Fair Value Measurement Discretion and Opportunistic Avoidance of Impairment Loss Recognition

54 Pages Posted: 23 Jul 2019 Last revised: 9 Nov 2020

See all articles by Leslie D. Hodder

Leslie D. Hodder

Indiana University - Kelley School of Business - Department of Accounting

Amy Sheneman

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: July 22, 2019

Abstract

Prior studies find evidence that opportunistic reporting occurs in settings where fair value measurement is used. However, such research cannot determine whether the source of the opportunistic reporting is the estimate of fair value itself. Using detailed insurer investment holdings information, we separate the use of fair value measurement discretion from the application of non-measurement-related discretion in accounting for incurred losses of financial instruments. Our evidence contradicts the view that fair value measurement discretion plays a large role in opportunistic avoidance of loss recognition for financial instruments. Instead, managers appear to avoid impairment loss recognition by opportunistically applying subjective criteria related to perceived loss persistence and intent to hold.

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

JEL Classification: G20, G22, G30, M41

Suggested Citation

Davis Hodder, Leslie D. and Sheneman, Amy, Fair Value Measurement Discretion and Opportunistic Avoidance of Impairment Loss Recognition (July 22, 2019). Available at SSRN: https://ssrn.com/abstract=3424305 or http://dx.doi.org/10.2139/ssrn.3424305

Leslie D. Davis Hodder (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Amy Sheneman

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

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