Fair Value Of Assets Research Articles

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.

Public management reform under the dome of accruals (Presidential Decree 54/2018): Investigation of the effects on the financial information and the audit of the General Government entities

Presidential Decree 54/2018 legislated the introduction of accrual basis accounting from 1/1/2023 to all entities of the General Government of Greece in accordance with the European System of Accounts 2010. We study the effect of accrual basis accounting under the 54/2018 on financial information and audit of entities, as well as the transition process. The research was conducted using the qualitative method, the structured interview protocol was the data collection tool and the participants were the employees of the Third Department of the General Government Accounting Plan. We find that there will be objective information of the entity's financial position and performance, depreciation, provisions, impairments and fair value of assets. Transparency and accountability are strengthened, audits are facilitated to establish useful sound financial management, there is a central control of public finances and the phenomena of corruption and financing of public officials will be reduced. The job of the audit mechanisms is strengthened, audits become more effective and the way available resources are managed is more precisely controlled. Major difficulties during the transition are the lack of personnel and an appropriate accounting information system, and in combination with the covid-19 pandemic, it was noted that the transition cannot be implemented on 1/1/2023 and for that reason our results suggest an extension to 2025 for the transition, proposal which was implemented on July 30, 2022 with Law 4964/2022.
 
 EL Classifications: H83, P41, M48.
 Key words: Accrual Accounting, Accounting Reform, General Government, Accountability, Audit.

Can the Reclassification of Other Comprehensive Income Narrow the Opportunities for Creative Accounting: Earnings Management and Income Smoothing?

So far, research in Indonesia examines that the factors that influence creative accounting are the application of Good Corporate Governance, leverage, company size, and political connections, while research on the effect of other comprehensive income (OCI) as a result of the application of fair value accounting has not been widely carried out. This study finds evidence that aggregate OCI accumulation does not affect earnings management and income smoothing. However, testing on group OCI items that will be reclassified to net income has a negative effect. Asset realization commitment increases the negative effect of OCI on earnings management and income smoothing. Creative accounting through OCI can be done through a policy of delaying the realization time and or reducing the real amount of assets realized to get the net profit value according to the interests of management and the subjectivity of deter­mining the fair value of assets and liabilities.

Assessing banks’ resilience: A complementary approach to stress testing using fair values from banks’ financial statements

AbstractFor more than a decade, supervisory banking authorities in Europe and the United States have sought to assess the resilience of banks to adverse economic episodes to safeguard the financial system's stability. They rely on regulatory capital measures like Common Equity Tier 1 (CET1) relative to risk‐weighted assets in the aftermath of potential economic crises. We propose a new measure of banks' resilience based on financial statements. The fair value margin (FVM) is estimated as the difference between the fair value of assets and the book value of liabilities, scaled by the book value of equity. We find that FVM is positively associated with the surplus or shortfall of CET1 resulting from the stress testing results from 2014, 2016 and 2018. To corroborate the relevance of FVM for supervisory authorities, we compare the ability of the loan component of FVM to predict future credit losses with the capital surplus/shortfall metric derived from the stress test. The findings indicate that the fair value of loans predicts net charge‐offs better than stress test outcomes. Therefore, we suggest that FVM could be used as a readily available and relatively low‐cost tool to assess bank resilience, thus complementing the stress test exercises.

Can Other Comprehensive Income be Used for Tax Avoidance?

Other Comprehensive Income (OCI) is the impact of applying fair value accounting, namely the difference between the fair value of assets (liabilities) and their carrying values. Uncertainty about the time and amount of OCI which is a medium for tax avoidance. This study provides empirical evidence whether OCI can be used for tax avoidance, data from 504 companies listed on the IDX for 2016 – 2020. The results show that companies in Indonesia do not carry out earnings management for tax avoidance through OCI, companies in Indonesia consistent in realizing OCI according to the plan for the previous period, there is no time delay or change in the amount of OCI realization. The novelty of this study lies in the effect of OCI on tax avoidance, in addition to previous literature such as the influence of governance, political connections, foreign interests, legal systems, and CSR.

APPLICATION OF FAIR VALUE IN THE ACCOUNTING, CONTROL AND REPORTING FOR UKRAINE IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS

One of the key and most controversial accounting and control issues is the measurement of the elements of financial statements. The question of determining the fair value of assets and liabilities is one of the most relevant in modern accounting practice. This type of measurement is currently the subject of heated debate in the accounting community. International Financial Reporting Standards proceed from the priority of the interests of users of financial statements and are essentially aimed at providing them with the most relevant and useful information. This message determines the logic of building standards. IFRS 13 «Fair Value Measurement» considers fair value measurements in a broad sense, concentrating on the definition of fair value and the principles for measuring it. The main problem arising in the process of applying the fair value estimate is the lack of a methodology for its calculation. The article reveals the factors that influence the process of determination fair value. An algorithm in the selection of fair value valuation methods for management accounting is proposed, which allows quickly and timely determine the real value of accounting items and financial reporting elements, as well as a hierarchy of sources of fair value, which is represented by three levels. Level I is distinguished by the lowest degree of subjectivity in the measurement of assets and liabilities, Level II is characterized by a greater degree of subjectivity in the measurement of assets and liabilities, Level III is associated with the greatest degree of subjectivity in the measurement of assets and liabilities. The choice and proper use of the fair value method requires a high level of qualification in the field of appraisal, in-depth knowledge of the asset being valued, a liability or business, as well as the wide application of professional judgment. Historical cost and fair value provide two different kinds of information, which are both useful to investors. A dual measurement and reporting model could be more effective for assessing the success of an investment. Financial statements are more reliable, the more adequately it reflects the financial situation and financial results of the company. It is very important in the preparation of financial statements to apply various methods of measurement of assets and liabilities that are relevant to the company at the moment. Both historical cost and fair value should be provided as only together they can deliver complete and useful information to investors.

Fair Value of Operational Assets, Uncertainty, and Information

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

Earnings quality before and after the implementation of PSAK 69

PSAK 69 Agriculture regulates the accounting treatment of agricultural activities in Indonesia. The measurement of biological assets is the most important part of the arrangement of PSAK 69. PSAK 69 deals with biological assets measured at fair value less costs to sell at the beginning and end of the reporting period. Characteristics of growing biological assets will have an impact on the growth in fair value of assets, so there will be differences in fair value at the beginning and end of the financial reporting period. The difference in fair value of biological assets, whether realized or not, is recognized as gain in the current period. This will have an impact on the quality of the company's earnings. This study aims to examine differences in earnings quality before and after the implementation of PSAK 69 in agricultural sector companies listed on the Indonesia Stock Exchange. The research was conducted on 14 agricultural companies listed on the Indonesia Stock Exchange in the 2016-2019 observation period. Earnings quality is measured by the earnings response coefficient. Earnings response coefficients are estimated using the firm specific coefficient model (FSCM) and pooled cross-sectional regression model (CSRM) methods. This study measures the quality of earnings before and after the application of PSAK 69. The quality of earnings before and after the application of PSAK 69 is tested by a paired two-sample t-test. The results of this study found no difference in earnings quality before and after the application of PSAK 69.

Uses of the Revised Exchange Rate to Maintain Fair Value of Assets under Covid-19 Crisis

The research aims to identify the effect of using the modified exchange rate in preserving the fair value of the assets, which are the most important economic variables in the Iraqi economy, which are the growth rate of the amount of money in circulation, the value of Iraq’s crude oil exports, the rate of inflation, the rate of growth of the gross domestic product, which expresses the rate of economic growth and the value of spending Government and the value of foreign direct investment in the presence of the COVID-19 crisis. The research found that the effect of the adjusted exchange rate value on both the rate of growth in the amount of money in circulation in Iraq and the growth rate of GDP in Iraq during the period (2004-2018) was not significant, while the significant effect of the value of the adjusted exchange rate on both the value of Iraqi exports Of crude oil in Iraq, the rate of inflation, the value of government spending, the value of foreign investment during the period (2004-2018). The effect of the revised exchange rate was evident in maintaining the fair value of assets in general and in light of the COVID-19 crisis in particular. The research recommended the necessity for the Central Bank of Iraq to use more effective monetary policies that would help increase the impact on the rate of growth of the amount of money in circulation as well as the rate of growth of gross domestic product, the need to work to diversify sources of income in the Iraqi economy and encourage development in all economic sectors and reduce dependence on oil as a main source For income in Iraq, work to develop economic and financial policies that encourage companies and individuals to invest in all non-oil economic sectors, the need to develop monetary policies that can confront emergency situations that may occur, activate the role of crisis management and increase their levels of efficiency.

Fair value in the measurement of assets and liabilities of selected banks

The main purpose of this article is to determine the impact of changes in the fair value of assets and liabilities on the overall net result of selected banks listed on the Warsaw Stock Exchange. The research covered the consolidated financial statements of five banks, for the years 2014-2018. Methods of analyzing the literature on the subject, financial statements, and legal acts, including selected IFRS, were used. It has been shown that, on the one hand, fair value revaluations have a significant impact on the financial result of the described entities; on the other hand, the fair value in these entities is determined mainly at the 1st level of the hierarchy. This means that the basis for determining the fair value is observable prices on the market, and that the impact of subjective estimates on the financial result is small.

Утицај промјена у пословном окружењу и нормативној основи финансијског извјештавања на исказну моћ мјерила финансијских перформанси компанија // The impact of changes in the business environment and normative basis of financial reporting on the presented power of measure of financial performance of the company

Резиме: Више од једног вијека стара рацио анализа, упркос бројним промјенама које су настале, нарочито у посљедње двије деценије у окружењу и пословању компанија, показала се као једноставан и брз начин идентификовања квалитета финансијског положаја и успјешности. Почетак примјене „мјешовите” основе финансијског извјештавања донио је усљед примјене фер вриједности промјену у садржини резултата и сопственог капитала. Околност да резултат садржи нереализоване добитке чија се реализација може очекивати у релативно кратком року, претворила је реализовани добитак из концепта историјског трошка у резултат који би компанија остварила ако до тренутка продаје финансијских средстава која се вреднују по фер вриједности кроз резултат не би било промјена њихове фер вриједности. Како су таква очекивања нереална, корисно је утврдити учешће нереализованих добитака/губитака у резултату. Слична, али јача потреба постоји и када је ријеч о сопственом капиталу, који садржи нереализоване добитке чија реализација ће усљедити у дужем периоду, па је вјероватноћа да ће доћи до промјена фер вриједности средстава и обавеза који се вреднују по фер вриједности кроз Остали укупан резултат виша. Мјерила финансијских перформанси која се утврђују на основу наведених величина због овога могу имати другачију висину и тумачење. Потреба да се мјерила перформанси прилагоде потребама инвеститора и повјерилаца наметнула је захтјеве за стварањем нових и коришћењем нефинансијских мјерила перформанси заједно са одабраним мјерилима финансијских перформанси.Summary: Until today despite the many changes that have occurred, particularly in the last two decades, in the business environment and operations of companies, more than a century old ratio analysis proved to be a simple and quick way of identifying the quality of their financial position and successfulness. The beginning of the application of „mixed” basis of financial reporting brought change in the content of results and in the equity due to the application of the fair value. The circumstances in which the result includes unrealized gains whose realization can be expected in a relatively short time, turned a realized gain out of the concept of historical cost into the result that the company would achieve if, until the sale of financial assets that are measured at fair value per result, there would not be any changes in their fair value. As such expectations are unrealistic it is useful to determine the share of unrealized gains/losses in the result. There is also a similar but stronger need when it comes to the equity, which includes unrealized gains whose realization will occur in a longer period, so there is higher probability that changes in the fair value of assets and liabilities which are measured at fair value per other total result will happen. Because of this measures of financial performance, which are determined on the basis of the stated parameters, can have different values and interpretations. The need to adapt the performance measures to the needs of investors and creditors imposed the requirements for establishing new ones and using non-financial performance measures together with the selected measures of financial performance.

English

The paper assesses the extent to which Malawian agricultural entities are complying with recognition and measurement requirements of IAS 41-Agriculture, for their agricultural produce and biological assets. The purpose of the paper is to investigate the extent to which Malawian agricultural entities are using the fair value accounting model proposed in IAS 41 for measuring their agricultural produce and biological assets; to establish the most common method utilized for measuring the agricultural produce and biological assets; and to identify the implementation challenges that agricultural entities face in complying with IAS 41, in particular, the determination of fair value. Questionnaires were used to collect the data. Thirty-two participants from Eastern Produce Malawi Limited and Sable Farming Limited participated in the research. Purposive sampling was used to identify the participants to the study. The findings indicate that most Malawian Agricultural entities recognize and measure their biological assets in accordance with IAS 41. However, there are challenges particularly with the determination of fair value. The findings indicate that most agricultural entities measure their agricultural produce and biological assets at fair value less estimated cost of sale at the point of harvest and fair value respectively. It was also established that present value of estimated future cash inflows is the most utilized method to determine the fair value of assets that are biological in nature. Key words: Biological assets, fair value, recognition, agriculture produce, disclosure.

RELEVANSI NILAI REVALUASI ASET TETAP DENGAN TINGKAT UTANG SEBAGAI VARIABEL MODERASI

This study aims to analyze the value relevance of fixed asset revaluation and whether debt levels moderate value relevance of fixed asset revaluation. Signaling theory states that the company revalues its assets with the aim to provide credible signals about favorable future prospects; whereas debt contracting theory suggests that firms with high debt levels have opportunistic motives in doing the revaluation of fixed. This study uses 54 data of nonfinancial companies listed on the Indonesian Stock Exchange and have revalued its fixed assets in the period 2012-2015. The results shows that the revaluation of fixed asset has a value relevance, and leverage moderates this value relevance. Companies are trying to show the fair value of assets and an overview of the actual company's financial condition by revaluing their assets. However, when the company revalued its assets and has a fairly high leverage, investor respons negatively on revaluation conducted. Investors perceive that it is an opportunistic motives of managers to avoid the costs arising from the loan agreement.

RELEVANSI NILAI REVALUASI ASET TETAP DENGAN TINGKAT UTANG SEBAGAI VARIABEL MODERASI

This study aims to analyze the value relevance of fixed asset revaluation and whether debt levels moderate value relevance of fixed asset revaluation. Signaling theory states that the company revalues its assets with the aim to provide credible signals about favorable future prospects; whereas debt contracting theory suggests that firms with high debt levels have opportunistic motives in doing the revaluation of fixed. This study uses 54 data of nonfinancial companies listed on the Indonesian Stock Exchange and have revalued its fixed assets in the period 2012-2015. The results shows that the revaluation of fixed asset has a value relevance, and leverage moderates this value relevance. Companies are trying to show the fair value of assets and an overview of the actual company's financial condition by revaluing their assets. However, when the company revalued its assets and has a fairly high leverage, investor respons negatively on revaluation conducted. Investors perceive that it is an opportunistic motives of managers to avoid the costs arising from the loan agreement.

Investigation of the existing methodology of value estimation and methods of discount rate estimation

The subject of research is the current practice of determining the fair value of assets and liabilities at the present (discounted) cost. One of the most problematic places is the determination of the discount rate, which belongs to the jurisdiction of a professional accountant judgment.The methods of formalization, hypothetical assumption, system approach and scientific abstraction in substantiating the formation of accounting policy with respect to the choice of the discount rate are used in the research.The results of the study have shown that fair value measurement using discounting can reduce the quality of financial reporting for subjectivity when choosing methods for its valuation and the discount rate. An algorithm is proposed in the choice of methods for fair value estimation, which allows to more reliably determine the real value of accounting objects and elements of financial reporting. Thanks to this, it is possible to simulate the process of calculating the cost of objects, by sequentially identifying an adjustment to the aggregation of value values. Proceeding from the desire to minimize the influence of professional judgments on the financial reporting indicators, the feasibility of determining the future cash flow with the terms of the contract is justified. For the purposes of the following estimates of this asset or liability, it is necessary to calculate the discount rate. Based on the mathematical dependence of the present value of the future cash flow with its nominal value and the discount rate, a formula for calculating the discount rate is proposed. In comparison with similar studies, such discount rate is the actual rate agreed by the parties to the contract, agreeing on the terms and amount of payments. This provides an opportunity to minimize the impact of professional accounting judgments on the reliability level of financial reporting.

Relevansi Nilai Atas Nilai Wajar Aset dan Liabilitas Dengan Mekanisme Good Corporate Governance Sebagai Variabel Pemoderasi

This study examines the relevance of fair value of assets and liabilities and mechanisms of good corporate governance as a moderating variable by using a sample banking companies listed in Indonesia Stock Exchange from 2012 to 2014 year. The sampling method using purposive sampling and analysis of research data using Eviews. Mechanism of Good Corporate Governance in the study visits of the independent board, institutional investors and the audit committee of the company. Furthermore, this research also investigates the value relevance of accounting information such as book value, earnings, the fair value of financial assets and liabilities with a view influence on stock prices and stock returns. Ohlson Model (1995) into the measurement model used in this study, and this study examines both the measurement model Ohlson is the pricing model and the model returns to see the consistency of the study. Significant results indicate that the book value, earnings, the fair value of assets and liabilities fair value has relevance value. So we can conclude all variables affect stock prices and stock returns. In addition, Good corporate governance mechanisms able to moderate over the value relevance of book value, earnings, fair value of financial assets and liabilities fair value.

An Explanation of the Nature of Internally Generated Goodwill Based on Aggregation of Interacting Assets

Increasing internally generated goodwill (IGG) is another way of depicting the rising gap between market and accounting values sometimes referred as the “book-to-market black box”. Existing methods propose to value internally generated goodwill as the present value of abnormal earnings (e.g., residual income models) or to measure it indirectly through the excess of the enterprise value over the fair value of assets in a business combination. The critical drawback of these approaches is that they do not explain how the goodwill is created. In other words they do not enter into the “black box”. We propose an alternative valuation method based on the recognition that using an asset in combination with other assets leads to an interaction affecting firm value. In this context IGG emerges from an inadequate theory of aggregation of assets. Using Choquet’s capacities, which are non-additive aggregation operators, allows solving this adequacy issue as IGG arises as a consequence of specific synergies between assets. Our model is tested on the U.S. High Technology sector and benchmarked against the residual income model. To the extent of the accuracy to forecast equity value, our model performs better than the standard residual income model.

An Experiment in the Economic Consequences of Additional Disclosure: The Case of the Fair Value of Unlisted Equity Investments

We investigate the economic consequences of additional disclosure about assets with no active market in terms of liquidity, perception of information reliability and relevance. We use an experimental design: 181 MBA students are asked to value 24 investments. We manipulate the level of disclosure on the fair value of assets (Limited versus Full), the perception of expected profit (Gain versus Loss) and the firm's business risk (Low versus High). In the case of Limited (resp. Full) disclosure, participants are given a point estimate for the fair value of the investment (resp. plus a range of possible fair values). We find that in the Full disclosure situation, participants tend to make an offer more frequently, to bid prices lower than the fair value and to earn a lower return on their investments compared to the Limited disclosure case. These consequences vary with the environment (expected profit and risk).

Juste valeur et reporting de la performance : débats conceptuels et théoriques

<titre>Résumé</titre>L’objet de l’article est de montrer en quoi la référence à la juste valeur introduit une nouvelle logique dans le reporting comptable de la performance. Notre propos est non seulement de développer des arguments conceptuels et théoriques souvent implicites dans les normes internationales, mais aussi de proposer une lecture explicative des modes de reporting de la performance sous tendus par des visions économiques différentes de l’entreprise.

Management Perceptions of Fair‐Value Accounting for all Financial Instruments

Accounting for all financial instruments at fair value is a controversial issue currently under review by standard‐setters. Banking industry associations have typically opposed the use of fair‐value accounting for financial instruments. This study examines perceptions of managers at financial institutions regarding support for recording all financial instruments at fair value. Managers at financial institutions do not uniformly oppose the use of fair‐value accounting for all instruments. Considerable variation is found, ranging from strong support to strong opposition. Support for fair‐value accounting is negatively associated with concern about excess volatility in reported earnings. There is less concern that the fair value of assets and liabilities cannot be reliably measured.