Predicting Future Performance Using Fair Value versus Historical Cost: Evidence from Investment Property

This study investigates whether reporting investment property at fair value using IAS 40 provides incremental predictive ability for future performance beyond historical cost. Specifically, this study examines whether recognizing incomes under the fair value model can predict a firm's future income more accurately than the historical cost model. Using a sample of Chinese real estate firms from 2007 through 2014, this study finds that reporting investment property at fair value provides better predictive ability for future income than historical cost. This study also determines that the predictability of income for future earnings under the fair value model increases with the size of accumulated changes in fair value gains and losses of investment properties. The results suggest that the recognition of fair value gains and losses of investment property in income statements can improve the predictability of a firm's future income.