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Can Asset Revaluation Be Manipulative? - A Case Study

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  • Crisan Sorana Adina

    (Babes-Bolyai University,)

Abstract

Asset revaluation can trigger different signals to investors depending upon company type, asset intensity and category and investors' expectations. In the same time, motivations behind asset revaluation decisions are diverse, being influenced by management incentives, credit covenants, faithful representation and various other reasons. In many cases the revaluation decision is imposed upon the company by auditors or the need to reduce information asymmetry. In Romania, one of the main decision drivers is the Fiscal Code, due to buildings taxation provisions. For companies that revaluate their fixed assets for taxation purposes only (which is the case for most small companies in Romania), the primary concern is to reduce the fiscal impact - the preferred scenario in this case is most likely to be the one that reduces tax expenses. Our research aims to provide a full picture of the motivations behind the revaluation decision and point to the manipulation instruments made available to companies by the allowed alternatives in what regards (1) which assets to be revalued and (2) how to recalculate book values. By means of a case study we identify the options available to a revaluating company and show how each one can impact the financial statements and financial ratios, thus influencing financial statement users' perception. Our analysis is limited to fixed assets revaluation, as these are the ones revaluated by most Romanian companies. The comparative analysis shows that the decision to not revaluate certain assets categories can lead to serious distortions of the faithful image. Financial ratios can be significantly impacted by the type of assets revalued, depending upon the revaluation direction (upward or downward) and the revaluation differences. In upward revaluation leverage ratios and solvency can improve, leading to a better position in relation to credit covenants. Equity is also positively affected. Alternatively, a decrease of assets' value will be reflected in a negative manner upon these indicators, which might be a serious reason for a company to not revaluate, thus not preserving the true and fair value of assets in the financial statements. Companies can choose between two alternatives of recalculating book values and depreciation. The option taken can also influence the company's financial position. Our study shows that impact over profitability is lower and that profit tax is not affected in a significant manner even if an influence can be identified.

Suggested Citation

  • Crisan Sorana Adina, 2013. "Can Asset Revaluation Be Manipulative? - A Case Study," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 1198-1209, July.
    • Handle: RePEc:ora:journl:v:1:y:2013:i:1:p:1198-1209
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    File URL: http://anale.steconomiceuoradea.ro/volume/2013/n1/127.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    assets' revaluation; fair value; financial statements; motivations;
    All these keywords.

    JEL classification:

    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

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