Does Fair Value Accounting for Non-Financial Assets Dominate Historical Cost Convention? Empirical Evidence from IFRS and Indian GAAP

Abstract

The present study explores valuation practices of fifteen (15) large non-financial companies listed in India and Tanzania for the FY 2013/1014. We indentify valuation practices by reading the accounting policies sections of each company’s annual report. The study reveal that despite permission by reporting standards to use fair value measurement for non-financial assets it is rarely practiced amongst non-financial listed companies. We conclude that the IFRS implementation has effectively increased discretion on fair value measurement for elements of financial statements (37.2%) relative to Indian GAAP (18.2%) but it has not increased fair valuation practice for non-financial assets amongst sampled entities. The study suggests that despite its market orientation and relevance to investors it is nearly impracticable for fair value to become a prime measure for non-financial assets especially when its application is optional. We, associate the despair to fair value use with illiquidity of assets; high costs of obtaining reliable estimates; conflict between relevance and reliability of fair value; reporting culture; unbreakable trust of managers on historic cost convention and managers’ reporting incentive. The study makes appeal to regulators, national and global standard setters (IASB) to assess the current fair value standards and exercise caution in incorporating fair value measurement on certain assets particularly those with no active market.

Keywords: IFRS, Indian GAAP, Fair value, Historic cost, Non-financial assets