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Fair Value Accounting

Implications for Users of Financial Statements

Series:

Kristian Bachert

Fair value accounting is viewed as a major feature of IFRS and several standards either require assets to be measured at fair value or at least provide an option to fair value measurement instead of applying historical cost. While it is argued that fair values provide more timely and relevant information, the global financial crisis led to a considerable debate about the usefulness of fair value accounting. The study examines the implications of fair value accounting for financial analysts and nonprofessional investors. It provides evidence that, even if financial analysts find it challenging to produce accurate forecasts under a fair value regime, nonprofessional investors make larger investments and are more confident with their judgments for fair value firms.

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summary 1 Introduction ....................................................................................................... 1 1.1 Groundwork ................................................................................................... 1 1.2 Scientific research strategy and conceptualization ......................................... 12 2 Conceptual grounding ...................................................................................... 16 2.1 Fair value accounting .................................................................................... 16 2.2 Users of financial statements ......................................................................... 45 3 Related empirical literature ............................................................................... 65 3.1 Relevance of fair value accounting ................................................................ 66 3.2 Reliability of fair value accounting ................................................................ 76 3.3 Predictability of accounting numbers ............................................................ 82 3.4 Summary and research gap ........................................................................... 87 4 Theory and hypotheses development ................................................................ 92 4.1 Theoretical foundation ................................................................................. 92 4.2 Hypotheses development ............................................................................ 102 5 Analysis of financial analysts’ forecasts ........................................................... 116 5.1 Methodological approach ........................................................................... 116 5.2 Results ........................................................................................................ 127 5.3 Discussion .................................................................................................. 159 6 Analysis of investors’ judgments and investment decisions ............................. 166 6.1 Methodological approach ........................................................................... 166 6.2 Results ........................................................................................................ 179 6.3 Discussion .................................................................................................. 209 7 Conclusion ...................................................................................................... 216 7.1 Summary and main findings ....................................................................... 216 7.2 Implications and contribution .................................................................... 221 7.3 Limitations and perspectives ....................................................................... 224 XI Contents Index of figures ...................................................................................................... XVII Index of tables ........................................................................................................ XIX Index of formulas ................................................................................................ XXIII Index of abbreviations ........................................................................................... XXV Index of symbols ................................................................................................. XXIX 1 Introduction ....................................................................................................... 1 1.1 Groundwork ................................................................................................... 1 1.1.1 Background and motivation for the study ............................................ 1 1.1.2 Research question and contribution ..................................................... 6 1.1.3 Outline of the study ............................................................................. 9 1.2 Scientific research strategy and conceptualization ......................................... 12 1.2.1 Philosophy of science ......................................................................... 12 1.2.2 Theoretical scientific concepts and research strategy .......................... 13 2 Conceptual grounding ...................................................................................... 16 2.1 Fair value accounting .................................................................................... 16 2.1.1 Recent developments of fair value accounting under IFRS ................. 16 2.1.2 Fair value approach under IFRS ......................................................... 18 2.1.2.1 Definition of fair value according to IFRS .......................... 18 2.1.2.2 Alternative fair value constructs .......................................... 20 2.1.2.3 Measures of fair value ......................................................... 22 2.1.2.4 Determination of fair value ................................................ 23...

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