of account . Similarly any Impairment(decrease) in the value of fixed asset should be debited as impairment loss in income statement as per cost model which is currently used by U.S. GAAP.