IIARD International Institute of Academic Research and Development

Journal of Accounting and Financial Management (JAFM )

E-ISSN 2504-8856
P-ISSN 2695-2211
VOL. 7 NO. 2 2021

---

Historic Cost Accounting versus Fair Value Accounting: A Comparative Effect on Profitability: Evidence from Nigeria Quoted Manufacturing Firms

Amaefule Leonard Ph.D, Awheme Blessing Ewoma M.Sc., Okoro Charles Ugochukwu HND, M.Sc. ANAA & Davies, Stanley Diepiriye, M.Sc. ACA, ACIT, ANAA

---

Abstract

This study examined the effect of Historic Cost Accounting (HCA) and Fair Value Accounting (FVA) practices on profitability of quoted manufacturing firms in Nigeria. Secondary data was obtained from 10 quoted manufacturing firms from 2015 - 2019 from the Nigerian Stock Exchange Fact book and annual reports of the quoted manufacturing firms. The variables considered were profit after tax as dependent variable while historic cost of equity, historic cost of non-current assets, fair value cost of equity and fair value cost of non- current assets were used as predictor variables. Panel data methodology was employed and the fixed effects model was used as estimation technique at 5% level of significance. Fixed effects, random effects and pooled estimates were tested and the Hausman test was used to determine the best fit. The fixed effect result shows fair value accounting can explain 55.1 percent variation on profit after tax. The beta coefficient of the variables shows that the variables have positive no significant effect on profit after tax of the manufacturing firms while historic cost accounting explain 72.5 percent variation on profit after tax. The beta coefficient of the variables shows that the variables have positive but no significant effect on profit after tax of the manufacturing firms. The study observed that there is ambiguity in the interpretation of the instrument conveying the principles, recommendations and application of fair value accounting method and this has given rise to several arbitrary and conflicting interpretations – especially as it suits the reporting body corporate. Premised upon the foregoing, the study recommends among others that accounting professionals and research fellows; relevant accounting institutions and government agencies, and system operators should continue to address the issue of measurement with a view to providing sustainable solution

keywords:

Historic Cost Accounting, Fair Value Accounting, Profit after Tax, Non-Current Assets, Cost of Equity

---

References:

Ahmad, F.B. & Aladwan (2015). The effect of fair value accounting on Jordanian investment
properties: An empirical study on Jordanian listed real estate companies. International
Journal of Financial Research, 6(4), 99 – 113.
Alaryan, L.A., Haija, A.A.A. & Ali, M.A. (2014), The Relationship between Fair Value
Accounting and Presence of Manipulation in Financial Statements, International
Journal of Accounting and Financial Reporting, 4(1), 221-237.
AlJeburi, F. A & Al-Yasiri K. N,( 2019)Application of IFRS 13 and its Impact on the Sincerity
and Fairness of the Financial Statements for Iraqi Companies, Journal of Advanced
Research in Dynamical & Control Systems, Vol. 11, 01-Special Issue, 1787 - 1798
Alkababji, M.W. (2016). The extent of compliance with the disclosure requirements for Fair
Value Measurement (IFRS13): A Study on the Annual Reports of Palestinian
Corporations, European Journal of Accounting, Auditing and Finance Research, 4(4),
65 – 88.
Al-Sakini, S. & Al-Awawdeh, H. (2015). The effect of accounting conservatism and its impacts
on the fair value of the corporation: An empirical study on Jordanian public joint-stock
industrial companies.International Journal of Business and Social Science 6(7), 229 –
241.
Amaehufule, L. I, Okoye, E. I, Kalu, E. O, & Nwosu, S. U. (2018). Fair Value Measurement
versus Historical Cost Accounting: A comparative effect on firms’ performance in
Nigeria. Research Journal of Finance and Accounting, 9(10), 165 – 175.
Amanamah, R. & Owusu, E. K. (2016), Perception on Fair Value Measurement in Ghana:
Evidence from Account Personnel, African Journal of Applied Research (AJAR), 2 (2),
22-34.
Ashford, C.C. (2011), Fair Value Accounting: Its Impacts on Financial Reporting and how it
can be Enhanced to provide more Clarity and Reliability of Information for Users of
Financial Statements, International Journal of Business and Social Science, 2(20), 12-
19.
Awang, R. N., & Mokhtar, M. Z. (2012), Comparative Analysis of Current Values and
Historical Cost in Business Zakat Assessment: Evidence from Malaysia,International
Journal of Business and Social Science, 3(7), 286 – 298.
Bessong, P. K., & Charles, E. (2012), Comparative Analysis of Fair Value and Historical Cost
Accounting on Reported Profit: A Study of Selected Manufacturing Companies in
Nigeria,Research Journal of Finance and Accounting, 3(8), 132 – 249.
Dickinson, G. & Liedtke, P.M. (2004), Impact of a Fair Value Financial Reporting System on
Insurance Companies: A Survey, The Geneva Papers on Risk and Insurance, 29(3),
540-581.
Edward, E. O., & Bell, P. W. (1991), Theory of Measurement of Business Income, Los
Angeles: University of California Press,International Journal of Scientific Research
and Innovative Technology,4(9),80-90.
Elfaki, A.A.A. & Hammad, S.M.E. (2015), the Impact of the Application of Fair Value
Accounting on the Quality of Accounting Information: An Empirical Study on a Group
of Companies Listed on the Khartoum Stock Exchange, International Journal of
Academic Research in Accounting, Finance and Management Sciences, 5(1), 148–160.
Emerson, D. J., Karim K. E., & Rutledge, R. W. (2010), Fair Value Accounting: A Historical
Review of the Most Controversial Accounting Issue in Decades,Journal of Business
and Economic Research 8(4), 77 – 86.
Ene, G.S., Chilarez, D. & Dindire, L.M. (2014), Relevance and Credibility of the Fair Value
Measurement during the Crisis, Procedia Economics and Finance, 8, 306 – 312.
Ghafeer, N.M. & Abdul-Rahman, A.A. (2014), The Impact of Fair Value Measurements on
Income Statement: IFRS 13 "An Application Study in Insurance Companies”, Research
Journal of Finance and Administration, 5(16), 120-127.
Harward & Upton (1961), “Introduction to Business Finance”, Mc Graw Hill, New
York.
IASB (2011), International Financial Reporting Standard 13 Fair Value Measurements,
Available on-line at: http://eifrs.ifrs.org
Ijeoma, N. B. (2013), The Impact of Fair Value Measurement on Financial Instrument of Firms
in Nigeria, International Journal of Advancements in Research & Technology, 2(11),
90 – 96.
Ijeoma, N. B. (2014), The Contribution of Fair Value Accounting on Corporate Financial
Reporting in Nigeria, American Journal of Business, Economics and Management,
2(1), 1 – 8.
Ikpefan, O.A. & Akande, A.O. (2012), International Financial Reporting Standard (IFRS):
Benefits, Obstacles and Intrigues for Implementation in Nigeria, Business Intelligence
Journal, 5(2), 299-307.
Isenmila, P.A. & Adeyemo, K.A. (2013), Mandatory Adoption of International Financial
Reporting Standards (IFRS) in Nigeria: The Unresolved Institutional Question,
Mediterranean Journal of Social Sciences, 4(1), 175-184.
Jaijairam, P. (2013), Fair Value Accounting vs. Historical Cost Accounting, the Clute Institute:
Review of Business Information Systems, 17(1), 1-6.
Jarolim, M. & Öppinger, C. (2012), Fair Value Accounting in times of Financial Crisis, ACRN
Journal of Finance and Risk Perspectives, 1(1), 67-90.
Karen, T. C. & Alan, D. (2011), An Evaluation of the Implementation of Fair Value
Accounting: Impact of Financial Reporting, Journal of Business & Economics
Research 9(1), 1 - 16.
Liu, Y. (2010), The Study of the Application Status of Fair Value Accounting in China.
International Journal of Business and Management, 5(9), 155-158.
Mati?, D. & Bonaci, C. G. (2008), Fair Value Accounting for Financial Instruments–
Conceptual Approach and Implications. Timisoara Journal of Economics 1(2), 191 -
206.
Okafor, C. & Ogiedu, O. (2012), Perceptions of Fair Value Accounting: Evidence from
Nigeria, JORIND, 10 (3), 417 – 432.
Osisioma, B.C., Okoye, E.I. & Ijeoma, B.N. (2014), A Model for Implementation of Fair Value
Accounting in Corporate Financial Reporting, SOP Transactions on Economic
Research, 1(2), 10 – 34.
Rodríguez-Pérez, G., Slof, J., Solà, M., Torrent, M., & Vilardell, I. (2011),Assessing the Impact
of Fair-Value Accounting on Financial Statement Analysis: A Data Envelopment
Analysis Approach. ABACUS 47(1), 61 - 84.
Umobong, A.A. (2015), IFRS Adoption and Firms’ Performance: A Comparative Analysis of
Quoted Food and Beverage Manufacturing Firms In Nigeria. European Journal of
Accounting Auditing and Finance Research, 3(8), 70-83.
Zhuang, X. & Luo, Y. (2015), Relevance between the Degree of Industrial Competition and
Fair Value Information: Study on the Listed Companies in China, Journal of Industrial
Engineering and Management, 8(3), 894 – 908.

DOWNLOAD PDF

---

Back