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VALUATION OF FAIR VALUE ACCOUNTING ON ASSETS VALUATION IN PUBLIC

LIMITED COMPANIES: A CASE STUDY OF PETROLEUM COMPANIES IN
NIGERIA

Article in Business And Management Studies An International Journal · January 2022

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UATION OF FAIR VALUE ACCOUNTING ON ASSETS

ATION IN PUBLIC LIMITED COMPANIES: A CASE STUDY OF
OLEUM COMPANIES IN NIGERIA ·

ll fo Patricia and Nzekwe Abumchukwu

Orizu College of Education, Nigeria

nis sr :.1 Jy evaluates tht; impa ·t f'" · - · J · ·

. . . . c o 1au va ue accountrng on asset valuation in public limited companies
it cus on petroleum companies in Nigeria:The data for the study were generated through primary
ondary sources. The secondary data used were annual reports and publications from Nigeria
xchange. Also data on fair value and historical cost of the assets of the companies were obtained
reau of statistics as published by the Central Bank of Nigeria and published annual financial
, •1t of the companies . The major instrument for primary data collection was the questionnaire.
·l1 ~) -: ,d umcnt was su!Jjcctcd to bo th face and content valid it,; · by experts. The dala generated for this
ru ere ·analyzed using both descriptive and inferential statistics. T-test statistical tool was used in
·ning whether there was significant difference in assets valued in the application of these
s. The resu,lt of the study showed that there -was significant difference between assets valued at
al cost and fair_
.
value method. It was also discovered that price level changes was the principal .
,· , '.:,on s ib lc for the di fferenc e in asset valuation and that of financial statement prepared under
hLSe · ,elhods produced different information for the users. The implication of findings is that financial
ta • , ents prepared under historical cost method understate the '[alue of the assets as against fair value
. Another implication is that, the financial report basetl on historical cost method of asset
on may be misleading to the users of accounting information. Based on t~e study,, the res_ear~h
ds among others that ·companies in petroleum industry should.adopt fair value accountmg m
en of their asset 'research also suggested that where fair value accountmg
uation · 1s· not po~s1"bl e, the
!
·ease should be stated as note to account so that users of accounting information can be well mformed.
!
rds: Historical cost, Asset valuation, Price level, Fair value, Current cost.

f.,, (l·n ,nt i ""

'1·•1 -
· a b ou t fair value accounting · Disclosing assets at their fair
f I'. value as

~o:
,-1 , has been much d1scuss10n •
t is referred by some but opposed by others. T~e use o 1atr va1ue

1
' t" . . •
e~ to their h1stoncal deca~es rimarily for financial assets. In recent years, both the Financial
t1~g has been around do(F ASB) ~d the International Accounting Standard Board (IASB) have
ntmg Standards Boar . . •
tnwl'trds more extensive use of fair value accountm_g. .
·· · • ' ' · k th information on most tmanctai reports di1fert;t1l irv1n
. . neral pnce leve 1 ma es e . . . b
rise to mcrease m ge . f financial reporting is to provide mformat10n a out
the producer had in mind. The baste purpose o . I
:: !
,!'•

,,i,
' '
"rt •·

109
110 Evaluation of Fair Value . on Asse ts "aluation
· Accounting
.. "' in Public Limited ...

an economic • enttty
• to the users m
· an economy sue h as Nigeria · The users of accounting informatio n can \
be classified into two major users namely: the internal and external users. (Ahmed and Schaefer, 2012) j
(i) The internal users that is, the management, uses it as a guide for a better de~ision to aid better 1
performance. The stewardship of management is measu~ed based on their performance as
rendered in the financial statements and;
(ii) The external users that is, the investors, creditors, shareholders, employees and government. All
l
. ter~.:; te::l. Pl
t1ese are m . t h p 'lnc :·,-,1101·
. 0 f. ilnv ''JUS Jn~~~
. nr~ '!n!. Z'.7 ,r . ,,..~"'(lo\!
! : . _ ,,
, , .., - , -. ' } i , .... , . . . ., (" , . '

performance by a true and fair ~iew of financi~I statements which is almost impossible because of
the impact of different methods of assets valuation. Most accounts were prepared according to
Historical convention, which means items are recorded in the-accounts at their historical costs.
Similarly, the costs of goods sold are recorded at historical cost while the selling price is stated at
current prices. This results is overstc1 ted profit leading to overp:1ymcnt 0f '~x . l-!: -; to ric:::1 •:v •
accounting tends overstates operational profit in the sense that, if a company is ro distribute al.i of ,·
its reported profit after tax as dividend to shareholders, it would be left with inadequate funds for 1
, the business to sustain operations at the same level as before at best not without borrowing or j "
issuing new shares to raise capital. On the other hand, where profit after tax is very high due
undervaluation of stock and undervaluation offixed assets, there is evecy tendency for employees
to demand for higher wages. In the same vein, high profit declaration, of cause attracts high tax,
f
so also the shareholders of such a company will expect high dividends. Jn effect, investo1o, ;, ,
speculator and indeed all users of financial information are misguided by the financial reports
rendered in su~h situation. Acc~rding to Be~song and C~arles (2012), concluded reasonably that
the need for adJus~ent on certam elements m the financial statements to meet price level changes
called for. Hence the use of current cost accounting as an alternative to assets
should beisemphasized.
valuation

Problem Statement
, Ii
The fair value accounting, although very promising, is not without a hitch. Certain aspects of FVA
principle give grounds for doubts a~ to_ whethe~ the lofty advantages_ ex.pected of it are in reality, i ,•
achievable. The usefulness of accountmg mformat10n about other enterprise increases greatly if it can be 1, II M
compared with similar information about other
enterpnse · fior same period or some
· other
.
. . enterprises
po10t
. 10
. (F" and
time 10anc1a
.
. 1with
A similar
.. .1 •
ccow1t10g
.
information about the sanie
Standard .Board
. , 2013)
. · 1 ;
,r·
r
1

There are five conseque~ces ~f h1~toncal cosi,account~ng conyentton because ofnse pnce reduces
h · 1· bTty of the information given 10 company s financial report. 10 f-:
teretaitF . 1 · h t ldb h d l"b•1· •
air vablue is the amount for wh1c an asse cou· e exc ange or
Th· h a · 1a I tty settled between "
d willing parties at an arm length transacuon. 1s assumes t atId tt represents market value """· =-1
knowle gea e, · h ""' · I
. a sufficient
m . 1Y robust market. Where no market exist, t e 1a1r va ue wou need to be conceptually, ,,_·'
sti
e mated. d0 teas~ the compa,ability problem. It also has a significant impact on consistency, ·
Fair value ~ no cial assets decline precipitously and the valuation inputs change overnight, it is .'·
When
. the
"bl market
ti the m _mfian
ormat"oni to be consistent. It seems to result in a situation where comparability and ,
1mposs1
s . t e or·e more compromised than in the historical model. . •
fi . I . th . . . ..,~.
con is ency ai . O f IASB on fair value as a tool for mancia reportmg, e question remams. WIii ,
Despite .the viewl oduce d"ffiI er
ent result from historical cost method. . . - .
the use of fatr va ue pr t. that the researcher intends to compare the impact of historical cost "', .
In view of the· h Oabove queS iorll, ation in financial statements ofl>ublic Limited Companies in Nigeria ...:
d on assets va u . . h 1· . . ,,
a~d fair ~alue met . in whether there is si~ni~cant d~ff~re~ce m t e af:, ~cat1~n ~f fair value and .'
with a view of ascertam g
. metho d on ass et valuation lll public li mited. compan, c:, m N1ge1 1:i. , ._
historical cost accounting ,
 111
Oranefo Patricia and Nzekwe Abumchukwu

Objectives of the Study

The major objective of the study is to evaluate the fair value accounting method so as to determine its
impact on asset valuation in public limited companies in Nigeria. ·
The specific ob_iectives for the f:tudy are the fn llnw inw
1. To ascertain whether the value obtained by the application of fair value accounting in valuation
of Plant and Machinery is significantly different from the value when historical cost is used.
2. To ascertain whether the value obtain by the application of fair value accounting in the valuation
of inventory is significantly different from the value when the historical cost method is used.
r" • -

Research Questions

1. To what extent does the value of Plant and Machinery differ when valued with fair value
acc~\lllting method as against when valued with Historical cost accounting method?
2. · How different is the value of inventory when valued with fair value accounting method as against
when valued with Historical Cost Accounting ~ethod.

Research Hypotheses

There is _no s_ignificant differeni in the value of Plant and Machinery obtained through fair value
and at H1stoncal ~ost accounting method. · · ·
'HT . r-r,1. - .. .... . .~ . - • ' " • ,... • 1 • ,.. ~

Scope of the Study

This rese~ch is_principally the effect of fair value accounting on . asset Valuation and to tou h th
. h bl d . fi . I c o er
1n erednt_ ppro eHi:ns create . m mdanc'.a reports. In other to achieve these, public companies in Nigeria
1ocate m ort arcourt were use . · :
!
I

Review of Re~ated Litera~re

Fair value Accounting (FVA)

Fair value accounting is a valuation concept which combines th l

realizable value in determining whether selling price should be use: f~;n~epts of replace~e~t ~ost at
value of an asset to the business in further discussion on valuation based t ; purpose of e~tabhshm~ ~he
market with many buyers and,sellers 1 the.price of ~n asset in th' on air value asset m competttlve
reflect the current value of asset, if it is in expectat1•011 of 0'th i:-: IS market may reasonably be taken to
t!T 11nns Wh h ·
assets, the FVA concept recommends the approximation O f h f:..
ere t ere is ~o market for used
purchased in current established market less accumulated d 1.
e. air value of an identical new item
the asset in use (Hendrlksen, 20i2). Thus, FVA tends tor ~preciation for the period, equal to the age of
relevant for decision during the period of price level he ect COS.t a?d value to a more realistic figure,
· c anges In his ·
opinion that financial statement are prepared on modified hi t ·.
o ··
. vie~, ~1S1oma (2012) was of
1
on Fair value . He farther stre·ngths that when an entity's one~ coS t basis with a gro~ing emphasis
financial statement should be adjusted to state all items m · th mancial _currency is hyper inflationary, its
· e measunng t
date. In general, the advantages of FVA system are that it ov . wan s currency at the reporting
th
in that, being a current' value system accounting, its ai~ is trcomes e defect of ~istorical cost system
0
reality of the si~ation to which it refers. · represent as far possible, the commercial
l 12 Evaluation of Fair Value Accounting on Assets Valuation in Public Limited ...

Ahmed, (2014), in specific terms stated the advantages of FVA as:

I. Fair values are matched with current revenue for depreciation and calculated on the value to the
business of the assets concerned. In majority of cases, such value is the net current replacement ;
cost, and cost of sales is calculated on actual or assumed date-of-sale cost prices, l
II. The statement of Financial Position shows assets at their value to the business. i
III. As a result of i and ii, users of accounting info rmation have avai 1,,blc ,' 1<Ys f P;i!i~ti r. inforrvi:i tion
on cost, profit or loss, asset value and the return on capital and on assets. •
IV. The system identifies profits or losses arising from business operations separately from those 1
arising from price level changes and,
V i Current basic figures lead to better quality long term and short decisions.
The fair value accounting, although very promising, is not without a hitch. Certain aspects of
FVA principle gives grounds for doubts as to whether the lofty advantages expected of it are in
reality achievable. The Consultative committee of the accountancy bodies in the United Kingdom and ( '
Ireland (CCAB, 20 I 2) found the Sandi lands reports unacceptable on the grounds that the FVA did not
take account of all aspects in inflation. The CCAB puts its case in the following terms; the aspects of f
, inflation which the FVA does not deal with at all or does not deal adequately with are: the decrease in the I
value of monetary assets, the decrease in value of obligation represented by monetary liabilities, the /-
whole effect of inflation on the value of the proprietor's interest in the company or other organization
concerned, irrespective of whether that interest is represented by non-monetary assets, the description of f
the incremental difference between an asset's original cost and its value to the business as a "holding f
gain" is potentially misleading as the whole or part of the gain will be the result not of a real gain in f
wealth, but of a decrease in the value of money and the problem of making valid comparisons over a
Der ind of tip1f: w~en t1e un it of rri easurem"r:t is unstable. ,,
· Abu (2014) stated that current cost or value approach seeks to value all assets and inputs consumed
in the process of generating income on the basis of their "curr~~t" value _income which is stripped of any
windfall element (holding gain) and thus re~bec t thhe pure eammgs ~apacf1tyth ofif the, firm and also, of a net i;
rf
t fi hi. ch reflects as closely ·as poss1 1e, t e current va 1uahon o e mn s component assets, he r
asse 1gure w . · • h · b · · · f.
ar ued that FVA is not simply ah inflation accountmg tee mque ut rather a techmque for obtam~ng
g
accountmg . . fiormat'10n data that reflect current
m •
values.
d · ·Although · FVA seeks· · to make accountmg f ·
information more up to date and relevant for budsmdethss t.ecth1s1cns, ctert~t1_n p ract1bc a1 d1ffihc:1 ltie~ still tenddbto
. . . f ·deal results. He ad e a , e mos en 1ca1 pro 1em, w 1ch 1s create y f.'
hmder. the a~hievem:n~i;fi:ulty in achieving the determining net r~alization cost (NRC), net realization
FVA, IS the mcrease . d Jue (EV) in respect of each asset. FVA is based on values, which are as a ,:,·
value (NRY_) and the expecte. v~ difficulty in determining the accurate contribution made by each asset
result of estimates, and there is _e.
h. h suits from JO mt use.
to an income, w IC re . .f
O
•tal maintenance is more relevant to the operations of a business ,
On the whole, the concept capi t Therefore if choice has· to . be made between FVA and the r
than the genera l pure as
h e power concep s. ' • ud /
current purchasing power accountmg,
. . FVA should be adopted (Glautier & n er down 2012).
,
· i
f
Theoretical Framework . . f
l ( on have been around for a long time'. The choice of ~·
th
Historical cost and fair value m~ ods 18
.• h· to fair value'dmethod
. ~ 0::~~=t~gly a~ importantdecisio~ where all perspecti~es have
0

. ·nrom an existing to a new method of ftfinancial

f~-
i
whether to sw1tc • the transaction b 11 asset
h ·1 ,
11 alu~ted in const enng . . I cost principles have work,ed a so1ute1y me a w I e. Ir
to lbe t:quaH yi::ory has proved that the h1sto~~~eration and speculation to switch to a new method of ll
va ua ion . uestion as to why con h b . hould drive the ideally considered being the [
This now poss us a . Wh t theories and w at as1s s
financia I asse t va luat10n?·. h •a ch oice o f mo ct ei,.,' r·.
. +: the sw1tc, ID
opportune trne ,o, '

r
 Oranefo Patricia and Nzekwe Abumchu~u 11 3

Measurement of financial as t . h . .
reporting today. In d t d . se _is t e core issue of relevance in financial accounting and report
O
_ , . er O ecide which method of valuation one must choose it is imperative that there
. l
1t h..i~ l l.)\.., l-l ~\. h ... ll \.l u •1ut t::, \.uitJ;11 - ,• ,
I:, v LIi \;. i <.1 11 'd 1u 1., d li u 111.:, Lu l 11...u i 1... v :, L u1., 1.,vu11 .i11 g 1i 11.,iJ1 v u v 1 vd1ua, ; , J ,1 1u 1
f". . , ' · • ! · · , : ' , , . ·

fimancia assets.
~n the light of above concepts, the research work was premised on Chambers Theory of
Contmuously Contemporary Accounting and Assets Theories.
According to Chambers, the theory views people's need in terms . of information. He makes an
assumption about the objective of accouriting is to guide future actions. He prescribed that all assets
should be measured at net m~rket value and that such information is more useful for informed decision
making than information based on historical cost which could be misleading. Furthermore, in his
Blueprint paper published in 2011 where he wrote: It is therefore corollary of the assumption of rational
management that there should be an information providing system, such as a basis for decision and as a
basis for reviewing the consequences of decision, it was suggested that accounting information should be
relevarit, verifiable, free from bias and quantifiable. The choice of accounting methods depends on factors
such as reliability, relevance, timeliness and comparability.

Assets Theories
Within the context of this theory, asset was described as any object, tangible, or intangible that is of value
_to· its possessor, which can be consumed, appreciated or traded-off over time (F ASB, 2008).
According to Weir, (2012), described historical cost as the actual purchase price plus incidental c~st
incurred in getting the fixed asset in a condition and position ready for intitial use or commercial
production. In support of this definition, he sited a practical example on the effect of valuing assets at .
•• i historical cost. According to him, a plot of land bought by for N 1,000,000 by a firm some 40years back,
bu_t is perhaps worth at present N3,000,000, will be recorded in the Statement ·of Financial position of the
true value of the firm's at historical cost of Nl,000,000 and not the higher value. This may not give the
true value of the firm's worth as at the reporting date. In line with Chambers theory such report will fail to
give the reliable information needed by the stakeholders.

Empirical Revie~

There h~i been niuch discussion about fair value accounting. Disclosing assets at their fair value as
opposed to their historical cost is preferred by some but opposed by others. The use of fair value
accounting has been around for decades primarily for financial assets. In recent years, both the Financial
Accounting Standards Board (FASB) and •the International Accounting Boaed (IASB) have moved
towards more extensive use of fair value accounting. ·
Accounting to Godfrey et al (20~0) the use of historical cost for valuation of non-monetary assets
has come from several sources, these mclude the 1940 book by Patron and Littleton: An Introduction t
Corpora_te A~cou~ting St~ndards. The boqk provides many of the theoretical arguments for th~
accountmg. Historical cost. 1s generally defined as the amount at which the asset or liability was or· ·· ll
. d. ·'Where th e h'1stonca
obtame . 1 cost expected to be different. .
from the final value when the ,·t ' igma • y
1
Ionger on the Sta_tement o f.F'mancia · _1 bl?sidtlo~,
P · · _s~me amort1zat1on · · or depreciation of the value is expected em ts no
Th ese va1µes are genera11y more re11a y • etermmable, but less relevant than fair value. · ·
T}, p finl:l nri ~! A""rnmtin!Y Stafl rl qrd Hnar<l (F ASH' a Vtl"'V to hi:1 rn1oni'iin rT -r, .. n 11 1
. . . . . . ' r, . em V ArrPnt::ihl
Accountmg Prmc1ples (GAAP) with Intemat10nal Financial Reporting Standa d Th · · f"
slalcmenl, fair value measurement was introduced into the rl:porting sys tem Exa 11 1 · f rough these
. 1 IA . l p cs o su1.:h s tat ,
ar~: IF~S 13 1arr va ue measu:ement, S 16 .- P:operty, _P lant and Equikpment IAS 41 _cml;lll~
(Biological.assets), IAS- Intangible assets valuation m the financial statements · Agriculture
In, view of the above literature reviewed, it was observ~d that so · · .
· b ase
valuation · d ·on h'1stonca
· · I cost
· w· h'li e ot hers ·h old their
· opinion .for fa· me were m· .support. . . o f assets
. ir va1ue accounting meth0. d T .
· heir
 . A I \' I1,n liNl ;n P11/,Fr· I im i/ ,.. , / .
F\•n ltt(1tior, of Fnir VCTfue At"rotml1n r, nn ~~r:- ' n ·

. . . . h f6 t f hanges in price level on val ue ol

views were backed up with vanous facts among which are t e e ec O c d B d . .
. ' . . . A
assets at the reporting date and the position of Internat10na1 ccoun mg .
t' Standar .
oar S m ensuring
,
· · · d
consistency and comparability m the preparat10n an presen a 10t t' n of financial statements. o I ar, areas
.
· · : · · l t'
not reviewed are the impact of fair value and h1stonca accoun mg me · thod on· net val ue of. a-1 cnt,tv
during break - up or combination, merger and where an enlity operates w_iu1 difforent ~ets 01 asSels. in
the light of these shortcomings in these literature reviewed, the research intends to b~dge the g~p be
establishing the impact of fair value on asset valuation in Public Limited Company with emphasis on
Petroleum Companies in Nigeria.

Population

The population of this study comprises of 12 Petroleum Companies quoted in Nigeria Stock Exchange
(NSE) . These companies were considered appropriate population for the study because they are among
those companies statutorily required to submit their published financial statements to the Security and
exchange Commission (SEC).

Sample

Five (5) of the petroleum companies were judgmentally selected from the studied population of 12. This
is because the sample meets our estimated requirement. Olasehide and Bankole (2005), described
judgmental sampling as a method whereby the researcher mere grand-picks the samples for the reason
that, in his opinion they are quite typical to what he desire.

Method of Data .Collection

The data for the study consist of secondary data only. In other to obtain necessary data, we visited Nigeria
Stock Exchange (NSE). Security and Exchange Commission (SEC), Federal Bureau of Statistics (FBS)
a~d Central Bank of Nigeria (CBN). At the Nigeria Stock Exchange Lagos, list of quoted companies was !·_·
obtained while at the Central bank of Nigeria and Federal Bureau of Statistics, statistical Bulletin was t
colle~teq. The data obtained ftom these sources are Annual Published Financial Statement for a period of , ·.·
five (5)years covering 2009- 2014 and Price Index for 2013. Relevant ·area of the Annuai Financial
Statements necessary for this study covers Plant and Machinery, Freehold Property and Inventories. ·
~
·
·Method of Data Analysis
J
The da~ collected was an~lyzed using t-test statistical tool. T - test statistic is used in testing to determine ~-
whether there is significant-·difference in the mean of two groups. This choice was informed because the ,
researcher wants to test whether there is statistically significant difference in asset value obtained by f
histodcal and fair value methods of assets valuation. .
Historical c.o st p,rice adjusted for inflati~n w~ used as proxy for fair value. The adjustment was
achieved by conver&ic;>n of.histoijc~l.£OSt tQ fair. v~lue. . .. . '. .
The ~onversion rat~ was generated' by '·cpmpµting"Price Index for each asset on y~arly ~a:ses. Pr,ce
. Index was computed through data collected from the Central Bank of Nigeria. Computation was done in
two stages, that is, conversion of fixed assets and inventories.
Stage I: the first stage was to generate a fixed asset and depreciation schedule. .
Stage 2: to generate the fair value for Plant and Machinery and Freehold Property res~ectively. . .
Sta e 2: involves the co~p~tation_of inventories. It,_in~lu?.~~ _t~~ pr?~~,!~ _of -~~?:r~E·~!t;t~~.,~P.:~l·n'g·
4l~:jp_g,.1fist(i)tieal . co=-.4ts.:;q:f~~ venteFf"estfrom.the fmanc)al.'.statements ::for'1rtlr~ }beiii04"'®~1f';Tef 1.~
~?..rt:~- ..·
~ oog; .
2014. . . _ r.
l
 Oranefo Patricia and Nzekwe Abumchukwu 115

. The values wer~ used to test the stated hypothesis of the study with a view to depicting significant
differt.:nces between historical cost and fair value accounting method as basis of asset valuation and
ascertaining whether fair value accounting method has impact on assets valuation.

Data Presentation

The value for HCA IN table 1 to 3 below were obtained from annual financial statements of Oando
Petroieun1 Plc, whiie the vaiues in respect of FYA were computed by the researchers, using the prevailing
price index. Price Index was obtained through data collected from the statistic Bulletin published by the
Central Bamk of Nigeria (CBN).

Table 1. Historical and Fair value of Plant and Machinery, Inventory and Freehold Property
I
i Plant and machinery Inventory Freehood Property
year HCA FVA HCA FVA HCA FVA
N'0O0 N'000 N'000 N'000 N'000 N'000
2009 2,971,029 3,000,740 8,552,972 7,612,145 7,552,864 7,857,999
2010 2,980,7.29 :3,000,740 ' 8,552,972 8,597,675 7580153 7,807,558
2011 5,157,606 3,278,802 10,191,326 9,070,280 6470292 7,313,464
2012 28,822 29,975 53,942 60,415 553,157 566,503
2013 507,830 436,733 41,476 37,328 52865 462,553
total 11,170,288 39,228,686 28,392,688 25,344,253 22,209,331 24,008,077
Mean · 2,234,058 7,845,737 5,678,538 5,068,851 4,441,866 4,801,615
Source: Researchers' Computation (2015)

Table I above shows the historical and fair values of Plant and Machinery, Inventory and Freehold
Property at the end of each year under study.

Hypothesis 1

Ho: There is no significant ~ifference in the v~luation of Pl~t and Machinery obtained through
curr~nt cost and conv~nt10~al cost a~count1~g method. T~1s_hypothesis is tested with the data
in Table I (Plant and Machmery column), usmg t-test statistic.

Table 2. Showing Historical and fair value of Plant and Machinery

Year HCA FVA
N'OOO N'OOO
2009 2,971,029 3,00Q,740 ..
, .. . ,,. :. , :~; . .
I
. "l --:1 ,
J ,"'- / 0
Q ,f\,..
O\JL
' '
2011 5,157,606 5,621,791
2012 28,822 29,975
2013 -32,102 27,608
Totat 11,170,288 · 39,228,686
--- -- · - -- -- -
I J VH,<lil j .:.,2.h,vJo l,lH.S,1.; I
J
Source: Researcher's Computation (2015)
ll 6 Evaluation of Fair Value Accounting on Assets Valuation in Public Limited ...

Table 3. T-test computation of valuation methods for plant and machinery

-
df t-cal t- Sig.
Method of valuation N Mean

Std. Dev. I

5 24736082 228866.127 8 0.104 2.32 0.920

Value of the Fair Value ale
Plant and method Historical
Machinery cost ale method 5 23292032 2088387.094
Source: Researcher's field work analysis (2015)

The t calculated is 0.104 as shown in Table 4. Since the t- calculated is 0.104 , and less than ts
tabulated at 0.05% level of significant and 8 degree of freedom is 2.3006, it suggests that the null
hypothesis be rejected. That is, there is significant difference in valuation of Plant and Machinery
obtai~ed through fair value and historical cost accounting method.

Hypothesis 2

· Ho: There is,· no , significant difference between · Inventory valued by fair value and historical cost I
accounting method.
~his hypothesis is tested with Table 1 ( Inventory and Fair value of Inventory) using t-test statistic.
I

!I
1..,
Table•· Showing Histori~al,and Fafr yalµe oflnventory
Year HCA FVA
N'OOO N'OOO
2009 8,552,972 7,612,145
2010 9,552,972 8,597,675
"
2011 10,191,326 9,070,280
..
2012 53,942 60,415
2013 41,476 37,328
Total 28,392,688 25,344,253
' r, -, ,:, ~'l ~ - A rri nr
1\,l"'" TI , 1

, . ' l ' •\ l
I
'
Source: Researcher's fieldwork analysis (2015)

Table 5. T-test comparison of valuation methods for inventory

Method of valuation N Mean Std.Pev Df t-cal t-crit Sig,

.. '·5 50755686 , 4618787.895
(

· Valu,e,. Qf ·current cost ,,. : . . .·

Inventory, accounting ~eth~d,
·8 • ·0:194 2.32 0.851 .'·
f'
Historical cost
accounting method r
56785376 5173282.646
,

Source: Researcher's fieldwork anafy~1s (2015)

,
5
f
The calculat~d_is 0.194 ~s ·shown in Table 5. Since the_ t-_calc~lated 'is 0.194 and less than t-tab of
r
2.3006 at 0.05% level of sigmficant and 8 degree of freedom, 1t 1mphes that there is significant difference

f r

f
f
1 I
 Oranefo Patricia and Nzekwe Abumchukwu 11 7

between inventory valued using fair value and historical cost accounting inethod. Hence Null hypo th esis
should be rejected.

Summary of Findings

Based on the data above, the findings of the study tire as follows:
There is significant difference between Freehold property valued at historical cost and fair value
methods in favour of fair value in Petroleum Companies in Nigeria.
There is significant difference between Inventories valued at historical cost and fair value
mdhods in f~vour of historical cost in Petroleum Companies in Nigeria.
There is significant difference between Plant and Machinery valued at historical cost and fair
value methods in favour of fair value in petroleum Companies in Nigeria.
The findings above show that reported value of Plant and Machinery and Freehold Property using
historical cost method will' understate the result of the Financial Statements while fair value method
reinstates the historical cost of Pla~t and Machinery and Freehold Property to the current market value.
On the other, Inventory valued at historical cost shows a higher value than the fair value. This difference
in the impact of method of valuation on Plant and Machinery and freehold Property, and inventory can be
adduced to the degree of volatility of individual assets to changes in price level. '
. , As a result, information. provided by Financial Statements based on historical cost may be
misleading, because it fails to consider the effect .of changes in price level. Hence, decisions making by
·the users of accounting information becomes complication, especially, in terms of asset replacement, as
funds set aside as provision for depreciation under historical cost accounting method to meet the current
cost of the asset at the time of replacement may not be sufficient, which may result to borrowing
additional fund to finance the replacement or close down the affected line of production.
The value of firm as reflected on the financial statements based on historical cost is not reliable. For
instance, in the case of merger or purchase of business, negotiation will be based on the current market
value of assets acquired. This may call for revaluation. ·

Recommendations

Based on the findings above, the researcher recommend that;

(i) Since valuation of Pla,pt and Machi?cry was in fav~ur of fair value accounting method, fi~s in
Petroleum Industry should favour fair value accountmg method, .
(ii) It was also observed .that valuation of l~ventory was favoured by historical cost method, in this
case, accountants in Petr~leum_ Companies ai:e. agreed to explain the rational behind the change in
form of note to accounts m their annual financial report and;
(iii) On the aspect of Freehold 'Prope~, test revealed t_hat fair value acco1mting methpd was favoured
hence it is recommended that fair .value ac~ount1?g method can be adopted .. General! .furthe;
·, :·,· ·_,, · · .._. •·., . 1,_1,· .,--, .·1. '_ ! : , ~ C,.l!1 ' )•.~'1_,_ <. \ ~r ' ' !l :1:(. t ::· r.,, i. l 1:1::{. :•.i : ~•.-1. :J( j,_~ 111 ' , ,
-
4
·. I . '.. · : ·: ·, ;·;. ; ()
1: \ I. ~,.;.
y,

Conclusion
.· f th above findings and recommendations, it was observed that valuation of a t . .
In view o e . . h fi t p 't I C . sse s m Pubhc
- . d C mpanies in Nigena wit re erence o e ro eum ompames, are vulnerable t I ..
L1m1te o . . g annual financial . statemen ts base d on h'1stonca.
• 1
cost may not show th o vo at1lity
· ·
Therefore, repo rtm · . h • · e true and fair
. Of h. fi ancial statements. Consequent1y, t e mterna1and external users of accountin 10. fi .
-yi~w sbuc d m tely guided in 'the course of making economic decision. g ormation
will. not e a equa .
 '
118 Evaluation of Fair Value Accounting on Assets Valuation in Public Limited ·· ·

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