PART A: Arguments for and against the auditors insisting that MPS should begin expensing some parts of the construction costs instead of accumulating the increasing asset.
According to FASB 360-10, it has been specified that the value of an asset need not to be carried at a greater rate than the potentiality of its service. Moreover, this statement of FASB requires that the carrying amount of an asset should be reduced whenever the expectation of the future cash flow is less than its carrying amount.
According to the case study, it seems that the Eagle Mountain would finally cost far more than the anticipation of the Metropolitan Power Supply through operations. Therefore, some of the total cost might be treated as a loss rather than being a productive asset. However, in understanding that the auditors are considering all aspects of this situation, it is expected that some people will insist on ending the debt that is longstanding while others will propose the ongoing project hoping to recoup some of the invested capital.
As it concerns the auditors, that will be for the expensing some parts of the construction costs, it is sensible to discontinue the accumulation of the extra costs at a loss due to the continuation of the project that involves the ever increasing assets.
Additionally, the matters concerning the arguments for and against the auditors insisting that MPS should begin expensing some parts of the construction costs instead of accumulating the ever increasing asset is because: The Eagle Mountain is going to terminate the additional costs of MPS than they will ever recover. However, there is no way the company can make 100% recovery of its expenses with the Eagle Mountain.
According to the general rule of GAAP 980-340, the action rates of the regulator can only provide a reasonable assurance of the existence of an asset. Therefore, a company can capitalize all or a portion of its incurred cost that will otherwise be charged to the expense only if the future revenue is a value that is at least equivalent to the cost that is capitalized. Consequently, this will lead to the addition of such a cost in the allowable costs for the purpose of rate making. Based on the availability of the evidence, the prospective revenues will be provided to allow for the repossession of the previous costs incurred instead of providing it through the automatic clause of rate adjustments.
The condition of the case study requires that the intention of the regulator to be clear to allow the recovery of the previous costs incurred. Consequently, costs that do not meet the recognition criteria of these assets at the date that they were incurred will be recognized as regulatory assets when it meet the criteria during later dates for expensing the part of the construction costs.
Arguments against expensing the part of construction cost of the company
On the other hand, in expensing part of the construction cost, the company may become insolvent. Therefore, the determination should be made as to whether the company is capable of gaining extra values out of the long-term assets at the time they are no longer able make reasonable estimates on the amount of the cost (Summary of Statement No. 144, 2016).
The auditors are capable of making the recovery, or after they have exhausted all opportunities for their success completely. However, the auditor may make reports on less than a complete set of financial statements. For instance, an auditor may issue an audit report with an opinion on the position of the financial statement or balance sheet alone.
The requirement of GAAP that requires a company to present the statement of financial position and an income statement may complicate the matter as the company is required to present the statement of cash flows because if there is an omission of the cash flow statement in this situation, a departure from the FASB will occur. Sometimes the auditors have the reporting responsibilities that are similar to other legal and regulatory requirements. For instance, the government auditors are expected to report on the internal control over financial reporting that is compliance with the laws and regulations. Therefore, it is when the relevant law permits the auditors to make the report of the auditors' report on financial statements, and this will be relevant.
As an auditor, regarding my position, I will be willing to permit the company to complete its projects with the main aim of expecting that the business will make sufficient recovery on the costs over a realistic period.
PART B: Should the auditor modify their reports due to uncertainty or not for MPS to remain a going concern
The auditors should not modify the reports and the MPS should remain Going concern
The case study shows that there is a likelihood the business will continue, and the company will make recovery from the construction costs particularly if the project is ultimately complete. Therefore, it is unnecessary to make modification concerning the uncertainty of the report because the current situation permits the concern (Whittington, & Pany, 2014).
It will be sensible to include an emphasis of a paragraph that is explaining the specific concerns and the realization of the capitalized cost of construction as they may appear in the present financial statements. The paragraph should describe the financial standing and ability of the company in supporting the completion of the project. Similarly, it should also outline the possibility of any recovery on the capitalized construction costs.
References
Summary of Statement No. 144. (2016). Fasb.org. Retrieved 25 April 2016, from http://www.fasb.org/summary/stsum144.shtml
Whittington, R. & Pany, K. (2014). Principles of Auditing and other Assurance Services (19th ed.). New York: McGraw-Hill.
