CFA Practice Question

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CFA Practice Question

Which statement(s) is (are) true?

I. U.S. GAAP allows the historical cost method to value long-lived assets.
II. IFRS standards allow for the accounting of long-lived assets either through the cost or the revaluation model.
Correct Answer: I and II

User Contributed Comments 4

User Comment
johntan1979 GAAP also allows revaluation but only downward revaluation (impairment).
farhan92 Dont really understand why US GAAP only allows downward revaluation. Surely users of financial statements would want a more accurate picture of the business than a conservative one.
ascruggs92 ^Here's the reasoning: if companies were able to write up and down, they would have to report gains/losses on the income statement every year with the fluctuation of their asset values, and it would make their balance sheet more volatile, and therefore less reliable, on a year to year basis.

Think about what's going on with the oil industry right now. Oil companies are allowed to listed proven reserves on the balances sheet, but only when the reserves are profitable to recover. At $100/barrel a lot of oil was profitable to recover, at $30/barrel, not so much, and a bunch of oil companies that appeared to be in great shape suddenly faced huge write downs that destroyed their financials.

Imagine if this could be done for intangible or other assets? A company could revalue their patents and trademarks or the value of their headquarters, then a recession hits and the perceived future benefit never materializes, causing a big write down?

It goes along with the fact that we can only speculate about what will happen in the future, while we are certain of what's happened in the past. To avoid aggressive accounting that could produce materially misstatements of future value, whether the intention was to mislead or not, is more important than knowing the estimated (which itself implies a best guess) fair value at that moment in time.
syazwan21 excellent explanation ascruggs92
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