Does Fair Value Accounting for Non-Financial Assets Pass the Market Test?
Hans Bonde Christensen
University of Chicago - Booth School of Business
Valeri V. Nikolaev
University of Chicago Booth School of Business
January 10, 2013
Review of Accounting Studies, Forthcoming
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 very 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 low 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.
Number of Pages in PDF File: 50
Keywords: Fair Value, IFRS, Non-Financial Assets, Illiquid Assets
JEL Classification: M4, M41
Date posted: September 17, 2008 ; Last revised: February 27, 2013