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The quality of fair value measures for property, plant, and equipment

Author

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  • Don Herrmann
  • Shahrokh M. Saudagaran
  • Wayne B. Thomas

Abstract

Based on Statement of Financial Accounting Concepts (SFAC) No. 2, this paper argues for fair value measures of property, plant, and equipment and challenges the primary arguments in support of maintaining the current status quo in the United States—strict historical costs for all property, plant, and equipment unless the asset is impaired. We first provide a summary of the valuation of property, plant, and equipment internationally noting that revaluations to fair value are an acceptable practice under international and many national accounting standards. We also provide a brief historical perspective of accounting in the United States where prior to 1940 the upward valuation of property, plant, and equipment was an acceptable accounting alternative. We then evaluate fair value versus historical cost measures for property, plant, and equipment based on the qualitative characteristics of accounting information in SFAC No. 2. We argue that fair value measures for property, plant, and equipment are superior to historical cost based on the characteristics of predictive value, feedback value, timeliness, neutrality, representational faithfulness, comparability, and consistency. Verifiability appears to be the sole qualitative characteristic favoring historical cost over fair value. Finally, we address key measurement concepts for property, plant, and equipment. The United States could learn from the practices already established in other countries and in International Financial Reporting Standards by reconsidering fair value measures for property, plant, and equipment.

Suggested Citation

  • Don Herrmann & Shahrokh M. Saudagaran & Wayne B. Thomas, 2006. "The quality of fair value measures for property, plant, and equipment," Accounting Forum, Taylor & Francis Journals, vol. 30(1), pages 43-59, March.
  • Handle: RePEc:taf:accfor:v:30:y:2006:i:1:p:43-59
    DOI: 10.1016/j.accfor.2005.09.001
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    Citations

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    Cited by:

    1. Tami Dinh Thi & Wolfgang Schultze, 2011. "Capitalizing research & development and ‘other information’: the incremental information content of accruals versus cash flows," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 22(3), pages 241-278, November.
    2. Bencheikh, Fayrouz & Taktak, Neila Boulila, 2017. "Access to bank financing and the collateral channel: The case of Tunisian firms before and after the revolution," Research in International Business and Finance, Elsevier, vol. 42(C), pages 874-886.
    3. Gwilliam, David & Jackson, Richard H.G., 2008. "Fair value in financial reporting: Problems and pitfalls in practice," Accounting forum, Elsevier, vol. 32(3), pages 240-259.
    4. Norden, Lars & van Kampen, Stefan, 2013. "Corporate leverage and the collateral channel," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5062-5072.
    5. Adela Deaconu & Anuţa Buiga & Cristina Nistor, 2010. "The Value Relevance of Fair Value," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 17(1), pages 151-169, May.
    6. Olante, Maria Elena & Lassini, Ugo, 2022. "Investment property: Fair value or cost model? Recent evidence from the application of IAS 40 in Europe," Advances in accounting, Elsevier, vol. 56(C).
    7. repec:mth:ijafr8:v:8:y:2018:i:3:p:91-107 is not listed on IDEAS
    8. Lorek, Kenneth S., 2014. "Trends in statistically based quarterly cash-flow prediction models," Accounting forum, Elsevier, vol. 38(2), pages 145-151.
    9. Nemanja Karapavlović & Vladimir Obradović & Jasmina Bogićević, 2020. "The Use Of Historical Cost And Fair Value For Property And Plant And Equipment Measurement – Evidence From The Republic Of Serbia," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 65(227), pages 95-118, October –.
    10. Beisland, Leif Atle, 2014. "Equity valuation in practice: The influence of net financial expenses," Accounting forum, Elsevier, vol. 38(2), pages 122-131.
    11. Iulia Jianu & Roxana Ruiu & Ionel Jianu & Mihaita Ruiu, 2013. "The Value and the Evaluation Process in Accounting," Journal of Knowledge Management, Economics and Information Technology, ScientificPapers.org, vol. 3(6), pages 1-15, December.

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