scholarly journals Fair value accounting and management opportunism on earnings management in banking sector: First evidence

2018 ◽  
Vol 15 ◽  
pp. 59-69 ◽  
Author(s):  
Marco Tutino ◽  
Marco Pompili
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Banking Sector ◽  
Strong Relationship ◽  
Fair Value ◽  
Financial Instruments ◽  
Fair Value Accounting ◽  
Valuation Process ◽  
Earning Quality ◽  
Short Termism

Accounting standard boards (IASB and FASB) have chosen fair value accounting (FVA) approach to help financial reporting users in the decision-making process. During recent years, an intense debate arose about the trade-off between relevance and reliability of accounting information in this approach. Even if fair value based information could be considered highly relevant and helpful from an investor’s perspective, many authors outline problems related to fair value hierarchy valuation of financial instruments. In particular, the discretionary use of unobservable inputs in financial instruments valuation process can support earnings management strategy underlying the risk for emerging agency problems, moral hazard behaviour and management short-termism. Stating that, after providing a literature review focused on management behaviour related to FVA, the main objective of the paper is identifying possible relationships between FVA valuations and earning quality observing a sample of US and European banks listed in the period 2011-2016 based on Šodan model (Sodan, 2015). Results show a negative and strong relationship between FVA and earning quality for US banks; results for European listed banks do not provide any strong evidence.

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.

scholarly journals A Stakeholder’s Perspective on the Implications of IFRS and Fair Value Accounting on Valuation of Securities

2013 ◽  
Vol 3 (2) ◽  
Author(s):  
Glynis Milne and Dr. Eloisa Perez
Keyword(s):  
Financial Reporting ◽  
Market Value ◽  
Fair Value ◽  
Financial Instruments ◽  
Fair Value Accounting ◽  
Optimal Method ◽  
Historical Cost ◽  
Financial Reporting Standards ◽  
Illiquid Markets ◽  
Fair Market Value

Due to the complexity of modern financial instruments, accurate valuation can prove difficult even in optimal market conditions. Traditionally International Financial Reporting Standards (IFRS) have allowed securities to be valued based on their historical cost, which results in financial instruments being held on the books at the initial cost paid, until the point at which they are sold. However, this practice may be viewed as problematic when the market value of the financial instrument has not appreciated. Furthermore, market valuation becomes even more difficult to substantiate in illiquid markets, as it may oftentimes be difficult to secure a buyer at any price. Opponents of the historical cost methodology argue that in these circumstances it is unreasonable to allow firms to continue to hold their financial instruments at historical cost, and advocate for a valuation framework that requires the holders of securities to mark their book value to the best estimate of fair market value available. This viewpoint is countered by those who believe that in illiquid markets or markets in crisis, marking to market value is unfair as no functional market exists. In light of the subprime mortgage crisis the new iteration of IFRS requires the use of fair value accounting and marking to market for investment products of all types, with the exception of those held to maturity (bonds). Through a review of current literature, we sought to determine the optimal method for valuation of investment products. Our goal was to determine a reliable and representationally faithful method of valuation that will balance the needs and requirements of all stakeholders and provide transparency in accounting.

Transparency of Fair Value Accounting and Tax

2014 ◽  
pp. 476-494
Author(s):  
Eva Eberhartinger ◽  
Soojin Lee
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Accounting Standards ◽  
Fair Value ◽  
Reporting Standards ◽  
Fair Value Accounting ◽  
Financial Reporting Standards ◽  
Comprehensive Income ◽  
Accounting Measurement ◽  
Other Comprehensive Income

This chapter examines transparency in fair value accounting (measurement, presentation, additional disclosure), with special emphasis on tax disclosure and on the presentation of fair values in the statement of other comprehensive income. After considering the international relevance of the International Financial Reporting Standards, the chapter discusses fair value accounting in the context of accounting standards. It then reviews prior research to determine whether fair value accounting adds to accounting transparency. It also looks at the measurement and presentation of the transparency of fair value accounting based on relevance and reliability, along with issues of earnings management and procyclical effects.

scholarly journals The impact of IFRS-based accounting standards on earnings management: evidence from Malaysia

2016 ◽  
Vol 5 (1) ◽  
pp. 1
Author(s):  
Yosra Makni Fourati ◽  
Rania Chakroun Ghorbel
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Emerging Market ◽  
Accounting Standards ◽  
Absolute Value ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Earning Quality ◽  
The Impact ◽  
Different Levels

This study aims to examine the consequences of International Financial Reporting Standards (IFRS) convergence in an emerging market. More specifically, we investigate whether the adoption of the new set of accounting standards in Malaysia is associated with lower earnings management. Using a sample of 3,340 firm-year observations across three reporting periods with different levels of IFRS adoption, we provide evidence that IFRS convergence improves earning quality. In particular, we find a significant decrease in the absolute value of discretionary acccruals in the partial IFRS-convergence period (2007-2011), whereas this effect is restrictive after the complete IFRS- implementation.

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.

Issues and challenges of IFRS 9 in Malaysian Islamic financial institutions: recognition criteria perspective

2021 ◽  
Vol 12 (2) ◽  
pp. 239-257
Author(s):  
Marziana Madah Marzuki ◽  
Abdul Rahim Abdul Rahman ◽  
Ainulashikin Marzuki ◽  
Nathasa Mazna Ramli ◽  
Wan Amalina Wan Abdullah
Keyword(s):  
Financial Institutions ◽  
Financial Reporting ◽  
Business Models ◽  
Fair Value ◽  
Financial Instruments ◽  
Structured Interviews ◽  
Content Type ◽  
Reporting Framework ◽  
Islamic Financial Institutions ◽  
Ifrs 9

Purpose The purpose of this paper is to investigate the effects and challenges of the new amendment of International Financial Reporting Standards (IFRS) 9 in Malaysia from the perspectives of regulators, auditors, accountants and academicians in Malaysian Islamic financial institutions. For the purpose of this study, this paper focuses on the recognition criteria perspective of the standard, which provides a basic understanding of the financial reporting framework. Design/methodology/approach Using 10 series of semi-structured interviews undertaken with key individuals in regulatory bodies, audit companies, full-fledged Malaysian Islamic Banks and Malaysian higher learning institutions. Findings The findings revealed that IFRS 9 strengthens International Accounting Standards 39 in terms of relevance and reliability, recognition of financial instruments and identification of business models. Nevertheless, Islamic financial institutions face challenges in terms of a faithful representation of fair value, substance over form, identification of financial instruments before recognition criteria and the extent of the role of risk management in reducing manipulation in identifying business models. Research limitations/implications This study provides implications to regulators and standard setters in Malaysia to enhance the quality of financial reporting framework and practices in Islamic financial institutions in this country using IFRS 9. Practical implications Practically, the findings of this study can be used by the regulators to resolve the issues that arise in adopting IFRS 9 among Islamic financial institutions to further enhance financial reporting quality. Originality/value The findings of this study are very important to ensure that the adoption of IFRS among Islamic financial institutions are in line with Sharīʿah principles. To date, no studies have been done on the challenges of adopting IFRS 9 among Islamic financial institutions in Malaysia.

scholarly journals Does the New European Banking Regulation discourage Earnings Management?

2017 ◽  
Vol 10 (10) ◽  
pp. 45 ◽  
Author(s):  
Giuseppe Di Martino ◽  
Grazia Dicuonzo ◽  
Graziana Galeone ◽  
Vittorio Dell'Atti
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Banking Sector ◽  
Banking Regulation ◽  
Regulatory Framework ◽  
Loan Loss ◽  
Minimum Capital ◽  
Loan Loss Provisions ◽  
European Banking ◽  
Single Rulebook

In the recent past, the financial crisis has shown important lacks in the EU regulation relating to the banking sector, making the introduction of a unified regulatory framework necessary. Since June 2009 the European Council has recommended a “Single Rulebook”, that is a unique and harmonizing discipline applicable to all financial institutions in the Single Market, become effective on January 2014. This prudential discipline requires much more minimum capital, liquidity and information transparency and it defines format and minimum standards of contents.The aim of this research is to investigate the relation between the new mandatory disclosure and earnings management policies in banking sector realized through Loan Loss Provisions (LLP), the component of income statement mainly subject to manipulations, especially in form of earnings smoothing. Because the new integrated regulatory framework requires a more transparent disclosure, we expected that accruals manipulation (basically LLP) could be discouraged. The empirical analysis is based on a sample of 116 listed European banks over the period prior (2011-2012-2013) and after (2014-2015-2016) the effective date of the Single Rulebook. The evidence confirm our hypothesis suggesting that this banking reform discourages earnings manipulation and improves earnings quality, making financial reporting more useful for investors. The results are important to the regulatory institutions (such as European Union and European Central Bank) supporting more stringent discipline introduced by Basel III.

scholarly journals Fair Value Accounting: Implementation Challenges Facing Small and Medium-Sized Entities in the Agricultural Sector

2018 ◽  
Vol 8 (4) ◽  
pp. 60
Author(s):  
Joseph Kwasi Agyemang ◽  
Owusu Acheampong ◽  
Wiafe Nti Akenten
Keyword(s):  
Financial Reporting ◽  
Agricultural Sector ◽  
Fair Value ◽  
International Standards ◽  
Reporting Standards ◽  
Fair Value Accounting ◽  
Implementation Challenges ◽  
Financial Reporting Standards ◽  
Regulatory Bodies ◽  
Value Reporting

Nowadays, the relevance of fair value in financial reporting is gaining impetus and recent discussions are moving in the trend of full fair value reporting. Small and medium-sized entities are not ignored in this instance. The move to new reporting standards results in various challenges for different interest groups such as auditors, preparers and regulators. The main objective of the study was to establish the fair value implementation challenges facing SMEs in the agricultural sector with evidence from regulatory bodies in Ghana. The study established that there is lack of methodological relationship between existing local laws and IFRS and absence of involvement of regulatory bodies in financial reporting standards setting. In light of these challenges, the study recommends involvement of regulatory bodies in standard setting and consideration should also be given to local laws when setting international standards.

scholarly journals Fair Value Accounting and Earnings Management Using LLP and Realized Gains and Losses: Study in Banking Industry Listed on Indonesia Stock Exchange

2018 ◽  
Vol 14 (2) ◽  
pp. 126-137
Author(s):  
Ice Maria Ulfa ◽  
Bambang Subroto ◽  
Zaki Baridwan
Keyword(s):  
Earnings Management ◽  
Empirical Evidence ◽  
Banking Industry ◽  
Stock Exchange ◽  
Fair Value ◽  
Fair Value Accounting ◽  
Loan Loss ◽  
Trade Off ◽  
Gains And Losses ◽  
The Impact

Abstract: Fair Value Accounting and Earnings Management Using LLP and Realized Gains and Losses: Study in Banking Industry Listed on Indonesia Stock Exchange. This study examines whether earnings management can be limited by the implementation of fair value accounting in banking industry. The main contribution of this study is  providing provide empirical evidence about the impact of fair value accounting on earnings management in Indonesia. Earnings management is proxied by loan loss provision (LLP), the realized of gains and losses, and the trade-off between realized gains and losses and LLP following Bratten et al (2013). The study provides empirical evidence that earnings management is still performed by banks, by using LLP, realized gains and losses and also occurs trade-off between LLP and realized gains and losses as means to perform earnings management in accordance with the needs of management. If banks are exposed to fair value accounting, managers will have more flexibility in reporting banks’ financial performance to present a desired earning, by  providing them with additional earning managements tools. These findings can be informative for policymakers, banking practitioners, and academics.  Keywords: earnings management, fair value accounting, LLP, realized gains and losses, trade-off LLP and realized gains and losses.Abstrak: Akuntansi Nilai Wajar dan Manajemen Laba menggunakan CKPN dan Realized Gains and Losses: Studi pada Industri Perbankan yang terdaftar di Bursa Efek Indonesia. Studi ini bertujuan untuk meneliti apakah manajemen laba dapat dibatasi oleh penerapan akuntansi nilai wajar dalam industri perbankan. Kontribusi dari penelitian ini adalah untuk memberikan bukti empiris tentang dampak penerapan akuntansi nilai wajar pada manajemen laba di Indonesia. Manajemen laba diproksikan oleh cadangan kerugian penurunan nilai (CKPN), realized of gains and losses, dan trade-off antara realized of gains and losses dan CKPN mengikuti model penelitian Bratten et al (2013). Studi ini memberikan bukti empiris bahwa manajemen laba masih dilakukan oleh bank menggunakan CKPN, realized of gains and losses dan juga terjadi trade-off antara CKPN dan realized of gains and losses sebagai sarana manajemen laba sesuai dengan kebutuhan manajemen. Konsekuensi dari paparan bank terhadap akuntansi nilai wajar dapat meningkatkan fleksibilitas manajer dalam melaporkan penghasilan yang diinginkan dengan memberikan mereka alat manajemen laba. Temuan-temuan tersebut dapat bersifat informatif bagi pembuat kebijakan, anggota industri perbankan, dan akademisi. Kata kunci: manajemen laba, akuntansi nilai wajar, CKPN, realized gains and losses, trade-off CKPN dan realized gains and losses.

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.

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