Fair Value Accounting and Valuation of Non-Financial Assets: A Study of Impact of IFRS Adoption

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This paper tries to examine the degree of adaptability of the Fair Value concept, as codified in the International Financial Reporting Standards (IFRSs), in Indian Accounting Standards. Indian Accounting Standards are the official set of corporate financial reporting standards of India, a major emerging economy on the world map. Researchers examine whether and why companies preferred fair value to historical cost and what extent they choose between the two valuation methods. Except for property investment owned by real estate companies, historical price by far dominates fair value in practice. Indeed, proper value accounting is not mandatory for the plant, equipment, and intangible assets. The study includes the valuation methods for arguably the most controversial (non-financial) asset group: Property Plant and Equipment (PPE) and Property investment. For this, researchers have selected India’s top twenty real estate companies and examined companies’ incentives to choose fair value over historical cost by analyzing cross-sectional variation in valuation practices after IFRS adoption. In this research logistic regression model have been used to the probability that a given company will apply fair value as a function of company-specific characteristics. Researchers match each fair value of the company with historical cost companies, which are based on market capitalization in the stock market and the log of the market value of equity. It is found that companies using fair value accounting rely more on debt financing than companies that use historical cost. The evidence is consistent with companies using fair value to signal asset liquidation values to their creditors. It is not compatible with equity investors demanding fair value accounting for non-financial assets.

Keywords: Fair Value Accounting, IFRS, Historical Cost, Non-Financial Assets

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