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Accounting for Changing Prices: The Value Relevance of Historical Cost, Price Level, and Replacement Cost Accounting in Mexico
Author(s) -
Gordon Elizabeth A.
Publication year - 2001
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.00008
Subject(s) - historical cost , inflation (cosmology) , sample (material) , economics , price level , value (mathematics) , cost price , fair value , cost accounting , relevance (law) , accounting , econometrics , monetary economics , statistics , chemistry , physics , mathematics , chromatography , theoretical physics , political science , law , stock market , paleontology , horse , biology
This paper investigates the value relevance of historical cost, price level and replacement cost accounting using a sample of Mexican firms from 1989 to 1995. It contributes to prior research by distinguishing between two distinct aspects of changing prices:(1) the change in the general price level, and (2) the change in the value of specific non‐monetary assets. I select Mexico to examine because it is unique in requiring and disclosing separately price level and replacement cost adjustments. A sample of Mexican firms also addresses a key reason cited for mixed results in previous assessments of the usefulness of price level and replacement cost accounting using United States data: the effects of inflation are too weak to detect. High rates of inflation in Mexico, ranging between 7% and 52% during the sample period, mitigate that potential problem. Results indicate that replacement cost adjustments are relatively and incrementally relevant beyond historical cost and price level measures while price level adjustments are incrementally value relevant beyond historical measures.