Does fair value accounting for non-financial assets pass the market test?

Does fair value accounting for non-financial assets pass the market test? The choice between fair value and historical cost accounting is the subject of long-standing controversy among accounting academics and regulators. Nevertheless, the market-based evidence on this subject is limited. We study the choice of fair value versus historical cost accounting for non-financial assets in a setting where market forces rather than regulators determine the outcome. In general, we find a very limited use of fair value accounting. However, the observed variation is consistent with market forces determining the choice. Fair value accounting is used when reliable fair value estimates are available at a lower cost and when they convey information about operating performance. For example, with very few exceptions, firms’ managers commit to historical cost accounting for plant and equipment. Our findings contribute to the policy debate by documenting the market solution to one of the central questions in the accounting literature. Our findings indicate that, despite its conceptual merits, fair value is unlikely to become the primary valuation method for illiquid non-financial assets on a voluntary basis. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Does fair value accounting for non-financial assets pass the market test?

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Publisher
Springer US
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Accounting/Auditing; Finance/Investment/Banking; Public Finance & Economics
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-013-9232-0
Publisher site
See Article on Publisher Site

Abstract

The choice between fair value and historical cost accounting is the subject of long-standing controversy among accounting academics and regulators. Nevertheless, the market-based evidence on this subject is limited. We study the choice of fair value versus historical cost accounting for non-financial assets in a setting where market forces rather than regulators determine the outcome. In general, we find a very limited use of fair value accounting. However, the observed variation is consistent with market forces determining the choice. Fair value accounting is used when reliable fair value estimates are available at a lower cost and when they convey information about operating performance. For example, with very few exceptions, firms’ managers commit to historical cost accounting for plant and equipment. Our findings contribute to the policy debate by documenting the market solution to one of the central questions in the accounting literature. Our findings indicate that, despite its conceptual merits, fair value is unlikely to become the primary valuation method for illiquid non-financial assets on a voluntary basis.

Journal

Review of Accounting StudiesSpringer Journals

Published: May 29, 2013

References

  • Revaluations of fixed assets and future firm performance, evidence from the UK
    Aboody, D; Barth, ME; Kasznik, R
  • International financial reporting standards (IFRS): Pros and cons for investors
    Ball, R.
  • The role of accruals in asymmetrically timely gain and loss recognition
    Ball, R; Shivakumar, L
  • Revalued financial, tangible, and intangible assets, association with share prices and non-market-based value estimates
    Barth, ME; Clinch, G
  • Accounting measurement rules in UK bank loan contracts
    Citron, DB
  • Reliability of asset revaluations: The impact of appraiser independence
    Cotter, J; Richardson, S
  • An investigation of revaluations of tangible long-lived assets
    Easton, PD; Eddey, PH; Harris, TS

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