A Business Valuation Framework for Asset Measurement: Evidence from IAS 41

• In Event: Financial Accounting & Reporting # 5 (Dialogue)
  In Dialogue Session: Financial Accounting and Reporting # 5 (Dialogue)

Abstract

Firms use two types of assets to generate value. In-exchange assets (e.g. cash) generate value on a
standalone basis, while in-use assets (e.g. PP&E) generate value in combination with other assets. Early accounting theorists link decision-useful asset measurement (i.e. fair value versus historical cost) to the manner in which an asset generates value (i.e. in-exchange versus in-use) (e.g. Littleton 1935). In a departure from this approach, certain modern accounting standards require fair value accounting for in-use
assets. For example, International Accounting Standard (IAS) 41 requires fair value measurement for a class of in-use assets referred to as "biological assets".

The application of IAS 41 provides a setting for addressing whether the relative decision-usefulness of fair value versus historical cost information is linked to the manner in which assets generate value. Specifically, I investigate the relative decision-usefulness of fair value versus historical cost measurement for
in-use biological assets. I examine 306 international firms that adopt IAS 41. This sample is comprised of three subsets of observations. In the first subset, 159 firms switch from historical cost to fair value
measurement of their biological assets, which allows for before and after analyses of the change in the decision-usefulness of the information across the two measurement regimes. For reasons explained in detail later in the paper, 77 (70) firms measure their biological assets using historical cost (fair value) throughout the sample period. This allows for cross-sectional analyses of the difference in the decision-usefulness of the information provided by firms employing fair value (historical cost) measurement of their biological assets.

Author

• Adrienna Alys Huffman, The University of Utah