Fair Value or Conservatism: The Case of the Gold Industry*

This research examines the information content of historical cost and fair value reporting using a sample of gold firms. When revenue is recognized at the completion of production, finished goods inventory of precious metals is marked to market on the balance sheet. Revenue recognition at the point of completion of production was recently disallowed in Canada. This represents a significant departure from the trend of current accounting standards, which have been moving toward requiring mark-to-market accounting. I show that balance sheet data have better explanatory power for firm value when firms recognize revenue at the completion of production. There is no significant evidence that firms who recognized revenue at the completion of production did so for opportunistic reasons. I find evidence that income statement numbers are more relevant for firms that did not recognize revenue as production was complete, but rather used the traditional point-of-sale method as the critical event for revenue recognition. My results highlight the trade-offs standard-setters must make when considering the impact of accounting standards on the value-relevance of the balance sheet versus the income statement.