Accounting for changing prices: The value relevance of historical cost, price level, and replacement cost accounting in Mexico

This paper investigates the value relevance of historical cost, price level and replacement cost accounting using a sample of Mexican firms from 1989 to 1995. It contributes to prior research by distinguishing between two dis tinct aspects of changing prices: (1) the change in the general price level , and (2) the change in the value of specific non-monetary assets. I select Mexico to examine because it is unique in requiring and disclosing separat ely price level and replacement cost adjustments. A sample of Mexican firms also addresses a key reason cited for mixed results in previous assessment s of the usefulness of price level and replacement cost accounting using Un ited States data: the effects of inflation are too weak to detect. High rat es of inflation in Mexico, ranging between 7% and 52% during the sample per iod, mitigate that potential problem. Results indicate that replacement cos t adjustments are relatively and incrementally relevant beyond historical c ost and price level measures while price level adjustments are incrementall y value relevant beyond historical measures.