An assessment of the implementation of fair value accounting in the Australian agricultural sector

This purpose of this thesis is to provide an empirical assessment of the implementation of IAS 41, Agriculture, in the agricultural sector in Australia, in the context of longstanding concerns over the use of fair value accounting for biological assets. Three areas of concern are examined in three papers: first, whether fair value accounting adopted under IAS 41 provides decision-useful information; second, whether the discretion provided in IAS 41 leads to opportunistic behaviour by management; and third, whether executive compensation contracts and corporate governance attributes are effective to constrain opportunistic behaviour. IAS 41 requires biological assets to be measured at fair value so that the transformation of biological assets through growth is presented in the financial statements in a timely manner, and thus provides information to investors for decision-making. The first paper of this thesis (in Chapter Two) evaluates the decision-usefulness of the information provided under fair value accounting in the Australian agricultural sector by examining the forecasting power of fair value of biological assets for future operating cash flows. The results find that fair value of biological assets contains limited useful information about future operating cash flows. Market-determined prices are not superior to managerial estimates in relation to providing useful information for decision-making. The fair value measurements prescribed in the standard require considerable use of management discretion. Thus, one of the main concerns about the use of fair value accounting for biological assets is the reliability of the information. The second paper of this thesis (in Chapter Three) examines whether managers use the discretion provided in IAS 41 opportunistically. The results indicate that managers in the Australian agricultural sector have used the discretion allowed in IAS 41 to manage their earning sin a manner consistent with meeting or beating target earnings. This problem mainly exists when managerial estimates are applied. The results also show that firms use a wide range of discount rates to achieve their various desired goals. The inclusion of unrealised agriculture gains in the income statement as part of reported earnings raises the question about whether executive compensation contracts and corporate governance are effective in monitoring the reliability of fair value information. The third paper of this thesis (in Chapter Four) examines the pay-sensitivity of executive compensation to agriculture gains as well as the role of corporate governance in monitoring the opportunistic behaviour allowed by the discretion provided in IAS 41.The findings show that executive bonus is not related to unrealised agriculture gains, consistent with boards of directors reviewing the earnings and rewarding executives for realised earnings only. The results also show that unrealised gains are smaller and less associated with pre-agriculture earnings when female directors are present on the board, suggesting that a gender-diverse board is more able to monitor the reliability of fair value information.