An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Jo Danbolt
University of Glasgow - Scotland

William Rees
University of Amsterdam - The Netherlands

Abstract: We use British real estate and investment fund industries as experimental settings where fair value and historic cost accounting can be compared. Both industries have assets marked to market and hence the difference between the two accounting systems is profound. We find that fair value income is considerably more value relevant than historic cost income. However, in the presence of changes in fair balance sheet values, all income measures become irrelevant. Fair values for our real estate sample are considerably less value relevant than for the investment companies and exhibit biases consistent with earnings management that are not so obviously present in the investment sample. We interpret these results as confirming that where fair values are unambiguous, FVA is highly relevant and largely unbiased. However, where valuation is more ambiguous, which will normally be the case, value relevance will be lower and biased accounting may be revealed.

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