Judging the Relevance of Fair Value for Financial Instruments

2011 ◽  
Vol 86 (6) ◽  
pp. 2075-2098 ◽  
Author(s):  
Lisa Koonce ◽  
Karen K. Nelson ◽  
Catherine M. Shakespeare
Keyword(s):  
Value Relevance ◽  
Fair Value ◽  
Data Availability ◽  
Financial Instruments ◽  
Counterfactual Reasoning ◽  
Financial Instrument ◽  
Relevance Judgments

ABSTRACT We conduct three experiments to test if investors' views about fair value are contingent on whether the financial instrument in question is an asset or liability, whether fair values produce gains or losses, and whether the item will or will not be sold/settled soon. We draw on counterfactual reasoning theory from psychology, which suggests that these factors are likely to influence whether investors consider fair value as providing information about forgone opportunities. The latter, in turn, is predicted to influence investors' fair value relevance judgments. Results are generally supportive of the notion that judgments about the relevance of fair value are contingent. Attempts to influence investors' fair value relevance judgments by providing them with information about forgone opportunities are met with mixed success. In particular, our results are sensitive to the type of information provided and indicate the difficulty of overcoming investors' (apparent) strong beliefs about fair value. Data Availability: Contact the authors.

scholarly journals Fair value hierarchy in financial instrument disclosure. Is there transparency for investors? Evidence from the banking industry

2012 ◽  
Vol 1 (4) ◽  
pp. 23-38 ◽  
Author(s):  
Enrico Laghi ◽  
Sabrina Pucci ◽  
Marco Tutino ◽  
Michele Di Marcantonio
Keyword(s):  
Fair Value ◽  
Annual Reports ◽  
Financial Instruments ◽  
Financial Instrument ◽  
Sfas 157 ◽  
Ifrs 7 ◽  
Research Questions ◽  
Points Of View ◽  
Value Hierarchy ◽  
Fair Value Measurements

The debate on fair value accounting is still open although the last 20 years have been spent in looking for solutions by academics, practitioners and institutions. After long and continuous discussion both on the basic concepts and the information level contained in fair value measurements and on the different solutions that are possible to adopt in mark to market measurements, IASB and FASB have recently issued new standards on fair value measurements applying some principles not only to financial instruments but also to property and other investments. To verify if the solutions adopted in these Standards really improve the disclosure level and the “usefulness of data for investors”, this paper analyzes the actual level of transparency and the “usefulness” of the “fair value hierarchy” (which from some points of view synthesized the Board’s way of thinking regarding to fair value) which has already been introduced for financial instruments by IFRS 7, Financial Instruments: Disclosure. The paper presents results of an empirical investigation on a sample of domestic and foreign listed banks that adopted fair value hierarchy in line with SFAS 157 and IFRS 7 recommendations. Research questions can be summarized as follows: (i) does fair value hierarchy improve transparency in financial instrument evaluation in bank annual reports, or can it be considered as a tool for earnings management?

Accounting Choice and the Fair Value Option

2011 ◽  
Vol 25 (3) ◽  
pp. 487-510 ◽  
Author(s):  
Katherine Guthrie ◽  
James H. Irving ◽  
Jan Sokolowsky
Keyword(s):  
Commercial Banks ◽  
Fair Value ◽  
Data Availability ◽  
Complete Picture ◽  
Financial Instruments ◽  
Accounting Choice ◽  
Early Adopters ◽  
Future Earnings ◽  
Over Time

SYNOPSIS Under the fair value option, SFAS No. 159, firms have full discretion over electing to report specified financial instruments at fair value on a contract-by-contract basis. Building on Henry's (2009) study of early adopting banks, this paper examines to what extent firms' election of instruments benefited their current or future earnings. Our sample comprises the constituents of the S&P 1500 Index for the first quarters of fiscal years 2007 and 2008. Expanding the sample across industries and over time allows us to obtain a more complete picture of the adoption of the fair value option. We identify 72 adopters, two-thirds of which are not commercial banks. We do not find evidence of systematic opportunistic election of the fair value option. In only a handful of cases—concentrated among early adopters with an earnings shortfall—did firms experience a significant improvement in current or future earnings that casts doubt on whether their adoption was keeping with the intent and spirit of the standard. Data Availability: The list of adopters used in this paper is available from the authors upon request.

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

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.

Does Recognition versus Disclosure Matter? Evidence from Value-Relevance of Banks' Recognized and Disclosed Derivative Financial Instruments

2006 ◽  
Vol 81 (3) ◽  
pp. 567-588 ◽  
Author(s):  
Anwer S. Ahmed ◽  
Emre Kilic ◽  
Gerald J. Lobo
Keyword(s):  
Research Design ◽  
Value Relevance ◽  
Fair Value ◽  
Natural Setting ◽  
Financial Instruments ◽  
Design Problems

We provide evidence on how investor valuation of derivative financial instruments differs depending upon whether the fair value of these instruments is recognized or disclosed. Expanded disclosures and accounting practices prior to SFAS No. 133 and mandatory recognition of derivative fair values after SFAS No. 133 provide a natural setting for comparing the valuation implications of recognized and disclosed derivative fair value information. This unique setting mitigates many of the research design problems with recognition versus disclosure studies. Using a sample of banks that simultaneously hold recognized and disclosed derivatives prior to SFAS No. 133, we find that the valuation coefficients on recognized derivatives are significant, whereas the valuation coefficients on disclosed derivatives are not significant. Further, using a sample of banks that have only disclosed derivatives prior to SFAS No. 133, which are recognized after SFAS No.133, we find that while the valuation coefficients on disclosed derivatives are not significant, the valuation coefficients on recognized derivatives are significant. These results are consistent with the view that recognition and disclosure are not substitutes. Our findings suggest that SFAS No. 133 has increased the transparency of derivative financial instruments.

The value relevance of the fair value hierarchy. Empirical evidence from the European Union

2018 ◽  
pp. 7-35
Author(s):  
Alessandro Mechelli ◽  
Vincenzo Sforza ◽  
Alessandra Stefanoni ◽  
Riccardo Cimini
Keyword(s):  
Financial Reporting ◽  
Value Relevance ◽  
Fair Value ◽  
Capital Adequacy ◽  
Financial Instruments ◽  
The European Union ◽  
Accounting Standard ◽  
Management Behaviour ◽  
Value Hierarchy ◽  
Value Measurement

This paper investigates the value relevance of the fair value hierarchy disclosed for financial instruments through a sample of 97 financial entities listed over the period 2011-2016 in the stock markets of 23 European countries. Its main objectives are threefold. First, by analysing the European setting, the paper means to study the value relevance of the fair value hierarchy to judge the choice of the International Accounting Standard Board (IASB) to extend the disclosure of the hierarchy to all the assets and liabilities. Second, the paper aims to evaluate the choice of abandoning management intent as a criterion for the classification and measurement of financial instruments investigating the effect that such an intent has on the value relevance of the fair value hierarchy. Finally, by studying the effect that exposure to risks has on the value relevance of the fair value hierarchical levels, the paper plans to investigate the implications that the disclosure of the hierarchy could have on the rules of Basel 3 capital adequacy. Formulating three different research hypotheses, the findings validate them providing evidence that the value relevance of fair value measurement depends on the source of inputs used to estimate fair value and that both management intent and the risk intensity of the asset book only affect the value relevance of the less reliable fair value estimates. These results are useful for standard setters and regulators. Actually, for the investors decisions, they suggest the importance of disclosing the fair value hierarchy for all the assets and liabilities as required by IFRS 13, as well as the advantage of replacing in IFRS 9 the management intent criterion with the business model test and the characteristics of the instruments for the classification and measurement of financial assets. For the future, the findings suggest the opportunity to introduce filters within the common equity tier 1 for the less reliable fair value estimates. This paper's current and future implications for standard setters and regulators are to avoid earnings management and capital management behaviour possibly affecting the quality of financial reporting.

Who's the Fairest of Them All? Evidence from Closed-End Funds

2015 ◽  
Vol 91 (1) ◽  
pp. 207-227 ◽  
Author(s):  
Alastair Lawrence ◽  
Subprasiri Siriviriyakul ◽  
Richard G Sloan
Keyword(s):  
Value Relevance ◽  
Fair Value ◽  
Data Availability ◽  
Omitted Variable Bias ◽  
Level 3 ◽  
Closed End Funds ◽  
Level 1 ◽  
Variable Bias ◽  
Fair Value Measurements ◽  
Level 2

ABSTRACT Prior research examining the ASC 820 fair value hierarchy concludes that Level 3 fair value measurements are significantly less value-relevant than Level 1 and Level 2 fair value measurements. We reevaluate this conclusion using the closed-end fund setting, in which fair value measurements are available for substantially all assets. Contrary to prior research, we find that Level 3 fair values are of similar value relevance to Level 1 and Level 2 fair values. Our findings suggest that the results in previous research are attributable to correlated omitted variable bias arising from the absence of fair value data for most assets. JEL Classifications: M41; G12; G29. Data Availability: Data are publicly available from sources identified in the article.

Does Fair Value Accounting Provide More Useful Financial Statements than Current GAAP for Banks?

2018 ◽  
Vol 93 (6) ◽  
pp. 257-279 ◽  
Author(s):  
John M. McInnis ◽  
Yong Yu ◽  
Christopher G. Yust
Keyword(s):  
Measurement Error ◽  
Value Relevance ◽  
Financial Statements ◽  
Relevant Information ◽  
Fair Value ◽  
Financial Instruments ◽  
Fair Value Accounting ◽  
Book Value ◽  
Gains And Losses ◽  
Relevant Measurement

ABSTRACT Standard setters contend that fair value accounting yields the most relevant measurement for financial instruments. We examine this claim by comparing the value relevance of banks' financial statements under fair value accounting with that under current GAAP, which is largely based on historical costs. We find that the combined value relevance of book value of equity and income under fair value is less than that under GAAP. We also find that fair value income is less value-relevant than GAAP income because of the inclusion of transitory unrealized gains and losses in fair value income. More surprisingly, we find that book value of equity under fair value is not more value-relevant than under GAAP, due both to divergence between exit value and value-in-use and to measurement error in fair value estimates. Overall, our results suggest that financial statements under fair value accounting provide less relevant information for bank valuation than financial statements under current GAAP.

Accounting Identification of Agricultural Receipts as Financial Instruments

2021 ◽  
pp. 30-38
Author(s):  
Olha Lukova ◽  
◽  
◽  
Keyword(s):  
Fair Value ◽  
Careful Consideration ◽  
Financial Instruments ◽  
Agricultural Producers ◽  
Accounting Standard ◽  
Financial Instrument ◽  
Contractual Relationship ◽  
Accounts Payable ◽  
Study Results ◽  
Rules Set

Agricultural receipts are a particular financial instrument with industry specifics and are used exclusively by agricultural producers. However, not all types of agricultural receipts are always financial instruments. The purpose of the article is to reveal the accounting nature of the agricultural receipt as a financial instrument to avoid the risks of the accumulation of information in erroneously defined accounting sections. The study results show that approaches to accounting for commodity and financial agricultural receipts should be distinguished. It was proved that regardless of whether an agricultural receipt is issued in exchange for goods or money, it cannot be identified as a financial instrument because it provides for settlement by receiving (supplying) a non-financial asset. At the same time, the financial agricultural receipt meets the criteria of the financial instrument. So it should be reflected in the accounting by the rules set out in the relevant National Accounting Standard. Based on the analysis of subspecies of financial agricultural receipt, it was established that its variable accounting nature is manifested in the fact that depending on the terms of the contract and in exchange for which such an agricultural receipt was issued, it can be recognised in accounting repayable financial assistance (loan), accounts payable for goods (works or services) or derivative financial instruments. Recognition of a financial agricultural receipt as a derivative requires careful consideration of each embedded component and evaluation of the contractual relationship to determine the change (or lack thereof) in the asset's fair value or liability at each reporting date. The identified features of agricultural receipts as accounting objects must be considered in the formation of accounting policies of the enterprise and the implementation of expert verification of accounting records of transactions with such financial instruments.

The Impact of a Major Financial Event on the Value Relevance of Financial Instruments Fair Value

2013 ◽  
Vol 14 (2) ◽  
pp. 130-153 ◽  
Author(s):  
Ssu-Yang Fang ◽  
Shaw K. Chen ◽  
Chung-Jen Fu
Keyword(s):  
Value Relevance ◽  
Fair Value ◽  
Financial Instruments ◽  
The Impact

scholarly journals ANALISIS KEPATUHAN PT BANK RAKYAT INDONESIA (PERSERO) Tbk PADA REVISI PSAK 60

2017 ◽  
Vol 6 (1) ◽  
pp. 35
Author(s):  
Lisa Christy Longgorung ◽  
Ventje Ilat
Keyword(s):  
Research Method ◽  
Accounting Standards ◽  
Financial Statements ◽  
Fair Value ◽  
Financial Accounting ◽  
Financial Assets ◽  
Financial Instruments ◽  
Financial Instrument ◽  
Loan Terms ◽  
Bank Disclosure

Statement of Financial Accounting Standards (SFAS) 60 adjustment in 2014 is a standard that governs the disclosure of financial instruments. This greatly affects the standard of disclosure of details of banking information Indonesia on financial assets in the financial statements, as the industry is highly regulated, allegedly the level of compliance of the Bank Rakyat Indonesia (BRI) to implement the standard was high. Financial assets consist of available-for-sale, held to maturity, loans and receivables, and financial assets at fair value through profit or loss. This study aimed to see if the BRI bank disclose financial assets in accordance with SFAS No. 60 adjustment, 2014. The research method is descriptive qualitative. The results showed BRI bank in the disclosure of their financial assets in accordance with SFAS No. 60 adjustment in 2014 but the management did not express because the default has been completed and the loan terms have been renegotiated before the end of the reporting period. Bank BRI to apply IAS 60 and keep abreast of revisions in accordance with the specified standard. So that transparency in the disclosure of financial statements BRI clearer and can build higher trust of our customers and shareholdersKeywords : bank,disclosure, financial instrument

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