Fair Value or Historical Cost?

A Decision Theory Approach
on the Decision Process in Some Atlantic Canadian
Mostaq Hussain, Angel Linero, Greg Laprise, Elizabeth McCarville, Xu
Zhong and Mostaq M. Hussain
It is well known that International Financial Reporting
Standards (IFRS) are engineered for the improvement of
company transparency, especially for the adoption of the Fair
Value model (FV) over traditional Historical Cost methods
(HC) of valuation. Conversely, Accounting Standards for
Private Enterprises (ASPE) offers fewer options for fair market
valuations and encourages the use of the cost method for
different reasons. In light of the recent adoption of IFRS in
Canada and the corresponding shift from Generally Accepted
Accounting Principles (GAAP) to ASPE, IFRS must be
adopted for publicly traded companies. However, private
companies are given a choice between the two
methods. ASPE was designed to ease implementation
between GAAP and ASPE(including easier valuation through
historical cost), while IFRS main advantage is the increased
transparency (through the use of fair value accounting). This
study attempts to explore the decision process involved in the
adoption of either standard referring to four different
enterprises in New Brunswick, Canada. That is, this research
tries to find the ultimate reasons for companies to make their
accounting choice on adopting fair value or historical
cost. This explanatory case study is carried out within the
decision theoretical approach. Particular emphases are given
on the methods, motivations and efficiencies behind the
decisions made (IFRS versus ASPE, and FV versus HC).
This research finds that any effect that reporting standards
(IFRS and ASPE) have on fair value play a limited role in the
decision process between fair value and historical cost. It has
also been found in some cases that transparency of the
financial statements and financial stability are not mutually
exclusive, and in fact, play a key role in the decision making
process. Companies that have tendencies to choose the
valuation method, they effectively portray the ideal
combination of transparency and stability. This study reveals
that companies of different sizes and within different industries
have drastically diverse decision processes. The decision that
is right for one company could be absolute wrong for the next
door’s one. Thus, it is difficult to derive an all encompassing
conclusion on the choice between fair value and historical
cost, or even on the decision process a company must apply
to make the decision.

Mostaq Hussain, Angel Linero, Greg Laprise, Elizabeth McCarville, Xu Zhong and Mostaq M. Hussain
Associate Professor of Accounting, Faculty of Business, University of New Brunswick-Saint John, 100
Tucker Park Rd, Saint John, NB E2L 4L5, CANADA