The Case Against Asset Revaluations

Abstract

The upward revaluation of non-current assets is a common feature of contemporary accounting in Australia. This paper presents a case against the practice. The effects of revaluations are examined and possible reasons why firms revalue are considered. It is argued that asset revaluation is theoretically unsound, being inconsistent with the accounting structure within which it occurs. It is concluded that there are significant costs but few obvious benefits associated with revaluation.

Asset Write‐Offs in the Absence of Agency Problems

“…Influenced by the evidence available from the asset revaluation literature, we incorporate two additional control variables, the level of financial debt (Henderson and Goodwin, 1992;Whittred and Chan, 1992;Brown et al, 1992;Cotter and Zimmer, 1995;Gaeremynck and Veugelers, 1999;and Lin and Peasnell, 2000) and liquidity (Whittred and Chan, 1992;Brown et al, 1992;Cotter and Zimmer, 1995;and Lin and Peasnell, 2000). The majority of the sample SPCs are equity financed, but those that use financial debt will, to some extent, be subject to debt covenants, which often prescribe a certain maximum debt-to-asset ratio.…”

An Investigation of Revaluations of Tangible Long-Lived Assets

“…Three recent Australian studies (Brown, Izan, and Loh [1992], Henderson and Goodwin [1992], and Whittred and Chan [1992]) suggest and explore several explanations for the incidence of revaluations which include:…”

The Impact of Impending Corporate Failure on the Incidence and Magnitude of Discretionary Accounting Policy Changes

“…Although not generally permitted in North America, in Australia the revaluation of noncurrent assets is a generally accepted accounting practice (Henderson & Goodwin, 1992). Except for the revaluation costs (e.g.…”

“…If firms revalue depreciable assets, however, these effects are accompanied by lower periodic profit figures arising from increased depreciation charges. Additionally, net profit will be affected upon sale of any revalued asset, as the gain (loss) on sale will be lower (higher) due to the asset's higher carrying amount (Henderson & Goodwin, 1992). Thus, asset revaluations have the potential to affect many of the financial ratios commonly considered indicators of company financial health and employed in corporate failure prediction models.…”

“…Thus, asset revaluations have the potential to affect many of the financial ratios commonly considered indicators of company financial health and employed in corporate failure prediction models. Henderson & Goodwin (1992) contended that upward asset revaluations may improve perceptions of a company through reduced leverage. This may also allow managers to avoid breaching a debt covenant.…”