Purpose Concerns relating to the representational faithfulness and, consequently, the relevance of fair value (FV) estimates are likely to be heightened in the wake of market uncertainty caused by the COVID pandemic. Therefore, this paper aims to study the relevance of supplementary disclosures intended to improve the representational faithfulness of FV estimates by examining their impacts on audit fees and investors’ valuation of FV adjustments in the uncertain market condition of 2020. Design/methodology/approach The sample is comprising Australian real estate firms. The authors develop both weighted and unweighted disclosure indices based on supplementary disclosures related to Level 3 FVs under IFRS 13 Fair Value Measurement. The authors measure the levels of disclosure by the sample firms based on these indices from 2018 to 2020 and ascertain their effects on audit fees and the market value of FV adjustments on investment properties. Findings The authors find that real estate firms increased supplementary FV disclosures during 2020. The authors document a negative association between supplementary disclosures and audit fees, although the authors find no incremental impact of disclosures on audit fees during the pandemic. Additionally, the authors find that investors’ pricing of FV adjustments increased with the increase in disclosures during the market uncertainty of 2020, while in the pre-uncertainty period, their pricing influence was not significant. Originality/value The findings extend the understanding of the role of supplementary disclosures on Level 3 investment properties in mitigating the perceived audit risk for auditors and the faithful representation concerns for investors in a distressed market environment.
In this study we examine the use and usefulness (value relevance) of equity accounting. Descriptive evidence shows there is a higher frequency of disclosure about the investment in associates than the share of profits. There is also more diversity in presentation and disclosure than reported by the International Accounting Standards Board. The characteristics of firms differ for those that report ancillary disclosures such as assets and liabilities of the associate. Firm characteristics also differ on whether associate income is reported before earnings before interest and taxes (EBIT). Last, we document that equity accounting is value relevant, but not when alternative accounting options (e.g., fair value or proportionate accounting) are available.
Fair value (FV) means the market value of an asset, which can be observed directly (Level 1), or indirectly (Level 2). In some cases, the FVs are not observable in the market and managers of companies estimate the valuation internally using statistical models based on the best information available. These are known as Level 3 FV. The measurement uncertainty is the highest for Level 3 FVs as they rely on managerial discretion, creating concerns about their representational faithfulness and relevance among auditors and investors. This concern is likely to be heightened in the wake of market uncertainty during 2020 caused by the COVID pandemic. Regulators (e.g., ASIC) suggested that disclosing supplementary information (i.e., beyond the minimum required by regulation) on FV can help mitigate such concerns. In this study, I examine the relevance of supplementary disclosures intended to improve the representational faithfulness and relevance of Level 3 FV by investigating their impacts on audit fees and investors’ valuation in the uncertain market condition of 2020. My sample comprises Level 3 investment properties held by Australian real estate companies. I find that managers of real estate companies increased supplementary FV disclosures during 2020. I document a negative association between supplementary disclosures and audit fees, implying that disclosures reduce the audit risk effect by signalling higher transparency. However, I find no incremental impact of disclosures on audit fees during the pandemic. Additionally, I find that investors’ pricing of FV increased with the increase in disclosures during the market uncertainty of 2020, while in the pre-uncertainty period, their pricing influence was not significant. The findings of this study inform regulators and other financial reporting stakeholders about the role of supplementary FV disclosures in mitigating the perceived audit risk for auditors and the faithful representation concerns for investors in a distressed market environment.
This paper presents the direct vs. indirect debate of hedge fund regulation and attempts to find which approach is better able to mitigate systemic risk that the industry poses to the economy. The waves of regulatory reforms and enhanced concern regarding investors protection have recently brought attention of the regulators to hedge fund regulation issue. But, many academics fear that direct intervention may limit industry growth and benefit. Addressing these concerns, this paper observes the systemic importance of hedge fund industry based on four criteria's [size, leverage, interconnectedness to large complex financial institutions (LCFIs) and herding] and concludes that although this industry is still small in terms of size and leverage, their interconnectivity with LCFIs and potential herding make them systemically significant. Hence, regulation of hedge fund is necessary to restrict the transmission of systemic events. Analysing direct and indirect approaches, this paper suggests that the counterparties are best positioned to implement this regulatory change.
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