Under US GAAP, which of the following statements about impairment and appreciation of the value of long-lived assets are ture? managers: 1. may write down the value of impaired assets 2. have considerable discretion about the timing and amount of impairment recogniion for assets the company intends to keep 3.have considerable discretion about the timing and amount of recognised increase in the value of appreciated assets i know 1 is right, but why we choose 2 rather than 3? an analyst shout consider whether a company acquired assets through a capital lease or an operating lease because a company may structure: a) operating leases to look like capital leases to enhance their leverage ratios b) operationg leases to look like capital leases to enhance their liquidity ratios c) capital leases to look like operating leases to enhance their leverage ratios d) capital leases o look like operating leases to enhance their liquidity ratios. i know a, b is not possible answer, but again, why c but not d? thanks in advance!!!
C) would increase the leverage --> bad signal D) dont really know… sry.
For first question, I’d pick 2. 3 is not allowed. 1 is unclear with what its saying, impairment means writing down the asset to its fair value. For question 2, d is flawed. if you have operating leases, then your liquidity ratios are depressed, not enhanced, hence d is not the right choice. I don’t know the rigth answer. what is it?
to pepp: for Q1 why 3 is not allowed? and can u explain in detail for Q2? answer: Q1: 1&2 Q2: C
3.have considerable discretion about the timing and amount of recognised increase in the value of appreciated assets … Can upward revaluation of assets only occur if you downward evaluated it before? THis is why I dont think #3 is true. I pick C because for operating lease, there is no added liability and asset added to the financial leverage ratio. So leverage ratio will look lower and enhanced.
As far I know, under US GAAP you can’t revalue assets upwards under any circumstances. Therefore, 3 is wrong.
1, 2 are right 1 is obvious, 2 is the same because if a company was not depreciating their assets fast enough, they can take a one time charge to NI and write down the assets that are impared. 3 of course under US GAAP you can not revalue upwards 2 is C. Leverage rations are higher under capital leases. (Net Income initially goes down and debt goes up by the present value of the liability.) D is a possible answer, but C is the best. In D, your liquidity does go down with cap leases (working capital, current ratio, etc.) however leverage ratios are more affected by the choice of lease