The Value Relevance of Fixed Asset Revaluation Reserves in International Accounting

International Management Review

Vol. 5 No. 2 2009

The Value Relevance of Fixed Asset Revaluation Reserves in International
Accounting
Gyung Paik
Brigham Young University, Provo, Utah, USA
[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

References: Aboody, D., Barth, M., & Kasznik, R. (1999). Revaluations of fixed assets and future firm performance: Evidence from the UK Barlev, B., Fried, D., Haddad, J., & Livnat, J. (2007). Reevaluation of revaluations: A cross-country examination of the motives and effects on future performance Barth, M. & Clinch, G. (1998). Revalued financial tangible and intangible assets: Association with share prices and non-market based estimates Bartov, E. (1993). The timing of asset sales and earnings manipulation. The Accounting Review, 68, 840-855. Bernard, V. (1993). Discussion of an investigation of revaluations of tangible long-lived assets. Journal of Accounting Research, 31, 39-45. Brown, P., Izan, H., & Loh, A. (1992). Fixed asset revaluations and managerial incentives. Abacus, 28(1) 36-57. Cotter, J., & Zimmer, I. (1995). Asset revaluations and assessment of borrowing capacity. Abacus, 31(2), 136151. Cotter, J., & Richardson, S. (2002). Reliability of asset revaluations: The impact of appraiser independence. Easton, P., Eddy, P., & Harris, T. (1993). An Investigation of revaluations of tangible long-lived assets. Journal of Accounting Research, 31(3), 1-38. Financial Accounting Standards Board (FASB) (2001). Accounting for the impairment or disposal of long-lived assets Gaeremynck, A., & Veugelers, R. (1999). The revaluation of assets as a signaling device: a theoretical and an empirical analysis Herrmann, D., Saudagaran, S., & Thomas, W. (2005). The quality of fair value measure for property, plant and equipment International Accounting Standards Board (IASB). (1982). Accounting for property, plant, and equipment. Jaggi, B., & Tsui, J. (2001). Management motivation and market assessment: revaluations of fixed assets. Johnson, S. (2009). SEC pushes back IFRS roadmap. Retrieved Feb.4, 2009 from http://www. CFO.com Lin, Y., & Peasnell, K Missonier-Piera, F. (2007). Motives for fixed-asset revaluation: An empirical analysis with Swiss data. The International Journal of Accounting, 42(2), 186-205. Nichols, L., & Buerger, K. (2002). An investigation of the effect of valuation alternatives for fixed assets on the decision of statement users in the United States and Germany Radebaugh, L., Sidney, J., & Black, E. (2006). International accounting and multinational enterprises. John Wiley & Sons, Inc. Securities and Exchange Commission (SEC). (2008). SEC proposes roadmap toward global accounting standards to help investors compare financial information more easily Shenkar, O., & Luo, Y. (2008). International business. Sage Publication, Inc. Whittred, G., & Chan, K. (1992). Asset revaluations and mitigations of underinvestment. Abacus, 28 (1), 58-74.