Fair Value or Cost Mode Drivers of Choice for Ias 40

European Accounting Review
Vol. 19, No. 3, 461– 493, 2010

Fair Value or Cost Model? Drivers of Choice for IAS 40 in the Real
Estate Industry
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.

1. Introduction
We analyse if the choice between cost or fair value for investment property under IAS 40 aims at (i)

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