Question

A separate company is taking a fresh look at it's financial statements. Since the Company's property is worth far more today than when they bought it, the President and Company Accountants agree that it makes no sense to continue to depreciate their building. They plan to insist to their auditors that this expense not be shown on the Income Statement shown to their bank. What will be the response of their auditors? Is this proposed treatment okay under GAAP? Why or why not?

Answer 1

No this is not OKay under GAPP.

Depreciation expense represents the expenses on the assets which is expensed over time as the asset is used, instead of expensed in the year of purchase .

Depreciation is an expense which need to be provided under matching principe where the expenses to earn revenues need to be deducted from revenues to arrive at the Income. If depreciation is not prrovided,

1. The Income Statement is distorted

2. Funds for replacement of assets are not generated

If the fair value of the property has appreciated, the company can revalue the property and reflect the same in the Balance Sheet. But the Income Statement cannot be distorted by not depreciating the building because depreciation is an expense to match the revenue