Does Fair Value Accounting Provide More Useful Financial Statements than Current GAAP for Banks? Academic Article

abstract

• ABSTRACT Standard setters contend that fair value accounting yields the most relevant measurement for financial instruments. We examine this claim by comparing the value relevance of banks' financial statements under fair value accounting with that under current GAAP, which is largely based on historical costs. We find that the combined value relevance of book value of equity and income under fair value is less than that under GAAP. We also find that fair value income is less value-relevant than GAAP income because of the inclusion of transitory unrealized gains and losses in fair value income. More surprisingly, we find that book value of equity under fair value is not more value-relevant than under GAAP, due both to divergence between exit value and value-in-use and to measurement error in fair value estimates. Overall, our results suggest that financial statements under fair value accounting provide less relevant information for bank valuation than financial statements under current GAAP.

authors

• Yust, Christopher

published proceedings

• ACCOUNTING REVIEW

author list (cited authors)

• McInnis, J. M., Yu, Y., & Yust, C. G.

citation count

• 23

complete list of authors

• McInnis, John M||Yu, Yong||Yust, Christopher G

publication date

• November 2018

publisher

• American Accounting Association  Publisher

published in

• Accounting Review  Journal

keywords

• Bank
• Fair Value
• Financial Instrument
• Historical Cost
• Value Relevance

Digital Object Identifier (DOI)

• 10.2308/accr-52007

start page

• 257

end page

• 279

volume

• 93

issue

• 6

URL

• http://dx.doi.org/10.2308/accr-52007