The Relative Informativeness of Fair Value Versus Historical Cost Amounts for Long-Lived Tangible Assets
Posted: 6 Apr 1998
Date Written: March 1998
In this study, we investigate which accounting measurement practice, fair value or historical cost, results in a relatively better measure of financial position and profitability. As investment property in the U.K. is required to be recognized at ?open market value? and historical cost amounts also are required to be disclosed, the focus of our investigation is on U.K. investment property. Open market value is defined as an exit value and is the valuation basis for all long-lived tangible assets in the U.K, not just investment property. Thus, unlike extant research, we are able to directly compare fair value and historical cost amounts for the same assets and investigate revaluations that are not discretionary. We find that fair value estimates for buildings and land are more highly associated with security prices than historical cost in every year we examine and that fair value adjustments are valued in a similar manner as historical cost amounts. We find weaker but consistent evidence that fair value estimates are more highly associated with security returns than historical cost.
JEL Classification: M41, M44
Suggested Citation: Suggested Citation