An Experiment in Fair Value Accounting: UK Investment Vehicles

Danbolt, Jo; Rees, William

doi:10.1080/09638180701819865

Cited by 99 publications

(51 citation statements)

References 39 publications

(28 reference statements)

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“…Fair value estimates, especially for Level 3 assets, are heavily reliant on valuation estimation models and assumptions, which may result in unintentional or intentional bias. For example, Benston (, p. 106) claims that ‘dishonest and opportunistic CFOs and CEOs are likely to find fair value accounting a boon to their efforts to manipulate reported net income.’ Several empirical studies have evidenced deliberate managerial bias in fair value accounting (Dietrich et al ., ; Hodder et al ., ; Danbolt and Rees, ; Ramanna, ). In addition, previous studies have supported the argument that assessing fair market value involves subjectivity.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

Determinants of discretionary fair value measurements: the case of Level 3 assets in the banking sector

Yao

Percy

Stewart

et al. 2016

Accounting & Finance

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The objective of our research was to respond to the call of Barth and Taylor (2010) for more research to examine the role of discretion in fair value estimates. Specifically, we investigate factors that explain banks' accounting choices to use Level 3 valuation inputs from the fair value measurement hierarchy. Using hand-collected data from a sample of international banks during 2009-2013, we find that incentives to use discretionary Level 3 valuation inputs, which can provide an opportunity to manage earnings, are associated with both firm-level and country-level determinants. Additional tests provide evidence that Level 3 'transfer-in' behaviour is related to changes in bank characteristics.

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Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

Determinants of discretionary fair value measurements: the case of Level 3 assets in the banking sector

Yao

Percy

Stewart

et al. 2016

Accounting & Finance

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“…For example, Plantin, Sapra, and Shin [2008] present an analytical model that compares conditions (specifically, short‐lived/long‐lived assets, liquid/illiquid assets, and junior/senior assets) under which historical cost measurement systems result in lower inefficiencies than fair value accounting measurement systems. Similarly, archival studies also compare the value relevance of historical cost accounting versus fair value accounting (e.g., Danbolt and Rees [2008], Christensen and Nikolaev [2010]). However, prior research provides little empirical evidence on the effect of fair value versus historical cost accounting on managerial decisions 7…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

Fair Value Accounting and Managers' Hedging Decisions

Wei

Tan

Wang

2012

J of Accounting Research

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We conduct two experiments with experienced accountants to investigate how fair value accounting affects managers’ real economic decisions. In experiment 1, we find that participants are more likely to make suboptimal decisions (e.g., forgo economically sound hedging opportunities) when both the economic and fair value accounting impact information is presented than when only the economic impact information is presented, or when both the economic and historical cost accounting impact information is presented. This adverse effect of fair value accounting is more likely when the price volatility of the hedged asset is higher, which is a situation where, paradoxically, hedging is more beneficial. We find that the effect is mediated by participants’ relative considerations of economic factors versus accounting factors (e.g., earnings volatility). Experiment 2 shows that enhancing salience of economic information or separately presenting net income not from fair value remeasurements reduces the adverse effect of fair value accounting. Our findings are informative to standard setters in their debate on the efficacy of fair value accounting.

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“…As noted previously, in general, prior studies have shown that the information obtained by applying FVA is more relevant for users than that derived from the historical cost approach, but also less reliable (Betts and Wines, 2004; Elad, 2004; Häusler, 2004; Bies, 2005; Ball, 2006). Using FV could produce greater bias in the financial information reported (Ronen, 2008; Danbolt and Rees, 2008). The lower degree of reliability with FVA, in comparison to historical cost, is usually associated with difficulties in obtaining market prices to quantify asset values (AAAFASC, 2005).…”

Section: Fair Value As a Means Of Improving Government Financial Statmentioning

confidence: 99%

The Role of Fair Value Accounting in Promoting Government Accountability

Bolívar¹,

Galera²

2012

Abacus

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A key factor to improve the financial accountability of governments is the existence of a set of generally accepted financial reporting of standards, such as IPSAS issued by the IFAC, which seek to enhance information transparency. This paper examines the capability of fair value accounting to improve, through financial transparency, government accountability, analysing the possible effect of the implementation of this measurement basis on understandability, comparability and timeliness-three qualitative characteristics linked to the relevance of financial reporting. This paper further considers whether the difficulties involved in achieving FV estimations could affect government financial accountability. The findings indicate that FVA implementation could enhance accountability by improving understandability, comparability and timeliness in governmental financial reporting, although the use of objective measures to estimate the FV of assets is fundamental. In addition, the type of assets and the existence of an active market are crucial to improving the comparability of financial statements under FVA, whereas improving timeliness could be limited by the possibility of estimating FV measures in-house.

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An Experiment in Fair Value Accounting: UK Investment Vehicles

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Cited by 99 publications

References 39 publications

Determinants of discretionary fair value measurements: the case of Level 3 assets in the banking sector

Determinants of discretionary fair value measurements: the case of Level 3 assets in the banking sector

Fair Value Accounting and Managers' Hedging Decisions

The Role of Fair Value Accounting in Promoting Government Accountability

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