On Cost Tradeoffs Between Conservative and Market Value Accounting

Joseph Bachar, Nahum D. Melumad and Guy Weyns
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Joseph Bachar: Arthur Andersen
Nahum D. Melumad: Arthur Andersen
Guy Weyns: Arthur Andersen

Review of Accounting Studies, 1997, vol. 2, issue 1, No 1, 7-34

Abstract: Abstract We identify a cost tradeoff relevant to the comparison of alternative accounting regimes. We compare equilibrium deadweight losses, due to transacting and auditing, across the historical cost, lower-of-cost-or-market, and market value regimes. We provide conditions for each of the regimes to dominate the other two. We show that while market-value accounting is likely to prevail in an inflationary setting, it may also be optimal under deflation. Similarly, lower-of-cost-or-market is likely to prevail in a deflationary setting, though it may also be optimal under inflation. Last, historical cost prevails only if the variation in asset prices is sufficiently high.

Keywords: Public Finance; Asset Price; Alternative Accounting; Deadweight Loss; Historical Cost (search for similar items in EconPapers)
Date: 1997
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DOI: 10.1023/A:1018314526438

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