Value-relevance of reported changes in fair values and measurement-related fair value disclosures: evidence from the Australian real estate industry

Abstract

PurposeThe paper aims to investigate the value-relevance of changes in fair values of investment property reported under International Accounting Standards (IAS) 40 and International Financial Reporting Standards (IFRS) 13.Design/methodology/approachMultivariate regression models are used to regress cumulative market-adjusted stock returns of real estate firms on changes in fair values, along with control variables and corporate governance variables, in order to examine the research question.FindingsUsing hand-collected data from the Australian Real Estate Industry (AREI), the authors find that changes in fair values of investment property are value-relevant for equity investors. The authors further find that using unobservable inputs in an active market (Level 3 inputs) does not diminish the information content of fair values. The authors document that properties valued exclusively by directors have a significantly reduced value-relevance, whereas property valuations made collectively by both directors and independent valuers have superior value-relevance, possibly owing to the combination of inside knowledge and externally imposed monitoring. Collectively, the findings suggest that in the real estate industry, where unobservable inputs are commonly used to determine fair values of properties, the fair values determined subjectively are perceived to be sufficiently informative and relevant.Research limitations/implicationsThe authors' findings have important implications for accounting standard-setters in considering whether an external valuation should be required and whether the extensive measurement-related fair value disclosure requirements are useful.Originality/valueThe study extends previous archival evidence and complements prior commentaries on experimental and analytical work in the Australian regulatory environment.

Fair value estimates of investment property, corporate governance and audit pricing: evidence from the Hong Kong real estate industry

“…earnings per share) for UK firms than US firms. Sangchan et al (2021) find that in a sample of Australian real estate companies, fair value changes of investment property under IAS 40 is value relevant to investors. The value relevance is lower for valuation estimates provided by firm directors than those collectively provided by both internal directors and external property valuers.…”

“…earnings per share) for UK firms than US firms. Sangchan et al. (2021) find that in a sample of Australian real estate companies, fair value changes of investment property under IAS 40 is value relevant to investors.…”

Hedging Performance and Fair-Value Financial Reporting: Evidence from Bank Holding Companies

“…A key motivation for the support for more fair-value-based income measures comes from the notion that earnings variability under fair-value accounting provides better risk assessment (Ryan 1997). However, previous empirical studies have found mixed results regarding the risk relevance of fair-value income measures (Barth et al 1995;Bratten et al 2016;Hodder et al 2006;Sangchan et al 2022). These studies focus on the incremental volatility of a constructed aggregate fair-value income measure that is derived by adding to GAAP earnings all fair-value gains/losses available from required disclosures.…”