IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v18y2013i3d10.1007_s11142-013-9232-0.html
   My bibliography  Save this article

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

Author

Listed:
  • Hans B. Christensen

    (The University of Chicago)

  • Valeri V. Nikolaev

    (The University of Chicago)

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.

Suggested Citation

  • Hans B. Christensen & Valeri V. Nikolaev, 2013. "Does fair value accounting for non-financial assets pass the market test?," Review of Accounting Studies, Springer, vol. 18(3), pages 734-775, September.
    • Handle: RePEc:spr:reaccs:v:18:y:2013:i:3:d:10.1007_s11142-013-9232-0
    DOI: 10.1007/s11142-013-9232-0
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11142-013-9232-0
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11142-013-9232-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Don Herrmann & Shahrokh M. Saudagaran & Wayne B. Thomas, 2006. "The quality of fair value measures for property, plant, and equipment," Accounting Forum, Taylor & Francis Journals, vol. 30(1), pages 43-59, March.
    2. Shleifer, Andrei & Vishny, Robert W, 1992. "Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-1366, September.
    3. Ray Ball, 2006. "International Financial Reporting Standards (IFRS): pros and cons for investors," Accounting and Business Research, Taylor & Francis Journals, vol. 36(S1), pages 5-27.
    4. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 2001. "The relevance of the value relevance literature for financial accounting standard setting: another view," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 77-104, September.
    5. Mary E. Barth & Greg Clinch, 1996. "International Accounting Differences and Their Relation to Share Prices: Evidence from U.K., Australian, and Canadian Firms," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 135-170, March.
    6. Jo Danbolt & William Rees, 2008. "An Experiment in Fair Value Accounting: UK Investment Vehicles," European Accounting Review, Taylor & Francis Journals, vol. 17(2), pages 271-303.
    7. Holthausen, Robert W. & Watts, Ross L., 2001. "The relevance of the value-relevance literature for financial accounting standard setting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 3-75, September.
    8. Sharpe, Ian G. & Walker, R.G, 1975. "Asset Revaluations and Stock Market Prices," Working Papers 2, University of Sydney, School of Economics.
    9. Laux, Christian & Leuz, Christian, 2009. "The crisis of fair-value accounting: Making sense of the recent debate," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 826-834, August.
    10. Kothari, S.P. & Ramanna, Karthik & Skinner, Douglas J., 2010. "Implications for GAAP from an analysis of positive research in accounting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 246-286, December.
    11. Solomon Fabricant, 1936. "Revaluations of Fixed Assets, 1925-1934," NBER Books, National Bureau of Economic Research, Inc, number fabr36-2.
    12. S.P. Kothari & Karthik Ramanna & Douglas J. Skinner, 2009. "Implications for GAAP from an Analysis of Positive Research in Accounting," Harvard Business School Working Papers 09-137, Harvard Business School, revised Sep 2010.
    13. Muller III, Karl A., 1999. "An examination of the voluntary recognition of acquired brand names in the United Kingdom1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 179-191, January.
    14. Aboody, David & Barth, Mary E. & Kasznik, Ron, 1999. "Revaluations of fixed assets and future firm performance: Evidence from the UK1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 149-178, January.
    15. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    16. Julie Cotter & Scott Richardson, 2002. "Reliability of Asset Revaluations: The Impact of Appraiser Independence," Review of Accounting Studies, Springer, vol. 7(4), pages 435-457, December.
    17. Solomon Fabricant, 1936. "Revaluations of Fixed Assets, 1925-1934," NBER Chapters, in: Revaluations of Fixed Assets, 1925-1934, pages 1-12, National Bureau of Economic Research, Inc.
    18. Cairns, David & Massoudi, Dianne & Taplin, Ross & Tarca, Ann, 2011. "IFRS fair value measurement and accounting policy choice in the United Kingdom and Australia," The British Accounting Review, Elsevier, vol. 43(1), pages 1-21.
    19. Karl A. Muller III & Edward J. Riedl, 2002. "External Monitoring of Property Appraisal Estimates and Information Asymmetry," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(3), pages 865-881, June.
    20. Ray Ball & Lakshmanan Shivakumar, 2006. "The Role of Accruals in Asymmetrically Timely Gain and Loss Recognition," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 44(2), pages 207-242, May.
    21. Fields, Thomas D. & Lys, Thomas Z. & Vincent, Linda, 2001. "Empirical research on accounting choice," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 255-307, September.
    22. Easton, Pd & Eddey, Ph & Harris, Ts, 1993. "An Investigation Of Revaluations Of Tangible Long-Lived Assets," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 31, pages 1-38.
    23. Karl A. Muller, III & Edward J. Riedl & Thorsten Sellhorn, 2011. "Mandatory Fair Value Accounting and Information Asymmetry: Evidence from the European Real Estate Industry," Management Science, INFORMS, vol. 57(6), pages 1138-1153, June.
    24. Stephen Zeff, 2007. "The SEC rules historical cost accounting: 1934 to the 1970s," Accounting and Business Research, Taylor & Francis Journals, vol. 37(S1), pages 49-62.
    25. Karthik Ramanna & Ross L. Watts, 2012. "Evidence on the use of unverifiable estimates in required goodwill impairment," Review of Accounting Studies, Springer, vol. 17(4), pages 749-780, December.
    26. Barth, ME & Clinch, G, 1998. "Revalued financial, tangible, and intangible assets: Associations with share prices and non-market-based value estimates," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 36, pages 199-233.
    27. Ball, R, 1972. "Changes In Accounting Techniques And Stock Prices," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 10, pages 1-38.
    28. Sharpe, Ig & Walker, Rg, 1975. "Asset Revaluations And Stock-Market Prices," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 13(2), pages 293-310.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stefano Cascino & Joachim Gassen, 2015. "What drives the comparability effect of mandatory IFRS adoption?," Review of Accounting Studies, Springer, vol. 20(1), pages 242-282, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Olante, Maria Elena & Lassini, Ugo, 2022. "Investment property: Fair value or cost model? Recent evidence from the application of IAS 40 in Europe," Advances in accounting, Elsevier, vol. 56(C).
    2. Mehnaz, Laura & Rahman, Asheq & Kabir, Humayun, 2023. "Covenant violation concern and investors’ pricing of Level 3 fair value adjustments," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(3).
    3. Cairns, David & Massoudi, Dianne & Taplin, Ross & Tarca, Ann, 2011. "IFRS fair value measurement and accounting policy choice in the United Kingdom and Australia," The British Accounting Review, Elsevier, vol. 43(1), pages 1-21.
    4. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    5. Michel Magnan & Haiping Wang & Yaqi Shi(Sans nom), 2016. "Fair Value Accounting and the Cost of Debt," CIRANO Working Papers 2016s-32, CIRANO.
    6. Marco Fasan & Carlo Marcon, 2014. "Accounting Tradition and other drivers of the Fair Value choice: An Opportunistic Management perspective," Working Papers 13, Venice School of Management - Department of Management, Università Ca' Foscari Venezia.
    7. Voulgaris, Georgios & Stathopoulos, Konstantinos & Walker, Martin, 2014. "IFRS and the Use of Accounting-Based Performance Measures in Executive Pay," The International Journal of Accounting, Elsevier, vol. 49(4), pages 479-514.
    8. Bandyopadhyay, Sati P. & Chen, Changling & Wolfe, Mindy, 2017. "The predictive ability of investment property fair value adjustments under IFRS and the role of accounting conservatism," Advances in accounting, Elsevier, vol. 38(C), pages 1-14.
    9. Shahid Khan & Mark Anderson & Hussein Warsame & Michael Wright, 2015. "Do IFRS‐Based Earnings Announcements Have More Information Content than Canadian GAAP‐Based Earnings Announcements?," Accounting Perspectives, John Wiley & Sons, vol. 14(3), pages 276-302, September.
    10. Lopes, Alexsandro Broedel & Walker, Martin, 2012. "Asset revaluations, future firm performance and firm-level corporate governance arrangements: New evidence from Brazil," The British Accounting Review, Elsevier, vol. 44(2), pages 53-67.
    11. Jung, Boochun & Pourjalali, Hamid & Wen, Eric & Daniel, Shirley J., 2013. "The association between firm characteristics and CFO's opinions on the fair value option for non-financial assets," Advances in accounting, Elsevier, vol. 29(2), pages 255-266.
    12. S. P. Kothari & Charles Wasley, 2019. "Commemorating the 50‐Year Anniversary of Ball and Brown (1968): The Evolution of Capital Market Research over the Past 50 Years," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 57(5), pages 1117-1159, December.
    13. Rolf Uwe Fülbier & Thorsten Sellhorn, 2023. "Understanding and improving the language of business: How accounting and corporate reporting research can better serve business and society," Journal of Business Economics, Springer, vol. 93(6), pages 1089-1124, August.
    14. Doron Israeli, 2015. "Recognition versus disclosure: evidence from fair value of investment property," Review of Accounting Studies, Springer, vol. 20(4), pages 1457-1503, December.
    15. Li Yu (Colly) He & Sue Wright & Elaine Evans, 2018. "Is fair value information relevant to investment decision-making: Evidence from the Australian agricultural sector?," Australian Journal of Management, Australian School of Business, vol. 43(4), pages 555-574, November.
    16. Igor Goncharov & Edward J. Riedl & Thorsten Sellhorn, 2014. "Fair value and audit fees," Review of Accounting Studies, Springer, vol. 19(1), pages 210-241, March.
    17. Wessel M. Badenhorst, 2014. "Fair Value Measurements of Control Premiums," Accounting Perspectives, John Wiley & Sons, vol. 13(3), pages 173-188, September.
    18. Karl A. Muller & Edward J. Riedl & Thorsten Sellhorn, 2008. "Consequences of Voluntary and Mandatory Fair Value Accounting: Evidence Surrounding IFRS Adoption in the EU Real Estate Industry," Harvard Business School Working Papers 09-033, Harvard Business School.
    19. Anup Srivastava, 2014. "Selling-price estimates in revenue recognition and the usefulness of financial statements," Review of Accounting Studies, Springer, vol. 19(2), pages 661-697, June.
    20. Michel Magnan & Andrea Menini & Antonio Parbonetti, 2015. "Fair value accounting: information or confusion for financial markets?," Review of Accounting Studies, Springer, vol. 20(1), pages 559-591, March.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reaccs:v:18:y:2013:i:3:d:10.1007_s11142-013-9232-0. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.