Fair Value Accounting Research Articles

The Fair Value Accounting Controversy in the 2008 Financial Crisis: A Structured Literature Review

This research aims to explore the controversy surrounding fair value accounting (FVA) during the 2008 financial crisis. Using a structured literature review approach, this research collected 20 relevant articles on Scopus that were most cited and published in high-quality journals after 2008, and developed a suitable framework for analysis. The results of this research show that the controversy in current research is first manifested in whether FVA exacerbated the 2008 financial crisis. Secondly, this research also analyzed the controversy within different views. In addition, this research found that the controversy over FVA is most intense in the North America, while Australia and Europe show highly consistent results. Finally, this research points out that the controversy over FVA is most intense in studies using empirical research methods, while other research methods show strong consistency.

Fair value accounting and untraceable financial crime

Fair value accounting and untraceable financial crime

The Impact of Corporate Governance and Fair Value Accounting on Debt Contracts

This paper investigates the theoretical relationship between corporate governance, fair value accounting, and debt contracts. It primarily examines the individual impacts of corporate governance and fair value accounting on debt contracts, while also exploring the influence of corporate governance on fair value accounting. The study emphasizes the importance of considering the interests and legal status of creditors in the context of debt contracts. The findings indicate that strong corporate governance can reduce the likelihood of debt default and that the company’s restructuring costs in the event of a default determine whether improved corporate governance will increase or decrease debt costs. Additionally, the study reveals that the strength of corporate governance affects the value relevance of fair value accounting. However, the impact of fair value accounting on debt contracts is not inherently positive or negative; for instance, companies may use fair value adjustments with manipulative intent to enhance performance. Ultimately, the research highlights that discussions about corporate governance should not prioritize shareholder interests exclusively but also consider the legitimate position of creditors.

The development of international accounting and auditing standards for fair value accounting in the Arab Middle East, Jordan: a systematic review

The development of international accounting and auditing standards for fair value accounting in the Arab Middle East, Jordan: a systematic review

Fair value and investment property in accounting literature: a review

Purpose This study aims to provide a timely review concerning the determinants and economic consequences of fair value reporting in real estate industry, as these topics have been gaining momentum in accounting literature recently. Design/methodology/approach Diverse editorial sources (e.g. Elsevier, Emerald, Meridian Allenpress, Springer, Sage, Taylor & Francis and Wiley-Blackwell) were consulted to identify relevant studies for this review. Keywords used to collect studies include “fair value” and “IAS 40” or “investment property” and “fair value or “fair value and real estate.” This search yields 33 studies published between 2009 and 2023. Findings The synthesis of reviewed papers suggests that studies were mainly conducted in the European countries after the mandatory adoption of international financial reporting standards (IFRS) in 2005 and the Australian setting. The first stream of research deals with the choice of fair value approach. Reported empirical findings suggest that corporate size and market-to-book ratio are negatively associated with fair value choice, whereas ownership dispersion increases the likelihood of choosing fair value approach. The empirical evidence concerning the determinants of fair value magnitude suggests the type of appraiser represents a key predictor of the extent of fair value use. The second stream of research examines the impact of fair value reporting in real estate industry. Findings suggest that empirical evidence is still limited with respect to creditors, managers and financial analysts; fair value reporting is generally associated with higher level of value relevance for investors; and the use of Level 3 inputs in fair value estimates for investment properties is associated with high degree of estimation uncertainty for external auditors leading to increased audit risk and fees. Practical implications With respect to regulators, this review emphasizes that the beneficial impacts of fair value reporting are linked to institutional characteristics (e.g. legal system, the degree of market development), the reliability concerns regarding fair value estimates and the independence of appraiser. Because real estate industry is generally characterized by the lack of active market, regulators may adopt regulations requiring the independence external appraiser. Originality/value This literature review represents a historical record and an introduction for accounting scholars, in emerging economies and other settings, where fair value accounting has gained wide acceptance among the investment community. It also offers guidance for future research avenues.

Shifting Economic Allegiance of Capital Gains

Technological advances and the digitalization of the global economy have created an economic environment beyond the imagination of the original designers of the international tax system. Much scholarly attention has been paid to the question of how these economic transformations should affect which country is able to tax a multinational company’s income. But which country should be able to tax capital gains income from the sale of that company’s shares is an important and overlooked question. This Article answers this question. It concludes that taxing authority over capital gains income must be reallocated to the countries in which companies conduct business. In our modern, digitalized economy, this reallocation is necessary to align international sourcing rules with international tax law’s underlying principles. While this Article is a primarily a proof of concept, it also seeks to begin a conversation about ways to implement this reallocation and describes one possible approach: an annual mark-to market tax at the company level on increases in company value apportioned amongst source countries based on a set formula.

Effect of corporate governance and enforcement on fair value accounting in Brazil

PurposeThis paper aims to investigate whether Brazilian firms that legally bond to stricter enforcement and commit to stringent corporate governance requirements experience increased value relevance of discretionary fair value measurements (Levels 2 and 3), and how different measurement levels are associated with firms’ systematic risk.Design/methodology/approachThe Brazilian data’s distinctive feature helps in analyzing fair value’s relevance in an emerging market with heterogeneous enforcement regimes. Given the inherent self-selection in corporate governance levels and cross-listing decisions, the authors use a two-step generalized method of moments approach. Building upon Song et al.’s (2010) framework, the authors carefully address potential selection biases. Furthermore, the authors expand Riedl and Serafeim’s (2011) model, based on Ohlson’s (1995) model, to explore whether the negative correlation between Level 1 net assets (assets minus liabilities) and firms’ beta is more pronounced compared to Levels 2 or 3 net assets. Additionally, the authors investigate whether this relationship intensifies when firms align themselves with enhanced governance structures and stricter enforcement regimes.FindingsFair value measurements which require more judgment (Levels 2 and 3) are more value-relevant when a firm is legally bonded to higher enforcement and better corporate governance. Level 1 fair values of these firms’ net assets are associated with lower systematic risk, while Levels 2 and 3 fair values (high subjectivity valuation) are not.Originality/valueThe authors show that firms that bond to better corporate governance and stricter enforcement regimes mitigate the information risk involved in subjective fair-value measurements.

The Role of Fair Value Accounting in Debt Structure Decisions: Evidence from Priority Structure and Financial Flexibility

Synopsis The research problem This study investigates whether the debt structure of a firm — that is, how a firm organizes its debt contracts — depends on the extent to which fair value measurement is applied to the balance sheet. Motivation Most public firms have a nontrivial percentage of balance sheet items measured at fair value under the mixed attribute accounting, and there is a lack of understanding of its effect on the reporting entity’s debt structure. This study focuses on two aspects of the debt structure that have both practical and theoretical relevance, namely the priority structure and the financial flexibility. A priority structure involves the simultaneous use of different priorities of debt and is common among risky borrowers. Survey results show that financial flexibility is of first-order importance regarding the debt policy of firms. Here, financial flexibility refers to a firm’s ability to pursue new investment opportunities via debt issuance. The test hypotheses The first hypothesis states that a borrower with a higher percentage of balance sheet items measured at fair value is less likely to have a priority structure. The second hypothesis states that a borrower with a higher portion of balance sheet items measured at fair value likely has a debt structure that is more financially flexible. The third hypothesis states that the fair value of liabilities and the fair value of assets are equally relevant to debt structure decisions. Target population This study focuses on nonfinancial firms in North America that are subject to the mixed attribute accounting, which measures a certain percentage of assets and liabilities at fair value. Adopted methodology The main tests use multivariate analysis that includes both logistic regressions and OLS regressions. Additional tests include cross-sectional analyses and the Granger causality test. Analysis Using a sample constructed from Compustat North America and Capital IQ (6,220 firms and 36,487 firm-year observations), the main tests regress dependent variables, namely the priority structure measures and financial flexibility, on the exposure to fair value measurement. Findings Results show that fair value measurement reduces information asymmetry and has favorable effects on the debt structure. A high exposure to fair value measurement reduces the need for a priority structure. A high exposure to fair value measurement also enhances financial flexibility. Additional analyses reveal that the favorable effect mainly comes from assets measured at fair value. The effect becomes weaker with respect to liabilities measured at fair value.

Unresolved Financial Reporting Issues: Opportunities for International Accounting Research

ABSTRACT This article identifies unresolved financial reporting issues that research can help resolve and provides examples of how adopting an international perspective can deepen the insights obtained from the research. Some of the issues pertain to well-established literatures—intangible assets, risk and uncertainty, fair value accounting, conservatism, and earnings management. Others are relatively new—namely, sustainability, particularly climate change, and digital assets, particularly crypto assets. Addressing these issues could require a reconsideration of the concepts underlying accounting standards, including thinking more broadly about accounting information to encompass more than information in financial statements, including more nonfinancial information. Regardless, there are many opportunities for international accounting research to address open questions these issues raise to provide insights into how global financial accounting and reporting might be improved.

On the Ethics of Fair Value Accounting: Distributive Effects, Distributive Injustice, and Implications for Social Peace

Fair value accounting is at the heart of arguably the world’s most prominent accounting standards, particularly US GAAP and IFRS. Fair value measurement has been the subject of intense debate. Among other things, it has been analyzed from an ethical perspective. However, this discussion has mainly been limited to the judgment involved in fair value measurement and the ethics of fair value in its ability to provide decision-useful information to interested parties. This study pushes the boundaries by adding a new dimension to the discussion of the ethics of fair value accounting by examining its ethics from a more systemic and societal perspective. Drawing on Austrian business cycle theory, it argues that fair value accounting facilitates certain distributive effects in inflationary monetary environments, thereby contributing to distributive injustice and potentially to social discord. In this respect, fair value accounting—in contrast to historical cost accounting—should not be considered fair or just, but unethical instead.

Understanding Private Equity Funds: A Guide to Private Equity Research in Accounting

ABSTRACT Private equity (PE) funds are increasingly important to the economy and now serve as the primary vehicle for raising new capital. However, a limited understanding of the unique PE fund setting among accounting academics inhibits accounting research in this area. In this paper, we first describe the PE fund setting and explain how fundamental differences between PE and previously studied settings make it difficult to infer PE fund behavior from research performed using other settings. We then discuss how PE funds provide researchers with the ability to explore fundamental questions related to agency costs, governance, compensation, disclosure, and fair value accounting. Finally, we provide guidance on PE data sources available for use in future research. Because of the volume of economic activity currently funneled through PE and the unique aspects of the PE setting, it is important for researchers to explore when, why, and how accounting matters for PE funds. Data Availability: Data used in this study are available from the public sources identified in the text. JEL Classifications: G1; G14; G30; M4; M41.

The impact of a fair value accounting application on takaful insurance surplus: Insights from Shikan insurance and reinsurance company limited in Sudan

This study examines the impact of fair value accounting implementation on the quality of measuring, equitable distribution and enhanced disclosure of takaful insurance surplus within Shikan Takaful Insurance and Reinsurance Company Limited's financial statements. Data was collected using a two-part questionnaire and a descriptive analysis technique: one gathering personal data about respondents and the other exploring study themes across four dimensions to test hypotheses. The questionnaire was distributed to a random sample of 60 corporate employees and 54 individuals responded, reflecting a 90% response rate. Data analysis used the Statistical Package for Social Sciences (SPSS). Three hypotheses were tested: (1) a positive relationship between fair value accounting and the accuracy of takaful insurance surplus measurement. (2) A positive relationship between fair value accounting and the equitable distribution of takaful insurance surplus. (3) A positive correlation between fair value accounting and enhanced disclosure of takaful insurance surplus. Results demonstrate a positive influence of fair value accounting on surplus measurement quality, equitable distribution and improved disclosure in company financial statements. The study recommends the crucial adoption of fair value accounting practices in insurance and reinsurance companies emphasizing the necessity of maintaining commitment to fair value accounting. Additionally, promoting full disclosure of takaful insurance surplus in financial statements is highlighted as a valuable tool for attracting new policyholders.

A ‘Distributional Apparatus’ for real estate: Fair value accounting and the assetization of UK property

Research on housing financialization argues that property assets are important stores of value that collateralise global systems of financial accumulation. Yet remarkably little is known about how those assets are constructed, valued and generate returns. This paper draws on the assetization literature to unpack how investment properties are constructed as ‘assets’, applying an accounting lens to locate their growing importance within the move towards a fair value accounting regime. We argue that property investors benefit from a generous 'distributional apparatus' - that is, a collection of rules, norms, reporting technologies and market-orienting devices that act as both a resource and an incentive to engage in practices of valuation that maximise potential distributions. In the case of property assets, accounting rule IAS40 determines how housing assets should be recognised in an annual statement; the RICS Red Book acts as a market device which articulates with IAS40, providing rules and principles on the techniques of valuation and revaluation; and the ICAEW provides guidance on whether revaluations amount to a ‘realised profit’ which can be distributed to shareholders legally. Together these three features underpin the assetization process in investment property. We use two case studies to show that this apparatus acts as a flexible resource as companies build different valuation and distribution strategies around the RICS Red Book revaluation process, with different risk implications. Our findings contribute to financialization, assetization and accounting scholarship.

The Effect of Fair Value Accounting on Firm Public Debt – Evidence from Business Combinations Under Common Control

We analyze the choice allowed to parent firms under IFRS of how to account for a business combination under common control (BCUCC), and provide evidence on the motivation to select fair values and the economic implications of this choice. A BCUCC is a merger of two firms owned by the same parent. Under IFRS, parent firms can use the acquisition method (fair values) to record the BCUCC or use assets’ historical cost. We show that parents are likely to choose fair values when they desire to increase the transparency of their financial reports and when they likely need to raise capital. Using propensity-score matching, we find that firms that used fair values are more likely to issue new public debt following the transaction. We also find that the cost of issuing new debt for these firms is 55 basis points lower than that of comparable firms that did not do BCUCCs. Our results suggest that using fair values in BCUCCs can increase transparency and lower firms’ cost of debt.

Do others comprehensive income, profit, and equity attributable impact external audit fee?

Research aims: Fair value accounting, fairness, and transparency are the basis for other comprehensive income (OCI), profit, and equity attributable. This research aims to analyze the impact of adding this information on external audit fees, considering that the content of financial reports becomes more extensive with a longer format.Design/Methodology/Approach: This study tested the influence of aggregate OCI, OCI to be reclassified, profit and equity attributable, and control variables (size, ROA, leverage, period, type of industry) on audit fees in 238 companies registered on IDX in all business sectors for the 2015-2021 period with data 1,666 observations.Research findings: Additional information on OCI, profits, and equity attributable has been proven to influence external audit fees because the inherent properties of OCI, such as the level of management subjectivity, sensitivity to externals, high volatility and exposure, as well as the complexity of the holding company reflecting the attribution value, could increase audit work and audit risk in assessing the fairness of OCI presentation and attribution.Theoretical contribution/ Originality: This study provides empirical evidence in Indonesia on how OCI disaggregation (reclassification), profit, and equity attributable affect external audit fees.Practitioner/Policy implication: For management, it can be an input in predicting the amount of audit fees, and for external auditors, it can be a consideration in determining the amount of audit fees by taking into account additional audit procedures due to OCI and profit attribution.Research limitation/Implication: The limitation of this research is that in measuring OCI reclassification, it only included the holding company, while OCI in subsidiaries and associations was not involved.

Managerial Ability and Fair Value Accounting: The Mediating role of Incentive-based Compensation

Managerial Ability and Fair Value Accounting: The Mediating role of Incentive-based Compensation

Opportunistic motivation on fair value accounting of investment properties: Does corporate governance matter in Indonesia?

Opportunistic motivation on fair value accounting of investment properties: Does corporate governance matter in Indonesia?

Calculation of present value for the purposes of determining fair value in accounting: analysis of the main approaches and related problems

Thanks to the references in the Russian Federal Accounting Standards (FAS) to IFRS 13, when determining fair value, Russian and international accounting now contain the same rules for calculating this valuation, including on the basis of present value. However, these rules cannot be called very simple. In addition, they are quite unusual for Russian accountants. In this regard, the study of issues related to the calculation of discounted value used to determine fair value seems very relevant. This study is the subject of this article. When conducting research, methods such as the grouping method, analysis and synthesis, comparison, method of analogies, logical approach, and systematic approach were used. As a result of the research, this work analyzes the main approaches to calculating present value used to determine fair value, and identifies the most important problems arising in this area. The results obtained in this article will be useful to a wide range of readers interested in modern problems of Russian and international accounting; they can be used in the educational process of higher educational institutions, in the practical work of accounting departments, as well as in the development and improvement of relevant domestic and foreign regulatory documents on accounting.

Value Relevance Research in Accounting and Reporting Domains: A Bibliometric Analysis

This review systematically investigates the body of scientific knowledge on value relevance in accounting and reporting fields through a mixed method integrating bibliometric and systematic literature review (SLR) instruments. A dataset of 918 journal articles published from 1996 to 2020 was identified and processed by combining different bibliometric instruments. Findings highlight the most influential articles, journals, authors and countries and the most relevant thematic clusters: IFRS introduction and value relevance of accounting data; Capital market, earnings and equity book values; intangibles and non-financial information; Fair value accounting and goodwill. The main insights from the most relevant contributions were discussed for each cluster. Promising research areas and future research opportunities were also outlined. To the best of the authors’ knowledge, this is the first study that integrates bibliometric and SLR instruments to provide a comprehensive outlook of the scientific debate originating from value relevance research.

Fair value accounting and the cost of corporate bonds: the role of auditor expertise

Purpose This study aims to examine the association between fair value accounting and the cost of corporate bonds, proxied by bond yield spread. In addition, this study explores the moderating role of auditor industry expertise at both the national and the city levels. Design/methodology/approach This study first examines the effect of the use of fair value on yield spread by estimating firm-level regression model, where fair value is the testing variable and yield spread is the dependent variable. To test the differential impact of the three levels of fair value inputs, this paper divides the fair value measures based on the three-level hierarchy, Level 1, Level 2 and Level 3, and replace them as the test variables in the regression model. Findings This study finds that the application of fair value accounting is generally associated with a higher bond yield spread, primarily driven by Level 3 estimates. The results also show that national-level auditor industry expertise is associated with lower bond yield spreads for Level 1 and Level 3 fair value inputs, whereas the impact of city-level auditor industry expertise on bondholders is mainly on Level 3 fair value inputs. Research limitations/implications The paper innovates by exploring the impact of fair value accounting in a setting that extends beyond financial institutions, the traditional area of focus. Moreover, most prior research considers private debt, whereas this study examines public bonds, for which investors are more likely to rely on financial reporting for their information about a firm. Finally, the study differentiates between city- and national-level industry expertise in examining the role of auditors. Practical implications This research has several practical implications. First, firms seeking to raise debt capital should consider involving auditors, with either industry expertise or fair value expertise, due to the roles that auditors play in safeguarding the reliability of fair value measures, particularly for Level 3 measurements. Second, from standard-setting and regulatory perspectives, the study’s findings that fair value accounting is associated with higher bond yield spread cast further doubt on the net benefits of applying a full fair value accounting regime. Third, PCAOB may consider enhancing guidance to auditors on Level 2 fair value inputs, to further enhance audit quality. Finally, creditors can be more cautious in interpretating accounting information based on fair value while viewing the employment of auditor experts as a positive signal. Originality/value First, the paper extends research on the role of accounting information in public debt contracting. Second, this study adds to the auditing literature about the impact of industry expertise. Finally, and more generally, this study adds to the ongoing controversy on the application of fair value accounting.