Fair-value accounting, asset sales and banks’ lending

2018 ◽  
Vol 35 (1) ◽  
pp. 163-177
Author(s):  
Jeff Downing
Keyword(s):  
Asset Prices ◽  
Design Methodology ◽  
Cost Accounting ◽  
Fair Value ◽  
Regulatory Capital ◽  
Asset Sales ◽  
Fair Value Accounting ◽  
Content Type ◽  
The Impact

Purpose This paper aims to examine the interaction between fair-value accounting, asset sales and banks’ lending in booms and busts. Throughout, the author uses “fair value” and “mark-to-market” interchangeably, to denote an accounting regime where changes in the prices of banks’ assets affect regulatory capital. “Historic-cost accounting” has been used in the paper to denote an accounting regime where changes in asset prices do not affect regulatory capital. Design/methodology/approach The author built a model that examines how the accounting regime affects banks’ incentives to sell assets and how the impact of the accounting regime on asset sales affects lending. Findings In a bust, fair value strengthens banks’ incentives to sell assets. The resulting increase in sales increases banks’ lending capacity. Consequently, lending can be higher under fair value. Conversely, in a boom, historic cost strengthens banks incentives to sell assets. The resulting increase in sales increases banks’ lending capacity. Hence, lending can be higher under historic cost. Originality/value This paper identifies a new channel through which the accounting regime could affect lending. The accounting regime can affect banks’ incentives to sell assets. The resulting difference in sales can affect banks’ ability to make new loans. Hence, in a boom, although banks book mark-to-market gains under fair value, asset sales could be higher under historic cost. Lending, thus, could be higher under historic cost. Conversely, in a bust, although banks book mark-to-market losses under fair value, sales could be higher under fair value. Lending, thus, could be higher under fair value.

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.

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.

Fair value accounting, earnings management, and the case of bargain purchase gain

2019 ◽  
Vol 28 (2) ◽  
pp. 229-253
Author(s):  
Steven Lilien ◽  
Bharat Sarath ◽  
Yan Yan
Keyword(s):  
Design Methodology ◽  
Fair Value ◽  
Control Group ◽  
Fair Value Accounting ◽  
Market Returns ◽  
Accounting Earnings ◽  
Content Type ◽  
Level 3 ◽  
Accounting Earnings Management

Purpose The purpose of this paper is to investigate the association between bargain purchase gains (BPGs) booked by the acquirer and smoothing of acquirers’ earning performance across time. Design/methodology/approach The authors use a sample of 122 bargain purchase acquisitions in non-financial industries from 2009 to 2012 and a pair-match control group of 122 goodwill acquisitions. Findings The authors find that BPGs, and in particular, the Level-3 fair value estimates of intangible assets acquired, have consistently been used to smooth earnings but that such smoothing activities are not associated with long-term market returns. Originality/value This study is the first one to investigate bargain purchase acquisitions in a broad range of non-financial industries and suggests that managers are using the valuation of intangibles to avoid unfavorable earnings even though these valuations are not credible to investors.

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.

Discussion of commercial lender judgment and fair-value recognition: an investigation into the impact of future accounting standards

2020 ◽  
Vol 28 (4) ◽  
pp. 481-486
Author(s):  
Nen-Chen (Richard) Hwang
Keyword(s):  
Interest Rates ◽  
Empirical Evidence ◽  
Research Design ◽  
Design Methodology ◽  
Experimental Studies ◽  
Accounting Standards ◽  
Fair Value ◽  
Content Type ◽  
Commercial Lenders ◽  
The Impact

PurposeThis paper aims to discuss the study by Warne (2020), which investigates whether disclosure or recognition of fair value information for nonfinancial assets influences commercial lenders’ judgment on interest rates and the dollar amounts of business loans.Design/methodology/approachProvides a discussion of research design and general issues related to behavioral/experimental studies.FindingsIdentifies issues that should be carefully thought out and properly addressed by behavioral researchers in order to improve the robustness of the empirical evidence.Originality/valueThis discussion highlights issues that should be carefully thought out and properly addressed by behavioral researchers in order to improve the robustness of the empirical evidence.

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 Fair Value Accounting vs. Historical Cost Accounting

2012 ◽  
Vol 17 (1) ◽  
pp. 1-6
Author(s):  
Paul Jaijairam
Keyword(s):  
Balance Sheet ◽  
Financial Statements ◽  
Cost Accounting ◽  
Fair Value ◽  
Fair Value Accounting ◽  
Historical Cost ◽  
Income Statement ◽  
Accounting Reports ◽  
The Impact ◽  
Historical Cost Accounting

This paper reviews fair value accounting method relative to historical cost accounting. Although both methods are widely used by entities in computing their income and financial positions, there is controversy over superiority. Historical cost accounting reports assets and liabilities at the initial price they were exchanged for at the time of the transaction. Conversely, fair value accounting quotes the prevailing price in the market. Nevertheless, while both methods of accounting affect financial statements, the impact of fair value accounting on the balance sheet and income statement is extreme due to the potential volatility of the method. Fair value accounting is deemed superior when compared to historical cost accounting because it reflects the current situation in the market whereas the later is based on the past. In addition, in relative terms, fair value accounting provides users with more current financial information and visibility.

A Convenient Scapegoat: Fair Value Accounting by Commercial Banks during the Financial Crisis

2011 ◽  
Vol 87 (1) ◽  
pp. 59-90 ◽  
Author(s):  
Brad A. Badertscher ◽  
Jeffrey J. Burks ◽  
Peter D. Easton
Keyword(s):  
Financial Crisis ◽  
Fair Value ◽  
Commercial Banking ◽  
Data Availability ◽  
Regulatory Capital ◽  
Asset Sales ◽  
Fair Value Accounting ◽  
Firm Level ◽  
Level Increase ◽  
Recent Financial Crisis

ABSTRACT Critics argue that fair value provisions in U.S. accounting rules exacerbated the recent financial crisis by depleting banks' regulatory capital, which curtailed lending and triggered asset sales, leading to further economic turmoil. Defenders counter-argue that the fair value provisions were insufficient to lead to the pro-cyclical effects alleged by the critics. Our evidence indicates that these provisions did not affect the commercial banking industry in the ways commonly alleged by critics. First, we show that fair value accounting losses had minimal effect on regulatory capital. Then, we examine sales of securities during the crisis, finding mixed evidence that banks sold securities in response to capital-depleting charges. However, the sales that potentially resulted from the charges appear to be economically insignificant, as there was no industry- or firm-level increase in sales of securities during the crisis. JEL Classifications: M41; M42; M44. Data Availability: Data are available from sources identified in the article.

On theoretical engorgement and the myth of fair value accounting in China

2019 ◽  
Vol 33 (1) ◽  
pp. 59-76 ◽  
Author(s):  
Christopher Nobes
Keyword(s):  
Design Methodology ◽  
International Institutions ◽  
Fair Value ◽  
International Standards ◽  
Fair Value Accounting ◽  
Content Type ◽  
Technical Data ◽  
Technical Content ◽  
Special Circumstances ◽  
Practical Implications

Purpose The purpose of this paper is to provide “Comments” on two previous papers in this journal about fair value in Chinese accounting. It extends those papers by considering developments since 2006. Design/methodology/approach The paper analyses the contents of Chinese Accounting Standards, dividing the references to fair value into several different categories. This analysis is compared to the findings of the two previous papers. This paper then re-assesses the evidence about the alleged pressures from international institutions on Chinese accounting. Findings The two previous papers greatly overstate the importance of fair value in Chinese accounting, partly through misinterpreting Chinese standards and partly because of a lack of caveat that the instructions about fair value often relate to special circumstances or unusual companies. The theorising about Chinese enthusiasm for fair value is misguided: the present author suggests that China became keen to adopt international standards despite their use of fair value not because of it, and that China removed much of the fair value when it adapted international standards. The extension of the analysis beyond 2006 provides a fuller coverage but does not alter the conclusions. Research limitations/implications The earlier of the two papers examined has been extensively cited. Researchers need to be warned that the technical content and the conclusions of both papers are questionable. Authors should define terms clearly and should provide sufficient reference detail to enable readers to check findings. Practical implications Multinational companies, auditors and financial analysts should not be misled into thinking that Chinese accounting makes extensive use of fair value accounting. Originality/value This paper critically re-assesses two previous papers, starting with detailed technical data and moving through to the influence of international institutions. This paper also newly extends the analysis of Chinese standards beyond 2006.

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