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“Upward Revaluation Of Nonfinancial Assets” Essay

993 words - 4 pages

The article “Upward Revaluation of Nonfinancial Assets,” by David Sardone and Tom Tyson, explains that the two most widely recognized sets of accounting standards, namely Generally Accepted Accounting Practice in the US (US GAAP) and International Financial Reporting Standards (IFRS), address the measurement of non-financial assets differently, and compelling arguments exist in favor of each approach. Notes that, despite the challenges to auditing fair value estimates, some suggest that Financial Accounting Standards Board (FASB) should conform more closely to current IFRS procedures by allowing the revaluation of certain non-financial assets. The authors propose that FASB should allow the ...view middle of the document...

The measurement of these assets, if they are not new, is the lower of the carrying amount or the fair value, minus the cost to sell. If they are newly acquired, the measurement is as follows: fair value, minus the cost to sell at the acquisition date.1 IAS 16 permits revaluation of property, plant, and equipment, but the entire asset class must be revalued as well. U.S. GAAP does not allow companies to use revaluation2. In the October 2007 edition of PriceWaterhouseCoopers’ “Similarities and Differences; a comparison of IFRS and US GAAP,” the valuation of assets under IFRS is described: “Historical cost is the main accounting convention. However, IFRS permits the revaluation of intangible assets, property, plant and equipment and investment property” (Holgate & Fuchs, 39). Under U.S. GAAP, nonfinancial assets that are used in operations are measured using the historical cost as well, including the costs necessary to bring the asset to the condition and location of its intended use.2 They are then depreciated over the asset’s useful life—depreciation is defined as “the process of allocating the costs of the service that an asset renders, spread over its expected life.”3 The article further discusses the arguments for changing the U.S. GAAP approach to valuing nonfinancial assets to the IFRS approach.
The IFRS approach to valuation should be extended to U.S. GAAP. This would enhance “true and fair” financial statement presentations. Sardone and Tyson argue that presenting PP&E at fair value ensures relevance, which is one of the most important fundamental characteristics of accounting because relevant information can influence decision makers. They further argue upward revaluation contrasts with the cost method in that the cost method focuses on reliability rather than relevance. There are benefits to this, “however, carrying long-lived nonfinancial assets at cost provides neither the predictive nor confirmatory value that external users need to make decisions” (Sardone & Tyson). ASC 820 is a guideline that was developed to make calculations of fair value more accurate and consistent. A hierarchy of 3 levels is developed, the third level being...

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