Why Do Some Firms Recognize Whereas Others Only Disclose Asset Revaluations?

Abstract

Australian GAAP requires firms to either disclose or recognize the current values of property in their financial statements. We investigate why managers of some firms choose to recognize revaluation increments in their financial statements while others choose simply to disclose. We propose that the propensity to recognize is related to the degree of management certainty that the value increase will be realized in future cash flows. In support of this proposition, we find that firms recognizing a revaluation increment (a) tend to have assets that are more general than specific, and (b) are more likely to have subsequent increases in operating performance. Our results indicate that, for asset revaluations at least, disclosure and recognition are different in terms of the signal that they convey about the underlying reliability of the measure.

JEL Classification: M41, M44, M45, G12