International Variations in the Financial Reporting of Property

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The accounting treatment of property plant and equipment varies from country to country, with the primary difference being the revaluation of fixed assets. In this report, an analysis of the standard setting system under the IFRS, US GAAP and Japanese GAAP regimes is provided. A review of the differences in the relevant standards on property plant and equipment is carried out. It appears that whilst the USA and Japan (with the exception of revaluation of land which was permitted only for a specific period of time) do not allow the use of revaluation model, under IFRS the use of the revaluation model for subsequent measurement of fixed assets is allowed. A discussion as to whether the revaluation or cost method enhances comparability, relevance and reliability revealed that there is disagreement amongst academics. It was also discovered that the reason for not introducing revaluation could be of a political nature rather than of an accounting nature. Although certain authors like Herrmann et al (2006) manage to argue persuasively that the revaluation of Property Plant and Equipment is the method that enhances relevance, reliability and comparability, what is relevant and reliable in one country may not be so in another due to cultural factors.

Table of Contents

Abstract 2

Table of Contents 3

1.0 Introduction 4

2.0 An overview of standard setting under IFRS, US GAAP and Japanese GAAP 5

2.1 The Financial Accounting Standards Board (FASB) 5

2.2 The International Accounting Standards Board (IASB) 7

2.3 Japanese GAAP and the Accounting Standards Board of Japan (ASBJ) 9

3.0 The treatment of property plant and equipment 12

3.1 IFRS 12

3.2 US GAAP 13

3.3 Japanese GAAP 14

3.4 Issues relating to Relevance, Reliability, and Comparability 15

3.4.1 Relevance 16

3.4.2 Reliability 17

3.4.3 Comparability 18

4.0 Conclusion 19

5.0 References 22

1.0 Introduction

The aim of this project is to analyse the international variations in the financial reporting of property plant and equipment. For the purposes of this study, three reporting regimes were considered - US Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), and Japanese GAAP. In the first part of the project, an overview of the standard setting process under each of the three regimes was provided. Thereafter, differences and similarities in the treatment of property plant and equipment between the three regimes were identified, with particular consideration to the revaluation of fixed assets. A minor reference to differences in depreciation rules was also made. Through the use of articles published in academic journals, magazine articles and other relevant literature an attempt has been made to assess whether revaluation increases or decreases the comparability, reliability, and relevance of financial statements as defined in the Framework for the Preparation and Presentation of Financial Statements (IASB 1989). As explained in this project, what is reliable and relevant in one country may not be so in countries with different cultures and legal systems.

2.0 An overview of standard setting under IFRS, US GAAP and Japanese GAAP

2.1 The Financial Accounting Standards Board (FASB)

The FASB is an independent standard setting authority for private businesses in the United States which was set up in 1973. It is a direct successor of the Accounting Principles Board, which had been issuing accounting standards in the USA from as early as 1958. The FASB is not responsible for prescribing accounting standards for governmental organisations - the responsibility of which rests upon the Government Standards Board (GASB) (Bragg 2002). Although the Securities Acts which were issued after the Great Depression gave the powers of issuing standards to the SEC, the latter believed that it would be better if the standards were issued by the profession. Hence the responsibility of issuing standards was delegated to the profession. (Jenkins 2002, Canfield 1999). Crucial to the FASB, is its independence from any private sector organisation in the United States, although this has been subject to several criticisms. Jenkins (2002), who was chairman of the FASB at the time of Enron's collapse, admitted that critics were arguing that the FASB was not independent enough from the Big Five firms.

In 2009, the FASB has finalised a project of codification, whereby US GAAP now has a single authoritative source, known as the Accounting Standards Codification, which is accessible for free on its website. Only the rules which are included in the new codification are considered to be enforceable with the exception of rules which are issued by the SEC. (Ernst and Young, 2009a).

Besides standard setting, the FASB is responsible for the improvement of such standards, and the issuing of relevant guidance on their application. In order to achieve its mission of improving accounting standards, the FASB, similar to the IASB, is working on the convergence of accounting standards across the globe (FASB 2010).

Although it is the standard setter, the FASB has no authority over the application of the standards. Jenkins (2002) argues that the role of the FASB is not to ensure that the standards are adhered to. The responsibility for ensuring compliance with the standards rests with the management of the company, and the auditors in the case of private companies. In the case of public companies, the Securities and Exchange Commission (SEC) also is responsible for ensuring the firms are complying with the accounting standards.

In conducting its roles, the FASB maintains a number of principles. It ensures that it maintains objectivity throughout the standard setting and improvement processes. Furthermore, as much as possible, consultation is sought between interested parties prior to the issuing of standards or changes of such. It also ensures that when changes are made, the consequences of the decisions are taken into consideration, minimising any negative effects on businesses. Another principle which the FASB embraces is that the standards should be kept up to date with developments in the accounting and economic environment. Finally one must mention that the FASB should make sure as much as possible that the cost of adopting a particular accounting practice does not exceed the benefits of such (FASB 2010).

2.2 The International Accounting Standards Board (IASB)

In 1973, an independent committee known as the International Accounting Standards Committee (IASC) was set up with the ultimate aim of providing worldwide standards, in order to ensure consistency in the financial reporting across the world. In 2001, the IASC, was replaced by the International Accounting Standards Board (IASB), which adopted all the standards which had been previously issued by the IASC. The IASB is the standard setting body of a larger organisation, the IFRS Foundation, which appoints the members of the IASB.

Apart from the development and amendment of International Financial Reporting Standards (IFRS), the IASB is also responsible for producing IFRS for SMEs. The IASB has also the role of approving the interpretations which are issued by the IFRS Interpretations Committee (IASB 2010a). According to the IASC Foundation [1] (2010) Constitution, the IASB should consider undertaking field tests, in order to assess the impact of a particular standard prior to publication. This is done in order to ensure its practicality.

Like the FASB in the United States, the IASB has no authority to enforce such standards in any country. However, the standards issued by the IASB are the most widely adopted, with over 120 countries requiring or allowing the use of IFRS (IASB 2010b). In certain jurisdictions, the standards as published by the IASB do not become automatically enforceable. For example, in the European Union, there is a complex endorsement process following publication of an IFRS which includes further consultation with the various interest groups within the European Union, through the European Financial Reporting Interest Group (EFRAG) (European Union, 2009).

The figure below shows in a simplified manner, the standard setting process which is carried out by the IASB. The process is very similar to the process carried out by the FASB. A topic reaches the IASB agenda, through trustees of the IASB, the audit firms, and other key stakeholders for discussion. On complex matters, a discussion paper is issued prior to the publication of an exposure draft. In each stage, the comments submitted during the public consultation are analysed, after which a final debate is carried out, and the formal publication of the standard takes place. (Epstein and Jermakowicz, 2010).

Figure 1: The standard setting process (IASB 2010b)

According to the IASC Foundation's (2010) constitution, in order for a standard or exposure draft to be published, it requires the approval of nine members out of fourteen [2] . The members of the IASB have to be from different parts of the world as specified in the IASC Foundation's constitution.

Schroeder et al (2005), argues that one difference between the IASB and FASB is that sometimes IFRS permit alternative accounting treatments, although the number of instances whereby there are alternative accounting treatments have been reduced in recent amendments to the IFRSs. Yet, certain standards still allow for alternative treatment for example IAS 16 allows for the subsequent measurement of property plant and equipment using the cost model or using the revaluation model.

2.3 Japanese GAAP and the Accounting Standards Board of Japan (ASBJ)

Prior to the establishment of an independent standard setting body, the accounting standards in Japan were restricted to the legislation - namely the Commercial Code and the Securities and Exchange legislation [3] , and also to the statements of opinion which were issued by the Business Accounting Deliberation Council (BADC). This legalistic approach has led to Nobes (1984) classifying Japan's accounting as being macro-uniform statute based, similar to Germany. The state's involvement in accounting was highlighted by the introduction of a law which permitted a one off revaluation of land, aimed at increasing the capitalisation of banks, details of which are discussed later on in section 3.3 of this report.

It is worth noting, that in Japan there is what is referred to by Ali and Haider (2008) as a triangular legal system for financial reporting, with three laws - the Securities and Exchange Law, the Commercial Code, and Taxation Laws, prescribing financial reporting requirements which often result in the presentation of more than one set of financial statements. If there is no accounting standard which prescribes the required treatment for a particular transaction, then the taxation laws prevail (Ali and Haider 2008). According to Misawa (2005), there are significant differences between IFRSs and the Japanese Commercial code, with the latter usually requiring less disclosure, for example - the Commercial Code does not require any comparative figures. An important difference is that under the Commercial Code, only large companies are required to disclose consolidated accounts, whereas IFRS requires consolidated accounts for all groups of companies regardless of size.

Following advice from the IASB, it was suggested that the setting of accounting standards should be shifted to the private sector. The Financial Accounting Standard Foundation was set up, with its respective accountancy standard setting body, the Accounting Standards Board of Japan (ASBJ) in 2001 (Nakoshi 2006). Roberts et al (2005) also argue that the reason for the new standards board was also the need for new standards in view of increasingly complex accounting transactions and globalisation. Although the ASBJ issues accounting standards, Benston et al (2004) argue that the standard setter is still constrained by the triangular regulatory system mentioned earlier on. To date, the ASBJ has issued 24 standards, the last one being in December 2009, concerning changes in accounting policies and errors. The ASBJ, submits regular comments on the discussion papers which are issued by the IASB. Even though the previous standard setter, the BADC has no longer the powers to prescribe standards it still maintains an accounting advisory role.

Since 2005, the ASBJ and the IASB are undertaking a convergence project, which has set ambitious deadlines for convergence with IFRS. In fact, the remaining differences concerning existing standards are expected to be removed as early as June 2011, in accordance to the "Tokyo Agreement", in which both boards agreed to accelerate the convergence project (JICPA 2010).

According to Japanese law, as from April 2002, domestic companies registered with the US SEC, can submit the financial statements in US GAAP instead of Japanese GAAP, a practice which was previously restricted to a small number of Japanese companies who had special arrangements with the Ministry of Finance (Benston et al 2006). As Roberts (2005) points out the US influence on the accounting of Japanese companies is also highlighted by the fact that many companies produce financial statements in English.

In December 2009, the Japanese government announced that some specific companies could use IFRS as from periods ending 31st March 2010 onwards for their consolidated financial statements. The companies which can produce the financial statements using IFRS must be listed on a Japanese stock exchange, and produce the necessary reports required by the Financial Instruments and Exchange Act. Furthermore, the company should have adequate staff with knowledge on IFRSs. In the first year, similar to other jurisdictions which have recently adopted IFRS, reconciliation between IFRS and Japanese GAAP should be done, with an explanation of material differences in narrative form (Deloitte 2009).

There still appears to be a number of major differences between Japanese GAAP, and IFRS. For example according to Benson et al (2006) prior period adjustments are not allowed and are treated as extraordinary items in the current year, revaluation of fixed assets are not allowed, and stock does not necessarily have to be shown at the lower of cost and the net realisable value. Yet, as stated, progress is being done to eliminate differences from IFRSs. For example, according to Ernst & Young (2009b), LIFO cannot be used for stock valuations as from April 2010. Retrospective adjustments for prior period errors, will be possible in line with ASBJ statement no 29 as from April 2011 (ASBJ 2009).

3.0 The treatment of property plant and equipment

After discussing briefly standard setting under the three regimes, a brief overview of the accounting treatment under each regime is provided hereunder.

3.1 IFRS

Under the IFRS regime, IAS 16 - Property Plant and Equipment deals with the treatment of property plant and equipment, their recognition and subsequent depreciation.

Under IAS16, property plant and equipment is initially recognised at cost. Two approaches may be taken for subsequent measurement. Under the cost model, an asset is valued at cost less any accumulated depreciation and accumulated impairment losses (similar to the US and Japanese treatment). Alternatively, the revaluation model discussed hereunder may be used. Under this method assets are shown at fair value less any subsequent accumulated depreciation and accumulated impairment losses. However, an important qualification is made through a recent amendment in the standard. The fair value cannot be measured reliably; the revaluation approach cannot be used.

In line with IAS 16 paragraph 36, individual assets cannot be revalued, but this accounting treatment has to be applied to whole group of assets. For example, one cannot revalue just a particular building, but all the buildings have to be revalued. Alfredson et al (2005) cite two reasons for this. The first reason is to avoid "cherry picking", whereby the management would select specific assets to revalue in order to obtain the desired results. The other reason, cited by the authors is to ensure consistency within the financial statements.

Before moving on to discuss US GAAP and Japanese GAAP, it is important to comment briefly on the treatment of depreciation under IFRS. IAS16 requires that property plant and equipment is systematically depreciated over its useful life. The IAS states that "significant parts" of an asset (implying parts of a significant value), have to be considered separately using different rates in order to ensure proper depreciation. For example, the engine of an aeroplane would have a different useful life than its seats. Furthermore, the same standard requires an annual review of the useful life of the assets and its residual value. Changes in the depreciation method, useful life and residual value are treated as a change in accounting estimate, in line with the requirements of IAS 8. Furthermore, the standard requires an assessment to be carried out at least on annual basis as to whether the depreciation method being used reflects the pattern of benefits generated by the asset.


The relevant treatment for property plant and equipment under US GAAP is prescribed under ASC 360 (codification topic 360). The only differences which arise are related to the subsequent measurement of fixed assets - revaluation and depreciation. Under US GAAP, the only subsequent permitted is the cost model - i.e. the revaluation model is not allowed.

Walker (1992) argues that this was not always the case, in fact prior to the 1930's revaluation was a common practice in the USA. The practice was discouraged in the 1940's by the SEC after it was discovered that some companies were reporting fair values of property plant and equipment arbitrarily. By the 1950's, the use of current values even in the disclosure notes of company acquisition documents was banned by the SEC. The ban on revaluation was also a direct result of the stock market crash of 1930's, whereby scholars were arguing that the increase in stock prices which led to the crash was a direct consequence of the overvaluation of assets (Carmichael et al 2007). In a letter to the editor of Barron's National Business and Financial Weekly, Flegm (1986) describes the use of fair values prior to the abovementioned stock market crash as being "voodoo accounting".

Besides, differences concerning the revaluation treatment there are also difference with regards to the treatment of depreciation. ASC320 prescribes that the recoverability of a long lived asset is only tested if there are indications that this has changed (i.e. not annually like under the IFRS regime). If there is a change, the treatment under US GAAP is the same as that of change in accounting estimates under IAS8. Although, different depreciation treatment for parts of assets (similar to the aeroplane example mentioned in the previous section) is permitted, in contrast to IFRS, this is not a requirement. (KPMG 2009).

3.3 Japanese GAAP

Japanese companies comply with corporate tax law rather than accounting law when they deal with issues concerning property plant and equipment with the exception of ASBJ Standard No. 18 - Asset Retirement Obligations.

Under Japanese GAAP, initial measurement is at cost similar to IFRS and US GAAP, however there are differences with regards to the treatment of subsequent measurement.

Similar to US GAAP revaluation of noncurrent assets is not permitted under Japanese GAAP. However, recently there was an exception. In the early 1990s, the unrealised gains of Japanese banks were decreasing drastically, and the Government was suggesting that the solution to improve banks' capital was to allow revaluation (The Economist 1993). To this respect a special legislation was enacted in 1999 to allow for a one-off revaluation of land between 31st March 1998 and 31st March 2002 for large companies (Herrmann et al 2006, Kawamura 2007).

With regards to depreciation, similar to IFRS and in contrast to US GAAP, depreciation is calculated each period in accordance to the Audit and Assurance Committee Report No. 81. Therefore the assessment of residual values, useful lives and depreciation methods is carried out each year like under the IFRS regime. However, one key difference between Japanese GAAP and the other two regimes is that a change in depreciation method is treated as an accounting policy and not as an accounting estimate. Strictly speaking this does not make much difference since in Japan changes in accounting policies are accounted for prospectively, although a note has to be made on the impact of the change on the financial statements of the current period. There is no specific rule regarding the depreciation of parts within a particular asset, and therefore the treatment of such is similar to the US GAAP, with depreciation of parts being permitted but not a requirement. (Ernst & Young 2009b, JICPA 2006)

3.4 Issues relating to Relevance, Reliability, and Comparability

Under the IASB Framework for the Preparation and Presentation of Financial Statements (1989), four fundamental concepts are identified as being qualitative characteristics - understandability, relevance, reliability, and comparability.

The question of the upcoming discussion is whether the treatment of property plant and equipment in the three regimes follows these characteristics with particular reference to upward revaluation. In a report by the Committee of European Securities Regulators (CESR) (2005), it was indicated that the FASB framework is similar to the IASB framework on most issues, although they are not identical. Under the US regime, the abovementioned qualitative characteristics are also of importance and discussed in the FASB's Concept Statement No. 2. Furthermore, the same committee analysed a Japanese discussion paper on the conceptual framework and concluded that in Japan, relevance and reliability are placed at the highest level but comparability and understandability are also considered indirectly.

3.4.1 Relevance

According to the IASB Framework (1989) information is relevant when it affects the economic decisions of users. Relevance has both a predictive and confirmative aspect - in the sense that relevant information can help in the analysis of present and future decisions, and can also correct or confirm decisions which were previously done incorrectly. The discussion below will shed some light as to whether the revaluation of property plant and equipment increases relevance or not.

The predictive aspect was tested by several authors such as Aboody, Barth and Kasniz (1998). In their study on UK firms, they found that at least up till three years after the revaluation, operating performance improved. This suggests that the financial statements had been made more relevant following the revaluation. However, the authors point out that managers can revalue in order to manage their debt to equity ratios. This was evidenced by the fact that operating performance improved by less in the case of companies with high debt to equity ratios. The study was criticised by Sloan (1999), who was concerned that the changes in future economic performance is not only attributable to revaluations, but it could be a result of various other factors which are not taken into consideration by the authors.

Herrmann et al (2006) argue also that some States in the USA require companies to distribute dividends only if the fair value of assets exceeds the fair value of the liabilities after deducting the dividend payments. Therefore, by having the assets shown at fair value on the balance sheet, one would be able to predict the company's ability to distribute dividends.

With regards to the confirmative aspect, referred to as feedback value under the US GAAP, Herrmann et al (2006) argue that since historical cost do not change, it is not providing any feedback value after an acquisition. A return on investment (ROI) calculation based on historical costs, would not show whether the investment has been profitable or not and could provide misleading results.

Another important issue relating to relevance is timeliness. Those who argue in favour of fixed asset revaluation question the usefulness of outdated cost information (Herrmann et al 2006). Against these arguments one can mention the viewpoint Henderson and Goodwin (1992), who question revaluations. They argue that revaluations are not done frequently and systematically. In view of this, timeliness in the case of revaluations is questionable.

3.4.2 Reliability

The second qualitative characteristic found in the IASB framework is reliability. Information is reliable if it is free from error and bias. Therefore issues such as neutrality, prudence, faithful representation, substance over form and completeness are considered under this characteristic. The FASB's SFAC No. 2 includes verifiability as a quality required to ensure reliability, and this was also recognised by the IASB as being important (IASB 2005).

With regards to faithful representation, if revaluation is not done, the asset would not be shown fairly because its value is shown incorrectly in the balance sheet. The counterargument to this is that historical cost presents the figures more fairly because it is subject to less manipulation. But one would argue earnings could still be manipulated using historical cost by taking into consideration the timing of the sale of the assets. Herrmann et al (2003) investigated how fixed assets sales were leading to earnings management in Japan. The authors outline how the Japanese Securities and Exchange Law require that firms disclose earnings forecast, and how this requirement has led to earnings management. In fact, the study concluded that when earnings are below the forecasted figures, it is likely that management would sell its assets to increase earnings. By requiring revaluation, one would be reducing the possibility of such earnings management, although in view that IAS 16 for example allows the use of the cost model just the same, the earnings management cannot be eliminated not even if a standard similar to IAS 16 is introduced in Japan.

With regards to neutrality, the Framework indicates that to be neutral information has to be free from bias. Whilst for authors like Herrmann et al (2006) consider the historical cost as being as biased towards conservatism, Fearnley and Sunder (2007) argue that by using fair values we are introducing inaccuracies since there are only very few assets whose fair value can be measured reliably without any degree of subjectivity. As a result of the subjectivity and frequent price volatility, the authors argue that we should bring back the concept of prudence and use historical cost.

One should also consider briefly verifiability because it is one of the major concerns when it comes to reliability. It has been argued, even by Fearnley and Sunder (2007) that the reliability is put into question because unlike the historical costs fair values are not easily verifiable. The authors argue that this fact also puts into question the audit function because the auditor cannot offer the same level of assurance when there is a revaluation then when there is historical cost. But again Herrmann et al (2006) question this fact, based on the argument that when there is a business acquisition a revaluation of fixed assets at the acquisition date is acceptable in the USA. They also argue that for example in the case of self constructed assets, one can include arbitrary overhead allocations, which would also bring into question the issue of verifiability, despite that historical cost is being used.

3.4.3 Comparability

With regards to comparability Herrmann et al (2006) argue that by using historical cost we are using a myriad of valuation methods, because each time an asset is bought it is added to the previous historical costs. The example cited by the authors, is in the case of land - newly purchased land is added to the cost of land which was purchased say 20 years ago. One further issue which Herrmann et al (2006) mention is that sometimes the problem mentioned above is augmented by the affect of different foreign exchange rates.

Yet if not all assets are revalued at the same time, this problem is not resolved (Deegan and Unerman, 2006). In Japan, there is also the problem that IFRS is optional, and therefore companies using Japanese GAAP will not be comparable, not only because of historical costs, but also because there are companies who adopted different financial reporting standards.

4.0 Conclusion

The above analysis has identified the major difference in the treatment of property plant and equipment under US GAAP, Japanese GAAP and IFRS as being the revaluation of assets. Minor differences were also identified with regards to depreciation. Whilst revaluation of assets is allowed under IFRS, at present this is not permitted under Japanese GAAP and US GAAP. However, the situation in Japan is that some listed companies are now being allowed to publish their financial statements using IFRS, hence revaluation is partially possible for a number of large companies. None of the treatment adopted by the regimes is free from flaws, and there seems to be a trade off between relevance and reliability.

The revaluation model appears to be more relevant as evidenced by studies concerning the operating income following the revaluation (Aboody et al 1999), even though managers still can exercise their discretion as to whether they use the revaluation model or not, for which class of assets to use it and its timing. But, as outlined by Lin and Peasnell (2000) and Easton et al (1993), the motives for revaluating assets are far from being only related to reliability, relevance and comparability. Amongst the motives cited by Lin and Peasnell (2000) are the use of revaluation as a signalling approach for better future prospects, and the fact that firms which have been subject to equity depletion or are expected to experience a reduction in equity in the near future, revalue more their assets in order to improve the equity position.

The main arguments criticising the revaluation model appear to be reliability issues. IAS 16 indicates very clearly that in order to use the revaluation approach, the revalued amount must be measured reliably.

The basis of the argument has been subjectivity and difficulties in verifiability, although this has been questioned by Hermann et al (2006) on the basis that there are instances in US legislation were the value of the assets is not the actual historical cost such as acquisitions, and the managerial involvement outlined earlier on. One perceived way of improving reliability, is to make use of independent valuers which have an outstanding reputation. According to Cotter (1999) in countries like New Zealand for revaluation to be possible, the valuer has to be independent. Whilst this is desirable, there is the counterargument that in view of the costs involved companies may decide to revalue less, hence therefore reducing the relevance. The study found no evidence that the use of highly reputed valuers increases reliability.

With regards to comparability, it is clear that the use of historical cost for asset valuation does not enhance comparability because when a new asset is purchased it is added to the cost of the assets which were purchased before. However, one must point out that this occurs also when assets are revalued since revaluations do not necessarily take place at the same time (Deegan and Unerman, 2006).

One final consideration is that in a study by Paik (2009), it was argued that revaluation may be only value relevant in common law countries, suggesting that if the revaluation would be introduced in the United States, it is likely to increase relevance, whereas if Japanese accounting rules would permit revaluation, this is not likely to increase relevance. One suggestion would be to undertake further studies similar to the one but possibly in more depth than Paik (2009), because if the results are accurate, there could be an argument that revaluation should not be introduced in Japan but would make financial statements more relevant to investors in the USA. The problem remains that certain listed companies in Japan have implemented already IFRS, despite that revaluation would not necessarily increase relevance. Furthermore, this issue of having more than one accounting system reduces comparability of financial statements between different entities especially since the application of IFRS remains optional.

However, in my opinion whether to introduce revaluation or not has to be taken into the local context, not only on the basis of stock prices. For example, Shibata (1996) argues the fact that revaluation was not allowed in Japan was leading to "hidden profits". Hidden profits in assets were shifting the management's focus onto speculation and ignoring the liquidity position of companies leading to severe problems for Japanese companies.

All the arguments in favour and against revaluation have been challenged by academics therefore whichever option is right or wrong is subject to controversy. However, it is important to note that besides academic arguments, there could be political reasons for banning revaluation. Watts and Zimmerman (1986), argued that the ban on revaluation by the SEC could have been as a result of an asymmetric loss function, whereby bureaucrats fear they would be blamed if the assets of a company are overstated and the company in question goes bankrupt, and as a result refuse to allow revaluations. Political reasons should not be the reason for deciding whether to introduce revaluation or not.

Hermann et al (2006) contend that they believe that there is a valid argument for introducing revaluations of property plant and equipment. In my opinion, for every argument against revaluations of fixed assets, Hermann et al (2006), manage to provide a reason as to why the revaluation model is preferable. They tend to convince the reader that the revaluation model is superior to the cost model, although I remain sceptic on the fact that revaluation is optional under IFRS. Having stated so one must also stress that this also depends on cultural aspects because as Paik (2009) states revaluation is more relevant in countries which have a common law accounting system, rather than a codified system.

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