Fair Value Accounting Research Articles

Fair value complexity and financial statement comparability

ABSTRACT This study examines whether fair value accounting and its complexity influence financial statement comparability. Using quarterly US bank holding company data from 2008 to 2014, I find that the proportion of assets and liabilities that are fair valued is negatively associated with financial statement comparability and that this negative relation appears to be driven by the less verifiable (lower-level) fair value estimates. Under the three-level hierarchy of SFAS 157, the financial statements of a bank become less comparable with those of other banks as the complexity of its fair value estimates increases. Overall, these results indicate that fair value complexity has a negative influence on comparability.

Valuation Implications of FAS 159 Reported Gains and Losses From Fair Value Accounting for Liabilities

This study examines the economic implications of fair value liability gains and losses arising from the adoption of Statement of Financial Accounting Standards No. 159 (hereafter, FAS 159). We find a positive correspondence between a firm’s FAS 159 fair value liability gains and losses and current period stock returns, consistent with the notion that these gains and losses are priced by equity investors. However, further analysis indicates that fair value gains and losses from liabilities have a statistically significant negative association with future returns, suggesting that investors misprice this earnings component and subsequently correct the mispricing. We also find that the negative association for fair value gains is stronger for firms with lower levels of institutional ownership.

Convergence in Motion: A Review of Fair Value Levels’ Relevance

ABSTRACT The IFRS 13 post-implementation review by the IASB motivates our investigation on the value relevance of fair value (FV) measurement hierarchy (i.e. level 1, level 2, and level 3). First, using a meta-analysis, which allows us to summarize inconsistent empirical findings, we synthesize studies on the value relevance of the FV hierarchy. Overall, value relevance is lower for level 3 than for levels 1 and 2, but it increases over time. In non-U.S. studies, we note lower value relevance across all levels of FV assets. Underlying asset fundamentals, model risk, and measurement process complexity may contribute to this value relevance gap. Second, from interviews with professionals from financial institutions, we note that, in practice, there has been extensive learning about FV accounting since the 2007–9 Financial Crisis and a formalization of the valuation process that the academic literature has yet to fully recognize. We thus highlight conceptual and methodological issues and areas for research with practical implications.

The Value Relevance of Fair Value Levels: Time Trends under IFRS and U.S. GAAP

ABSTRACT The IASB's post-implementation review of IFRS 13 Fair Value Measurement motivates our analysis of the evolution of the value relevance of fair value (FV) levels over time on banks that report under IFRS and U.S. GAAP. For both sets of standards, results provide evidence that is consistent with (1) an increase in value relevance across all three FV levels over time, and (2) a convergence of the value relevance of the three FV levels over time. However, FV levels exhibit systematically higher value relevance under U.S. GAAP compared to IFRS. Such gap has closed to some extent since the enactment of IFRS 13. This evolution is likely due to learning about FV accounting and changes in financial reporting regulations that increased disclosure requirements. These findings confirm the IASB's conclusions that FV levels’ disclosure is useful to users of financial statements, but also emphasizes preparers and investors’ learning over time.

TIMING, RECURRENCE, AND EFFECTS OF FIXED ASSET REVALUATION: EVIDENCE FROM BANGLADESH

This study intended to explore when and how often fixed asset revaluation (FAR) is practiced in Bangladesh and explain the impacts of FAR on net asset value (NAV), stock prices, and debts of companies. Based on 175 listed companies on the Dhaka Stock Exchange, this study found increasing use of the revaluation model where the textile industry witnessed the highest number of revaluations. Most of the listed companies were irregular revaluer, and they performed FAR during the bull market in 2010. Most newly listed companies did it just before their initial public offerings (IPO). The results of the Wilcoxon signed-rank test imply that the changes in NAV, stock prices, and total debts after revaluation were statistically significant. This study found evidence of enhancing debt capacity and stock prices of several companies through improved NAV. The findings will assist regulators to recognize the consequence of revaluation and enable them to take an appropriate stance for controlling abusive and creative reporting. The study will also make investors cautious about companies with revaluation induced assets. This study suggests that companies practicing the revaluation model should perform FAR on regular intervals to reduce information asymmetry about assets’ value and thus help improve investors’ confidence. Keywords: Fair value accounting, IAS 16, PP&E, Bull-bear market, Information asymmetry, NAV JEL Classifications : G1, G11, M41, M48 DOI: https://doi.org/10.32479/ijefi.10828

Managerial ability and fair value accounting: evidence from nonfinancial firms

PurposeThe purpose of this study is to examine the relation between managerial ability and fair value inputs (measured as fair value intensity) for nonfinancial firms.Design/methodology/approachThis study uses regression analysis to investigate the impact of managerial ability on the level of fair value inputs.FindingsThis study finds significant and positive relations between managerial ability and use of Level 1 and Level 2 fair value inputs. On the other hand, this study finds an insignificant relation between managerial ability and Level 3 inputs.Originality/valueThe findings contribute to two research streams. To the best of the author’s knowledge, this is perhaps the first study that directly examines the link between managerial ability and fair value inputs.

“Taking Diversity Into Account”: Real effects of accounting measurement on asset allocation

In the wake of the financial crisis, accounting issues have caught the attention of both economists and regulators. Fair value accounting has indeed been charged of amplifying the procyclicality of the banking system. Real effects of accounting are therefore to be taken into consideration when discussing the issues raised by the crisis. We develop a theoretical model to study what the real effects of accounting on financial institutions’ investment decision are. Doing so, we show that fair value accounting may incentivize banks to underinvest in long-term risky assets, while historical cost accounting may incentivize them to invest too much in those assets. At first sight, bank accounting thus appears as a choice between bad and worse. We show that this is not necessarily the case. More precisely, if financial institutions are subject to different accounting rules depending on their time horizon – i.e. long-sighted financial institutions are subject to historical cost accounting while shorter-sighted financial institutions are subject to fair value accounting – the inefficiencies associated with both accounting rules may be softened.

Fair value accounting implementation challenges in South Africa

PurposeThe objective of this research is to explore the challenges being encountered when applying and implementing fair value accounting requirements, focusing specifically on the determination of fair value per International Financial Reporting Standards (IFRS) 13: Fair value measurement (IFRS 13) in the South African capital market.Design/methodology/approachData are collected from 20 detailed interviews, primarily with preparers and interpretively analysed to identify how individuals internalise the requirements of IFRS 13 and the challenges associated with its application. The researchers focus specifically on South Africa because of its status as a developing economy and, at the same time, its extensive experience in applying IFRS.FindingsSouth African preparers appear reluctant to change from a conventional cost-based measurement approach to one grounded in fair value. Primary concerns include the perceived usefulness of fair value accounting and its conceptual appropriateness, given its perceived de-emphasis of the traditional stewardship role of financial reporting. Related challenges to the application of IFRS 13 include concerns about the cost of determining fair value; the inherent subjectivity of fair value measures and the practical difficulty of calculating fair values when markets are not efficient or where business environments are complex and dynamic where Level 1 inputs are not widely available for all assets and liabilities. These challenges encourage preparers to choose accounting policies, which minimise the use of fair value or apply the provisions of IFRS 13 legalistically.Research limitations/implicationsData are collected from a group of respondents from a single developing economy. Additional research on the application of IFRS 13 in other developing markets will be required to conclude on the relevance of economic, cultural and social factors for the understanding and implementation of new accounting standards by practitioners.Practical implicationsStandard setters and regulators cannot assume that new accounting standards will be interpreted and applied as intended. Even when compliance with IFRS is mandatory, preparers have considerable discretion when it comes to operationalising accounting prescriptions. Unless the challenges raised by preparers are addressed, misapplication of IFRS is likely to continue.Originality/valueThe research makes an important empirical and practical contribution by providing primary evidence on the operationalisation of IFRS 13 in a novel setting. It complements earlier research which has focused primarily on the conceptual/theoretical dimension and on American and European perspectives.

Forecast of factors affecting the fair value accounting in Vietnamese listed companies

Forecast of factors affecting the fair value accounting in Vietnamese listed companies

Accounting for sustainable finance: does fair value measurement fit for long-term equity investments?

PurposeThe purpose of this paper is to discuss whether fair value accounting fits for long-term equity investments, which are considered key to retool economies according to sustainability criteria. In doing so, the paper focuses on the European Union and addresses the European Commission’s (2018a) concern that current accounting rules are unfit for achieving the United Nations Sustainable Development goals and the targets of the Paris Agreement on climate change.Design/methodology/approachThe paper grounds in a wide literature review on the effects of fair value accounting on investors’ asset allocation strategies. By critically integrating literature on the notion of long-term investment with theories and possible accounting approaches, the paper provides implications for a revision of the current measurement system for long-term equity investments.FindingsThe literature review supports the view that fair value accounting has played a role in discouraging equity investments over time, thus leaving economies with poorer risk-sharing and weaker long-term investments. The paper contributes to the debate on alternative measurement systems by suggesting possible solutions in relation to controversies arising from empirical evidence.Originality/valueReorienting economies according to sustainability criteria represents an urgent issue which requires prompt and policy-oriented responses. Accordingly, this paper offers insights and guidelines that can help policymakers revise current accounting rules for long-term equity investments in line with sustainable development objectives.

On theoretical engorgement and the myth of fair value accounting in China: a reply

PurposeThis article is a reply to “On theoretical engorgement and the myth of fair value accounting in China” Nobes (2019) from the authors of “Adaptability to fair value accounting in an emerging economy: A case study of China's IRFS convergence” (Peng and Bewley, 2010) and “The Winding Road to Fair Value Accounting in China: A Social Movement Analysis” (Bewley et al., 2018).Design/methodology/approachThis article engages directly with the arguments of the criticism.FindingsThis article argues that the author of the commentary misunderstands the purpose, content and findings of both papers. By providing only a narrowly focused technical analysis of the new Chinese accounting standards, the author fails to see that their qualitative research approach reveals important, complex social and political factors at play in China's attempts to adopt modern international accounting principles. The commentary expresses a view that accounting is a neutral technology that needs only to be clearly defined and enumerated to be correctly implemented, whereas this research takes a much broader and deeper perspective. The authors seek to understand how China was able to successfully adopt fair value accounting standards in 2006, whereas an earlier attempt to introduce fair value in 1998 had led to abuse of fair value measurements and the eventual repeal of fair value regulations in 2001.Practical implicationsThis article helps clarify the purpose of qualitative accounting research, the role of theory in such research and the usefulness of theory in describing and explaining empirical case facts related to changes in accounting standards, particularly in an international context.Originality/valueThis article contributes to a better appreciation of qualitative accounting research.

Fair Valuations of Non-Traded Financial Assets: Evidence from the Mutual Fund Industry

We exploit a growing trend of mutual funds investing in private companies to examine the practice of fair value accounting. This particular setting provides a unique opportunity to examine fair value accounting because multiple mutual funds are required to simultaneously report valuations of identical assets that are not publicly traded. We find that funds’ valuations of private companies are much sticker than that of publicly traded companies. In more than a third of the quarterly observations of private companies, valuations are unchanged from the prior quarter – compared to only 0.1% for publicly traded companies. In fact, for 16% of the observations of private companies, valuations are unchanged for at least a year after a fund’s initial investment. We empirically examine potential explanations for this stickiness. First, we provide some evidence that changes in the valuation of private companies are timed to improve funds’ performance rankings, but no evidence that the valuations associated with changes are biased to improve rankings. Second, consistent with funds managing reporting costs and risks associated with fair value accounting by recording changes only when there is a compelling case for doing so, we provide evidence that changes often follow large macroeconomic and firm specific events, and that change behavior is highly correlated across funds and fund families. Finally, we find that changes are more likely around large negative market fluctuations than large positive market fluctuations suggesting that funds perceive that reporting risks associated with fair value accounting are asymmetric in nature.

Mark-to-Market (or Wealth) Taxation in the U.S.: Evidence from Options

Recent U.S. tax proposals under various names (e.g., wealth taxes, estate tax reform, etc.) center on mark-to-market (MTM) taxation, which eliminates investors’ ability to defer or avoid capital gains taxes. To provide insight on potential effects of these tax proposals, we exploit a unique U.S. setting where “index” options on the S&P 500 Index (SPX) face MTM taxation whereas nearly identical “non-index” options on the exchange traded fund (ETF) tracking the S&P 500 Index (SPY) do not. We find new evidence of asset price consequences to MTM taxation, suggesting that MTM taxation depresses asset prices as investors appear to avoid assets subject to MTM near year-end. Additional analysis suggests this result is driven by tax, rather than administrative, costs of MTM. From a policy perspective, this suggests that 1) MTM taxation has negative, unintended market consequences in the U.S. and 2) U.S. investors will engage in actions to avoid MTM taxation. Both attributes caution policymakers in any attempts to broaden MTM taxation.

Financial Reporting under Economic Policy Uncertainty

In this paper, I discuss financial reporting under economic policy uncertainty. This paper is one of the first papers to relate economic policy uncertainty to financial reporting behaviour. It identifies the link between economic policy uncertainty and financial reporting in terms of earnings management and fair value accounting. It argues that high economic policy uncertainty will transmit fewer new information to firms which can motivate managers to influence accounting numbers in the direction of the desired financial reporting outcome. The discussion in the paper adds to our understanding of how economic conditions affect financial reporting outcomes.

The Value Relevance of Fair Value Levels: Time Trends under IFRS and U.S. GAAP

The IASB’s post-implementation review of IFRS 13 Fair Value Measurement motivates our analysis of the evolution of the value relevance of fair value (FV) levels over time on banks that report under IFRS and U.S. GAAP. For both sets of standards, results provide evidence that is consistent with (1) an increase in value relevance across all three FV levels over time, and (2) a convergence of the value relevance of the three FV levels over time. However, FV levels exhibit systematically higher value relevance under U.S. GAAP compared to IFRS. Such gap has closed to some extent since the enactment of IFRS 13. This evolution is likely due to learning about FV accounting and changes in financial reporting regulations that increased disclosure requirements. These findings confirm the IASB’s conclusions that FV levels’ disclosure is useful to users of financial statements, but also emphasizes preparers and investors’ learning over time.

Investment and Contagion Tradeoffs Between Fair Value and Historical Cost Accounting

Investment and Contagion Tradeoffs Between Fair Value and Historical Cost Accounting

Fair Value Accounting for Non-Current Assets and its Role in Determining Auditing Fees

The study aimed to identify the role of non-current assets’ fair value in determining audit fees, in addition to studying the impact of non-current assets’ fair value on audit fees. This was achieved through different valuation methods and the corporate governance represented by board independence for the period of 2013 to 2018. The study included 50 industrial companies listed on the ASE. 'The panel data was processed using the fixed effects model, and the study found that there is a reverse effect of the non-current assets’ fair value on the audit fees. Furthermore, the study found a difference in the non-current assets’ fair value on audit fees through corporate governance represented by the independent board of directors as well as a difference in the non-current assets’ fair value on audit fees by different fair value valuation methods measured at the first, second and third levels.

Financial reporting under economic policy uncertainty

Purpose This paper aims to discuss financial reporting under economic policy uncertainty. Design/methodology/approach The paper uses discourse analysis to examine financial reporting under economic policy uncertainty. Findings The paper identifies the link between economic policy uncertainty and financial reporting, in terms of earnings management and fair value accounting. It argues that high economic policy uncertainty will transmit fewer new information to firms which can motivate managers to influence accounting numbers in the direction of the desired financial reporting outcome. Originality/value The relationship between economic policy uncertainty and financial reporting has not been studied. This paper is one of the first papers to relate economic policy uncertainty to financial reporting behavior.

Decision Usefulness of Net Income versus Comprehensive Income: Case of Financial Firms in Malaysia

Research aims: This paper aims at investigating the decision usefulness, namely predictive power and value relevance, of Net Income (NI) in comparison with Comprehensive Income (CI) for financial firms in Malaysia. Design/Methodology/Approach: Panel data analysis techniques are used. An unbalanced panel data is obtained from 29 financial firms listed in Malaysia from 2012 to 2017. Research findings: Pertaining to predictive power tests, there is not enough evidence to conclude that one accounting metric has better predictive power than the other. In terms of value relevance, the results show that NI is better than CI using both Price and Return models. This indicates that NI is more decision useful to investors than CI for financial firms in Malaysia. Originality: This study expands on the literature on the decision usefulness of NI in comparison with CI for financial firms in the context of an emerging economy with a smaller and less efficient market in the Asian region such as Malaysia. This study is related to fair value accounting (FVA) where it is still underexplored in the Malaysian setting. Hence, this study may provide some insights to the financial statements’ users in understanding the effects of FVA on reported earnings in Malaysia where such evidence is lacking. Practitioner/Policy implications: The findings may assist investors in making better investment decisions in the Malaysian market. This study may benefit the academicians by offering a body of knowledge as a reference for furthering and broadening their research on this area in other jurisdictions. The paper may also be relevant to the standard setters, regulators, and policymakers as it offers empirical evidence on the decision usefulness of accounting information disclosure in the context of an emerging country such as Malaysia.

Unfair “Fair Value” in Illiquid Markets: Information Spillover Effects in Times of Crisis

We investigate the effects of write-downs on market prices and volumes under fair value accounting. We also examine the prominent role that illiquidity plays in exacerbating the direct and spillover effects of exit valuation on equity and credit default swap (CDS) markets. Using hand-collected data on write-down announcements made during and after the 2007–2009 financial crisis, we find that firms that wrote down assets in accordance with fair value rules experience significant abnormal negative stock returns and spikes in the CDS premiums written on their obligations; similar firms without write-downs exhibit sympathetic and significant negative abnormal returns and positive premiums. We find that both the direct effect of the write-downs and the indirect spillover effects resulting from crisis-related illiquidity in the markets for financial assets (affecting the magnitude of write-downs) and in the securities markets (affecting the reaction to the write-downs) during the financial crisis go beyond normal direct and information transfer effects and may have contributed to the adverse consequences of the crisis. This paper was accepted by Shiva Rajgopal, accounting.