Cost vs. Fair Value Model for Investment Property

Read the full paper from a group of researchers from Padjadjaran University and Bina Nusantara University in Indonesia on “WHY COMPANIES CHOOSE THE COST MODEL OVER FAIR VALUE FOR INVESTMENT PROPERTY? EXPLORATORY STUDY ON INDONESIAN LISTED COMPANIES”.

Despite the favourable impact on the profit figure from the fair value model under IAS 40, most of the Indonesian listed companies reported investment property using the cost model. This research aims to reveal the factors affecting the decision to apply a cost model instead of fair value. Using logit model regression from 96 Indonesia listed companies during 2013-2015, this study tests if firm characteristics (i.e., size, profitability, leverage and growth), ownership (i.e., institutional ownership and family shareholders) and industry type (real-estate or non-real estate) influence firms’ decision to use cost model or fair value for investment property. Three business practitioners from the listed real estate company were also interviewed to gain a deeper understanding on the accounting policy decision.

Results from regression analysis have shown that profitable firms and firms in real estate industries are more likely to apply cost model than fair value model for investment property. On the other hand, firms with a high percentage of institutional investors and higher growth are less likely to use the cost model. Results from interviews have revealed that the taxation complexity has been the main reason to avoid the fair value model. Respondents also have mentioned the volatility risk and owner’s conservatism as other reasons for avoiding fair value model.

Full paper is made available at http://www.ijbs.unimas.my/images/repository/pdf/Vol20-no1-paper10.pdf