Fair value accounting: Effects on banks' earnings volatility, regulatory capital, and value of contractual cash flows

1995 ◽  
Vol 19 (3-4) ◽  
pp. 577-605 ◽  
Author(s):  
Mary E. Barth ◽  
Wayne R. Landsman ◽  
James M. Wahlen
Keyword(s):  
Fair Value ◽  
Cash Flows ◽  
Regulatory Capital ◽  
Fair Value Accounting ◽  
Earnings Volatility

Toward an optimal hedging strategy considering earnings volatility through fair value accounted financial derivatives

2016 ◽  
Vol 17 (3) ◽  
pp. 310-327
Author(s):  
Eva Marie Ebach ◽  
Michael Hertel ◽  
Andreas Lindermeir ◽  
Timm Tränkler
Keyword(s):  
Fair Value ◽  
Income Smoothing ◽  
Sensitivity Analyses ◽  
Financial Industry ◽  
Fair Value Accounting ◽  
Trade Off ◽  
Content Type ◽  
Earnings Volatility ◽  
Market Values ◽  
Optimal Hedging

Purpose The purpose of this paper is to determine a financial institution's optimal hedging degree under consideration of costly earnings volatility induced by fair value accounted derivatives. The discussion on the adoption of fair value accounting in the financial industry has been rather controversial in recent years. Under this accounting regime, the change in market values of specific assets must be considered as profit or loss. Critics argue that fair value accounting induces higher earnings volatility compared to historical cost accounting and, therefore, may initiate a downward spiral during recessions. Thus, increased earnings volatility induces costs, which can be explained by disappointed capital market expectations. Consequently, in general, a lowering of earnings volatility will be rewarded. Consistent with this theoretical finding, empirical research provides strong evidence that companies pursue income smoothing to reduce earnings volatility. In contrast to industrial corporations, financial institutions may easily reduce their earnings volatility by engaging in additional hedging activities. However, more intense hedging usually reduces expected profits. Design/methodology/approach Based on a research project initiated by a large German bank, this study quantitatively models the trade-off between the (utility of) costs of earnings volatility and the reduction of profit potential through additional hedging. Findings By conducting sensitivity analyses and simulations of the crucial factors of the trade-off, we examine relevant causal relationships to obtain first indications about the economic benefits of income smoothing. Originality/value To the best of our knowledge, we are the first to develop an optimization model that supports decision-making by attempting to determine an optimal (additional) hedging degree considering the costs induced by earnings volatility.

scholarly journals Fair Value Accounting and Corporate Reporting in Nigeria: A Logistics Regression Approach

2020 ◽  
Vol 11 (2) ◽  
pp. 301
Author(s):  
A. E. Adegboyegun ◽  
E. Ben-Caleb ◽  
A. O. Ademola ◽  
J. U. Madugba ◽  
D. F. Eluyela
Keyword(s):  
Strong Relationship ◽  
Fair Value ◽  
Cash Flows ◽  
Primary Data ◽  
Fair Value Accounting ◽  
Corporate Reporting ◽  
Regression Approach ◽  
The Impact ◽  
Future Cash Flows ◽  
Structured Questionnaire

This study examined the impact of fair value accounting on corporate reporting in Nigeria. The primary data used were gathered through a well-structured questionnaire, designed and administered to 120 respondents, who are made up of accountants, auditors, bankers, financial experts and practitioners in Lagos State, Nigeria. We adopted the logistic regression approach in analyzing the research questions. We found that fair value accounting has impact on corporate reporting. The Cox and Snell’s R-Square revealed that 67.1% of the variation in the corporate reporting was explained by the logistic model. We further found a moderate strong relationship between the fair value accounting and corporate reporting. Based on this finding, the study concluded that the used of fair value helped in predicting the earnings and assessment of the amounts, timing and uncertainty of future cash flows in corporate reporting which dependent on its reliability. However, institutional factors played an essential role in enhancing the reliability of discretionary fair value estimates which in return increased the informativeness of accounting information in corporate reporting.

The joint effects of management incentive and information precision on perceived reliability in fair value estimates

2014 ◽  
Vol 27 (2) ◽  
pp. 188-206 ◽  
Author(s):  
Ning Du ◽  
John E. McEnroe ◽  
Kevin Stevens
Keyword(s):  
Confidence Level ◽  
Fair Value ◽  
Cash Flows ◽  
Point Estimate ◽  
Fair Value Accounting ◽  
Content Type ◽  
Information Precision ◽  
Representational Faithfulness ◽  
Main Criticism ◽  
Future Cash Flows

Purpose – The purpose of this paper was to examine whether a less precise (or imprecise) estimate may increase investors’ confidence and improve investors’ perceptions of fair value reliability. The main criticism of fair value accounting has been its lack of reliability perceived by investors. Design/methodology/approach – A 2 × 3 randomized experiment was used where management incentive and information precision are manipulated. Findings – The results from this study indicate that perceived reliability is jointly affected by management’s incentives and information precision. Reliability rating is the highest for fair value stated as a point estimate with a specified confidence level attached to it. Further analysis indicates that higher perceived reliability is related to its representational faithfulness because participants perceive that a point estimate with a specified confidence level better matches uncertainty in measuring future cash flows. Originality/value – This is the first study to examine whether a less precise (or imprecise) estimate may increase investors’ confidence and improve investors’ perceptions of fair value reliability. Because of the subjectivity and uncertainty in fair value estimates, less precise fair value estimates may not be viewed as less reliable. In fact, using a precise format to represent fair value estimates may not be appropriate (neither reliable nor credible), because a precise point estimate fails to capture its underlying uncertainty in future cash flows. A less precise format could represent a credible choice for fair value because it reflects uncertainty and subjectivity and effectively communicates management’s assessments of variability in future cash flows.

Is fair value information relevant to investment decision-making: Evidence from the Australian agricultural sector?

2018 ◽  
Vol 43 (4) ◽  
pp. 555-574 ◽  
Author(s):  
Li Yu (Colly) He ◽  
Sue Wright ◽  
Elaine Evans
Keyword(s):  
Agricultural Sector ◽  
Investment Decision ◽  
Empirical Support ◽  
Accounting Standards ◽  
Fair Value ◽  
Cash Flows ◽  
Jel Classification ◽  
Fair Value Accounting ◽  
Operating Cash Flows ◽  
Investment Decision Making

Despite major accounting standards boards worldwide continuing to use fair value extensively, academic evidence on the relevance of fair value accounting has focused on financial assets. This study breaks new ground to provide the first empirical evidence for the agricultural sector on the relevance of fair value accounting. It examines the forecasting power of the fair value of biological assets for future operating cash flows. Using all agribusinesses listed in Australia, where fair value accounting was first implemented in the agricultural sector, we find that fair value of biological assets does not provide incremental forecasting power for future operating cash flows, whether market-determined prices or managerially estimated value is used. The findings of this study provide empirical support for the call by Elad and Herbohn in 2011 for the International Accounting Standards Board (IASB) to revisit the implementation of fair value accounting in the agricultural sector. JEL Classification: G14, G38, M41, Q18

Matching and the Changing Properties of Accounting Earnings over the Last 40 Years

2008 ◽  
Vol 83 (6) ◽  
pp. 1425-1460 ◽  
Author(s):  
Ilia D. Dichev ◽  
Vicki Wei Tang
Keyword(s):  
Fair Value ◽  
Earnings Persistence ◽  
Economic Relation ◽  
Fair Value Accounting ◽  
Accounting Earnings ◽  
Earnings Volatility ◽  
Stated Goal ◽  
Contemporaneous Correlation ◽  
Empirical Tests ◽  
Over Time

ABSTRACT: We present a theory that poor matching manifests as noise in the economic relation of advancing expenses to earn revenues. As a result, poor matching decreases the correlation between contemporaneous revenues and expenses, increases earnings volatility, decreases earnings persistence, and induces a negative autocorrelation in earnings changes. The empirical tests document these effects in a sample of the 1,000 largest U.S. firms over the last 40 years. We find a clear and economically substantial trend of declining contemporaneous correlation between revenues and expenses, increased volatility of earnings, declining persistence of earnings, and increased negative autocorrelation in earnings changes. The combined evidence suggests that accounting matching has become worse over time and that this trend has a pronounced effect on the properties of the resulting earnings. This evidence also suggests that the standard-setters’ stated goal of moving away from matching and toward more fair-value accounting is likely to continue and deepen the identified trends in the properties of earnings.

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