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Why Companies Choose the Cost Model over Fair Value for Investment Property? Exploratory Study to Indonesian Listed Companies

23 December 2019
27 January 2020
14 February 2020

William Pratama Naulibasa, Ersa Tri Wahyuni

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Despite of the favourable impact to the profit figure from the fair value model under IAS 40, most of Indonesian listed companies reported investment property using the cost model. This research aims to reveal the factors affecting the decision to apply cost model instead of fair value. Using logit model regression from 96 Indonesia listed companies, this research tested if leverage, company size, institutional ownership, and scope of business (real-estate or non real-estate) variables influence the accounting policy choice. Three business practitioners from listed real estate company were also interviewed. Results from regression analysis shows that all variables do not have significant influence except for the scope of business. Real Estate companies are significantly more favourable to choose cost model than non real-estate companies. The interviews revealed that the taxation complexity has been the main reason to avoid the fair value model. Respondents also mentioned the volatility risk and owner’s conservatism as other reasons of avoiding fair value model.

Keywords: Accounting policy choice, accounting conservatism, cost model, investment property.


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