Fair value versus historical cost-based valuation for biological assets: Predictability of financial information

Josep M. Argilés, Josep Garcia-Blandon, Teresa Monllau

Research output: Indexed journal article Articlepeer-review

32 Citations (Scopus)

Abstract

There is an intense debate on the convenience of moving from historical cost (HC) toward the fair value (FV) principle. The debate and academic research is usually concerned with financial instruments, but the IAS 41 requirement of fair valuation for biological assets brings it into the agricultural domain. This paper performs an empirical study with a sample of Spanish farms valuing biological assets at HC and a sample applying FV, finding no significant differences between both valuation methods to assess future cash flows. However, most tests reveal more predictive power of future earnings under fair valuation of biological assets, which is not explained by differences in volatility of earnings and profitability. The study also evidences the existence of flawed HC accounting practices for biological assets in agriculture, which suggests scarce information content of this valuation method in the predominant small business units existing in the agricultural sector in advanced Western countries.

Original languageEnglish
Pages (from-to)87-113
Number of pages27
JournalRevista de Contabilidad-Spanish Accounting Review
Volume14
Issue number2
DOIs
Publication statusPublished - 2011
Externally publishedYes

Keywords

  • Biological assets
  • Cash flow prediction
  • Earnings prediction
  • Fair value
  • Historical cost

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