Academic journal article International Management Review

The Value Relevance of Fixed Asset Revaluation Reserves in International Accounting

Academic journal article International Management Review

The Value Relevance of Fixed Asset Revaluation Reserves in International Accounting

Article excerpt

[Abstract]

The Securities and Exchange Commission (SEC) of the U.S. has recently proposed that all U.S. firms be required to issue financial statements in accordance with IFRS by 2014. Under IFRS, the rules for measurement of fixed assets are presented in IAS 16, which allows firms to choose either the cost model or the revaluation model. In this study, I investigate the effect of adopting the IFRS standard for fixed asset revaluation by examining the relationship between changes in revaluation reserves and stock prices. Out of the 15 countries used for the analyses, five countries have revaluation reserves that are statistically significant in explaining the market value of equity, suggesting that revaluation reserves are value relevant for those countries. I further break down the sample countries and categorize them based on the legal system to which they are subject, whether common law or code law. The results suggest that revaluation reserves of common law countries are value relevant, while those of code law countries are not. This study contributes to the international accounting literature by suggesting that the effect of adopting new IFRS rules, such as IAS 16, may differ in each country due to various legal, economic, cultural, and social forces.

[Keywords] International accounting; value relevance; asset revaluation; revaluation reserves

Introduction

In August 2008, the Securities and Exchange Commission (SEC) of the U.S. outlined a "road map" promoting the acceleration of the convergence effort of US firms to adopt International Financial Reporting Standards (IFRS). It proposes that by 2014, all U.S. firms will be required to issue financial statements in accordance with IFRS (see SEC for Immediate Release 2008-184).

In this study, I investigate the effect of adopting the IFRS standard for fixed asset revaluation (IAS 16) using companies in the countries where firms follow IFRS and are able to choose either the cost method or the fair value method to value their long-term fixed assets. If firms choose the fair value method, they revalue their fixed assets annually as measured by market value, and the revaluation reserves of fixed assets affect the equity value of the firms. In this study, I specifically investigate the relationship between changes in revaluation reserves and stock prices in various countries.

The sample for this study includes 15 countries, each with at least 30 companies that have valid revaluation reserves data for the year 2005. Using multivariate analyses, which examine the relationship between the amount of revaluation reserves and the market value of equity, I find that five of the 15 countries selected in the sample have revaluation reserves that are statistically significant in explaining the market value of equity, suggesting that revaluation reserves are value relevant for those countries. The revaluation reserves for the other 10 countries are not statistically significant, signifying that for those countries, revaluation reserves are not considered for investment decisions and are, therefore, not value relevant.

I further examine the value relevance of revaluation reserves by partitioning the sample countries into two different country groups. I categorize countries based on their legal system to which they are subject, whether common law or code law, as suggested by Radebaugh, Sidney, and Black (2006) and Shenkar and Luo (2008). The results suggest that revaluation reserves of common law countries are value relevant, while those of code law countries are not.

This paper contributes to the existing knowledge on the value relevance of asset revaluations by examining equity valuation based on variables other than those commonly used, such as net income and the book value of equity for various countries. By doing so, this study contributes to the international accounting literature by suggesting that the effect of adopting new IFRS rules, including IAS 16, may differ due to the legal, cultural, and social differences of each country. …

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