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Fair Value Accounting

Implications for Users of Financial Statements


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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3 Related empirical literature


Based on the research questions identified in the first chapter, this chapter reviews related empirical literature and highlights the research gap of the study. The research investigates several characteristics of fair value accounting and has, as such, broad implications for sev- eral streams of literature. The first study provides evidence on the forecasting ability of financial analysts when they are either confronted with assets measured at historical cost or fair value. In the course of the second study, implications of fair value accounting on the judgments and investment decisions of nonprofessional investors are examined. Figure 3-1 presents a classification of the related empirical literature which is reviewed in this chapter. Figure 3-1: Classification of related empirical literature While fair value accounting has already been examined in manifold ways, the empirical accounting literature reviewed is selected to best apply to the objects of this study. As Figure 3-1 demonstrates, the related literature can basically be divided into literature ex- amining the relevance and the reliability of fair value accounting in financial statements. As aforementioned in chapter, there is a trade-off between relevance and reliabil- ity when dealing with fair values. However, both requirements are qualitative characteris- tics of financial statements in the IFRS framework and determine the usefulness of finan- cial reporting. Whereas the characteristic of relevance is operationalized by value relevance of fair value measures in this chapter,88 reliability is represented by the potential for mana- gerial discretion provided by fair value accounting. Because a great number of...

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