Using Fair Value Earnings to Assess Firm Value

2018 ◽  
Vol 32 (4) ◽  
pp. 49-58 ◽  
Author(s):  
Mary E. Barth ◽  
Wayne R. Landsman
Keyword(s):  
Financial Reporting ◽  
Firm Value ◽  
Fair Value ◽  
Cash Flows ◽  
Financial Statement ◽  
Fair Value Accounting ◽  
Economic Decisions ◽  
The Subject

SYNOPSIS Whether fair value accounting should be used in financial reporting has been the subject of debate for many years. A key dimension to this debate is whether fair value earnings can provide information to financial statement users that is helpful in making their economic decisions. A criticism of fair value accounting is the contention that fair value earnings simply reflects “shocks” to value, and thus cannot be used to assess firm value. We show how fair value earnings can be disaggregated into components that can be used to assess firm value, as well as components that provide information about various types to shocks to value, e.g., effects of changes in expected cash flows.

scholarly journals Fair value accounting and its usefulness to financial statement users

2014 ◽  
Vol 12 (2) ◽  
pp. 102-116 ◽  
Author(s):  
Vera Palea
Keyword(s):  
Financial Reporting ◽  
Standard Setting ◽  
Fair Value ◽  
Theoretical Background ◽  
Financial Statement ◽  
Fair Value Accounting ◽  
Content Type ◽  
Comprehensive Picture ◽  
Value Measurement ◽  
Dual Measurement

Purpose – This paper aims to discuss fair value accounting and its usefulness to financial statement users. The European Commission has recently endorsed IFRS 13 on fair value measurement and is considering the endorsement of IFRS 9, which extends the use of fair value for financial instruments. Furthermore, fair value accounting has been under deep scrutiny because of its alleged role in the financial crisis. Therefore, the usefulness of fair value accounting is a key issue for standard setting purposes. Design/Methodology/Approach – This paper delineates the theoretical background for fair value accounting, it provides empirical evidence on its usefulness, it highlights some controversial issues and makes some proposals for standard setting discussion. Findings – Empirical research raises some doubts on fair value reliability. Furthermore, fair value accounting alone cannot provide information useful to evaluate stewardship. Historical cost is also needed. A dual measurement and financial reporting system could therefore deliver more complete and useful information to financial statement users. Practical implications – This paper provides the reader with a comprehensive picture of the main issues related to fair value accounting and contributes to the standard setting debate on the optimal measurement system. Originality/value – This paper reframes the debate on historical versus fair value accounting by explaining the reason why a dual measurement and reporting model should be implemented.

scholarly journals Fair Value Accounting: A Historical Review Of The Most Controversial Accounting Issue In Decades

2010 ◽  
Vol 8 (4) ◽  
Author(s):  
David J. Emerson ◽  
Khondkar E. Karim ◽  
Robert W. Rutledge
Keyword(s):  
Financial Reporting ◽  
Historical Review ◽  
Financial Statements ◽  
Fair Value ◽  
Financial Statement ◽  
Fair Value Accounting ◽  
Critical Elements ◽  
History Of ◽  
Regulatory Bodies ◽  
Fair Value Measurements

<p class="MsoNormal" style="text-align: justify; margin: 0in 27pt 0pt 0.5in; mso-pagination: none;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">Historically, there have been many disputes in the area of corporate financial reporting.<span style="mso-spacerun: yes;">&nbsp; </span>However, one of the primary issues of disagreement between practitioners, regulators, and theoreticians is that of valuation of financial statement components. <span style="mso-spacerun: yes;">&nbsp;</span>The latest twist in the evolution of valuation is the push for (and against) the use of a fair value approach.<span style="mso-spacerun: yes;">&nbsp; </span>The purpose of this paper is to examine the history and evolution of how the most critical elements of an entity&rsquo;s financial statements are valued.<span style="mso-spacerun: yes;">&nbsp; </span>We provide a history of valuation of financial statement components, and identify the issues involved.<span style="mso-spacerun: yes;">&nbsp; </span>Further, we examine the criticisms of actions taken by the regulatory bodies in their efforts to standardize and advance accounting practices.<span style="mso-spacerun: yes;">&nbsp; </span>Particularly, we focus on the evolution of fair value measurements.<span style="mso-spacerun: yes;">&nbsp; </span>Arguments both for and against the implementation of fair value accounting are provided.</span></span></p>

scholarly journals Including Estimates of the Future in Today's Financial Statements

2006 ◽  
Vol 20 (3) ◽  
pp. 271-285 ◽  
Author(s):  
Mary E. Barth
Keyword(s):  
Financial Reporting ◽  
Financial Statements ◽  
Fair Value ◽  
Economic Benefits ◽  
Economic Conditions ◽  
Fair Value Accounting ◽  
Economic Decisions ◽  
The Future ◽  
Income Measure ◽  
Expected Benefits

This paper explains why the question is how, not if, today's financial statements should include estimates of the future. Including such estimates is not new, but their use is increasing. This increase results primarily because standard-setters believe asset and liability measures that reflect current economic conditions and up-to-date expectations of the future will result in more useful information for making economic decisions, which is the objective of financial reporting. This is why standard-setters seem focused on fair value accounting. How estimates of the future are incorporated in financial statements depends on the asset and liability measurement attribute, and on financial reporting definitions of assets and liabilities. The present definitions depend on identifying past transactions or events that give rise to expected inflows or outflows of economic benefits and, for inflows, control over the expected benefits. Thus, not all expected inflows or outflows of economic benefits are recognized. Disclosures in the notes can help users understand recognized estimates and can provide information about unrecognized estimates. Including more estimates of the future in today's financial statements would result in an income measure that differs from today's income, but such a measure arguably provides better information for making economic decisions.

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 Pengaruh Kecurangan Laporan Keuangan terhadap Nilai Perusahaan: Ditinjau dari Perspektif Fraud Pentagon (Kasus di Indonesia)

2020 ◽  
Vol 20 (1) ◽  
pp. 121
Author(s):  
Desi Elviani ◽  
Syahril Ali ◽  
Rahmat Kurniawan
Keyword(s):  
Financial Reporting ◽  
Firm Value ◽  
Stock Exchange ◽  
Sample Selection ◽  
Financial Statement ◽  
Fraudulent Financial Reporting ◽  
Financial Statement Fraud ◽  
Company Value ◽  
Negative Effect ◽  
Five Elements

This study aims to examine how the influence of fraudulent financial reporting on firm value is viewed from the perspective of a pentagon fraud with a sample of 71 companies from the infrastructure, utilities and transportation sectors in the Indonesia Stock Exchange in 2014-2018. The sample selection used was purposive sampling method. Company value is measured by price book value, financial statement fraud is measured by fraud-score models. There are two variables that have a positive and significant influence, namely the opportunity and arrogance variables, the two variables present two of the five elements of pentagon fraud, where as the three variables, pressure, rasionalization, competence, do not affect the fraudulent financial reporting. The results of this study have proven that fraudulent financial reporting has a negative effect on firm value.

scholarly journals FINANCIAL STATEMENT FRAUD DETECTION USING PERSPECTIVE OF FRAUD TRIANGLE ADOPTED BY SAS NO. 99

2016 ◽  
Vol 1 (2) ◽  
pp. 317 ◽  
Author(s):  
Shabrina Prasmaulida
Keyword(s):  
Financial Reporting ◽  
Financial Stability ◽  
Stock Exchange ◽  
Cash Flows ◽  
External Pressure ◽  
Financial Statement ◽  
Fraud Triangle ◽  
Manufacturing Companies ◽  
Financial Statement Fraud ◽  
Financial Need

Financial statements generally aim to provide information about the company’s financial position, performance, and cash flows to the interested parties. The motivation to gain trust from the users, especially investors, shareholders and creditors, leads someone to commit fraud in the financial reporting. This study aims to detect and predict financial statement fraud based on the perspective of fraud triangle adopted by SAS No. 99. The dependent variable in this study is financial statement fraud which is proxied by earnings management, while the independent variables in this study are financial stability pressure, personal financial need, ineffective monitoring, effective monitoring, external pressure, and financial targets.Population of this research is manufacturing companies listed in Indonesia Stock Exchange period 2012 - 2014. Samples are selected using purposive sampling method and obtained 150 companies out of a total population of 162 companies. The results show that financial stability pressure and external pressurehave significant positive effect on financial statement fraud. Meanwhile, personal financial need, ineffective monitoring, effective monitoring, and financial targets do not have significant effect on financial statement fraud.

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 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.

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.

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