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Accounting for Changing Prices: The Value Relevance of Historical Cost, Price Level, and Replacement Cost Accounting in Mexico

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  • Elizabeth A. Gordon

Abstract

This paper investigates the value relevance of historical cost, price level and replacement cost accounting using a sample of Mexican firms from 1989 to 1995. It contributes to prior research by distinguishing between two distinct aspects of changing prices:(1) the change in the general price level, and (2) the change in the value of specific non‐monetary assets. I select Mexico to examine because it is unique in requiring and disclosing separately price level and replacement cost adjustments. A sample of Mexican firms also addresses a key reason cited for mixed results in previous assessments of the usefulness of price level and replacement cost accounting using United States data: the effects of inflation are too weak to detect. High rates of inflation in Mexico, ranging between 7% and 52% during the sample period, mitigate that potential problem. Results indicate that replacement cost adjustments are relatively and incrementally relevant beyond historical cost and price level measures while price level adjustments are incrementally value relevant beyond historical measures.

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  • Elizabeth A. Gordon, 2001. "Accounting for Changing Prices: The Value Relevance of Historical Cost, Price Level, and Replacement Cost Accounting in Mexico," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 177-200, June.
    • Handle: RePEc:bla:joares:v:39:y:2001:i:1:p:177-200
    DOI: 10.1111/1475-679X.00008
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    Cited by:

    1. Dmitry Livdan & Alexander Nezlobin, 2017. "Accounting rules, equity valuation, and growth options," Review of Accounting Studies, Springer, vol. 22(3), pages 1122-1155, September.
    2. Davis-Friday, Paquita Y. & Frecka, Thomas J. & Rivera, Juan M., 2005. "The financial performance, capital constraints and information environment of cross-listed firms: Evidence from Mexico," The International Journal of Accounting, Elsevier, vol. 40(1), pages 1-30.
    3. Eiler, Lisa A. & Miranda-Lopez, Jose & Tama-Sweet, Isho, 2015. "The Impact of Accounting Disclosures and the Regulatory Environment on the Information Content of Earnings Announcements," The International Journal of Accounting, Elsevier, vol. 50(2), pages 142-169.
    4. John Hughes & Jing Liu & Mingshan Zhang, 2004. "Valuation and Accounting for Inflation and Foreign Exchange," Journal of Accounting Research, Wiley Blackwell, vol. 42(4), pages 731-754, September.
    5. Eddie Chamisa & Musa Mangena & Hamutyinei Harvey Pamburai & Venancio Tauringana, 2018. "Financial reporting in hyperinflationary economies and the value relevance of accounting amounts: hard evidence from Zimbabwe," Review of Accounting Studies, Springer, vol. 23(4), pages 1241-1273, December.
    6. Felipe Restrepo & Jérôme P. Taillard, 2022. "Private firms’ incentives and opportunities to manage earnings: Evidence from the use of inflation adjustments," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(1-2), pages 69-110, January.
    7. Fábio Moraes da Costa & Carol Liu & Gina Cavalier Rosa & Samuel L. Tiras, 2020. "The Commitment to Income‐Decreasing Accounting Choices As a Credible Signal to Reducing Information Asymmetry: The Case of Asset Revaluations," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2501-2522, December.
    8. Ross Jennings & Gustavo Maturana, 2005. "The Usefulness Of Chilean Inflation Accounting," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 8(1), pages 85-118.
    9. Konchitchki, Yaniv, 2011. "Inflation and Nominal Financial Reporting: Implications for Performance and Stock Prices," MPRA Paper 52928, University Library of Munich, Germany.
    10. Musa Yelwa Abubakar & Nasiru Abdulsallam & Muhammad Yusuf Alkali, 2017. "The Impact of the New Accounting Reporting Among Listed Firms in Nigerian Stock Market," Asian Journal of Social Sciences and Management Studies, Asian Online Journal Publishing Group, vol. 4(1), pages 1-9.
    11. Malcolm Anderson, 2002. "Accounting History publications 2001," Accounting History Review, Taylor & Francis Journals, vol. 12(3), pages 505-512.

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