Convergence in Motion: A Review of Fair Value Levels’ Relevance

ABSTRACT

The IFRS 13 post-implementation review by the IASB motivates our investigation on the value relevance of fair value (FV) measurement hierarchy (i.e. level 1, level 2, and level 3). First, using a meta-analysis, which allows us to summarize inconsistent empirical findings, we synthesize studies on the value relevance of the FV hierarchy. Overall, value relevance is lower for level 3 than for levels 1 and 2, but it increases over time. In non-U.S. studies, we note lower value relevance across all levels of FV assets. Underlying asset fundamentals, model risk, and measurement process complexity may contribute to this value relevance gap. Second, from interviews with professionals from financial institutions, we note that, in practice, there has been extensive learning about FV accounting since the 2007–9 Financial Crisis and a formalization of the valuation process that the academic literature has yet to fully recognize. We thus highlight conceptual and methodological issues and areas for research with practical implications.

Keywords:

• Fair value hierarchy
• Fair value measurement
• Meta-analysis
• Valuation process
• IFRS 13
• SFAS 157
• ASC 820

Acknowledgements

We thank Araceli Mora (editor) and two anonymous reviewers for helpful guidance. We thank Lio Tong for research assistance and Ann Gallon for copy-editing. This research was partly funded by the IASB research grant for the Post-Implementation Review of IFRS 13 Fair Value Measurement. We thank the IASB members and staff for valuable comments and the practitioners we interviewed for agreeing to share their perspectives. Any views and opinions expressed herein are those of the authors and do not necessarily reflect the official policy or position of the IASB. 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. 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).

Notes

1 As part of the post-implementation review of IFRS 13, the IASB commissioned a review of the academic literature (Filip et al., 2017). The resulting document is now part of the documentation accompanying the IASB’s conclusions. The current paper builds and extends upon Filip et al. (2017).

2 https://www.ifrs.org/projects/2018/pir-of-ifrs-13-fair-value-measurement/ accessed on July 22, 2020.

3 The relevance of FVA-based information and FV levels can be assessed from several perspectives such as its impact on credit rating agencies’ assessments (Ayres, 2016) or analyst forecasts (Magnan et al., 2015). However, since only studies with similar dependent and test variables can be aggregated and analysed using a meta-analysis, focusing on the stock market value relevance of FV levels provides a sufficiently large number of studies and observations to draw valid meta-analysis statistical inferences.

4 For example, updates to FV regulations such as Accounting Standards Update (ASU) 2011–04 and IFRS 13 require additional FV-related disclosures.

5 The FASB issued the Statement of Financial Accounting Standards No. 157 Fair Value Measurements (SFAS 157) in 2006, for mandatory implementation from November 15, 2007. IFRS 13 has applied to annual accounting periods beginning on January 1, 2013, but early adoption was allowed.

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

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

8 In meetings and discussions with the authors, IASB members and staff clarified that the three levels are not necessarily meant to reflect an ordering or ranking.

9 We exclude studies that do not report standard errors or t-statistics, as we were unsuccessful in obtaining this data from the authors.

10 The studies were independently coded by one research assistant and one co-author to identify information relevant to the meta-analysis (Stanley et al., 2013).

11 Too few studies examine the value relevance of FV liabilities by level to conduct meaningful meta-analyses.

12 Inferences are similar if we use 2011 or 2013 instead of 2012, but the sub-samples of studies are less balanced.

13 The interviews took place in Canada. Both firms apply IFRS as enacted by the IASB, consistent with Canadian securities regulations.

14 For instance, Durocher and Gendron (2014) focus on the accounting profession and on its apprehension and commitment toward FVA. Georgiou (2018) contrasts the views of market participants (analysts, investors) with standard-setters with respect to FVA.

15 We thus integrate practice into accounting research, thereby addressing recent critiques of the gap between accounting practice and research (Rajgopal, 2019).

16 The interviews took place in June, September, and October 2018. Two interviews were conducted by two of the co-authors; the other two interviews were conducted by three of the co-authors. Each interview lasted about one hour. To ensure confidentiality, the interviews were not voice recorded, but the co-authors took detailed hand-written notes. Immediately after each interview the co-authors typed up their notes and compared them to reach a consolidated version. The Appendix reproduces the interview guide.

Additional information

Funding

Magnan gratefully acknowledges funding from the Stephen A. Jarislowsky Chair in Corporate Governance, the Desjardins Centre for Innovation in Business Finance and the Institute for the Governance of Private and Public Organizations. The authors acknowledge funding from the International Accounting Standards Board.