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An Experiment in Fair Value Accounting: UK Investment Vehicles

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  • Jo Danbolt
  • William Rees
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    Abstract

    We use the British real estate and investment fund industries as experimental settings where historic cost (HC) and fair value accounting (FVA) can be compared. Both industries have the majority of their assets marked to market and hence the difference between the two accounting systems is profound. However, as the valuation of real estate is arguably more subjective than that of investment funds, we are able to contrast fair value accounting in a near ideal setting with one where it remains important, but where valuation difficulties may permit bias. As this distinction is incorporated in the recently issued SFAS 157, which also formed the basis of the IASB's relevant discussion document, the results of our study may be particularly timely. As expected, we find that fair value income is considerably more value relevant than historic cost income. However, in the presence of changes in FVA balance sheet values, income measures become largely irrelevant. This implies that there is no obvious advantage from adopting FVA income accounting if FVA balance sheet values are available to the user. Furthermore, FVA for our real estate sample is considerably less value relevant than for the investment companies and the evidence for this sample, if not conclusive, is consistent with earnings management. We interpret these results as confirming that fair values are highly relevant and largely unbiased where the values are unambiguous. Where valuation is ambiguous, which will normally be the case, value relevance will be lower and biased accounting may be revealed.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal European Accounting Review.

    Volume (Year): 17 (2008)
    Issue (Month): 2 ()
    Pages: 271-303

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    Handle: RePEc:taf:euract:v:17:y:2008:i:2:p:271-303

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    Cited by:
    1. Yuan Ding & Thomas Jeanjean & Cédric Lesage & Hervé Stolowy, 2009. "An Experiment in the Economic Consequences of Additional Disclosure: The Case of the Fair Value of Unlisted Equity Investments," Post-Print halshs-00458950, HAL.
    2. Marco Fasan & Carlo Marcon, 2014. "Accounting Tradition and other drivers of the Fair Value choice: An Opportunistic Management perspective," Working Papers 13, Department of Management, Università Ca' Foscari Venezia.
    3. Chedli Baccouche & Sana Ben Ghodbane, 2012. "Fair value evaluation: analysis and determinants," International Journal of Critical Accounting, Inderscience Enterprises Ltd, vol. 4(1), pages 77-91.
    4. Konstantinos J. Liapis & Christos L.Galanos, 2010. "Accounting GAAPs and Accounting Treatments for Management of Property: Case Studies from Greek Real Estate Market," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 169-194.
    5. Dana Dvořáková, 2011. "Fair Value Measurement in Financial Reporting," European Financial and Accounting Journal, University of Economics, Prague, vol. 2011(1), pages 60-75.

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