CASE 2 Accounting Standards-Asset Valuation Canadian REIT is a large real estate investment trust with total invested funds of approximately $10 billion. It owns and manages shopping centres that contain stores such as Wal-Mart, Lowes, Winners, large grocery stores, and many types of setail stores. Canadian REIT shares trade on the Toronto Stock Exchange. Prior to 2011, the company reported its financial results using the Canadian (ienerally Accepted Accounting Principles (GAAP). As a publicly traded corpora- tion, the company is now required to use the International Financial Reporting Standards to report its results. In past years, the company recorded the land and property it owned on its balance sheet according to GAAP. The amount reported, $5 billion, was based on the cost principle, that is, the amount paid when the land and property was purchased. This followed the former GAAP rules for reporting assets. With the adoption of the IFRSS, the company had the option to use the fair value principle as its method of reporting the value of its property. The company Ised the services of accountants, appraisers, and real estate experts to determine the fair value of its property. A fair value of $6 billion was determined for the property. This amount was $1 billion more than the previous cost principle figure and resulted in an increase in the value of the assets carried on the balance sheet by $1 billion. The company has decided to adopt the fair value concept option alforded by the IFRS. Quostlons 1. Does the company have the right to choose which standards it will follow, GAAP or the IFRS? Why? 2. What effect will the switch to "fair value" have on the company's balance sheet? 3. Suggest other positive effects of the change to fair value. Valuation of Assets CASE 3 David Henhawk owns a small bicycle courier service. He is the sole owner and has chosen to follow the Accounting Standards for Private Enterprise for financial reporting. David will be approaching the bank for a loan to support business operations. He asks you, his accountant, to prepare a current balance sheet for him to show the bank regarding his loan application. A friend of David's, who works in the real estate business, has indicated that a building owned by the business would be worth $400 000 if offered for sale on the current market. The building is listed as an asset on the company's books at $250 000, its original cost price. David feels the higher amount should be used on the balance sheet because it better reflects the value of his business and would impress the bank. Questions 1. Under the Accounting Standards for Private Enterprise cost principle, what amount should be shown on the balance sheet for the building? 2. Under the International Financial Reporting Standards fair value principle, what amount should be shown on the balance sheet? 3. Should you follow David's instructions when you prepare the balance sheet? Give reasons for your answer. 4. Would the bank be interested in the current value of the building? Why? 5. What advice would you give David? CASE 2 Accounting Standards-Asset Valuation Canadian REIT is a large real estate investment trust with total invested funds of approximately $10 billion. It owns and manages shopping centres that contain stores such as Wal-Mart, Lowes, Winners, large grocery stores, and many types of setail stores. Canadian REIT shares trade on the Toronto Stock Exchange. Prior to 2011, the company reported its financial results using the Canadian (ienerally Accepted Accounting Principles (GAAP). As a publicly traded corpora- tion, the company is now required to use the International Financial Reporting Standards to report its results. In past years, the company recorded the land and property it owned on its balance sheet according to GAAP. The amount reported, $5 billion, was based on the cost principle, that is, the amount paid when the land and property was purchased. This followed the former GAAP rules for reporting assets. With the adoption of the IFRSS, the company had the option to use the fair value principle as its method of reporting the value of its property. The company Ised the services of accountants, appraisers, and real estate experts to determine the fair value of its property. A fair value of $6 billion was determined for the property. This amount was $1 billion more than the previous cost principle figure and resulted in an increase in the value of the assets carried on the balance sheet by $1 billion. The company has decided to adopt the fair value concept option alforded by the IFRS. Quostlons 1. Does the company have the right to choose which standards it will follow, GAAP or the IFRS? Why? 2. What effect will the switch to "fair value" have on the company's balance sheet? 3. Suggest other positive effects of the change to fair value. Valuation of Assets CASE 3 David Henhawk owns a small bicycle courier service. He is the sole owner and has chosen to follow the Accounting Standards for Private Enterprise for financial reporting. David will be approaching the bank for a loan to support business operations. He asks you, his accountant, to prepare a current balance sheet for him to show the bank regarding his loan application. A friend of David's, who works in the real estate business, has indicated that a building owned by the business would be worth $400 000 if offered for sale on the current market. The building is listed as an asset on the company's books at $250 000, its original cost price. David feels the higher amount should be used on the balance sheet because it better reflects the value of his business and would impress the bank. Questions 1. Under the Accounting Standards for Private Enterprise cost principle, what amount should be shown on the balance sheet for the building? 2. Under the International Financial Reporting Standards fair value principle, what amount should be shown on the balance sheet? 3. Should you follow David's instructions when you prepare the balance sheet? Give reasons for your answer. 4. Would the bank be interested in the current value of the building? Why? 5. What advice would you give David