Accounting and Finance 56 (2016) 47–58

Discussion of ‘Other comprehensive income: a review

and directions for future research’

Michael E. Bradbury
School of Accountancy, Massey University, Auckland, New Zealand

doi: 10.1111/acfi.12196

1. Introduction

Black (2015) searches five major accounting journals and a selection of other
accounting publications to review the research on the usefulness of compre-
hensive income, other comprehensive income (OCI) and components of OCI
for investor and contracting purposes. Prior literature typically examines
whether there are distinguishing characteristics between OCI and net income.
In providing an overall evaluation of Black (2015), I use terminology that will
be familiar to standard setters in the audience. Is the study relevant? The
reporting of income is at the core of measuring performance and therefore is at
the core of accounting. Furthermore, the way in which the literature is filtered,
classified and presented in the review makes it more relevant for standard
setters. Black (2015) employs a framework based on the Ohlson (1999)
properties to distinguish permanent income from transitory items: (i) the ability
to self-predict; (ii) the relevance for predicting next-period total income; and
(iii) value relevance.1 That is, Black (2015) examines whether the research on
OCI (or its components) predicts future OCI, predicts future earnings or is
associated with various capital market metrics (prices, returns or risk). In
addition to the Ohlson framework, Black (2015) also examines the properties of
OCI in relation to debt and compensation contracts.2
Reporting of information about performance, and OCI in particular is an
important section of the IASB’s current Exposure Draft Conceptual Framework
project (IASB, 2015). The review is both relevant and timely.

1
Any two of these attributes implie the third. Any one attribute leads to no conclusions
concerning the remaining two (Ohlson, 1999).
2
Ohlson (1999) also looks at contracting implication but applies a very restrictive
assumption, namely that managers’ efforts have no direct influence on transitory
earnings.
Invited by Steven Cahan (Editor). This discussion relates to the version of the paper
presented at the A&F/IASB Research Forum.

© 2016 AFAANZ
48 M. E. Bradbury/Accounting and Finance 56 (2016) 47–58

My general impression is that the review faithfully represents the underlying

literature. I use the term ‘general impression’ because I did not reach this
conclusion by weighting and aggregating the components of faithful represen-
tation. Faithful representation has three characteristics: completeness, free from
error and neutrality. Typing ‘other comprehensive income’ into Google Scholar
results in 4,910 hits, whereas there are approximately 60 academic articles cited
in Black (2015). Hence, the review is not complete in any sense of the word. Nor
am I willing to guarantee that it is free from error.3 However, from my
knowledge of the literature, the review is well balanced with regard to the issues
it covers, without resulting in information overload. Neutrality is an important
qualitative characteristic for the users of financial information and therefore
the Framework. Neutrality is also important in evaluating academic research.
This criterion helps to distinguish research from advocacy (the collection of
evidence to support a position or discredit and alternative position).4

2. OCI volatility under IFRS

One observation I would make about Black (2015) is that the journal
selection procedures result in research mainly from US sources. The top
accounting journals are US-based and the concentration of US studies partly
reflects the editors’ responsibility to the journals’ audience. However, it also
reflects that researchers will typically use the best available data. US capital
market data are readily available and numerous (which increases statistical
power). Hence, to publish non-US research in major journals, the data need to
have special features that would make the setting and the results interesting.
The issue for the IASB members in the audience is: How applicable is evidence
from the United States for the IASB?
In my view, evidence from US data is largely applicable to the IASB.
However, there are components of OCI which differ between US GAAP and
IFRS GAAP. Therefore, the IASB should attach more weight to studies that
use non-US data (e.g. Cahan et al., 2000; Goncharov and Hodgson, 22011;
Khan and Bradbury, 2014, Khan and Bradbury 2015).
Similar to Black (2015), in Figure 1 I graph OCI and its components from
2001 to 2010, scaled by profit for the year (PFTY) using New Zealand data.

3
It would seem these criteria need to be qualified with materiality. Is the information
materially complete? Or are there material omissions? Is the information materially free
from error? This suggests that these criteria apply at an entity level rather than at a
standard-setting (Framework) level.
4
In my conference presentation, I mentioned that ‘professional scepticism’ was another
a characteristic shared between researchers and practitioners (and auditors in partic-
ular). In the research world, this is called peer review and involves conference and
workshop presentations, and the review and editorial process. Academic commentators
will typically address research design choices (e.g. the basis for sample selection,
measurement of variables, statistical methods).

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 M. E. Bradbury/Accounting and Finance 56 (2016) 47–58 49

The data for these graphs are from Khan and Bradbury (2015) and are based
(for the most part) on IFRS. I display fiscal year minimums and maximums.5
When scaling items by profit, ratios can be dominated by negative and small
denominators. I therefore use the absolute PTFY and report unscaled OCI and
its components. Table 1 presents Spearman (nonparametric) correlations
between OCI and components of OCI.

Figure 1 OCI and OCI components.

5
The means are close to zero.

© 2016 AFAANZ
50 M. E. Bradbury/Accounting and Finance 56 (2016) 47–58

Table 1
Correlation statistics

ARS FCTR CFHR MSEC PEN OTHER

OCI 0.569* 0.553* 0.319* 0.086* 0.043 0.081*

OCI/ABS(PFTY) 0.588* 0.564* 0.284* 0.109* 0.044 0.067*
Adjusted OCI 0.685* 0.391* 0.136* 0.043 0.072*
(Adjusted OCI)/ABS(PFTY) 0.408* 0.260* 0.054 0.014 0.111*

This table presents Spearman (nonparametric) correlations between various measures of OCI
and the components of OCI (N = 927). Adjusted OCI is OCI excluding the asset revaluation
surplus. ABS(PFTY) is the absolute amount of the profit for the year. ARS is the asset
revaluation surplus. FCTR is the foreign currency translation reserve. CFHR is the cash-flow
hedge reserve. MSEC is marketable securities. PEN is the pension adjustment, and OTHER is
the residual OCI component. *Indicates statistical significance at the 5 percent level.

On average, OCI is close to zero, in both the raw data and relative to the
absolute amount of PFTY. Khan and Bradbury (2015) note that items of OCI
are infrequent but material. Scaling by absolute profit for the year (OCI/ABS
(PFTY)) flattens most years but accentuates others (e.g. 2005). The three main
components of OCI (i.e. those with the highest correlation with OCI in
Table 1) are the asset revaluation surplus (ARS), the foreign currency
translation reserve (FCTR) and the cash-flow hedge reserve (CFHR). Graphs
of these components are also shown in Figure 1.
The asset revaluation reserve component of OCI is of interest for the IASB
because asset revaluations are an accounting policy choice allowed under IAS
16, but not allowed under US GAAP. Asset revaluations were frequent in New
Zealand prior to the adoption of IFRS. The asset revaluation component is
similar to OCI in that the mean is close to zero but the maximum is large.
Revaluations are not always positive (i.e. there are value decreases). A question
for researchers is: Why does the scaled figure for ARS differ from the scaled
OCI, when the unscaled figures are similar? What causes the multiple-spiked
stegosaurus effect? Is the impact limited to this period? Or is there something
systematic (e.g. the frequency of revaluations) that induces this effect?
One of the arguments why comprehensive income should not be reported in a
single statement of performance is that OCI increases volatility (relative to net
profit). However, the major cause of that volatility (i.e. asset revaluations) is
voluntary. Hence, such volatility is self-inflicted. In Table 1, I report correla-
tions on adjusted OCI where the impact of asset revaluations is eliminated.6
Given the bias towards US research in Black (2015) and that revaluations
may be an important component of OCI, in the Appendix I review the research
literature on asset revaluations.

6
Note, this adjustment is only partial as depreciation on the revalued assets has not been
eliminated from income and the cumulative effect from retained earnings.

© 2016 AFAANZ
56 M. E. Bradbury/Accounting and Finance 56 (2016) 47–58

Hirst, D., and P. Hopkins, 1998, Comprehensive income reporting and analysts’
valuation judgments, Journal of Accounting Research 36, 47–75.
Hung, M., and K. R. Subramanyam, 2007, Financial statement effects of adopting
international accounting standards: the case of Germany, Review of Accounting
Studies 12, 623–657.
International Accounting Standards Board, 2015, Exposure Draft ED/2015/3: Concep-
tual Framework for Financial Reporting (IFRS Foundation, London, UK).
Jaggi, B., and J. Tsui, 2001, Management motivation and market assessment:
revaluations of Fixed Assets, Journal of International Financial Management and
Accounting 12, 160–187.
Khan, S., and M. Bradbury, 2014, Volatility and risk relevance of comprehensive
income, Journal of Contemporary Accounting and Economics 10, 76–85.
Khan, S., and M. Bradbury, 2015, The volatility of comprehensive income and its
association with market risk. Accounting and Finance Early View.
Kim, K. J., 1997, Empirical analysis of asset revaluation and accounting information,
Accounting Research 22, 37–57.
Krzywda, D., and M. Schroeder, 2007, An analysis of the differences between IFRS and
Polish accounting regulations: evidence from the financial statements of listed entities
on the Warsaw Stock Exchange for the calendar years ending 2001, 2003 and 2004,
Accounting in Europe 4, 79–107.
La Porta, R., F. Lopez-de Silanes, A. Schleifer, and R. W. Vishny, 2000,
Agency problems and dividend policies round the world, Journal of Finance
55, 1–33.
Lin, Y. C., and K. V. Peasnell, 2000, Fixed asset revaluation and equity depletion in the
UK, Journal of Business Finance and Accounting 27, 359–394.
Lintner, J., 1956, Distribution of incomes of corporations among dividends, retained
earnings, and taxes, American Economic Review 46, 97–113.
Maines, L., and L. McDaniel, 2000, Effects of comprehensive-income characteristics on
nonprofessional investors’ judgments: the role of financial-statement presentation
format, The Accounting Review 75, 179–207.
Miller, M. H., and F. Modigliani, 1961, Dividend policy, growth, and the valuation of
shares, Journal of Business 34, 411–433.
Ohlson, J., 1999, On transitory earnings, Review of Accounting Studies 4, 145–162.
Paik, G., 2009, The value relevance of fixed asset revaluation reserves in international
accounting, International Management Review 5, 73–80.
Perramon, J., and O. Amat, 2006, IFRS introduction and its effect on listed companies
in Spain, Working paper (Universitat Pompeu Fabra).
Sharpe, I., and R. Walker, 1975, Asset revaluation and stock market prices, Journal of
Accounting Research 3, 293–310.
Shin, G. H., and V. F. Willis, 2014, Asset revaluations under International Accounting
Standard 16: evidence from Korea, International Journal of Business, Accounting, &
Finance 8, 21–35.
Skinner, D. J., and E. Soltes, 2011, What do dividends tell us about earnings quality?,
Review of Accounting Studies 16, 1–28.
Standish, P. E., and S. Ung, 1982, Corporate signaling, asset revaluations and the stock
prices of British companies, The Accounting Review 57, 701–715.
Stent, W., M. E. Bradbury, and J. Hooks, 2010, IFRS in New Zealand: effects
on financial statements and selected ratios, Pacific Accounting Review 22, 92–
107.
Whittred, G., and Y. K. Chan, 1992, Asset revaluations and the mitigation of
underinvestment, Abacus 28, 58–74.

© 2016 AFAANZ
58 M. E. Bradbury/Accounting and Finance 56 (2016) 47–58

revaluations of property, plant, financial and intangible assets are value-

relevant to investors.
Non-Australian or UK evidence on OCI the capital market relevance is
limited. Using the Ohlson (1995) model, Kim (1997) argues that the change in
asset revaluation reserve explains stock performance for Korean firms over the
period 1991-1994. More recently Shin and Willis (2014) find the association
between asset revaluations by Korean firms and market announcements is
stronger for firms with lower risk, carrying foreign currency debt. Using Form
20-F reconciliations to US GAAP, Amir et al. (1995) find that investors view
both capitalised goodwill and asset revaluations as value-relevant. Paik (2009)
examines the adoption of IAS 16 by examining the relation between
revaluation reserves and stock prices in 15 countries. The results indicate that
the revaluation reserves from common law countries are value-relevant, while
those of code law are not.

Risk relevance

There is very little evidence of that relates asset revaluations to risk relevance.
Using a small sample, Sharpe and Walker (1975) report that the market
absorbs the information content of asset revaluations quickly into asset prices,
and there is little evidence that revaluation announcements are associated with
systematic stock return volatility.

Debt and compensation contracting

Survey evidence from Chief Financial Officers in Australia cites lowering

debt-to-equity ratios as a major reason for undertaking revaluations (Easton
et al., 1993). Several studies find that firms moving closer to debt convenient
violation are more likely to revalue assets (Brown et al., 1992; Aboody et al.,
1999; Gaeremynck and Veugelers, 1999). Lin and Peasnell (2000) examined a
sample of UK firms that revalued fixed assets during 1989 to 1991 and found
that upward revaluation was associated with depletion of equity caused by
writing off purchased goodwill directly against equity. Choi et al. (2013) find
that Korean firms revalue to improve their financial position or to reduce debt
contracting costs. Alternatively, voluntary revaluations are associated with
firms with the need to increase borrowing capacity because of higher growth
opportunities, lower cash reserves (Whittred and Chan, 1992) or declining cash
flows from operations (Cotter and Zimmer, 1995).
I know of no studies that examine asset revaluations in the context of
management compensation contracts.

© 2016 AFAANZ
 M. E. Bradbury/Accounting and Finance 56 (2016) 47–58 53

illustrate the unintended consequences of the introduction of fair value

accounting. The transitory nature of fair value adjustments (within income)
impacts dividend distributions and increase agency costs for minority share-
holders. Hence, the Ohlson (1999) criteria for distinguishing between perma-
nent and transitory items of OCI, and hence Black (2105), are also relevant for
agency costs related to dividend distributions.

4. Recycling

The issue of recycling is an important issue that deserves more research.

Recycling (or ‘reclassification adjustments’ as they are described in IAS 1) arise
with some items of accumulated OCI and not others. Consider the components
of OCI examined in Figure 1.

• The ARS is not recycled. On disposal of the assets, any accumulated amount
is transferred to retained earnings (IAS 16.41).
• The FCTR is reclassified to income when the gain or loss on disposal of a
foreign operation is recognised (IAS 21.48).
• The CFHR is recycled. When the hedged item is recognised, the accumulated
amount in the CFHR is included in the initial cost or carrying amount (IFRS
9.6.5.11(d)(i)). Hence, these amounts are recycled in income via depreciation
of property, plant and equipment, cost amortisation for financial assets and
liabilities, and cost of sales for inventory. Alternatively, the accumulated OCI
is transferred to profit in the same periods as the cash flows from the hedged
item affect profit or loss (IFRS 9.6.5.11(d)(ii)).

It is difficult to see how a user of financial statements and researchers can

unpick the impact of recycling. This must have a confounding effect on any
research on OCI. For example, consider the ratio of OCI/ABS(PFTY) used in
Figure 1. The effect of recycling is ignored in both the OCI and PFTY.
Furthermore, for some items of recycling (e.g. cash-flow hedges of inventory or
plant) the timing of when the accumulated amount in OCI hits earnings
(through cost of sales or depreciation) will not be observable. Thus,
experimental research (rather than archival research) may be more tractable.

5. Theoretical considerations

Research can increase understanding by providing empirical evidence or

providing conceptual arguments. Currently, there is little conceptual work that
helps standard setters decide what items should be reported in OCI. However,
concepts of capital seem to have been overlooked.
The measurement of income requires an entity to maintain its capital. In
order for income to be determined (or distributed), the capital (or well-offness)
of the entity must be maintained. Hence, under IFRS neither ‘profit for the

© 2016 AFAANZ
54 M. E. Bradbury/Accounting and Finance 56 (2016) 47–58

year’ nor ‘comprehensive income’ faithfully represents the notion of income

that is distributable.9 A major weakness of the Framework is that it provides
little guidance on capital maintenance.
The recent Framework exposure draft (International Accounting Standards
Board, 2015) states that discussion on capital maintenance will be revised if
future work is to be carried out on accounting for high inflation. Unfortu-
nately, accounting inflation is an asset valuation issue and is completely
independent of the capital maintenance decision. The accounting standard that
deals with accounting for high inflation is IAS 29. Nowhere in IAS 29 is capital
maintenance mentioned.10
Some consider the ARS to be a physical capital maintenance adjustment
because revaluation surpluses are taken directly to equity.11 IAS 16 does not
allow recycling of the accumulated ARS – which is consistent with physical
capital maintenance. Unfortunately, IAS 16 requires any accumulated balance
to be transferred directly to retained earnings when the asset is disposed. So
capital is maintained only while the asset is held. Furthermore, if a revaluation
goes directly to equity and is considered to be a capital maintenance
adjustment, there should be no recycling. Thus, capital maintenance can
provide a conceptual basis for (not) recycling.

6. Concluding remarks

The current Framework provides no conceptual basis for OCI. It does not
discuss the presentation of profit or loss (as a total or subtotal), the distinction
between profit or loss and OCI, or the issue of recycling. So rather than having
a clear principles-based approach, IFRS is based on ad hoc rules-based
approach to this issue. Individual accounting standards direct when gains and
losses are to be reported in OCI.
The lack of conceptual basis (other than concepts of capital) for reporting
items in OCI means that the IASB will need to decide on empirical evidence,
practical considerations or political expediency. Black (2015) provides a
summary of the empirical work that characterises the properties of items of
OCI. This should therefore be useful for standard setters.
Some contend that items in OCI are volatile, do not have predictive value,
and are beyond managements’ immediate control. However, there are also

9
See Bradbury (2015) for a discussion of capital maintenance in a contemporary
context.
10
This indicates either the IASB’s lack of understanding of the issue or their intention
not to address the issue.
11
Bradbury (2015) points out that asset revaluation under IAS 16 is voluntary.
Therefore, any capital maintenance is at best partial. Furthermore, the ‘physical capital
maintenance’ concept is a short-cut adjustment that requires the offset of an asset
valuation adjustment and a capital maintenance adjustment.

© 2016 AFAANZ
 Accounting and Finance 56 (2016) 47–58

Discussion of ‘Other comprehensive income: a review

and directions for future research’

Michael E. Bradbury
School of Accountancy, Massey University, Auckland, New Zealand

doi: 10.1111/acfi.12196

1. Introduction

Black (2015) searches five major accounting journals and a selection of other
accounting publications to review the research on the usefulness of compre-
hensive income, other comprehensive income (OCI) and components of OCI
for investor and contracting purposes. Prior literature typically examines
whether there are distinguishing characteristics between OCI and net income.
In providing an overall evaluation of Black (2015), I use terminology that will
be familiar to standard setters in the audience. Is the study relevant? The
reporting of income is at the core of measuring performance and therefore is at
the core of accounting. Furthermore, the way in which the literature is filtered,
classified and presented in the review makes it more relevant for standard
setters. Black (2015) employs a framework based on the Ohlson (1999)
properties to distinguish permanent income from transitory items: (i) the ability
to self-predict; (ii) the relevance for predicting next-period total income; and
(iii) value relevance.1 That is, Black (2015) examines whether the research on
OCI (or its components) predicts future OCI, predicts future earnings or is
associated with various capital market metrics (prices, returns or risk). In
addition to the Ohlson framework, Black (2015) also examines the properties of
OCI in relation to debt and compensation contracts.2
Reporting of information about performance, and OCI in particular is an
important section of the IASB’s current Exposure Draft Conceptual Framework
project (IASB, 2015). The review is both relevant and timely.

1
Any two of these attributes implie the third. Any one attribute leads to no conclusions
concerning the remaining two (Ohlson, 1999).
2
Ohlson (1999) also looks at contracting implication but applies a very restrictive
assumption, namely that managers’ efforts have no direct influence on transitory
earnings.
Invited by Steven Cahan (Editor). This discussion relates to the version of the paper
presented at the A&F/IASB Research Forum.

© 2016 AFAANZ
56 M. E. Bradbury/Accounting and Finance 56 (2016) 47–58

Hirst, D., and P. Hopkins, 1998, Comprehensive income reporting and analysts’
valuation judgments, Journal of Accounting Research 36, 47–75.
Hung, M., and K. R. Subramanyam, 2007, Financial statement effects of adopting
international accounting standards: the case of Germany, Review of Accounting
Studies 12, 623–657.
International Accounting Standards Board, 2015, Exposure Draft ED/2015/3: Concep-
tual Framework for Financial Reporting (IFRS Foundation, London, UK).
Jaggi, B., and J. Tsui, 2001, Management motivation and market assessment:
revaluations of Fixed Assets, Journal of International Financial Management and
Accounting 12, 160–187.
Khan, S., and M. Bradbury, 2014, Volatility and risk relevance of comprehensive
income, Journal of Contemporary Accounting and Economics 10, 76–85.
Khan, S., and M. Bradbury, 2015, The volatility of comprehensive income and its
association with market risk. Accounting and Finance Early View.
Kim, K. J., 1997, Empirical analysis of asset revaluation and accounting information,
Accounting Research 22, 37–57.
Krzywda, D., and M. Schroeder, 2007, An analysis of the differences between IFRS and
Polish accounting regulations: evidence from the financial statements of listed entities
on the Warsaw Stock Exchange for the calendar years ending 2001, 2003 and 2004,
Accounting in Europe 4, 79–107.
La Porta, R., F. Lopez-de Silanes, A. Schleifer, and R. W. Vishny, 2000,
Agency problems and dividend policies round the world, Journal of Finance
55, 1–33.
Lin, Y. C., and K. V. Peasnell, 2000, Fixed asset revaluation and equity depletion in the
UK, Journal of Business Finance and Accounting 27, 359–394.
Lintner, J., 1956, Distribution of incomes of corporations among dividends, retained
earnings, and taxes, American Economic Review 46, 97–113.
Maines, L., and L. McDaniel, 2000, Effects of comprehensive-income characteristics on
nonprofessional investors’ judgments: the role of financial-statement presentation
format, The Accounting Review 75, 179–207.
Miller, M. H., and F. Modigliani, 1961, Dividend policy, growth, and the valuation of
shares, Journal of Business 34, 411–433.
Ohlson, J., 1999, On transitory earnings, Review of Accounting Studies 4, 145–162.
Paik, G., 2009, The value relevance of fixed asset revaluation reserves in international
accounting, International Management Review 5, 73–80.
Perramon, J., and O. Amat, 2006, IFRS introduction and its effect on listed companies
in Spain, Working paper (Universitat Pompeu Fabra).
Sharpe, I., and R. Walker, 1975, Asset revaluation and stock market prices, Journal of
Accounting Research 3, 293–310.
Shin, G. H., and V. F. Willis, 2014, Asset revaluations under International Accounting
Standard 16: evidence from Korea, International Journal of Business, Accounting, &
Finance 8, 21–35.
Skinner, D. J., and E. Soltes, 2011, What do dividends tell us about earnings quality?,
Review of Accounting Studies 16, 1–28.
Standish, P. E., and S. Ung, 1982, Corporate signaling, asset revaluations and the stock
prices of British companies, The Accounting Review 57, 701–715.
Stent, W., M. E. Bradbury, and J. Hooks, 2010, IFRS in New Zealand: effects
on financial statements and selected ratios, Pacific Accounting Review 22, 92–
107.
Whittred, G., and Y. K. Chan, 1992, Asset revaluations and the mitigation of
underinvestment, Abacus 28, 58–74.

© 2016 AFAANZ
 M. E. Bradbury/Accounting and Finance 56 (2016) 47–58 57

Appendix
Review of asset revaluation literature

In this section, I review the literature on asset revaluations using the

framework in Black (2015).

Predictability and forecasting ability

Self-prediction and the ability to forecast next-period income are two

characteristics that can distinguish between items of permanent income from
transitory components. There has been no research on the (self-) predictability of
asset revaluations or revaluation increments. Presumably this is based on the
belief that price changes are random and therefore unpredictable.
Using a sample of UK firms, Aboody et al. (1999) find support for the
signalling hypothesis – that accurate and timely assets revaluations are positively
associated with future changes in firm performance (as measured by operating
income and cash from operations). Jaggi and Tsui (2001) find similar results using
a sample of firms from Hong Kong. Cotter and Ziimmer (1999) find that the
propensity to revalue by Australian firms is related to the degree of management
certainty that the value increase will be realised in future cash flows. Barlev et al.
(2007) provide evidence on the motivations and consequences of asset revalu-
ations. They undertake analysis similar to Aboody et al. (1999) and partition
firms from 35 countries into four national accounting zones: British-American,
continental, South American and transitional economy. They find that the
revaluation amount is significant for predicting next year’s operating income (for
all zones except South America) and future market returns (for British and
continental zones) but not for future operating cash flows. Hence, caution should
be taken when extrapolating the results found in one country to those where
cultural, economic and legal environments differ in a significant manner.

Price, returns and value relevance

Sharpe and Walker (1975) and Standish and Ung (1982) find revaluation that
the market reacts positively to revaluation announcements in Australia and the
UK, respectively.
Evidence from Australian data consistently supports the view that,
regardless of management discretion over the timing and sometimes the
revaluation amount, asset revaluations reflect share prices. Easton et al.
(1993) find that changes in asset revaluation reserves (i.e. the amounts
that flow through OCI) for a sample of Australian firms are associated
with stock price returns. They also show that the level of revaluation
reserves has significant explanatory power for price-to-book ratios.
Barth and Clinch (1998) study the relation between stock prices and
returns and various types of asset revaluations. The results show that

© 2016 AFAANZ
58 M. E. Bradbury/Accounting and Finance 56 (2016) 47–58

revaluations of property, plant, financial and intangible assets are value-

relevant to investors.
Non-Australian or UK evidence on OCI the capital market relevance is
limited. Using the Ohlson (1995) model, Kim (1997) argues that the change in
asset revaluation reserve explains stock performance for Korean firms over the
period 1991-1994. More recently Shin and Willis (2014) find the association
between asset revaluations by Korean firms and market announcements is
stronger for firms with lower risk, carrying foreign currency debt. Using Form
20-F reconciliations to US GAAP, Amir et al. (1995) find that investors view
both capitalised goodwill and asset revaluations as value-relevant. Paik (2009)
examines the adoption of IAS 16 by examining the relation between
revaluation reserves and stock prices in 15 countries. The results indicate that
the revaluation reserves from common law countries are value-relevant, while
those of code law are not.

Risk relevance

There is very little evidence of that relates asset revaluations to risk relevance.
Using a small sample, Sharpe and Walker (1975) report that the market
absorbs the information content of asset revaluations quickly into asset prices,
and there is little evidence that revaluation announcements are associated with
systematic stock return volatility.

Debt and compensation contracting

Survey evidence from Chief Financial Officers in Australia cites lowering

debt-to-equity ratios as a major reason for undertaking revaluations (Easton
et al., 1993). Several studies find that firms moving closer to debt convenient
violation are more likely to revalue assets (Brown et al., 1992; Aboody et al.,
1999; Gaeremynck and Veugelers, 1999). Lin and Peasnell (2000) examined a
sample of UK firms that revalued fixed assets during 1989 to 1991 and found
that upward revaluation was associated with depletion of equity caused by
writing off purchased goodwill directly against equity. Choi et al. (2013) find
that Korean firms revalue to improve their financial position or to reduce debt
contracting costs. Alternatively, voluntary revaluations are associated with
firms with the need to increase borrowing capacity because of higher growth
opportunities, lower cash reserves (Whittred and Chan, 1992) or declining cash
flows from operations (Cotter and Zimmer, 1995).
I know of no studies that examine asset revaluations in the context of
management compensation contracts.

© 2016 AFAANZ