Fair Value Measurement Under High Uncertainty: The Effects of Disclosure Format and Management Aggressiveness on Userss Risk Assessments

Cannon, Nathan H.

doi:10.2139/ssrn.2731367

Cited by 5 publications

(6 citation statements)

References 45 publications

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“…This is better than having management teams consistently selecting the value which most benefits them under the current circumstances at the measurement date (R1 and R4). This may garner more faith in fair values and related disclosures, and it supports the findings of Cannon (2015) that IFRS' disclosure requirements enhance perceptions of trust in fair value.…”

Section: Resultssupporting

confidence: 73%

“…This may suggest that users are still keenly aware of the susceptibility of Level 3 fair value to manipulation and may even be over-compensating for this risk. Related to perceptions of risk, Cannon (2015, p. 2) found that IFRS' onerous fair value disclosure requirements may be mitigating the higher risk associated with fair value. The significant and technical nature of IFRS 13's disclosure appears to result in an increased perception of “trust, competence and reliability” of fair value.…”

Section: Literature Reviewmentioning

confidence: 99%

“…The research answers directly the call for more interpretive research, which sheds light on the functioning of accounting in real-world settings (Napier, 2001) and accounting research conducted in Africa (Rahaman, 2010). Most of the existing literature deals with fair value accounting in an American (Du et al , 2014; Cannon, 2015; Ayres, 2016; Glover et al , 2017), European (Palea and Maino, 2013; Alexeyeva and Mejia-Likosova, 2016; Palea, 2019) or Asian (Peng and Bewley, 2010; He et al , 2012) context. To begin addressing this gap, data for this study are collected via 20 semi-structured interviews with South African financial reporting experts.…”

Section: Introductionmentioning

confidence: 99%

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Fair value accounting implementation challenges in South Africa

Pandya

Zijl

Maroun

2021

JAEE

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PurposeThe objective of this research is to explore the challenges being encountered when applying and implementing fair value accounting requirements, focusing specifically on the determination of fair value per International Financial Reporting Standards (IFRS) 13: Fair value measurement (IFRS 13) in the South African capital market.Design/methodology/approachData are collected from 20 detailed interviews, primarily with preparers and interpretively analysed to identify how individuals internalise the requirements of IFRS 13 and the challenges associated with its application. The researchers focus specifically on South Africa because of its status as a developing economy and, at the same time, its extensive experience in applying IFRS.FindingsSouth African preparers appear reluctant to change from a conventional cost-based measurement approach to one grounded in fair value. Primary concerns include the perceived usefulness of fair value accounting and its conceptual appropriateness, given its perceived de-emphasis of the traditional stewardship role of financial reporting. Related challenges to the application of IFRS 13 include concerns about the cost of determining fair value; the inherent subjectivity of fair value measures and the practical difficulty of calculating fair values when markets are not efficient or where business environments are complex and dynamic where Level 1 inputs are not widely available for all assets and liabilities. These challenges encourage preparers to choose accounting policies, which minimise the use of fair value or apply the provisions of IFRS 13 legalistically.Research limitations/implicationsData are collected from a group of respondents from a single developing economy. Additional research on the application of IFRS 13 in other developing markets will be required to conclude on the relevance of economic, cultural and social factors for the understanding and implementation of new accounting standards by practitioners.Practical implicationsStandard setters and regulators cannot assume that new accounting standards will be interpreted and applied as intended. Even when compliance with IFRS is mandatory, preparers have considerable discretion when it comes to operationalising accounting prescriptions. Unless the challenges raised by preparers are addressed, misapplication of IFRS is likely to continue.Originality/valueThe research makes an important empirical and practical contribution by providing primary evidence on the operationalisation of IFRS 13 in a novel setting. It complements earlier research which has focused primarily on the conceptual/theoretical dimension and on American and European perspectives.

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Section: Resultssupporting

confidence: 73%

Section: Literature Reviewmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Fair value accounting implementation challenges in South Africa

Pandya

Zijl

Maroun

2021

JAEE

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“…Our model is similar to that of Francis (2004), applied by other studies (Kanagaretnam et al, 2010;Cannon, 2015). Audit fees are used as the dependent variable in our study, measured as the natural log of audit fees in Jordanian dinars (Pratoomsuwan, 2017).…”

Section: Empirical Modelmentioning

confidence: 99%

The impact of fair value estimates on audit fees: evidence from the financial sector in Jordan

Alqatamin

Ezeani

2020

JAEE

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PurposeThis study investigates the association between the estimates of fair value and external auditor's fees.Design/methodology/approachBased on a sample of 32 Jordanian financial companies listed on the Amman Stock Exchange (ASE) over the period 2005–2018. We employ random effect models to test our hypothesis.FindingsWe found a positive relationship between audit fees and the proportion of fair value assets, which implies that external auditors are more likely to spend more effort for complex estimates, thereby increasing audit fees. We examined the relationship between audit fees and three levels of fair value inputs and found a positive relationship between the level of effort spent on assessment of higher uncertainty fair value inputs and audit fees. The findings are consistent with the expectation that more audit effort is required in a highly regulated environment due to the possibility of a higher cost of litigation.Practical implicationsThe findings of this study could be beneficial for a number of users of financial information, such as investors, regulators, auditors. This group of users might consider the results of this study when they are using a company's financial information, and consequently, better able to make the right decisions.Originality/valueAlthough prior studies have researched fair value, no study to date among developing countries has investigated its relationship with audit fees. This study, therefore, provides new empirical evidence that the complexity and risk of fair value estimates significantly influences auditors' motivation to expend additional effort, resulting in higher audit cost.

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“…A number of scholars have recently proposed changes that might help to alleviate these concerns (e.g., Montague 2010; Bell and Griffin 2012;Christensen et al 2012;Clor-Proell, Proell, and Warfield 2013;Peecher et al 2013;Christensen, Glover, and Wolfe 2014;Griffith et al 2015a;Griffith et al 2015b;Maksymov et al 2014;Cannon 2016). These include changes to the financial statements (e.g., presenting ranges of values instead of point estimates, or showing the effect of changes in fair value on net income), additional disclosures (e.g., historical estimation accuracy, current levels of EU), changes in the auditors' communications to users (e.g., allowing negative assurance for certain elements of the audit, such as FVMs, ''critical audit matter'' disclosures), implementing a ''reasonableness'' criterion for auditors, and changes from positively to negatively framed FVM auditing standards.…”

Section: Limitations and Conclusionmentioning

confidence: 99%

Auditing Challenging Fair Value Measurements: Evidence from the Field

Cannon¹,

Bedard

2016

The Accounting Review

Self Cite

169

120

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Concern about effective auditing of fair value measurements (FVMs) has risen in recent decades. Building on prior interview-based and experimental research, we provide an engagement-level analysis of challenging FVMs, using quantitative and qualitative data on audit phases from risk assessment to booking adjustments. Challenging FVMs have high estimation uncertainty, high subjectivity, significant/complex assumptions, and multiple valuation techniques. Estimation uncertainty is associated with higher inherent risk assessments, which are, in turn, predictive of client problems identified during the engagement. The use of a valuation specialist by auditors, associated with higher inherent risk and client specialist use, is a key decision: procedures performed by specialists have the highest yield in identifying problems. Auditor-client discussion of an adjustment increases with problem identification and auditors' expressions of residual concern about uncertainty post-testing. However, booked audit adjustments are infrequent; the only factors explaining income-decreasing adjustments are better evidential support and breadth of problems identified.

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Fair Value Measurement Under High Uncertainty: The Effects of Disclosure Format and Management Aggressiveness on Userss Risk Assessments

Cited by 5 publications

References 45 publications

Fair value accounting implementation challenges in South Africa

Fair value accounting implementation challenges in South Africa

The impact of fair value estimates on audit fees: evidence from the financial sector in Jordan

Auditing Challenging Fair Value Measurements: Evidence from the Field

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