Does Fair Value Accounting for Non-Financial Assets

Does Fair Value Accounting for Non-Financial Assets
Pass the Market Test?

Hans B. Christensen and Valeri V. Nikolaev

The University of Chicago
Booth School of Business
5807 South Woodlawn Avenue
Chicago, IL 60637

Abstract: The choice between fair value and historical cost accounting is the subject of longstanding 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. Keywords: Fair value, IFRS, non-financial assets, illiquid assets.
JEL Classification: M4, M41

This version: 4 November 2012


This paper previously circulated under the title: "Who uses fair -value accounting for non-financial assets after
IFRS adoption?" This research was funded in part by the Initiative on Global Markets at the University of Chicago
Booth School of Business. We benefited from helpful comments from two anonymous referees, Ray Ball, Philip
Berger, Jannis Bischof, Alexander Bleck, Christof Beuselinck, Johan van Helleman, S.P. Kothari, Laurence van
Lent, Christian Leuz, Paul

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