Value allocation – contribution and risk to the reliability of financial reporting
2016
Our study argues in favor of the reliability of fair value estimates for correct decision making by the
stakeholders of the
financial reporting market. The analysis is singularized to emergent contexts, as the Romanian market is the case study, and it is focused on the process of value allocation between
the components of a group of assets. Having an application on
fixed assets, the paper shows how
fair value estimation is critical and implies risks on such an atypical market. The process of value
allocation may bring a high level of arbitrariness to fair value accounting, this being crucial to apply
correctly the valuation methodology in relation to the nature of the asset and market information
available, and the selection of the allocation keys. The empirics of our study show a consistent
expertise of Romanian valuators, as the most frequently used method for value allocation is the
deduction of the value of those assets that was estimated based on the market approach, and not
the values that were estimated based on the cost or income approach. Other
findings show the
frequent use of replacement cost, gross or net, to the detriment of book value, a very important
aspect for an emergent market, even more so as revaluation in Romania does not guarantee that
dedicated valuation methodology was used. These results are all the more important as land and
buildings were the majority of
fixed assets valuated, with the highest values as a result of the real
estate bubble prior to the financial crisis, and with an essential role in the activity of the companies.
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