Valuation Implications of FAS 159 Reported Gains and Losses From Fair Value Accounting for Liabilities

Chung, Sung Gon; Lobo, Gerald J.; Yong, Keng Kevin Ow

doi:10.1177/0148558x211017837

Cited by 3 publications

(2 citation statements)

References 28 publications

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“…For a sample of U.S. firms (mostly banks and other financial firms) reporting nonzero DVA from 2007Q4 to 2010Q4, Chung et al (2017) report that stock returns are positively associated with DVA. Cedergren et al (2019) examine a sample of U.S. bank holding companies that report nonzero DVA for at least one quarter from 2007 to 2013; of their 793 bank-quarter observations, 184 report nonzero DVA.…”

Section: Background and Related Literaturementioning

confidence: 98%

“… 17. In contrast, the Federal Reserve requires U.S. bank holding companies to report their net gains or losses on liabilities attributable to changes in their own credit risk during the year in their regulatory FR Y-9C filings. Prior studies examining DVA for U.S. banks typically obtain DVA data directly or indirectly from these filings (e.g., Cedergren et al, 2019; Chung et al, 2017). …”

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confidence: 99%

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Banks’ Discretion Over the Debt Valuation Adjustment for Own Credit Risk

Dong

Doukakis

Ryan

2020

Journal of Accounting, Auditing & Finance

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During our 2007 to 2015 sample period, firms recorded unrealized gains and losses on fair-valued liabilities attributable to changes in the firms’ own credit risk, referred to as the debt valuation adjustment (DVA), in earnings. Various parties criticized the inclusion of DVA in earnings as counterintuitive and manipulable. Using a small but comprehensive sample of European banks reporting nonzero DVA during this period, we decompose banks’ DVA into a normal portion explained by economic factors (e.g., changes in bond yield spreads) and an abnormal portion (the residual). Controlling for abnormal loan loss provisions (LLP) and realized securities gains and losses (RGL), we find that banks’ abnormal DVA is negatively associated with their premanaged earnings, consistent with banks exercising discretion over DVA to smooth earnings. We further find that banks that record larger LLP or RGL or that have histories of using LLP or RGL to smooth earnings are less likely to exercise discretion over DVA. These findings obtain in the financial crisis but not afterward. Collectively, our findings suggest that banks exercised discretion over DVA substitutably with discretion over LLP and RGL during the crisis. With the caveat that our analysis is limited by a small sample and the inherent difficulties of DVA decomposition, our findings have implications for how bank regulators and investors should interpret banks’ reported DVA, particularly in stress periods such as the crisis, and they provide support for the International Accounting Standards Board and Financial Accounting Standards Board’s (FASB) decisions to require firms to record DVA in other comprehensive income starting in 2018.

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Section: Background and Related Literaturementioning

confidence: 98%

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confidence: 99%

Banks’ Discretion Over the Debt Valuation Adjustment for Own Credit Risk

Dong

Doukakis

Ryan

2020

Journal of Accounting, Auditing & Finance

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The evolution of fair value measurement

Fontes,

Panaretou,

Shakespeare

2024

Accounting and Business Research

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Fair Value of Earnouts: Valuation Uncertainty or Managerial Opportunism?

Ferguson,

Hu,

Lam

2024

The Accounting Review

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This study investigates the economic consequences of the IFRS 3 (2008) requirement for fair valuing earnouts. Using a hand-collected sample of earnout fair value estimates in acquisitions completed by Australian firms, we find that a significant portion of acquirers overstate initial earnout liabilities and strategically reverse them as operating gains to boost post-M&A earnings. These overstatements are more pronounced when acquirers face investment- and performance-related pressure but attenuated in the presence of high-quality auditors and debt-financed deals. Acquirers also obfuscate earnout-related disclosures, inhibiting investors’ assessment of earnout values. By doing so, managers extend their tenure. Further analysis reveals that IFRS 3 (2008) leads to a significant increase in both the frequency and magnitude of earnouts in public acquirers’ transactions. Overall, we highlight the accounting benefit of earnouts for acquirers under IFRS 3 (2008), with implications for investors, analysts, auditors, and standard setters. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G34; M41.

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Valuation Implications of FAS 159 Reported Gains and Losses From Fair Value Accounting for Liabilities

Cited by 3 publications

References 28 publications

Banks’ Discretion Over the Debt Valuation Adjustment for Own Credit Risk

Banks’ Discretion Over the Debt Valuation Adjustment for Own Credit Risk

The evolution of fair value measurement

Fair Value of Earnouts: Valuation Uncertainty or Managerial Opportunism?

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