Jurnal Umum
Fair Value or Conservatism: The Case of the Gold Industry
This researcb examines the information content of historical cost and fair value
reporting using a sample of gold firms. Tbe gold industry has had a long-standing
history of relying on industry practice to justify the recognition of revenue at the
completion of production (the production method), before the identification of a
specific purchaser.! The mechanics of this method of revenue recognition effectively
mark inventory on the balance sheet to market. As a result of recent accounting
pronouncements, described in section 2 of this paper, this practice has changed
such that gold producers are now required to carry inventory on the balance sheet
at cost, because they are disallowed from recognizing revenue on refined gold
before the point of sale (the sales method).
I use a sample of Canadian gold producers to study the trade-offs between fair
value accounting and conservatism in reporting. Although accounting standardsetters
are increasingly moving toward fair value recognition in financial statements,
regulators are also eager to stem the tide of what they perceive to be aggressive
revenue recognition. Yet the two objectives are mutually exclusive, at least in some
instances. Clearly, in the case of the gold industry, fair value reporting of gold
inventories causes revenue to be recognized earlier than if inventory were carded at
cost.
Comparisons of historical cost and fair value accounting are important issues
for standard-setters to consider because there is an increasing move to permit, and
in some cases, require, fair value accounting. For example, in a proposal highly
related to my study, the Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board (IASB) have a joint project on revenue
recognition that will explain and illustrate a revenue recognition approach based on
the measurement of assets and liabilities at fair value, and contrast this approach
with a "customer consideration" model based on historical costs.^
New standards incorporating fair value accounting are being proposed that are
based largely on theoretical rather than empirical evidence because it is impossible
to provide an empirical comparison of historical cost and fair value accounting
except in circumstances where the two models coexist. The Canadian gold industry
represents an opportunity to contrast the two methods at a very fundamental level
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