Ethical issues in asset revaluations. GAAP in the United Kingdom permit firms to report property, plant and equipment on the balance sheet either at acquisition cost (net of depreciation) or current replacement cost. Firms choosing to revalue property, plant and equipment must revalue all assets of the same class, defined as those with a similar nature, function, or use.

Firms must revalue such assets periodically, but not necessarily every year.

Unilever PLC is a consumer foods company headquartered in the United Kingdom. Its balance sheet for Year 12 reports total assets of £43.318 million, total liabilities of £39.689 million, and total shareholders" equity of £3.629 million. Total assets on this date include property, plant and equipment of £9,240 million, which Unilever reports at acquisition cost net of depre- ciation. The firm discloses in notes to the financial statements that the current replacement cost of this property, plant and equipment is £10,529 million. Unilever has reported the acquisition cost and current replacement cost of its property, plant and equipment in notes to its financial statements for many years.

a. Lenders to a firm often calculate the ratio of total liabilities to total assets to assess the risk of bankruptcy. Calculate this ratio for Unilever using the amounts reported on its balance sheet.

Compute this ratio assuming that Unilever chose to revalue its property, plant and equipment to current replacement cost.
Assume that Unilever has a restriction in its borrowing agreements that stipulates that major borrowings become immediately due if the total liabilities to total assets ratio exceeds 90 percent at any time. Before issuing financial statements lor Year 12 with the amounts shown above, Unilever contemplates changing the accounting tor its property, plant, and equipment from acquisition cost (net of depreciation) to current replacement cost. Identify any ethical issues that you think Unilever should consider in this decision.
What advice would you give to the firm?