Challenges of the Knowledge Society (May 2018)
HISTORICAL COST ACCOUNTING OR FAIR VALUE ACCOUNTING FROM THE EARNINGS AND ASSET IMPAIRMENT PERSPECTIVE
Abstract
This article studies the earnings and practice of depreciation of assets through the two accounting valuation systems: fair value accounting or historical cost accounting. It balances the methods used in each of the two accounting valuation systems: historical cost accounting and fair value accounting. Many firms that did use value in use to arrive at their asset impairment loss will have declined a net realizable value figure as this would have been reduce than the value in use figure. If the firms had used net realizable value instead of value in use, this would have cause a higher asset impairment charge. For the firms that use net realizable value for the purposes of determining the asset impairment charge this indicates that their net realizable value is higher than any calculated value in use figure. In this way, that many firms report using more than one valuation method depending on the type of asset that is impaired and the results become difficult to indicate any conclusions based on the information available, despite the initial observation that value in use appears very used. I claim that the use of fair value concept may have a different effect on the earnings quality for Romania because of less liquid or inactive markets. In this way, fair values will more probably be estimated by the use of valuation techniques which enables earnings management and could lead to lower quality of reported earnings. Then, earnings under more fair value-based reporting system have less aggregate quality rankings for firms in Romania. I get the evidence that the extent of more fair-value-based other comprehensive income is negatively related to aggregate earnings quality for firms
