ABSTRACT
Fair value estimates from external third-party sources are generally considered more reliable than internal estimates based on managerial inputs. However, even externally sourced estimates ...are subject to managerial opportunism, because firms can switch from one external source to another. In the context of life insurance companies that mostly rely on external sources, we posit that such source switches could be driven by managerial incentive either to faithfully report fair values (objective valuation) or to inflate estimates to avoid OTTI (opinion shopping). Our results support both motives. In instances in which the two incentives yield conflicting predictions for source switching, we find the opinion-shopping motive dominates. We also find that switches that increase fair value estimates are associated with a reduced OTTI likelihood and magnitude, especially for high-impairment-risk securities. On balance, our evidence suggests that opportunism with respect to source switching can compromise the reliability of externally sourced fair value estimates.
Data Availability: Data are available from the public sources cited in the text.
JEL Classifications: G22; M41.
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IZUM, KILJ, NUK, PILJ, SAZU, UL, UM, UPUK
SUMMARY Auditing fair value measurements and other complex estimates (hereafter, FVMs) has received significant attention from regulators, practitioners, and researchers. Using a survey, we gather ...data from audit partners with FVM expertise to gain further insights in areas that have not been fully explored in the previous literature. Specifically, we extend the literature by providing a deeper understanding of the following areas: auditors' use of different substantive approaches to test higher-risk FVMs, auditors' use of pricing services and valuation specialists, and how challenges differ when auditing financial versus nonfinancial FVMs. In doing so, our findings and analyses extend prior research and coalesce pieces of several prior studies on auditing FVMs to provide a more complete picture of current auditing practices and challenges encountered by auditors. Our study provides insights useful in reconciling seemingly inconsistent findings in previous studies and provides important implications for future research, regulation, and standard-setting.
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IZUM, KILJ, NUK, PILJ, SAZU, UL, UM, UPUK
Com objetivo apresentar a aplicação do Método de Custeio do Ciclo de Vida Adicionado (CCV Add) ou Life Cycle Costing (LCC) como alternativa na mensuração de um ativo biológico, comparando-o com o ...método de avaliação Fair Value, a presente pesquisa trata de alternativas de mensuração do Pinus taeda. Metodologicamente, a pesquisa caracteriza-se como descritiva, de abordagem quantitativa, bibliográfica, documental e estudo de caso com amostragem não-probabilística e por conveniência. A coleta de dados se deu em uma propriedade rural localizada no Município de Mallet/PR. Foram levantados dados relativos aos custos de implantação e manejo da cultura bem como os resultados advindos com a colheita e venda e aplicação das metodologias de avaliação de ativos biológicos. Os resultados apontam que existem diferenças significativas nas formas de avaliação dos custos e resultados. No entanto, não existem impactos financeiros no fluxo de caixa, independentemente de qual estratégia seja utilizada para avaliação dos ativos biológicos. Existem diferenças contábeis significativas na avaliação dos ativos e resultados patrimoniais e tal fato repercute nos demonstrativos financeiros.
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CEKLJ, DOBA, IZUM, KILJ, NUK, PILJ, PNG, SAZU, UILJ, UKNU, UL, UM, UPUK
SUMMARY The rising prominence of fair values and other estimates (FVOEs) to financial reporting increases their significance to the audit. Based on inspections that report numerous deficiencies, the ...PCAOB is concerned that auditors are not sufficiently prepared for the challenges faced in evaluating fair value measurements. In this paper, we first analyze the possible sources for observed practice deficiencies by evaluating extant archival and experimental research. To organize our discussion, we rely on an established theoretical research framework that examines auditor judgment through an analysis of three critical and interactive factors of the judgment process—the environment, the task, and the person (Bonner 2008). We believe that the framework is particularly useful in understanding judgments related to the audits of FVOEs, given that these areas have unique environmental and task factors such that addressing auditor characteristics alone to improve audit quality is likely to be insufficient. Second, considering the PCAOB-identified practice areas with direct implications for the audits of FVOEs, we develop and present future research lines of inquiry that take into account the important interactions among the three framework factors. We believe empirical evidence within these lines will help identify potential sources of, and remedies for, observed audit deficiencies.
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IZUM, KILJ, NUK, PILJ, SAZU, UL, UM, UPUK
We explore how discretion over fair value measurement affects the comparability of fair value estimates in the financial industry. We find that greater exposure to Level 2 (Level 3) measurement ...enhances (diminishes) the comparability of fair value estimates across firms. These contrasting results reflect a nuanced relation between discretion over fair value measurement and comparability and suggest that managers convey useful information through Level 2 estimates, whereas Level 3 measurement is subject to error and managerial opportunism. Cross-sectional analyses show that fair value estimates are less comparable when managers have stronger incentives to introduce discretion and more comparable when investor monitoring is stronger. Additional analyses demonstrate that the comparability of fair value estimates is negatively associated with non-agency mortgage backed security holdings, the asset class most likely to be held at Level 3 by our sample firms, and that our primary results hold for alternative measures of comparability. Taken together, our results highlight the critical role of discretion in shaping the comparability of fair value estimates.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
Based on extant literature, we review the positive theory of GAAP. The theory predicts that GAAP’s principal focus is on control (performance measurement and stewardship) and that verifiability and ...conservatism are critical features of a GAAP shaped by market forces. We recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets, but caution against expanding fair values to financial reporting more generally. We conclude that rather than converging U.S. GAAP with IFRS, competition between the FASB and the IASB would allow GAAP to better respond to market forces.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
We examine how fair value accounting affects debt contract design, specifically the use and definition of financial covenants in private loan contracts. Using SFAS 159 adoption as our setting, we ...find that a small but significant proportion of loans (14.5%) modify covenant definitions to exclude the effects of SFAS 159 fair values. Only a limited number of these modifications exclude assets elected at fair value (less than 7%), while all exclude liabilities elected at fair value. Notably, we document that covenant definition modification is unassociated with ex ante fair value elections. We find that covenant definition modification positively varies with common incentive problems attributed to fair value accounting and negatively varies with benefits attributed to fair value accounting. Our results suggest that fair value accounting is not uniformly detrimental for debt contracting and fair value adjustments are included when they are most likely to improve performance measurement.
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BFBNIB, FZAB, GIS, IJS, KILJ, NLZOH, NMLJ, NUK, OILJ, PNG, SAZU, SBCE, SBMB, UL, UM, UPUK
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.
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IZUM, KILJ, NUK, PILJ, SAZU, UL, UM, UPUK
Statement of Financial Accounting Standards No. 157 (FAS No. 157), Fair Value Measurements, prioritizes the source of information used in fair value measurements into three levels: (1) Level 1 ...(observable inputs from quoted prices in active markets), (2) Level 2 (indirectly observable inputs from quoted prices of comparable items in active markets, identical items in inactive markets, or other market-related information), and (3) Level 3 (unobservable, firm-generated inputs). Using quarterly reports of banking firms in 2008, we find that the value relevance of Level 1 and Level 2 fair values is greater than the value relevance of Level 3 fair values. In addition, we find evidence that the value relevance of fair values (especially Level 3 fair values) is greater for firms with strong corporate governance. Overall, our results support the relevance of fair value measurements under FAS No. 157, but weaker corporate governance machanisms may reduce the relevance of these measures.
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BFBNIB, CEKLJ, IZUM, KILJ, NMLJ, NUK, PILJ, PNG, SAZU, UL, UM, UPUK
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