Rouse Company, a real estate developer, is well known as one of the few U.S. companies to have reported the current value of property and equipment in its financial statements. As mentioned in the text of the chapter, IAS 16 permits the inclusion of upward asset revaluations in the financial statements. However, rules enacted by national accounting standard setting authorities vary greatly around the world.
In Germany, as in the United States, upward revaluations are not allowed. In fact, German rules are seen as encouraging write-downs, resulting in the creation of so-called hidden reserves, which constitute a systematic understatement of assets. In March 1993, Daimler-Benz (one of the two companies that merged into DaimlerChrysler) disclosed that it had hidden reserves of $2.45 billion.
Asset revaluations occur quite frequently in the United Kingdom. As discussed in the text, one example can be found in the financial statements of Diageo, the British consumer products firm. The June 30, 2004, net amount of land and buildings for Diageo was reported at ￡907 million, which is a mix of historical cost numbers and amounts obtained from professional revaluations. The net amount of land and buildings would have been ￡794 million without the revaluations.
1. Why might real estate companies be among the leaders in encouraging the disclosure of the current value of property and equipment?
2. If German companies have “hidden reserves,” why do you think Daimler-Benz chose to reveal the magnitude of its hidden reserves in March 1993? What is the advantage of having hidden reserves?
3. As an auditor, how would you feel about auditing the financial statements of a company that uses appraisal values instead of historical costs?