The Effects of Fair Value on the Matching of Revenues and Expenses: The Case of Asset Revaluations

35 Pages Posted: 1 May 2020 Last revised: 8 Jun 2020

See all articles by Fabio Moraes da Costa

Fabio Moraes da Costa

FUCAPE Business School

Carol Liu

Arizona State University (ASU), W.P. Carey School of Business, School of Accountancy, Students

Regina Rosa

University of New Orleans - College of Business Administration

Samuel L. Tiras

Indiana University - Kelley School of Business

Date Written: June 5, 2020

Abstract

Researchers and practitioners have expressed concern that matching has declined over time, as evidenced by a decreasing association between revenues and expenses. They attribute this decline to the shift in financial reporting from a revenue-expense view that emphasizes matching, to an asset-liability view that emphasizes the measurement of economic resources that incorporates more fair values. When revenues rise with inflation but the expenses remain tied to historical costs, the two streams tend to diverge. We hypothesize that upwardly revaluing the long-lived fixed operating assets resets the expense stream; thus, changes in revenues will be more closely associated with changes in expenses for firms that revalue than firms that do not upwardly revalue. Based on a sample of United Kingdom firms, we find evidence supporting our expectations, particularly in those higher inflationary industries.

Keywords: asset revaluations, matching, fair value accounting, IFRS

JEL Classification: M41

Suggested Citation

da Costa, Fabio Moraes and Liu, Carol and Rosa, Regina and Tiras, Samuel L., The Effects of Fair Value on the Matching of Revenues and Expenses: The Case of Asset Revaluations (June 5, 2020). International Journal of Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3570210

Fabio Moraes Da Costa

FUCAPE Business School ( email )

Fernando Ferrari Avenue, 1358
Goiabeiras
Vitória, Espirtio Santo 29075-010
Brazil
552740094444 (Phone)
552740094422 (Fax)

HOME PAGE: http://www.fucape.br

Carol Liu

Arizona State University (ASU), W.P. Carey School of Business, School of Accountancy, Students ( email )

Tempe, AZ
United States

Regina Rosa

University of New Orleans - College of Business Administration ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Samuel L. Tiras (Contact Author)

Indiana University - Kelley School of Business ( email )

801 W. Michigan Street
Indianapolis, IN 46202
United States
(317) 274-3420 (Phone)

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