On the revaluation of property, plant and equipment (ppe): motivations, value relevance, and effects on audit fees

A K M Waresul Karim,Rafiqul Bhuyan,Shariful Islam

doi:10.4038/ijabf.v6i1.49

Abstract

This paper examines three important aspects of asset revaluations under International Financial Reporting Standards (IFRS). First, it seeks to identify characteristics of firms that choose to employ the revaluation model instead of the cost model while accounting for PP&E. Hypothesizing both opportunistic and efficiency motives, the paper finds that firms with high leverage are more likely to choose the revaluation model, thus confirming contracting cost reasons, analogous to opportunistic motivation. However, the political cost reason of opportunistic motivation does not appear to be significant. On the other hand, our findings support that efficiency motive is highly significant behind asset revaluations, proving that firms with financial slack or those having higher percentage of investment in PPE are highly likely to choose the revaluation model, while those with growth opportunities are not. Second, given the managers' motivations for choosing the revaluation model, we find, using Ohlson (1995) model, that investors do not consider asset revaluation to be value relevant, proving that investors might already be aware of managers' motivation behind the choice. Finally, the paper empirically tests the effects of the use of the revaluation model on audit fees and finds that the choice of the revaluation model leads to a significant increase in audit fees. This finding supports the hypothesis that the use of the revaluation model involves additional audit effort that merits higher audit fees.

Highlights

International Financial Reporting Standards (IFRS) have either been adopted or domestic standards have substantially been converged with it by many countries around the world including the UK, the European Union, Australia, Canada, China, India, Japan, New Zealand, South Africa, and most developing countries and jurisdictions.Countries like Bangladesh have adopted IFRS in their efforts to accelerate the pace of capital market development and do so with greater transparency and higher quality financial reporting
This paper examines three important aspects of asset revaluations under International Financial Reporting Standards (IFRS)
It seeks to identify characteristics of firms that choose to employ the revaluation model instead of the cost model while accounting for PP&E. Hypothesizing both opportunistic and efficiency motives, the paper finds that firms with high leverage are more likely to choose the revaluation model, confirming contracting cost reasons, analogous to opportunistic motivation

Summary

Introduction

Countries like Bangladesh have adopted IFRS in their efforts to accelerate the pace of capital market development and do so with greater transparency and higher quality financial reporting. Most of the research conducted on different aspects of IFRS revolve around developed countries the EU countries. This research aims to focus on International Accounting Standard 16 (IAS 16) Property, Plant and Equipment (PPE) in the context of Bangladesh. Bangladesh has been using IFRS/IAS since the beginning of the new century and since has been trying to improve its institutional and regulatory framework for accounting, aiming to improve its capital market dominated by banks in meeting the financial needs of a fast expanding business sector. Very small amount of research has been conducted so far on different aspects of accounting standards such as IFRS/IAS. These studies try to explain the reasons of revaluation and over time, and as part of their work, two competing theories have been developed and gained empirical support

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Conclusion