Upward Revaluation of Fixed Assets

Under the U.S. GAAP, fixed assets are reported at their book values which are derived by deducting accumulated depreciation from the original cost. Companies are allowed to write down their fixed assets if the value of the fixed assets is impaired. Under no circumstances can a company write up its fixed assets even if the market value of these assets exceeds their book value. However, such upward revaluation is allowed under the International Accounting Standards (IAS). Specifically, as an allowed alternative, IAS No.16, “Property, Plant & Equipment,” permits fixed assets to be revalued periodically and carried at fair value. Significant controversies currently exist regarding the revaluation provision under IAS No.16. Critics of IAS No.16 have expressed concerns that revaluation of fixed assets is arbitrary and may be used by management to manipulate reported accounting numbers. To address such concerns, this study empirically assesses the reported fixed assets under IAS No.16. Based on the data of 113 companies whose consolidated financial statements were prepared using IAS, this study documented significant empirical evidence suggesting that fixed assets reported by sample firms under IAS No. 16 reflect their economic value as perceived by investors. The findings seem to support the use of IAS in preparation of financial statements for cross-border listing of securities.