Fair Value or Cost Mode Drivers of Choice for Ias 40

Topics: Cost accounting, Costs, Generally Accepted Accounting Principles Pages: 65 (15017 words) Published: November 30, 2012
European Accounting Review
Vol. 19, No. 3, 461– 493, 2010

Fair Value or Cost Model? Drivers
of Choice for IAS 40 in the Real
Estate Industry

Department of Accounting and Business Studies (DITEA), University of Genova, Genova, Italy and ∗ ∗ Department of Computer and Management Science (DISA), University of Trento, Trento, Italy

(Received September 2008; accepted February 2010)
ABSTRACT The IFRS mandatory adoption in European countries is an excellent context from which to assess the validity of accounting choice theory, which postulates that information asymmetry, contractual efficiency (agency costs) and managerial opportunism reasons could drive the choice. With this aim, we test the impact of these factors to explain the adoption of fair value for investment properties (IAS 40) in the real estate industry, taking into account the ‘revaluation’ option offered by IFRS1 and using historical cost without revaluations as a baseline category for comparison purposes. We select a sample of European real estate companies from Finland, France, Germany, Greece, Italy, Spain and Sweden, all first-time adopters of the IFRS. Using a multinomial logistic model, we show that information asymmetry, contractual efficiency and managerial opportunism could account for the fair value choice. Particularly, the most significant findings are that size as a proxy of political costs reduces the likelihood of using fair value while market-to-book ratio is negatively associated with the fair value choice. On the other hand, leverage, another typical proxy of contracting costs, seems not to influence the choice. This evidence confirms the current validity of traditional accounting choice theory even if it reveals, in such a context, the irrelevance of the usual relations between accounting choice and leverage.

1. Introduction
We analyse if the choice between cost or fair value for investment property under IAS 40 aims at (i) reducing agency costs (contractual efficiency

Correspondence Address: A. Quagli, Department of Accounting and Business Studies (DITEA), University of Genova, Via Vivaldi 2, 16126 Genova (GE), Italy. E-mail: quaglia@economia.unige.it 0963-8180 Print/1468-4497 Online/10/030461–33 # 2010 European Accounting Association DOI: 10.1080/09638180.2010.496547

Published by Routledge Journals, Taylor & Francis Ltd on behalf of the EAA.


A. Quagli and F. Avallone

reasons), (ii) mitigating information asymmetries, as standard setters claim, or (iii) allowing managerial opportunism, typical motives defined by accounting choice theory (Holthausen, 1990; Fields et al., 2001).

Using a multinomial logistic regression, we test these hypotheses using 73 observations from real estate companies located in European countries (Finland, France, Germany, Greece, Italy, Spain and Sweden) which do not allow the fair value method in the pre-IFRS mandatory period in order to eliminate the influence of pre-existing fair value adoption. All these firms are firsttime IFRS adopters, enabling us to compare the same accounting choice in a similar situation (first-time adoption).

The mandatory adoption of IAS 40 (Investment properties) by European listed companies offers a unique opportunity to verify managers’ behaviour in a composite context of accounting choice. In fact, IAS 40 allows two alternative methods for appraisal of investment property assets: the cost method or the fair value method with recognition of fair value changes through profit and loss. Additionally, taking into account the IFRS1 ‘fair value as deemed cost’ option, the cost choice could be split into two alternatives: (i) historical cost without revaluation, (ii) historical cost with the IFRS1 option to revaluate investment property. This second option could represent a partial substitute for the fair value method, showing its effects only in equity without influencing profit and loss.1

Thus, our model assumes the choice of applying historical...

References: Aboody, D. (1996) Recognition versus disclosure in the oil and gas industry, Journal of Accounting
Research, 34, pp
Ahmed, A., Kilic, E. and Lobo, G. J. (2006) Does recognition versus disclosure matter? Evidence from
value-relevance of banks’ recognized and disclosed derivative financial instruments, The
Amir, E. and Lev, B. (1996) Value-relevance of non-financial information: the wireless communications industry, Journal of Accounting and Economics, 22(3), pp. 3–30.
Ball, R. (2006) International Financial Reporting Standards (IFRS): pros and cons for investors
[Special issue], Accounting and Business Research, 36, pp
Ball, R., Kothari, S. P. and Robin, A. (2000) The effect of international institutional factors on properties of accounting earnings, Journal of Accounting and Economics, 29, pp. 1–51.
Barlev, B. and Haddad, J. R. (2003) Fair value accounting and the management of the firm, Critical
Perspectives on Accounting, 14, pp
Barnett, V. and Lewis, T. (1994) Outliers in Statistical Data, 3rd edn (New York: Wiley).
Barth, M. E. and Landsman, W. R. (1995) Fundamental issues related to using fair value accounting
for financial reporting, Accounting Horizons, 9(4), pp
Barth, M. E., Elliot, J. A. and Finn, M. W. (1999) Market rewards associated with patterns of increasing earnings, Journal of Accounting Research, 37(2), pp. 387–413.
Basu, S., Hwang, L. and Jan, C. (2001) Differences in conservatism between Big Eight and Non-Big
Eight auditors, Working Paper, Baruch College, City University of New York, New York.
Beattie, V., Goodacre, A. and Thomson, S. (2003) Recognition versus disclosure: an investigation of
the impact on equity risk using UK operating lease disclosures, Journal of Business Finance &
Accounting, 27(9), pp. 1185–1224.
Burgstahler, D. C., Hail, L. and Leuz, C. (2006) The importance of reporting incentives: earnings management in European private and public firms, The Accounting Review, 81(5), pp. 983–1016.
CFA Institute Centre (2008) Fair Value Reporting (London: CFA Institute Centre).
Christensen, H. B. and Nikolaev, V. (2008) Who uses fair-value accounting for non-financial assets
following IFRS adoption?, SSRN Working Paper.
Chung, R. et al. (2003) Auditor conservatism and reported earnings, Accounting and Business
Research, 33(1), pp
Citron, D. B. (1992) Accounting measurement rules in UK bank loan contracts, Accounting and
Business Research, 28, pp
Cotter, J. and Zimmer, I. (2003) Disclosure versus recognition: the case of asset revaluations, AsiaPacific Journal of Accounting and Economics, 10(1), pp. 81–99.
Danbolt, J. and Rees, W. (2008) An experiment in fair value accounting: UK investment vehicle,
European Accounting Review, 17(2), pp
Davis-Friday, P. Y., Folami, B. L., Chao-Shin, L. and Mittelstaedt, H. F. (1999) The value relevance
of financial statement recognition vs
Deloitte & Touche (2001) European Comparison: UK & Germany. The Main Differences between UK
and German Accounting Practice (London: Deloitte & Touche).
EPRA (European Public Real Estate Association) (2006) Best Practices Policy Recommendations,
Espahbodi, H., Espahbodi, P., Rezaee, Z. and Tehranian, H. (2002) Stock price reaction and value relevance of recognition versus disclosure: the case of stock-based compensation, Journal of
Accounting and Economics, 33, pp
European Central Bank (2004) Fair Value Accounting and Financial Stability, Occasional Paper
Series No
Fields, T. D., Lys, T. Z. and Vincent, L. (2001) Empirical research on accounting choice, Journal of
Accounting and Economics, 31, pp
Francis, J., Laford, R., Olsson, P. M. and Schipper, K. (2004) Costs of equity and earnings attributes,
The Accounting Review, 79, pp
Gopalakrishnan, V. (1994) The effect of recognition vs. disclosure on investor valuation: the case of
pension accounting, Review of Quantitative Finance and Accounting, 4(4), pp
Graham, J. R., Campbell, R. H. and Shiva, R. (2005) The economic implications of corporate financial
reporting, Journal of Accounting and Economics, 40, pp
Hagerman, R. and Zmijewski, M. (1979) Some economic determinants of accounting policy choice,
Journal of Accounting and Economics, 1(2), pp
Heflin, F., Kwon, S. S. and Wild, J. J. (2002) Accounting choices: variation in managerial opportunism, Journal of Business Finance & Accounting, 29(7/8), pp. 1047–1078.
Holthausen, R. W. (1990) Accounting method choice. Opportunistic behavior, efficient contracting,
and information perspectives, Journal of Accounting and Economics, 12, pp
Holthausen, R. W. and Leftwich, R. W. (1983) The economic consequences of accounting choice:
implications of costly contracting and monitoring, Journal of Accounting and Economics, 5,
Hosmer, D. W. and Lemeshow, S. (2000) Applied Logistic Regression, 2nd edn (New York: Wiley).
Khurana, I. K. and Kim, M. S. (2003) Value relevance of fair value disclosure in the banking industry,
Journal of Accounting and Public Policy, 22, pp
KPMG (2003a) IAS Compared with US GAAP and Finnish GAAP. Available at: www.kpmg.com
KPMG (2003b) IAS Compared with US GAAP and French GAAP
KPMG (2005) IFRS Compared to Swedish GAAP: An Overview. Available at: www.kpmg.com
La Porta, R., Lopez-De-Silanes, F., Shleifer, A
Lang, M. and Lundholm, R. (1993) Cross-sectional determinants of analyst ratings of corporate disclosures, Journal of Accounting Research, 31, pp. 246–271.
Leuz, C., Nanda, D. and Wysocki, P. (2003) Earnings management and investor protection: an international comparison, Journal of Financial Economics, 69, pp. 505–527.
Martin, R. D., Rich, J. S. and Wilks, T. J. (2006) Auditing fair value measurements: a synthesis of
relevant research, Accounting Horizons, 20(3), pp
Nobes, C. (1998) Towards a general model of the reasons for international differences in financial
reporting, Abacus, 34(2), pp
Perramon, J. and Amat, O. (2007) IFRS introduction and its effect on listed companies in Spain, SSRN
Working Paper.
Plantin, G. et al. (2008) Marking-to-market: panacea or Pandora’s box?, Journal of Accounting
Research, 46(2), pp
PWC (2005) Similarities and Differences IFRS, US GAAP and Italian GAAP. Available at: www.pwc.
Reis, R. F. and Stocken, P. C. (2007) Strategic consequences of historical cost and fair value measurements, Contemporary Accounting Research, 24(2), pp. 557–584.
Schipper, K. (2005) The introduction of International Accounting Standards in Europe: implications
for international convergence, European Accounting Review, 14(1), pp
Schipper, K. (2007) Required disclosures in financial reports, The Accounting Review, 82(2), pp.
Smith, C. W. and Watts, R. L. (1992) The investment opportunity set and corporate financing, dividend, and compensation policies, Journal of Financial Economics, 32(3), pp. 263–292.
Tsalavoutas, I. and Evans, L. (2009) Transition to IFRS in Greece: financial statement effects and
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Essay on Historical Cost and Fair Value
  • Essay on Fair Value vs. Historical Cost Accounting
  • fair value accounting Essay
  • Fair Value Essay
  • Historical Cost V Fair Value Essay
  • Fair Value vs Historic Cost Essay
  • Hisorical Cost vs Fair Value Essay
  • Cost and Value Drivers

Become a StudyMode Member

Sign Up - It's Free