Value Relevance of Fair Values—Empirical Evidence of the Impact of Market Volatility

This study examines empirically the effects of market volatility on the value relevance of fair values. Using the modified Ohlson model ( 1995 ) and a sample of U.S. financial companies for the period of 2008 to 2013, this study shows that fair values are priced at a significant discount when market volatility is high. Song ( 2013 ) shows analytically that the effectiveness of fair value accounting is negatively affected by market volatility. Findings of the current study suggest that investors understand the effects of market volatility on fair values and price them accordingly. The study extends the research on the determinants of the usefulness of fair values by looking beyond factors associated with the reliability of estimated fair values (Level 2 and Level 3 fair values). This study has practical implications: current accounting standards for fair value measurement acknowledge the limitations of the market as a source of fair values by offering a three‐level fair value hierarchy with provisions for fair values to deviate from market prices. Findings of this study shed light on a previously little studied factor, that is, market volatility, on the usefulness of fair values.     

The Value‐relevance of Equity Accounted Carrying Amounts and Disclosed Fair Values of Listed Associates

Equity accounting is a controversial accounting treatment. Although fair value measurement represents a potential alternative measurement base, information content may be lost under a pure fair value measurement approach. This study investigates the value‐relevance of equity accounted carrying amounts and disclosed fair values of listed associates, using a sample of the largest firms listed in South Africa, Australia and the UK. The main finding is that the alternative measurement bases are incrementally value‐relevant during the sample period of 31 December 2005 to 31 December 2011, implying that equity investors do not blindly accept either measurement base. Rather, investors include their own assessment of the intrinsic value of an entity's listed associates in their valuations.     

Fair Value Measurements of Control Premiums

As the overview of the current state of research within this paper shows, the debate around fair value measurements is far from over. This paper analyzes fair value measurement requirements in a controversial scenario, namely when a control premium exists. The analyses of the paper show that, while measurement rules around control premiums could have a material impact on fair value measurements and the financial statements as a whole, significant fair value measurement issues remain unresolved. The conclusion is that fair value measurements should include or exclude control premiums consistently. It is argued that including control premiums for all fair value measurements is the most faithful representation of the underlying economic phenomenon. This paper contributes to the fair value measurement debate by comparing the merits of alternative fair value measurements for control premiums and highlights an area where researchers, investors, and other users should exercise caution when evaluating financial statements.     

Does fair value accounting for non-financial assets pass the market test?

The choice between fair value and historical cost accounting is the subject of long-standing controversy among accounting academics and regulators. Nevertheless, the market-based evidence on this subject is limited. We study the choice of fair value versus historical cost accounting for non-financial assets in a setting where market forces rather than regulators determine the outcome. In general, we find a very limited use of fair value accounting. However, the observed variation is consistent with market forces determining the choice. Fair value accounting is used when reliable fair value estimates are available at a lower cost and when they convey information about operating performance. For example, with very few exceptions, firms’ managers commit to historical cost accounting for plant and equipment. Our findings contribute to the policy debate by documenting the market solution to one of the central questions in the accounting literature. Our findings indicate that, despite its conceptual merits, fair value is unlikely to become the primary valuation method for illiquid non-financial assets on a voluntary basis.     

公允价值与当代会计理论反思

公允价值计量产生的真正根源是物价变动对会计计量的持续冲击。公允价值会计的核心是按照各个报告时点上的现行市价调整账面记录,通过动态反映使账面价值与真实价值始终保持一致,目标是追求真正意义上的真实反映,是"会计的重心是计量"的回归。它与按"目标导向"路径构建的当代会计理论在会计本质(信息系统)、会计目标(决策有用)、会计信息质量特征(相关和可靠)等各个方面是冲突、矛盾的。构建于信息系统论和历史成本原则之上的当代会计理论,与公允价值会计着眼于真实反映的思想相悖。公允价值会计的出现是对传统会计理论的颠覆,因此必须系统反思和重构当代会计理论。     

Assessing the Impact of Fair‐Value Accounting on Financial Statement Analysis: A Data Envelopment Analysis Approach

The historical‐cost and prudence principles have guided accounting for financial investments and tangible fixed assets in many jurisdictions around the globe. This situation might change as a consequence of the increasing number of countries adopting International Financial Reporting Standards (IFRS), which, to some extent, permit accounting on a fair‐value basis. It is unclear how such a change would affect the analysis of financial statements and to what extent it could modify analysts' perceptions of companies' condition and performance. This paper attempts to shed some light on this issue by restating the financial investments and tangible fixed assets of a sample of 85 Spanish insurance companies, applying fair value instead of historical‐cost‐based valuations and by simulating analyst perception of these companies' efficiency and profitability for both sets of data using data envelopment analysis (DEA). We find that the numbers on the face of the financial statements change considerably and observe that the magnitude of these changes varies between companies and classes of assets. However, only in a few cases does a change in the valuation basis lead to a relevant change in DEA scores; within our sample, the overall assessment of companies with regard to efficiency and profitability remains largely the same under both valuation bases. These findings seem to indicate that a change from historical‐cost to fair‐value accounting could alter analyst perceptions of a limited number of companies but likely will not have a major impact on the appraisal of the majority of them.     

关于会计计量的几个理论问题

随着当代财务会计试图把越来越多的所谓“资产负债表外业务”纳入表内核算和试图在会计报表中反映资产、负债价值的变化,会计准则中已经越来越多引入了公允价值等除历史成本以外的其它会计计量基础,从而对现行的历史成本会计模式产生了很大挑战。不仅如此,由于过去的财务会计概念框架没有考虑这一新的会计计量发展趋势,也使得会计准则与概念框架之间、会计准则与会计准则之间因为会计计量问题而产生了诸多的不一致,十分不利于会计信息质量的提高和国际会计的趋同。为此,本文以现行国际财务报告准则中存在的会计计量问题为出发点,系统研究了当前会计计量问题的实质、理论基础、未来发展趋向及其国际努力,并进而提出了我国的因应对策。     

Fair Value Accounting and Managers' Hedging Decisions

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.     

The usefulness of accounting estimates for predicting cash flows and earnings

Accounting estimates and projections potentially improve the relevance of financial information by providing managers a venue to convey to investors forward-looking, inside information. The quality of financial information is, however, compromised by the increasing difficulty of making reliable estimates and forecasts and the frequent managerial misuse of estimates. Given the ever-increasing prevalence of estimates in accounting data, particularly due to the move to fair value accounting, whether these opposing forces result in an improvement in the quality of financial information is among the most fundamental issues in accounting. We examine the contribution of accounting estimates embedded in accruals to the quality of financial information, as reflected by their usefulness in the prediction of enterprise cash flows and earnings. Our out-of-sample prediction tests indicate that accounting estimates beyond those in working capital items (excluding inventory) do not improve the prediction of cash flows. Estimates do, however, improve the prediction of next year’s earnings, though not of subsequent years’ earnings. We conclude that the usefulness of accounting estimates to investors is limited and provide suggestions for improving the usefulness of estimates.     

The Effect of Reversibility on a Manager's Decision to Record Asset Impairments

Over time, accounting standards have moved toward presenting more items at fair value on the balance sheet. Consistent with this trend, IAS No. 36 permits an impairment loss on a long‐lived asset to be reversed if the economic value of the asset recovers. This article uses empirical data from an experiment conducted with 118 managers to explore the implication of allowing impairment reversals on a manager's decision to record the loss. Results suggest that permitting reversals significantly increases the likelihood that a manager will record the impairment, especially if the manager has a bonus plan. The bonus plan effect is not caused by the manager's intention to smooth income through impairment reversals, but by his disutility from a bonus forgone if the value of the asset recovers but accounting rules prohibit him from reversing the loss.     

Ownership Structure and Accounting Method Choice: A Study of European Real Estate Companies

Companies can under IAS 40 Investment Properties choose between the fair value and the cost models. The fair value model arguably results in more relevant information but is also more costly to use. Based on studies suggesting that financial reports are a more important medium for communication with investors if ownership is dispersed, we hypothesize that the use of the fair value model is positively associated with ownership dispersion. We study European Real Estate firms and find support for this prediction. We also find a positive association between trade of shares and ownership dispersion, supporting the view that financial statements are less important if ownership concentration is high. Finally, we examine whether the choice depends on the identity of large owners. Companies with a financial company as the largest owner are somewhat more likely to choose the fair value model. Overall, the results indicate that accounting rules facilitating optional accounting policies have benefits.     

Collaborative Resource Solutions

Collaborative Resources Solutions (CRS) is based on a real situation outlining the issues related to buying a service organization. This instructional case requires students to provide advice to a client who is considering purchasing a 50 percent ownership of a similar consulting business with the vision of blending the two companies together and increasing the knowledge base of her current company; therefore improving the ability to target more to clients. The case requires the students to evaluate the strategic, valuation, and financial issues in considering the acquisition of the existing business. In order to do so, students are required to analyze the financial information provided, both historical and forecasted, as well as analyzing key internal operations issues that may impact the future success of the business. This case is suitable for use in upper‐level undergraduate business strategy courses and accounting courses, as well as in master‐level accounting courses. Assessment rubrics and teaching notes accompany the case for use by instructors.     

Accounting rules,equity valuation,and growth options

In a model with irreversible capacity investments, we show that financial statements prepared under replacement cost accounting provide investors with sufficient information for equity valuation purposes. Under alternative accounting rules, including historical cost and value in use accounting, investors will generally not be able to value precisely a firm’s growth options and therefore its equity. For these accounting rules, we describe the range of valuations that is consistent with the firm’s financial statements. We further show that replacement cost accounting preserves all value-relevant information if the firm’s investments are reversible. However, the directional relation between the value of the firm’s equity and the replacement cost of its assets is different from that in the setting with irreversible investments.     

Insights from Accounting Practitioners on China's Convergence with IFRS

This study provides insights from accounting practitioners on China's convergence with International Financial Reporting Standards (IFRS). Through a survey of 33 senior financial executives of Chinese listed companies in 2014, the study reports their perceptions on the following issues: first, the degree of convergence between IFRS and Chinese Accounting Standards (CAS); second, the choice between fair value and historical cost accounting, and the usefulness of fair value accounting for Chinese companies’ financial reporting; third, challenges in the process of China's harmonisation with IFRS; and finally, essential capabilities of Chinese accounting professionals in the process of China's harmonisation with IFRS. Multivariate regression was used for further analysis. The survey findings reveal that in general CAS have converged with IFRS, with a few exceptions that reflect the unique Chinese context. Historical cost accounting is the preferred measurement base to fair value accounting. Exercising professional judgement was identified as a challenge for China's full convergence with IFRS. Ownership structure and the expertise of accounting practitioners were found to affect respondents’ judgements on China's convergence with IFRS. This study has policy implications for international accounting standard setters and accounting educators to consider the contextual issues of implementing IFRS in an emerging economy.     

Index investors and the return of stewardship accounting

Passive asset managers, seeking to deliver investment returns that mirror market indices, now control and vote about 30% of all managed U.S. shares. When bad news surfaces, index investors do not sell a company's shares. Instead, these beneficial owners protect the value of equity investments by influencing governance practices to restore long-term value creation. Interviews with stewardship offices at leading index investment firms suggest that passive investors do not use financial accounting information to value securities. The implication of this study is that the current focus of accounting standard setting – predicated on the idea that the purpose of financial reporting is to permit prediction of future cash flows – does not meet the needs of a particular group of financial statement users who have considerable influence over the governance of leading listed companies around the world.     

公允价值会计的国际应用

本文比较全面和系统地回顾了公允价值会计在国际上的运用及对公允价值问题的实证研究。在评价公允价值运用于会计准则的基础上,对公允价值会计的现状以及未来发展进行了讨论。总的来看,公允价值由于其高度的相关性,已受到各界的高度关注。公允价值会计极有可能成为21世纪资产和负债的计量基础。     

Cybersecurity Disclosure by the Companies on the S&P/TSX 60 Index

Cybersecurity has become a topic of great interest since 2010. Accounting issues surrounding cybersecurity governance, management, and disclosure have gained attention from accounting standard setters, large accounting firms, and professional associations, but only a limited number of studies have looked at cybersecurity disclosure. In this study, we examine whether the content of cybersecurity disclosures of Canadian firms comprising the S&P/TSX 60 index is aligned with best practices—that is, financial regulators' guidelines in that matter. A content analysis was performed of documents issued between January 2017 and mid‐2018, consisting of recent annual information forms (AIFs), annual and quarterly management's discussion and analysis (MD&As), proxy circulars, material change reports, and news releases. To assess the nature and extent of cybersecurity disclosure, we developed a scoring grid featuring 40 items based on financial regulators' guidelines. Results show that cybersecurity disclosure levels are low. Companies vary widely in the amount of detail they provide, and the information is often not company‐specific. The variations among industrial sectors involve the categories related to cybersecurity risk, cybersecurity risk mitigation, and other items. Most of the companies provided cybersecurity disclosures in the annual MD&A, and several reiterated some disclosure items in the AIF and proxy circular. The results of this study highlight some areas where cybersecurity disclosures have evolved and others where they could be improved. They suggest that some firms strive to avoid boilerplate language and be more company‐specific. The findings also suggest that financial regulators could issue more stringent requirements.     

Fair Value and the IASB/FASB Conceptual Framework Project: An Alternative View

This paper analyses various controversial issues arising from the current project of the IASB and FASB to develop a joint conceptual framework for financial reporting standards. It discusses their possible implications for measurement and, in particular, for the use of fair value as the preferred measurement basis. Two competing world views are identified as underlying the debate: a Fair Value View, implicit in the IASB's public pronouncements, and an Alternative View implicit in publicly expressed criticisms of the IASB's pronouncements. The Fair Value View assumes that markets are relatively perfect and complete and that, in such a setting, financial reports should meet the needs of passive investors and creditors by reporting fair values derived from current market prices. The Alternative View assumes that markets are relatively imperfect and incomplete and that, in such a market setting, financial reports should also meet the monitoring requirements of current shareholders (stewardship) by reporting past transactions and events using entity-specific measurements that reflect the opportunities actually available to the reporting entity. The different implications of the two views are illustrated by reference to specific issues in recent accounting standards. Finally, the theoretical support for the two views is discussed. It is concluded that, in a realistic market setting, the search for a universal measurement method may be fruitless and a more appropriate approach to the measurement problem might be to define a clear measurement objective and to select the measurement method that best meets that objective in the particular circumstances that exist in relation to each item in the accounts. An example of such an approach is deprival value, which is not, at present, under consideration by the IASB.     

稳健性与公允价值:基于股票价格反应的规范性分析

本文讨论了企业内外信息不对称性对稳健性原则和公允价值计量方法的影响,并结合现代经济特点,认为股权投资者应该成为会计信息的主要服务对象。大量实证研究结果表明稳健会计方法和激进会计方法同样给股权投资者理解会计信息造成障碍,因此在会计准则中适当引入公允价值计量方法是有益于资本市场发展的。     

Does Fair Value Accounting Exacerbate the Procyclicality of Bank Lending?

This study investigates whether fair value accounting contributes to the procyclicality of bank lending. Using banks’ approval/denial decisions on residential mortgage applications to capture banks’ supply of credit, I find no evidence that fair value accounting has procyclical effects on bank lending over the past two business cycles. I further identify two reasons for this result. First, the main accounting item distinguishing fair value accounting from historical cost accounting—unrealized gains and losses on available‐for‐sale securities—does not affect lending decisions. Second, unrealized gains and losses on available‐for‐sale securities are not procyclical, as the risk‐free interest rate rises during some expansionary periods, resulting in unrealized losses, while the risk‐free interest rate (and sometimes the default spread) falls during some recessionary periods, resulting in unrealized gains.