Predicting Future Performance Using Fair Value versus Historical Cost: Evidence from Investment Property

• In Event: Usefulness of Accounting Information

Abstract

This study investigates whether reporting investment property at fair value using IAS 40 provides incremental predictive ability for future performance beyond historical cost. Specifically, this study investigates whether recognizing changes in fair value of investment properties can predict a firm’s future income and future cash flows. Using a sample of Chinese real estate firms from 2007 through 2013, we find that reporting investment property at fair value provides incremental predictive ability for future income beyond historical cost. In contrast, this study finds fair value provides no incremental predictive ability beyond historical cost for future cash flows. This study also finds that the recognizing fair value gains and losses in income can predict a firm's one-year-ahead and two-year-ahead income and one-year-ahead cash flows but cannot predict for two-year-ahead cash flows.

Authors

• Stephen Wen-Jen Lin, Florida International University

• Shu-Hsing Wu, Chang Jung Christian University

• Andy Sbaraglia, Independence