Client Understanding Paper
Client: The ADT Corporation
I thank you for the opportunity to work with The ADT Corporation on this important project. As I was analyzing the papers provided, I realized that additional information is requested by your representatives. It was brought to my attention that ADT and its affiliates are unclear about why the additional information was requested on the adjusting lower cost of market inventory on valuation, the capitalizing interest on building construction, the recording of gains or losses on asset disposal, and the adjusting goodwill for impairment. The adjusting lower cost of market inventory on valuation is specified in Accounting Research Bulletin No. 43 (ARB No. 43). The Statement of Financial Accounting Standards (SFAS) No. 34 is the statement, which deals with capitalization of interest as part of the cost of the asset. The SFAS No. 144 addresses the reporting and accounting for the impairment of the disposal of long-lived assets. New rules for the accounting for goodwill have been addressed in SFAS No. 142. To be able to complete the analysis of the work papers of my clients’, certain information must be obtained. To alleviate the concern of the client of why the information is requested analysis of each topic and its importance will be discussed in this paper. The adjusting lower cost of market inventory valuation is essential because through the life cycle of inventories, the inventories will decline in value. Although the primary basis of accounting for inventories is cost, when inventories usefulness become lower than cost, then the use of adjusting lower cost of market is accepted. There are many advocates that think that inventories should be valued at market price. The belief is assets should reflect current values. Generally Accepted Accounting Principles (GAAP) instructs that when inventories decline in value, the future selling price should move in the same direction in the same time period. The American Institute of Certified Public Accountants (AICPA) provides the following definitions for use when applying the lower cost or market rule to inventories. These definitions are that “market should not exceed the net realizable value and market should not be less than net realizable value reduced by an allowance for an approximately normal profit margin” (Schroeder, Clark & Cathey, 2005, p. 256). Adjusting lower cost of market inventory valuation satisfies the qualitative characteristics of account information contained in SFAC No. 2. It also satisfies the definitions of assets and losses contained in SFAC No. 6. There are arguments that the use of lower of cost or market rule for inventories, are only applied for downward adjustments, the arguments have been ignored because the importance of maintaining conservative financial statements was deemed more important. Capitalizing interest on building construction has been an issue because of the question of when to capitalize the interest on the building construction. Because materials and supplies are needed for the construction of the building, extra financing is needed from outside sources. Through this financing, interest is incurred during the construction period. There is a debate to how the interest incurred should be recorded. Some arguments are that interest is a financing rather than an operating charge and therefore should not be charged against an asset. To counter that argument others note that “if the asset was acquired from outsiders, interest charges would be part of the cost basis to the seller and would be included in the sales price” (Schroeder, Clark & Cathey, 2005, p. 276). To address these opinions, the Financial Accounting Standards Board issued SFAS No. 34, “Capitalization of Interest Costs.” This simply states that interest should be capitalized only when an asset requires a period of time to be prepared for its intended use. This statement was “intended to recognize interest cost as a...
References: Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2005). Financial Accounting Theory and Analysis (8th ed.). Hoboken, NJ: John Wiley & Sons.
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