The Value Relevance of Fair Value Levels: Time Trends under IFRS and U.S. GAAP

ABSTRACT

The IASB's post-implementation review of IFRS 13 Fair Value Measurement motivates our analysis of the evolution of the value relevance of fair value (FV) levels over time on banks that report under IFRS and U.S. GAAP. For both sets of standards, results provide evidence that is consistent with (1) an increase in value relevance across all three FV levels over time, and (2) a convergence of the value relevance of the three FV levels over time. However, FV levels exhibit systematically higher value relevance under U.S. GAAP compared to IFRS. Such gap has closed to some extent since the enactment of IFRS 13. This evolution is likely due to learning about FV accounting and changes in financial reporting regulations that increased disclosure requirements. These findings confirm the IASB's conclusions that FV levels’ disclosure is useful to users of financial statements, but also emphasizes preparers and investors’ learning over time.

Keywords:

• fair value hierarchy
• fair value levels
• fair value measurement
• IFRS 13
• SFAS 157
• ASC 820

Acknowledgements

We thank the Editor, Aracelli Mora, as well as two anonymous reviewers for their comments and suggestions. We also thank Shane Nicholls for sharing the fair value data for Europe and Ann Gallon for copy-editing. Michel Magnan gratefully acknowledges funding from the Stephen A. Jarislowsky Chair in Corporate Governance and the Desjardins Centre for Business Finance Innovation, both at Concordia University, as well as from the Institute for the Governance of Private and Public Organizations. Ahmad Hammami gratefully acknowledges funding from the Social Sciences and Humanities Research Council of Canada (SSHRC) Insight Development Grant.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1 The Financial Accounting Standards Board (FASB) issued the Statement of Financial Accounting Standard (SFAS) 157 – Fair Value Measurements in 2006, for mandatory implementation from 15 November 2007. SFAS 157 has since been replaced by Accounting Standard Code (ASC) Topic 820. The International Accounting Standards Board (IASB) introduced the fair value hierarchy in 2009 via the International Financial Reporting Standard 7 (IFRS 7) – Financial Instruments Disclosure but formalized its measurement and disclosure with IFRS 13 – Fair Value Measurement. IFRS 13 has applied to annual accounting periods beginning on 1 January 2013, but early adoption was allowed.

2 IFRS 13 defines and develops the basis for fair value measurement and disclosure, thus further defining the concepts and principles enacted in IFRS 7. While IFRS 7 focuses on financial instruments, IFRS 13 aims to provide a broader framework for fair value accounting encompassing financial and non-financial assets and liabilities.

3 Retrieved from the IASB web site on 7 June 2020; https://www.ifrs.org/projects/2018/pir-of-ifrs-13-fair-value-measurement/

4 Discussions with several Big 4 auditors and executives involved in corporate financial reporting corroborate our view that since the enactment of SFAS 157 and IFRS 13, reporting entities have overhauled their FV measurement processes while auditors have significantly raised their level of expertise about financial instruments and models as well as their validation tools.

5 IFRS 7 Financial Instruments: Disclosures was originally issued in August 2005 and has applied to annual accounting periods beginning on 1 January 2007.

6 http://www.fasb.org/cs/ accessed on 11 April 2018.

7 These proportions are largely consistent with those arising from initial disclosure of hierarchy levels under SFAS 157 by a sample of Fortune 500 firms (Bhamornsiri et al., 2010).

8 While we acknowledge the existence of this debate, directly contributing to it is not in the scope of this paper.

9 For brevity, we use ‘Europe’ to refer to the European Union countries plus Iceland, Liechtenstein, Norway, and Switzerland. While Iceland, Liechtenstein and Norway have adopted IFRS for publicly listed companies, Switzerland allows IFRS, U.S. GAAP or Swiss GAAP. All Swiss banks in our sample report under IFRS, except for one that reports under U.S. GAAP.

10 We consider that a bank-year for which the sum of FV assets and non-FV assets is different than the amount of total assets as reported in the database contains data errors.

11 Imposing that a European bank is present in the sample in all years, as we do for the U.S. sample, would lead to significant sample attrition, hence we relax this requirement.

12 All inferences remain unchanged if we use the share price one year ahead as dependent variable.

13 Specifically, Siekkinen (2016) reports a value relevance coefficient of 0.162 for L1 FV assets and −0.137 for L1 FV liabilities; 0.216 for L2 FV assets and −0.183 for L2 FV liabilities; and, 0.208 for L3 FV assets and −0.175 for L3 FV liabilities (see Table 6 on page 9).

Additional information

Funding

Michel Magnan gratefully acknowledges funding from the Stephen A. Jarislowsky Chair in Corporate Governance and the Desjardins Centre for Business Finance Innovation, both at Concordia University, as well as from the Institute for the Governance of Private and Public Organizations. Ahmad Hammami gratefully acknowledges funding from the Social Sciences and Humanities Research Council of Canada (SSHRC) Insight Development Grant.