Fair Value Accounting and Managerial Discretion

37 Pages Posted: 6 Mar 2008

See all articles by Alistair Byrne

Alistair Byrne

University of Edinburgh - Business School

Iain Clacher

University of Leeds - Leeds University Business School (LUBS)

David Hillier

University of Strathclyde - Department of Accounting and Finance

Allan Hodgson

University of Queensland - Faculty of Business, Economics and Law; Financial Research Network (FIRN)

Date Written: January 2008

Abstract

We analyse the extent to which managers exercise discretion under fair value accounting and the value relevance of these disclosures. Utilising a sample of firms that apply the UK fair value pension accounting standard, (FRS-17), we examine the main determinants of the assumptions managers use to arrive at pension scheme valuation. Despite little variation in the underlying economic inputs, differences in stated assumptions across companies, auditors and actuaries are significant. Managers display considerable variation in conservatism when implementing fair value accounting and this variation is related to scheme-specific characteristics, such as asset allocation and pension solvency. Although the disclosed amounts are found to be value relevant, the observed inconsistency in reporting across firms brings into question the efficacy of fair value accounting for assessing corporate risk.

Keywords: Accounting Standards, FRS-17, Pensions, Managerial Discretion, Capital Markets, Fair Value Accounting

JEL Classification: G23, M41

Suggested Citation

Byrne, Alistair and Clacher, Iain and Hillier, David and Hodgson, Allan C., Fair Value Accounting and Managerial Discretion (January 2008). Available at SSRN: https://ssrn.com/abstract=1101691 or http://dx.doi.org/10.2139/ssrn.1101691

Alistair Byrne

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, EH8 9JS
United Kingdom

Iain Clacher (Contact Author)

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom

David Hillier

University of Strathclyde - Department of Accounting and Finance ( email )

Curran Building
100 Cathedral Street
Glasgow G4 0LN
United Kingdom
44 0141 330 4809 (Phone)
44 0141 330 4442 (Fax)

Allan C. Hodgson

University of Queensland - Faculty of Business, Economics and Law ( email )

4072 Brisbane, Queensland
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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