Fair Value Measurement Discretion and Opportunistic Avoidance of Impairment Loss Recognition

Abstract

Studies find evidence that opportunistic reporting often accompanies fair value measurement. However, research has not determined whether the source of this opportunism is the estimate of fair value. Using detailed information on insurers’ investment holdings, we separate the use of fair value measurement discretion from the application of non-measurement-related discretion in accounting for impairments of financial assets. Our evidence contradicts the view that fair value measurement discretion plays a large role in opportunistic avoidance of impairment recognition for investment securities. Instead, managers appear to avoid recording impairment losses by opportunistically applying subjective criteria regarding perceived loss persistence and intent to hold.

Keywords: fair value, earnings management, insurance companies, asset values

JEL Classification: G20, G22, G30, M41