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Brief Case Studies - Week 7 - Essay Example

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International Fair Value Accounting (Case 15-2) a) Nowadays there is a recent trend prevailing in accounting standards which is known as harmonization of accounting standards among the leading accounting standards setting bodies across the globe. There are two major accounting standard setting bodies i.e…
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Brief Case Studies - Week 7
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Brief Case Studies - Week 7

They are listed in different stock exchanges of the world as well. Under such circumstances, it becomes quite complicated as well as costly to prepare the financial statements under different reporting requirements. IFRS issued by IASB provides the treatment of fair value accounting of property, plant and equipment which is currently not supported US GAAP issued by FASB. However, with the increasing adoption of IFRS, it is very likely that US GAAP will also add the similar treatment for fair value accounting of Property, Plant and Equipment. b) Fair value accounting has the biggest disadvantage of valuing property, plant and equipment on the basis of subjectivity. When measuring fair values of the property, plant and equipment, several subjective assumptions are taken by the evaluators which pose question marks upon the objective approach towards financial statements. Thus, the financial statements become less attractive to be compared with other financial statements of other entities due to lack of objectivity element. c) The fair value accounting for property, plant and equipment has the similarity with that of investment accounting. Under both types of accounting, if the fair values of the asset are increased, then stockholders’ equity is also increased directly such that it has no impact on the net profit of the entity. However, in case of decrease of the fair value of property, plant and equipment, and investment, the amount of decrease is expensed out in the income statement which directly decreases the profitability of the entity. After that the decreased amount of net profit is credited to stockholder’s equity. This mechanism is set out in order to apply the principle of conservatism which states that the entity should not anticipate any profits but it must anticipate all the losses. The fair value accounting for property, plant and equipment and investment accounting consider this principle as the unrealized gains are credited directly to equity whereas unrealized losses are charged as an expense in the income statement thus reducing the profitability of the entity. Analysis of Statement of Cash Flows (Case 16-3) a) 1. As far as depreciation is concerned, it is an item of non-cash expense. To make it very clear, it is not a cash flow. However, the reason behind including depreciation in cash flow statements is the elimination of effect of depreciation from calculating net cash flow increased or decreased. In order to arrive at the corrected figure of cash flows, the depreciation amount needs to be added in the net profit as it was deducted previously when calculating net income in the income statement. Since it is a non-cash expense, therefore, it does not decrease the cash flows. Because of this, it is added in the cash flow statement in order to provide the correct amount of cash flows. 2. Even though share issued for acquiring land is not a cash transaction, however, the substance of this transaction is based on share. If the company is going to buy back these shares, it would have to complete this transaction by providing consideration in cash. Under existing scenario, cash is not directly involved, but a significant investment is made, therefore, this transaction is shown as a separate schedule in the cash flow statement and not included in the mainstream working of calculation of cash flows. 3. Gain on sale of investment is also non-cash income therefore its treatment is similar to that of depreciation. Since the amount ... Read More
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