Fair value accounting choice

2015 ◽  
Vol 8 (2) ◽  
pp. 130-152 ◽  
Author(s):  
Inês Pinto ◽  
Manuel Caldeira Pais
Keyword(s):  
Financial Reporting ◽  
Fair Value ◽  
Accounting Conservatism ◽  
Accounting Choice ◽  
Fair Value Accounting ◽  
Content Type ◽  
Fund Managers ◽  
Asset Value ◽  
Accounting Model ◽  
The Impact

Purpose – Profiting from a unique research opportunity in the Portuguese REIFs market, this paper aims to investigate the impact of fund managers ' accounting choice on funds ' returns distribution and analyses the relationship between fair value accounting choice and conditional accounting conservatism. Design/methodology/approach – According to Portuguese securities market regulation, fund managers of REIFs can fix the value of the fund properties between the acquisition cost and the average of the appraisal values assigned periodically by two independent appraisers. Therefore, through the analysis of fund managers’ actual choice to value REIF net asset value in comparison with a mandatory adoption of a pure fair value method (appraisers’ valuations), the paper investigates the impact of accounting choice on funds’ return series. On the other hand, an analysis at fund level is also conducted to determine the consequences of fair value accounting choice on the ability of fund managers in delaying the recognition of asset value decreases (bad news). Findings – Results indicate that in the period of financial crisis, significant differences in REIF returns according to the accounting method used to value properties are observed. There is also evidence that fund managers of open-end funds that are subject to greater market pressure to meet financial reporting objectives are more likely to smooth book value returns. Additionally, findings support the hypothesis that REIFs that use a more historical cost accounting model exhibit a lower degree of conditional accounting conservatism, suggesting that the use of fair value may be useful to reduce fund manager discretion in delaying the recognition of losses. Originality/value – This paper provides an empirical evidence of one possible positive effect of the use of fair value on the quality of financial reporting, evidencing how a more fair value accounting model may limit fund managers’ discretion.

Fair value and banking contagion

2016 ◽  
Vol 7 (3) ◽  
pp. 215-236 ◽  
Author(s):  
Leila Gharbi ◽  
Halioui Khamoussi
Keyword(s):  
Data Model ◽  
Banking Sector ◽  
Fair Value ◽  
Islamic Banks ◽  
Fair Value Accounting ◽  
Content Type ◽  
Gcc Countries ◽  
Conventional Banks ◽  
Value Changes ◽  
The Impact

Purpose This paper aims to explore empirically the impact of fair value accounting on banking contagion in a comparative context between Islamic banks and conventional banks. Design/methodology/approach The analysis of the impact of fair value changes on banking contagion is carried out through a panel data model. This study covers 20 Islamic banks and 40 conventional banks operating in the Gulf Cooperation Council (GCC) countries during nine years from 2003 to 2011. Findings Empirical evidence shows that there is a significant change in dynamic volatility in GCC banking sector because of financial crisis 2008. However, results fail to confirm the hypothesis that fair value accounting is significantly associated with an increase of banking contagion for both Islamic and conventional banks operating in GCC countries. Originality/value The outcome of this study provides some insights for academicians, accountants as well as regulators in terms of enhancing the effectiveness of accounting practices.

scholarly journals The (un)suitability of fair-value accounting in emerging economies: the case of Vietnam

2019 ◽  
Vol 15 (2) ◽  
pp. 170-197 ◽  
Author(s):  
Lisa-Uyen Nguyen
Keyword(s):  
Financial Reporting ◽  
Institutional Environment ◽  
Fair Value ◽  
Business Environment ◽  
Future Research ◽  
Critical Examination ◽  
Fair Value Accounting ◽  
Structured Interviews ◽  
Corporate Misconduct ◽  
Content Type

Purpose This study aims to explore the suitability and challenges of implementing fair value accounting (FVA) in Vietnam, an emerging/transitioning economy. While such implementation would enable convergence with International Financial Reporting Standards, standard setters and auditors have raised practical concerns about its adoption. Design/methodology/approach This qualitative study uses semi-structured interviews with regulators and auditors, together with an analysis of two fraud cases that illustrate the business environment in Vietnam. Public, private and capture theories guide the analysis. Findings The business and institutional environment in Vietnam creates several impediments to FVA being effectively implemented and transparently applied. Given the major challenges identified regarding the infrastructure necessary for this valuation system, the premature adoption of FVA may become a catalyst for corporate misconduct. Research limitations/implications The findings are derived from data aggregated from two fraud cases and interviews, and as such, the results may not be generalisable to other settings. However, these findings may inform future research, particularly after the Ministry of Finance provides further guidance on the use of FVA in Vietnam. Practical implications A timely and critical examination of the challenges of implementing FVA in a transitioning economy is provided, and the two fraud cases reveal the complexities of the business environment in Vietnam. Originality/value This research gives voice to the tensions that developing countries are confronting as they seek to balance external pressures with internal constraints. The introduction of an assemblage of three theoretical lenses enables insights into contemporary issues associated with applying FVA in such settings.

scholarly journals The impact of CEOs’ accounting backgrounds on earnings management and conservatism

2017 ◽  
Vol 10 (1) ◽  
pp. 4-24
Author(s):  
Nan Hu ◽  
Rong Huang ◽  
Xu Li ◽  
Ling Liu
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Discretionary Accruals ◽  
Accounting Conservatism ◽  
Policy Implications ◽  
Good News ◽  
Content Type ◽  
Accounting Research ◽  
Significant Difference ◽  
The Impact

Purpose Existing literature in experimental accounting research suggests that accounting professionals and people with accounting backgrounds tend to have a lower level of moral reasoning and ethical development. Motivated by these findings, this paper aims to examine whether chief executive officers (CEOs) with accounting backgrounds have an impact on firms’ earnings management behavior and the level of accounting conservatism. Design/methodology/approach The authors classify CEOs into those with and without accounting backgrounds using BoardEx data. Using discretionary accruals from several different models, they do not find that CEOs with accounting backgrounds are more likely to engage in income-increasing accruals. However, the authors find that CEOs with accounting backgrounds exhibit lower levels of conservatism, proxied by C-scores and T-scores (Basu, 1997). This finding suggests that CEOs with accounting backgrounds recognize bad news more quickly than good news, consistent with the accounting principle of “anticipating all losses but anticipating no gains”. Findings The authors show that firms whose CEOs have accounting backgrounds exhibit lower levels of accounting conservatism. However, these firms do not exhibit higher levels of income-increasing discretionary accruals. This study documents the impact of CEOs’ educational backgrounds on firms’ accounting choices and confirms prior findings in experimental accounting research using large sample archival data. Originality/value This paper is the first study that investigates the impact of CEOs’ accounting backgrounds on firms’ financial reporting policy. The findings may have some policy implications. If accounting backgrounds of CEOs can make a significant difference on firms’ behavior, it is reasonable to make CEOs accountable for the quality of financial reporting. This paper is one of the first to empirically test inferences drawn by experimental accounting research. There has been a gap between archival and experimental accounting studies. The authors propose that interesting research questions can be addressed by filling in such a gap.

scholarly journals Fair value accounting and earning management: The impact of unobservable inputs on earning quality. Evidence from the US

2019 ◽  
Vol 16 (2) ◽  
pp. 8-18 ◽  
Author(s):  
Marco Pompili ◽  
Marco Tutino
Keyword(s):  
Financial Reporting ◽  
Negative Impact ◽  
Evaluation Process ◽  
Strong Relationship ◽  
Fair Value ◽  
Financial Instruments ◽  
Fair Value Accounting ◽  
Earning Quality ◽  
The Impact

Accounting standard boards (IASB and FASB) are aimed at designing high-quality standards able to increase transparency and comparability of financial reporting. They have chosen fair value accounting (FVA) approach to improve the quality of financial reporting and at the same time help financial reporting users in the decision-making process. During recent years, an intense debate has arisen about the trade-off between relevance and reliability of accounting information using this approach. Many authors outline problems related to the fair value hierarchy valuation of financial instruments, in particular, the discretionary use of unobservable inputs in financial instruments valuation process in support of earnings management. Tutino and Pompili (2018) have identified a general negative correlation between the extent of FVA and earning quality. Stating this, the main objective of the paper, using the same approach of the previous one, is to identify the specific impacts of unobservable inputs on earning quality. Theory and previous literature suggest a major negative impact of unobservable inputs than observable ones on the quality of information provided within financial reporting. Results show a negative and strong relationship between FVA and earning quality for US banks that do not depend on the hierarchy of input used in the evaluation process. These results suggest new considerations on the reliability of fair value concerning the possibilities of manipulation given to the management with this approach.

Fair value accounting implementation challenges in South Africa

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Anuradha Pandya ◽  
Wayne van Zijl ◽  
Warren Maroun
Keyword(s):  
South Africa ◽  
South African ◽  
Financial Reporting ◽  
Accounting Standards ◽  
Fair Value ◽  
Perceived Usefulness ◽  
Developing Economy ◽  
Fair Value Accounting ◽  
Extensive Experience ◽  
Content Type

PurposeThe objective of this research is to explore the challenges being encountered when applying and implementing fair value accounting requirements, focusing specifically on the determination of fair value per International Financial Reporting Standards (IFRS) 13: Fair value measurement (IFRS 13) in the South African capital market.Design/methodology/approachData are collected from 20 detailed interviews, primarily with preparers and interpretively analysed to identify how individuals internalise the requirements of IFRS 13 and the challenges associated with its application. The researchers focus specifically on South Africa because of its status as a developing economy and, at the same time, its extensive experience in applying IFRS.FindingsSouth African preparers appear reluctant to change from a conventional cost-based measurement approach to one grounded in fair value. Primary concerns include the perceived usefulness of fair value accounting and its conceptual appropriateness, given its perceived de-emphasis of the traditional stewardship role of financial reporting. Related challenges to the application of IFRS 13 include concerns about the cost of determining fair value; the inherent subjectivity of fair value measures and the practical difficulty of calculating fair values when markets are not efficient or where business environments are complex and dynamic where Level 1 inputs are not widely available for all assets and liabilities. These challenges encourage preparers to choose accounting policies, which minimise the use of fair value or apply the provisions of IFRS 13 legalistically.Research limitations/implicationsData are collected from a group of respondents from a single developing economy. Additional research on the application of IFRS 13 in other developing markets will be required to conclude on the relevance of economic, cultural and social factors for the understanding and implementation of new accounting standards by practitioners.Practical implicationsStandard setters and regulators cannot assume that new accounting standards will be interpreted and applied as intended. Even when compliance with IFRS is mandatory, preparers have considerable discretion when it comes to operationalising accounting prescriptions. Unless the challenges raised by preparers are addressed, misapplication of IFRS is likely to continue.Originality/valueThe research makes an important empirical and practical contribution by providing primary evidence on the operationalisation of IFRS 13 in a novel setting. It complements earlier research which has focused primarily on the conceptual/theoretical dimension and on American and European perspectives.

Accounting conservatism, capital structure, and global diversification

2015 ◽  
Vol 27 (1) ◽  
pp. 119-138 ◽  
Author(s):  
Feras M Salama ◽  
Karl Putnam
Keyword(s):  
Capital Structure ◽  
Financial Reporting ◽  
Fixed Effects ◽  
Reporting Quality ◽  
Accounting Conservatism ◽  
Fixed Effects Model ◽  
Financial Leverage ◽  
Content Type ◽  
The Impact ◽  
Global Diversification

Purpose – The purpose of this paper is to investigate the effect of accounting conservatism (as a proxy for financial reporting quality) on the degree of financial leverage. In addition, this paper examines the impact of global diversification (as a proxy for operational complexity) on the relationship between conservatism and financial leverage. Design/methodology/approach – A panel data regression analysis is conducted for the period 2000-2006. The authors utilized a two-way fixed-effects model to control for unobservable firm characteristics and time effects that may influence the firm’s decision to report conservatively. Findings – This paper provides empirical evidence that conservatism is positively associated with the degree of financial leverage, and the influence of conservatism on financial leverage is enhanced by the degree of global diversification. Originality/value – A major issue in corporate finance is the identification of variables that influence corporate capital structure choices. The evidence presented in this paper reveals that more conservative financial reporting is associated with a higher degree of financial leverage in the firm’s capital structure. This effect increases with the extent of global diversification, indicating that bondholders place a higher value on conservatism when there is more information asymmetry between stakeholders and managers caused by global diversification.

IFRS adoption and accounting conservatism in Latin America

2020 ◽  
Vol 33 (3/4) ◽  
pp. 301-320
Author(s):  
Harold Lopez ◽  
Mauricio Jara ◽  
Adriana Cabello
Keyword(s):  
Latin America ◽  
Latin American ◽  
Financial Reporting ◽  
Accounting Conservatism ◽  
Content Type ◽  
Listed Firms ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Mandatory Adoption ◽  
The Impact

Purpose The purpose of this paper is to analyze the impact of IFRS mandatory adoption on accounting conservatism and to shed light on the drivers of such impact. Design/methodology/approach Using a sample of listed firms for five Latin American countries, the authors analyze the relation between mandatory adoption of International Financial Reporting Standards and the conditional accounting conservatism of earnings. Findings The authors find evidence that IFRS adoption boosts earnings conservatism. This result is robust and heterogeneous. The results also show that the effect of IFRS differs across firms and countries. Specifically, the impact of IFRS adoption is higher for low-earnings-quality firms and for firms with high levels of investment opportunities. Practical implications The results suggest that IFRS adoption in Latin America has enhanced comparability of financial information both across and within countries. Originality/value This paper contributes to the literature by providing new evidence on the drivers of the impacts of IFRS adoption in emerging markets.

Regime change in the accounting for goodwill

2017 ◽  
Vol 25 (1) ◽  
pp. 43-69 ◽  
Author(s):  
Md Khokan Bepari ◽  
Abu Taher Mollik
Keyword(s):  
Information Content ◽  
Regime Change ◽  
Accounting Standards ◽  
Fair Value ◽  
Fair Value Accounting ◽  
Content Type ◽  
Goodwill Impairment ◽  
Accounting Measurement ◽  
Business Combination ◽  
The Impact

Purpose This study aims to examine the impact of the recent regime change in accounting for goodwill, from the systematic periodic amortisation to the impairment testing, on the frequency and the extent of goodwill write-offs in the context of Australia. It also examines the impact of the change from the amortisation approach to the impairment approach on the value relevance of older goodwill. Design/methodology/approach The authors approach the first research question by comparing the actual amount of goodwill impairment charge by the sample firms with the minimum “as if” amortisation charge that would have been required under the amortisation regime. The authors approach the second question using a modified Ohlson model (1995), similar to Bugeja and Gallery (2006). The sample consists of 911 firm-year observations with the number of observations in the particular year being 238, 242, 220 and 211 in 2009, 2008, 2007 and 2006, respectively. Findings The findings suggest that the adoption of the impairment approach has decreased the frequency and the amount of goodwill write-off. The goodwill impairment amount is substantially less than the “as if” amortisation amount that would have been required under the amortisation regime. The results also suggest that older goodwill is now value-relevant, whereas goodwill purchased during the current year is not value-relevant. One reason for this may be that AASB 3: Business Combination allows for the provisional allocation of the purchase price to goodwill to be allocated to other identifiable intangible assets latter on. Hence, during the year of business combination, investors do not form a firm view of the amount of goodwill arising out of the business combination. Research limitations/implications This study uses data for the first four years since the inception of the impairment approach. Practical implications The findings of this study have important implications for the fair value accounting debate. The discretions allowed the managers under the impairment approach to improve the information content of goodwill. The relatively low levels of goodwill impairment even during the 2008-2009 global financial crisis contradict to the apprehensions found in the literature that managers will use the goodwill write-off as a tool for downward earnings management. The findings also imply that if managers are allowed with adequate flexibility through accounting standards rather than stipulating some systematic and mechanistic rules, the information value of the accounting measurement may improve. Social implications The findings feed into the debate of “rule-based” versus “principle-based” accounting standards and favours the “principle-based” accounting standards. The findings also contribute to the accounting measurement literature by concluding that if allowed with discretionary choices, managers may not always opt for the conservative accounting measurements (such as, recording goodwill write-offs). Originality/value Adopting an alternative approach, this study shows that the fair value accounting for goodwill has resulted in an optimistic approach to goodwill write-offs. It has also improved the information content of reported goodwill. This is the first known study addressing the research questions in consideration after the adoption of the goodwill impairment approach.

scholarly journals Financial reporting under economic policy uncertainty

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Peterson Kitakogelu Ozili
Keyword(s):  
Economic Policy ◽  
Financial Reporting ◽  
Fair Value ◽  
Policy Uncertainty ◽  
Fair Value Accounting ◽  
Content Type ◽  
Economic Policy Uncertainty ◽  
New Information ◽  
Accounting Numbers ◽  
The Relationship

Purpose This paper aims to discuss financial reporting under economic policy uncertainty. Design/methodology/approach The paper uses discourse analysis to examine financial reporting under economic policy uncertainty. Findings The paper identifies the link between economic policy uncertainty and financial reporting, in terms of earnings management and fair value accounting. It argues that high economic policy uncertainty will transmit fewer new information to firms which can motivate managers to influence accounting numbers in the direction of the desired financial reporting outcome. Originality/value The relationship between economic policy uncertainty and financial reporting has not been studied. This paper is one of the first papers to relate economic policy uncertainty to financial reporting behavior.

Managerial ability and fair value accounting: evidence from nonfinancial firms

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Wray Bradley ◽  
Li Sun
Keyword(s):  
Design Methodology ◽  
Fair Value ◽  
Managerial Ability ◽  
Fair Value Accounting ◽  
Content Type ◽  
Level 3 ◽  
Level 1 ◽  
The Impact ◽  
Nonfinancial Firms ◽  
Level 2

Purpose The purpose of this study is to examine the relation between managerial ability and fair value inputs (measured as fair value intensity) for nonfinancial firms. Design/methodology/approach This study uses regression analysis to investigate the impact of managerial ability on the level of fair value inputs. Findings This study finds significant and positive relations between managerial ability and use of Level 1 and Level 2 fair value inputs. On the other hand, this study finds an insignificant relation between managerial ability and Level 3 inputs. Originality/value The findings contribute to two research streams. To the best of the author’s knowledge, this is perhaps the first study that directly examines the link between managerial ability and fair value inputs.

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