Problem:
Companies following international accounting standards are permitted to revalue fixed assets above the assets' historical costs. Such revaluations are allowed under various countries' standards and the standards issued by the International Accounting Standards Board (IASB). Liberty International, a real estate company, headquartered in United Kingdom (U.K.), follows U.K. standards. In a recent year, Liberty disclosed the following information on revaluations of its tangible fixed assets. The revaluation reserve measures the amount by which tangible fixed assets are recorded above historical cost and is reported in Liberty's stockholders' equity.
Liberty International
Completed Investment Properties
Completed investment properties are professionally valued on a market value basis by external valuers at the balance sheet date. Surpluses and deficits arising during the year are reflected in the revalution reserve.
Liberty reported the following additional data. Amounts for Kimco Realty (which follows U.S. GAAP) in the same year are provided for comparison:
Liberty
(pounds sterling, in thousands)
Total revenues, 741
Average total assets, 5,577
Net income, 125
Kimco
(dollars, in millions)
Total revenues, 517
Average total assets, 4,696
Net income, 297
A. Discuss how do these companies compare on these performance measures?
1.Return on assets: Liberty, 0.13; Kimco, 0.11
2.Profit margin: Liberty, .1687 (16.87%); Kimco, .5745 (57.45%)
3.Assets turnover: Liberty, .022 (2.2%); Kimco, .063 (6.3%)
B. Liberty reports a revaluation reserve of 1,952 pounds. Assume that 1,550 of this amount arose from an increase in the net replacement value of investment properties during the year. Prepare the journal entry to record this increase. (Hint: Credit the Revaluation Reserve account.)
C. Under U.K. (and IASB) standards, are Liberty's assets and equity overstated? If so, why? When comparing Liberty to U.S. companies, like Kimco, what adjustments would you need to make in order to have valid comparisons of ratios such as those computed in (a) above?