Fair value adoption in Central and Eastern Europe - Do firms apply fair value accounting to tangible non-current assets under IFRS?

Abstract

This study focuses on two asset groups under non-current non-financial assets: property, plant, and equipment (PPE) and investment property. The object of the research is to find out whether the dominant role of historical cost accounting evidenced by prior studies applies to companies domiciled in Central and Eastern Europe. What is more, I also examine how fair value accounting affects asset values and explore what explains the choice to use fair value. All the companies included in the research report under the International Financial Reporting Standards (IFRS). The total sample comprehends companies that come from five different countries including Estonia, Latvia, Lithuania, Poland and Slovenia.

To clarify the applied accounting methods for PPE and investment property I read each company's accounting policies for these asset groups in its annual report. Fair value accounting's effect on asset values is studied by comparing different financial ratios between historical cost companies and fair value companies. The choice to apply fair value accounting to PPE and investment property is examined by applying a logistic regression analysis.

In line with previous evidence, historical cost accounting is the dominant accounting method. However, I find more support for fair value accounting for PPE than previous studies. On the other hand, fair value accounting for investment property is slightly less popular than results from earlier studies would suggest. The results indicate that fair value accounting has a significant impact on asset values. Fair value companies have clearly higher book-to-market ratios and lower return on assets (ROA). When examining the choice to apply fair value, I find that companies operating in the real estate industry are more likely to apply fair value to investment property. As for PPE, there are two factors that explain the choice to apply fair value. First, companies that measure investment property at fair value are more likely to apply fair value to PPE as well. Second, PPE-heavy firms are more likely to measure PPE at fair value.