Reporting Model Influences Balance Sheet and Net Income Forecasts Differently, Says Research From Syracuse University

Newswise — New research by Lihong Liang, assistant professor of accounting at the Martin J. Whitman School of Management at Syracuse University, and Edward Reidl, associate professor of accounting at Boston University, examines how the reporting model for a firm’s operating assets affects analyst forecast accuracy.

The authors predicted and found higher NAV forecast accuracy for UK relative to US firms and lower EPS forecast accuracy for UK firms when reporting under the full fair value model of international financial reporting standards (IFRS). Overall, they conclude, the results indicate that the fair value reporting model enhances analysts’ ability to forecast the balance sheet, but the full fair value model reduces their ability to forecast net income.

“We contrast UK and US investment property firms having real estate as their primary operating asset, exploiting that UK (US) firms report these assets at fair value (historical cost). We assess the accuracy of a balance sheet-based forecast (net asset value, or NAV) and an income statement-based forecast (earnings-per-share, or EPS),” explains Liang.

The paper, titled “The Effect of Fair Value versus Historical Cost Reporting Model on Analyst Forecast Accuracy,” has been accepted for publication in the May 2014 issue of The Accounting Review. Read the full paper here.