Vol. 19, No. 3, 461– 493, 2010
Fair Value or Cost Model? Drivers
of Choice for IAS 40 in the Real
A. QUAGLI∗ and F. AVALLONE∗∗
Department of Accounting and Business Studies (DITEA), University of Genova, Genova, Italy and ∗ ∗ Department of Computer and Management Science (DISA), University of Trento, Trento, Italy
(Received September 2008; accepted February 2010)
ABSTRACT The IFRS mandatory adoption in European countries is an excellent context from which to assess the validity of accounting choice theory, which postulates that information asymmetry, contractual efﬁciency (agency costs) and managerial opportunism reasons could drive the choice. With this aim, we test the impact of these factors to explain the adoption of fair value for investment properties (IAS 40) in the real estate industry, taking into account the ‘revaluation’ option offered by IFRS1 and using historical cost without revaluations as a baseline category for comparison purposes. We select a sample of European real estate companies from Finland, France, Germany, Greece, Italy, Spain and Sweden, all ﬁrst-time adopters of the IFRS. Using a multinomial logistic model, we show that information asymmetry, contractual efﬁciency and managerial opportunism could account for the fair value choice. Particularly, the most signiﬁcant ﬁndings are that size as a proxy of political costs reduces the likelihood of using fair value while market-to-book ratio is negatively associated with the fair value choice. On the other hand, leverage, another typical proxy of contracting costs, seems not to inﬂuence the choice. This evidence conﬁrms the current validity of traditional accounting choice theory even if it reveals, in such a context, the irrelevance of the usual relations between accounting choice and leverage.
We analyse if the choice between cost or fair value for investment property under IAS 40 aims at (i) reducing agency costs (contractual efﬁciency
Correspondence Address: A. Quagli, Department of Accounting and Business Studies (DITEA), University of Genova, Via Vivaldi 2, 16126 Genova (GE), Italy. E-mail: firstname.lastname@example.org 0963-8180 Print/1468-4497 Online/10/030461–33 # 2010 European Accounting Association DOI: 10.1080/09638180.2010.496547
Published by Routledge Journals, Taylor & Francis Ltd on behalf of the EAA.
A. Quagli and F. Avallone
reasons), (ii) mitigating information asymmetries, as standard setters claim, or (iii) allowing managerial opportunism, typical motives deﬁned by accounting choice theory (Holthausen, 1990; Fields et al., 2001).
Using a multinomial logistic regression, we test these hypotheses using 73 observations from real estate companies located in European countries (Finland, France, Germany, Greece, Italy, Spain and Sweden) which do not allow the fair value method in the pre-IFRS mandatory period in order to eliminate the inﬂuence of pre-existing fair value adoption. All these ﬁrms are ﬁrsttime IFRS adopters, enabling us to compare the same accounting choice in a similar situation (ﬁrst-time adoption).
The mandatory adoption of IAS 40 (Investment properties) by European listed companies offers a unique opportunity to verify managers’ behaviour in a composite context of accounting choice. In fact, IAS 40 allows two alternative methods for appraisal of investment property assets: the cost method or the fair value method with recognition of fair value changes through proﬁt and loss. Additionally, taking into account the IFRS1 ‘fair value as deemed cost’ option, the cost choice could be split into two alternatives: (i) historical cost without revaluation, (ii) historical cost with the IFRS1 option to revaluate investment property. This second option could represent a partial substitute for the fair value method, showing its effects only in equity without inﬂuencing proﬁt and loss.1
Thus, our model assumes the choice of applying historical...