Fair Value Accounting Research Articles

Exploring the Relevance and Reliability of Fair Value Accounting

Abstract While the FASB had regarded relevance and reliability as two of the most important qualitative characteristics for years, it replaced reliability with faithful representation revising its Concepts Statement No. 2 in 2010. Even if fair values are relevant for the measurement of assets and liabilities, these figures are not necessarily reliable or verifiable. We believe this point is the central message of Ramanna, K. (2022). Unreliable accounts: How regulators fabricate conceptual narratives to diffuse criticism. Accounting, Economics and Law: A convivium forthcoming. The application of fair value measurement has been substantially extended recently to income recognition of not-for-trading financial instruments and even non-financial assets. Is this extension due to the primacy of relevance over reliability, or the relaxing of requirement for reliability toward faithful representation? Whatever measurement method we use, it is absolutely necessary to construct a system of concepts on which the purpose of measurement should be established. In spite of the fact that any measurement method is a means to intended purposes, if we first chose a particular method and applied it to every situation slavishly, we would become similar to a bogus doctor selling a fake drug as panacea valid for any disease.

An agricultural sector assessment of biological asset valuation challenges with inputs considered from valuers

Purpose: Establish whether the industry biological asset fair valuing challenges are country-specific or agricultural-sector specific. Determine how the inputs and challenges experienced by the valuers relate to the industry challenges. Research Methodology: Descriptive, qualitative conceptual content analysis of financial reports of 50 listed organizations across 10 countries from 2012 to 2015; with relational content analysis through in-person interviews with 24 biological asset valuers. Results: This paper contradicts prior research as no correlation was identified between large agricultural organizations and the extent of biological asset disclosures. The biological asset valuation and disclosure challenges are not country-specific or agricultural-sector-specific and the inconsistency in factors applied by the valuers appears to impact the industry challenges directly. Limitations: As biological assets are only held by agricultural organizations of which not all fair value the assets to report thereon – limiting the number of interviews to 24. Data collected via the interviews represent the challenges and valuation considerations of the individuals and their exposure to biological asset valuations. Contribution: This research analyzed and categorised the biological asset valuation challenges to determine whether it is country-specific and/or unique to an agricultural sector. The input factors and challenges experienced by the valuers in relation to the reporting challenges allow a relational analysis of the industry challenges. Keywords: Biological asset valuation, Decision-enhancing disclosures, Fair value accounting, Users of financial statements, Valuation elements

Acceptability of Fair Value Accounting In Indian Corporate Sector – An Opinion Study

Ministry of Corporate Affairs (MCA), Govt. of India, by its notification dated 16.02.2015, in exercise of the powers conferred by section 133 read with section 469 of the Companies Act, 2013 in consultation with the NACAS, introduced a new accounting standard rules which has converged Indian Accounting Standards in the line of IFRSs (i.e. Ind ASs). MCA has notified 39 Ind. ASs till date including a separate Ind AS on Fair Value Measurement (Ind AS 113). Companies (Indian Accounting Standards) Rules, 2015 and its subsequent amendments stipulate adoption and applicability of Ind ASs in Indian corporate financial reporting in a phased manner mandatorily from the financial year 2016-17. Therefore, in India, financial statements for the year ended 31st March, 2017 are the first that some specified companies have already prepared adopting Ind ASs as well as applying fair value measurement with a transition date of 1st April, 2015. The undertaken research study is a humble endeavour to judge opinions of Indian academicians and professionals in the field of accounting regarding acceptability and impact of application of fair value method on Indian corporate financial reporting. For the purpose, we conducted an opinion study through questionnaire survey with the Indian academicians and professionals. In the opinion survey, it has been observed that most of the respondents advocate for presentation of assets and liabilities in the financial statements at fair value, instead of historical cost.

How to Re-Conceptualize and Re-Integrate Climate Finance Into Society Through Ecological Accounting?

In this paper, we argue that current finance, and the prevailing fair value accounting system, is disconnected from companies and from strong sustainability requirements, making it difficult to develop a climate finance system that is operational and aligned with the challenges of climate preservation. Based on this observation, we propose an exploratory and theoretical study which introduces how and why a particular and innovative ecological accounting approach, the CARE model, currently called upon by a growing number of practitioners and researchers, is a relevant framework to re-conceptualize the issue of climate finance. From a theoretical point of view, CARE offers a suitable language for structuring the issues of ecological costs, debts and conservation and associated financing. From a practical point of view, it offers a methodological support that can be used to address these issues, from an accounting and management point of view as well as from an investor's point of view, ensuring compliance with the Paris Agreements 2°C goal in particular.

An Analytical Study for the Relationship between Fair Value Accounting and Earning Management

The use of Fair Value in financial reporting has developed a debate about the impact of fair value accounting on Earning Quality. FVA is a market-based measurement. Nevertheless, Fair Value is considered unreliable and often it is subject to managerial discretion, especially when markets are illiquid or inactive. Fair value is based on subjectivity in estimation that allows management opportunities for the exercise of judgments and intentional bias as a result the quality of financial reporting decrease and negatively affects stakeholders’ decisions. Management discretion can result in a higher earning quality and in a reduced amount of earning quality.

Analytical Analysis for the Impact of Fair Value Accounting on Audit Quality Practices

Analytical Analysis for the Impact of Fair Value Accounting on Audit Quality Practices

Relationship between Fair Value Accounting Adoption and Financial Reporting Quality

Relationship between Fair Value Accounting Adoption and Financial Reporting Quality

Hoarding Bad News: When Non-financial Firms Hold Financial Assets

This paper presents an empirical examination on how listed nonfinancial firms use one of the most important financial assets, namely, available-for-sale securities, as earnings manipulation tools because of bad-news-hoarding motives. In 2007, China set its first accounting standards for financial instruments, which classify financial assets based on the highly subjective “managerial holding intention” criterion. We find that from 2007 through 2016, the holding of available-for-sale securities is positively associated with the likelihood of stock price crashes for Chinese listed firms. The effect is more pronounced for firms with a CEO who has a finance background, higher information asymmetries, and less effective external monitoring. Our evidence indicates that in typical emerging markets, fair value accounting may have unintended consequences, inducing nonfinancial firms to employ financial assets as tools to hoard bad news.

Unreliable accounts: How regulators fabricate conceptual narratives to diffuse criticism – A response to Karthik Ramanna

Abstract Karthik Ramanna’s article titled “unreliable accounts: How regulators fabricate conceptual narratives to diffuse criticism” provides a critical insight into how Fair Value Accounting (FVA) was incorporated into the conceptual framework for general purpose financial reporting. Karthik reveals that the installation of FVA into the FASBs constitution can be understood through a framework: conceptual veiling. In this framework, the FASB is captured within the logics of financial market economics, assuming investors and capital market actors are best served by financial disclosures that reflect market valuations. Captured by these interests, the FASB needed to modify the narratives contained in the conceptual framework removing reliability and substituting faithful representation because much of what constitutes FVA disclosures are estimates and judgements of questionable reliability. A more forceful critical evaluation of the re-orientation of accounting practise from Historical Cost Accounting to FVA might have located changes in the context of the financialized company.

Fair Value Accounting and Reporting, and Firm Value: Evidence from Quoted Deposit Money Banks in Nigeria

The study evaluated the effect of fair value reporting on financial profitability and firm value with focus on deposit money banks listed on the Nigerian Stock Exchange Using a sample of 13 banks quoted on the Exchange, the study employed secondary data gathered from published annual reports of eight years (four years pre-IFRS, historical value measurement and four years post-IFRS fair value measurement) 2008 to 2015. The study was anchored on the agency theory while descriptive analysis was employed to summarize data collected while SPSS Version 23 software and regression analysis were used to analyze data. The result support the hypothesis that fair value reporting does not significantly affect reported profitability. Fair value was however found to affect firm valuation. Overall, this study suggests that he study concludes that in order to effectively evaluate financial performance and position, knowledge of fair value is not enough. Users also need to know the historical cost of the investment. Therefore, companies should adopt a hybrid form of measurement (measurements which entail both fair and historical values) in reporting their activities to reflect actual value creation.

The Impact of Fair Value Accounting on Information Asymmetry: Evidence from Jordanian Banking Sector

This study aims at examining the impact of Fair value accounting measured by other comprehensive income on information asymmetry measured by the bid-ask spread in the Jordanian banking sector between 2010 and 2017. The study sample consisted of the thirteen commercial banks listed in Amman Stock Exchange, and panel data analyses were employed to test the study hypothesis, data for the study was gathered through the annual financial reports disclosed on Amman Stock Exchange. The findings revealed that fair value has a negative and significant impact on information asymmetry in the Jordanian commercial banks, indicating that fair value accounting supplies stakeholders with accurate and appropriate data and reflects the informational value of fair value numbers to investors.

Discussion of “The effect of fair value accounting on the performance evaluation role of earnings”

Using the setting of IFRS adoption, DeFond, Hu, Hung, and Li (2020) examine the impact of fair value accounting on the usefulness of earnings in executive performance evaluation and compensation. In this discussion, we review the research design, discuss the implications of the findings, and provide suggestions for future research. In particular, DeFond et al.’s measure of the impact of fair value accounting may contain substantial measurement error, which calls for additional analyses. We believe that DeFond et al. address an important question motivated by recent developments in accounting standard setting. Yet, the broader question of whether and how IFRS fair value provisions affect the way compensation contracts are written and the usefulness of accounting information, not just that of earnings, has not been fully understood.

The effect of fair value accounting on the performance evaluation role of earnings

We study the effect of fair value accounting on the association between net income and cash pay following the 2005 worldwide adoption of IFRS. We find that, while IFRS's non-fair-value provisions are associated with an increase in this association, its fair value provisions are associated with a decrease in this association. Overall, we contribute to the literature on the usefulness of fair value accounting by presenting evidence that fair value accounting is associated with a decrease in this association. Under assumptions that we detail and subject to caveats that we detail, our evidence suggests that fair value accounting may reduce the usefulness of earnings in evaluating management performance.

Fair Value Accounting and Implications for the Auditing Profession: Historical Overview

This paper explores the link between the introduction of fair value measurements (FVM) and the development of the Global Financial Crisis (GFC) in 2008-9. The paper aims to provide an historical analysis of the development of the Enron scandal with a focus on fair value accounting (FVA) and provides a narrative literature review of the subsequent economic downturn, its effect on the auditing profession and audit fees arrangements, implications for FVA, and response of global institutions and standard setters. It provides a theoretical explanation of the underlying antecedents using existing accounting theories. For each reviewed stream of research, the paper establishes the theoretical underpinning and discusses its application supported by the context. The content analysis using NVivo software was employed to analyse existing research and available published information. Based on the comprehensive literature review, the study arrives at two main findings. First, the paper concludes with the controversial use of FVM and establishes a direct connection between Enron’s collapse, the GFC, and improper FVM practices. Secondly, the study identifies the current pricing strategy for audit as an industry response to the abuse of external audit arrangements regarding FVA. Supported by the literature review findings, the paper contributes to the audit research by providing deep insights into the connection between FVA practices, the GFC and development of the audit profession. The paper addresses the lack of foundational research in FVA and establishes a solid background for further studies on FVA and audit profession development in general.

Fair Value Accounting for Financial Assets. A Value Relevance Study in an Emerging Economy

There are few areas in accounting which generate debates as intense as measurement, and in particular fair values, because they directly impact the figures reported, as well as their credibility and relevance. The main argument in favour of fair values is that these are providing relevant information to the market participants. The main objective of our paper is to analyze if fair values reported by Romanian companies in their financial statements (more precisely in the case of financial assets) are value relevant. We therefore contribute to the little developed body of literature on the value relevance of fair value in emerging markets. We employ a model which is similar to that proposed by Barth (1994), based on the relation between the bank’s market value and its net assets, separated into financial assets and net asset before (excluding) financial assets. Furthermore, we also analyze whether value relevance of fair value accounting for financial assets varies with the three levels of the fair value hierarchy. Consistent with Barth (1994), we find that financial reporting at fair value of the financial assets has a greater explanatory power of the share prices compared to the historical cost reporting. Partially consistent with Song et al. (2010), we also document that financial assets reported at fair value within level 1 are value relevant, while financial assets of level 2 and level 3 are not value relevant.

Impact of factors on fair value accounting: empirical study in Vietnam

Due to the ongoing process of globalization, enterprises need to provide financial statements in accordance with international practices, in which information about assets and liabilities should be presented at fair values rather than at original prices. Fair value is supported by the International Accounting Standards Board and the Financial Accounting Standards Board. The purpose of this study is to evaluate the adoption of fair value accounting in Vietnam and the impact of factors on the adoption of fair value. The paper used the analytical framework of previous studies to identify factors affecting the adoption of fair value. Additionally, this study applied quantitative research methods and collected data by sending questionnaires to 127 accountants and directors of listed companies. Particularly, binary logistic regression was conducted to investigate the extent of the impact of each factor on the adoption of fair value. The results have shown that human resources have the strongest and positive impact on the adoption of fair value, and this is followed by the benefits of fair value. Difficulties and markets negatively affect the use of fair value. Furthermore, the control variables that affect the use of fair value are sector, size and length of operation with different levels of impact. The accuracy rate of the overall predictive model is 85.8%. The findings provide guidance of the application of fair value accounting in companies and give recommendations to policy makers in establishing a legal accounting framework in Vietnam.

Minority shareholders dispute tang Plaza’s value

Theoretical basis This case covers the framework and process to determine fair value as specified in International Financial Reporting Standards (IFRS) 13. It illustrates an instance in which auditors interpret the concept of fair value to be consistent with other principles in standards such as the principle of prudence in the conceptual framework. In addition, a lot of the discussion in the case is applicable to accounting education in any regulatory jurisdictions given the convergence of US generally accepted accounting principles (GAAP) and IFRS 13. In addition, while fair value accounting may have been designed to give investors more useful information, in practise it could involve highly subjective judgement and the resulting implementation may be affected by incentives of different stakeholders. The CK Tang’s case provides an excellent opportunity to discuss incentives of varies parties in determining the fair value in financial reporting decisions. In short, this case could be a good jumping-off point to talk about management and auditors’ incentives in financial reporting in general. Research methodology Publicly available information (e.g. financial reporting standards, corporate announcements and reports, news reports) was used as the basis for this case. Case overview/synopsis The case centres on an iconic Singaporean integrated retailing and property landlord entity: Tang holdings. As part of its succession planning, the company’s founding family decided to take its listing arm, C.K. Tang Limited (CK Tang hereafter), private in May 2006. The Tang brothers, who represented the controlling family, initiated several attempts to delist the company. The minority shareholders of CK Tang were unhappy that the offer price was below the net asset value of the company. The minority shareholders also highlighted that the reported fair value of the flagship Tang Plaza complex understated its highest and best use and might not possibly comply with International Financial Reporting Standards (IFRS) 13. Complexity academic level The case can be used for class discussions with undergraduate students or master students in intermediate accounting courses.

Resolving the Mark-to Market vs Historical Cost debate: where do we go from here?

Mark-to-market accounting has been one of the most hotly debated changes in accounting. Some, including the past Federal Reserve Chairman, Ben Bernanke, cited it as one of the causes of the 2007-2008 U.S. economic crisis. Many in the accounting community disagree with the Chairman and feel that movement away from historical cost has been a positive for transparency. Though countless individuals have voiced either their opposition or their support of mark-to-market accounting, each of them seems to view the debate as one between either historical cost or mark-to-market. After reviewing the arguments for both historical cost and mark-to-market in detail, we conclude the production of two financial statements, a traditional Balance Sheet based on historical costs, and a Statement of Financial Condition based on mark-to-market, would be relatively inexpensive to produce and would better provide the information needed by different users employing said financial information for, invariably, different purposes.

The effect of applying fair accounting on the quality of financial reports from the auditors' point of view: (A field study for Saudi Telecom Company): أثر تطبيق المحاسبة العادلة على جودة التقارير المالية من وجهة نظر المراجعين: (دراسة ميدانية لشركة الاتصالات السعودية)

The study aimed to measure the effect of applying fair accounting on the quality of financial reports from the auditors 'point of view through knowing the reality of interest in them, and showing the impact of accounting disclosure according to the basis of fair value on the quality of financial reports from the auditors' point of view and the study examined the reality of completion of applying fair accounting in the Saudi business environment. Measuring the impact of accounting disclosure according to fair value on the quality of financial reports. The study used a sample of the auditors at Saudi Telecom Company, where an electronic questionnaire was designed and sent to the sample to clear their opinions on the impact of the application of fair accounting on the quality of the company's financial reports. The number of responses was (52) responses. The researcher used the descriptive analytical approach. The results of the study showed that there is an application of the fair value in the qualitative characteristics of accounting information and this is an indication of the quality of financial reports and that the application by the Saudi fair value companies increases the degree of reliability of the information and the study recommended the need to emphasize Saudi joint stock companies to adhere to the standard of fair value accounting and work to raise the level Coordination and interaction between Saudi universities and academic and training institutions and between joint stock companies that apply accounting standards in order to mix theoretical knowledge with the practical experience of workers in those companies.

The impact of SFAS 157 on fair value accounting and future bank performance

PurposeThe purpose of this paper is to investigate whether levels-classified fair values of US banks based on SFAS 157: Fair Value Measurements, as recognised in the quarterly financial statements of the banks over the period from 2008 until 2015, have predictive value in relation to the banks’ future financial performance measured by operating cash flows and earnings over a three-quarter horizon period. In addition, we consider whether the global financial crisis (GFC) impacted the relationship between SFAS 157–based levels‐classified fair values and bank future financial performance.Design/methodology/approachWe develop hypotheses connecting the net levels-classified bank fair values based on SFAS 157 with banks’ future financial performance. We test the hypotheses by estimating three-period quarters’ ahead forecasting models. We also use these models to test for the impact of the GFC on the relationship between the fair values and future financial performance.FindingsOur findings suggest that the levels-classified net fair values based on SFAS 157 have predictive value in relation to future cash flows for banks. There is significant variation, across the levels, in the predictive value of levels-classified net fair values for future performance. Our findings indicate that the GFC has limited impact on the predictive value for cash flows, but the GFC had a significant adverse impact on earnings, and, with allowance for the effect of the GFC, the Level 2 net fair values have predictive value for the future earnings.Originality/valueThe study provides the first direct empirical evidence on the relationship between the SFAS 157 levels-classified quarterly bank fair values recognised in publicly available financial statements and banks’ future performance. Our results are consistent with the findings from earlier research (Ehalaiye et al., 2017) using annual data disclosed in the supplementary notes to the financial statements of US banks based on SFAS 107. The study, makes a significant contribution to the question of frequency of reporting and to the disclosure vs recognition debate. The study has implications for policy makers, regulators and accounting standards setters such as the Securities and Exchange Commission and the Financial Accounting Standards Board in evaluating the use of fair value measurement in financial reporting.