Edinburgh Research Explorer

An Experiment in Fair Value Accounting: UK Investment Vehicles

Research output: Contribution to journalArticle

Related Edinburgh Organisations

Open Access permissions

Open

Documents

  • Download as Adobe PDF

    Rights statement: This is an Author's Original Manuscript of an article whose final and definitive form, the Version of Record, is © Rees, W., & Danbolt, J. (2008). An Experiment in Fair Value Accounting: UK Investment Vehicles. European Accounting Review, 17(2), 271-303. 10.1080/09638180701819865. Available online at : http://www.tandfonline.com/10.1080/09638180701819865

    Accepted author manuscript, 341 KB, PDF document

http://www.tandfonline.com/doi/abs/10.1080/09638180701819865#.UjCEgsZRR8E
Original languageEnglish
Pages (from-to)271-303
Number of pages33
JournalEuropean Accounting Review
Volume17
Issue number2
DOIs
Publication statusPublished - 2008

Abstract

We use the British real estate and investment fund industries as experimental
settings where historic cost (HC) and fair value accounting (FVA) can be compared. Both industries have the majority of their assets marked to market and hence the difference between the two accounting systems is profound. However, as the valuation of real estate is arguably more subjective than that of investment funds, we are able to contrast fair value accounting in a near ideal setting with one where it remains important, but where valuation difficulties may permit bias. As this distinction is incorporated in the recently issued SFAS 157, which also formed the basis of the IASB’s relevant discussion document, the results of our study may be particularly timely. As expected, we find that fair value income is considerably more value relevant than historic cost income. However, in the presence of changes in FVA balance sheet values, income
measures become largely irrelevant. This implies that there is no obvious advantage from adopting FVA income accounting if FVA balance sheet values are available to the user. Furthermore, FVA for our real estate sample is considerably less value relevant than for the investment companies and the evidence for this sample, if not conclusive, is consistent with earnings management. We interpret these results as confirming that fair values are highly relevant and largely unbiased where the values are unambiguous.
Where valuation is ambiguous, which will normally be the case, value relevance will be lower and biased accounting may be revealed.

Download statistics

No data available

ID: 280797