Does Fair Value Accounting Provide More Useful Financial Statements Than Current GAAP for Banks?

Posted: 8 Dec 2017 Last revised: 31 Jul 2019

See all articles by John M. McInnis

John M. McInnis

University of Texas at Austin - Department of Accounting

Yong Yu

University of Texas at Austin

Christopher G. Yust

Texas A&M University

Date Written: November 21, 2017

Abstract

Standard setters contend 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 the combined value relevance of book value of equity and income under fair value is less than that under GAAP. We also find 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 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.

Keywords: fair value, historical cost, financial instrument, bank, value relevance

JEL Classification: G12, G34, M41, M44

Suggested Citation

McInnis, John M. and Yu, Yong and Yust, Christopher G., Does Fair Value Accounting Provide More Useful Financial Statements Than Current GAAP for Banks? (November 21, 2017). The Accounting Review, Vol. 93 (6), pp. 257-279, November 2018. Available at SSRN: https://ssrn.com/abstract=3082333

John M. McInnis

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-232-6791 (Phone)

Yong Yu (Contact Author)

University of Texas at Austin ( email )

1 University Station B6400
Austin, TX 78712
United States
(512)471-6714 (Phone)
(512)471-3904 (Fax)

Christopher G. Yust

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States
979.845.3439 (Phone)

HOME PAGE: http://www.christopheryust.com

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