The Effects of Fair Value on the Matching of Revenues and Expenses: The Case of Asset Revaluations

Fábio Moraes da Costa, Carol Liu, Gina Cavalier Rosa and Samuel L. Tiras
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Fábio Moraes da Costa: FUCAPE Business School, Av. Fernando Ferrari, 1358 – Goiabeiras, Vitória, ES, CEP 29075-053, Brazil
Carol Liu: W. P. Carey School of Business, Arizona State University, Tempe, AZ 85287, USA
Gina Cavalier Rosa: College of Business Administration, The University of New Orleans, 2000 Lakeshore Drive New, Orleans, LA 70148, USA
Samuel L. Tiras: Kelley School of Business, Indiana University-Indianapolis, 801 W. Michigan Street, Indianapolis, IN 46202, USA

The International Journal of Accounting (TIJA), 2020, vol. 55, issue 04, 1-24

Abstract: Researchers and practitioners have expressed concern that matching has declined over time, as evidenced by a decreasing association between revenues and expenses. They attribute this decline to the shift in financial reporting from a revenue–expense view that emphasizes matching to an asset–liability view that emphasizes the measurement of economic resources that incorporates more fair values. When revenues rise with inflation but the expenses remain tied to historical costs, the two streams tend to diverge. We hypothesize that upwardly revaluing the long-lived fixed operating assets resets the expense stream; thus, changes in revenues will be more closely associated with changes in expenses for firms that revalue than firms that do not upwardly revalue. Based on a sample of United Kingdom firms, we find evidence supporting our expectations, particularly in those higher inflationary industries.

Keywords: Asset revaluations; matching; fair value accounting; IFRS (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S1094406020500195

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