Who Uses Fair Value Accounting For Non Financial Assets After Ifrs Adoption

Working Paper No.
09-12
Who uses fair value accounting for non-financial

assets after IFRS adoption?
Hans B. Christensen
University of Chicago Booth School of Business
Valeri Nikolaev
University of Chicago Booth School of Business
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Who uses fair value accounting for non-financial assets
after IFRS adoption?
Hans B. Christensen and Valeri Nikolaev
The University of Chicago

Booth School of Business
5807 South Woodlawn Avenue
Chicago, IL 60637
Abstract: We examine whether and why companies prefer fair value to historical cost when they
can choose between the two valuation methods. With the exception of investment property
owned by real estate companies, historical cost by far dominates fair value in practice. Indeed,
fair value accounting is not used for plant, equipment, and intangible assets. We find that
companies using fair value accounting rely more on debt financing than companies that use
historical cost. This evidence is consistent with companies using fair value to signal asset
liquidation values to their creditors, and is not consistent with equity investors demanding fair
value accounting for non-financial assets. Our evidence broadly speaks to the importance of
accounting for contracting.
Keywords: Fair value accounting, IFRS, international accounting.

JEL Classification: M4, M42, M48
First draft: August 2008

This version: February 2009
This research was funded in part by the Initiative on Global Markets at the University of Chicago Booth School of
Business. We thank Ray Ball, Phil Berger, Alexander Bleck, Christof Beuselinck, Johan van Helleman, S.P.
Kothari, Laurence van Lent, Christian Leuz, Doug Skinner, and workshop participants at the University of Chicago
and Tilburg University for helpful comments. Michelle Grise, SaeHanSol Kim, Shannon Kirwin, Ilona Ori, Russell
Ruch, and Onur Surgit provided excellent research assistance.

1. Introduction
Academics and practitioners alike are actively debating the movement toward fair value
accounting, both in the United States and around the world. The Securities and Exchange
Commission (SEC) recently proposed a roadmap that could require mandatory adoption of
International Financial Reporting Standards (IFRS) in the United States by 2014. If adopted,
IFRS will allow a much wider application of fair value accounting to non-financial assets in the
United States. The documented correlation between market value of equity and fair value
estimates, however, offers little information regarding the reliability of such estimates. Indeed,
the judgment required to establish fair value estimates, absent liquid markets, undermines their
use (Watts 2006). In this paper, we examine whether and why in practice companies use fair
value accounting for three major asset groups: (i) property, plant, and equipment; (ii) investment
property; and (iii) intangible assets.1 Specifically, we exploit changes in accounting practices
around the adoption of IFRS in the UK and Germany. We focus on the UK and Germany for two
reasons: they have the largest financial markets in the European Union (EU) and, historically,
they are at the opposite ends of the spectrum in terms of applying fair value accounting.
Moreover, under IFRS, companies in the UK and Germany are permitted to choose between fair
value and historical cost accounting for each of the three asset groups we examine. 2,3
Throughout this paper, we adopt a positive accounting theory view of accounting practice
(Watts and Zimmerman 1986). This view maintains that accounting choices are shaped by
incentives to improve the costly contracting process between a company and its claimholders.
1
In this paper, we use the term asset group to describe the three types of assets we examine. Intangible assets,
investment property, and property, plant, and equipment each constitute one asset group. We use the term asset class
to describe a subsection of an asset group. For instance, property constitutes an asset class under the asset group
property, plant, and equipment. Our definition of an asset class is consistent with IAS 16.37.
2
We use the term historical cost to describe accounting treatment under which assets are recognized at historical cost
less subsequent depreciation (amortization), and/or impairments.
3
Appling fair value to intangible assets requires the existence of a liquid market (see Section 2.3).

Agency-related conflicts induce suboptimal behavior on the side of management and thus impose
substantial costs on companies in the form of price protection on the side of market participants
(Jensen and Meckling 1976). The price protection, in turn, encourages companies to select
accounting methods that pre-commit against value-destroying actions by management and
therefore reduce agency costs. In our setting, for example, choosing historical cost over fair
value can be viewed as a commitment against upward asset revaluations, which can be desirable
from a contracting perspective, particularly when no objective way exists to measure fair value.
Such pre-commitment can be a powerful way for creditors to curb shareholders’ incentives to
overstate assets and thereby expropriate wealth from other claimholders.
Since January 1, 2005, all listed companies domiciled in the UK and Germany have been
required to prepare their consolidated statements according to IFRS. The new standards provide
companies in either country with the same set of valuation alternatives. Yet the companies
domiciled in Germany and the UK are departing from very different local GAAP regimes. Under
German GAAP, for example, upward revaluations are not allowed for any of the asset groups
examined in this study. On the contrary, under UK-GAAP, companies are required to recognize
investment property at fair value and are allowed to choose between fair value and historical cost
for property, plant, and equipment and intangible assets. Under IFRS, companies domiciled in
either country can choose to continue with the same valuation method as under local GAAP or
they can switch to the other method.4
Our sample consists of the 1,539 companies available in the Worldscope database for
which we were able to obtain an annual report prepared according to IFRS. We identify each
company's valuation practice by reading the accounting policy section of its annual report. For
4
IFRS allow the choice between fair value and historical cost for the three asset classes examined in this paper.
Thus IFRS broadens the valuation choices compared to local GAAP in both the UK and Germany.

German companies, we review the first annual report prepared under mandatory IFRS. For UK
companies, on the other hand, to identify companies that changed their valuation practices upon
IFRS adoption, we review both the last annual report prepared under UK-GAAP and the first
annual report prepared under IFRS.
Ultimately, no companies in our sample use fair value accounting for intangible assets.
We find that only 3% of companies use fair value accounting for at least one asset class under
property, plant, and equipment. With very few exceptions, these companies use fair value
accounting only for the property asset class; members of the plant and equipment asset classes
are valued, in almost all cases, at historical cost. Examination of balance sheet amounts reveals
that total assets and shareholders’ equity are, respectively, 31% and 88% higher on average for
those companies that apply fair value than for a matched sample of companies that use only
historical cost accounting.5 These large economic differences highlight the importance of the
choice between the valuation methods.
An even more striking observation emerges when we examine the post-IFRS choices of
companies that recognized at least one property-plant-and-equipment asset class at fair value
under local GAAP (i.e., pre-IFRS). We find that 44% of these companies switched to historical
cost accounting upon IFRS adoption. In contrast, among companies that recognized all property-
plant-and-equipment asset classes at historical cost under local GAAP, only 1% switched to fair
value for at least one asset class. This finding does not support the expectation that IFRS will
promote the use of fair value accounting for property, plant, and equipment. Rather, the joint
evidence suggests that the average company prefers historical cost to fair value, perhaps, we
conjecture, because fair value estimates are considered less reliable.
5
This result cannot be interpreted as causal because incentives to use fair value depend on how different the
outcome of using fair value accounting is compared to using historical cost accounting.
3
Regarding investment property held to earn rental income or for capital appreciation, or
both, we find that companies are equally likely to use historical cost and fair value accounting.
For investment property, the strongest determinant of fair value use is whether real estate
constitutes one of the company's primary business activities. In particular, we find that German
companies, all of which applied historical cost before IFRS adoption, are more likely to switch to
fair value accounting for investment property when real estate is among their primary activities.
At the same time, in the UK, where all companies had to use fair value prior to IFRS, we observe
that the switch toward historical cost is uncommon when real estate is a primary activity. We
expect real estate companies to use fair value for investment property more often because the
real estate industry is more likely to exhibit fairly liquid markets for comparable property. In
addition, when a company is in the business of holding and selling property, changes in the value
of investment property are closely linked to the performance of that company's core activities.
Since many contracts require performance measurement, companies may be willing to trade off
some reliability for greater relevance in cases where fair value can provide better information
about the success of a company’s operations over a given period.
We also analyze companies’ decisions to use fair value after IFRS adoption for both the
investment property and property, plant, and equipment asset groups. We find that companies
with higher leverage are more likely to choose fair value over historical cost. This finding is
noteworthy because the average debt contract excludes the revaluation reserve from definitions
of financial ratios and is, in effect, written in terms of historical cost even when the company
employs fair value (Citron 1992). When we decompose leverage into its short-term and long-
term components, we find that short-term debt is at least as important a determinant of fair value
use as long-term debt, which suggests that any slack in accounting-based covenants is unlikely to
4
influence a company's choice of the valuation method. Notice, however, that a company's
commitment to fair value accounting for property, plant, and equipment can be viewed as an
increase in information disclosure. Such disclosure is likely to be in demand by creditors, who
are naturally interested in knowing a company's liquidation value. Since the recognition of fair
value estimates, which are by nature less reliable than historical cost, subjects a company and its
auditors to litigation risk, recognizing the fair value of assets in the body of financial statements
can signal the reliability of the fair value estimates. Consistent with this argument, we find that
companies that apply fair value to investment property are more likely to access debt (but not
equity) markets in the future.
Overall, the fact that fair value accounting is, in practice, used so rarely suggests that
historical cost is a more effective mechanism for reducing agency costs. However, the minority
of companies that do choose to recognize assets at fair value appear to derive contracting
benefits from this choice. The results, therefore, can be broadly interpreted in support of
contracting, rather than valuation, role of accounting.
Section 2 describes the valuation methods available to companies under German GAAP,
UK-GAAP, and IFRS. Section 3 establishes the relation between our study and prior literature.
Section 4 describes the sample selection procedure and presents our results. Section 5 discusses
our main findings and section 6 concludes our study.
2. Valuation methods under German GAAP, UK-GAAP, and IFRS
This section describes the valuation methods allowed for long-term, non-financial assets
in Germany and the UK before and after IFRS adoption. The long-term, non-financial assets
comprise three major asset groups: investment property, property, plant, and equipment, and
5
intangible assets. We define fair value accounting as the commitment to revalue assets every
time their book value materially differs from their market value. 6 We now consider the
accounting treatment of each of these three asset groups.
2.1 Accounting for investment property
IAS 40 defines investment property as land or buildings held to generate rental income or
capital appreciation that are not currently occupied by the owner. Under German GAAP,
companies must value investment property at historical cost, while under UK-GAAP companies
are required to use fair value. Upward revaluations under UK-GAAP are credited to the
revaluation reserve in equity and therefore do not directly affect net income. IFRS offers
companies the choice between recognizing investment property at historical cost or fair value. If
a company chooses to recognize investment property at historical cost, it must systematically
depreciate the acquisition costs and disclose the investment property's fair value in the notes
accompanying the financial statements. In contrast, if a company chooses to apply fair value,
changes in the investment property's value become part of operating income and the assets are
not subject to depreciation. Under IFRS, German companies can either switch to fair value
accounting or continue to value investment property at historical cost. UK companies, on the
other hand, can either switch to historical cost or continue to recognize investment property at
fair value (provided valuation changes are recognized in the income statement).
2.2 Accounting for property, plant, and equipment
The only valuation method for property, plant, and equipment permitted under German
GAAP is historical cost. Under both IFRS and UK-GAAP, the asset group property, plant, and
equipment is initially recognized at cost, but at each subsequent balance sheet date is valued at
6
While this definition is consistent with IAS 16, it departs from the revaluations studied by most prior literature
(e.g., Brown et al., 1992). In the settings of prior literature, for example, companies can revalue whenever they
choose and do not have to commit to regular revaluations.
6
either historical cost or fair value. In either case, these assets are subject to depreciation. When
fair value is applied, positive changes in an asset's value are credited to the revaluation reserve,
which constitutes part of shareholders’ equity (i.e., the revaluation model). Revaluations,
therefore, only affect income through future depreciation charges. Finally, under IFRS, the
choice of valuation method must be consistent for all assets in the same asset class (IAS16.29).
2.3 Accounting for intangible assets
Under German GAAP, historical cost is the only valuation method permitted for
intangible assets. Under both UK-GAAP and IFRS, however, intangible assets are to be carried
at either historical cost or fair value less any amortization and impairment charges. Under fair
value, the accounting treatment is similar to that of property, plant, and equipment; that said, a
company may only apply fair value to an intangible asset if an active market exists for that asset
(IAS38.75). The definition of an active market is very narrow and for most intangible assets,
such as brands, patents, and trademarks, it is, due to their uniqueness and the specificity of their
application, nonexistent (IAS38.78).
3. Background and relation to prior literature
We begin this section by summarizing opposing views among academics, standard
setters, and practitioners regarding the benefits of fair value accounting. We then review prior
empirical research that examines whether asset revaluations convey new information to the stock
market. Finally, we discuss contracting issues that pertain to fair value accounting.
In recent years, both the Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board (IASB) have moved toward more extensive use of fair
value accounting. While, currently, fair value accounting in the United States is generally limited
7
to use for financial instruments, it can be applied, under IFRS, to a much broader set of assets
(see Section 2). A range of opinions exists about the appropriate use of fair value accounting.
Proponents of fair value justify its use on the grounds that it is more relevant to users of financial
statements and offers greater transparency (Schipper 2005).7 Indeed, 79% of respondents who
participated in a survey conducted by the CFA Institute indicated that they believe fair value
information improves both the transparency and investor understanding of financial institutions.
This belief, however, raises an important concern: namely, is fair value measurement sufficiently
reliable and, what's more, invulnerable to manipulations by management (Watts 2006)? Lack of
reliability is closely linked to the absence of liquid markets, which could otherwise be used as an
independent source of verification for subjective fair value estimates. Schipper (2005) argues,
however, that fair value measurement does not require an extant market to be representationally
faithful (and thus reliable). Nevertheless, concern over the reliability of fair value accounting
persists among practitioners (e.g., Ernst&Young 2005).
3.1 Conveying information to equity investors
Most of the existing evidence regarding non-financial asset revaluations is based on data
from Australia or the UK.8 Several studies examine the information content of upward asset
revaluations and document a positive stock market reaction to asset revaluations (Sharpe and
Walker 1975; Standish and Ung 1982).9 Others examine whether longer period returns, future
cash flows, and the market value of equity are correlated with asset revaluations (e.g., Easton et
al. 1993; Aboody et al. 1999; Danbolt and Rees 2008). These studies generally conclude that fair
7
For example, the official position of the CFA Institute’s Center for Financial Markets Integrity states that “all
assets and liabilities should be reported at fair values based upon market values for identical or similar assets or
liabilities” and that “fair value information is the only information useful for investment decision-making” (CFA
Institute Centre, 2008).
8
In both the UK and Australia, upward asset revaluations were common before 1999/2000 when both countries
adopted national standards similar to IAS 16.
9
Interestingly, Sharpe and Walker find that half of the market reaction takes place before the revaluation becomes
public, and Standish and Ung find no association between the magnitude of the revaluation and the price change.
8
value estimates are value relevant. The studies, perhaps, most related to our setting are Muller et
al. (2008) and Cairns et al. (2008). Muller et al. examine the valuation methods for investment
property applied by the European real estate sector after IFRS adoption. They find that most
companies in their sample use fair value accounting and argue that measurement at fair value is
associated with reduced information asymmetry. Cairns et al. study valuation methods used by
228 companies in the UK and Australia after IFRS adoption. They find that IFRS adoption
increased comparability among companies.
Notwithstanding the above, virtually no research has been conducted on the reliability of
fair value estimates. Schipper (2005) points out that such empirical analysis is hampered by the
absence of an objective measure of reliability in the literature. Our approach, however, does not
require construction of a reliability proxy; rather, we focus on a company’s choice of fair value
accounting over historical cost accounting. We assume this choice reflects market participant
demand for fair value information and thus represents empirical evidence regarding the tradeoff
between relevance and reliability when it comes to use of fair value accounting.
3.2 Contracting explanations for revaluations
Contracts constitute another major application of accounting information. Agency-related
conflicts induce suboptimal managerial actions and impose costs on companies when they
contract with outside parties (Jensen and Meckling 1976). This gives companies economic
incentives to choose accounting methods and procedures that reduce outside-party contracting
costs (Watts and Zimmerman 1986). A company's choice of historical cost over fair value can be
viewed, for example, as a commitment against upward asset revaluations, which can be desirable
from a contracting viewpoint (particularly when no objective way of measuring the asset's fair
9
value exists). Such pre-commitment curbs a company’s ability to overstate the value of its assets,
an action often associated with claim-holder value expropriation.
Brown and Finn (1980) point out the necessity of understanding the economic incentives
behind revaluations in order to understand their impact on stock prices. Brown, Izan, and Loh
(1992), Whittred and Chan (1992), and Cotter and Zimmer (1995) use Australian data and find
that revaluations are related to contracting motives; indeed, leveraged companies in danger of
violating covenants are more likely to revalue assets.10 In a survey of chief financial officers
conducted by Easton et al. (1993), 40% of respondents explicitly indicated that revaluations,
being independently obtained and thus credible to lenders, are aimed at decreasing a company’s
leverage.
Unlike prior literature, we do not study voluntary asset revaluations, where separating the
effect of revaluating from the decision to revalue is complicated. That is, we study a company's
commitment to revalue assets every time an asset's book value is materially different from its
market value, rather than the revaluations themselves. Given that companies determine their
accounting policy prior to the realization of their accounting numbers, it is, a priori, unlikely that
such a commitment is made for the purpose of instantaneous opportunistic gain.
3.3 Theoretical considerations of mark-to-market accounting
While contracting efficiency is the common explanation for a company's decision to
revalue assets, there is little in the theory that demonstrates the efficiency of revaluations to fair
value, particularly for non-financial assets. Several recent studies focus on financial assets and
highlight important tradeoffs between mark-to-market and historical cost accounting. Plantin,
10
Whittred and Chan argue that asset revaluations reduce underinvestment problems that arise from contractual
restrictions, while Cotter and Zimmer argue that upward revaluations increase borrowing capacity. While debt
contracting is the main explanation for asset revaluations, Brown et al. also find that bonus contracts, as well as
signaling and political cost explanations, play an important role.
10
Sapra, and Shin (2008) show that, while historical cost disregards important new information,
mark-to-market induces endogenous price volatility and is inefficient when applied to long-lived,
illiquid, and senior claims. In a similar vein, Allen and Carletti (2008) show that in illiquid
markets, marking financial assets to market value distorts banks’ portfolios and increases the risk
of insolvency and inefficient liquidation when contagion in banking and insurance sectors is
present. Taken together, while fair value is a powerful and appealing concept actively promoted
by accounting standard setters, its practical benefits have yet to be established.
4. Results
4.1 Sample selection and descriptive statistics
Our sample selection process begins with all UK and German companies (active and
inactive) available in the Worldscope database. We restrict our sample to those companies
domiciled in the UK and Germany that Worldscope classifies as complying with IFRS in either
2005 or 2006. For inclusion in the German and UK cross-sectional samples, we further require
that a company has available in Thomson One Banker an annual report according to IFRS. For
inclusion in the UK switch sample, we additionally require that a company has the annual report
(prepared according to UK-GAAP) before IFRS adoption. We use the UK cross-sectional
sample to document accounting practices after mandatory IFRS adoption and the UK switch
sample to examine whether companies use mandatory IFRS adoption to switch their accounting
practices. Since, under German GAAP, companies are not permitted to value the assets examined
in this study at fair value, the application of fair value accounting after IFRS adoption always
indicates a switch and two samples are not necessary. Both for companies in Germany and the
UK, we obtain their first annual report under mandatory IFRS, which is typically for fiscal year
11
2005. In addition, for companies in the UK, we look for their last UK-GAAP annual report,
which is typically for fiscal year 2004. If we cannot find these annual reports we take the next
annual report available in Thomson One Banker (e.g., for fiscal year 2006). We verify the
accounting standards that a given company follows by looking at either the accounting policy
section or the auditor’s opinion section of its annual report(s). To identify the asset valuation
practice a company follows, we read the accounting policy section of its annual report(s).
[Insert Table 1 here]
Table 1, Panels A and B present the distribution by industry of companies in Worldscope
as well as in the German sample, the UK cross-sectional sample, and the UK switch sample. The
industry distribution in each of the three sub-samples approximates the industry distribution in
Worldscope.
4.2 Valuation practices
In this section, we document how extensively and to which asset groups companies in the
UK and Germany apply fair value. A company is classified as applying fair value accounting if it
recognizes at least one asset class within an asset group at fair value. Similarly, a company is
classified as applying historical cost if it recognizes at least one asset class within an asset group
at historical cost. Appendix A presents examples of fair value accounting and historical cost
accounting for the property, plant, and equipment asset group.11
4.2.1 Valuation practices in the UK
Table 2 documents the valuation practices in the UK cross-sectional sample. We identify
no use of fair value accounting for intangible assets; instead, all the companies in our sample rely
on historical cost for this asset group. For property, plant, and equipment, 5% of companies use
11
Panel A of Appendix A provides an example of a company that switched from fair value to historical cost, Panel
B provides an example of a company that used fair value under both UK-GAAP and IFRS, and Panel C provides an
example of a German company that uses fair value.
12
fair value accounting while all companies use historical cost for at least one class of assets within
this asset group. Fair value accounting is applied evenly across different industries with some
concentration within financial companies.
Table 3 presents the results from the UK switch sample. For property, plant, and
equipment, we find that 6% of companies use fair value under UK-GAAP and 5% use fair value
under IFRS. A material number of switches occur for this asset group. Specifically, 44% of
companies that use fair value for at least one asset class in the property, plant, and equipment
asset group under UK-GAAP switch to historical cost for all asset classes upon IFRS adoption.
In contrast, only 1% of companies that use historical cost for all asset classes under UK-GAAP
switch to fair value for at least one asset class upon IFRS adoption. These findings suggest that
many companies in our sample used the adoption of IFRS as a convenient opportunity to switch
to historical cost accounting. The question that naturally arises, then, is why these companies did
not switch to historical cost under local GAAP. Since UK-GAAP allows historical cost
accounting for these assets, we have to assume that the switch that occurred upon mandatory
IFRS adoption is voluntary in nature. We attribute this finding to the costs associated with
changes in accounting practice. For example, accounting changes involve the renegotiation of
debt and compensation contracts and must be communicated to shareholders and justified to
auditors. The incremental cost of voluntary changes is substantially lower when combined with a
mandatory change due to a fixed cost component (i.e., the renegotiation has to take place
anyway). While historical cost presumably became desirable for these companies before IFRS
adoption, the associated costs could have made switching unattractive.
13
For investment property, on the other hand, fair value accounting is much more common
after the mandatory adoption of IFRS. That said, 23% of companies using fair value pre-IFRS
still switched to historical cost upon IFRS adoption. Significant industry variation is present:
only 2% of financial companies that used fair value switched to historical cost, whereas 45% of
non-financial companies made the switch.
4.2.2 Valuation practices in Germany
Table 4 documents the valuation practices in the German sample. Under German GAAP,
companies are not allowed to value any of the three asset groups at fair value, and thus we do not
distinguish between cross-sectional and switch samples. We also find no use of fair value
accounting for intangible assets in Germany. For property, plant, and equipment, 1% of
companies switch to fair value for at least one asset class upon IFRS adoption. Only one
company applies fair value to all asset classes in the property, plant, and equipment asset group,
while all other companies use historical cost for at least one asset class. These findings
approximate those we observed in the UK.
For investment property, we find that 23% of German companies switch to fair value
upon IFRS adoption. However, we also observe substantial industry variation. Among financial
companies, 49% switch to fair value, while only 6% of non-financial companies make the
switch.
In summary, we find that a small number of companies use fair value accounting for at
least one asset class under property, plant, and equipment after IFRS adoption. The absence of
fair value accounting for intangibles and its limited use for property, plant, and equipment in
14
both the UK and Germany suggests that only a small subset of companies perceive net benefits
to using fair value accounting. In fact, in the UK, where fair value accounting for property, plant,
and equipment was common under UK-GAAP, we observe a fairly high frequency of switches
away from fair value upon IFRS adoption.
4.2.3 Assets recognized at fair value
In this section, we examine those asset classes under property, plant, and equipment that
are recognized at fair value. Table 5 presents the distribution of fair value use across the three
asset classes within the asset group. Sixty-nine companies in the sample use fair value
accounting either before mandatory IFRS adoption, after mandatory IFRS adoption, or both. Of
these companies, 93% use fair value accounting for property. Only 3% use fair value for plant,
and only 4% use fair value for several asset classes under property, plant, and equipment. The
distributions of fair value use in the UK and Germany are similar.
This evidence suggests that the application of fair value accounting is, in practice, not
only limited in terms of the number of companies using it, but also in terms of the assets to
which it is applied, namely, property. For most companies, property is the only asset class for
which a reliable market valuation is available. This observation, which is supported by Plantin,
Sapra, and Shin (2008), can potentially explain why property dominates among those assets
recognized using fair value accounting.
4.3 Fair value accounting and the book value of assets
Companies that follow historical cost accounting must periodically test their assets for
impairment. An asset is considered impaired when its carrying amount is higher than (i) its fair
value less costs to sell and (ii) the present value of future cash flows it is expected to generate
15
(IAS36.18). Thus, under historical cost accounting, companies will, in practice, value assets
close to fair value if depreciated historical cost exceeds fair value. In contrast, under fair value
accounting, companies revalue assets either upward or downward depending on the change in the
fair value estimate. This implies that book values of assets (equity) are likely to be higher for
companies that use fair value accounting. To provide evidence on the differences in balance
sheet amounts of fair value vs. historical cost companies, we carry out the following analysis. 12
Table 6 compares the book value of total assets (book value of equity) divided by the
market value of total assets (market value of equity) for companies that use fair value with that
of companies that use only historical cost.13 Panel A of Table 6 presents the evidence for
investment property, and Panel B of Table 6 presents the evidence for property, plant, and
equipment. Each company that recognizes property, plant, and equipment at fair value is
matched, on industry and market capitalization, with a company that recognizes all assets at
historical cost. For investment property, we include all companies that hold investment property
as there is no pronounced disbalance between fair value and historical cost subgroups. We find
that, on average, the ratio of book value of total assets to market value of total assets is 16%
higher for companies that recognize investment property at fair value; the ratio of book value of
equity to market value of equity is 27% higher. Among companies that apply fair value to
property, plant, and equipment, we find that the ratio of book value of total assets to market
value of total assets and the ratio of book value of equity to market value of equity are,
respectively, 31% and 87% higher than those of matched companies that use only historical cost.
The differences in the book values of assets and equity in both the investment property and
12
We emphasise that one should not be interpreting these results as causal because they are conditional on the
company’s choice to use fair value.
13
We proxy the market value of total assets by the sum of the market value of equity and the book value of
liabilities.
16
property, plant, and equipment samples are all significant at the 1% level. We also examine how
return on assets (ROA) differs between fair value vs. historical cost companies. We find a lower
ROA in the property, plant, and equipment sample among companies that recognize assets at fair
value. In the investment property sample, we also find a lower ROA among companies that use
fair value accounting; this difference, however, is statistically insignificant. 14
The evidence in Table 6 indicates that fair value accounting can be associated with,
economically, a significant effect on companies’ balance sheets. Moreover, fair value often
makes a company appear less conservative in terms of their book-to-market ratios. This, coupled
with management's ability to estimate fair value discretionarily, may be one reason few
companies adopt fair value accounting.
4.4 Analysis of the choice to use fair value
In this section, we examine companies’ incentives to choose fair value over historical
cost by analysing cross-sectional variation in valuation practices after IFRS adoption. We use a
logistic regression to model the probability that a given company will apply fair value as a
function of company-specific characteristics. Our analysis draws on two different subsamples.
First, we analyse the sample of companies that hold investment property. Second, we restrict our
analysis to the sample of companies that use fair value for property, plant, and equipment
matched with a historical cost control group. The summary statistics for variables used in this
analysis are reported in Table 7. All variables are defined in Appendix B. Because the number of
observations and the set of explanatory variables vary across the two subsamples, we report two
separate sets of summary statistics in Panels A and B. To avoid mechanical associations, we
14
It is not surprising that fair value accounting for property decreases ROA because while, on average, fair value
accounting increase the book value of assets, upward revaluations do not affect the net income. For investment
property this effect is smaller because upward revaluations increase both net income and total assets.
17
refrain from using explanatory variables directly affected by fair value revaluations (e.g., book-
to-market, book leverage, total assets). Except for investment property for which data is not
available, we are able to overcome this issue by subtracting the (hand-collected) revaluation
reserve from the book values of equity and total assets.15
4.4.1 Investment property
While IFRS provides UK companies with the first opportunity to switch to historical cost
for investment property, in Germany the opposite is the case. Our sample comprises the 275
companies (124 UK companies; 151 German companies) that hold investment property.
Depending on the specification, additional data requirements limit the sample further. We begin
with the simple logistic regression,
Fairpost IFRS 1 Fairpre IFRS 2 Fairpre IFRS * Sic65 Cost pre IFRS
3 4 Cost pre IFRS * Sic65 , (1)
where Fair (Cost) is an indicator variable that takes the value of one when a company applies
fair value (historical cost) to investment property and zero otherwise, and Sic65 is an indicator
that takes the value of one when a company has SIC code 65 (real estate) among the first five
SIC codes and zero otherwise. Equation 1 examines the persistence of valuation practices and
how this persistence varies with primary business activity. Specifically, the coefficients β1 and β3
capture the persistence of reporting method for non-real estate companies, while β2 and β4 show
the increment in persistence when real estate is among a company's primary industries of
operation. We further augment Equation 1 with several regressors of interest, including size,
leverage, and dividend payout dummy.
15
As explained in Section 2, value changes for investment property at fair value are not recognized in the revaluation
reserve. The lack of a revaluation reserve complicates the collection of the pre-revaluation book value.
18
Table 8 (Models 1 through 8) presents our results. The pseudo R-squared from Model 1
suggests that Equation 1 explains a substantial portion (i.e., 34%) of the variance in the decision
to use fair value. The estimates indicate that companies that value investment property at
historical cost under local GAAP (i.e., companies domiciled in Germany) are significantly more
likely to use cost accounting (i.e., are less likely to use fair value) after IFRS adoption (β3). This
effect, however, is significantly smaller for companies whose primary industries include real
estate (β3 + β4). Companies that apply fair value to investment property under local GAAP (i.e.,
companies domiciled in the UK) are generally more likely to use fair value under IFRS, although
the effect is small. This effect, however, is much stronger (and more significant) for companies
in the real estate business (β1 + β2). The evidence in Table 8 indicates that valuation practices
largely persist over IFRS adoption. This finding is not unexpected because consistency in
application of GAAP is a fundamental accounting principle and is required in contracts. 16 As we
argue below, real estate businesses' greater propensity to either switch to fair value or continue
its use is consistent with our understanding of fair value as a superior measure of economic
performance in the real estate industry.
To entertain several potential explanations for fair value use, Models 2 through 8 of
Table 8 present Equation 1 augmented by log of market capitalization, leverage, IFRS early
adoption dummy, dividend payouts dummy, and retained earnings. Our key finding in Model 2 is
that companies that rely more heavily on debt financing are more likely to apply fair value
16
Persistence in accounting policies across time is highly regarded by the accounting profession. Comparability is a
qualitative characteristic expressed in IASB’s Framework (paragraph 39): “. . . the measurement and display of the
financial effect of like transactions and other events must be carried out in a consistent way throughout an entity and
over time for that entity.” In U.S. literature, consistency is expressed in several places including the Accounting
Research Study No. 1 of the American Institute of Certified Public Accountants (postulate C-3). See Ball (1972) for
an extensive discussion of the accounting profession’s reliance on consistency.
19
accounting to investment property. This finding, however, seems at odds with the argument that,
from a debt contracting perspective, historical cost is more desirable than fair value; were this the
case, one would expect to observe a negative association between reliance on debt and (more
subjective, less conservative) fair value estimates.
To shed more light on this issue, in Model 3 we decompose leverage into its long- and
short-term components, as well as proxy for reliance on convertible debt. We find that short-term
leverage is at least as important as long-term debt in predicting fair value use. Also, the
coefficient on convertible debt is significantly positive. As accounting-based covenants are less
common for short-term and convertible-debt contracts, the results are inconsistent with the
conclusion that companies use fair value opportunistically to manage earnings around covenants.
Models 4 through 6 of Table 8 replace leverage with other variables frequently used in debt
contracts.17 We find that the ratio of total debt to operating income is positively related to the use
of fair value, while the coverage of interest and the current ratios are negatively related to fair
value use. These results confirm the effect of leverage and show that companies with tighter
covenants are more likely to use fair value. We interpret these results as being consistent with
companies more heavily dependent on debt markets using fair value to both signal the quality of
their fair value estimates and convey information about their underlying fundamentals (see
discussion below).
Models 7 and 8 of Table 8 examine whether dividends are related to fair value use. We
find that dividend-paying companies and companies with positive retained earnings are less
likely to use fair value for investment property. In particular, the coefficient on the dividend
dummy is significantly negative as is the coefficient on retained earnings when retained earnings
17
We exclude leverage because these variables are highly correlated with leverage and therefore capture aspects of
the same construct.
20
are a positive. One can interpret this result as follows: changes in the fair value of investment
property go via the income statement and therefore amplify earnings volatility, which, in turn,
can lead to interruptions in dividend payouts, for example, in the case of negative earnings. Since
the market interprets dividend interruptions negatively, we would expect fair value to be less
common among dividend-paying companies.18
4.4.2 Property, plant, and equipment
We conduct a similar analysis of a company's decision, post-IFRS, to apply fair value to
property, plant, and equipment. A few distinctions, however, bear mentioning. First, we hand
collect the fair value revaluation reserve data from companies’ annual reports. This enables us to
compute book values of equity and total assets as if companies used historical cost and thus to
include book-to-market and book leverage as explanatory variables. Second, the percentage of
fair value companies in the population is low for this asset group; therefore, to improve the
credibility of our inferences, we match each fair value company to a historical cost company. We
perform this match according to country of domicile, two-digit industry code, and the log of
market value of equity and use the closest match. This procedure, which requires non-missing
market value of equity, yields 90 observations. Data availability restrictions further reduce the
sample to 87 (86) observations.
Table 9 presents the results from our logistic regression analysis. Because we match
according to country, industry, and size, we omit these as explanatory variables. The coefficient
on book-to-market is positive and statistically significant in most specifications, which suggests
that, after IFRS adoption, high growth companies are less likely to use fair value. In line with
prior evidence, we find a positive and significant association between market leverage (book
18
Alternatively, the level of retained earnings is likely to increase upon fair value adoption and thus may induce
pressure from shareholders to start paying out dividends. This, in turn, creates incentives not to adopt fair value.
21
leverage) and the use of fair value accounting. Further analysis in column (3) reveals that short-
term debt, once again, accounts for this association. The portion of convertible debt is now
significantly negatively related to the use of fair value, a finding for which we currently have no
explanation. We further find, as a positive coefficient on FairInvPr suggests, that companies that
apply fair value to investment property are more likely to apply fair value to property, plant, and
equipment as well. Controlling for this effect, however, does not alter our findings with respect
to leverage or book-to-market. Finally, neither dividends nor retained earnings exhibit
significance in this setting. 19
4.4.3 Future financing choices and use of fair value for investment property
We attempt to further understand the role of fair value accounting and examine whether
companies that use fair value accounting are more likely to access debt or equity markets in the
years following IFRS adoption. Our analysis will potentially clarify whether fair value
accounting plays an information role in debt markets and, in addition, help to distinguish
between the contracting and valuation roles played by fair value information.
Here, we focus on investment property for two reasons. First, investment property
exhibits substantial variation in the use of fair value. Second, we expect that markets for
investment property are more liquid. Based on Worldscope data for 2006 and 2007, we construct
several proxies for debt and equity financing. Specifically, we proxy for future debt financing
with the following variables: DebtIss1 (DebtIss2) indicates whether by 2007 total debt (long
term debt) had increased by more than 10% of the current market value of assets; FtrLev1
(FtrLev2) proxies for the level of future total debt (long-term debt) in 2007 while controlling for
19
The insignificance of dividends and retained earnings does not necessarily indicate the lack of power of the test
because applying fair value should have no effect on a company’s ability to pay out dividends (i.e., the revaluation
reserve cannot be distributed as dividends).
22
the level of current debt in the regression; and DbtGrow1 (DbtGrow2) indicates growth in total
debt (long-term debt). Proxies for equity issuance over 2006 and 2007 are as follows: EqIss1
indicates whether combined net proceeds of equity issuance less proceeds from stock options
exceed 10% of market value of current assets; and EqIss2 is the ratio of net proceeds to current
market value of assets. We regress these proxies on both the fair value indicator variable and
controls for company characteristics that include country, size, and leverage.
We present our findings in Table 10. Columns (1) through (6) present regressions with 6
proxies for debt issuance used as the dependent variables, while columns (7) and (8) are based on
equity issuance. All proxies for debt issuance are statistically significant and indicate a relation
between fair value use and future debt financing. Proxies for equity financing are insignificant at
the conventional levels. While we have no strong prior for why equity markets should prefer fair
value, the relationship between fair value use and future debt issuance supports the explanation
that fair value can convey information to debt markets.
5. Discussion
While we find rare application of fair value accounting in practice, the instances where
fair value is used are likely to have a contracting explanation. First, in case of investment
property, the use of fair value is concentrated among real estate companies, where fair value
estimates are more likely to facilitate the measurement of the underlying economic performance
required, for example, by compensation contracts.
Second, companies with higher leverage are more likely to use fair value accounting; a
finding consistent with these companies conveying information about the current realizable (or
liquidation) value of the assets. More specifically, one can argue that debtholders, in fact,
23
demand fair value information if the company can credibly communicate it. The application of
fair value accounting increases the likelihood of overstating the book value of assets, which, in
turn, increases a company's (and its auditor's) risk of litigation and losing reputation. Litigation
costs and the risk of losing reputation, however, are expected to decrease as the quality of fair
value estimates increases. A commitment to fair value, then, can be viewed as a costly way for
companies that are confident in the quality of their estimates to distinguish themselves from
companies with less reliable fair value estimates. Our finding that companies that value
investment property at fair value are more likely to issue debt in the future further supports this
explanation.
Finally, our finding that companies that use fair value accounting for property, plant, and
equipment possess fewer growth opportunities (as measured by book-to-market net of the
revaluation reserve) is consistent with the use of fair value accounting as a means of avoiding
overinvestment in fixed assets when few growth opportunities are present. Companies with few
growth opportunities are more likely to make suboptimal investments in negative NPV projects
and retain assets for which the opportunity cost exceeds the present value of future cash flows.
Common accounting metrics, for example, return on assets or return on investment, are less
likely to reflect this information under historical cost accounting because the depreciated cost is
usually lower than the market value, that is, the value in alternative use (see Section 4.3). A
commitment to fair value accounting dilutes the return on assets, makes it more costly for
management to hold unproductive assets, and, when fair value estimates are reliable, improves
the performance measurement. In other words, a commitment to fair value effectively forces
managers to incur rents on their investments' current values, regardless of the time of purchase
and their historical cost.
24
6. Summary
We investigate the use, in practice, of fair value accounting for non-financial assets.
Because companies can choose between historical cost and fair value accounting for these assets,
and because the amount of information demanded by equity investors is often the same, we
expect that the observed practice serves a contracting role and minimizes agency costs. We
examined the accounting policies for intangible assets, investment property, and property, plant,
and equipment of 1,539 companies domiciled in the UK and Germany. With very few
exceptions, we find that fair value is used exclusively for property. We find that 3% of
companies use fair value for owner-occupied property, compared with 47% for investment
property. The lack of companies that use fair value for all other non-financial assets is
inconsistent with net benefits of fair value accounting. We can explain the use of fair value for
property alone by that fact that reliable fair values are more likely to exist for this type of asset.
The main determinant of fair value use for investment property is whether real estate is among a
company’s primary activities. This is consistent with historical cost being a less informative
measure of economic performance in real estate companies.
We find that leverage is an important determinant of fair value use, for both investment
property and property, plant, and equipment. We argue that managerial opportunism is an
unlikely explanation for this finding, which is, rather, more consistent with a contractual
explanation. In particular, fair value can supply lenders with the up-to-date liquidation value of a
company’s assets. We also find that companies with fewer growth opportunities are more likely
to commit to fair value, a finding consistent with the use of fair value as a means of curbing
overinvestment in fixed assets.
Overall, our evidence is broadly consistent with the observation that companies do not
25
perceive the net benefits of fair value accounting to exceed those of historical cost accounting.
We find, however, that where fair value is used, the evidence points to contracting, rather than
valuation, needs as the main determinant of a company's decision to use fair value over historical
cost.
26
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27
Appendix A: Examples of accounting practice
This appendix presents examples of fair value and historical cost accounting from the accounting policy
section of annual reports of companies in our samples. Panel A presents an example of a switch from fair
value under UK-GAAP to historical cost under IFRS. Panel B presents an example of fair value
accounting under both UK-GAAP and IFRS. Panel C presents an example of a German company that
uses fair value accounting under IFRS.
Panel A: Switch from fair value to historical cost

Annual report according to UK-GAAP for 2004
AMEC plc annual report and accounts 2004 (page 67)
12 Tangible assets (continued)
All significant freehold and long leasehold properties were externally valued as at 31 December 2004 by
CB Richard Ellis Limited in accordance with the Appraisal and Valuation Manual of the Royal Institute
of Chartered Surveyors.
For the United Kingdom, the basis of revaluation was the existing use value for properties occupied by
group companies and the market value for those properties without group occupancy. For properties
outside the United Kingdom, the appropriate country valuation standards were adopted which generally
reflect market value.
No provision has been made for the tax liability that may arise in the event that certain properties are
disposed of at their revalued amounts.
The amount of land and buildings included at valuation, determined according to the historical cost
convention, was as follows:
Group Group Company Company
2004 2003 2004 2003
£ million £ million £ million £ million
Cost 39.2 46.4 9.3 8.6
Depreciation (10.61) (13.9) (2.5) (1.7)
Net book value 26.6 32.5 6.8 6.9
Annual report according to IFRS for 2005

AMEC plc annual report and accounts 2005 (page 102)
IAS 16 Property, plant and equipment
Under UK-GAAP, AMEC’s policy was to revalue freehold and long leasehold property on a regular
basis. Under IAS 16, AMEC has opted to carry property, plant and equipment at cost less accumulated
depreciation and impairment losses. As permitted by IFRS 1, AMEC has frozen the UK-GAAP land and
buildings revaluations as at 1 January 2004 by ascribing the carrying value as deemed cost. The impact of
this change in policy is as follows:
 The revaluation reserve is reclassified into retained earnings as at the date of transition;
 the results of the external revaluation as at 31 December 2004 are reversed, reducing the value of
property, plant and equipment as at 31 December 2004 by £9.6 million; and
 as part of the 2004 external revaluation, certain properties were revalued downwards. Under UK-
GAAP, these deficits were charged against previous revaluations held in the revaluation reserve.
Under IFRS, these downward revaluations have been taken as indicators that the value of the
relevant properties is impaired and as such, they have been charged to the income statement as
28
impairment charges in 2004. This reduces the profit for the year ended 31 December 2004 and the
value of property, plant and equipment as at 31 December 2004 by £1.8 million.
Panel B: Fair value under both UK-GAAP and IFRS

Annual report according to UK-GAAP for 2004
The Wolverhampton & Dudley Breweries, PLC Annual report 2005 (page 44).
(e) Tangible fixed assets
 Freehold and leasehold properties are stated at valuation or at cost. Plant, furnishings, equipment
and other similar items are stated at cost.
 Freehold buildings are depreciated to their residual value on a straight line basis over 50 years.
 Other tangible fixed assets are depreciated to their residual value on a straight line basis at rates
calculated to provide for the cost of the assets over their anticipated useful lives. Leasehold
properties are depreciated over the lower of the lease period and 50 years and other tangible
assets over periods ranging from three to 15 years.
 Own labour directly attributable to capital projects is capitalised.
Valuation of properties: Trading properties are revalued professionally by independent valuers on a five-
year rolling basis. When a valuation or expected proceeds are below current carrying value the asset
concerned is reviewed for impairment. Impairment losses are charged directly to the revaluation reserve
until the carrying amount reaches historical cost. Deficits below historical cost are charged to the profit
and loss account except to the extent that the value in use exceeds the valuation in which case this is taken
to the revaluation reserve. Surpluses on revaluation are recognised in the revaluation reserve, except to
the extent that they reverse previously charged impairment losses, in which case they are recorded in the
profit and loss account. Any negative valuations are accounted for as onerous leases and included within
provisions (see note 20).

The Wolverhampton & Dudley Breweries, PLC Annual report 2006 (page 46).
Property, plant and equipment
 Freehold and leasehold properties are stated at valuation or at cost. Plant, furnishings, equipment
and other similar items are stated at cost.
 Depreciation is charged to the income statement on a straight-line basis to provide for the cost of
the assets less residual value over their useful lives.
 Freehold and long leasehold buildings are depreciated to residual value over 50 years.
 Short leasehold properties are depreciated over the life of the lease.
 Other plant and equipment is depreciated over periods ranging from 3 to 15 years.
 Own labour directly attributable to capital projects is capitalised.
 Land is not depreciated.
Valuation of properties - Properties are revalued by qualified valuers on a regular basis using open market
value so that the carrying value of an asset does not differ significantly from its fair value at the balance
sheet date. When a valuation is below current carrying value, the asset concerned is reviewed for
impairment. Impairment losses are charged to the revaluation reserve to the extent that a previous gain
has been recorded, and thereafter to the income statement. Surpluses on revaluation are recognised in the
revaluation reserve, except where they reverse previously charged impairment losses, in which case they
are recorded in the income statement.
29
Panel C: Fair value accounting by German company
Hypo Real Estate Group, Annual report 2006 (page 96)
12 Property, plant and equipment
Property, plant and equipment is normally shown at cost of purchase or cost of production. As an
exception to this rule, land and buildings are shown with their fair value in accordance with IAS 16. The
carrying amounts – if the assets are subject to wear and tear – are diminished by depreciation in
accordance with the expected service life of the assets. In the case of fittings in rented buildings, the
contract duration taking account of extension options is used as the basis of this contract duration is
shorter than the economic life.
Appendix B: Variable definitions
Fair_IFRS = one if the company uses fair value after adoption of IFRS, and zero otherwise.
UK = one if a company is domiciled in the UK, and zero otherwise.
UkSic65 = one if a company has SIC 65 (real estate) among the first five SIC codes and is domiciled in
the UK, and zero otherwise.
Germany = one if a company is domiciled in Germany, and zero otherwise.
GermanySic65 = one if a company has SIC 65 (real estate) among the first five SIC codes and is
domiciled in Germany, and zero otherwise.
Early = one if the company adopted IFRS before 2005, and zero otherwise.
Size = log of market value of equity.
MktLev = total liabilities divided by market value of assets (defined as book value of liabilities plus
market value of equity) as of December 2005.
MktLevLong = long-term debt divided by market value of assets (liabilities plus market value of equity)
as of December 2005.
MktLevShort = short-term liabilities defined as total liabilities less long-term debt divided by market
value of assets (liabilities plus market value of equity) as of December 2005.
LevBook = book leverage defined as total liabilities divided by total assets net of fair value revaluation
reserve.
LevBookLong = long-term debt divided by total assets net of fair value revaluation reserve.
LevBookShort = ratio of total liabilities minus long-term debt to total assets net of fair value revaluation
reserve.
Convertible = ratio of convertible debt to long-term debt.
DebtToOi = total liabilities divided by operating income.
Coverage = operating income divided by interest expense.
Current = current assets divided by current liabilities.
Dividend = one if company pays dividends, and zero otherwise.
RE = retained earnings scaled by the market value of equity plus total liabilities.
D(RE<0) = one if retained earnings are negative, and zero otherwise.
30
FairInvPr = one if company holds investment property recorded at fair value , and zero otherwise.
DbtIss1 = change in total liabilities that took place from 2005 to 2007 scaled by beginning-of-period
market value of assets (liabilities plus market value of equity).
DbtIss2 = change in long-term debt that took place from 2005 to 2007 scaled by beginning-of-period
market value of assets (liabilities plus market value of equity).
FtrLev1 = total liabilities as of 2007 scaled by beginning-of-period market value of assets (liabilities plus
market value of equity).
FtrLev2 = long-term debt as of 2007 scaled by beginning-of-period market value of assets (liabilities plus
market value of equity).
DbtGrow1 = logarithmic growth in total liabilities from 2005 to 2007.
DbtGrow2 = logarithmic growth in long-term debt from 2005 to 2007.
EqIss1 = dummy variable; one if total net proceeds from issuance of common and preferred stock less
proceeds from stock options over 2006 and 2007 exceeded 10% of 2005 market value of assets
(liabilities plus market value of equity), and zero otherwise.
EqIss2 = net proceeds from issuance of common and preferred stock less proceeds from stock options
combined over 2006 and 2007 and scaled by 2005 market value of assets (liabilities plus market
value of equity).
Note: Unless otherwise stated, variables are measured as of December 2005 using the Worldscope
database.
31
Table 1: Sample selection process
Table 1 presents the sample selection process and industry distribution. Panel A presents the selection process for
the UK samples. The cross-sectional sample consists of companies for which we can identify an annual report
according to IFRS. Our switch sample further requires that an annual report (according to UK-GAAP) be available
prior to mandatory IFRS adoption. Panel B presents the selection process for the German sample. To be included in
the German sample, companies must have available an annual report according to IFRS. Percentages are rounded
and thus may not exactly sum to 100%.
Panel A: UK samples
Active companies (FBRIT, March 2008) 2,312
Inactive companies (DEADUK, March 2008) + 5,597
UK listed companies in Worldscope 7,909
Companies that Worldscope does not classify as complying with

IFRS in 2005 or 2006 (mainly inactive companies) – 6,464
IFRS companies 1,445
Companies not domiciled in the UK – 270

UK companies subject to mandatory IFRS 1,175
Companies for which we cannot identify an IFRS annual report

or companies with more than one security listed on LSE – 241
UK Cross-Sectional Sample 934
Companies for which we cannot identify a UK-GAAP annual report – 231

UK Switch Sample 703
Industry distribution in the UK samples
UK UK UK UK
Worldscope IFRS Cross-sectional Switch
No. Industry name All All Excl. N/A
obs. % % Obs. % Obs. % Obs. %
N/A No industry classification 3,139 40%
13 Aerospace 19 0% 0% 11 1% 5 1% 5 1%
16 Apparel 42 1% 1% 7 1% 7 1% 6 1%
19 Automotive 44 1% 1% 6 1% 6 1% 5 1%
22 Beverages 50 1% 1% 11 1% 7 1% 5 1%
25 Chemicals 106 1% 2% 24 2% 20 2% 18 3%
28 Construction 234 3% 5% 65 5% 54 6% 49 7%
31 Diversified 48 1% 1% 8 1% 6 1% 6 1%
34 Drugs, Cosmetics, & Health care 178 2% 4% 52 4% 44 5% 31 4%
37 Electrical 55 1% 1% 13 1% 10 1% 6 1%
40 Electronics 539 7% 11% 136 11% 109 12% 90 13%
43 Financial 674 9% 14% 187 16% 140 15% 105 16%
46 Food 107 1% 2% 27 2% 23 2% 21 3%
49 Machinery & equipment 141 2% 3% 22 2% 22 2% 16 2%
52 Metal producers 213 3% 4% 59 6% 49 5% 23 3%
55 Metal product manufacturers 63 1% 1% 15 1% 12 1% 11 2%
58 Oil, gas, coal, & related services 251 3% 5% 64 6% 52 6% 29 4%
61 Paper 44 1% 1% 9 1% 6 1% 5 1%
64 Printing & publishing 92 1% 2% 25 2% 19 2% 16 2%
67 Recreation 294 4% 6% 51 4% 41 4% 32 5%
70 Retail 211 3% 4% 56 4% 51 5% 43 6%
73 Textile 53 1% 1% 10 1% 8 1% 6 1%
76 Tobacco 10 0% 0% 6 0% 3 0% 3 0%
79 Transportation 73 1% 2% 19 2% 17 2% 14 2%
82 Utilities 232 3% 5% 62 6% 31 3% 23 3%
85 Other industries 997 13% 21% 230 18% 192 21% 135 19%
Total 7,909 100% 100% 1,175 100% 934 100% 703 100%
32
(Table 1 continued)
Panel B: The German sample
Active companies (March 2008) 1,437

Inactive companies (March 2008) + 10,126
German listed companies in Worldscope 11,563
Companies that Worldscope does not classify as complying with
IFRS in 2005 or 2006 (mainly inactive companies) – 10,117
IFRS companies 1,446
Companies not domiciled in Germany – 635
German companies subject to mandatory IFRS 811
Companies for which we cannot identify an IFRS annual report – 206

German sample 605
Industry distribution in the German sample

German German German
Worldscope IFRS Sample
No. Industry name All All Excl. N/A
obs. % % Obs. % Obs. %
N/A No industry classification 2,192 19% N/A N/A N/A N/A N/A
13 Aerospace 25 0% 0% 2 0% 1 0%
16 Apparel 72 1% 1% 19 2% 11 2%
19 Automotive 99 1% 1% 18 2% 10 2%
22 Beverages 93 1% 1% 11 1% 9 1%
25 Chemicals 207 2% 2% 34 4% 16 3%
28 Construction 235 2% 3% 34 4% 22 4%
31 Diversified 74 1% 1% 12 1% 8 1%
34 Drugs, Cosmetics, & Health care 610 5% 7% 36 4% 25 4%
37 Electrical 143 1% 2% 21 3% 13 2%
40 Electronics 1,832 16% 20% 95 12% 78 13%
43 Financial 1,430 12% 15% 131 16% 96 16%
46 Food 154 1% 2% 11 1% 8 1%
49 Machinery & equipment 324 3% 3% 69 9% 54 9%
52 Metal producers 251 2% 3% 1 0% 1 0%
55 Metal product manufacturers 108 1% 1% 10 1% 6 1%
58 Oil, gas, coal, & related services 323 3% 3% 9 1% 5 1%
61 Paper 69 1% 1% 9 1% 6 1%
64 Printing & publishing 78 1% 1% 6 1% 6 1%
67 Recreation 371 3% 4% 30 4% 25 4%
70 Retail 350 3% 4% 23 3% 17 3%
73 Textile 46 0% 0% 8 1% 5 1%
76 Tobacco 16 0% 0% 0 0% 0 0%
79 Transportation 148 1% 2% 10 1% 7 1%
82 Utilities 497 4% 5% 25 3% 20 3%
85 Other industries 1,816 16% 19% 187 23% 156 26%
Total 11,563 100% 100% 811 100% 605 100%
33
Table 2: UK companies' valuation practices after IFRS adoption
Table 2 presents valuation practices among companies in the UK cross-sectional sample (defined in Table 1). The
industry classification is based on Worldscope's major industry groups. The "With PPE" ("With intan.") column presents
for each industry how many companies have property, plant, and equipment (intangible assets). The historical cost (fair
value) columns present how many companies use historical cost (fair value) for at least one asset class within property,
plant, and equipment and intangible assets.
Cross- Property, Plant, and Equipment Intangible assets

No. Industry name sectional With Historical Fair With Historical Fair
sample PPE cost value intan. cost value
No. No. % No. % No. No. % No. %
13 Aerospace 5 5 5 100% 0 0% 5 5 100% 0 0%
16 Apparel 7 7 7 100% 1 14% 7 7 100% 0 0%
19 Automotive 6 6 6 100% 0 0% 6 6 100% 0 0%
22 Beverages 7 7 7 100% 1 14% 7 7 100% 0 0%
25 Chemicals 20 20 20 100% 1 5% 20 20 100% 0 0%
28 Construction 54 54 54 100% 4 7% 39 39 100% 0 0%
31 Diversified 6 6 6 100% 0 0% 6 6 100% 0 0%
34 Drugs, Cosmetics, & Health care 44 44 44 100% 0 0% 44 44 100% 0 0%
37 Electrical 10 10 10 100% 0 0% 10 10 100% 0 0%
40 Electronics 109 107 107 100% 1 1% 100 100 100% 0 0%
43 Financial 140 118 118 100% 16 14% 68 68 100% 0 0%
46 Food 23 23 23 100% 2 9% 23 23 100% 0 0%
49 Machinery & equipment 22 22 22 100% 1 5% 22 22 100% 0 0%
52 Metal producers 49 44 44 100% 1 2% 44 44 100% 0 0%
55 Metal product manufacturers 12 12 12 100% 1 8% 12 12 100% 0 0%
58 Oil, gas, coal, & related services 52 52 52 100% 1 2% 50 50 100% 0 0%
61 Paper 6 6 6 100% 0 0% 6 6 100% 0 0%
64 Printing & publishing 19 19 19 100% 0 0% 16 16 100% 0 0%
67 Recreation 41 41 41 100% 1 2% 36 36 100% 0 0%
70 Retail 51 50 50 100% 3 6% 40 40 100% 0 0%
73 Textile 8 8 8 100% 1 13% 8 8 100% 0 0%
76 Tobacco 3 3 3 100% 0 0% 3 3 100% 0 0%
79 Transportation 17 17 17 100% 1 6% 17 17 100% 0 0%
82 Utilities 31 31 31 100% 0 0% 31 31 100% 0 0%
85 Other industries 192 191 191 100% 6 3% 185 185 100% 0 0%
Total Sample 934 903 903 100% 42 5% 805 805 100% 0 0%
34
Table 3: UK companies’ valuation practices before and after IFRS adoption
Table 3 presents valuation practices among companies in the UK switch sample (defined in Table 1). The industry
classification is based on Worldscope's major industry groups. The "With PPE" ("With inv. prop.") column presents for
each industry how many companies have property, plant, and equipment (investment property). The historical cost (fair
value) columns present how many companies use historical cost (fair value) for at least one asset class within property,
plant, and equipment and intangible assets.
1
As a percentage of companies that use fair value accounting under UK-GAAP.
2
As a percentage of companies that use only historical cost under UK-GAAP.
3
Given that UK-GAAP requires that investment property be recognized at fair value, the application of historical cost always
constitutes a switch. Therefore, in Table 3, we use the UK cross-sectional sample for investment property.
Property, plant, and equipment Investment property

No. Industry name Switch With Fair value Switch to Switch to Cross- With Keep Move to
sample PPE UK IFRS historical cost fair value sectional inv. fair value historical cost
No. % No. % No. % 1 No. % 2 sample 3 prop. No. % No. %
13 Aerospace 5 5 0 0% 0 0% 0 N/A 0 0% 5 2 1 50% 1 50%
16 Apparel 6 6 1 17% 1 17% 0 0% 0 0% 7 0 0 N/A 0 N/A
19 Automotive 5 5 1 20% 0 0% 1 100% 0 0% 6 1 1 100% 0 0%
22 Beverages 5 5 1 20% 1 20% 0 0% 0 0% 7 1 0 0% 1 100%
25 Chemicals 18 18 1 6% 1 6% 0 0% 0 0% 20 0 0 N/A 0 N/A
28 Construction 49 49 6 12% 4 8% 3 50% 1 2% 54 10 7 70% 3 30%
31 Diversified 6 6 0 0% 0 0% 0 N/A 0 0% 6 1 1 100% 0 0%
34 Drugs, Cosmetics, & Health care 31 31 1 3% 0 0% 1 100% 0 0% 44 0 0 N/A 0 N/A
37 Electrical 6 6 0 0% 0 0% 0 N/A 0 0% 10 1 1 100% 0 0%
40 Electronics 90 89 1 1% 1 1% 0 0% 0 0% 109 3 1 33% 2 67%
43 Financial 105 90 13 14% 10 11% 6 46% 3 4% 140 66 65 98% 1 2%
46 Food 21 21 2 10% 1 5% 1 50% 0 0% 23 2 1 50% 1 50%
49 Machinery & equipment 16 16 0 0% 1 6% 0 N/A 1 6% 22 1 0 0% 1 100%
52 Metal producers 23 22 0 0% 0 0% 0 N/A 0 0% 49 1 0 0% 1 100%
55 Metal product manufacturers 11 11 0 0% 1 9% 0 N/A 1 9% 12 0 0 N/A 0 N/A
58 Oil, gas, coal, & related services 29 29 1 3% 1 3% 0 0% 0 0% 52 3 3 100% 0 0%
61 Paper 5 5 0 0% 0 0% 0 N/A 0 0% 6 1 0 0% 1 100%
64 Printing & publishing 16 16 0 0% 0 0% 0 N/A 0 0% 19 0 0 N/A 0 N/A
67 Recreation 32 32 2 6% 1 3% 1 50% 0 0% 41 1 0 0% 1 100%
70 Retail 43 42 4 10% 2 5% 2 50% 0 0% 51 9 1 11% 8 89%
73 Textile 6 6 1 17% 1 17% 0 0% 0 0% 8 2 1 50% 1 50%
76 Tobacco 3 3 0 0% 0 0% 0 N/A 0 0% 3 0 0 N/A 0 N/A
79 Transportation 14 14 0 0% 1 7% 0 N/A 1 7% 17 2 2 100% 0 0%
82 Utilities 23 23 1 4% 0 0% 1 100% 0 0% 31 3 1 33% 2 67%
85 Other industries 135 135 8 6% 4 3% 4 50% 0 0% 192 14 10 71% 4 29%
Total Sample 703 685 44 6% 31 5% 20 44% 7 1% 934 124 96 77% 28 23%
35
Table 4: German companies’ valuation practices after IFRS adoption
Table 4 presents valuation practices among companies in the German sample (defined in Table 1). The industry
classification is based on Worldscope's major industry groups. The "With PPE" ("With inv. prop.") {"With intan."} column
presents for each industry how many companies have property, plant, and equipment (investment property) {intangible
assets}. The historical cost (fair value) columns present how many companies use historical cost (fair value) for at least one
asset class within property, plant, and equipment and intangible assets.
Property, plant and equipment Investment property Intangibles

No. Industry name Sample With Fair Historical With Fair Historical With Fair Historical
PPE value cost inv. value cost intan. value cost
No. % No. % prop. No. % No. % No. % No. %
13 Aerospace 1 1 0 0% 1 100% 0 0 N/A 0 N/A 1 0 0% 1 100%
16 Apparel 11 11 0 0% 11 100% 0 0 N/A 0 N/A 11 0 0% 11 100%
19 Automotive 10 10 0 0% 10 100% 4 0 0% 4 100% 10 0 0% 10 100%
22 Beverages 9 9 0 0% 9 100% 3 1 33% 2 67% 9 0 0% 9 100%
25 Chemicals 16 16 0 0% 16 100% 2 0 0% 2 100% 16 0 0% 16 100%
28 Construction 22 22 0 0% 22 100% 8 1 13% 7 88% 22 0 0% 22 100%
31 Diversified 8 8 0 0% 8 100% 7 0 0% 7 100% 8 0 0% 8 100%
34 Drugs, Cosmetics, & Health care 25 25 0 0% 25 100% 4 0 0% 4 100% 25 0 0% 25 100%
37 Electrical 13 13 0 0% 13 100% 3 0 0% 3 100% 13 0 0% 13 100%
40 Electronics 78 78 0 0% 78 100% 6 1 17% 5 83% 77 0 0% 77 100%
43 Financial 96 96 3 3% 96 100% 57 28 49% 29 51% 87 0 0% 87 100%
46 Food 8 8 0 0% 8 100% 1 0 0% 1 100% 8 0 0% 8 100%
49 Machinery & equipment 54 54 1 2% 54 100% 11 2 18% 9 82% 54 0 0% 54 100%
52 Metal producers 1 1 0 0% 1 100% 0 0 N/A 0 N/A 1 0 0% 1 100%
55 Metal product manufacturers 6 6 1 17% 6 100% 1 0 0% 1 100% 6 0 0% 6 100%
58 Oil, gas, coal, & related services 5 5 0 0% 5 100% 1 0 0% 1 100% 4 0 0% 4 100%
61 Paper 6 6 0 0% 6 100% 1 0 0% 1 100% 6 0 0% 6 100%
64 Printing & publishing 6 6 0 0% 6 100% 3 0 0% 3 100% 6 0 0% 6 100%
67 Recreation 25 25 0 0% 25 100% 0 0 N/A 0 N/A 25 0 0% 25 100%
70 Retail 17 17 1 6% 17 100% 8 0 0% 8 100% 17 0 0% 17 100%
73 Textile 5 5 0 0% 5 100% 3 0 0% 3 100% 5 0 0% 5 100%
76 Tobacco 0 0 0 N/A 0 N/A 0 0 N/A 0 N/A 0 0 N/A 0 N/A
79 Transportation 7 7 0 0% 7 100% 3 0 0% 3 100% 7 0 0% 7 100%
82 Utilities 20 20 0 0% 20 100% 6 0 0% 6 100% 20 0 0% 20 100%
85 Other industries 156 156 1 1% 155 99% 19 1 5% 18 95% 154 0 0% 154 100%
Total Sample 605 605 7 1% 604 100% 151 34 23% 117 77% 592 0 0% 592 100%
36
Table 5: Asset classes and the application of fair value accounting
Table 5 presents evidence regarding which asset classes under property, plant, and equipment are recognized at fair value.
The No. columns present the number of companies that recognize assets at fair value within the respective asset classes.
The % columns present the values in the No. columns as a percentage of those companies in the UK, Germany, and the full
sample that use fair value for any class of assets under property, plant, and equipment.
1
Includes companies that use fair value under UK-GAAP or IFRS, or both.
United Kingdom Germany Full sample

No.1 % No. % No. %
Companies that use fair value for PPE 62 100% 7 100% 69 100%
Divided according to asset classes:

Property 58 94% 6 86% 64 93%
Plant 2 3% 0 0% 2 3%
Equipment 0 0% 0 0% 0 0%
PPE in general 2 3% 1 14% 3 4%
37
Table 6: The effect of fair value accounting on asset values
Table 6 illustrates the differences in the book value of assets for fair value vs. historical cost companies. Information
regarding the use of fair value is hand-collected from companies’ annual reports in Thompson One Banker. The data is
taken from the Worldscope database as of December 2005. Panel A presents a sample of 275 companies (124 UK
companies; 151 German companies) that hold investment property. Panel B is based on a matched sample of
companies that began using fair value after IFRS adoption. We match each fair value company with historical cost
companies on country, two-digit industry group, and the log of market value of equity and take the closest match. This
procedure, which requires non-missing market value of equity, yields 90 observations. BTM is book value of equity
divided by the market value of equity, TA is total value of assets, MKT(TA) is market value of assets plus book value of
liabilities, ROA is return on assets, and PPE/MKT(EQUITY) is book value of property, plant, and equipment divided by
the market value of equity.
Statistics BTM TA/MKT(TA) ROA PPE/MKT(EQUITY)
Panel A: Investment property
Mean:
Historical cost mean 0.68 0.80 5.75
Fair value mean 0.87 0.93 4.98
Difference –0.18 –0.13 0.77
% –26.78 –16.11 13.46
t-stat –3.24 –4.20 0.56
p-value 0.001 0.000 0.574
Median:
Historical cost median 0.64 0.83 4.81
Fair value median 0.88 0.97 3.79
Difference –0.25 –0.14 1.02
% –38.55 –16.45 21.12
z-stat –3.74 –4.56 1.12
p-value 0.00 0.00 0.26
Panel B: Property, plant, and equipment
Mean:
Historical cost mean 0.50 0.71 7.47 0.40
Fair value mean 0.94 0.93 4.33 0.94
Difference –0.43 –0.22 3.14 –0.55
% –86.60 –31.20 42.00 –136.86
t-stat –4.40 –4.06 2.24 –2.81
p-value 0.00 0.00 0.14 0.01
Median:
Historical cost median 0.44 0.73 5.97 0.11
Fair value median 0.83 0.93 3.33 0.46
Difference –0.40 –0.20 2.64 –0.35
% –90.89 –26.65 44.22 –309.86
z-stat –3.91 –3.60 1.83 –3.12
p-value 0.00 0.00 0.07 0.00
38
Table 7: Summary statistics for logistic regression analysis
Table 7 presents summary statistics for three subsamples used in the logistic regression analysis presented in Tables 8
through 10. All variables are defined in Appendix B. Information regarding the use of fair value is hand-collected from
companies’ annual reports in Thompson One Banker. The data is taken from the Worldscope database as of December
2005. Panel A presents a sample of 275 companies (124 companies in the UK and 151 companies in Germany) that hold
investment property. Panel B presents a matched sample of companies that began using fair value after IFRS adoption.
We match each fair value company with historical cost companies on country, two-digit industry group, and the log of
market value of equity and take the closest match. This procedure, which requires non-missing market value of equity,
yields 90 observations. In Panel C, we match companies that use fair value for property, plant, and equipment during at
least one of the periods (i.e., either before IFRS adoption, after IFRS adoption, or both) with an equal sample of
companies that use historical cost both before and after IFRS adoption. Matches based on industry and log of market
valuation yields 102 observations. Note that requiring non-missing values for a particular variable often further limits the
sample.
Variable Mean Std. Dev. Q25 Median Q75 Obs.
Panel A: Investment Property subsample
Fair_IFRS 0.473 0.500 0 0 1 275

UkSic65 0.225 0.419 0 0 0 275
Germany 0.549 0.498 0 1 1 275
GermanySic65 0.189 0.392 0 0 0 275
Early 0.229 0.421 0 0 0 275
Size 12.550 2.257 10.908 12.502 14.119 245
MktLev 0.524 0.250 0.330 0.521 0.708 244
MktLevShort 0.356 0.245 0.164 0.301 0.514 244
MktLevLong 0.168 0.168 0.028 0.120 0.268 244
Convertible 0.055 0.387 0 0 0 180
DebtToOI 1.119 2.147 –0.074 1.349 2.512 199
Coverage 1.330 1.725 0.259 1.200 2.183 210
Current 0.307 0.574 0.029 0.254 0.604 152
DivDum 0.761 0.427 1 1 1 276
RE 0.056 0.634 0.015 0.079 0.195 243
D(RE<0) 0.156 0.363 0 0 0 276
DbtIss1 0.562 0.497 0 1 1 276
DbtIss2 0.380 0.486 0 0 1 276
FtrLev1 0.924 1.639 0.376 0.613 0.928 230
FtrLev2 0.494 1.143 0.062 0.240 0.557 229
DbtGrow1 0.413 1.119 –0.031 0.195 0.582 253
DbtGrow2 0.257 1.229 –0.205 0.155 0.705 215
EqIss1 0.093 0.292 0 0 0 182
EqIss2 0.052 0.255 0 0.000 0.008 182
Panel B: Property Plant and Equipment subsample
FAIR_IFRS 0.517 0.503 0 1 1 87

Size 12.037 2.114 10.2709 11.9925 13.6682 87
Btm 0.576 0.351 0.3541 0.4747 0.8596 87
MktLev 0.498 0.235 0.3319 0.4748 0.6262 87
MktLevShort 0.365 0.239 0.1550 0.3227 0.5045 87
MktLevLong 0.132 0.165 0.011 0.067 0.170 87
BookLev 0.633 0.227 0.436 0.656 0.807 87
BookLevShort 0.469 0.254 0.267 0.463 0.649 87
39
BookLevLong 0.164 0.194 0.015 0.092 0.237 87
Convertible 0.019 0.108 0 0 0 87
FairInvPr 0.253 0.437 0.000 0.000 1.000 87
DiviDum 0.828 0.380 1.000 1.000 1.000 87
RE 0.082 0.394 0.023 0.095 0.215 86
D(RE<0) 0.149 0.359 0 0 0 87
40
Table 8: Choice of fair value for investment property group
Table 8 presents estimates from the logistic regression of the IFRS fair value indicator on a set of company-specific
variables. All variables are defined in Appendix B. Information on the use of fair value is hand-collected from companies’
annual reports in Thompson One Banker. The data is taken from Worldscope database as of December 2005. The sample
consists of 275 companies (124 UK companies; 151 German companies) that hold investment property. Requiring non-
missing values for explanatory variables further limits the sample in some specifications. ***, **, * indicate statistical
significance at less than 1, 5, and 10%, respectively.
Variables (1) (2) (3) (4) (5) (6) (7) (8)
UK (constant) 0.460* 1.24 1.37 3.084** 4.153*** 4.456** 1.438 4.371***

[1.759] [0.949] [0.857] [2.011] [2.595] [2.120] [1.089] [3.050]
[0.079] [0.343] [0.391] [0.044] [0.009] [0.034] [0.276] [0.002]
UkSic65 2.215*** 2.115*** 2.792*** 1.873** 1.425** 2.090** 2.167*** 2.776***
[3.818] [3.436] [3.231] [2.140] [1.996] [2.432] [3.495] [3.415]
[0.000] [0.001] [0.001] [0.032] [0.046] [0.015] [0.000] [0.001]
Germany –2.539*** –3.822*** –4.735*** –4.242*** –4.437*** –3.471*** –4.362*** –4.133***
[–6.142] [–6.133] [–4.808] [–5.374] [–5.707] [–3.743] [–5.886] [–6.321]
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
GermanySic65 1.848*** 1.893*** 1.776** 1.672*** 1.632*** 0.298 2.009*** 1.721***
[4.344] [3.586] [2.284] [2.714] [2.675] [0.302] [3.664] [3.291]
[0.000] [0.000] [0.022] [0.007] [0.007] [0.763] [0.000] [0.001]
Early 1.320** 1.866** 1.543*** 1.462** 1.151 1.414** 1.316**
[2.551] [2.174] [2.625] [2.486] [1.154] [2.537] [2.547]
[0.011] [0.030] [0.009] [0.013] [0.249] [0.011] [0.011]
Size –0.158* –0.214* –0.202* –0.204** –0.370** –0.0767 –0.304***
[–1.680] [–1.789] [–1.914] [–1.991] [–2.210] [–0.794] [–3.553]
[0.093] [0.074] [0.056] [0.046] [0.027] [0.427] [0.000]
MktLev 2.681*** 2.557*** 2.137**
[3.400] [3.229] [2.438]
[0.001] [0.001] [0.015]
MktLevShort 3.381***
[3.020]
[0.003]
MktLevLong 4.090**
[1.966]
[0.049]
Convertible 3.841**
[2.366]
[0.018]
DebtToOi 0.337**
[2.197]
[0.028]
Coverage –0.380***
[–2.585]
[0.010]
Current –0.820*
[–1.789]
[0.074]
Dividends –1.313**
[–2.377]
[0.017]
D(RE<0) –1.089*
[–1.682]
[0.093]
RE –5.306**
[–2.145]
41
[0.032]
RE*D(RE<0) 6.199**
[2.403]
[0.016]
Observations 275 244 172 182 192 140 244 243

Pseudo R-squared 0.335 0.409 0.508 0.437 0.426 0.434 0.43 0.456
42
Table 9: Use of fair value for property, plant, and equipment
Table 9 presents estimates from the logistic regression of the IFRS fair value indicator on a set of company specific
variables. All variables are defined in Appendix B. Information on the use of fair value is hand-collected from companies’
annual reports in Thompson One Banker. The data is taken from the Worldscope database as of December 2005. The
results are based on a matched sample of companies that began using fair value after IFRS adoption. We matcheach fair
value company to historical cost companies company on country, two-digit industry group, and the log of market value of
equity and take the closest match. This procedure, which requires non-missing market value of equity, yields 90
observations. Requiring non-missing values for other explanatory variables further limits the sample. ***, **, * indicate
statistical significance at less than 1, 5, and 10%, respectively.
Variable (1) (2) (3) (4) (5) (6) (7)
UK (constant) –1.643** –1.806*** –2.501** –2.827*** –1.423** –1.597** –1.854**
[–2.567] [–2.738] [–2.542] [–2.761] [–2.168] [–2.185] [–2.413]
[0.010] [0.006] [0.011] [0.006] [0.030] [0.029] [0.016]
Btm 2.032** 1.677* 2.046** 0.875
[2.041] [1.662] [2.052] [1.094]
[0.041] [0.096] [0.040] [0.274]
MktLev 2.032** 1.677* 2.046** 2.571**
[2.041] [1.662] [2.052] [2.282]
[0.041] [0.096] [0.040] [0.022]
MktLevShort 2.492**
[2.234]
[0.025]
MktLevLong 2.104
[1.335]
[0.182]
Convertible –6.045*** –5.886***
[–2.610] [–2.585]
[0.009] [0.010]
LevBook 2.276**
[2.087]
[0.037]
LevBookShort 2.692**
[2.315]
[0.021]
LevBookLong 2.647*
[1.795]
[0.073]
FairInvPr 1.057*
[1.714]
[0.086]
DivDum –0.0705
[–0.125]
[0.900]
D(RE<0) –0.629
[–0.878]
[0.380]
RE 1.128
[0.521]
[0.602]
RE*D(RE<0) –2.383
[–0.997]
[0.319]
Observations 87 87 87 87 87 87 86
Pseudo R-squared 0.0734 0.106 0.0737 0.106 0.0982 0.0735 0.098
43
Table 10: Future financing and the use of fair value accounting
Table 10 presents estimates from OLS regression of future financing choices on the IFRS fair value indicator and a set of
company-specific controls. All variables are defined in Appendix B. Information on the use of fair value is hand-collected
from companies’ annual reports in Thompson One Banker. All other data is taken from the Worldscope database between
December 2005 and 2007. The sample consists of 275 companies (124 UK companies; 151 German companies) that hold
investment property. Requiring non-missing values for explanatory variables further limits the sample in some
specifications. ***, **, * indicate statistical significance at less than 1, 5, and 10%, respectively.
(1) (2) (3) (4) (5) (6) (7) (8)

Variable DbdIss1 DbtIss2 FtrLev1 FtrLev2 DbtGrow1 DbtGrow2 EqIss1 EqIss2
Fair 0.218*** 0.216*** 0.714* 0.506*** 0.457*** 0.519*** 0.0544 0.0506

[2.674] [2.904] [1.813] [2.665] [2.814] [2.636] [1.235] [1.286]
[0.008] [0.004] [0.071] [0.008] [0.005] [0.009] [0.219] [0.200]
UK –0.0655 –0.12 –0.604 –0.278 –0.365** –0.339 –0.0327 –0.0212
[–0.783] [–1.598] [–1.583] [–1.538] [–2.275] [–1.554] [–0.738] [–0.893]
[0.434] [0.111] [0.115] [0.126] [0.024] [0.122] [0.462] [0.373]
Size 0.0360** –0.0163 –0.0846 –0.0555 0.0148 0.0155 –0.0219** –0.0173*
[2.500] [–1.330] [–1.541] [–1.380] [0.623] [0.342] [–2.142] [–1.660]
[0.013] [0.185] [0.125] [0.169] [0.534] [0.733] [0.034] [0.099]
MktLev 0.0645 0.545*** 2.037* 1.088 0.586 0.639 0.399*** 0.317*
[0.349] [3.479] [1.921] [1.516] [1.413] [1.163] [2.948] [1.713]
[0.727] [0.001] [0.056] [0.131] [0.159] [0.246] [0.004] [0.089]
Constant –0.0655 –0.12 –0.604 –0.278 –0.365** –0.339 –0.0327 –0.0212
[–0.783] [–1.598] [–1.583] [–1.538] [–2.275] [–1.554] [–0.738] [–0.893]
[0.434] [0.111] [0.115] [0.126] [0.024] [0.122] [0.462] [0.373]
Observations 229 229 229 228 229 196 181 181

R-squared 0.121 0.092 0.144 0.147 0.213 0.081 0.108 0.177
44

Who Uses Fair Value Accounting For Non Financial Assets After Ifrs Adoption

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Who Uses Fair Value Accounting For Non Financial Assets After Ifrs Adoption

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Working Paper No.

Who uses fair value accounting for non-financial

This paper also can be downloaded without charge from the

Electronic copy available at: http://ssrn.com/abstract=1269515

Hans B. Christensen and Valeri Nikolaev

The University of Chicago

Keywords: Fair value accounting, IFRS, international accounting.

First draft: August 2008

Electronic copy available at: http://ssrn.com/abstract=1269515

Electronic copy available at: http://ssrn.com/abstract=1269515

accounting methods that pre-commit against value-destroying actions by management and

overstate assets and thereby expropriate wealth from other claimholders.

they can switch to the other method.4

Electronic copy available at: http://ssrn.com/abstract=1269515

annual report prepared under IFRS.

choice between the valuation methods.

conjecture, because fair value estimates are considered less reliable.

about the success of a company’s operations over a given period.

increase in information disclosure. Such disclosure is likely to be in demand by creditors, who

equity) markets in the future.

contracting, rather than valuation, role of accounting.

our main findings and section 6 concludes our study.

2. Valuation methods under German GAAP, UK-GAAP, and IFRS

accounting treatment of each of these three asset groups.

2.1 Accounting for investment property

a company chooses to recognize investment property at historical cost, it must systematically

accounting or continue to value investment property at historical cost. UK companies, on the

2.2 Accounting for property, plant, and equipment

2.3 Accounting for intangible assets

application, nonexistent (IAS38.78).

3. Background and relation to prior literature

We begin this section by summarizing opposing views among academics, standard

persists among practitioners (e.g., Ernst&Young 2005).

3.1 Conveying information to equity investors

increased comparability among companies.

3.2 Contracting explanations for revaluations

Contracts constitute another major application of accounting information. Agency-related

an action often associated with claim-holder value expropriation.

such a commitment is made for the purpose of instantaneous opportunistic gain.

3.3 Theoretical considerations of mark-to-market accounting

While contracting efficiency is the common explanation for a company's decision to

by accounting standard setters, its practical benefits have yet to be established.

4.1 Sample selection and descriptive statistics

(prepared according to UK-GAAP) before IFRS adoption. We use the UK cross-sectional

[Insert Table 1 here]

Table 1, Panels A and B present the distribution by industry of companies in Worldscope

4.2 Valuation practices

accounting for the property, plant, and equipment asset group.11

4.2.1 Valuation practices in the UK

Table 2 documents the valuation practices in the UK cross-sectional sample. We identify

concentration within financial companies.

[Insert Table 2 here]

adoption, the associated costs could have made switching unattractive.

non-financial companies made the switch.

[Insert Table 3 here]

4.2.2 Valuation practices in Germany

approximate those we observed in the UK.

[Insert Table 4 here]

away from fair value upon IFRS adoption.

4.2.3 Assets recognized at fair value

distributions of fair value use in the UK and Germany are similar.

recognized using fair value accounting.

UK (constant) 0.460* 1.24 1.37 3.084 4.153* 4.456 1.438 4.371*

Fair 0.218* 0.216* 0.714* 0.506* 0.457* 0.519*** 0.0544 0.0506