Relative value relevance of historical cost vs. fair value: Evidence from bank holding companies

This study examines the impact of hypothesized factors on the value-relevance of SFAS No. 107 fair value disclosures.  These factors include firm size, the relative magnitude of the difference between the fair value and the historical cost measurements for each financial instrument, firm financial condition, and the quality of a firm’s financial statement audit.  A pooled valuation model is employed on the sample of 867 firm years for banks and bank holding companies during the period of 1996 and 1997.   The results indicate that the SFAS No. 107 fair value disclosures for investment securities, net loans, and long-term debt are value-relevant in explaining the market value of common equity for the sample banks.  With respect to the hypothesized factors, firm size was found to have a statistically significant impact on the value-relevance of the disclosures for net loans and long-term debt.  Additionally, the relative magnitude of the difference between the fair value and historical cost had a statistically significant effect on the value-relevance of the disclosure for investment securities and long-term debt.  Finally, firm financial condition and the quality of a firm’s audit were found to have a statistically significant impact on the fair value disclosure for net loans.  The results of this study are descriptive of the behavior of financial statement users with respect to these fair value disclosures.  The implications of this study’s findings are useful for both accounting standard-setters and preparers of financial statements.  Taken together, these findings suggest that the market does not respond to the SFAS No. 107 fair value disclosures at their face value alone or without considering their context.  Specifically, it appears to look to other factors that may impact the relevance and/or reliability of these disclosures.

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The Reliability of Fair Value versus Historical Cost Information: Evidence from Closed-End Mutual Funds

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x0301800101 ◽

2003 ◽

Vol 18 (1) ◽

pp. 1-24 ◽

Cited By ~ 67

Author(s):

Thomas J. Carroll ◽

Thomas J. Linsmeier ◽

Kathy R. Petroni

Keyword(s):

Stock Returns ◽

Mutual Funds ◽

Stock Prices ◽

Stock Price ◽

Value Relevance ◽

Fair Value ◽

Cost Information ◽

G7 Countries ◽

Historical Cost ◽

Equity Securities

This research examines the value-relevance of fair value accounting relative to historical cost accounting for financial instruments held by closed-end mutual funds to provide evidence on the reliability of fair value estimation. Closed-end funds are considered because their balance sheets and income statements typically are reported at fair value and there is great variation in the types of securities held by various funds. For a sample of 143 closed-end mutual funds during 1982–1997, we find a significant association between stock prices and the fair value of investment securities, as well as between stock returns and fair value securities gains and losses, even after controlling for historical costs. To examine whether differences in the perceived reliability of the investment securities fair values affect investors' assessments of the usefulness of the information, we examine the association between stock price metrics and fair values across different fund types (e.g., publicly held equity securities from G7 countries, equity securities other than those publicly held from G7 countries, U.S. government or municipal securities, corporate bonds). We find that in all cases there is a significant association between the stock price metrics and fair values. This suggests that the need to estimate fair values for securities traded in thin markets, such as private or non-G7 equities, does not cause the incremental value-relevance of fair value information to be eliminated. Our strong and consistent findings in the closed-end fund setting suggest that reliability problems in measuring the fair values of investment securities are not the primary explanation for the inconsistency in prior research results; instead such inconsistency may be attributed to the incomplete availability of fair value measures in other settings.

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Information Asymmetry and Voluntary SFAS 157 Fair Value Disclosures by Bank Holding Companies During the 2007 Financial Crisis

Accounting Perspectives ◽

10.1111/1911-3838.12144 ◽

2017 ◽

Vol 16 (3) ◽

pp. 169-203

Author(s):

Renee Weiss ◽

John Shon

Keyword(s):

Financial Crisis ◽

Information Asymmetry ◽

Fair Value ◽

Bank Holding Companies ◽

Holding Companies ◽

Sfas 157

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Motives for Reporting Fixed Assets at Revalued Amount: Evidence from a Developing Economy

Global Business Review ◽

10.1177/0972150917735918 ◽

2018 ◽

Vol 19 (3) ◽

pp. 604-622 ◽

Cited By ~ 4

Author(s):

Habeeb Mohamed Nijam

Keyword(s):

Value Relevance ◽

Stock Exchange ◽

Fair Value ◽

Manufacturing Firms ◽

Future Research ◽

Financial Analyst ◽

Return On Equity ◽

Historical Cost ◽

Fixed Assets ◽

First Time

The purpose of this study is to examine firms’ motives for reporting fixed assets at revalued amount. The study analysed 30 manufacturing firms listed in Colombo Stock Exchange (CSE) for a period of two years from 2012 to 2013, employing Mann–Whitney U test and bivariate and multivariate logistic regression. It is found that manufacturing firms tend to report their property, plant and equipment (PP&E) at revalued amount, when land and building dominates their fixed assets, and firms whose PP&E is dominated by plant and machinery are inclined towards reporting fixed assets at historical cost. However, all such other factors investigated as firm size, carrying amount of PP&E ( ppe), intensity of PP&E ( ippe), returns on total assets ( roa) and return on equity ( roe) fail to explain the accounting choice between cost and revaluation models. The probability for a revaluation to occur, on the other hand, is found to be significantly and positively associated to financial leverage, indicating that highly levered manufacturing firms tend to revalue their assets, may be with the expectation of creating possibilities for additional borrowing. Further, no other variables investigated associate with the probability for a revaluation to occur, though prior researches support such association. Findings reveal that fixed assets revaluation motives may be characterized by the nature of fixed assets and their market dynamics characterized by the nature of economy in which firms operate. Findings also suggest that fair value accounting is relevant to manufacturers with high levels of land and building within their asset structure. Fixed assets revaluation motives may differ across countries which should accordingly be valued by financial analyst and investors. Future research should focus on value relevance of revaluation decision of firms in developing countries. Revaluation decisions should be analysed as first-time revaluation and frequency of subsequent revaluations. This is the first study in Sri Lanka reporting the evidence for fixed asset revaluation motives.

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The Value and Risk Relevance of Fair Value: The Case of French Firms

International Journal of Accounting and Financial Reporting ◽

10.5296/ijafr.v6i2.9692 ◽

2016 ◽

Vol 6 (2) ◽

pp. 15

Author(s):

Mondher Kouki ◽

Mosbeh Hsini ◽

Farah Tabassi

Keyword(s):

Value Relevance ◽

Fair Value ◽

Net Income ◽

Financial Instruments ◽

Historical Cost ◽

Comprehensive Income ◽

Empirical Tests ◽

Income Measurement ◽

Value Changes ◽

Value Measurement

We study the performance of fair value accounting standards of financial instruments starting from the analysis of quality relevance of accounting information. In particular, we are interested in the value relevance and risk relevance of income that contains financial instruments measured or not at fair value. To do so, we compare three income levels known as accounting standard’s history. The three major levels are Full-Fair-Value income measurement (all-fair-value changes recognized in income), piecemeal-fair-value income measurement or comprehensive income (some fair-value changes recognized in income), and historical-cost income measurement or net income (no fair-value measurement existing). The empirical tests of value relevance showed that net income is not a relevant value, and Full Fair Value Income is more significant than the Comprehensive Income. The study shows also that risk relevance is more, measured by the volatility of Full Fair Value Income.

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The shift of accounting models and accounting quality: The case of Norwegian GAAP

Corporate Ownership and Control ◽

10.22495/cocv14i4c1art11 ◽

2017 ◽

Vol 14 (4) ◽

pp. 289-300 ◽

Cited By ~ 1

Author(s):

Tonny Stenheim ◽

Dag Øivind Madsen

Keyword(s):

Financial Reporting ◽

Value Relevance ◽

Balance Sheet ◽

Cost Accounting ◽

Fair Value ◽

Accounting Quality ◽

Historical Cost ◽

Ifrs Adoption ◽

Conservative Accounting ◽

Historical Cost Accounting

This paper investigates the change in accounting quality when firms shift from a revenue-oriented historical cost accounting regime as Norwegian GAAP (NGAAP) to a balance-oriented fair value accounting regime as International Financial Reporting Standards (IFRS). Previous studies have demonstrated mixed effects on the accounting quality upon IFRS adoption. One possible reason is that the investigated domestic GAAP to a large extent has been adjusted to IFRS prior to IFRS adoption. This is not the case in NGAAP where IFRS adoption led to significant changes in the recognition and measurement rules. To investigate the change in accounting quality, the paper makes use of a panel design with 640 firm-year obserations from 2001 up to the financial crisis year 2008, including four years of pre-IFRS NGAAP observations and four years of IFRS-observations. The paper employs four commonly used approaches to investigate accounting quality: test of value relevance of net earnings and book values, accrual quality of net earnings, incidence of small positive net earnings and test of timely loss recognition. The paper demonstrates that the adoption of IFRS increases the relevance accounting information has for valuation purposes. IFRS requires recognition of intangible assets and off-balance sheet liabilities not allowed under NGAAP. Moreover, IFRS allows the use of fair value to a larger extent than NGAAP. The paper also demonstrates that NGAAP leads to timelier recognition of losses than IFRS. This supports the notion that historical cost accounting, which is the basic accounting principle under NGAAP, provides more conservative accounting numbers. Overall, this suggests that IFRS provides information more useful for valuation purposes, but to a lesser extent stewardship purposes which generally favours conservatism. NGAAP on the other hand, provides information less relevant for valuation purposes, but more relevant for stewardship purposes.

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Fair Value Accounting on the Housing Crisis

Business and Management Studies ◽

10.11114/bms.v2i3.1755 ◽

2016 ◽

Vol 2 (3) ◽

pp. 1

Author(s):

Phillip Neely Jr ◽

Ray Muhammad

Keyword(s):

Fair Value ◽

Housing Crisis ◽

Asset Valuation ◽

Fair Value Accounting ◽

Effect Analysis ◽

Holding Companies ◽

Historical Cost ◽

Valuation Method ◽

Alternate Model ◽

Research Findings

The circumstances which led to the development of each of these methods of accounting will be examined to better understand the context in which each technique was to be incorporated and its effect. Analysis will be performed on whether the use of these accounting practices changed since their inception and if so, for what purpose. The researcher will discuss how and if these accounting procedures become instrumental in relation to the valuation of housing assets, particularly in America. As a result of the financial crisis, some experts have expressed the opinion that Fair Value Accounting as opposed to the historical cost approach exacerbated the housing crisis while others have developed opinions that Fair Value Accounting had no negative affect on the crisis and in fact allowed for greater transparency in disclosure. The finding will analyze the effect of Fair Value Accounting on the housing crisis and whether the historical cost valuation method would be more effective and less subject to risk in home asset valuation by bank holding companies. Research findings will determine which method is most effective and whether an alternate model of valuation would provide a more reliable accounting practice for the housing market.

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