IFRS NO: 14

Companies following international accounting standards are permitted to revalue fixed assets above the assets’ historical costs. Such revaluations are

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 IASB. Liberty International, a real estate company headquartered in the United

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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.

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Liberty International

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Completed Investment Properties

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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.

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Liberty reported the following additional data. Amounts for Kimco Realty (which follows GAAP) in the same year are provided for comparison.

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Liberty Kimco (pounds sterling, in thousands) (dollars, in millions)

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Total revenues £ 741 $ 517

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Average total assets 5,577 4,696

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Net income 125 297

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Instructions

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(a) Compute the following ratios for Liberty and Kimco.

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(1) Return on assets.

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(2) Profit margin on sales.

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(3) Asset turnover.

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How do these companies compare on these performance measures?

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(b) Liberty reports a revaluation surplus of £1,952. 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.

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(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?

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