Review of Accounting Studies, 7, 435–457, 2002
2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
Reliability of Asset Revaluations: The Impact
of Appraiser Independence
University of Southern Queensland
University of Pennsylvania, Wharton School, 2424 Steinberg Hall-Dietrich Hall, Philadelphia, PA 19104-6365
Abstract. In this paper we examine whether there are differences in the reliability of asset revaluations made
by boards of directors versus independent (external) appraisers. We use a sample of recognized Australian asset
revaluations. As a ﬁrst step we examine the determinants of the choice between director-based revaluations and
those undertaken by independent appraisers. We ﬁnd that independent appraisers are more likely to be used for
revaluations of land and buildings and directors are more likelyforinvestments, plant and equipment and identiﬁable
intangibles. We interpret this as evidence of ﬁrms harnessing directors’ knowledge of asset speciﬁcities. We also
ﬁnd that ﬁrms with less independent boards are more likely to use independent appraisers. We interpret this as
evidence of substitutability between governance mechanisms.
As for differences in reliability, we ﬁnd that revaluations of plant and equipment that are made by independent
appraisers are more reliable than those by directors. However, we are unable to detect a difference for other
classes of non-current assets. We deﬁne reliability in terms of ex-post adjustments of recognized value increases.
Reliability is determined by an examination of the extent to which upward revaluations are subsequently reversed.
Keywords: asset revaluations, corporate governance, reliability
JEL Classiﬁcation: G34, M41
The current move towards greater internationalization of accounting standards has rekindled
the debate over the recognition of current values. In particular, the International Accounting
Standards Committee (IASC) re-issued IAS 16 Property, Plant and Equipment on 1 October,
1998, and the Financial Accounting Standards Board (FASB) has undertaken to assess the
provisions of this standard as part of its review of international accounting standards. IAS 16
allows for upward revaluations of non-current assets, and requires disclosures identifying
whether an independent appraiser was involved. Proponents of asset revaluations contend
that by disallowing the recognition of upward revaluations, the US may be foregoing oppor-
tunities to increase the relevance of ﬁnancial statements. However, US regulators have very
strict views about the internationalization of accounting standards. Schroeder (1998) cites
previous SEC chairman Arthur Levitt as saying “Any set of global accounting standards
must satisfy a fundamental test—does it provide the necessary transparency, comparability
and full disclosure?” The reliability of current value estimates is an important issue facing
regulators assessing the merits of asset revaluations.
Asset revaluations have received considerable research interest recently (Easton, Eddey
and Harris, 1993; Barth and Clinch, 1998; and Aboody, Barth and Kasznik, 1999). They