Fair Value Hierarchy Research Articles

The impact of ESG scores on the value relevance of fair value hierarchy of financial instruments: Evidence from European Banks

Using hand-collected accounting data on 154 European banks, we investigate the impact of ESG scores on the value-relevance of the fair value hierarchy (FVH) of financial instruments held on their balance sheets. Our findings are multi-faceted. Banks that possess an ESG score are valued at a premium on book value and the presence of the ESG score is associated with lower (higher) value-relevance of the reported fair value of Level 1 (Level 2 and 3) items. The value relevance of Level 2 and 3 FVH levels, however, decreases in the ESG score. These findings imply that, while availability of ESG scores proxies for market visibility, stock market investors either do not treat the ESG score as a reliable measure of ESG performance or, embracing the “overinvestment view” rather than the “risk mitigation view” of Corporate Social Responsibility (CSR), do not associate positive ESG performance to greater corporate transparency and trustworthiness.

Fair Value Hierarchy and Corporate Governance Mechanisms in Financial Institutions

Fair Value Hierarchy and Corporate Governance Mechanisms in Financial Institutions

Measurement of financial assets of BSE-Listed information technology companies using fair value hierarchy

Measurement of financial assets of BSE-Listed information technology companies using fair value hierarchy

Effect of Fair Value Measurement on the Share Price of Listed Deposit Money Banks in Nigeria

This study examined the effect of fair value accounting on share price of listed deposit money banks in Nigeria from 2016 to 2022. the data used was obtained from the annual reports of the banks. OLS regression was employed in the analysis of the data. The results from the regression analysis show that earnings per share, fair value hierarchy, fair value through other comprehensive income have significant effect on the value relevance of listed deposit money banks in Nigeria. The study concludes that earnings per share is an important variable investor’s pays attention to when making investment decision. In addition, the study concludes that banks which discloses information regarding fair value hierarchy will attract investors and this will result in a corresponding increase in share price. Furthermore, the study concludes that investors pay close and more attention to other comprehensive income value. And finally, the study concludes that fair value through other comprehensive income have an effect on the share price of listed deposit money banks in Nigeria. The study therefore, recommends among others that management of listed deposit money banks in Nigeria should ensure that information using fair value are disclosed since its disclosure have an effect on share price. The study also recommends that regulatory bodies should establish an evaluation system to monitor adequate discourse of fair value information.

The moderating impact of auditor industry specialisation on the relationship between fair value disclosure and audit fees: empirical evidence from Jordan

PurposeThis paper investigates the application of the product differentiation and shared efficiency approaches to understand the impact of the auditor industry specialisation (IS) on audit fees in relation to Fair Value Disclosures (FVD).Design/methodology/approachThe study uses 1,470 firm-year observations for the period 2005–2018 and is focused on Jordanian financial firms. Two competing theoretical approaches of IS proxied by audit fee-based measures were employed: firstly, the product differentiation approach measured using Market Share-based (MS) measure and secondly, the shared efficiency approach measured using Portfolio Share-based (PS) measure. The paper employs the Ordinary Least Squares regression to test the association between the proportion of fair-valued assets (using fair value hierarchy inputs) and audit fees.FindingsThe results suggest that the association between the proportion of fair-valued assets and audit fees is strengthened (weakened) when the client hires specialist auditors identified by MS (PS). This association varied across the fair value inputs. Level 1 assets were found to be only moderated by both scenarios positively (negatively) for MS (PS) experts. The results are robust after controlling the endogeneity of auditor self-selection.Practical implicationsThe results provide valuable insights for policymakers into challenges of auditing FVD. These insights present a valuable input for the development of FVD policies and practices as well as providing guidance for updating auditor prices. Additionally, the results provide a foundation for policymakers and regulators to introduce and update fair value auditing practices. The current findings are generalisable to other countries, including the Middle East and North Africa, and are particularly beneficial for those countries which have adopted the fair value model.Originality/valueThis study contributes to the theory by demonstrating the impact of the auditor industry expertise on post-implementation costs of FVD. The novelty of the study lies in introducing principle-based standards requirements of FVD to test the relationship. This approach is based on the IFRS disclosure requirements using data from the Jordanian financial sector to examine this relationship.

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.

Study on Conditional Conservatism Within Fair Value Measurements Based on Anti-discount Expectations.

As a rapidly growing emerging capital market, China has attracted the attention of both investors and scholars. To alleviate the expectation of external users of listed companies’ financial statements to “discount” items in levels 2 and 3 of the fair value measurement, listed companies will treat these items as conditional conservatism. It refers to the conservatism of companies when confirming bad news of unrealized gains and losses sooner than confirming good news. A sample was selected for empirical analysis to verify the existence of this relationship. The results are as follows: (1) the higher the proportion of levels 2 and 3 fair value measurements, the stronger the conditional conservatism of the company’s profit and loss; (2) the higher the proportion of cash holding of operating activities in a company’s operating profit and the higher the audit quality, the higher the proportion of levels 2 and 3 fair value hierarchy measurements, and the stronger the conditional conservatism of the company’s profit and loss; and (3) the lesser the internal control defects in a company, the higher the proportion of levels 2 and 3 fair value hierarchy measurements, and the stronger the conditional conservatism of its profit and loss. The findings provide empirical evidence to identify listed companies adopting conditional conservatism to alleviate discounting expectations of fair value items of financial statements’ external users and provide a reference for improving the standards and regulation of listed companies.

Fair value hierarchy, bargaining power, and audit pricing across audit firms’ client portfolios

AbstractThis study explores how the presence of Level 2 and/or 3 fair value assets (FVA_23) influences audit pricing across small and large clients for Big‐4 and non‐Big‐4 audit firms. Through analysis of 7918 firm‐year observations, we investigate whether companies with FVA_23 incur higher audit fees than companies without FVA_23 and the differences between how Big‐4 and non‐Big‐4 firms price risk for large and small companies. Our theoretical basis is product differentiation and economic importance, which suggest competing influences on audit fees based on firm and company size. We are the first to analyze the effect of FVA_23 on audit fees with the United States sample including all industries during a stabilized regulatory period, and we are the first to explore the effect of FVA_23 on audit pricing across small and large audit clients for Big‐4 and non‐Big‐4 firms. We find companies with FVA_23 incur higher audit fees than companies without FVA_23. More specifically, we find small and large companies realize different audit fees compared to companies of similar size without FVA_23. Additionally, Big‐4 and non‐Big‐4 firms price audits with FVA_23 differently than audits without FVA_23. Furthermore, Big‐4 and non‐Big‐4 audit pricing is influenced by FVA_23 differently based on company size.

Information Risk in the Fair Value Hierarchy and Firm Characteristics

[연구목적]본 연구는 공정가치 서열체계로 측정된 금융상품을 보유한 기업의 특성을 확인한다. 현재 한국채택국제회계기준(K－IFRS)은 기업이 보유한 금융상품에 대해 서열체계를 부여하여 표시하도록 규정한다. 하지만 경영진은 낮은 서열체계에 대해 자의적인 판단을 통해 공정가치 정보를 왜곡할 수 있다. 따라서 본 연구는 낮은 서열체계를 가진 기업들이 어떠한 특성을 가지고 있는지를 확인함을 그 목적으로 한다. [연구방법]본 연구는 비금융업을 대상으로 상장기업의 2011년부터 2016년까지 금융상품의 공정가치 서열체계 정보를 사업보고서 주석에서 추출하여 총 3,749개의 기업－연도 자료를 분석하였다. [연구결과]공정가치 서열체계의 수준이 낮은 금융자산을 보유한 기업의 특성은 다음과 같다. 이들 기업은 기업규모가 크고, 영업효율성이 높으며, 유가증권 비율이 낮았으며 매출채권과 재고자산 비율과 손실 가능성이 유의하게 낮았다. 한편, 금융부채로 수준 3을 평가하는 기업은 기업규모가 크고 부채비율이 높았으며, 주식수익률변동성이 낮았다. 또한 수준 2＋3의 금융부채를 높은 비중으로 보유한 기업은 파산가능성인 알트만 Z값과 유의한 음(－)의 연관성을 보였다. [연구의 시사점]본 연구는 높은 정보위험이 내재된 금융상품을 보유한 기업의 특성이 금융자산과 금융부채의 분류에 따라 다르다는 것을 발견했다. 즉 수준이 낮은 금융자산을 보유한 기업은 손실가능성이 작거나 영업활동이 효율적인 긍정적 효과가 있다. 반면, 수준이 낮은 금융부채를 보유한 기업 경우 재무위험과 파산가능성이 상대적으로 높았다. 본 연구는 공정가치 서열체계에 따른 기업특성을 확인한 연구로 기업, 규제기관 및 감사인 등 다양한 이해관계자에게 중요한 시사점을 제시한다.

Do investors value audit quality of complex estimates?

In recent years, Public Company Accounting Oversight Board (PCAOB) inspections have repeatedly reported audit deficiencies related to complex fair value measurements. Motivated by the PCAOB's concern, this paper investigates whether audit quality of fair value measurements has information value to investors. Using a sample of U.S. public banks during 2008–2019, I find a significantly positive (negative) association between stock prices (bid-ask spreads) and the perceived audit quality of fair value estimates. This finding is consistent with investors valuing audit quality as it enhances the reliability of—and reduces the uncertainty associated with—complex estimates. Furthermore, using the fair value hierarchy mandated by SFAS 157, Fair Value Measurement, I find the incremental valuation effect of the perceived audit quality is greater for the substantial estimation uncertainties and potential management bias inherent in Level 3 fair value assets. In addition, I find some evidence that an auditor's banking industry expertise plays a more significant role than Big 4 status in investors' perceptions of audit quality with respect to FVM. Additional cross-sectional results reveal that the documented effect is greater for banks with declining capital adequacy and for smaller banks. Collectively, my findings suggest that perceived audit quality is important to investors in assessing the informativeness of complex fair value measurements.

The Impact of ESG Score on the Value Relevance of Fair Value Hierarchy: Evidence from European Banks

The Impact of ESG Score on the Value Relevance of Fair Value Hierarchy: Evidence from European Banks

Fair value hierarchy in valuation of investment properties: content analysis in Borsa Istanbul

Fair value hierarchy in valuation of investment properties: content analysis in Borsa Istanbul

Non-Professional Investors' Judgments of the Reliability of Fair Value Estimates—The Impact of Investor Mood

ABSTRACTWe study whether investor mood affects non-professional investors' judgments of the reliability of fair value estimates. In two experiments, we find that investor mood, which is a factor that is unrelated to the assessment of reliability across the fair value hierarchy, is associated with differences in the extent to which Level 1 fair values are perceived to be more reliable than Level 3 fair values. As mood becomes more positive, investors perceive greater differences in the extent to which Level 1 fair values are more reliable than Level 3 fair values. Importantly, we find that including brief definitions in the headings under which fair values are reported reduces the influence of mood over perceptions of reliability, and likely improves the effectiveness of fair value disclosures.

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 relevance of fair value after the adoption of IFRS 13: fair value measurement and the role of audit committee

This study aims to analyse the relevance of fair value after IFRS 13 adoption, which focuses on the financial assets' fair value for all three (3) levels of the fair value hierarchy. This study als...

Pengaruh Kepemilikan Institusional Terhadap Relevansi Nilai Informasi Hierarki Nilai Wajar

The purpose of this research is to examine the relevance of fair value hierarchy information and the effect of institutional ownership on the relevance of fair value hierarchy information. This research is a causal associative research with a quantitative approach. Research conducted on banking companies listed on the Indonesian Stock Exchange period 2015-2018, which were determined by purposive sampling method so that 37 companies were selected as samples. The hypotheses were tests using multiple regression. The results indicate that the fair value level 2 is more relevant than the level 1 and 3, this research proves that the fair value level 2 is relevant for decision making of investor. In subsequent tests, institutional ownership does not have a positive effect on the relevance of fair value level 1, level 2 and level 3.

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.

Penerapan Nilai Wajar Untuk Penilaian Aset Perusahaan Perbankan Pada Bank Permata, Tbk.

Indonesian Financial Accounting Standards (PSAK) confirm that asset assessment should be used fair value, therefore entities have to follow it from the previous application. Indonesian Financial Accounting Standard (PSAK) is a framework of accounting procedure to provide accounting financial statement which consist of standard of recording, preparation, treatment and providing financial statement. Valuation techniques used to measure fair value to maximize the use of observable relevant input and minimize the use of Unobservable relevant input. This study is using qualitative method which covert into quantitative by giving the weight value for the purpose of providing the preliminary understanding about implementation of fair value disclosure with valuation of asset from PT. Bank Permata Tbk. financial statement using primary data with collecting the data using interview and questionnaire. The overall result of fair value measurement of asset valuation from banking industry in PT. Bank Permata Tbk has been considered as appropriate, it is due to from the questionnaire 19 out of 20 questions were answered in accordance with the PSAK 68. Based on result of analysis, it is found that the question number 12 were not answered in accordance with PSAK 68 paragraph 74 with regards to the entities is prioritize the fair value hierarchy compare than the input, in other hand according to PSAK 68 paragraph 74 the priority should be the input than fair value hierarchy.

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.

Essencialidade do valor justo na avaliação das propriedades para investimento: Evidências no Brasil

O objetivo geral deste estudo foi investigar a essencialidade do valor justo na perspectiva das Propriedades para Investimento (PPIs), verificando como e se as empresas listadas no mercado brasileiro avaliam tais ativos, bem como a relação com aspectos empresariais e com os níveis de hierarquia do valor justo. Foram analisadas as demonstrações financeiras e notas explicativas das empresas listadas na B3 que possuíam PPIs, entre 2013 e 2017. Observou-se comportamento mais conservador na escolha do método de avaliação de suas PPIs, dada a complexidade para determinação do valor justo sobre os critérios como do custo histórico. Os resultados aqui reportados demonstram como principal contribuição que o critério de avaliação a valor justo não é essencial para as empresas analisadas, uma vez que a utilidade dessa informação é conferida se estas forem verificáveis e compreensíveis. Ademais, destaca-se que a contabilização do valor justo está sob profundo escrutínio por causa de seu papel em crises financeiras, sendo sua utilidade uma questão fundamental para seu tratamento no contexto brasileiro.