Leslie Hodder (Indiana University) will be joining us for FASRI Office Hours at 4pm ET, March 24th, to talk about recent research on Fair Value Accounting. No doubt we will talk a fair bit about FASB’s recent proposals to clarify FAS 157’s discussion on ‘active markets’ and to alter reporting of impairment (see here and here).

But we will also talk about two recent research papers that actually look at the application of FAS 157 by banks in 2008.  This is a timely discussion, given the tenor of recent news and discussion. Information about office hours is now available here.

Read more for links to the research articles and some recent news.

Papers for Discussion
Goh, Ng and Yong, Market Pricing of Banks’ Fair Value Assets Reported under SFAS 157 During the 2008 Economic Crisis.
Our paper presents early evidence on how investors price fair value assets reported by banks under Statement of Financial Accounting Standards No. 157 (SFAS 157) in 2008. We observe significant variation in the pricing of different levels of fair value assets, with the pricing being less for lower level assets (i.e., assets that have lower liquidity and more reporting reliability concerns). We also find that the pricing of lower level assets declines over the course of 2008. These results are consistent with worsening market conditions toward the end of 2008, which heightened investors’ concerns about the value of these assets. Finally, we find that fair value assets are priced higher by investors for banks with greater capital adequacy and which are audited by a Big 4 auditor. Overall, our paper uses both time-series and cross-sectional analyses to provide insights on investors’ use fair value accounting information during the current economic crisis.

Song, Thomas and Yi, Value Relevance of FAS 157 Fair Value Hierarchy Infomration and the Impact of Corporate Governance Mechanisms
Statement of Financial Accounting Standards No. 157 (FAS 157), Fair Value Measurements, prioritizes the source of information used in fair value measurements into three levels: (1) Level 1 (i.e., observable inputs from quoted prices in active markets), (2) Level 2 (i.e., 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 (i.e., unobservable, firm-generated inputs). Using quarterly reports of banking firms in 2008, we provide three tests. First, we examine the value relevance of fair value measurements across levels. We find that Level 1 and Level 2 fair value measurements are value relevant, while Level 3 fair value measurements are also value relevant but to a lesser degree. Second, we find that disclosures of fair values by levels under FAS 157 are somewhat incremental to existing disclosures of fair values by asset/liability types. For our third test, we find evidence that the value relevance of fair values (especially Level 3) is less evident for firms with weaker corporate governance. Overall, our results support the relevance of fair value measurements under FAS 157, but weaker corporate governance mechanisms may reduce the relevance of these measures.

Recent News Articles

Tempers Flare as IASB Looks to Change Fair-Value Standards (from CFO, quoting Leisenring)

Accounting Brothel Opens Doors to Bankers Fiesta (by Bloomberg columnist Jonathan Weil)

The Next Round of Banker-Based Appeasement, by Jack Ciesielski