Why Companies Choose the Cost Model over Fair Value for Investment Property? Exploratory Study to Indonesian Listed Companies
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2017-06-14
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Abstract
This research is based on the absence of underlying reasons affecting companies to report investment property under the cost model, rather than the fair value model. Considering the recent increase in real estate value in Indonesia, the application of the fair value model could provide positive contribution for companies’ profit figure. However, 86.3% out of 95 listed companies reported investment property under the cost model, which may produce lower profit figure compared to fair value model. Therefore, this research is aimed to gain insight on the considerations affecting the conservatism in investment property reporting.
In order to obtain the answers, this research is designed as a mixed method, incorporating quantitative research and qualitative research. The quantitative research utilizes the logit model regression, obtaining 95 listed companies that reports investment property in 2014. The research tested leverage, company size, institutional ownership, and scope of business variables. The qualitative research is conducted to enrich information uncovered through the quantitative research. This is conducted by obtaining information pertaining to the reasons affecting the decision on accounting policy to report investment property from business practitioners.
Results from quantitative research shows that leverage, company size, and institutional ownership are insignificant in affecting companies to use of the cost model. Nevertheless, companies in the real estate business are highly probable to use the cost model for investment property. Through the qualitative research, taxation cost is proved to be the underlying reason made by companies to avoid using the fair value model. Tax consideration causes companies to neglect achieving the advantage to report higher profit in a prospering market. The volatility risk due to the cyclical nature of the real estate industry causes companies to avoid using the fair value model. And last, conservative owner drive companies to use the cost model for investment property. This research contributes in adding literature regarding the option of accounting policy by documenting the determining factors. In addition this research opens up path for more rigorous studies on accounting conservatism in relation with accounting policy.
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Accounting policy choice, accounting conservatism, cost model