We examined the accounting policies for intangible assets, investment property, and property, plant, and equipment of 1,539 companies domiciled in the UK and Germany. With very few exceptions, we find that fair value is used exclusively for property. We find that 3% of companies use fair value for owner-occupied property, compared with 47% for investment property. The lack of companies that use fair value for all other non-financial assets is inconsistent with net benefits of fair value accounting.
We can explain the use of fair value for property alone by that fact that reliable fair values are more likely to exist for this type of asset. The main determinant of fair value use for investment property is whether real estate is among a company’s primary activities. This is consistent with historical cost being a less informative measure of economic performance in real estate companies.
We find that leverage is an important determinant of fair value use, for investment property and property, plant, and equipment. We argue that managerial opportunism is an unlikely explanation for this finding, which is, rather, more consistent with a contractual explanation. In particular, fair value can supply lenders with the up-to-date liquidation value of a company’s assets. We also find that companies with fewer growth opportunities are more likely to commit to fair value, a finding consistent with the use of fair value as a means of curbing over investment in fixed assets. Overall, our evidence is broadly consistent with the observation that companies do not perceive the net benefits of fair value accounting to exceed those of historical cost accounting.
We find, however, that where fair value is used, the evidence points to contracting, rather than Valuation, needs as the main determinant of a company's decision to use fair value over historical cost.
I’m sending my assignment today because my daughter was admitted in the hospital, and we got out this morning and I apologize for lateness.