Accounting for Liabilities at Fair Value: The Advantage of Relational Versus Informational Disclosures in Interpreting Credit Risk Changes

38 Pages Posted: 15 Oct 2009

See all articles by Lisa Milici Gaynor

Lisa Milici Gaynor

University of South Florida - School of Accountancy

Linda S. McDaniel

University of Kentucky - Von Allmen School of Accountancy

Teri Lombardi Yohn

Emory University Goizueta Business School

Date Written: September 2009

Abstract

One objection to fair value accounting for liabilities is that changes in a company’s credit risk are recognized as gains or losses in a manner that is counterintuitive to the way gains and losses are typically interpreted (Lipe 2002). Specifically, when a company’s credit risk increases (decreases), the company reports a gain (loss). To address constituents’ concerns about the potential for misinterpretation arising from this accounting (FASB 2006), the FASB mandated informational disclosures for changes in a company’s own credit risk. Using CPAs as participants, we experimentally find (1) over 70 percent of participants fail to properly assess a company’s credit risk from recognized fair value gains or losses even when provided with informational disclosures, (2) participants’ assessments of risk significantly improve when relational disclosures (i.e., disclosures explicating the association between credit risk changes and income statement effects) are presented, and (3) relational disclosures are more beneficial when fair value gains versus losses are recognized, but additional disclosures do not eliminate misinterpretations.

Keywords: fair value accounting, credit risk change, financial liabilities, disclosures

JEL Classification: M41, M44

Suggested Citation

Gaynor, Lisa Milici and McDaniel, Linda S. and Yohn, Teri Lombardi, Accounting for Liabilities at Fair Value: The Advantage of Relational Versus Informational Disclosures in Interpreting Credit Risk Changes (September 2009). Available at SSRN: https://ssrn.com/abstract=1489440 or http://dx.doi.org/10.2139/ssrn.1489440

Lisa Milici Gaynor (Contact Author)

University of South Florida - School of Accountancy ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States

Linda S. McDaniel

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States

Teri Lombardi Yohn

Emory University Goizueta Business School ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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