دانلود رایگان مقاله تنظیم ارزیابی ورودی و اثر آن بر ارتباط ارزش اندازه گیری ارزش منصفانه

abstract

The fair value accounting standards; i.e., FAS 157, FAS 157-3 and FAS 157-4, specify the circumstances where firms need to adjust valuation inputs to fair value measurements in response to changes in market conditions. Such an adjustment inherently involves substantial management judgment and is accompanied with transfers of assets and liabilities among the different levels of the fair value hierarchy. We study the effect of adjusting valuation inputs to reflect market variations on value relevance of fair value measurements by comparing the value relevance of fair value assets between the banks that make transfers of assets and the banks that make no transfers. Overall, we find a significant increase in value relevance of fair value measurements for banks that transferred assets into/out of the Level 3 category. Our study examines a challenging situation in the application of fair value standards; i.e., determining fair value when there is a change in market conditions. Fair value measurement under such a situation involves substantial management judgment and potential estimate errors and manipulation. Our findings provide useful information for researchers, regulators and accounting professionals to assess the market’s perception of the reliability of fair value information when management exercises substantial discretion in adjusting valuation inputs under changing market conditions.

5. Conclusions

We study the effect of adjusting valuation inputs in response to market variations on value relevance by comparing the value relevance of fair value assets between banks that make transfers of assets into/out of the Level 3 category of the fair value hierarchy and banks that make no transfers. According to the fair value accounting standards, when observable Level 1 and Level 2 inputs become unavailable in an inactive or illiquid market, companies need to make transfers into the Level 3 category where substantial unobservable inputs are used to estimate fair value. When the market recovers and Level 1 and Level 2 inputs become available, companies need to transfer assets out of Level 3 back into Level 1 and Level 2 and use observable market-based inputs to determine fair value. We find a significant increase in value relevance of all three levels of fair value assets for banks that make transfers compared to banks that do not make such transfers. The results are robust given that we conduct additional tests to examine the effect of bank size and the amount of fair value assets and liabilities on value relevance. Further analyses show that transfers of assets into and transfers of assets out of the Level 3 category have a similar effect on value relevance of fair value information. In addition, the increase in value relevance of Level 3 assets for banks that make transfers mainly occur in the period after the fair value guidance was issued. Overall, we conclude that value relevance of fair value measurements is improved when companies adjust valuation inputs to reflect changes in market conditions. Our study examines a challenging situation in the application of fair value standards where fair value measurement involves substantial management judgment and potential estimate errors and manipulation. Our findings provide useful information for researchers, regulators and accounting professionals to assess the market’s perception of the reliability of fair value information generated under volatile market conditions and to evaluate the effect of allowing management discretion in determining appropriate valuation inputs. Furthermore, the issuance of the fair value guidance initially created controversy among the banking industry, the investor advocates, and the accounting professional organizations. The overall positive effect we find in our study should alleviate concerns expressed by investor advocates and accounting professionals over fair value standards. Our study is subject to a number of limitations. Due to the substantial amount of effort involved in hand-collecting data from the SEC filings, we limit our sample to the banking industry in the eight quarters from 2008 to 2009. We select the banking industry because banks tend to have more assets and liabilities carried at fair value. Our sample period from 2008 to 2009 coincides with the financial crisis and a period of a volatile market. The level of value relevance for fair value assets and liabilities in a stable market may differ from that in a volatile market. Therefore, readers may need to exercise caution in generalizing our findings to firms in other industries and to other periods.