Valuation for Financial Reporting : Fair Value Measurements and ...

More documents

Recommendations

Info

Academic Research on the Relevance of Fair Value Accounting 15BANKS: BALANCE SHEET RELEVANCEA journal article by Mary E. Barth (the Barth Study) 30 studies the relevancy of fairvalue accounting to investors. It examined two different accounting measurements,historical cost and fair value, on the same financial statement components. Priorresearch had not found strong evidence on the relevance of fair value accounting.Researchers argued that management errors in estimating the fair values of assetswere the primary cause for earlier findings. These earlier findings were based onstudies that examined multiple industries and cross-sectional differences, whichmay have led to findings of weak evidence.In contrast, the Barth Study examined the relevance of fair value accounting in asingle industry: banking. The study investigated how financial-instrument assetsmeasured at fair value and the related securities gains and losses are reflected in bankstock prices compared with historical cost measurements, to determine which is morerelevant to investors for valuing bank stocks. The Barth Study examined U.S. bankswhose financial data appeared on the 1990 Compustat Annual Bank Tape. Thefinancial statement data covered periods from 1971 to 1990. The investment assets inthe banks in this study averaged about 15% to 20% of total assets. The averagedifferences between historical cost and fair value were large: 37% of the book valueand 57% of the market value of equity.The Barth Study showed that financial-instrument assets measured at fair valuesprovide statistically significant explanatory power over historical costs in the shareprices of banks. The study also found that the historical costs of financial instrumentsprovide no significant explanatory power incremental to fair values. The Barth Studyconcluded that using fair values to measure financial instruments appeared to berelevant to investors in valuing bank equities.BANKS: INCOME STATEMENT RELEVANCEThe Barth Study found inconsistent results on securities gains and losses. Thesignificance of any explanatory power of securities gains and losses based on fairvalue measurements beyond historical costs depended on the statistical model used.Models that offered explanatory power were not robust. Some models revealed thatfair values offered no statistically significant explanatory power. However, historicalcosts always provided explanatory power beyond fair values.Barth argued that the evidence suggested that the inability of fair values to offerany incremental explanatory power was a result of management errors in estimatingthe securities’ fair values. (Valuation errors are still a principle argument of those whoare generally opposed to fair value accounting.) Measurement errors are a largerpercentage relative to securities gains and losses than they are to the securities fairvalues, causing a greater relative impact. Barth acknowledged this argument wasunverifiable. The Barth Study concluded that using fair values to measure gains andlosses of financial instruments did not appear to be relevant to investors in valuingbank equities.
16 Valuation for Financial ReportingIn contrast, a journal article by Anwer S. Ahmed and Carolyn Takeda (the Ahmed/Takeda Study) 31 studied the same issues as the Barth Study but controlled for theeffects of interest rate sensitivity on other assets and liabilities (on-balance sheet).The Ahmed/Takeda Study found securities gains and losses using fair valueshave incremental explanatory power over historical costs. These findings suggestthe inconsistent results in the Barth Study may not be attributed to securities’ fairvalue measurement problems and arguably offer evidence that fair values to measuregains and losses are relevant to investors in valuing bank stocks.CLOSED-END FUNDS: BALANCE SHEET AND INCOMESTATEMENT RELEVANCEA journal article by Thomas J. Carroll, Thomas J. Linsmeier, 32 and Kathy R. Petroni(the Carroll et al. Study) 33 studied a sample of 143 closed-end funds using data from1982 to 1997. They argue that closed-end funds offer better evidence on the relevanceof fair value accounting than other financial instruments. One reason the authors offeris that substantially all of the assets appearing on the financial statements of funds arereported at their fair values. (Liabilities in the funds are negligible.) The Carroll et al.Study also argues that the broader types of investments owned by funds offers betterevidence than other financial instruments. This data allowed the researchers toperform additional tests on usefulness based on varying degrees of reliability offair value measurements.The Carroll et al. Study found a statistically significant association between stockprices of the funds and the funds’ investments when they were measured with fairvalues after controlling for historical costs. It also found a significant relation betweenstock returns and the investment gains and losses. The research suggests thatsecurities measured at fair value are relevant to investors in valuing stocks ofclosed-end funds.The authors of the Carroll et al. Study also tested their hypothesis across differentfund types and compared the results to one another. Tests included funds with publiclyheld equities from G7 countries and those with equities other than those publicly heldfrom G7 countries. The results across all fund types showed a statistically significantassociation between fund stock prices and the fund investments using fair values. TheCarroll et al. Study argues that the findings suggest the need to express all securities attheir estimated fair values, including those that are traded in thin markets, such asprivate or non-G7 markets.ENDNOTES1. Michael A. Crain, CPA/ABV, ASA, CFA, CFE, is a contributing author to this chapter.Crain is Managing Director of The Financial Valuation Group in Ft. Lauderdale, Florida,and Chair of the American Institute of Certified Public Accountants Business ValuationCommittee.
Page 2: VALUATION FORFINANCIALREPORTINGFair
Page 6 and 7: VALUATION FORFINANCIALREPORTINGFair
Page 8: To our familiesnear and faryoung an
Page 12 and 13: PrefaceThe second edition of this b
Page 14: AcknowledgmentsTo Deanna Muraki, th
Page 17 and 18: xivAbout the Authorsappraiser with
Page 20: Valuation for FinancialReportingFai
Page 23 and 24: 2 Valuation for Financial Reporting
Page 31 and 32: 10 Valuation for Financial Reportin
Page 35: 14 Valuation for Financial Reportin
Page 43 and 44: Appendix 1.2Pronouncements Excluded
Page 71 and 72: Intellectual PropertyAppendix 2.1On
Page 77 and 78: Appendix 2.2Significant Changes in
Page 87 and 88:
66 Valuation for Financial Reportin
Page 89 and 90:
# Copyright 2007 by FVG Holdings, L
Page 91 and 92:
Exhibit 3.4 Target Company Business
Page 93 and 94:
Page 95 and 96:
Page 97 and 98:
Page 99 and 100:
Page 101 and 102:
Exhibit 3.7 Target Company Valuatio
Page 103 and 104:
Exhibit 3.7 (Continued)No. Job Titl
Page 105 and 106:
Page 107 and 108:
Page 109 and 110:
Page 111 and 112:
Page 113 and 114:
Exhibit 3.10 Target Company Calcula
Page 115 and 116:
Page 117 and 118:
Page 119 and 120:
Page 121 and 122:
100 Valuation for Financial Reporti
Page 123 and 124:
Page 125 and 126:
Page 127 and 128:
Exhibit 3.16 (Continued)Total Fair
Page 129 and 130:
Exhibit 3.17 (Continued)2017 Taxabl
Page 131 and 132:
Page 133 and 134:
Page 135 and 136:
Exhibit 3.19 Target Company Valuati
Page 137 and 138:
Exhibit 3.19 (Continued)No. Job Tit
Page 139 and 140:
Page 141 and 142:
Page 143 and 144:
Exhibit 3.22 Target Company Calcula
Page 145 and 146:
Page 147 and 148:
Exhibit 3.23 (Continued)(5) After-t
Page 149 and 150:
Exhibit 3.24 (Continued)Sum of Retu
Page 151 and 152:
Page 153 and 154:
Exhibit 3.27 Target Company Summary
Page 155 and 156:
Page 157 and 158:
Page 159 and 160:
Exhibit 4.2 Report Standard Compara
Page 161 and 162:
Exhibit 4.2 (Continued)StandardNACV
Page 163 and 164:
Page 165 and 166:
Page 167 and 168:
Page 169 and 170:
Page 171 and 172:
Page 173 and 174:
Page 175 and 176:
Page 177 and 178:
Page 179 and 180:
Page 181 and 182:
Page 183 and 184:
Page 185 and 186:
Page 187 and 188:
Exhibit 4.4 (Continued)Actual Forec
Page 189 and 190:
Page 191 and 192:
Page 193 and 194:
Page 195 and 196:
Page 197 and 198:
Page 199 and 200:
Page 201 and 202:
Page 203 and 204:
Page 205 and 206:
Page 207 and 208:
Page 209 and 210:
Page 211 and 212:
Page 213 and 214:
Page 215 and 216:
Page 217 and 218:
Page 219 and 220:
Page 221 and 222:
Page 223 and 224:
Page 225 and 226:
Page 227:
Page 231 and 232:
210 IndexBusiness Enterprise Analys
Page 233 and 234:
212 IndexGoodwill (continued )111,
Page 235 and 236:
214 IndexLong-termcapital, 71debt,
Page 237 and 238:
216 IndexSecurities and Exchange Co
show all

Valuation for Financial Reporting : Fair Value Measurements and ...

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?