Individual research assignment, Weighting 20%

Research topic: Historical cost versus fair value accounting for non-financial assets

Word limit: 2500 words (excluding references)

The choice between fair value and historical cost accounting has been a widely debated issue in the accounting literature (Christensen & Nikolaev, 2013). However, the conceptual framework for international financial reporting (hereafter the IASB Framework) does not prescribe a specific measurement base to account for the key elements in financial reports (the IASB Framework 2010). Specific measurement methods for different accounting elements are provided in the specific international financial reporting standards (IFRS). Unlike most other accounting standards, IFRS provides a free choice between fair value and historical cost accounting for the non-financial asset groups: property, plant and equipment (PPE) (see IAS 16) and intangibles (see IAS 38). This has resulted in variations in valuation practices for PPE and intangible assets.

Required

1. Refer to the current IASB Framework and IFRS 13 Fair Value measurements, briefly explain the measurement concepts in relation to historical cost and fair value accounting.

2. Evaluate the benefits and challenges of using historical cost and fair value accounting for PPE and intangibles, by reviewing accounting literature.

3. Identify valuation practices (in relation to the use of historical cost and fair value accounting) for the following non-financial asset groups: PPE and intangibles, by reading the ‘accounting policy’ sections of three listed companies’ 2014 annual reports. Note: You are required to select one company listed on your home country’s stock exchange, one company listed on the New York Stock Exchange, USA, and the third one is selected from the Australian Securities Exchange.

4. Analyse if the valuation practices for PPE and intangibles are consistent across the three companies.

5. What is your opinion on the free choice between historical cost and fair value accounting for PPE and intangibles: should such free choice be continued in practice? Or should it be abandoned? Justify your answer.

References

Christensen, Hans B. & Nikolaev, Valeri V., (2013). Does fair value accounting for non-financial assets pass the market test? Review of Accounting Studies, 18(3), pp 734-775.

Missonier-Piera, Franck., (2007). Motives for fixed-asset revaluation: An empirical analysis with Swiss data, The International Journal of Accounting, 42(2), pp186–205.