Does Fair Value Accounting Provide More Useful Financial Statements than Current GAAP for Banks?

2018 ◽  
Vol 93 (6) ◽  
pp. 257-279 ◽  
Author(s):  
John M. McInnis ◽  
Yong Yu ◽  
Christopher G. Yust
Keyword(s):  
Measurement Error ◽  
Value Relevance ◽  
Financial Statements ◽  
Relevant Information ◽  
Fair Value ◽  
Financial Instruments ◽  
Fair Value Accounting ◽  
Book Value ◽  
Gains And Losses ◽  
Relevant Measurement

ABSTRACT Standard setters contend that fair value accounting yields the most relevant measurement for financial instruments. We examine this claim by comparing the value relevance of banks' financial statements under fair value accounting with that under current GAAP, which is largely based on historical costs. We find that the combined value relevance of book value of equity and income under fair value is less than that under GAAP. We also find that fair value income is less value-relevant than GAAP income because of the inclusion of transitory unrealized gains and losses in fair value income. More surprisingly, we find that book value of equity under fair value is not more value-relevant than under GAAP, due both to divergence between exit value and value-in-use and to measurement error in fair value estimates. Overall, our results suggest that financial statements under fair value accounting provide less relevant information for bank valuation than financial statements under current GAAP.

scholarly journals Sustainability Reporting and Value Relevance of Financial Statements

2018 ◽  
Author(s):  
Bambang Sutopo ◽  
Sebastian Kot ◽  
Arum Kusumaningdyah Adiati ◽  
Lina Nur Ardila
Keyword(s):  
Stock Price ◽  
Value Relevance ◽  
Sustainability Reporting ◽  
Positive Association ◽  
Financial Statements ◽  
Relevant Information ◽  
Book Value ◽  
Natural Logarithm ◽  
Earnings Per Share

This study examines whether information about the winners of the Sustainability Reporting Award (SRA) contributes to the usefulness of the information in the financial statements. This study used a sample consisting of 110 winners of SRA (SRA firms) and 110 companies that did not receive SRA (non-SRA firms) from 2008 to 2016. The study found that earnings per share (EPS), book value per share (BVPS), and earnings per share change (EPSC) are value relevant information. Results of comparison between SRA firms and non-SRA fimrs, this study found that EPS positive association with stock price and with returns for SRA firms is higher than that for non-SRA firms. Findings of this study also show that, value relevance of BVPS for non-SRA firms is higher than that for SRA firms. When mesures of Price and BVPS are transformed into natural logarithm, the value relevance of BVPS for SRA firms is higher than that for non-SRA firms. Thus, the results are sensitive to measures of the variables. The findings of this study indicate that information about the winners of SRA contributes to the usefulness of financial statements.

scholarly journals NILAI WAJAR SAHAM PADA KUALITAS LABA

2009 ◽  
Vol 8 (1) ◽  
Author(s):  
Francisca Reni Retno Anggraini
Keyword(s):  
Negative Correlation ◽  
Cost Of Capital ◽  
Earnings Quality ◽  
Financial Statements ◽  
Fair Value ◽  
Net Income ◽  
Fair Value Accounting ◽  
Accrual Quality ◽  
High Volatility ◽  
Gains And Losses

This research aims to investigate the effect of unrealized gains and losses of marketable securities from 19 firms in banking, insurance, credit agencies, and securities industries to earnings quality. The research periods are taken from 2001-2005 becaused of the effective date of PSAK 30 and 50 that related with banking accounting and valuation of securities is December 31th, 2001. There is no volatiles difference between unrealized gains and losses of marketable securities and net income before extraordinary items and unrealized gains and losses of marketable securities persisten from year to year. It is interesting, because theoretically fair value accounting yields higher volatility in earnings. It indicate that manager manages risk by smooths unrealized gains and losses of marketable securities because the high volatility of them cause volatility of earnings increase and finally cost of capital increase so investors do not interest to invest their capital. Finally, this research finds that there is negative correlation of unrealized gains and losses of marketable securities and accrual quality. It indicates that fair value accounting can not increase objectivity of financial statements.

scholarly journals The value relevance of fair value accounting: Evidence from the real estate industry

2012 ◽  
Vol 9 (4-4) ◽  
pp. 408-417
Author(s):  
Mukesh Garg ◽  
Dean Hanlon
Keyword(s):  
Real Estate ◽  
Value Relevance ◽  
Balance Sheet ◽  
Fair Value ◽  
Fair Value Accounting ◽  
The Real ◽  
The Real Estate ◽  
Incremental Value ◽  
Real Estate Investments ◽  
Gains And Losses

This study examines whether investors use the fair value of real estate investments in the balance sheet, and unrealized fair value gains and losses in the income statement, in their price setting process. Drawing on sample firms from the real estate development industry in New Zealand, the results of the current study suggest that: (1) unrealized fair value gains and losses on real estate investments have incremental value relevance compared to historical cost earnings, controlling for the method of recognition of the fair value gain or loss; and (2) current fair value of real estate investments has incremental value over historical book value of real estate investments. Such investigation is important given the current international debate concerning fair value accounting

scholarly journals A Survey on Accounting for Derivatives and Other Financial Instruments

1970 ◽  
Vol 15 (2) ◽  
pp. 131-147
Author(s):  
Alan Reinstein ◽  
Gerald Lander
Keyword(s):  
Financial Statements ◽  
Fair Value ◽  
Financial Derivatives ◽  
Securities And Exchange Commission ◽  
Financial Accounting ◽  
Financial Instruments ◽  
Financial Accounting Standards Board ◽  
Derivative Instruments ◽  
Gains And Losses ◽  
Financial Securities

In response to the recent growth in the use of derivative financial instruments, the Financial Accounting Standards Board (FASB) recently required all companies to make certain classifications and disclosures for such "complex" financial instruments. Yet, the Securities and Exchange Commission (SEC) and the FASB now demand even further reporting requirements - including requiring companies to recognize the "fair value" (and resultant gains and losses) of their financial derivatives as well as make other "qualitative disclosures" of the potential risk of holding such financial securities. The provisions of the current and proposed standards will affect significantly virtually all types of companies, especially those using derivative instruments. Hence, those preparing and evaluating financial statements under this emerging set of standards must comprehend these new provisions. The paper first discusses the current standards relating to financial derivatives and other financial instruments; it then provides examples of "leading" disclosures of such financial instruments. Then, based upon the responses to a mail questionnaire, the paper discusses how key groups view potential SEC changes in accounting for derivatives. All four of the groups generally agree with the provisions of SFAS No. 119 and most favor the recently passed, increased reporting standards.

scholarly journals Valuation Implications of FAS 159 Reported Gains and Losses From Fair Value Accounting for Liabilities

2021 ◽  
pp. 0148558X2110178
Author(s):  
Sung Gon Chung ◽  
Cheol Lee ◽  
Gerald J. Lobo ◽  
Kevin Ow Yong
Keyword(s):  
Stock Returns ◽  
Accounting Standards ◽  
Institutional Ownership ◽  
Fair Value ◽  
Negative Association ◽  
Financial Accounting ◽  
Fair Value Accounting ◽  
Economic Implications ◽  
Current Period ◽  
Gains And Losses

This study examines the economic implications of fair value liability gains and losses arising from the adoption of Statement of Financial Accounting Standards No. 159 (hereafter, FAS 159). We find a positive correspondence between a firm’s FAS 159 fair value liability gains and losses and current period stock returns, consistent with the notion that these gains and losses are priced by equity investors. However, further analysis indicates that fair value gains and losses from liabilities have a statistically significant negative association with future returns, suggesting that investors misprice this earnings component and subsequently correct the mispricing. We also find that the negative association for fair value gains is stronger for firms with lower levels of institutional ownership.

Judging the Relevance of Fair Value for Financial Instruments

2011 ◽  
Vol 86 (6) ◽  
pp. 2075-2098 ◽  
Author(s):  
Lisa Koonce ◽  
Karen K. Nelson ◽  
Catherine M. Shakespeare
Keyword(s):  
Value Relevance ◽  
Fair Value ◽  
Data Availability ◽  
Financial Instruments ◽  
Counterfactual Reasoning ◽  
Financial Instrument ◽  
Relevance Judgments

ABSTRACT We conduct three experiments to test if investors' views about fair value are contingent on whether the financial instrument in question is an asset or liability, whether fair values produce gains or losses, and whether the item will or will not be sold/settled soon. We draw on counterfactual reasoning theory from psychology, which suggests that these factors are likely to influence whether investors consider fair value as providing information about forgone opportunities. The latter, in turn, is predicted to influence investors' fair value relevance judgments. Results are generally supportive of the notion that judgments about the relevance of fair value are contingent. Attempts to influence investors' fair value relevance judgments by providing them with information about forgone opportunities are met with mixed success. In particular, our results are sensitive to the type of information provided and indicate the difficulty of overcoming investors' (apparent) strong beliefs about fair value. Data Availability: Contact the authors.

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