Disclosure versus recognition: The case of asset revaluations

Australian GAAP requires firms to either disclose or recognise the current values of real estate in their financial statements. Given recognition criteria related to reliable measurement, the propensity to recognise an upward revaluation is subject to the inherent uncertainty of the assessed increase in value. Accordingly, we predict and find that managers are more likely to recognise (rather than just disclose) revaluations when the revaluation estimate is more reliable. The recognition criteria contained in Australian GAAP implies that market participants will rationally infer that revaluations recognised in the balance sheet are more reliably measured than those disclosed in footnotes. An analysis of share market effects finds that the market discounts disclosure compared to recognition of real estate revaluations. This effect becomes insignificant when controls for the reliability of revaluations are included in the analysis, and we therefore conclude that the value relevance of recognised revaluations is not due to recognition per se, but rather to the fact that the assets being revalued are more reliably measured.