The convergence to the International Financial Reporting Standards (IFRS) is linked with diverse issues related to accounting. The need to choose between historical cost and fair value (FV) accounting when it comes to non-financial assets is among the highly debated issues. Based on current studies, FV measurement’s insufficient standardization and partial reliance on institutional facts could reduce its helpfulness for accounting for non-financial assets.
In relation to real estate, equipment, or intellectual property, FV is often unknowable, unstable, and disengaged from institutional reality. In their case study of pharmaceutical, telecommunications, and industrial companies that use FV accounting for non-financial assets, Barker and Schulte (2017) highlight FV measurement’s contributions to producing misleading information. From their analysis, FV accounting offers two possibilities: reporting well-established institutional facts (IFs) or creating new data not constituting valuable IFs. Based on the empirical evidence that Barker and Schulte (2017) retrieved, the second option is dominant in most cases. These challenges’ potential implications for accounting are tremendous, including substantial overall value deviations in companies’ financial statements.
Another disadvantage of using FV for businesses’ non-financial assets is the absence of the universally accepted FV measurement approach that would facilitate international comparison practices. Despite the commonly discussed promise of FV in terms of accuracy, influential non-financial companies in Tanzania and India rarely practice FV accounting (Kaaya & Noorbasha, 2017). Resistance to FV accounting for non-financial assets stems from insufficient standardization. During low market liquidity periods, FV accounting practices can encourage the manipulation of FV estimates (Kaaya & Noorbasha, 2017). This results in the inconsistent application of the IFRS, which reduces the ability to analyze diverse companies’ data comparatively (Kaaya & Noorbasha, 2017). Taking that into account, the massive use of FV with non-financial assets could hinder the collection of objective data pointing to specific companies’ positions relative to other businesses.
References
Barker, R., & Schulte, S. (2017). Representing the market perspective: Fair value measurement for non-financial assets.Accounting, Organizations and Society, 56, 55-67. Web.
Kaaya, I. D., & Noorbasha, A. (2017). Does fair value account for non-financial assets dominate historical cost convention? Empirical evidence from IFRS and Indian GAAP.European Journal of Business Management, 9(11), 28-36. Web.