Relevance of Level 3 fair value disclosures and IFRS 13: a case study

Abstract

This paper studies the relevance of Level 3 fair value disclosures in financial statements for equity analysts. The research also examines the impact that implementation of IFRS 13 Fair Value measurement had on the relevance of disclosures and disclosure practice. Semi-structured interviews with equity analysts and fair value disclosures of three listed real estate companies are used to analyse relevance of fair value disclosures. Equity analysts focus on cash flow and do not incorporate Level 3 fair values as an input in their valuation. These results indicate that Level 3 fair value measurements or fair value disclosures have little relevance or information value for analysts. However, the fair value disclosures appear to have to some extent confirmative value as they provide the analysts with comfort over their own fair valuation measurements and verify the credibility of management. The additional disclosure requirements implemented with IFRS 13 have scant relevance for equity analysts. The results provide evidence that standard setters, auditors and preparers of financial statements with significant Level 3 estimates should focus on predictive and forward-looking disclosures to evaluate future cash flows. Detailed disclosures about management valuation process and sensitivity analysis have limited relevance for the analysts. This study links together the analysts and disclosures literature and provides insights into relevance of fair value disclosures and understanding how analysts process and use fair value disclosures.