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Companies Should Have the Leeway to Report All Assets at Either Their Current Market Value or Their Original Purchase Price

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Companies should have the leeway to report all assets at either their current market value or their original purchase price

For purposes of consistency, reliability and comparability, companies should not have the freedom to report their assets at either current market or cost.Such an alternative reporting methodology would make it difficult for users of financials to make informed decisions because:1). inconsistent methods could be used from year to year (consistency); 2). companies could effectively set their own values for assets without reference to any objective standard (reliability); and 3). comparisons among companies in the same industry would become more problematic (comparability).

The costprinciple under US GAAP requires companies to account and report most assets and liabilities at cost rather than fair market value(“FMV”).Cost is the purchased price, while FMV refers to the price at which the asset would change hands between a willing buyer and a willing seller, neither being under a compulsion to buy or to sell and both having reasonable knowledge of all relevant facts.

Investors (with the potential to provide the capital that businesses need in order to grow) require consistency and reliability in reporting to assess a company’s financial strength.Likewise, creditors require accurate reporting in order to determine the solvency of a business--for example by analyzing ratios such as debt-to-assets (total liabilities divided by total assets). A higher ratio translates into lower equity, which is less appealing to creditors.This, in turn, creates pressure on management to value and report assets as high as possible to demonstrate solvency.On the other hand, reporting lower assets improves the return on assets ratio (net income divided by average assets), which suggests a more profitable company.

In short, the cost principle provides...

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