Fund of Funds Case Study

The Fund of Funds

1. Consider the principles, assumptions, and constraints of Generally Accepted Accounting Principles (GAAP). Define the conservatism constraint and explain why it is important to users of financial statements.

The constraints of accounting refer to the limitations to providing financial information that exist in the financial reporting environment. Financial reporting must follow the generally accepted accounting principles, or GAAP. The constraints of accounting permit certain variations from the basic accounting principles in reporting a company’s financial information. Such variations are not considered a violation of the GAAP because of the recognized constraints of accounting.

Similar to industry practices, conservatism is another less prevalent accounting constraint but should be observed in financial reporting when applicable. Conservatism means that when in doubt about how to report an accounting issue, choose the method that least likely overstates assets and income or understates liabilities and losses. Sometimes companies may find difficult situations in which simply following GAAP may not yield the best reporting results.

http://www.ehow.com/info_12066263_constraints-accounting.html#ixzz2moeHheML

2. Explain why FOF’s decision to record substantial increases in its natural resource assets violated the conservatism constraint. Please be specific.

I think that FOF’s decision to record substantial increases in its natural resource assets, in fact, violated the conservatism constraint. FOF relied on the advice of KRC for the revaluations of its natural resource assets. Because their speculative nature and the lack of an active trading market determining the value of natural resource interests was very difficult. Moreover, Andersen questioned whether the 10% sale was sufficient enough to establish the value of the whole parcel. Andersen also questioned the basis for the write-up due to the short holding period for the...