Recognition of a real estate loss 1331



  • I know that companies must keep accurate information on risks and liabilities to be available on a rapid and current basis. But does this mean that disclosure requirements have changed as well? For instance, lets say a company’s book value of a manufacturing plant has significantly decreased. Now if the company sells the plant it will take a huge a loss. But if the plants are mothballed and not sold then the company can avoid this loss by keeping the higher book value in the F/S. Under SOX, would a company have to disclose that it is doing this or is it sufficient enough to just have this information ready in case the SEC asks for it?
    Thanks, your help is very much appreciated.



  • This is a good question. At a minimum, all companies must comply with GAAP standards concerning real estate valuations. Even with GAAP, I’m guessing that the books might have to be adjusted annually based on true current status of these types of assets?
    In theory, there appears to be a potential for ‘financial accounting games’ to occur in not realistically assessing property valuations in either direction. However, SOX 302 is at one of control that should mitigate this reporting risk by requiring the accuracy of all business results and asset valuations. Executives must sign on the dotted line and be possibly held personally liable for inaccurate reporting discrepancies.
    I’m sure there are other controls that prevent the ‘cooking of the books’ when it comes to accounting standards in SOX.



  • I know that companies must keep accurate information on risks and liabilities to be available on a rapid and current basis. But does this mean that disclosure requirements have changed as well? For instance, lets say a company’s book value of a manufacturing plant has significantly decreased. Now if the company sells the plant it will take a huge a loss. But if the plants are mothballed and not sold then the company can avoid this loss by keeping the higher book value in the F/S. Under SOX, would a company have to disclose that it is doing this or is it sufficient enough to just have this information ready in case the SEC asks for it?
    Thanks, your help is very much appreciated.
    Do you mean that the FMV has declined? I would assume that GAAP standards around impairment would address the valuation issues and whether or not a loss needs to be recorded for financial reporting purposes. Whether you hold or sell the property likely would not impact the need to record an impairment loss.



  • Do you mean that the FMV has declined? I would assume that GAAP standards around impairment would address the valuation issues and whether or not a loss needs to be recorded for financial reporting purposes. Whether you hold or sell the property likely would not impact the need to record an impairment loss.
    Yes the FMV has declined. Do GAAP impairment requirements require a recoverability test at certain times? I thought that by holding the property an impairment test was not needed because of going concern.



  • From FASB Statement 144 -
    When circumstances change indicating a carrying amount may not be recoverable, CPAs should test the asset for impairment. A test may be called for when one or more of these events occur:
    A significant decrease in the market price of a long-lived asset.
    A significant change in how a company uses a long-lived asset or in its physical condition.
    A significant change in legal factors or in the business climate that could affect an asset’s value, including an adverse action or assessment by a regulator (such as if the EPA rules that a company is polluting a stream and must change its manufacturing process, thereby decreasing the value of its plant or equipment).
    An accumulation of cost significantly greater than the amount originally expected to acquire or construct a long-lived asset.
    A current-period operating or cash flow loss combined with a history of such losses or a forecast demonstrating continued losses associated with use of a long-lived asset.
    An expectation the entity will sell or otherwise dispose of a long-lived asset significantly before the end of its previously estimated useful life.


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