Changes In Fair Value Research Articles

Does Fair Value Taxation Affect Banks’ Investment Portfolios and Risk Taking?

ABSTRACT We analyze the implications of including fair value changes in taxable income on banks’ asset allocation and risk taking. Exploiting variation in fair value tax regimes and tax rates across 27 countries from 2010 to 2018, we find that fair value taxation is associated with banks’ investment portfolio choices and risk taking. On average, banks hold fewer fair-value taxed securities when fair value taxes increase. This effect is pronounced for savings and cooperative banks. Further, the effect is pronounced for banks that report under local GAAP for tax purposes. Our results also suggest that banks instead invest more in securities that are not taxed at fair value. Lastly, we provide evidence that the risk taking of savings and cooperative banks is positively associated with the tax rate when subject to fair value taxes. In addition, banks that report under local GAAP increase risk taking when subject to fair value taxes. Data Availability: Data are available from the sources cited in the text. JEL Classifications: G21; G28; H25; M41.

Classification and Measurement under IFRS 9: A Commentary and Suggestions for Future Research

This paper discusses several issues that were raised by the International Accounting Standards Board (IASB) in their request for information for the post-implementation review (PIR) of the International Financial Reporting Standard (IFRS) 9: Financial instruments – Classification and Measurement. In doing so, we first review the related academic literature and present empirical evidence on the post-adoption impact of IFRS 9. We then discuss conceptual issues associated with the business model and cash flow characteristics assessment in IFRS 9, as well as issues associated with the presentation of fair value changes in other comprehensive income (OCI) and modifications to contractual cash flows. Finally, we identify gaps in the literature and provide suggestions for future research that can help inform accounting standard setters.

Examining The Value Relevance of Biological Assets and Their Fair Value Change in Malaysia

The Malaysian Financial Reporting Standard 141 (MFRS 141) on agriculture requires all agriculture companies to measure their biological assets based on fair value less cost to sell. Some researchers argue that fair values of biological assets are not reliable and relevant whereas the others suggest that they are value relevant. The purpose of this study is to investigate the value relevance of biological assets and the change in the fair value of biological assets in Malaysia, as measured in accordance with the MFRS 141. Specifically, this investigation looked into whether or not biological assets and changes in fair value over time are relevant to market value. In particular, the study concentrated on assessing whether biological assets and changes in their fair values have a substantial influence on the market value. The sample for this study is made of agriculturally-related companies that had their shares listed on a public stock exchange in Malaysia between 2018 and 2020. The research project was carried out in Malaysia. The investigation was conducted in a manner that adhered to the value relevance technique that Ohlson (1995) recommended. It was revealed that the biological asset and the change in fair value that was established by using MFRS 141 are both major factors that play a role in the process of determining market value. The results lead the researchers to the conclusion that the adoption of MFRS 141 - Agricultural resulted in an improvement in the quality of financial reporting of biological assets in Malaysia. Future studies should include sample from ASEAN, Asia or developed countries so that the results can be generalised.

Utječu li učinci primjene koncepta fer vrijednosti i pripadajući odgođeni porezi značajno na financijski položaj i uspješnost?

This paper aims to identify the impact of the effects of the fair value concept application and corresponding deferred taxes on the financial position and performance of the large Croatian companies from the real sector in the period from 2010 to 2019. The impact of the effects of the fair value concept application and corresponding deferred taxes on companies’ financial position and performance is analysed using the descriptive statistical methods and multiple linear regression. Based on the results of regression analysis, it could not be confirmed that the changes in fair value and corresponding deferred taxes have a statistically significant effect on the financial position of the large Croatian companies in the real sector. The results of regression analysis also indicated that the changes in fair value recognized in the income statement have a statistically significant effect on the financial performance of the large Croatian companies from the real sector while the corresponding deferred taxes do not have. Therefore, the results of this research suggest that by applying the concept of fair value, the management of the large Croatian companies in the real sector can significantly affect the financial performance of the company, but not the financial position of the company. Furthermore, deferred taxes associated with the effects of the fair value concept application do not significantly affect the financial position and performance of the large Croatian companies from the real sector.

Empirical Research of Fair Value Measurement in Chinese Financial Enterprises—Analysis Based on Commercial Banks and Securities Corporations 2007-2012

The use of fair value in China is closely linked with that of the United States, which calls for attention from the Chinese accounting academies. A series of hypothesis were tested and the relationship between the fair value information and the financial enterprises' value was examined. Results revealed that there is a correlation between changes in fair value and the share price of financial companies but not very significant. Furthermore, differences exist in the value relevance of fair value across financial companies (securities corporations and banks) during the sample period.

IMPAIRMENT IN VALUE OF PSAK 7 FINANCIAL ACCOUNTING STANDARDS, CLASSIFICATION OF ACCOUNTING MEASUREMENTS IN HEDGING COMPANIES IN THE BANKING SECTOR DUE TO CORONA VIRUS

The less difference between SAK and IFRS can provide benefits for stakeholders in commercial banks in Indonesia. Companies that have public accountability, regulators try to make the necessary regulatory infrastructure, especially in capital market transactions, as well as users of financial statement information can use or use financial accounting standards as a guide in improving the quality of information produced in financial statements. value, financial instruments, measurement classification, hedging in banking sector companies due to the corona virus. The results showed that the banking sector experienced a decline in value with the entry of the Corona Virus outbreak which lasted long enough so that the banking sector was depressed which resulted in the value of PSAK 71 changing the condition of banking financial statements so that risk hedges arise from certain risks that can affect profit and loss or comprehensive income. others, in the case of investments in equity instruments that the entity has selected to represent changes in fair value in other comprehensive income.

Classification of Equity Instruments under IFRS 9: Determinants and Consequences

AbstractOne of the main differences between International Financial Reporting Standard (IFRS) 9 Financial Instruments and International Accounting Standard (IAS) 39 Financial Instruments: Recognition and Measurement is the classification and measurement of equity instruments that are financial assets. Under IFRS 9, a firm must measure acquired equity instruments at fair value through profit or loss (FVPL) unless the firm irrevocably chooses at initial recognition to measure those assets at fair value through other comprehensive income (FVOCI). In this case, a firm must recognise all changes in FVOCI without the possibility of reclassifying these amounts into profit or loss. In this context, this study has two main objectives. First, it examines the frequency of firms that elect to classify equity instruments as FVOCI in the first year of IFRS 9 adoption and identifies the determinants of the decision to classify equity instruments as available for sale (AFS) (under IAS 39) or as financial assets at FVOCI (under IFRS 9). Second, it considers whether this choice has any influence on the value relevance of financial information. The results of a sample based on firms in the FTSE 100 and EURO STOXX 50 show that risk is the main determinant of the reclassification from AFS to FVOCI in the first year of IFRS 9 adoption, while the level of variable compensation for CEOs (for AFS) and the level of fair value hierarchy (for AFS and FVOCI) are the main determinants for the classification of equity instruments. Regarding the consequences of this change, the findings indicate that the prohibition of recycling for the FVOCI option under IFRS 9 leads investors to pay more attention to the changes in fair value as recognised in OCI.

Дослiдження динамiки iнструменту своп процентної ставки iз використанням методiв машинного навчання

For the European financial system, the interest rate swap is a well-known mechanism to reduce the potential effects of these risks, but it is new to the Ukrainian interbank market. In the second half of 2020, the National Bank of Ukraine and commercial banks held their first interest rate swap auctions. According to this provision, one party offers the other a floating interest rate while the other offers a fixed interest rate based on a conditional amount. Based on the Ukrainian overnight interbank rate index, the latter is computed (UONIA). Future cash flows are discounted at rates determined by the zero coupon yield curve created for hryvnia government bonds. The parties agree on how to calculate the difference in interest payments within the predetermined period of time. The analysis of the fair value of this financial instrument at future points in time is the main concern of mathematical modeling of interest rate swap transactions. Predicting future changes in fair value is particularly crucial when the zero coupon yield curve’s coefficients vary and when there are specific trends in the index of overnight interbank rates. The sensitivity of the specified factors to the interest rate swap’s dynamics was investigated in the study, and a forecast of the instrument’s future dynamics based on the change in important macroeconomic indicators was developed.

The Impact of Discretionary Measurement Criteria on Investors’ Judgement and Decisions

This study investigates the effect on nonprofessional investors’ judgements and decisions of discretionary measurement choices. Using a paper-and-pencil experience, we collect and analyze information regarding investment amounts as well as past and future financial performance judgements of firms’ earnings by manipulating fair value (mark-to-market and mark-to-model) criteria and benchmarking it with historical cost-based financial statements. We proxy nonprofessional investors with graduate students from a business school. Our results show evidence that nonprofessional investors view fair value changes as permanent. We argue for a cashflow volatility factor. Contrary to previous research, we do not find evidence of any effect on investors’ willingness to invest (average budget amounts invested) or performance judgments (past and future). We corroborate previous evidence that investors rank measurement concepts’ relevance differently for different classes, although, on average, mark-to-market fair values and historical cost are rated more relevant and reliable than mark-to-model fair values.

Value-relevance of reported changes in fair values and measurement-related fair value disclosures: evidence from the Australian real estate industry

PurposeThe paper aims to investigate the value-relevance of changes in fair values of investment property reported under International Accounting Standards (IAS) 40 and International Financial Reporting Standards (IFRS) 13.Design/methodology/approachMultivariate regression models are used to regress cumulative market-adjusted stock returns of real estate firms on changes in fair values, along with control variables and corporate governance variables, in order to examine the research question.FindingsUsing hand-collected data from the Australian Real Estate Industry (AREI), the authors find that changes in fair values of investment property are value-relevant for equity investors. The authors further find that using unobservable inputs in an active market (Level 3 inputs) does not diminish the information content of fair values. The authors document that properties valued exclusively by directors have a significantly reduced value-relevance, whereas property valuations made collectively by both directors and independent valuers have superior value-relevance, possibly owing to the combination of inside knowledge and externally imposed monitoring. Collectively, the findings suggest that in the real estate industry, where unobservable inputs are commonly used to determine fair values of properties, the fair values determined subjectively are perceived to be sufficiently informative and relevant.Research limitations/implicationsThe authors' findings have important implications for accounting standard-setters in considering whether an external valuation should be required and whether the extensive measurement-related fair value disclosure requirements are useful.Originality/valueThe study extends previous archival evidence and complements prior commentaries on experimental and analytical work in the Australian regulatory environment.

Regulatory Treatment of Changes in Fair Value and the Composition of Banks' Investment Portfolios

ABSTRACTFollowing the financial crisis of 2007–2008, Basel III recommended that bank regulators include changes in the fair value of available-for-sale (AFS) debt securities in Tier 1 capital. However, the U.S. allowed smaller banks to continue excluding these changes through a one-time opt out election. This paper examines the investment decisions of smaller banks in the 1990s when changes in the fair value of AFS debt securities were temporarily included in regulatory capital. Using a sample of smaller banks and a difference-in-differences research design, we find that low-capitalized banks reduced their investments in more volatile asset classes (e.g., corporate bonds, non-agency MBS) and increased their investments in less volatile asset classes (e.g., treasuries and municipal bonds) after these changes were included. These findings suggest that providing smaller banks with an opt out election potentially allows low-capitalized, riskier banks to continue to hold more volatile securities in their AFS portfolios.JEL Classifications: M41; M48; G18; G21.

Fair value accounting impact on decision-usefulness of accounting information: evidence from accounting standards update 2016–01 on the US insurance industry

Purpose The purpose of this study is to evaluate the impact of ASU 2016–01 on the predictive value, the confirmatory value and the value relevance of earnings. One of the key provisions of ASU 2016–01 is the requirement that all changes in unrealized gains and losses on all equity securities are recognized in income instead of other comprehensive income (OCI) as under prior guidance (SFAS 115). Because many companies in the insurance industry are large holders of equity securities, the sample for this study consists of firms from the insurance industry. Design/methodology/approach The author compares the change in earnings volatility and analysts’ forecast error for the periods before and after adoption of ASU 2016–01, and the relationship between the percentages of assets invested in equity securities for both earnings volatility and analysts’ forecast error. Further, the author tests the price reaction at the time of the release of earnings using an event study. The author also tests the value reliance of earnings measured by the correlation of earnings and stock prices, as well as the change in earnings and stock returns. The association between investment gain/loss components of earnings, and OCI, with stock prices and returns is tested for value relevance. Findings The findings of this study show that earnings volatility and analysts’ forecast errors increased in the period after adopting ASU 2016–01 and an initial overreaction to earnings releases. Further, the investment gain/loss components of earnings and OCI are not value-relevant in this study and including unrealized gains/losses on equity securities in income decreased value relevance of earnings in the post-adoption period, particularly for firms with large equity investment portfolios. Research limitations/implications This study is limited to one industry and only represents the impact of ASU 2016–01 on that industry. Thus, there are opportunities to extend the research to other industries. Furthermore, the time-period of study since adopting ASU 2016–01 is limited to only two years and with the passage of time, a greater sample of post-ASU 2016–01 will be available for testing. Practical implications Standard setters considering recognizing fair value changes on all investment securities in income should consider the findings of this study. Further, industry participants affected by ASU 2016–01 should consider improving explanation of earnings to mitigate the initial misunderstanding of earning announcements found in this study. Originality/value To the best of the author’s knowledge, this is the first study on the effects of ASU 2016–01 on volatility of earnings, earnings forecast errors, market reactions to earnings releases and the value relevance of earnings. This paper fills a gap in prior research by studying the effects of fair value on reported earnings, which is limited in prior research. This study contributes to the growing field of research on fair value accounting.

Reconsidering the Prudential Filter for the Cash Flow Hedge Reserve in View of the Purpose of Banking Regulation

Common Equity Tier 1 capital of credit institutions is adjusted by the prudential filter for the cash flow hedge reserve according to art. 33(1)(a) CRR. Thereby, fair value changes of hedging instruments, especially of derivatives, are neutralized by imputed fair value changes of future cash flows that are part of a cash flow hedge. However, these future cash flows are (mostly) expected to occur under market conditions and, thus, imputed fair value changes are not reflected in changes of present values derived from real transactions that exist at the time of the regulatory capital calculation. As a result, positive effects on Common Equity Tier 1 capital can be viewed critically in regard to the prudence principle of banking supervision if an initial reduction in Common Equity Tier 1 capital due to losses from hedging instruments is corrected. Furthermore, the adjustment is case specific and depends on the hedge effectiveness, which is questionable because of consistency reasons. To solve these weaknesses, we suggest to eliminate the prudential filter for the cash flow hedge reserve as a whole. This would lead to a better quality of Common Equity Tier 1 capital by improving its loss absorbency and as a side effect to a reduction in complexity enhancing supervision through regulatory authorities and market discipline. Furthermore, we demonstrate the impact that the proposed abolishment of the prudential filter for the cash flow hedge reserve would have on the Common Equity Tier 1 capital ratios of the largest European banks in 2014–2019

Can information confusion caused by the financing model of new economy companies be eliminated?

New economy companies often use convertible and redeemable preferred shares with equity and debt characteristics as financing tools to reduce risk during their early stages of growth. According to relevant accounting standards, such preferred shares should be classified as financial liabilities and measured at fair value, with changes in fair value recognized in profit or loss. This can lead to confusing financial information: the better a company’s development prospects, the higher its redemption or conversion price and loss, which can result in a large negative net asset value. A successful initial public offering, however, could offset large losses and negative net asset value. Following the development of accounting standards, this article thoroughly analyzes various proposals to modify relevant accounting standards and eliminate confusing information. This article also proposes possible problems and solutions as a reference for accounting standard setters and the various stakeholders in new economy companies.

Fair Value of Operational Assets, Uncertainty, and Information

Generally, the fair value of an asset is its sales price. For a non-financial asset, however, a fair value measurement is performed by identifying the highest value-in-use (IFRS 13, § 27; SFAS 157, § 12). This assessment includes the sales price obtainable by selling the asset to another market participant, who will use the asset in its highest and best use. Thus, the fair value of an operational asset is the highest value of the asset owner’s best use and the implicit sales price, which reflects the best external use. The expected fair value of an operational asset is shown to be the probability-weighted average of the expected values in use and for sale. There is also an expected value of the uncertainty caused by the requirement to switch reporting from the operational value to the sales value if the latter is higher or vice versa, corresponding to the time value of an option to exchange one asset use for another. Consequently, the expected fair value of an operational asset is higher than the maximum of the expected operational value and the expected sales price. The fair value changes as information arrives about the sales and operational values. As the precision of the information increases, the expected fair value approaches the highest of the expected operational and sales value, and the expected value of uncertainty falls to zero. When for example the measurement of the operational value is perfect, the expected fair value will be higher if the sales value remains uncertain.

Real Effects of Recognizing Fair Value Changes in Net Income on Firms’ Investment Choices

Real Effects of Recognizing Fair Value Changes in Net Income on Firms’ Investment Choices

Облікова ідентифікація аграрних розписок як фінансових інструментів

Agricultural receipts are a particular financial instrument with industry specifics and are used exclusively by agricultural producers. However, not all types of agricultural receipts are always financial instruments. The purpose of the article is to reveal the accounting nature of the agricultural receipt as a financial instrument to avoid the risks of the accumulation of information in erroneously defined accounting sections. The study results show that approaches to accounting for commodity and financial agricultural receipts should be distinguished. It was proved that regardless of whether an agricultural receipt is issued in exchange for goods or money, it cannot be identified as a financial instrument because it provides for settlement by receiving (supplying) a non-financial asset. At the same time, the financial agricultural receipt meets the criteria of the financial instrument. So it should be reflected in the accounting by the rules set out in the relevant National Accounting Standard. Based on the analysis of subspecies of financial agricultural receipt, it was established that its variable accounting nature is manifested in the fact that depending on the terms of the contract and in exchange for which such an agricultural receipt was issued, it can be recognised in accounting repayable financial assistance (loan), accounts payable for goods (works or services) or derivative financial instruments. Recognition of a financial agricultural receipt as a derivative requires careful consideration of each embedded component and evaluation of the contractual relationship to determine the change (or lack thereof) in the asset's fair value or liability at each reporting date. The identified features of agricultural receipts as accounting objects must be considered in the formation of accounting policies of the enterprise and the implementation of expert verification of accounting records of transactions with such financial instruments.

The decision usefulness of reported changes in fair values and fair value measurement-related disclosure for debtholders: evidence from Australian real estate industry

Purpose This paper aims to examine the information content of changes in fair values of investment property reported under international accounting standards (IAS) 40 and International Financial Reporting Standards (IFRS) 13 to debtholders. This study further examines the effect of fair value hierarchy inputs, valuer types and the quality of fair value measurement-related disclosure on the information usefulness of changes in fair value. Design/methodology/approach This paper performs a panel regression on the cost of debt capital and changes in fair value of investment properties, and fair value measurement features using data covering periods 2007–2015 from Australian real estate companies. Findings The findings suggest that changes in fair value of investment property are informative about the real estate firm’s future cash flow to debtholders. Also, the findings show that the use of unobservable inputs in an active market (Level 3 inputs) and Level 2 has no different impacts on the cost of debts. Also, this paper documents that employing the directors solely in valuation may lead to a higher cost of debts. Furthermore, this paper reports that an extensive fair value disclosure appears no additional value in the debt decision. Originality/value Collectively, the findings indicate that although the use of unobservable inputs is common in the real estate sector, information on the changes of the fair value of investment properties are informative to debtholders. The findings have important implications for accounting standard setters to consider revisiting the IAS 40 and IFRS 13 on whether the independent valuation should be required and whether the extensive disclosure requirement is worthwhile.

The Value Relevance of Non-GAAP Earnings: The Case of EPRA Earnings for European Real Estate Investment Trusts (REITS)

The vast majority of European Real Estate Investment Trusts (REIT) choose, under IAS 40, to report fair value of investment properties on the balance sheet and therefore recognize changes in fair value in a gain or loss in the income statement. Under European Public Real Estate Association (EPRA) guidelines, most REITs report a non-Generally Accepted Accounting Principles (GAAP) measure of recurring performance — EPRA earnings — in addition to International Financial Reporting Standards (IFRS) financial statements. EPRA proposed these adjustments to IFRS earnings to neutralize transitory items such as changes in fair value, calculate core operating results more accurately, and indicate the extent to which earnings can support dividend payments. Based on studies suggesting that earnings without the transitory items are more useful for investors, we assume that EPRA earnings are more value relevant than IFRS earnings. Using a sample of 680 company-years over the period 2011–2017, we find that market value capitalizes EPRA earnings more than twice as much as IFRS earnings. We also find that changes in fair value of investment properties provide additional information for the valuation of REITs, supporting the idea that the dis-aggregation of the net income into recurring earnings and transitory items can be useful to investors. Finally, our results show that EPRA earnings are not always more value relevant than other non-GAAP indicators sometimes used by REITs to measure their recurring performance, such as Funds from Operations. Moreover, a complementary analysis suggests that the choice of EPRA earnings to communicate recurring performance is independent of the economic characteristics of REITs and is mainly made by EPRA member companies.

Fair Value Exposure, Changes in Fair Value and Audit Fees: Evidence from the Australian Real Estate Industry

AbstractThis paper investigates the relationship between audit fees and both fair value exposure and changes in fair value of investment properties. The study is motivated by the limited and inconclusive evidence on the effect on audit fees of full fair value reporting for illiquid assets. Using hand‐collected data from the Australian real estate industry, we find a negative (positive) association between audit fees and fair value exposure (changes in fair value of investment properties). Our findings also indicate that the use of unobservable inputs in fair value estimates for investment properties does not significantly increase audit risk and audit fees. Further, we find that audit fees are higher for firms with fair values of investment – properties estimated by external and mixed valuers – compared to firms with fair values estimated by directors alone. This study enriches the audit fee literature by documenting auditors’ pricing decisions in an area that involves significant estimation and valuation risks.