Explain how the fundamental qualitative characteristics apply in each of the following situations:
1. A company acquires land in exchange for shares, but the shares are lightly traded and cannot be easily valued. The most recent trades have fluctuated widely. The company proposes to use its own internal expert’s appraisal for the land.
2. A significant economic downturn occurs just as a company is preparing to issue its financial statements, three months after year- end. Because of the downturn, the collectability of its quite substantial accounts receivable is in doubt. The company’s CFO proposes that the company delay the issuance of the financial statements for another two or three months, until the collectability of the accounts becomes clearer.
3. A private (not publicly accountable) construction company wishes to defer revenue recognition on each construction project until the project is finished, although most companies recognize revenue on a percentage of completion basis (which also is required under IFRS). The company’s executives argue that since the completed- contract basis requires no estimates, it yields by far the most accurate (i. e., representationally faithful) measure of earnings.
4. The CEO of a major biotechnology company wishes to show the company’s important internally generated assets on the balance sheet. She is concerned that financial statement users are deprived of relevant information when they assess the earnings potential of the firm. She proposes that the assets be measured and reported by computing the discounted future cash flows that will occur from their use.
5. A company uses many assets that were acquired through long- term rental contracts. The easiest way to measure the cost is by treating the monthly rent as an expense. However, the company’s auditor insists that the leases be shown on the balance sheet as though the assets had been bought and a liability taken on, despite the significant number of estimates that are necessary to report it that way.