IDEAS home Printed from https://ideas.repec.org/a/eee/accfor/v38y2014i3p184-199.html
   My bibliography  Save this article

Changes in the measurement of fair value: Implications for accounting earnings

Author

Listed:
  • Fargher, Neil
  • Zhang, John Ziyang

Abstract

With the FASB's issue of staff position papers in 2009 and the relaxation of how fair value standards are applied, there has been a change in the practice of how fair value is measured. Since the FASB staff position papers in 2009, fair value measurement by financial institutions has increasingly relied on managerial assumptions. This study examines the impact of this change on the quality of earnings. Consistent with attribute substitution theory that emphasises reliability over relevance, we find that an apparent increase in managerial discretion in fair value measurement is associated with a higher probability of earnings management and lower earnings informativeness. The results indicate that allowing more managerial discretion in fair value measurement adversely affected the quality of financial reporting. Our study highlights the issue of reliable measurement in the debate among academics and practitioners of increasing the use of fair value accounting.

Suggested Citation

  • Fargher, Neil & Zhang, John Ziyang, 2014. "Changes in the measurement of fair value: Implications for accounting earnings," Accounting forum, Elsevier, vol. 38(3), pages 184-199.
    • Handle: RePEc:eee:accfor:v:38:y:2014:i:3:p:184-199
    DOI: 10.1016/j.accfor.2014.06.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0155998214000295
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.accfor.2014.06.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Huizinga, H.P. & Laeven, L., 2009. "Accounting Discretion of Banks During a Financial Crisis," Other publications TiSEM b94d0405-1ced-4aa4-870b-2, Tilburg University, School of Economics and Management.
    2. Degeorge, Francois & Patel, Jayendu & Zeckhauser, Richard, 1999. "Earnings Management to Exceed Thresholds," The Journal of Business, University of Chicago Press, vol. 72(1), pages 1-33, January.
    3. David Gwilliam & Richard H.G. Jackson, 2008. "Fair value in financial reporting: Problems and pitfalls in practice," Accounting Forum, Taylor & Francis Journals, vol. 32(3), pages 240-259, September.
    4. Heilpern, Eliot & Haslam, Colin & Andersson, Tord, 2009. "When it comes to the crunch: What are the drivers of the US banking crisis?," Accounting forum, Elsevier, vol. 33(2), pages 99-113.
    5. Gwilliam, David & Jackson, Richard H.G., 2008. "Fair value in financial reporting: Problems and pitfalls in practice," Accounting forum, Elsevier, vol. 32(3), pages 240-259.
    6. Christian Laux & Christian Leuz, 2010. "Did Fair-Value Accounting Contribute to the Financial Crisis?," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 93-118, Winter.
    7. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    8. Beisland, Leif Atle, 2014. "Equity valuation in practice: The influence of net financial expenses," Accounting forum, Elsevier, vol. 38(2), pages 122-131.
    9. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    10. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 2001. "The relevance of the value relevance literature for financial accounting standard setting: another view," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 77-104, September.
    11. Robert Bushman & Wayne Landsman, 2010. "The pros and cons of regulating corporate reporting: A critical review of the arguments," Accounting and Business Research, Taylor & Francis Journals, vol. 40(3), pages 259-273.
    12. Laux, Christian & Leuz, Christian, 2009. "The crisis of fair-value accounting: Making sense of the recent debate," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 826-834, August.
    13. Eliot Heilpern & Colin Haslam & Tord Andersson, 2009. "When it comes to the crunch: What are the drivers of the US banking crisis?," Accounting Forum, Taylor & Francis Journals, vol. 33(2), pages 99-113, June.
    14. Stephen Penman, 2007. "Financial reporting quality: is fair value a plus or a minus?," Accounting and Business Research, Taylor & Francis Journals, vol. 37(S1), pages 33-44.
    15. Larry R. Davis & Billy S. Soo & Gregory M. Trompeter, 2009. "Auditor Tenure and the Ability to Meet or Beat Earnings Forecasts," Contemporary Accounting Research, John Wiley & Sons, vol. 26(2), pages 517-548, June.
    16. Barth, Mary & Taylor, Daniel, 2010. "In defense of fair value: Weighing the evidence on earnings management and asset securitizations," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 26-33, February.
    17. Dechow, Patricia M. & Myers, Linda A. & Shakespeare, Catherine, 2010. "Fair value accounting and gains from asset securitizations: A convenient earnings management tool with compensation side-benefits," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 2-25, February.
    18. Leif Atle Beisland, 2014. "Equity valuation in practice: The influence of net financial expenses," Accounting Forum, Taylor & Francis Journals, vol. 38(2), pages 122-131, June.
    19. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. A. Kuzmin Yu. & А. Кузьмин Ю., 2019. "Вопросы учета хеджирования в системе МСФО при консолидации отчетности // Issues of Hedge Accounting in IFRS in Consolidated financial Statement," Учет. Анализ. Аудит // Accounting. Analysis. Auditing, ФГОБУВО "Финансовый университет при Правительстве Российской Федерации" // Financial University under The Government of Russian Federation, vol. 6(1), pages 40-49.
    2. Johannes Thesing & Patrick Velte, 2021. "Do fair value measurements affect accounting-based earnings quality? A literature review with a focus on corporate governance as moderator," Journal of Business Economics, Springer, vol. 91(7), pages 965-1004, September.
    3. Yurniwati, 2017. "The Influence of the Quality of an Audit to Relationship Other Comprehensive Income (OCI) And Relevance of Value Accounting Information, And Asymmetry of Information (Study on Companies in Indonesia)," GATR Journals gjbssr457, Global Academy of Training and Research (GATR) Enterprise.
    4. Rute Gonçalves & Patrícia Lopes, 2015. "Value-Relevance of Biological Assets under IFRS," FEP Working Papers 556, Universidade do Porto, Faculdade de Economia do Porto.
    5. Lin Liao & Helen Kang & Richard D. Morris, 2021. "The value relevance of fair value and historical cost measurements during the financial crisis," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 2069-2107, April.
    6. Liao, Lin & Yao, Daifei (Troy) & Kang, Helen & Morris, Richard D., 2020. "The impact of legal efficacy on value relevance of the three-level fair value measurement hierarchy," Pacific-Basin Finance Journal, Elsevier, vol. 59(C).
    7. Inês Pinto & Ana Isabel Morais, 2022. "Classification of Equity Instruments under IFRS 9: Determinants and Consequences," Australian Accounting Review, CPA Australia, vol. 32(4), pages 411-426, December.
    8. Yosr Hrichi & Feten Arfaoui, 2023. "Research and development capitalization, fair value, and earnings management: A study of French listed companies," Journal of Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 22(3), pages 569-586, September.
    9. Mirjana Hladika & Danimir Gulin & Ivana Bernat, 2021. "Revaluation as a Model of Subsequent Measurement of Property, Plant, and Equipment – Case of Croatia," Croatian Economic Survey, The Institute of Economics, Zagreb, vol. 23(1), pages 63-95, June.
    10. Manel Jmal Derbel & Mohamed Ali Boujelbene, 2015. "La Conformite Comptabilite-Fiscalite Et La Gestion Des Resultats : Cas Des Entreprises Tunisiennes," Post-Print hal-01188533, HAL.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Beisland, Leif Atle, 2014. "Equity valuation in practice: The influence of net financial expenses," Accounting forum, Elsevier, vol. 38(2), pages 122-131.
    2. Kohlbeck, Mark & Smith, Thomas & Valencia, Adrian, 2017. "Auditors and net transfers of Level 3 fair-valued financial instruments," Advances in accounting, Elsevier, vol. 36(C), pages 27-39.
    3. Mary E. Barth & Javier Gomez-Biscarri & Ron Kasznik & Germán López-Espinosa, 2012. "Fair Value Accounting, Earnings Management and the use of Available-for-Sale Instruments by Bank Managers," Faculty Working Papers 05/12, School of Economics and Business Administration, University of Navarra.
    4. Tuba Toksoz, 2022. "An Examination of Other‐than‐temporary Impairments: Evidence from FSP FAS 115‐2 and FAS 124‐2," Abacus, Accounting Foundation, University of Sydney, vol. 58(2), pages 262-299, June.
    5. Mary E. Barth & Javier Gomez-Biscarri & Ron Kasznik & Germán López-Espinosa, 2017. "Bank earnings and regulatory capital management using available for sale securities," Review of Accounting Studies, Springer, vol. 22(4), pages 1761-1792, December.
    6. Veltri, Stefania & Ferraro, Olga, 2018. "Does other comprehensive income matter in credit-oriented systems? Analyzing the Italian context," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 30(C), pages 18-31.
    7. Liao, Lin & Kang, Helen & Morris, Richard D. & Tang, Qingliang, 2013. "Information asymmetry of fair value accounting during the financial crisis," Journal of Contemporary Accounting and Economics, Elsevier, vol. 9(2), pages 221-236.
    8. Andrea Menini & Michel Magnan & Antonio Parbonetti, 2011. "Fair Value Accounting: Information or Confusion for Financial Markets?," CIRANO Working Papers 2011s-56, CIRANO.
    9. Grougiou, Vassiliki & Leventis, Stergios & Dedoulis, Emmanouil & Owusu-Ansah, Stephen, 2014. "Corporate social responsibility and earnings management in U.S. banks," Accounting forum, Elsevier, vol. 38(3), pages 155-169.
    10. David B. Sutton & Carolyn J. Cordery & Tony Zijl, 2015. "The Purpose of Financial Reporting: The Case for Coherence in the Conceptual Framework and Standards," Abacus, Accounting Foundation, University of Sydney, vol. 51(1), pages 116-141, March.
    11. William Grieser & Charles J. Hadlock & Joshua R. Pierce, 2021. "Doing good when doing well: evidence on real earnings management," Review of Accounting Studies, Springer, vol. 26(3), pages 906-932, September.
    12. Matt Pinnuck, 2012. "A Review of the Role of Financial Reporting in the Global Financial Crisis," Australian Accounting Review, CPA Australia, vol. 22(1), pages 1-14, March.
    13. Li Yu (Colly) He & Sue Wright & Elaine Evans, 2018. "Is fair value information relevant to investment decision-making: Evidence from the Australian agricultural sector?," Australian Journal of Management, Australian School of Business, vol. 43(4), pages 555-574, November.
    14. Ozili, Peterson K, 2019. "Impact of IAS 39 reclassification on Income Smoothing by European Banks," MPRA Paper 92098, University Library of Munich, Germany.
    15. Himanshu & Jatinder P. Singh & Ashwani Kumar, 2020. "Prioritizing and Establishing Cause and Effect Relationships Among Financial Reporting Quality Metrics," Vision, , vol. 24(3), pages 330-344, September.
    16. Wessel M. Badenhorst, 2014. "Fair Value Measurements of Control Premiums," Accounting Perspectives, John Wiley & Sons, vol. 13(3), pages 173-188, September.
    17. Pinto, Inês, 2013. "Asset value management in the Portuguese real estate sector," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 22(2), pages 86-97.
    18. A. Rashad Abdel‐Khalik, 2010. "Fair Value Accounting and Stewardship," Accounting Perspectives, John Wiley & Sons, vol. 9(4), pages 253-269, December.
    19. Dichev, Ilia D. & Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2013. "Earnings quality: Evidence from the field," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 1-33.
    20. Thomas G. Canace & Scott B. Jackson & Tao Ma, 2018. "R&D investments, capital expenditures, and earnings thresholds," Review of Accounting Studies, Springer, vol. 23(1), pages 265-295, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:accfor:v:38:y:2014:i:3:p:184-199. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/accounting-forum .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.