Commercial lender judgments and fair-value recognition: an investigation into the impact of future accounting standards

Purpose - This paper examines the impact that fair-value recognition of non-financial assets has on the judgments of commercial lenders. Design/methodology/approach - Commercial lenders, who were attending a national banking conference, participated in a controlled experiment. Findings - The experimental results show that commercial lenders incorporate fair values into their judgments but only when this information is recognized (vs disclosed) on the financial statements. Additionally, lenders assigned the highest loan interest rates when recognized fair values increased net income, and they assign the lowest loan amounts when recognized fair values decreased net income. Research limitations/implications - Typical limitations regarding behavioral experiments are acknowledged in the paper. For example, the commercial lenders in this study could not request additional information. In addition, because of the difficulty in obtaining these participants, the sample size is relatively small. Practical implications - US Generally Accepted Accounting Principles (GAAP) does not allow the fair-market valuation for most non-current assets while International Financial Reporting Standards (IFRS) require such valuations. The article adds to our understanding about how a significant user group of financial statements, commercial lenders, view GAAP and IFRS accounting. Social implications - This article provides insights regarding how commercial lenders' decisions may change based on accounting principles related to asset valuation. Obtaining credit through loans has significant implications for society. Originality/value - This article is unique because it examines commercial lenders' judgments using different asset valuations on the financial statements.