The Relevance of the Fair Value Measurement Hierarchy: A Holistic Perspective

75 Pages Posted: 7 Jan 2020

See all articles by Andrei Filip

Andrei Filip

ESSEC Business School

Ahmad Hammami

John Molson School of Business, Concordia University

Zhongwei Huang

Cass Business School, City, University of London

Anne Jeny

ESSEC Business School; ESSEC Business School - Department of Accounting and Management Control

Michel Magnan

Concordia University - Department of Accountancy

Rucsandra Moldovan

John Molson School of Business, Concordia University

Date Written: November 13, 2019

Abstract

This paper provides a non-traditional review of recent research on the fair value (FV) measurement hierarchy. We begin with a meta-analysis that synthesizes the studies on the value relevance of the FV hierarchy. Overall, we find that the value relevance is lower for level 3 than for levels 1 and 2. We also find that the value relevance of the FV hierarchy has increased over time, particularly for levels 1 and 2: this could be related to a learning effect among key parties (e.g., auditors, managers) and to advancements in technology. As for the level 3 results, the fundamentals of the underlying assets, model risk, and difficulties in conveying the complexity of the measurement process may contribute to a value relevance gap. In addition, we discuss studies that examine other issues related to the FV hierarchy, such as the attributes of investment securities and markets, managerial discretion, information content, and auditing and enforcement. We then evaluate the conclusions reached in the academic literature by adding insights from interviews with auditors and financial reporting professionals from financial institutions. Learning about fair value accounting (FVA) has accumulated over time, bringing a formalization of the FV measurement and reporting process in practice that the academic literature has yet to fully recognize. This highlights conceptual and methodological issues in the existing literature as well as interesting areas for research with practical implications.

Keywords: Fair value hierarchy; Fair value measurement; Meta-analysis; Valuation process; Fair value audit; IFRS 13; SFAS 157; ASC 820

JEL Classification: M41, M42, M48

Suggested Citation

Filip, Andrei and Hammami, Ahmad and Huang, Zhongwei and Jeny, Anne and Magnan, Michel and Moldovan, Rucsandra, The Relevance of the Fair Value Measurement Hierarchy: A Holistic Perspective (November 13, 2019). Available at SSRN: https://ssrn.com/abstract=3504756 or http://dx.doi.org/10.2139/ssrn.3504756

Andrei Filip

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France
+33 1 34 43 33 61 (Phone)

Ahmad Hammami

John Molson School of Business, Concordia University ( email )

Montreal, Quebec H3G 1M8
Canada

Zhongwei Huang

Cass Business School, City, University of London ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Anne Jeny

ESSEC Business School ( email )

Av Bernard Hirsch
BP 50105
Cergy-Pontoise, 95021
France

ESSEC Business School - Department of Accounting and Management Control ( email )

Av Bernard Hirsch
BP 50105
Cergy-Pontoise, 95021
France

Michel Magnan

Concordia University - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

Rucsandra Moldovan (Contact Author)

John Molson School of Business, Concordia University ( email )

Montreal, Quebec H3G 1M8
Canada
+1-514-848-2424 ext 2528 (Phone)

HOME PAGE: http://https://sites.google.com/site/rucsandramoldovan

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