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Review of Accounting Studies
Published in: Review of Accounting Studies 4/2018

11-07-2018

Asset use and the relevance of fair value measurement: evidence from IAS 41

Author: Adrienna Huffman

Published in: Review of Accounting Studies | Issue 4/2018

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Abstract

This study investigates whether asset use influences the relevance of fair value measurement. Specifically, I examine whether fair value is more relevant when it is applied to in-exchange assets than when it is applied to in-use assets. I test the framework on a sample of international firms that adopt International Accounting Standard 41. Using a difference-in-differences approach, I find that earnings information is significantly more relevant when firms measure in-exchange biological assets at fair value, but book value and earnings information is significantly less relevant when firms measure in-use biological assets at fair value. Consistent with these results, in cross-sectional analyses I find that investors discount the fair value of in-use biological assets and their associated unrealized gains and losses relative to the fair value of in-exchange biological assets. At present, the Conceptual Framework provides little guidance on asset measurement, resulting in inconsistencies across measurement standards. Thus, my findings may provide insight to standard setters and those interested in conceptually based asset measurement.
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Appendix
Available only for authorised users
Footnotes
1
More recently, the notion that assets derive value in-use or in-exchange is present in several accounting standards (see IASB 2009, ¶ME30-¶ME32; FASB 2011, Accounting Standards Codification (ASC) 820–10-35-10E).
 
2
For example, under U.S. Generally Accepted Accounting Principles (GAAP), firms are required to measure investment property at cost, while under International Financial Reporting Standards (IFRS), firms can choose to measure investment property at fair value (KPMG 2012). Similarly, under IFRS, PP&E can be recognized at cost, but biological assets, a class of assets belonging to PP&E, must be recognized at fair value (KPMG 2012).
 
3
Both firms are examples from my sample.
 
4
Whether the separability criteria of the asset influence the way the asset is used by the firm, and thus the relevance of the fair value information, is a limitation of this study. I thank an anonymous reviewer for this comment.
 
5
This holds true to the extent that the unobserved factors do not vary systematically across periods.
 
6
Specifically, the IASB amended IAS 41 with respect to bearer plants, a type of in-use biological asset.
 
7
My sample predates the IASB’s amendment to IAS 41.
 
8
According to the issues paper (IASB 2012a, ¶27), the analysts felt that accounting for in-use (bearer) biological assets under IAS 41 was misleading to users because the standard required reporting price changes for assets that were not being held for sale (derive value in-use). In addition, analysts felt that accounting for in-use (bearer) biological assets under IAS 41 introduced volatility into earnings that was not useful in estimating the value of the in-use (bearer) biological assets (IASB 2012a, ¶33).
 
9
The IASB (2010, ¶6.13a) states: “The existing Conceptual Framework provides little guidance on measurement and when a particular measurement basis should be used.”
 
10
Specifically, IAS 41 prescribes accounting treatment for agricultural activity, or “management by the entity of the biological transformation of living animals and plants (biological assets) for sale, into agricultural produce, or into additional biological assets” (IASB 2009, ¶IN1).
 
11
This sample selection is consistent with Daly and Skaife (2016), who examine whether IAS 41 impacted firms’ cost of debt, and partition their sample into bearer and non-bearer biological assets, eliminating firm-year observations holding both asset groups.
 
12
Fifty-five percent of firms in the sample are cross-listed on a variety of other exchanges.
 
13
My results are not sensitive this design choice. Specifically, my results are unchanged if I substitute the market information from the firm’s largest equity exchange as opposed to summing across exchanges.
 
14
In my sample, 50 firms (27.3% of the sample), adopt IAS 41 and continue to measure their biological assets at historical cost.
 
15
The amendment to IAS 41 does not include bearer livestock such as dairy cattle, only plants.
 
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Metadata
Title
Asset use and the relevance of fair value measurement: evidence from IAS 41
Author
Adrienna Huffman
Publication date
11-07-2018
Publisher
Springer US
Published in
Review of Accounting Studies / Issue 4/2018
Print ISSN: 1380-6653
Electronic ISSN: 1573-7136
DOI
https://doi.org/10.1007/s11142-018-9456-0

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