The application of “fair value” accounting standards to the income statements of companies listed in the Portuguese Stock Index-20 (PSI-20)

Abstract

Purpose:

“Fair value” accounting standards are not consensual. Supporters claim that they offer a methodology to find the “correct” value of accounting items, whereas critics contend that “fair value” accounting reduces the reliability of financial statements through a complex and unpractical method based on subjective information. Still, the impacts of “fair value” accounting upon taxes and public revenues are rarely discussed.

Design/methodology/approach:

The Portuguese case allows us to study taxation and public revenues. Through European Union norms, “fair value” standards have become mandatory after 2005 for companies listed in European stock-exchanges. Nevertheless, Portuguese corporate tax law was reformulated in 2010 to strongly restrict the use of “fair value” for taxation purposes. We study the use of “fair value” in the Income Statements of the largest companies listed in the Portuguese exchange between 2005 and 2012.

Findings:

If Portugal had not adopted “fair value” standards, its tax revenue would have been higher. Over all analyzed years and in almost all studied companies, average “fair value” adjustments are negative. Although a statistical association between negative adjustments and the economic cycle was found, this statistical association is not very strong. Therefore, the economic cycle cannot be used as the only explanation for the use of “fair value”.

Originality/value:

This paper demonstrates that discussions concerning the “fair value” accounting method must not ignore its possible impacts on government taxes and public revenue.

Keywords:
“Fair value”; historical cost; taxes; public revenue

Resumo

Objetivo:

O método contabilístico pelo chamado “justo valor” não é consensual. Seus defensores dizem que permite encontrar o “valor correto” dos itens contabilísticos. Os críticos declaram que reduz a confiabilidade das demonstrações financeiras através de uma metodologia complexa, difícil de implementar e apoiada em informação subjetiva. Contudo, o debate tende a ignorar os impactos desse método nos impostos e nas receitas públicas.

Metodologia:

O caso português permite estudar os impostos e receitas públicas. Normas da União Europeia instruíram as empresas cotadas nas bolsas europeias a adotar as normas internacionais de contabilidade que preveem o “justo valor” após 2005 (inclusive). Contudo, o código do imposto empresarial português foi reformulado em 2010 de forma a restringir fortemente o “justo valor” para efeitos fiscais. Estudamos a utilização do “justo valor” nas Demonstrações de Resultados das maiores empresas cotadas na bolsa portuguesa entre 2005-2012.

Resultados:

Se Portugal não tivesse adotado as normas do “justo valor”, seus recolhimentos de impostos teriam sido superiores. Em todos os anos, e em quase todas as empresas estudadas, os ajustes médios são negativos. Apesar de ter sido encontrada alguma associação estatística entre os ajustes negativos e o ciclo econômico, ela não é muito forte. Como tal, o ciclo econômico não pode ser apresentado como a única explicação para o uso do “justo valor”.

Contribuições:

Este estudo demonstra que os debates sobre o método contabilístico do “justo valor” não podem ignorar seus possíveis impactos em termos fiscais e de receitas públicas.

Palavras-chave:
“Justo valor”; custo histórico; impostos; receitas públicas

Texto completo disponível apenas em PDF.

Full text available only in PDF format.

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• 13
  Evaluation process: Double Blind Review

• Supporting Agencies: ADVANCE Research Center at ISEG, and Portuguese national funding agency for science, research and technology (FCT) Project UID/SOC/04521/2013.

• 1
  International Accounting Standards (until 2000), and International Financial Report Standards (after 2001).

• 2
  Diretriz Contabilística n.º 13 (DC 13, § 2), Diretiva 2001/65/CE, § (11) - Jornal Oficial das Comunidades Europeias L283/29.

• 3
  Financial statements. CMVM, (S.l.), (between 2005 and 2013). Available in: (http://web3.cmvm.pt/sdi2004/emitentes/contas_anuais.cfm). Access: Jan. to Jun. 2013.

• 4
  EDP Renováveis and REN, two companies previously integrated in the energy public company, EDP, which was privatized.

• 5
  Note that according to the international accounting standards, while value reductions tend to be recorded in the income statement, some revaluations are recorded directly in equity, only transiting to the Income Statement when a significant event occurs.

Contribution of each Authors:

Annex 1 - Integrated companies in the PSI-20 index during the study period [2005-2012], its net balance of adjustments by the criterion of “fair value” [values 000] in the period, and average values and annual variability of these adjustments According to their assets.

Annex 2 - Use the “fair value” for the large Portuguese companies over the 2005-2012 period

A
Breakdown by items

B
Companies that have the largest net “fair value” adjustments in absolute values

Publication Dates

• Publication in this collection
  Jan-Mar 2016

History

• Received
  24 Apr 2015
• Accepted
  20 Apr 2016