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

Tiago Cardão-Pito, Jorge Barros


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.


“Fair value”, historical cost, taxes, public revenue.


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