Does Fixed Assets Revaluation Create Avenues for Financial Numbers Game? Evidence from a Developing Country

Abstract

The study reveals the extent of changes in selective financial numbers caused by fixed asset revaluation (FAR) and explores whether there was a management motive for playing the financial numbers game through using the FAR model. The data set consists of a sample of 142 listed companies purposively selected from 13 industries. The study found a significant impact of FAR on the net asset value (NAV), fixed asset intensity (FAI), and debt-to-equity ratio (DER). These findings are supported by the political cost and the debt covenant hypotheses. The study also observed a high growth of fixed assets by 9.5% to 14,603.8% resulting from FAR. More revealing is that FAR increased NAV in revaluer companies by an average of 427.20% as compared to 6.86% in non-revaluer companies. Even some companies with negative NAV took resort on FAR to show positive NAV. Besides, revaluer companies managed to reduce their DER by 70.45% as opposed to an increase of 8.45% in non-revaluer companies. Hence, the study concludes that most of the publicly-listed companies are involved in financial numbers game by the use of the FAR model. To build confidence among investors, companies should practice FAR rightly and disclose related information to help reduce information asymmetry.

Timing, Recurrence, and Effects of Fixed Asset Revaluation: Evidence From Bangladesh

“…The application of the FAR model as an accounting policy choice has been a topic of long-standing debate among academics, investors, corporate managers, standard setters, and regulators (Christensen and Nikolaev, 2013;Rahman and Hossain, 2020). Therefore, empirical research on asset revaluation has been undertaken in many developed and developing countries covering the issues, such as the motivation behind FAR, factors influencing FAR, the timing of revaluation, the effects of FAR on future firm performance, and so forth.…”

“…The paper has emphasized the honesty of management behind the FAR decision. The study of Rahman and Hossain (2020) observed that FAR has a significant effect on the net asset value (NAV), FAI, and DER of companies in the subsequent year of revaluation. The study also found an increase of 427% in NAV and a decrease of 70% in DER originated essentially by FAR.…”

“…Although FAR is a usual accounting policy decision in many developed and developing countries the historical cost model is still the dominant practice in Bangladesh. However, the use of FAR is gradually increasing in Bangladesh (Rahman and Hossain, 2020).…”

“…Although there are many justifications for FAR, corporate entities perform it on an opportunistic basis to capture some benefits (Rahman and Hossain, 2020). The study of Iatridis and Kilirgiotis (2012) has also revealed that firms usually practice FAR when they expect to have the highest favorable financial outcome.…”

“…Despite many suspicions and criticisms about the fairness and application of the FAR model as mentioned by Majercakova and Skoda (2015), Rahman and Hossain (2020), The probe committee formed to investigate the stock market crash in Bangladesh in 2010-2011 has indicated FAR as one of the main reasons behind the crash (Khaled, 2011). Although many studies on FAR have done in developed countries, the findings concerning the timing, frequency, and accounting effects of FAR may not be identical in Bangladesh.…”