An Anatomy of the Level 3 Fair Value Hierarchy's Discount

2013 ◽  
Author(s):  
Emanuel Bagna ◽  
Giuseppe Di Martino ◽  
Davide Rossi
Keyword(s):  
Fair Value ◽  
Level 3

Fair Value Accounting and Earnings Persistence: Evidence from International Banks

2017 ◽  
Vol 17 (1) ◽  
pp. 47-68 ◽  
Author(s):  
Daifei (Troy) Yao ◽  
Majella Percy ◽  
Jenny Stewart ◽  
Fang Hu
Keyword(s):  
Strong Association ◽  
Balance Sheet ◽  
Fair Value ◽  
Institutional Factors ◽  
Earnings Persistence ◽  
Legal Enforcement ◽  
International Banks ◽  
Level 3 ◽  
Fair Value Measurements ◽  
Level 2

ABSTRACT Using hand-collected data from a sample of 210 international banks during the period 2009 to 2013, we investigate whether fair value exposure, the proportion of financial assets measured at fair values, is associated with earnings persistence and whether the reliability of fair value measurements influences earnings persistence. We also examine whether the association between fair value measurements and earnings persistence is a function of institutional factors such as legal enforcement, the audit environment, and country-level auditor industry expertise. Results suggest that the use of fair values for balance sheet financial instruments enhances earnings persistence. Also, we find that the nondiscretionary fair value Level 1 assets (measured with observable inputs) are positively associated with earnings persistence, whereas the Level 2 assets (measured with indirectly observable inputs) and Level 3 assets (measured using unobservable inputs) are not associated with earnings persistence. We provide further evidence that there is a strong association between factors reflecting countrywide institutional structures and the predictive power of fair values based on discretionary measurement inputs (Level 2 and Level 3 assets) and we find that the moderating effect from these institutional factors is greater for Level 3 assets than for Level 2 assets. Additional tests suggest that the association between fair value estimates and earnings persistence is moderated by the classification of fair value assets (that is, through profit and loss versus other comprehensive income) and the reliability of fair value estimates.

Fair value accounting, earnings management, and the case of bargain purchase gain

2019 ◽  
Vol 28 (2) ◽  
pp. 229-253
Author(s):  
Steven Lilien ◽  
Bharat Sarath ◽  
Yan Yan
Keyword(s):  
Design Methodology ◽  
Fair Value ◽  
Control Group ◽  
Fair Value Accounting ◽  
Market Returns ◽  
Accounting Earnings ◽  
Content Type ◽  
Level 3 ◽  
Accounting Earnings Management

Purpose The purpose of this paper is to investigate the association between bargain purchase gains (BPGs) booked by the acquirer and smoothing of acquirers’ earning performance across time. Design/methodology/approach The authors use a sample of 122 bargain purchase acquisitions in non-financial industries from 2009 to 2012 and a pair-match control group of 122 goodwill acquisitions. Findings The authors find that BPGs, and in particular, the Level-3 fair value estimates of intangible assets acquired, have consistently been used to smooth earnings but that such smoothing activities are not associated with long-term market returns. Originality/value This study is the first one to investigate bargain purchase acquisitions in a broad range of non-financial industries and suggests that managers are using the valuation of intangibles to avoid unfavorable earnings even though these valuations are not credible to investors.

Fair value, corporate governance, social responsibility disclosure and banks’ performance

2019 ◽  
Vol 19 (1) ◽  
pp. 30-47 ◽  
Author(s):  
Yi Zhang ◽  
Gin Chong ◽  
Ruixin Jia
Keyword(s):  
Corporate Governance ◽  
Firm Performance ◽  
Social Responsibility ◽  
Fair Value ◽  
Content Type ◽  
Fair Value Measurement ◽  
Level 3 ◽  
Value Measurement ◽  
Fair Value Measurements ◽  
Corporate Disclosures

Purpose The purpose of this paper is to investigate the interaction between mandatory disclosures and voluntary disclosures of banks and the information content of corporate disclosures on firm performance. Design/methodology/approach Based on the US-listed banks from 2007 to 2015, this paper examines the interplay among the fair-value measurement, corporate governance disclosure and voluntary social responsibility disclosure. In addition, the paper examines the extent of such disclosure of mandatory items (fair-value measurement) versus voluntary items (corporate governance and social responsibility issues) on banks’ performance in terms of their return on equity and return on asset. Findings This paper finds that banks with a higher social responsibility disclosure score and stronger corporate governance tend to have lower percentages of Level 3 fair-value assets. Banks with a higher Level 3 fair-value asset disclosure have a lower financial performance. Practical implications This paper provides evidence of the interplay of various corporate disclosures by banks and implies that banks use fair-value measurements to disguise their poor performance. The findings provide insights for the policymakers, investors and regulators to assess banks’ disclosure. Originality/value This paper extends the study of banks’ fair-value measurements and is the first study to examine the interaction between voluntary and mandatory disclosures. This study sheds lights on the theories of performativity, agency and stakeholder by demonstrating the information contents of corporate disclosures on firm performance.

scholarly journals Challenges Faced By Auditors When Estimating Fair Values. An Experiment in an Emerging Economy

2021 ◽  
Vol 66 (1) ◽  
pp. 36-60
Author(s):  
Adela Deaconu ◽  
Ioana Ciurdaş ◽  
Carmen Bonaci
Keyword(s):  
Internal Control ◽  
Fair Value ◽  
Influential Factors ◽  
Third Party ◽  
Audit Process ◽  
Tangible Assets ◽  
Valuation Process ◽  
Professional Body ◽  
Level 3 ◽  
Level Of Knowledge

Abstract Risks related to fair value (FV) estimates and their impact on the audit process represent a crucial topic in accounting and audit literature. Therefore, this paper focuses on one of the influential factors of FV estimation and related risks in audit missions, i.e. the valuation process performed (provider and measurement). In doing so, it addressees a less analysed FV level of estimation – level 3 according to IFRS 13, ’the models’, for the case of tangible assets. An experiment is conducted on a group of auditors, members of the Romanian audit professional body. The results reveal that, if the internal control quality is high, auditors differentiate between FV providers in the case of: FV measurement, i.e. income valuation approach versus cost approach, which implies additional effort for verification and risk of misstatement, when the estimation is provided by a third party instead of management. These findings could be related to the volatility of the investigated economic context and the respondents’ level of knowledge and expertise. We infer that respondents have a moderate understanding of valuation logic and methodology while excessively relying on their own valuator.

Fair Value Measurements and Audit Fees: Evidence from the Banking Industry

2014 ◽  
Vol 33 (3) ◽  
pp. 33-58 ◽  
Author(s):  
Michael L. Ettredge ◽  
Yang Xu ◽  
Han S. Yi
Keyword(s):  
Positive Association ◽  
Audit Fees ◽  
Fair Value ◽  
Data Availability ◽  
Publicly Traded ◽  
Cost Efficiencies ◽  
Level 3 ◽  
Level 1 ◽  
Fair Value Measurements ◽  
Level 2

SUMMARY: Using publicly traded bank holding company data from 2008 through 2011, this paper documents that the proportions of fair-valued assets held by banks are positively associated with audit fees. The positive association between audit fees and the proportions of total assets that are fair-valued using Level 3 inputs is greater than its positive association with the proportions of total assets that are fair-valued using Level 1 or Level 2 inputs. These results are consistent with a hypothesized scenario in which audit effort increases in the difficulty of verifying asset fair values. We also document that bank specialist auditors, defined as in Behn, Choi, and Kang (2008), charge lower audit fees to bank clients on average, suggesting cost efficiencies passed to clients as lower fees. However, bank expert auditors charge more for auditing the proportions of total assets that are fair-valued. Overall, the results support concerns expressed by some observers that greater use of fair value measurements for financial instruments will trigger increased audit fees. Data Availability: All data used in this study are publicly available from the sources identified in the text.

scholarly journals CEO Overconfidence and Fair Value Reporting-the Moderating Effect of Corporate Governance

2017 ◽  
Vol 9 (1) ◽  
pp. 136
Author(s):  
Hui-Wen Hsu
Keyword(s):  
Corporate Governance ◽  
Positive Relationship ◽  
Fair Value ◽  
Moderating Effect ◽  
Adverse Impact ◽  
Governance Mechanisms ◽  
Corporate Governance Mechanisms ◽  
Prior Literature ◽  
Level 3 ◽  
Value Reporting

This project examines whether CEO overconfidence affects firm's fair value reporting. Moreover, prior literature indicates effective corporate governance mechanisms ameliorate the adverse impact of CEO overconfidence. Thus, this paper further investigates whether effective corporate governance will mitigate the association between CEO overconfidence and level 3 fair values. Using a US sample drawn from 2008 to 2011, the results of this paper show that firms with higher CEO overconfidence report more Level 3 fair values and gains from Level 3 fair values. The results also indicates that the positive relationship between higher CEO overconfidence and Level 3 fair values reporting is attenuated for firms with high corporate governance.

Fair value's effects on closed-end funds' discounts and premia: is level 3 the sole perpetrator?

2020 ◽  
Vol 46 (8) ◽  
pp. 1001-1022 ◽  
Author(s):  
Steve Fortin ◽  
Ahmad Hammami ◽  
Michel Magnan
Keyword(s):  
Relevant Information ◽  
Fair Value ◽  
Content Type ◽  
Level 3 ◽  
Closed End Funds ◽  
Level 1 ◽  
Value Hierarchy ◽  
Valuation Uncertainty ◽  
The Impact ◽  
Level 2

PurposeThis study examines the long-term link between fair valuation uncertainty and discounts/premia in closed-end funds. This study argues that, in exploring the close-end funds puzzle, prior research generally omits to consider the uncertainty surrounding the measurement of funds' financial disclosure, as reflected in the fair value hierarchy, when investment specialty differs across funds.Design/methodology/approachRegressions were employed to explore how the fair value hierarchy affects closed-end funds' discounts/premia when investment specialty differs. The authors also examine the effects pre- and post-2012 to explore if that relationship changes due to the additional disclosure requirements enacted at the end of 2011.FindingsThe authors find that the three levels of the fair value hierarchy have effects that vary according to a fund's specialty. For equity specialized funds, Level 3 significantly increases discounts and decreases premia, suggesting the impact of valuation uncertainty that underlies Level 3 estimates; this relationship disappears (decreases in severity) for premia (discount) experiencing funds post-2012. In contrast, Level 1 and Level 2 do not have any significant effect on discounts or premia except that post-2012, Level 2 begins to display discount decreasing effects. For bond specialized funds, no significant association was noted between premia and any of the fair value levels except that post-2012, Level 3 begins to display premium increasing effects. However, results are different for discounts. The authors note that Level 1 valuations significantly increase discounts, but only post-2012; Level 2 valuations significantly decrease discounts (pre- and post-2012), consistent with such estimates incorporating unique and relevant information; and Level 3 valuations do not have a significant effect on discounts.Originality/valueThe results of this study revisit prior evidence and indicate that results about the effects of fair value measurement and the closed-end funds' puzzle are sensitive to the period length being considered and the investment specialty of the fund. The authors also note that additional disclosure regarding Level 3 valuation inputs decreases market concern for valuation uncertainty and increases the liquidity benefits of investing in Level 3 carrying funds.

scholarly journals Budgeting Audit Time: Effects of Audit Step Frame and Verifiability

2017 ◽  
Vol 30 (1) ◽  
pp. 59-73 ◽  
Author(s):  
Eldar M. Maksymov ◽  
Mark W. Nelson ◽  
William R Kinney
Keyword(s):  
Audit Quality ◽  
Fair Value ◽  
Time Budgets ◽  
Sufficient Time ◽  
Time Effects ◽  
Performance Quality ◽  
Public Company ◽  
Level 3 ◽  
Practice Audit ◽  
Audit Program

ABSTRACT Auditors must ensure that their audit plans budget sufficient time for key audit steps. Research has shown that insufficient audit time budgets can be detrimental to audit quality. We examine whether framing audit steps negatively (e.g., assess whether management's assumptions are not appropriate) increases time budgets—particularly for steps in which the auditor perceives that performance quality is less verifiable, and thus most at risk of being performed with low quality. First, we report the results of analyses indicating that, in practice, audit steps are predominantly framed positively, potentially resulting in smaller time budgets. We then report the results of an experiment in which 50 experienced audit managers budget time for an audit program that tests a Level-3 fair-value estimate. Prior research and Public Company Accounting Oversight Board (PCAOB) inspections indicate that this is a challenging audit area, vulnerable to allegations of low audit quality. The results support our predictions and suggest that reframing audit steps negatively would increase audit time budgets—an audit quality indicator—particularly for less-verifiable steps.

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