The Value-relevance of Fair Value Measurement for Inventories

Abstract

The objective of this paper is to determine if fair value measurement for inventories is value-relevant. Inventories are measured at historical cost and investors will have to estimate the fair value for themselves. For a sample of firms listed in the UK and reporting from 2009 to 2018, multivariate regression results show that the historical cost component of inventories on the balance sheet is value-relevant, but that the fair value component is not. By contrast, both historical cost earnings and changes in the fair value of inventories are value-relevant. Results therefore imply that investors need both historical cost earnings and fair value movements to make decisions. By extension, fair value measurements complement, rather than replace, historical cost information.