The quality of fair value measures for property, plant, and equipment

Based on Statement of Financial Accounting Concepts (SFAC) No. 2, this paper argues for fair value measures of property, plant, and equipment and challenges the primary arguments in support of maintaining the current status quo in the United States—strict historical costs for all property, plant, and equipment unless the asset is impaired. We first provide a summary of the valuation of property, plant, and equipment internationally noting that revaluations to fair value are an acceptable practice under international and many national accounting standards. We also provide a brief historical perspective of accounting in the United States where prior to 1940 the upward valuation of property, plant, and equipment was an acceptable accounting alternative. We then evaluate fair value versus historical cost measures for property, plant, and equipment based on the qualitative characteristics of accounting information in SFAC No. 2. We argue that fair value measures for property, plant, and equipment are superior to historical cost based on the characteristics of predictive value, feedback value, timeliness, neutrality, representational faithfulness, comparability, and consistency. Verifiability appears to be the sole qualitative characteristic favoring historical cost over fair value. Finally, we address key measurement concepts for property, plant, and equipment. The United States could learn from the practices already established in other countries and in International Financial Reporting Standards by reconsidering fair value measures for property, plant, and equipment.